The banking system we take for granted is unfixable. The good news is that we no longer need to rely on any private, rent-seeking, socially destabilizing network of banks, at least not the way we have so far.
Yanis Varoufakis is a former Finance Minister of Greece, Professor of Economics at the University of Athens, and author of several bestselling books including most recently “Another Now: Dispatches from an Alternative Present.” Get the book: https://amzn.to/3GlYGR2
This article originally appeared on the Project Syndicate site click here.+
This time the banking crisis is different. It is, in fact, worse than in 2007/8 when we could blame the banks’ sequential collapse on wholesale fraud, widespread predatory lending, sickening collusion between rating agencies and shady bankers to peddle derivatives whose value was always going to vanish – not to mention a regulatory mechanism that Wall Street-bred politicians, like Robert Rubin, had only recently dismantled.
Today’s bank failures cannot be blamed on any of this. Yes, the Silicon Valley Bank had been foolish enough to combine a strategy of taking on severe interest rate risk while serving mostly uninsured depositors. Yes, Credit Suisse had a sordid history with criminals, fraudsters and corrupt politicians. However, unlike in 2008, no whistleblowers were silenced, banks complied (more or less) with the post-2008 beefed-up regulations, and their assets were relatively solid. Moreover, again unlike 2008, none of the regulators in the United States and Europe could credibly claim to have been blind-sighted.
In fact, regulators and central banks knew everything. They enjoyed full access to the banks’ business models. They could see vividly that these business models would not survive the combination of significant long-term interest rate rises and a sudden depositor flight. And yet, they did nothing. Why? One explanation is that they failed to foresee herd-like panic-stricken flight by large, and thus uninsured, depositors? Perhaps. However, the real reason central banks did nothing when confronted by the fragile business models of the banks under their purview is even more disturbing: It was the central banks’ response to the 2008 financial crash that had given birth to the banks’ fragile business models. And they knew it!
Our states’ post-2008 policy, practised simultaneously in Europe and the United States, of harsh austerity-for-most and state-socialism-for-the-bankers had two effects that shaped financialised capitalism over the last fourteen years: First, it poisoned the West’s money. More precisely, it ensured that there is no longer a single nominal interest rate (e.g., a number such as 3.6%) capable of restoring the balance between money demand and money supply while, at once, averting a wave of bank failures. Secondly, Western bankers assumed that, if and when inflation reared its ugly head again, central banks would increase interest rates with one hand while bailing them out with the other hand – since it was common knowledge that there exists no single interest rate that achieves both price stability and financial sector stability. Which is, of course, precisely what we are witnessing now!
Faced with the stark dilemma between curbing inflation and saving the banks, venerable commentators appeal to central banks to do both: to continue hiking interest rates while continuing with the socialism-for-bankers post-2008 policy that is the only policy which can, others things being equal, stop the banks from failing one after the other. This strategy of tightening the monetary noose around society’s neck while lavishing bailouts upon the banking system is the only way the authorities can simultaneously serve the interests of the creditor class and of the banks. It is also a sure way of condemning the majority to unnecessary suffering (in the hands of avoidably high prices and preventable unemployment) while, also, sowing the seeds of the next banking conflagration.
Lest we forget, we have always known that banks were designed not to be safe and that, together, they comprise a banking system constitutionally incapable of abiding by the rules of a well-functioning market. The problem is that, so far, we had no alternative: Banks were the only means of channelling money to the people, through their tellers, branches, ATMs etc. That lack of alternatives turned society into a hostage of a network of private banks that monopolised the functions of payment system, store of savings and source of credit. However, today, technology has furnished us with a splendid alternative.
Imagine that the central bank provided everyone with a free digital wallet, effectively a free bank account bearing interest at the central bank overnight rate. Given that the current banking system functions like an anti-social cartel, the central bank might as well use modern digital, cloud-based technology to provide free digital transactions and savings storage to all, its net revenues paying for essential public goods. Freed from the compulsion to keep their money in a private bank, and to pay through the nose in order to transact using its system, people will then be free to choose if and when they wish to use private financial institutions offering risk intermediation between savers and borrowers whose monies will, however, live in perfect safety on the central bank’s ledger.
It is at around this point of my proposal that the crypto brotherhood will feign a fit, accusing me of pushing for a Big Brother central bank that sees and controls every transaction we make. Setting aside their stunning hypocrisy, days after they demanded an immediate central bank bailout of their Silicon Valley bankers, let me point out that the Treasury and other organs of the state already have access to each transaction of ours. Indeed, privacy could be better safeguarded if transactions were to be concentrated on the central bank ledger under the supervision of something like a Monetary Supervision Jury comprising randomly selected citizens and experts drawn from a wide range of professions.
In summary, the time has come to reach an inevitable conclusion: the banking system we take for granted is unfixable. That’s the bad news. But there is good news. We no longer need to rely, at least not the way we have so far, on any private, rent-seeking, destabilising network of banks. The time has come to blow up an irredeemable banking system which only delivers for property and share owners at the expense of the majority.
Coal miners have found out the hard way that society does not owe them a permanent subsidy to damage the planet. It is time for the bankers to make a similar discovery.