More laws could function as bandages, slowing the hemorrhaging as wealth flows from most of us to a tiny few.
Use existing law
Break up the banks deemed too big to fail
The simplest and most immediate action we can take is to break up the biggest banks. They were deemed too big to fail in 2007– when we bailed them out. Now they are even bigger: the five largest banks have increased their share of the banking industry, adding $2. trillion in domestic deposits over the past 10 years – a 180% increase.8 Almost half of America’s banking assets are under their control. In 2017 that left the other half to be divided up among 4,852 other institutions.9 A very small number of decision-makers have too much control over our economy. The advantage to our nation of breaking up these big banks far outweighs the advantages of scale to their few shareholders.
The 2010 Wall Street Reform and Consumer Protection Act includes a means of breaking up the biggest banks. We need leadership with the courage to use the law and break them up. Consider the courage of your Congressmen at election time.
Create $Trillion coins
Under established law and practice, the US Government creates our coinage, and retains the seignorage. The US government could create $1 billion or $1 trillion coins and use them to pay off all government debt and/or use them to jump start our economy with spending on infrastructure. This is one way to work around the privileges of the private sector banks in our current system. Without changing any laws, it uses precedent and the literal passage in our Constitution about Congress’s power “to coin money.” However, it would not put an end to the exponentially growing money supply; the government would join the exponential expansion folly, instead of actually making a substantive change to the whole system. But, it could be a useful short-term bridge.
Tax Adjustments
Bank taxes
Great Britain is considering a tax on the liability balance of the banks (all the money they have created and promised to produce on demand). Think of this as an insurance premium. If a bank has liabilities over a certain amount, it must pay the government an insurance fee to provide too-big-to-fail bailout insurance. Remember, these banks use the seignorage on the money they create. A tax on this money creation is one way to put a small percentage of the seignorage into the public coffers. It is a tax in terms of how it would be collected from the banks and put into the government account. The US could implement such a tax.
Wall Street transaction taxes
In the US there is talk about a tax on Wall Street transactions. Since most of the transactions are now high speed and made on borrowed money, this would cut down on the ratio of speculation to real market exchanges and would reduce the cost of everything. This would be an enormous boon to the Main Street economy. And of equal importance, it could raise enough to pay for college education for everyone who wants it (Bernie Sanders’ plan). This tax proposal deserves a hearing. It would bring the number of speculative transactions down to a level closer to a service, instead of a way for wealthy financial gamers to gouge the rest of the nation.
Individual income taxes
Since the system as-is tilts the playing field heavily to the benefit of the very rich, it would make sense to return to the progressive tax rates of 50–90 percent for the highest earners’ incomes over $500,000–$1 million/ year – or whatever is the equivalent of 10– times median income. These tax rates prevailed during the 1940s through 1960s, when our economy prospered. Contrary to what the one percent would have us believe, high taxes on the rich did not kill jobs or slow the economy.
Stricter banking laws
Establish a modern version of Glass-Steagal
The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) tightened bank safety requirements. For example, it requires banks have a ratio of 8 percent equity to assets, instead of the 2–4 percent common throughout the last 20 years of the 20th century. However, as noted previously, US accounting standards allow banks to keep so much off the books, their exposure and leverage is closer to the old 4 percent. Additional laws could limit the scope of bank holding companies (corporate entities including both money creator deposit banks and risk-taking investment, insurance, hedging and trading financial agencies) and put a damper on banks’ lending to their own investment friends. New law could be an update to Glass- Steagal that closes any loopholes allowing our highly secretive and off-balance sheet shadow banking sector to play the system. However, the Republican platform states that getting rid of Dodd-Frank is high on its to-do list, and reducing instead of increasing financial protections is already happening under a Republican Congress and president. These actions are amplifying the size of the next crash.
If we want to keep the existing system, it would be prudent to tighten the standards, rules, regulations, and oversight, so that our entire economy has a chance of pulling back from the looming brink of collapse. But, look at the exponential curve and share my concern that only systemic change can block a catastrophic meltdown.
