By Bob Gerecke

America’s present banking system has severe flaws.  The biggest banks speculate with much of their assets.  Despite holding trillions of dollars in assets, banks fail to lend and to rescue the economy by doing so; their fear of recession becomes a self-fulfilling prophecy.  Meanwhile, the government must borrow from the Federal Reserve in order to stimulate the economy through deficit spending; as a result, we taxpayers incur a big debt to be repaid in the future (probably by our children and grandchildren).  This newly created and spent money remains in the economic system, threatening to ignite inflation later.  The Federal Reserve can lend to the government and to private banks, but it isn’t authorized to lend to the Main Street economy, i.e., other businesses and consumers.

Here are some thoughts about reforming our banking system.

  1. THE GOVERNMENT SHOULD BE A LENDER, NOT A BORROWER.  Instead of borrowing money from the Federal Reserve, the government should be able to create money and lend it to businesses and consumers.  This will stimulate the economy during recessions but avoid creating a huge national debt.  The debt will be owed by the borrowers to the government, not by the government and ultimately by the taxpayers.  As the economy improves and the loans are repaid, the created money will disappear, acting as a brake on asset bubbles and price inflation.
  2. THE GOVERNMENT NEEDS A REAL NATIONAL BANK.  Most Americans don’t know it, but the Federal Reserve is owned by a consortium of private banks, which elect most of the Federal Reserve Board, although the President selects the Chair and Vice-Chair.  Through the Fed, these private banks create money and lend it to the government by purchasing Treasury bonds.  They, not the government and taxpayers, receive the profits from that lending.  To carry out the strategy described in item #1 above, the government needs to be its own bank, not a borrower from the Federal Reserve.  The closest thing to a real national bank in the U.S. is the state bank of North Dakota.  It partners with private banks to promote economic activity within North Dakota, and it pays its profits to the state government.  This has enabled North Dakota to have the lowest unemployment rate in the U.S. and to have a balanced budget every year. See:
  3. PRIVATE BANKS SHOULD LEND, NOT SPECULATE.  Small community banks mainly lend to businesses and consumers in their area.  Credit unions lend to their members.  This lending is the purpose and social justification for banking.  Big banks, however, devote much of their capital to speculation, which makes them and their key employees extremely wealthy when it succeeds but threatens the existence of the banks when it fails.  A financial corporation should have to choose between being a speculation machine and a bank.  If it chooses to speculate, government insurance should not protect its investors.  A federally insured bank should be limited to lending.  This will encourage investors and savers to place their money with real banks that support the real economy and will relieve taxpayers of the obligation to bail out unsuccessful speculators.

Reforms such as these will promote economic activity, stimulate the economy when it’s weak, restrain it when it’s in danger of overheating, avoid burdening present and future generations of taxpayers with debt, and lessen the likelihood of future economic crises such as that which caused our Great Recession.