The Banking System Needs to be Fixed

In my mind, ever since Financial Accounting Standards Board (FASB) allowed the banks to value things like mortgage-backed securities and real estate at whatever  they think they will be worth in the future, the system was insolvent.  The banking insolvency problem in America is so profound (FASB) changed the accounting rules in April of 2009 to cover it up.  In short the big banks,who control most of the assets in this country, are a mess and the system needs to be fixed.  Ellen Brown of Webofdebt.com has written another interesting article on Public Banking.  The basic premise is to treat banks more like public utilities than the gambling casinos they have turned into.  I do not know if this will fix all of our financial problems, but I think it might be a very good start.  Please enjoy her post below.–Greg Hunter–

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Public Sector Banks:

From Black Sheep to Global Leaders

 

Ellen Brown

http://WebofDebt.com/articles

March 7, 2012

Once the black sheep of high finance, government owned banks can reassure depositors about the safety of their savings and can help maintain a focus on productive investment in a world in which effective financial regulation remains more of an aspiration than a reality.

Centre for Economic Policy Research, VoxEU.org (January 2010)

 

Public sector banking is a concept that is relatively unknown in the United States.  Only one state—North Dakota—owns its own bank.  North Dakota is also the only state to escape the credit crisis of 2008, sporting a budget surplus every year since; but skeptics write this off to coincidence or other factors.  The common perception is that government bureaucrats are bad businessmen.  To determine whether government-owned banks are assets or liabilities, then, we need to look farther afield.

When we remove our myopic U.S. blinders, it turns out that globally, not only are publicly-owned banks quite common but that countries with strong public banking sectors generally have strong, stable economies.  According to an Inter-American Development Bank paper presented in 2005, the percentage of state ownership in the banking industry globally by the mid-nineties was over 40 percent.[i]  The BRIC countries—Brazil, Russia, India, and China—contain nearly three billion of the world’s seven billion people, or 40% of the global population.  The BRICs all make heavy use of public sector banks, which compose about 75% of the banks in India, 69% or more in China, 45% in Brazil, and 60% in Russia.

The BRICs have been the main locus of world economic growth in the last decade.  China Daily reports, “Between 2000 and 2010, BRIC’s GDP grew by an incredible 92.7 percent, compared to a global GDP growth of just 32 percent, with industrialized economies having a very modest 15.5 percent.”

All the leading banks in the BRIC half of the globe are state-owned.  In fact the largest banks globally are state-owned, including:

A May 2010 article in The Economist noted that the strong and stable publicly-owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the rest of the world in the last few years.  According to Professor Kurt von Mettenheim of the Sao Paulo Business School of Brazil:

Government banks provided counter cyclical credit and policy options to counter the effects of the recent financial crisis, while realizing competitive advantage over private and foreign banks.  Greater client confidence and official deposits reinforced liability base and lending capacity.  The credit policies of BRIC government banks help explain why these countries experienced shorter and milder economic downturns during 2007-2008.

Surprising Findings

In a 2010 research paper summarized on VoxEU.org, economists Svetlana Andrianova, et al., wrote that the post-2008 nationalization of a number of very large banks, including the Royal Bank of Scotland, “offers an opportune moment to reduce the political power of bankers and to carry out much needed financial reforms.”  But “there are concerns that governments may be unable to run nationalised banks efficiently.”

Not to worry, say the authors:

Follow-on research we have carried out (Andrianova et al, 2009) . . . shows that government ownership of banks has, if anything, been robustly associated with higher long run growth rates.

Using data from a large number of countries for 1995-2007, we find that, other things equal, countries with high degrees of government ownership of banking have grown faster than countries with little government ownership of banks. We show that this finding is robust to a battery of econometric tests.

Expanding on this theme in their research paper, the authors write:

While many countries in continental Europe, including Germany and France, have had a fair amount of experience with government-owned banks, the UK and the USA have found themselves in unfamiliar territory. It is therefore perhaps not surprising that there is deeply ingrained hostility in these countries towards the notion that governments can run banks effectively. . . . Hostility towards government-owned banks reflects the hypothesis . . . that these banks are established by politicians who use them to shore up their power by instructing them to lend to political supporters and government-owned enterprises. In return, politicians receive votes and other favours. This hypothesis also postulates that politically motivated banks make bad lending decisions, resulting in non-performing loans, financial fragility and slower growth.