More watchdogs with Integrity
Crony corruption is entrenched in our watchdog agencies. We can fund the watchdog agencies at a higher level. I like the idea of a standard one percent budgeted for all government spending to pay for an ombudsman, inspectors, and experts in fraud detection, monitoring and compliance. It would save us in the long-run.
We can write laws requiring watchdog agencies be staffed with people without a past or future conflict of interest; someone cannot move back and forth between a regulatory position and the regulated businesses. We could make a law requiring our watchdogs commit not to work for the industries they regulate for at least five years after they leave watchdog service – and then pay them well enough to make this level of integrity worth their while. All too often government employees are recruited during their government service. Then they make rulings favorable to their future employer, quit, and step into the lucrative payoff job in the private sector.
In August 2018, Senator Elizabeth Warren presented a comprehensive plan to reduce corruption in Washington that is worth attention.
Bring the shadow banking sector into the sunlight
The banks currently run operations off their balance sheets that may represent a third to half of their exposure and banking activities. A money creator bank, with our entire economy in its hands, should not be allowed to keep anything off their balance sheet. If they’ve exposed themselves to a liability, no matter how tangential, this exposure should see the light of day, front and center. It might need to be in a new column or category on the books, but there is no way a marketplace has any level of free choice when the people creating and manipulating our money and financial systems are allowed to hide their actions and their true status in the footnotes.
Adjust the Fed system
Cut dividends on capital stock
Currently, the private banks are paid 6 percent annually on their shares in the Federal Reserve System. These shares are the capital stock purchase that the banks are required to buy to belong to the system. They are currently guaranteed a 6 percent annual dividend on these shares. This expense is deducted from the seignorage on the central Fed’s money creation, before the net is passed to our government.
Some have suggested this dividend be reduced to 5 percent or less. This would be a reasonable way to tilt the balance back a little toward the common wealth. According to the 2014 Fed financial report, a cut of one percentage point would send another $281 million to the government. That is not much. Since bankers reap considerable benefits from belonging to the Fed – in addition to bankers’ privilege of money-creation power – why should the member banks get a guaranteed return on their membership investment at all? Why isn’t the share price the cost to belong, with no further annual dividend benefits? In 2014 cutting this payout entirely would have put an additional $1.7 billion into the government account – a slightly more equitable sharing of seignorage on the money that banks create.
Cut interest on reserves
In 2006, Congress passed the Financial Services Regulatory Relief Act, which among other things authorized the Federal Reserve to begin paying interest on certain types of reserves held by their member banks. This was intended to give the central Fed more control over the interest rate at which the banks lend to each other (federal funds rate). It was intended to encourage an increase in the level of reserves the banks kept, without a regulation requiring a higher level - carats, instead of a stick. There is little evidence it is providing the control the central Fed wanted, but it is another candy jar for the member banks.
For the 50 years prior to this 2006 law, banks kept about 10 percent more in reserves on deposit with the Fed than required. While this new interest payment is small – 0.25 percent – it encouraged the banks to increase their deposits astronomically. In 2007, when this interest incentive to hold reserves was new, the banks kept an extra $1.8 billion in reserves over a required $43 billion – an addition to their surplus of about 4 percent, all earning them interest. By 2012, banks’ required reserves increased to about $100 billion – a terrifying doubling of their overall assets and money creation in just 4 short years!10
Equally astounding, their excess reserves earning interest averaged $1,500 billion! – more than 14 times their required deposits! By 2014 the Fed was paying out $6.9 billion to depository institutions on reserve balances and term deposits. This has been another way to soak up the incredible amount of new money the banks are creating, but it is once again a boon to the bankers and a drain on the public and taxpayers. In essence, banks get paid to create money and keep it in their account at the central bank. This money is not circulating or benefitting anyone except the bankers.
We could change the law and remove this interest. But if the banks are no longer earning interest on these reserves, they have no motivation to keep them at the Fed. If they move this very large sum of money into the economy, we will see a spike in inflation previously moderated by the hoarding of these reserves. The interest payments on reserves created a bigger problem than they solved. This maneuver may be a reason the next meltdown has been postponed, but now we are over a barrel paying these billions to the bankers for money they have over-created. Truly, the only way out of this box may be to change the money system entirely to a common wealth money system.
