Horse and Buggy Banking

Too-Big-To-Fail: The sequel

By Mike Krauss

The creation of the Federal Reserve in 1913 was a fateful end-run around democratic government. It gave control of the supply and cost of the nation’s money and credit to what is in fact a private banking cartel — Wall Street.

It was sold as a great reform — taking these vital matters out of the hands of those elected in the political process, and giving them to the experts.

“In experts we trust.”

But this set-up made it possible for a small number of people in the private banking industry to accumulate fantastic wealth and political power at the expense of the whole of the American people. That was, of course, the intent.

Now, as Americans survey the wreckage of the economy and deride Fed Chairman Ben Bernanke as the greatest failure in the history of modern economics, the experts don’t look so good.

So they have doubled down, arguing that the U.S. has a “horse and buggy” regulatory system for a 21st century financial system, and what we really need is a more centralized and interconnected regulatory system, run by the experts, to manage a centralized and interconnected banking system.

This puts the American people between a rock and a hard place.

When Wall Street wanted to change an accounting rule, so that the banks’ near-worthless mortgages could be booked at several times their value, or wanted to exclude liabilities from the balance sheets altogether in order to mislead investors, boost the stock price and insure the gigantic bonuses, they had to deal with an agency that reports to Congress.

But since Wall Street owns Congress, this was no big problem.

Similarly, Wall Street is now spending millions in lobbying and campaign contributions to protect its gigantic derivative business. The latest quarterly report from the Office of the Comptroller of the Currency reports that four banks hold $250 trillion in the gross notional amount of derivative contracts outstanding, a whopping 95.9 percent of all derivative exposure.

One shock, one failed gamble of the kind that brought down AIG and Lehman Brothers, and there won’t be enough money in the world to cover the losses — not that they won’t try.

This is “Too-Big-To-Fail,” the sequel.

Incredibly, these same banks want more risk and are buying Congress to get it. As the New York Times lamented in an editorial, one bill would exempt a host of derivatives transactions from almost all regulation. Another would water down pending rules to require that most derivatives be traded on open exchanges, where investors can at least see what is going on. A third would let the banks trade derivatives through foreign subsidiaries and away from the scrutiny of U.S. regulators, which the Times accurately called “a loophole that would virtually invite banks to engage in unregulated transactions on a potentially vast scale.”

So, there’s the rock. A bought Congress and unbridled risk taking on Wall Street, with the capacity to sooner or later deliver another shock to the American economy — this time possibly fatal.

Now here’s the hard place. Give the Fed more control.

The Dodd-Frank “reform” creates the Consumer Financial Protection Bureau (CFPB). This sprawling new bureaucracy will be as reported, “an independent unit located inside and funded by the United States Federal Reserve.”

Independent of what and who? Well, of the Congress and the American people.

The CFSB will be funded, managed and staffed by the Fed. It won’t need to ask the Congress for nothin’. And that is precisely what Congress and the American people will get from them in the way of information and accountability.

The CFSB will “write and enforce bank rules (and) conduct bank examinations.” The Fed owns the CFSB and Wall Street owns the Fed. Think the Wall Street banks will pass the test?

The idea that the “expert” regulators cannot also be bought is laughable. In its least crude form, the purchase price is called the “round trip ticket” — depart Wall Street to Washington from a $500,000 a year job, to a few years of “public service” as a regulator at maybe $175,000 a year, and return Washington to Wall Street for $5 million a year.

There is a way out of this trap. It is to bypass the American central banking system and its incestuous relationship between the regulated and the regulators — whether the politicians or the experts — and create a network of locally authorized, autonomous, democratically operated and locally accountable public banks at the state and municipal level, to partner as “mini-Feds” with local banks and financial institutions in the business of banking and not speculation.

The U.S. banking and economic crisis was not brought on by antiquated banking regulation. Its cause is antiquated banking — the same “horse and buggy,” centralized banking system of 1913, organized now as a century ago to insure Wall Street against the certain losses of reckless speculation, at whatever the cost to the American people.

And it fails to create the affordable credit which in modern societies is an absolute necessity for economic development and the creation of widespread wealth and prosperity.

Public banking can address both these needs and bring American banking into the 21st century

Mike Krauss is a director of the Public Banking Institute and chairman of the Pennsylvania Project. www.papublicbankproject.org Email mike@mikekrausscomments.com