 

But that is not what the data of these researchers showed:

 

[W]e have found that . . . countries with government-owned banks have, on average, grown faster than countries with no or little government ownership of banks. . . . This is, of course, a surprising result, especially in light of the widespread belief—typically supported by anecdotal evidence—that ‘… bureaucrats are generally bad bankers’ . . . .

What accounts for their surprising findings?  The authors provide a novel explanation:

We suggest that politicians may actually prefer banks not to be in the public sector. . . . Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians – at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies.  Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders such as complex derivatives trading.

Government owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed, if at all, for the misdemeanours of private banks. It is the shareholders who are expected to prevent these but lack of transparency and weak governance stops them from doing so in practice. On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth.

The BRICs as a Global Power

Focusing on the financing of real businesses and economic growth seems to be the secret of the BRICs, which are leading the world in economic development today.  But the BRIC phenomenon is more than just a growth trend identified by an economist.  It is now an international organization, an alliance of countries representing the common interests and goals of its members.  The first BRIC meeting, held in 2008, was called a triumph for former Russian President Vladimir Putin’s policy of promoting multilateral arrangements that would challenge the United States’ concept of a unipolar world.

The BRIC countries had their first official summit and became a formal organization in Yekaterinburg, Russia, in 2009.  They met in Brazil in 2010 and in China in 2011, and they will meet in India in 2012.  In 2010, at China’s invitation, South Africa joined the group, making it “BRICS” and adding a strategic presence on the African continent.

The BRICS seek more voice in the United Nations, the IMF, and the World Bank.  They are even discussing their own multicultural bank to fund projects within their own nations, in direct competition with the IMF.  They oppose the dollar as global reserve currency.  After the Yekaterinburg summit, they called for a new global reserve currency, one that was diversified, stable and predictable; and they have the clout to get it.  According to Liam Halligan, writing in The U.K. Telegraph:

The BRICs account for . . . around three-quarters of total currency reserves. They have few serious fiscal issues and all are net external creditors.

Western financial interests have long fought to maintain the dollar as global reserve currency, but they are losing that battle, despite economic and military coercion.  Russia, China and India are now nuclear powers.  The BRICS will have to be negotiated with, and the first step to forming a working relationship is to understand how their economies work.

Written for the Public Banking in America Conference April 27-28th, Philadelphia.



Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back.  Her websites are http://WebofDebt.com and http://EllenBrown.com.

 

Comments
  1. Troy

    Greg,

    Given the current fractional Reserve Banking world house of cards, would it come as any surprise to see BRICS?

    Power would not corrupt, nor would absolute power not?

    Measures taken now by BRICS are what any Nation State would wish given the coming fall would they not?

    In the USA. Should not there be the protection of individual wealth. ie separation of corporate and State? Monetary unit at no interest and regulation yes.

    What are your thoughts as to a wholly owned Federal bank?

    What of competing State owned Banks?

    Troy

  2. M SMITH

    Greg, this is a great piece to put out for the readers, I found this short piece that adds to the article, I hope it helps. Thanks again for the great content & hard work!

    http://news.goldseek.com/RickAckerman/1331218800.php

    • Greg

      Thank you for the content M Smith.
      Greg

  3. Jim H

    Thanks Greg & Ellen
    Ellen Brown always brings information down to laymen’s terms. I guess short of killing a dead obsolete for profit system and replacing it with a system of doing good for all concerned because it’s the right thing to do, we can continue to tweak, bend and re-set this old thing one more time. Obviously after study, one sees the nearer to home the money stays, the less corruption.
    In 59 years, I can’t tell you how many great ideas I have seen killed, not because of lack of technology, man/woman power or resources but because of funding. Right now in America we all (99%) feel the effect of lack of funds or less funds for purchasing needs and wants. Let’s evolve!

  4. droidX-G

    It is my understanding that Chinese businesses have to put about 20% of there profits in the bank of china in the form I’d bonds. Communists and socialists always leave out what Al Gore for would call “inconvenient truths”

  5. Ambrose

    Greg,

    Treating banks like public utilities will not work. Public utilities companies are just another powerful monopoly that is also loosely regulated.

    The banking system needs to be fixed, but how?

