I am not the only person to think Janet Yellen got very close to effectively nationalising large parts of the US banking system on the last week. US commentator Ellen Brown, who is very good in banking issues, also did. Her commentary on what comes next is worth a read, but I offer a spoiler alert: it is not nationalisation, as yet, in her opinion. I am not so sure.
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I would prefer to say this would be more of a nationalising the money supply rather than the banks, who would remain private enterprises.
It is after all,” our ” money supply not the banks.Money It is a Sovereign issue
As an idealistic student at Exeter in 1970 I tagged along to barrack Ted Heath on a visit to Plymouth. The chant was “Hands off the unions, nationalise the banks.” Still relevant over 50 years later. Anyone for a three day week?
🙂
3 days? Richard is on a 9 day week! (Measured by the output)
What comes next for U.S banks?
Well more money of course and dollar imperialism:
– a possible war with China?
– an invasion of Iran?
We know we need banks to run a payments system and “store” our money.
We know we need banks to engage in maturity transformation and offer credit to the real economy.
We know that banks, left to their own devices, will take too much risk and fail.
We know that efforts to rein in that excessive risk will always be flawed.
We know that there are risks out there that we just don’t know.
We know that we want unsophisticated investors to be protected from bank failure.
How DO we get this right?
I am glad to see that Ellen Brown has picked up on the idea of a “Girobank” (or Bank of North Dakota in the US). I think it makes a lot of sense to set up a State Bank that can do all the “everyday stuff” that most ordinary folk need and is 100% safe. In the UK it would operate through the Post Office branch network and be linked in to NS&I. (It could also give legs to the Central Bank Digital Currency project)
With that in existence it would be possible to follow through with intention/thrust of all regulatory change since 2008… (1) get more capital in the banks to absorb losses before depositors get hit (2) get rid of interbank exposures that make the system “domino like” (3) allow banks to fail. The problem is that, at present, when the crunch comes there is no willingness to allow a failure because the losers (depositors) would argue they have no alternative. If there was a risk free alternative available, if there was a higher deposit guarantee figure and (perhaps most importantly) if there was a clear political statement that once these measures were in place, there would be no more bailouts…. we might just be getting closer to a better balance of risk reward between depositors (small and large), bank bondholders (or varying seniority), bank shareholder, bank executives and the State.
We might also see a huge contraction in the amount of credit available to the economy….. and I would argue that this – if managed gently – might, in the long run, be a good thing. We would all be better off with a less leveraged life.
Much to agree with there
In Ellen Brown article to which you refer, Richard she refers to Jimmy Stewart’s ‘Its a Wonderful Life’ (19460, and hits the nail on the head. It is a seminal film about both America and how Banking works, and how it ruins (specifically High Street/Main Street banking); and goes to the heart of public understanding of how banks work. It is therefore a powerful metaphor for public understanding of banking, and an invaluable educative tool (It is worth using more widely, because everybody loves the film).
Perry Mehrling uses the Jimmy Stewart banking reference extensively; and here is how he bridges that idea to real problems – in this case the 2008 mortgage securities crash; but it has wide, deeper, continuing resonance. Of course I have had to skip much of his embedded argument for the sake of viable brevity in a comment, but you can read Mehrling’s full paper online,’Financial Globalization and the Future of the Fed’ (2012):
“The Jimmy Stewart bank issued deposits and used the proceeds to fund mortgage loans. The Shadow Bank issued money market instruments and used the proceeds to fund mortgage-backed securities.
The analogy can be extended. Depositors in the Jimmy Stewart bank were protected from possible bank insolvency by a deposit insurance scheme (the FDIC) and from possible bank illiquidity by a lender of last resort facility (the Fed). Creditors of the Shadow Bank were protected similarly by a private asset insurance scheme—credit default swaps—and a private liquidity put to the traditional banking system. But these were supposed to be ultimate backstops only. Just as the Jimmy Stewart bank held capital and liquidity buffers that kicked in before the government backstop, so too did the Shadow Bank. These buffers are what is most important to understand because they are what failed.
