Private banking is a huge pain in the private sector’s butt. When will we see the end of private banking?
Terry Savage’s website says: “(She) is a nationally recognized expert on personal finance, the economy, and the markets. She writes a weekly personal finance column syndicated in major newspapers by Tribune Content Agency.”
Here are excerpts from an article she published on March 19, 2023
Banking on Belief
Last Monday as the failure of Silicon Valley Bank was just becoming apparent, I posted the following analysis on my website. I wouldn’t change a word.
Yet, even as the fears of fragility in the global banking system have accelerated, governments will do as they must to restore confidence –– no matter what it takes.
And it’s a good bet they’ll succeed, despite the gloomy prognostications of global financial collapse.
As I write, the news is breaking that the Swiss government has engineered the takeover of one of its largest banks, Credit Suisse, by another giant Swiss bank –UBS.
To facilitate the deal, the Swiss central bank offered UBS around $100 BILLION in liquidity to help it take on the operations of Credit Suisse, as well as $9 billion in guarantees against losses.
Although Credit Suisse had been at the heart of several major financial scandals in recent years — including bribery, money laundering, tax evasion, and corporate espionage — it had survived until this week’s global focus on the vulnerabilities of some major banks.
A lifeline of $54 billion from the Swiss National Bank was unable to stem the flood of deposit outflows late last week.
And so the marriage with UBS was arranged and announced today, with the Swiss central bank holding a shotgun full of liquidity bullets to make the match work.
In 2008, after seeing the consequences of letting Lehman fail, larger banks agreed to take on weakened competitors.
But then the government penalized the bank saviors for the problems they inherited. Understandably, strong banks are not getting in line to help this time around.
So, the Fed had to step in to resolve the problem of bank-held government bonds losing market value (see explanation below).
It offered to lend money to the banks at full face value of their U.S. Treasury securities, even though rising rates had made them worth less than face value in the current marketplace.
And the Treasury department and FDIC had to create a guarantee of ALL uninsured deposits (those over $250,000) at Silicon Valley Bank and Signature Bank — as they suddenly became “systemically important.”
It was done with the fictional explanation that the cost would be borne by a fee paid by all other banks, not taxpayer dollars.
But would they guarantee ALL deposits at ALL banks? There was no firm answer to that question.
There will be an answer soon. It’s the only way to create the required confidence in the banking system.
Your insured deposits under $250,000 are safe in your local bank.
But why make things complicated? If you have multiple accounts, (or simply aren’t sleeping well at night), buy U. S Treasuries.
See the craziness? Private banks repeatedly get into trouble. The government repeatedly steps in to solve the problem.
The purpose and goal of private banks is not to provide banking services.
The purpose and goal of private banks is to provide profits to the bankers.
So private banks continually look for ways, not to provide more service but to make more profit.
The more aggressive ones enter dangerous financial territory.
In response, the federal government passes laws and rules that the banks are supposed to follow.
Still, some greedy bankers get into trouble, and the federal government is forced to provide funds that safeguard innocent depositors.
Currently, the federal government insures $250,000 worth of any one depositor’s funds, but that seems not to be enough to make banks safe. Now, there is a clamor to increase the amount and in fact, to make it limitless.
Meanwhile, the government must take over the sick bank, or bribe some other bank to take it over, or lend it money to keep it going. And it happens again, and again, and again.
And we never learn one lesson:
There is no public purpose served by privately-owned, for-profit banks.
The government makes all the rules. The government inspects and supervises the banks to see that they are following the rules. The government insures depositors for when the banks don’t follow the rules. The government provides funds to bail them out when they fail.
The federal government already provides banking alternatives in the form of T-securities and other services.
Per the Bing AI:
The Federal Reserve Banks provide financial services to depository institutions including banks and credit unions, much like those that banks provide for their customers.
These services include collecting checks, electronically transferring funds, and distributing and receiving cash and coins.
They also act as fiscal agents to the federal government by maintaining the Treasury Department’s transaction account, paying Treasury checks, processing electronic payments, and issuing, transferring, and redeeming U.S. government securities.
Consider “a public bank.”
A public bank is a financial institution owned and operated by the state, city, or county government.