    My first question is, “How do the banks do whatever they want?” I am not a banking expert but I believe that the banking system is supposed to be regulated by both federal and state government agencies. What happened to The Office of the Comptroller of the Currency (OCC), The Board of Governors of the Federal Reserve System (FRB), The Federal Deposit Insurance Corporation (FDIC), The Office of Thrift Supervision (OTS), and state banking regulators? Did any of the regulators review and approve the banks’ actions? I don’t know the answer. But I know the regulators are not doing their jobs. Otherwise we wouldn’t see continous problems like subprime lending and robo-signing.

    Ever wonder why none of the agencies was under fire when the banks failed? The banking system can be reformed with new regulations. But it won’t do any good if the banking regulators are doing their own robo-signing (no question asked) and giving the banks free passes.

    Ambrose

    • Greg

      Ambrose,
      All good questions and all the regulators failed miserably and are still failing. Thank you for weighing in.
      Greg

  6. Ron P

    Greg, you stated “In my mind, ever since Financial Accounting Standards Board (FASB) allowed the banks to value things like mortgage-backed securities and real estate at whatever they think they will be worth in the future, the system was insolvent”. That is true.

    But there was another action that allowed all of this to happen. Until sometime in the late 80’s or early 90’s, we did not have “national banks”. All of them were regional or confined to specific states. In that way, banks could not get “too big to fail” and they would not own enough bad assets that they overvalued that could impact the economy. Then Bank control were lifted. North Carolina National Bank purchased other banks, one of the larger being a Texas bank and they became Nations Bank. As banks grew, nations Bank merged with a California bank called Bank of America. That is when Bank of America became too big and any failure that impacted their deposits had a huge impact on the federal governmen FDIC program.

    Had regulations stayed in effect to prevent ‘national banks”, then any bank that had bad assets could have failed without harm to the economy.

    • Greg

      Excellent point Ron P, Too Big To Fail or Too Big to Exist. Which will it be? The Dollar will be killed.
      Thank you
      Greg

  7. Chuck Allen

    Hi Greg,

    A banker by any other name is still a banker! A politican, or a crook by any other name is still a crook. All of them collectively are thieves! They are working real hard to enslave the population on a global scale. I believe they may be successful.

    The way out of the current mess will ultimately follow the examples of history and end up in all-out warfare. Only this time the results will be devastating beyond belief.

    It seems that people only resist the type of tyranny we are beginning to realize when it requires fighting, as in WW II.

    We see it happening every day. We talk about it everyday (good example your site), we see a few people trying to change it…everyday; however, the the truth is we don’t do anything to stop it…everyday.

    We need a proactive, in-their face leader, demanding a stop to it now!!

  8. brian

    State banking………I am skeptical, I live in Illinois, ’nuff said.

    • Greg

      Brian,
      Point well made and well taken. Thank you for weighing in.
      Greg

  9. norcar survivor

    Hey Grey
    Here’s a fix for you. 7 day waiting period for bank withdrawals.
    UPDATE: According to Stoll, Citi issued a statement saying that it has been required to make this change by Federal regulations–and it no longer sounds like it’s limited to Texas:

    Read more: http://articles.businessinsider.com/2010-02-19/wall_street/30047096_1_fdic-coverage-7-day-notice-accounts#ixzz1ooTu0fnt

  10. Herman Gerbils

    The system needs to be scrapped altogether, I have seen preferred stockholders of Chrysler and GM get their stock stolen and given to the unions (as non voting stock), MF Global steal 1.6 billion of segregated customer accounts ( and Mr Corzine still has the title of honorable) and if what I read about the DTCC is true (NESARA Australia, The unknown 20 trillion dollar company) you don’t own a stock when you buy it, you buy the right to be a beneficiary temporarily (see MF Global). Now why would I invest money into a system like that? The question is, how do you reform the system without going all Stalin/Mao/Pol Pot/on the 1%? I certainly don’t advocate that, but the pitch fork and torch brigades are getting restless.

  11. Mitch Bupp

    Hi Greg, When there is no real accountability there will be no improvement in the lswlessness within the banking community. In fact the course has been set with all of the fraudlent paper and the irresponsibility money pumping without adaduate accounting and enforcement measures can not be undone or unwound no matter how money is pumped into the balloon to plug the vast wasting equitic deflation.. Here is a freat article I found…

    http://www.alternet.org/economy/154426/what_if_the_%26ldquo%3Bbroken_windows%26rdquo%3B_theory_were_applied_to_wall_street/

    • Greg

      Thank you Mitch for adding content to the site.
      Greg

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