Unlike the case of Jimmy Stewart banking, the capital buffer of the Shadow Bank was not on its own balance sheet but rather in the rest of the system. Losses on the underlying mortgages were supposed to hit first the Lo Tranche, which I show as an asset held by a Hedge Fund. Second losses would hit the Mid Tranche, which I show as an asset held by a Pension Fund. The capital of these two Funds was therefore in effect the capital buffer of the Shadow Bank. Only very severe losses would hit the Hi Tranche, and the CDS backstop was there to cover this presumably improbable event.
The liquidity buffer of the Shadow Bank was also in the rest of the system. By construction, the Hi Tranche assets of the Shadow Bank were collateral for short term money market borrowing, such as term funding using Asset Backed Commercial Paper, which might for example be sold to an institutional Money Market Mutual Fund. If that buffer dried up, there was always the general repo market where good collateral could be used to raise funding at shorter term. The liquidity buffer of the Shadow Bank was thus on the balance sheet of the MMMF and the repo dealer, not the Shadow Bank itself. Only very severe liquidity crunches would impair Shadow Bank liquidity, and to cover that presumably improbable event there was the liquidity put to the traditional banking system.
From a Jimmy Stewart point of view, shadow banking thus looks like a way of doing more or less exactly what traditional banking does, but with more steps, less regulation, and no (direct) government backstop. For critics of shadow banking, it looks like a case of socially inefficient technology gaining a toehold because regulatory evasion makes it privately profitable. For enthusiasts, by contrast, it looks like a case of demonstrably superior technology gaining a toehold by finding ingenious ways to overcome inefficient and outmoded regulatory strictures.” (Mehring, p.5).
Thanks
Very oddly it was the first film my wife and I saw together
And that was before we were going out together. She apparently liked my opinion on the fil during discussion of it
You see! Clearly you have much to thank the film for! I rest my case.
“It also illustrates another problem in banking regulation. Even if you are successful and you kick the risk and shysters out of banking they migrate elsewhere to ply their trade at our expense.”
Thanks Clive. The problem is – at my age I will take a lot of convincing that you can crack this problem as longs as commercial bankers operate as, ehm, commercal banker; the only migration they do is from piracy to privateer, and back again to piracy; depending on circumstances. How did they fix piracy? They hanged the leading pirates, and the rest moved into the Royal Navy. Here is how it worked: from (private sector) piracy, to (public-private) privateer – deniable by Government, if you should be found out; finally to (public sector) Royal Navy.
Look at it from another perspective. Different institutions attract different people, for different reasons. There is an intrinsic relationship between their characteristics, depending on their cultures and history. I do not think you can fix the problem, and retain a meaningful culture of commerical banking. We do not think sufficiently about this problem because neoliberal economists want to solve everything with an equation.
Ah – Asset Backed Securities. Yes, they do look like an unregulated bank on auto-pilot.
Take a bunch of anything that has reasonable steady cash flows (like a bank loan book) and put into a Special Purpose Company; SPC issues bonds that are backed by the underlying cash flows in a waterfall system where the senior bonds get the cash they need (and get rated AAA) those lower down the pecking order only get water once those above are satisfied (and are more lowly rated).
The SPC looks like a bank; the senior bond holders look like depositors, the junior bond holders look like, well, junior bond holders and the owners of whatever is left looks like the shareholders of a bank…. indeed, this piece is often called the “equity piece”.
In effect, by creating the SPC, selling off the bonds and retaining the equity piece, the bank is distilling all the economics of the loan book down into a small equity piece that, (prior to 2008) required less regulatory capital to back it.
What could possibly go wrong?
Now, in the right hands and in the right circumstances it is a great idea…… but they do have a propensity to cause trouble!
It also illustrates another problem in banking regulation. Even if you are successful and you kick the risk and shysters out of banking they migrate elsewhere to ply their trade at our expense.
Panic over apparently. The Richmond Fed says it OK to back all deposits and also put up interest rates,they are “different issues” and he can’t see any problems.That is fine of you are a bank of course, the rest of society will pay as usual.
https://www.reuters.com/markets/us/fed-officials-say-sense-financial-stability-cleared-path-rate-hike-2023-03-24/?utm_source=Sailthru&utm_medium=Newsletter&utm_campaign=Weekend-Briefing&utm_term=032523