A public bank offers many of the same financial services as traditional banks, such as checking accounts, loans, and mortgages.
However, its main purpose is to serve the public interest in its area. As a result, a public bank puts a huge focus on improving its local community, using most of its resources to:
- Provide low-interest loans to businesses and low-income households
- Fund affordable housing and climate-protection projects
- Create new jobs and stimulate economic growth in their regionsA public bank also works as a type of “mini-Fed” to regional banks, providing them with loans and other banking solutions. They also provide banking services to government departments.
The U.S. currently has one public bank: The Bank of North Dakota. It was founded in 1919 to promote agriculture and commerce in the state. Today, it provides loans, college funding, and banking services to North Dakota residents and institutions.
A public bank is a step in the right direction. Its focus is not on profits but on providing banking services to the community.
Still, a public bank needs to have income to survive. If circumstances cause its loans suddenly to go bad — a war, a natural disaster, a new legal requirement — the bank could fail, and depositors would be punished.
A federally owned bank could provide every banking service and not worry about income. Our Monetarily Sovereign federal government neither needs nor uses income. It has infinite financial resources, the infinite ability to create dollars.
That is why the federal government is the bank insurer of last resort. When all private resources fail, the federal government has the ability (and the obligation) to step in and save the day.
If the federally owned bank could do everything a private bank can do, while removing all risk to the public, why do we still have privately owned banks?
They require constant surveillance and supervision by the federal government. They repeatedly get in trouble and must be rescued by the federal government. They repeatedly cheat customers. They repeatedly cause financial crises that the government must fix.
The private banks were the ones that redlined neighborhoods, depriving blacks of mortgages, then went the other way and overvalued houses and borrowers’ ability to pay, causing a massive failure of the banking system.
The private banks were the ones that invented high-risk products that traded at inflated values and had to be bailed out by the federal government.
Ironically, the federal government would have the resources to lend to borrowers other banks might refuse — people with a poor credit rating, poor people, people in sick neighborhoods — because even bad loans would pump growth dollars into the economy and not risk the government-owned banks solvency.
In short, private banking contributes nothing to the economy but risk. The federal government could do everything a private bank does, while eliminating the risk.
The U.S. dollar was invented by the federal government, yet for no good reason, the creation of new dollars has been turned over to private banks (via lending). It makes no sense.
The profit motive is irresistible. When surrounded by opportunities to make vast amounts of money by cheating the public, many bankers will succomb. No amount of regulation or supervision will prevent it.
Dollar creation should be in the hands of the federal government, the original dollar creator.
All banks should be federal banks.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The Sole Purpose of Government Is to Improve and Protect the Lives of the People.
13 thoughts on “The end of private banking”
A guarantee: So long as there are privately owned banks, there absolutely will be repeated bank crises caused by the greed of the banks.
Trying to regulate private banking is like throwing millions of dollar bills in through house windows, then passing laws against the residents picking them up.
Ricks adds that there would be no need for federal deposit insurance.
“FedAccount balances would be sovereign and nondefaultable since central bank accounts are pure money, economically equivalent to dollar bills,” Ricks said. “The perks of central banking would greatly increase the efficiency of transactions for businesses.”
Is there any reason why the deposit holding and transaction components of banking couldn’t or shouldn’t be hived off into a public option right now?
The bankers pay megabucks to the politicians. That is the only reason we have private banking.
Or like giving Icarus a pair of heat-resistant wings.
Below is an excerpt from a newsletter on Silicon Valley Bank.
“If you hike interest rates at the fastest pace in half a century, something just might break.
And recently, something did.
In just 48 hours, the 16th-largest bank in the US by deposits collapsed.
“the risk-free principle applies not just to stocks. It also applies to bonds, real estate, and any cash-generating asset.
Regarding Silicon Valley Bank, management thought it prudent to buy billions of dollars of risk-free bonds. These were US government Treasuries and government-guaranteed residential mortgages.
Yes, they’re risk-free. Holders of these debt instruments will receive their interest and their principal at the time of maturity.
However, receiving 100 cents on the dollar at any time during the life of the loan is not a guarantee.
