Public Banks and Class Politics
The 2008 world financial meltdown and Wall Street bank bailouts have put the nationalization of banks back on the political agenda in America for the first time in 100 years. There have been calls to nationalize failing Wall Street banks, form a government-owned national bank in their place, and even to organize state banks. From within the anti-foreclosure movement, one group has designated all homes foreclosed by bailed out banks as “public housing” suitable for occupation by people in need. Others have called for publicly owned land co-ops to free housing from the deadly grip of mortgages.
The foreclosure crisis is not improving and in fact is deepening daily. In March the number of “underwater” single-family homes – those with negative mortgage equity – increased to over 28%. The rates in Nevada, Florida, Michigan, Arizona, and California were all near or above 50%. Housing prices have entered a “double dip” and have now declined 29.5% since 2006, a steeper decline than took place in the Great Depression from 1928-33.
The movement has put forward numerous ideas to incrementally restrict or limit the banks: fines, new loan modification requirements, new regulations, breaking up big banks, making banks pay taxes, transaction taxes, etc. While it is important to support every effort to save anyone’s house, many of these proposals are insufficient and impractical. The “shadow banking system” has already made 1930s-style bank regulation impossible, and the banks have already effected “regulatory capture” of every agency ever established to rein them in, including the U.S. Congress itself.
No solution short of nationalization will be effective, but even that is problematic today. Illinois Senator Dick Durbin (Democrat) in an interview on radio station WJJG in April, 2009, rightly pointed out that the banks own the government. The demand to nationalize the banks, which is at the heart of the battle to end foreclosures, and many of the other battles we face as well, raises the essential question of class control of the government. Since what Durbin said is undoubtedly true, it means that the key question is not whether the banks should be nationalized, but what class controls the government and therefore in whose class interest nationalization takes place.
First of all, it is impossible to address the bank crisis without understanding that it is a symptom of underlying failure of the capitalist economic system. The global technological revolution has introduced automation into every sector of production in every country. By replacing human workers, it dramatically increases unemployment and reduces wages on a global scale. This weakens “effective demand” to the point that it becomes impossible to circulate commodities with normal methods. Especially since 1997, this was offset by the extension of bank credit through spectacular speculative vehicles that allowed commodities to continue to flow, up to and including the notorious sub-prime housing bubble.
The high percentage of underwater homes and recent upturn in unemployment have combined to put the banks in an extremely fragile economic position. They hold trillions of dollars of loans whose notes are denominated in amounts much higher than the collateral supposed to secure them. Their political situation is even more volatile. From Florida to the Rust Belt, foreclosure resistance is escalating. Fifty Attorney Generals are still investigating bank fraud, and the banks are pushing Congress to enact laws to protect them from prosecution.
The fiscal crises at the state, local, and national levels are further eroding the political position of the banks. Many of them actually contribute to the deficits by paying few or no taxes. For example, as Senator Bernie Sanders told Congress in June, 2011, Bank of America had profits of $4.4 billion and not only paid zero taxes last year, but received an IRS refund of $1.9 billion. More importantly, the banks have access to wealth so enormous that it literally dwarfs the deficits at every level. Ellen Brown reports in Truthout.org, January 14, 2011, that the total budget deficits of all fifty states add up to an estimated $140 billion in 2011. The Federal Reserve bailed out the banks with over 100 times that amount, nearly $12.3 TRILLION in almost interest-free credit after the 2008 crash. Yet Federal Reserve chair Ben Bernanke has flatly refused to assist the states in any way.
Nationalization for Whom?
Working class revolutionaries have called for “centralization of credit in the hands of the state.” And bank nationalization proposals have been around for hundreds of years, made by representatives of widely diverse classes with very different interests. Many early American slaveholders fought for national banks in a bid to consolidate the power of the slaveocracy. Late nineteenth century American populists called for nationalization of the banks in the interests of farmers, small businesses, and workers – but were unsuccessful. In the twentieth century, German and Italian fascists nationalized their banks to better serve their industrial cartels (“corporatism”).
The process of nationalization is further complicated by the fact that we are in an era already characterized by increasing merger of banks, industry, and the State.
The stage for this was set in America by establishment of the Federal Reserve System in 1913. William Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country calls the Fed “a unique marriage of public supervision and private interests, deliberately set apart from the elected government, though still part of it.” Its seven governors are appointed by the President for fourteen-year terms and subject to confirmation by the Senate. But they share power with twelve presidents of regional Federal Reserve Banks, who are essentially appointed by private commercial banks.
The Federal Reserve Act turned over Congress’s constitutional authority to create money to the 6000 private “member banks” in the Federal Reserve. The banks create money by what is called the “fractional reserve” system. Almost all US dollars are created not by printing currency, but rather by loans made by these banks. They do not generally make loans from funds actually on deposit, because experience has taught them that in normal times the depositors never all come to collect their deposits at the same time. Instead, the banks actually loan out several times the amount of the deposits they have on hand. They do not own or even hold this money: they create it out of thin air by making a bookkeeping entry, loan it out to others, and enrich themselves by collecting interest on funds they never even have in their possession.
The Fed regulates the overall money supply by buying government securities from private banks when it wants to expand the money supply, and selling them back when it wants to shrink it. The effect is to needlessly obligate taxpayers to go into debt (and pay onerous interest rates) every time it needs to expand the money supply.
The Federal Reserve itself was only the first step in the merger of banks and the State. Another example is the so-called Plunge Protection Team created by the Reagan administration in 1988. In order to stabilize markets. This team brings together major banks and government officials and funnels Treasury funds to “primary dealers” (favored Wall Street brokerage firms and investment banks) who invest them in selected stock futures to prevent crashes. Other examples are the Exchange Stabilization Fund and the Counterparty Risk Management Policy Group (CRMPG) that also serve to stabilize various aspects of the financial system.
Public Banks for Public Benefit
For all these reasons it is not enough to simply demand nationalization of the banks. What is required is a call for public, government-owned banks run democratically by working people in the public interest. All those underwater homes mean there are still trillions of dollars worth of toxic assets locked inside the banking system. As the economic crisis deepens, further proposals for bailouts and nationalizations will inevitably pose the question of whose interests the banks (and the government) should serve. The answer is public banks for public benefit. As the banks crash, the time will be increasingly ripe for their replacement, and replacement of the entire Federal Reserve System with them.
However, contrary to the formulations of classical American populists and their modern-day followers, public banks are not the panacea or ultimate solution to the economic crisis. Only a fully cooperative economy can be the solution. But public banks are an indispensable, strategic step in the battle of democracy – the battle for working class ownership of all socially necessary means of production and distribution of the social product according to need.
Furthermore, public banks for public benefit cannot be won by zealous reformers winning over progressive legislators in policy debates. It can only be won by a broad process of politicization of the workers as a class. This will only be done by tying the demand for public banks to every struggle where people are fighting to save their homes from foreclosure, their housing from HUD cuts, and their schools, services, pensions, and unions from destruction in the state budget wars.
This article originated in Rally, Comrades!
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Rally, Comrades ! May/June 2011