Tag: private banks

The end of private banking

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.
Who will GOP lawmakers stand with, the people or crooked bankers? | The Hill
Wells Fargo was fined for creating 1.5 million fake deposit accounts and more than 500,000 fake credit cards, all in customers’ names and without their permission. Extreme sales pressure has caused similar issues at other large banks.
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 regions
A 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 Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY

Bernanke wins Nobel Prize for solving the least of our problems

O.K., it’s not precisely the Nobel Prize. It’s the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. So, it’s something like winning the McDonald Hamburger Football Inflation Prize in Honor of John Heisman instead of the Heisman Trophy.

But hey, it’s worth $885,000, so just call me “jealous.”

My only question is, why didn’t John Maynard Keynes win it? Or, perhaps Warren Mosler and Bill Mitchell (no relation) for founding Modern Monetary Theory?

Ah, but I digress. I really want to talk about this article:

Bernanke shares economics
Nobel Prize for crisis research
Ott Ummelas and Niclas Rolander,
Bloomberg News

Former Federal Reserve Chair Ben S. Bernanke and two U.S.-based colleagues won the 2022 Nobel Prize in economics for their research into banking and financial crises.

Douglas Diamond, Philip Dybvig and the one-time central banker will share the 10-million-kronor ($885,000) award, the Royal Swedish Academy of Sciences announced in Stockholm on Monday.

“The laureates have provided a foundation for our modern understanding of why banks are needed, why they are vulnerable and what to do about it,” John Hassler, professor of economics and member of the prize committee, told reporters in Stockholm.

“In the laureates’ work, it is shown that deposit insurance is a way of short-circuiting the dynamics behind bank runs. With deposit insurance, there is no need to run to the bank.”

And there it is, the startling discovery that deposit insurance helps prevent bank runs by reassuring depositors their money is safe. Who’da thunk?

Diamond and Dybvig were lauded for their research identifying the vulnerability of banks to rumors of collapse, and how governments can prevent that. Bernanke’s studies meanwhile analyzed the Great Depression, and how bank runs ensured that crisis became so extended.

“Prior to Bernanke’s study, the general perception was that the banking crisis was a consequence of a declining economy, rather than a cause of it,” the committee said. “Bernanke established that bank collapses were decisive for the recession developing into deep and prolonged depression.

Bernanke demonstrated that the economy did not start to recover until the state finally implemented powerful measures to prevent additional bank panics.”

While Bernanke, Diamond, and Dybvig rush to the bank with their winnings, I will tell you, in just three words, the real cause of the Great  Depression:

LACK OF FEDERAL DEFICITS

And what cured the Great Depression?

FEDERAL DEFICITS

O.K., will you send me my Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel money, or must I travel to Sweden to pick it up/

Ask most people what caused the Great Depression, and they will answer:

  1. I have no idea
  2. Stock market speculation
  3. Bank failures
  4. Unemployment
  5. I still have no idea

Numbers 1 and 5 are the most accurate, while numbers 2, 3, and 4 are small parts of the problem. But the Depression actually was caused by a lack of money.

Readers of this blog have seen these numbers:

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

And this graph:

The blue line shows the annual percentage of economic growth. The red line shows the rate of money growth. Note how parallel they are.

If you want to learn whom to blame, here (from Self Financial, Inc.) they are:

Calvin Coolidge and Warren Harding did exactly what today’s economists would have told them to do: Eliminate federal deficits and run federal surpluses. It all sounds so economically prudent, doesn’t it?

I’m not sure what they thought taking more than $7 billion out of the economy would accomplish, but perhaps “thought” isn’t the appropriate word.

And who  should get credit for ending the Great Depression:

Yes, the much despised Herbert Hoover actually, sort of, kind of was on the right track, but it was the much beloved Franklin D. Roosevelt who understood that what the economy really needed was money, lots of money.

Fortunately for the execution of that realization, Hitler and Hirohito gave Roosevelt the excuse to run a monster (for those days) $236 billion deficit. The economy recovered big time.