No Interest Government Debt
Currently, WE the people borrow money from the Fed. The Fed creates new money for our government. We pay interest on this debt to whoever holds it: to the Fed if they hold it on their books; or to foreign nations; or to the general public.
From 2006–2016 the Fed purchased and held almost $4 trillion in assets on its books, of which $2.6 trillion are securities from the US Government. The US Government is paying interest to the Fed on those securities (IOUs). The Fed subtracts its expenses, including paying required 6 percent earnings to its member banks and interest on their member banks’ reserves. Then it pays the net back into the government coffers. This is an unnecessary merry-go-round. We do not need to follow this convoluted process or pay interest on government debt to the Fed. The Fed earns plenty of money in other ways to cover its expenses.
Congress could pass a law that US government debt securities currently held on the Fed’s balance sheet will no longer accrue any interest. They could still be bought and sold by the Fed to change how much money is in the economy; they will simply no longer pay interest. This might reduce the number of potential buyers and it might not. Because of insecurity and instability in the global banking system, many governments have been considering negative interest on their bonds. Negative interest means people are paying to have an IOU from a government, instead of earning interest on it. This sounds crazy, but when financial markets are volatile and it’s possible to lose up to half the value of your asset, paying to have a government bond may be a good deal. Again, think about where we are on that exponential curve.
Or, just as the Fed creates money to buy the debts of banks and private companies, the Fed could begin to buy up all available US government debt and keep it on its balance sheet. Congress could wipe out any interest accrual on this debt. The problem with this 100% buy back solution is it doesn’t go far enough. As long as the banks can continue to create new money, which they will do at the same exponential rate they do now, then as the Fed purchases government debts, more money will flood the economy. This would have an impact on the value of our currency; it could cause inflation. And the inflation would be inaccurately blamed on the Fed’s creation of money by buying government debt, and NOT on the private bankers’ continuing creation of new money. It would also deprive the banks of a cash equivalent asset, and leave them scrambling to strengthen their balance sheets.
Substantial foreign holdings of US debt undermine our ability to make economic and foreign policy in our nation’s overall best interest. Foreign governments can threaten to sell and flood the market with their extensive holdings of US debt. Generally, this would not be good for either party, so they would likely refrain, but the fact they can make serious threats means they can blackmail us into undue consideration of policies serving the interests of other nations and of the global money powers. Buying back our government debt from foreign powers would put us in a better position.
After the Fed, the largest holdings of US public debt belong to foreign nations ($6.3 trillion, December 2017). The top three nations are:
- China – $1,185 billion
- Japan – $1,062 billion
- Ireland – $ 327 billion
According to the Fed, in 1980, foreign and international investors held $118.2 billion in US government debt, when our GDP was $2,863 billion. Debt held by foreigners was equal to 4 percent of GDP.11 In 2016 with an $18,570 billion GDP, foreign investors held $6,006 billion – a sum equal to 32 percent of our GDP – a red flag.
Another benefit of a debt-free government is a decrease in the cost of government. As noted previously, currently 17 percent of our taxes paid into the government operating fund go to pay interest on government debt. As this interest diminishes and vanishes, taxpayer money could go towards services and/or reducing taxes. Either way it puts money into Main Street through government service spending, or through tax reductions.
Allow competition in transfer services
The British central bank, The Bank of England announced in June 2016 it will be adopting a policy change allowing non-bank payment service providers to hold accounts at the Bank of England.12 This means financial technology companies can compete directly with banks in providing transfer, storage and accounting services. This competition is likely to demonstrate that payment-transfer services can be provided cost-effectively without the power banks have to create money. The US could do this, too.
Same-same
Do what we’re doing – get what we’re getting
If we keep our system, even with increases in regulation, we will still have the boom and bust cycles and be heading up an exponential curve toward total collapse. New regulations will only stretch out the time between cycles and put off collapse for a few years.
Let’s discuss these bandage strategies, assess the pros and cons of implementation and compare their cost to a whole system change.