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How to think about banks

posted by Alan White

Banking is not an industry; banking is not the real economy. The big banks especially are economic and political behemoths that remain unpopular and poorly understood in the popular imagination. Opinion polls show voters favor breaking them up, and some shareholders do too. While Wall Streeters may bemoan the fact that banks are no longer hot growth stocks, I suspect most voters who chose either candidate would not be saddened to see banks become public utilities. The Republican agenda to roll back Dodd-Frank, if this means unshackling the megabanks from speculating with public and taxpayer funds, will be the first betrayal by the incoming administration of its voter base.

Banks are now basically franchisees of the government's, i.e. the taxpayers', full faith and credit, as recently and eloquently explained by Professors Saule Omarova and Robert Hockett  Banks create and allocate capital because the government recognizes bank loans as money and puts taxpayers' full faith and credit behind bank IOUs. The conventional story that banks convert privately-accumulated savings into loans to borrowers is a myth. Because banks are public-private partnerships to create and allocate capital, the public can and should play a central role in insuring that the financial system serves the needs of the real economy, not just the financial economy.

So here is the first test for our new federal leaders. Are you tools of Wall Street, doing its bidding by undoing financial reform, or will you turn banks into the public utilities they ought to be?  

Comments

Excellent point. We all know the Wall Street cry that Dodd-Frank is the reason they are doing poorly is like the spoiled brat that claims he can't get an A because of the way the Professor curves the grading. Change the class, change the school and the brat still flunks.

The Dodd-Frank issue is just a smoke screen - remove it and they'll likely fail and have to be broken up. Utilities make a lot of sense. President-Elect Trump has already stated he envisions a new form of Glass Steagall.

I'd, personally, support banks becoming traditionally-regulated public utilities. And regardless of this choice I wouldn't support candidates that wanted to undo Dodd-Frank - fortunately that was a winning vote here in California, though sadly not in the Midwest.

What I wouldn't support is a candidate insisting that the only alternative to supporting banking as a public utility is being a "tool of Wall Street, doing its bidding".

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