For the past 82 years, we endured the continual warnings that the federal debt is a “ticking time bomb,” while the economy grew when the government continued to run ever bigger deficits and only has faltered when deficit growth was insufficient.

Do economists learn from experience? Uh, not so much.

:

Annual percentage changes in federal debt. Recessions are vertical gray bars

Here is a stunning visual showing that federal debt growth falls before every recession. That’s called “lack of money.”

Further, because the cure for lack of money is more money, federal debt growth increases during recessions. That’s when the federal government pumps money into the economy to cure the recession.

Odd, isn’t it, that Congress and the President seem to understand that the cure for a recession is increased federal deficit spending, but don’t seem to understand that the cause of recessions is insufficient federal deficit spending.

It boggles.

It’s as though someone knows that the cure for starvation is food, but doesn’t understand that the cause of starvation is lack of food.

Anyway, back to Bernanke and his award-winning realization that people trust the federal government’s finances more than they trust the private banks’ finances.

The former Fed chief, who pioneered the use of unconventional monetary policies, in particular deploying large-scale asset purchases, is now at the Brookings Institution in Washington. Diamond is at the University of Chicago, while Dybvig is at Washington University in St. Louis.

Under Bernanke’s tenure, the Fed’s balance sheet soared to more than $4 trillion from less than $1 trillion as the central bank sought to foster growth in the U.S. economy pummeled by the global financial crisis.

Diamond explained what his research showed about financial turmoil, and how to avoid it. Crises happen “when people start to lose faith in the stability of the system,” he said.

“The best advice is to be prepared for making sure that your part of the banking sector is both perceived to be healthy and to stay healthy, and respond in a measured and transparent way to changes in monetary policy.”

He didn’t explain specifically how depositors, banks, or the government are supposed to “be prepared.” Amazingly: 

He added that the world is “certainly much better prepared” for any new crises than in 2008.

“Since then, both recent memories of that crisis and improvements of the regulatory policies around the world have left the system much less vulnerable.”

He said that at a time when the Republican Party, which could win the House and the Senate, is 100% opposed to federal spending (though perhaps that is only because a Democrat is President).

Frankly, recent memories and long-term memories don’t seem to be working, or else the politicians would remember the events that preceded every recession and every Depression in U.S. history.

The entire Congress seems hypnotized by the false notion that federal deficits (which add dollars to the economy) are bad and federal debt should be reduced, if not eliminated by federal surpluses (which take dollars from the economy).

In some respects, the risk of such turmoil is even necessary for the financial sector to provide vital functions to society.

“It’s possible, but it’s not necessarily desirable, to never have a financial crisis,” Diamond said. “I think we will probably always be subject to low-probability unexpected crises.”

If he is referring to a recession, we have one of those “low-probability unexpected crises” about every five years on average and are entering one right now. 

But let’s get back to his prize-winning discovery that the federal government has more money than any bank and that banks having government-funded deposit insurance are more trusted than were banks without government aid.

It’s a truly revolutionary idea, but here’s another revolutionary idea: Rather than having the federal government go to all the trouble of financially supporting banks, insuring banks, and regulating banks, by investigating and prosecuting bad banks,

Why not just have the federal government own all the banks?

Private banking is having the great Michael Jordan on your basketball team, but instead of letting him play, you tell him to sit in the stands and critique.

The federal government already does the important things. It sets the banking rules. It sets the interest rates, and it manages the nation’s money supply.

It essentially does everything except extract money from suckers who buy into crazy bank derivatives. The ostensible purpose of derivatives is to spread risk, which wouldn’t be necessary if the government were taking on all the risk.

There is no economic purpose served in putting the nation’s finances into the greedy hands of private bankers. “Lead us not to temptation . . .” indicates that humans have difficulty resisting temptation. Where is the temptation greater than managing a bank and all that money?

Banks should be non-profit, infinitely solvent banks, with most services free to the public, i.e., Federally owned banks.

Where do I get my Sveriges Riksbank Prize?

 

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY