–Should banks be public utilities?

Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

One of our readers named “Pete” said, “There’s a great interview with Yves Smith over on NC today about turning the banks into public utilities. I’m curious what your thoughts on that would be.”

Yves Smith is the pen name of Susan Webber. She is the brilliant author of what may be the best economics blog on the Internet, Naked Capitalism. She also is the founder of Aurora Advisors, Inc., a management consulting firm.

In the interview, which you can see at Interview with Yves Smith, Yves suggests that banks are:

Too economically and politically powerful
Too reckless
Too unregulated and
Too dependent on federal support.

I agree with the first three “toos,” not the last.

She suggests the cure would be to make banks public utilities. I disagree. Public utilities do not have a sterling record for serving the public, because they twist the politicians and regulators, just as the banks do now. Anyone who has gone through voice mail hell, trying to reach the electric company, or waited days for service to be restored after a storm, or suffered a 4-hour window waiting for the service person to arrive, understands that public utilities can be as uncaring about the public as can any private corporation.

Yves does not suggest that banks be owned by the federal government, so in essence, her “public utility” recommendation merely moves banks from their current set of government regulators to a different set of government regulators. I believe more fundamental steps must be taken.

Suggestion #1: Separate the banking function from the rest of the investing/speculating functions, something akin to what savings & loans did, but with broader lending capabilities than S&Ls had. Bank investments would be limited to federal securities.

While we did have an S&L crisis, also involving real estate lending, it was not as economically pervasive and damaging as what we have today, with banks using their massive lobbying power to run Congress and the President. (Anyone who does not think the executive and legislative branches of our government are run by the banks, has not been paying attention, and never has heard the name, Tim Geithner. )

Suggestion #2: Do not allow banks to pay lobbyists or to contribute to political candidates or action groups. Banks would be allowed to spend only on banking operations. Bank employees would retain their rights to make political contributions (freedom of speech), but every dollar would have to be made public, and not reimbursed by the bank.

Eliminate the culture of failed/rescued/rewarded, where bank executives have absolutely nothing to lose by stealing, cheating and criminal speculation. In fact, they have been given with big bonuses. To my knowledge, no banker has been jailed for these transgressions.

Suggestion #3: The top officers of any bank requiring federal support to survive, not only would be fired, but personally liable to reimburse the government for all FDIC payments. Bank officers would be civilly and criminally liable for all customer losses. (No bank customer ever should lose money in a bank).

As the the fourth “too,” I have no problem with banks being dependent on federal support, since federal support adds dollars to the economy, and thereby is economically stimulative. In fact, one approach might be:

Suggestion #4: Limit banks to zero profits before executive compensation, and to receive federal support for profits and executive compensation based on a percentage of deposits. This would focus executive motivation on providing the customer services that build deposits, rather than on investment profits.

As for the value big banks have in supporting big projects, these all could be handled by non-bank organizations.

So that is my quick answer to Pete’s comment. I’d welcome yours.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings


3 thoughts on “–Should banks be public utilities?

  1. Thanks Rodger. Thoughtful post. Seems like you and Yves would agree on the big issues, with slightly different means to accomplish the same basic ends. Certainly the North Dakota State bank could be referenced when discussing this idea.

    ~ Pete


  2. Rodger — Actually, some of the executives of Taylor, Bean and Whitaker, a large mortgage broker in Florida, have gone to jail for defrauding and ultimately bringing down Colonial Bank, headquartered here in Alabama. There have also been several Colonial execs sent to prison for participating in the fraud. Colonial provided the “warehouse loans” to TBW. The total amount involved in the fraud was about $2.9 Billion, according to published reports. Colonial was the sixth largest bank failure in history when it occurred in August, 2009.


  3. Thanks John,

    Good to know. Apparently these executives didn’t have the pull to receive one of the many Obama administration’s “get-out-of-jail-free” cards.

    For a view of how dirty and dangerous the situation is, and how hard the Obama-ites are trying to protect crooked banks and bankers, subscribe to the Naked Capitalism (www.nakedcapitalism.com) blog. Yves Smith does a great job exposing this disgusting mess — and the Obama administration’s cover-up.

    Rodger Malcolm Mitchell


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