Misplaced praise for the financial sector ignores the elephant in the room – private banks are some of the most heavily-subsidized businesses in the world. A justification for public banks
Despite the never-ending praise lavished on the financial services industry and especially the City of London by figures like Boris Johnson, the financial sector is actually a net drain on society. Boris is the habitual defender of white collar crime, be it HSBC laundering money for Mexican drug cartels, the Libor scandal (big banks manipulating interest rates) or the widespread mis-selling of financial products, in the eyes of Boris the city boys can do no wrong.
Leaving corruption, market manipulation and money laundering aside, to paraphrase Sam Seder in his excellent Minority Report critique of the corporate media fawning over the abysmal record of JP Morgan CEO Jamie Dimon, the financial services industry could not operate in its current form without massive government subsidies. Thankfully for the City of London, the UK government does far more than bend over backwards to ensure record profits for the too big to fail banks.
By abrogating its responsibility to issue the nations money supply, the government is gifting huge subsidies to the financial sector. The (UK) government does generate some seigniorage revenue from issuing notes and coins but the vast majority of our money (97%) is created effectively free of charge by commercial banks when they make loans. The banks have the audacity to charge interest on this newly created money, to households, businesses and government – meaning we are, in effect, paying to rent our money on a temporary basis.
According to Professor Margrit Kennedy writing in Occupy Money, a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from the real economy to the City. The rich get progressively richer at the expense of the rest of us, not just because of “Wall Street / City of London greed” but because of the inexorable mathematics of our private banking system.
Ellen Brown explains that “this hidden tribute to the banks will come as a surprise to most people, who think that if they pay their credit card bills on time and don’t take out loans, they aren’t paying interest. This, says Dr. Kennedy, is not true. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills. They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later. Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer.”
This interest-bearing, debt-based, parasitic banking system inevitably leads to the economic disparity Russel Brand railed against during his recent appearance on BBC Newsnight; where just 8.4% of all the 5 billion adults in the world own 83.4% of all household wealth (that’s property and financial assets, like stocks, shares and cash in the bank) and the top 1% own 41% of all wealth. This global wealth inequality is set to rise in the coming years. While governments attempt to placate the population and the corporate media continue to avoid investigating and reporting on the real causes of this obvious injustice, many people are turning to independent sources and looking for sustainable solutions which will expose and eventually remove this hidden tribute to the banking class. Public bank solutions are being proposed across the US and beyond as a way to avoid wealth being extracted from the poor for the benefit of the rich.
Public banks like the Bank of North Dakota are good for all sorts of reasons but the main one must be that even though they charge interest (albeit at much lower rates than commercial banks), this money goes back into the local economy (lowering taxes or increasing services) rather than into the pockets of the obscenely wealthy.
The Public Banking Institute is working with grass roots organisations in Philadelphia to formulate ideas for governance, mission and capitalisation of a public bank for their city. Arian Cymru (Money Wales) are taking their first tentative steps to investigating the viability of a public bank serving the needs of Welsh communities. These groups are not waiting for politicians to fix their economies; they are taking that right (to borrow the powerful closing remark from Russell Brand). We can no longer afford to wait for others to provide remedies to our economic woes. Our children will never forgive our continued disengagement. The time is now!
Rather than the powerhouse of the economy as Boris likes to imagine, private banks are some of the most heavily-subsidised businesses in the world, notwithstanding the huge subsidies gifted to the military and arms companies.
This subsidy is obviously completely separate to the moral hazard inducing deposit insurance provided by governments, effectively insuring customer deposits thereby enabling banks to make all manner of risky bets with ‘our’ money.
The other implicit government guarantee protects banks, money market institutions and insurance companies by declaring some banks too big to fail. So, large banks require a public subsidy to be profitable and are too big and important to fail. This subsidy incentives them to take risks they otherwise would not, increasing the likelihood of them failing. Of course, being too big to fail, or too complex and secret to regulate, when they do fail the government must step in to rescue them. Even the former Governor of the Bank of England, Mervyn King can’t see the sense in the system. While not specifically calling for public banks he alluded to their necessity when he declared:
“it is hard to see why institutions whose failure cannot be contemplated should be in the private sector in the first place”.
Banking doesn’t have to be a casino. It doesn’t have to be designed to create gambling opportunities so bank traders and executives can make seven- and eight-figure salaries. Banking should not even attract these psychopathic personalities. Banks should be run in the interests of the economy they serve. They should be sustainable, prudent, flexible, and conservative (with a small c) and some may argue, boring. Above all they should be public!