The recent banking crises reveal major issues with the rules that banks have to follow in the US, and forces us to ask: what is banking for and how can it best serve society? It’s time we start treating money and payment systems as the public good they are, through a public banking system.
America recently witnessed the biggest bank failure, and subsequently the largest government bailout, since the 2008 global financial crisis. Policy makers and regulators sprang into action, taking extraordinary measures to quickly contain the collapse of the Silicon Valley Bank (SVB) in California and prevent a larger financial meltdown. A range of factors contributed to this mess, with many actors to blame. But what this crisis makes clear is that our banking system is deeply flawed. Bank failures are far more dangerous to the public than other types of business failures because we all rely on banks to keep our money safe and to make our payments. When the banking system fails, its impacts hit people and businesses globally and affect everyone.
Unfortunately, history has shown that banks are prone to taking on excessive risks to try and maximize profits, with the potential to bring down the entire economy if the largest banks fail. That’s why, after the 2008 crash, Congress passed the Dodd-Frank Act to prevent banks from tanking the economy and upending millions of lives again. But many critical parts of Dodd-Frank were rolled back in 2018, through a successful effort by greedy bankers — including SVB’s CEO Greg Becker — to lobby the government and weaken the rules they have to follow. Leaders in Washington loosened their grip on the safeguards that were supposed to keep banks in line, paving the way for the recent bank failures.
Although efforts are already underway to bring back critical Dodd-Frank protections, this crisis reveals a deeper issue. Namely, the core tension and fragility baked into the system as a result of combining the vital public good banks provide in processing payments, with how they make their private profits, through riskier lending. Now could be the opportunity to finally separate these two functions, which would result in simpler and more straightforward rules for banks and better protections for the people and businesses who bank with them.
As Positive Money UK’s Simon Youel explains so succinctly in a recent blog:
“Money and payments are one of a number of key public goods that the very functioning of our society is dependent on, alongside utilities such as water, electricity and telecoms. If a bank fails, businesses will be unable to pay workers, and households would be unable to pay their bills or buy essentials like food. And if the bank failure is big enough it could drag the entire economy down with it. But no other utility industry, even those that have been privatized, has been given such free reign to enrich themselves through risk-taking and cause as much damage as banks have.”
What’s more, banks frequently use their financing powers to engage in socially and environmentally destructive practices. For example, major US banks continue to pour billions of dollars annually into fossil fuel projects, which are highly risky investments that are also fuelling climate change. Not only do banks’ destructive lending decisions threaten the habitability of our planet, but this short-term thinking and pursuit of profit above all else also exposes all of us to higher risk from financial meltdowns. We cannot afford to see another public bailout of the banks with vulnerable communities left suffering the most.
Banks should not be allowed to keep getting away with making risky bets so that bankers can privatize rewards and socialize losses. Stronger financial rules and regulations are certainly needed. But more fundamentally, we need a safe banking option that prioritizes public needs over private interests. People and communities need a safe and resilient banking system they can rely on, especially when times are hard.
A public banking system offers a way forward, so that we don’t have to depend on greedy private bankers to save money and make payments. There are three potentially complementary strands of public banking options that could come together to form a new public banking ecosystem in the U.S.
First, we need public banks owned by the people through their representative governments, with a public mandate to serve the needs of the community. The US currently has only one public bank, the Bank of North Dakota. But there is a growing movement gaining momentum across the country to create new public banks, set up to serve the public interest, and not to maximize profits for shareholders. These banks would allow local governments to reinvest profits back into the community, and finance important needs such as affordable housing and building electrification.
A second avenue presents itself through the U.S. Postal Services, which could provide a safe retail banking option especially for those who do not have access to traditional banks. Many countries already offer postal banking services, and the U.S. can too. The Postal Savings System, which was successfully operated by the US government for over 50 years, offers a model that can be emulated using modern technology.
Finally, we could take a much more direct route and set-up accounts with the U.S. central bank, the Federal Reserve. Proposals for such an account have been put forward by many leading thinkers, including by finance law professor Saule Omarova. And in 2020, Senator Sherrod Brown (D-OH) introduced legislation that would allow everyone to set up a digital dollar wallet, called a FedAccount, “a free bank account that can be used to receive money, make payments, and take out cash.”
A FedAccount would be a more efficient way of accomplishing what the system already does by allowing us to make payments directly through a service provided by the Federal Reserve, thus cutting out the middlemen — the unstable profiteering private banks. This could provide the public with the same access to the risk-free public money (a digital dollar) used for settling payments as currently enjoyed only by banks, meaning we would no longer need to rely on them. This would help extend banking services to the unbanked and underbanked, and could be blended with the retail banking services provided at post offices.
It’s time that our money and payment systems were treated as public goods, intended to serve the public interest, and that means reducing our dependence on risk-taking private banks. A public banking system is not a solution for all our problems, but it is a crucial piece of how we could build a fairer, more democratic and sustainable economy.
Positive Money US’s sister organizations in the UK and Europe have been fighting since 2010 for a system that separates the public good of the payments system from banks’ pursuit of private profit. We are now bringing the fight to America, and will keep advocating for our right to safe money and payment systems. The recent banking crises is just the latest example of why we urgently need a safe public banking system. We must seize this as an opportunity to get there.
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