For instance, if interest rates rise, why would anyone pay 100 cents on the dollar for a piece of paper yielding 2% if the new rate in the market is 4%–5%?
Bond prices are heavily influenced by alternatives that exist in the market. So, a 10-year bond yielding 2% in a world where rates are 5% is not worth full value.
Again, over time, the holder of that bond will get paid back at par. But what if they need to sell prior to maturity?
No one in the world—except a government, perhaps—will pay 100 cents on the dollar for a bond yielding 2% if the market rate is 5%. That would be value-destructive.
And yet with Silicon Valley Bank, this is effectively what happened. Just like the 1980s with bankers thinking oil prices would stay high, or the 2000s with bankers thinking home prices would always rise, a handful of bankers thought interest rates would stay at zero forever.
Obviously, they were proven dramatically wrong.
It’s common to think of a stock in relation to the multiple of its earnings. A $20 stock that earns $1 per share trades for 20X earnings.
A bond, however, is never quoted this way. A bond is quoted in the inverse. So, a $20 par value bond paying $1 in interest has a yield of 5%. And a $20 par value bond paying $0.40 in interest has a yield of 2%. Inverting it, this bond could be said to be trading for 50X earnings.
That’s a steep multiple. But that’s what Silicon Valley Bank executives decided to pay, and it backfired.
Bottom line, if you overpay for an asset, it’s less likely to become a valuable investment… even if you’re buying something “risk-free” like a US government Treasury.”
Right. The key sentence is: “No one in the world—except a government, perhaps—will pay 100 cents on the dollar for a bond yielding 2% if the market rate is 5%.”
The federal government can absorb any financial risk without blinking. That, and the lack of a profit motive, are exactly why banks should be owned by the federal government, not by the private sector.
Yes, that can be given the pejorative, “socialism,” but the dollar is a product of the federal government, and it is the federal government that should rule the dollar.
Yes but the Feds already rule the banks and the dollar andYes there are problems.
But do you really think all the problems would go away if the banks were all owned and run by the federal gov?
Actually, yes. Certainly all the current safety problems would go away. Might be service problems, though many private banks already provide poor service — and charge for it.
Ok but it seems to me that we could end up with a worse service problem. Aka crony capitalism? I guess we have some of that now.
“Crony capitalism, sometimes called cronyism, is an economic system in which businesses thrive not as a result of free enterprise, but rather as a return on money amassed through collusion between a business class and the political class. This is often achieved by the manipulation of relationships with state power by business interests rather than unfettered competition in obtaining permits, government grants, tax breaks, or other forms of state intervention over resources where business interests exercise undue influence over the state’s deployment of public goods, for example, mining concessions for primary commodities or contracts for public works. Money is then made not merely by making a profit in the market, but through profiteering by rent seeking using this monopoly or oligopoly. Entrepreneurship and innovative practices which seek to reward risk are stifled since the value-added is little by crony businesses, as hardly anything of significant value is created by them, with transactions taking the form of trading. Crony capitalism spills over into the government, the politics, and the media, when this nexus distorts the economy and affects society to an extent it corrupts public-serving economic, political, and social ideals”
That worry can be tacked onto any federal program. Would you prefer that Social Security be private? Medicare? The military? There are some things that government does better than the private sector, and banking is one of them.
Should be an affordable housing public bank that loans dollars into existence at 0.00% for say 800 months or 1000 months. No point penalizing people with interest if the point is to house people rather than to make a profit.
Sweden you can get one for 100 years. https://www.newstalk.com/news/why-sweden-is-limiting-mortgages-to-105-years-1372503
Good graph here: https://twitter.com/EzraFBridgers/status/1638541288520704000 Instead of a crap job guarantee Randy & Co should have a roof over every head with a pot to piss in guarantee.
Rep. Burgess Owens to lead congressional hearing on ‘unlawful’ student loan forgiveness program. The Utah Republican, who has filed for bankruptcy protection multiple times, said ‘debt cannot be canceled.’ https://www.sltrib.com/news/politics/2023/03/21/rep-burgess-owens-lead/
Minding that gap psychology ‘gap’ while ignoring that balance sheets have to ‘balance’ with the two sides netting out to zero. Loan +1 Forgive -1 It is all just credits and debits