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Banking Scandals and Public Solutions


interest_rate_swapNo American writer does a better job cataloguing, describing, and decrying the sins of big banks than Matt Taibbi. His recent exposition of U.S. authorities’ investigation of London-based ICAP for manipulation of information accompanying interest rate swaps is another in his corpus of descriptions of schemers and plotters playing with amounts of money “up to 100 times the size of the United States federal budget.”

But what to do? Taibbi writes:

The key here is that unlike a more transparent, regulated market like the New York Stock Exchange, where the results of stock trades are computed more or less instantly and everyone in theory can immediately see the impact of trading on the prices of stocks, in the swap market the whole world is dependent upon a handful of brokers quickly and honestly entering data about trades by hand into a computer terminal.

Taibbi acknowledges that, because the NYSE is more transparent than the interactions between private banks, the trades in the former are more accountable to the public than the latter. He concludes that it’s in the nontransparent markets where the greatest risks of abuse lie.

What other markets out there carry the same potential for manipulation? The answer to that question is far from reassuring, because the potential is almost everywhere. From gold to gas to swaps to interest rates, prices all over the world are dependent upon little private cabals of cigar-chomping insiders we’re forced to trust.

It’s a truism that public banks would not engage in interest rate swaps; they’d finalsquarehave no reason to. While, as Taibbi points out, big banks are learning to collude rather than compete in order to consolidate their economic and political power, public banks have a mandate to cooperate–with one another, and with their communities–to diffuse and spread economic power within the communities that run them. It’s such a truism that I won’t belabor the point, but instead will use it to springboard to a larger point, one which Taibbi and other critics of big, unregulated private banks could easily make: There are solutions to these abuses of power, solutions that are being discussed now in many circles, and which are not utopian and, in fact, have usually been empirically proven to work.

Implicit in many such solutions is the acknowledgment that there is a role for a non-bought-off government, for local communities and progressive state and national legislators and judges and yes, for regulations, to demand both transparency and democratic deliberation in financial as well as political institutions. Transparency and deliberation makes communities richer economically and morally. It’s a better way to spread the wealth.

In the March piece, Taibbi quotes David Frenk, director of research for Better Markets, concerning the irony that such huge price fixes are performed by such a small, invisible group of people. But unless his readers research Better Markets themselves, they won’t know that the group advocates: leverage limits for bank holding companies, limitations on short-term borrowing, rules to make it harder for banks to manipulate their loss estimates, severing of the links between trader bonuses and gains from trading, and the backing up of Volcker Rule prohibitions with meaningful penalties, to name just a few of their advocacies. Rolling Stone’s editors may fear that some of these concepts are too much for its audience to grasp, but Taibbi does a good job with analogies, and almost anyone can see why the link between trader bonuses and gains from trading should be severed.

Meanwhile, the newly released 2012 Annual Report for Bank of North Dakota (BND), the nation’s only state-owned bank, reveals empirical evidence that this transparent, accountable and public banking institution has programs in place that fund young farmers, enable new Main Street businesses, and fund infrastructure projects that eliminate the need for the state to issue general obligation bonds.

The Bank of North Dakota is the nation’s only state-owned bank, has been in business since 1919 and has been profitable every year since 1971, well before the current oil boom. BND set a new profit record for the ninth straight year, making $81.6 million in profits in 2012. Return on Equity was 17.6% and its assets grew 14% — to almost $6.2 billion.

To quote an old Agent Orange lyric, “the public gets what they deserve, not what they demand.”  What makes the North Dakota public deserve this innovative public bank?  Perhaps, in implementing BND, North Dakotans have instantiated the celebrated American ethic of self-sufficiency. They have asked themselves why they should trust outside corporations (Wall Street Banks) and even the federal government, when they can generate bank credit for their own purposes. In doing so, they have created a public solution that has inoculated them from the cynicism and paralysis dominating other states’ conversations about economic corruption and fiscal crisis.

There is shallowness, of course, in merely braying that the people describing the problems would do well to discuss some solutions. But this isn’t just a lecture on persuasion and Monroe’s Motivated Sequence. There’s a larger conceptual problem in withholding talk of solutions in favor of comprehensive skewering of the villains. The risk is that readers–and citizens–will convert their outrage to a general pessimism about the state of humanity. If every actor described is depraved, if there are no counterexamples of good people doing good things (and such examples are not in short supply), then we are left not only distrusting the purveyors of sovereign debt, fractional reserve lending or interest rate swaps, but distrusting all institutions and, by extension, all efforts at collective governance.

The BND annual report is a good example of underreported, solution-oriented news that could help lift people out of the cynicism that grows from constant, overwhelming corruption. Margaret Flowers and Kevin Zeese recently offered an excellent two-part series that analyzed the problem of “too big to fail or jail” banks in part one and offered solutions, including public banks, in part two. Obviously, describing solutions is tougher than describing problems. But the stakes are pretty high right now, and the American people are more than ready to try.

Public Banking 2013: Funding the New Economy, the second annual Public Banking conference, will take place in San Rafael, California on June 2-4, 2013.

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About Matt J. Stannard

Policy Director for Commonomics USA, longtime writer, speaker, and legal & policy consultant on economic justice and public deliberation.