May the banks burn

Image: Ahmet Olgun


Imploding an irredeemable banking system that works for owners and shareholders at the expense of the majority

The banking crisis, this time, is different. It is actually worse than the 2007-08. Back then, we could blame the sequential bank collapse on widespread fraud, the spread of predatory lending, collusion between ratings agencies, and dishonest bankers selling suspect derivatives – all made possible by the then-recent dismantling of the regulatory regime. by politicians close to Wall Street, such as Treasury Secretary Robert Rubin. Today's banking collapses cannot be attributed to any of these.

Yes, Silicon Valley Bank was foolish enough to take extreme interest rate risks while serving mostly uninsured depositors. Yes, Credit Suisse has a sordid history with criminals, fraudsters and corrupt politicians. However, unlike in 2008, no whistleblowers were silenced, banks adhered (more or less) to strengthened post-2008 regulations, and their assets were relatively solid. Furthermore, none of the regulators in the US and Europe could credibly claim – as they did in 2008 – that they were taken by surprise.

In fact, regulators and central banks knew everything. They had full access to the banks' business models. They could clearly see that these models would not survive the combination of significant increases in long-term interest rates and a sudden withdrawal of deposits. Still, they did nothing.

Did agents fail to anticipate the panicked mass flight of large, therefore uninsured, depositors? Perhaps. But the real reason for central banks' inaction when confronted with banks' fragile business models is even more disturbing: it was their response to the 2008 financial crash that gave birth to these business models – and policymakers knew it.

The post-2008 policy of severe austerity for the majority and state socialism for the bankers, practiced simultaneously in Europe and the United States, had two effects that shaped financial capitalism for the last 14 years. First, it poisoned the West's money. More precisely, it ensured that there is no longer a single nominal interest rate capable of restoring the balance between the demand for money and the supply of money while, at the same time, also preventing a wave of bank failures.

Second, since it was common sense that no particular interest rate could achieve both price stability and financial stability, Western bankers assumed that if and when inflation reared its ugly head again, the banks central banks would raise interest rates while bailing them out. They were right: this is exactly what we are witnessing now.

Faced with the stark choice between containing inflation or bailing out the banks, some venerable commentators are urging central banks to do both: keep raising interest rates while continuing the post-2008 policy of socialism for banks. A policy that, other things being equal, is the only way to keep the banks from toppling over like dominoes. Only this strategy – tightening the monetary noose around society's neck while squandering bailouts on the banking system – can simultaneously serve the interests of creditors and banks. It is also a sure way of condemning most people to unnecessary suffering (caused by the avoidable rise in prices and unemployment) while also sowing the next banking conflagration.

Let's not forget, we've always known that banks were designed to be unsafe and that together they form a system constitutively incapable of complying with the rules of a well-functioning market. The problem is that, until now, we haven't had an alternative: banks were the only means of getting money to people (through tellers, branches, ATMs, and so on). This made society hostage to a network of private banks that monopolized payments, savings and credit. Today, however, technology offers us a splendid alternative.

Imagine that the central bank provided everyone with a free digital wallet – effectively, a free bank account with interest equivalent to the rate overnight of the central bank itself. Given that the current banking system functions as an antisocial cartel, the central bank could very well use cloud-based technology to offer free digital transactions and savings to all, with its net income financing essential public goods.

Freed from the compulsion to keep their money in a private bank, and to spend up to their necks paying for transactions using its system, people would be free to choose whether and when to use private institutions that provide a risk intermediary between savers and borrowers. Even in these cases, your money would continue to reside in perfect safety in the central bank account.

The crypto brotherhood will accuse me of imposing a Big Brother central bank that sees and controls every transaction we make. Your hypocrisy aside – after all, this is the same crowd that demanded an immediate bailout of their Silicon Valley bankers by the central bank – it's important to mention that the Treasury and other state officials have also had access to every one of our transactions. Privacy could be better ensured if transactions were concentrated on central bank records under the supervision of some sort of “Monetary Supervisory Jury” composed of randomly selected citizens and experts a wide range of professions.

The banking system we take for granted today is incorrigible. That's the bad news. But we no longer need to depend on any private, rentier and socially destabilizing banking network, at least not in the way we have depended so far. The time has come to implode an irredeemable banking system that works for owners and shareholders at the expense of the majority.

Mining companies found out the hard way that society doesn't owe them a permanent subsidy to degrade the planet. The time has come for bankers to learn a similar lesson.

*Yanis Varoufakis is a former finance minister of Greece. Author, among other books, of the global minotaur (Literary Autonomy).

Translation: Daniel Pavan.

Originally published on the portal Project syndicate.

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