I’m a big fan of economist Dean Baker, who used to have a blog called Beat the Press, but is now behind a Patreon paywall. I’m a subscriber, and I thought I’d pass along the gist of his latest, as I think it makes a whole lot of sense, which is precisely why what he proposes will never happen. The post is his take on the failure of Silicon Valley Bank, and he proposes an obviously good way to make sure such bank failures don’t affect the larger financial system:
We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.
The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions. They could have their paychecks deposited there every two weeks or month.
They could have their mortgage or rent, electric bill, credit card bill, and other bills paid directly from their accounts.
This sort of system could be operated at minimal cost, with the overwhelming majority of transactions handled electronically, requiring no human intervention. There could be modest charge for overdrafts, that would be structured to cover the cost of actually dealing with the problem, not gouging people to make big profits.
Former Fed economist (now at Dartmouth), Andy Levin, has been etching the outlines of this sort of system for a number of years. The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment.
We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.
Let’s face it. For most of us, our bank accounts are not about saving money. They are about having a place to stash the money that is used to cover our mostly electronic payments. In fact, these days, most money never has a physical existence. It consists of an entry on a computer. There’s no reason why those computers can’t be maintained by the government. In fact, it would likely be a boon for the economy because at the present time the banking system extracts a cut from the seller every time someone uses a debit or credit card to make a purchase. Since almost all transactions are electronic, this has to force prices upward from where they otherwise might be. For that matter, it might bring us back to the days when banks were getting us used to ATMs, and didn’t charge us to withdraw our money from a competitor’s ATM. (Remember Yankee 24?)
If our money were separated from the risky stuff that brings down banks like Silicon Valley, we wouldn’t need to worry about banks collapsing, or about paying for their inevitable rescues.
Of course this will never happen, even if the Democrats get firm control of both houses of Congress. They’re better than the Republicans, but they still tend to see things from the perspective of the folks who line their pockets. Consider Democratic Senator Mark Warner’s statement today that he doesn’t at all regret making it easier for banks such as Silicon Valley to escape effective regulation. Elizabeth and Bernie would probably go for it, but not the “moderates”.
The probable end result of the Silicon Valley debacle is that the Fed will take some action that will put more money into the pockets of the already rich, while jacking up interest rates and throwing people out of work.
A bit off the main subject, but if you breach Baker’s paywall and read the full article, he has some interesting information about the amount of money the executives at Silicon Valley (according to Warner, a “mid-size bank”) were making. He points out that the CEO was making yearly what a minimum wage worker would make in approximately 15 lifetimes. They also handed out bonuses just before the bank collapsed.
