Those are all good arguments, but Congress is not likely to nationalize the whole banking system any time soon.
What About Nationalizing the Liquidity Pool?
Without going to those lengths, what could be made a public utility is the banks' liquidity pool. Banks could borrow directly from the deep pocket of the central bank, the "lender of last resort" (or from the Treasury if it were reengineered so that it could issue money as credit without taxing or going into debt). Banks would still need to make "prudent" loans - loans to borrowers who had demonstrated an ability to pay the money back - since if they suffered substantial defaults, they would not be able to balance their books and could be put into bankruptcy. They would still charge interest to cover their costs, and they would still compete for borrowers by keeping their interest rates low, maintaining the principles of "market capitalism" operating now. Customer deposits could be sequestered separately from loans, e.g. at government-backed postal banks. In fact, sequestering customer funds is what brokerages (such as Schwab and Fidelity) do now. Rather than the bank gambling with your money, you gamble with it yourself. But that, of course, can be risky too!
In any case sequestering deposits is not likely to happen either. What is being sought is what Roger Altman predicted - FDIC insurance coverage of the entire deposit base. In a March 17 letter first reported by Bloomberg News, the Midsize Bank Coalition of America called on regulators "immediately " to reinstate full deposit insurance coverage for depositors," for two years. That was done in 2008, the letter noted, "and was one of the most effective tools used in the great financial crisis and it needs to be brought back immediately. Importantly, as happened previously, this increase in insurance should be paid for directly by the banks themselves by simply increasing the deposit insurance assessment on banks who choose to participate in this increased insurance coverage."
The concern for midsize banks is that depositors have been fleeing to giant "too big to fail" banks, perceiving them to be safer. But as Cornell Prof. Robert Hockett observes, midsize banks lend to the midsize businesses that are the backbone of the productive economy. He has drafted legislation to provide for universal deposit insurance, discussed in Forbes. However, it's an uphill battle. Even Sheila Bair, who is clearly sympathetic to the plight of local banks, has reservations on full coverage. As reported on MSN.com:
FDIC Chairwoman Sheila Bair said
Tuesday that Congress should consider temporarily providing guarantees for
deposits in transaction accounts used by employers to pay their workers -- a
move that some Democrats are considering.
But Bair said it would be an "overreaction" to insure all bank deposits.
"Unlimited insurance would be very expensive to do. It would be assessed on the
banking system, backstopped by taxpayers, and would primarily help very, very
wealthy people," Bair said on Washington Post Live.
Small community banks -- defined as banks with $10 billion or less in assets --
have spoken out against paying more to cover the failure of larger banks such
as SVB.
The Public Bank Option
Meanwhile, one midsize bank that has escaped this furor is the Bank of North Dakota. With assets in 2021 of $10.3 billion and a return on investment of 15%, the BND is owned by the state, which self-insures it. There is no fear of bank runs, because the state's revenues compose the vast majority of its deposits, and they must be deposited in the BND by law.
The state's local banks are also protected by the BND, which is forbidden to compete with them. Instead, it partners with them, helping with liquidity and capitalization. The BND has been called a "mini-Fed" for the state and its banks. That helps explain why North Dakota has more local banks per capita than any other state, at a time when other states have been losing banks to big bank mergers, causing the number of U.S. banks to shrink radically.
UK Prof. Richard Werner recently published a briefing memo supporting the case for a public bank. It was prepared for the state of Tennessee, which is considering a sovereign state bank on the North Dakota model, but the arguments apply to all states. Benefits discussed include dividends, higher state-level tax revenues, greater job creation, greater local autonomy and resilience to shocks, more options for funding public sector borrowing and state pension funds, and protection of financial transaction freedom and privacy.
Small and local is good, but even small regional banks need to pool their resources for maximum efficiency and security. A state-owned bank on the model of the Bank of North Dakota can provide low interest loans, liquidity, and financial sovereignty, keeping financial resources in the state directed to public purposes, all while turning a profit for the state.
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