Wednesday, November 26, 2008

Nationalize all banks and permanently solve the Global Banking Crises!

Extract of interview by Jayke Umarezz as appeared in various publications. Please also read comments and related articles at the end of this extract.

In an exclusive interview by Jayke Umarezz, Dr A S Johan revealed his views as to how he believed the current global banking crises could be successfully and permanently solved….so that the global economy may allowed to prosper again.

Dr Johan made it clear that, in his opinion, the world’s current problems can be clearly defined as problems caused by banking industry excesses.

“As long as banking is privately owned and run as a business for the benefit of its shareholding investors, as it has to be, we will continue to have this problem of excesses over and over again” he said.

He went on to say “Banking like healthcare, water, energy etc. is an essential service industry that people need to survive in order to be productive and contribute to a country’s economy. They have an overriding social purpose that cannot be achieved through a private, for profit structure.

Don’t be mistaken, as an entrepreneur myself, I am in support of capitalism. I believe capitalism is the only system that encourages productivity and savings. However, I also believe that banking and other essential industries like healthcare, water, energy etc. just cannot properly and honestly serve society in a privatized form.

If banks are run as privately owned businesses, they cannot avoid taking on greater and greater levels of risks and eventually reach the excess we now know about. Because, in order to survive, banks must produce returns, expand and attract investment capital. The current banking crises is a direct result of competition among banks.

In all fairness, we cannot blame bank management for doing what they had to do to stay competitive. In our misguided belief that competition in a social service like banking is good and more is better, we have once again shot ourselves in the foot….and in the process almost wiped out the savings and wealth of millions.

Bailouts through equity injection and purchase of toxic assets only serves to support the excesses of management and the greed of shareholders….at the expense of innocent depositors.

I believe that In order to restore confidence once again and this time to keep it permanent, each country really needs just one credible national bank whose customer deposits are fully guaranteed by the Government.

I propose that all existing banks registered in a particular country be merged into one large Government owned bank. Pre-merger, all current shareholders of these banks will be bought out at net asset value per share by crediting them for the sales proceeds with deposits in the new nationalized bank. Such a state owned bank may expand its operations to other countries if it wants to but the host Government will make it known that only deposits received and registered at their home country will be guaranteed and not deposits taken in at a foreign subsidiary or branch. The Government of that foreign country may guarantee the deposits of its residents with this foreign bank if it so wishes.

Directors of these new nationalized banks will be appointed by Government and held accountable for their decisions just as other Government appointed heads of departments are. Management and staff will effectively become Government employees with salaries and benefits similar to other equivalent Government employees.

I do not see any issue of service efficiency. If other Government employees like the police, immigration etc. can provide reasonably efficient services, I don’t see why banking staff cannot.

The new nationalized bank’s checking (current), savings and deposit accounts will be 100% guaranteed by Government as to principal and contracted interest. These new state owned banks will also offer basic home mortgage and business loans to its domestic customers on a properly collateralized basis, in line with each Government’s policy.

State owned banks will therefore exist only to provide basic deposit and loan services and will not engage in investment management services, securities brokerage, private equity, venture capital etc. Their cash surpluses will be invested exclusively in National / Federal Government Bonds and profits if any paid to their respective Governments as dividends.

Non deposit taking services like investment management services, securities brokerage, private equity, venture capital etc. will be offered by licensed and regulated investment and brokerage firms who cannot call themselves banks.
Businesses, corporations and investors who need these services and can afford the costs and risks associated with dealing with these firms, may do so freely. However, they will be told, in no uncertain terms, that their accounts with these firms are not guaranteed by the Government.
It may however be a good idea to establish a credible clearing house funded by mandatory, dynamic contributions from all such investment management services, securities brokerage, private equity and venture capital firms.
National banks who wish to expand their banking services beyond their national borders will only be allowed to deploy their foreign country registered deposits (which will not in any case be guaranteed by their home country Government) to finance loans in that country.

If they try to fund such loans through inter - bank deposits they will find other banks reluctant to extend large lines of credit for long periods in view of the non guaranteed status of such inter – bank facilities.

Each country’s national bank will only enjoy a rating equivalent to their Government’s credibility and the amount of their guaranteed deposits. This will discourage banks from expanding overseas simply for the sake of expansion.

In fact the relationship by one country’s Government postal service with other country’s postal service regarding the international delivery of mail through the offsetting of stamp sale receipts could be a good example of how the future of international banking relationships could evolve.

The recommendations I’ve made here with regard to banking will apply to other essential services like water, power, healthcare etc. as well. So let’s get back to honestly and fairly providing the basic services that every citizen needs and can all rely on.

No doubt there may be many out there who could have issue with my proposal. If so, please let me know your views and together we can try and create a safer place for our savings”. END
Following is a response and a related article from L.M. Arndt of San Rafael California:-
Dr. Johan, I am ecstatic! I just found and read your essay, "Nationalize all banks and permanently solve the Global Banking Crises!"

I totally agree with your conclusions, which I'm delighted to find dovetail with my own. In the course of articulating a similar argument, I happened upon your comments – a breath of fresh air in an otherwise dismal miasma of foggy thinking. I make no claims to expertise as an economist, but I have lived a few years, and paid at least some attention, and it has become increasingly obvious that the current banking system is fatally flawed – for the reasons you so cogently articulate. You also analyze precisely how a nationalized banking system would function. Your knowledge of the internal workings of banks far outpaces my own, yet we have independently arrived at the same conclusion, that, as you put it, “Banking, like healthcare, water, energy etc. is an essential service industry that people need to survive in order to be productive and contribute to a country’s economy. They have an overriding social purpose that cannot be achieved through a private, for-profit structure."

I respectfully submit the following, all of which I wrote before reading your essay. I would greatly appreciate any comments you may have. Also, if there is any possibility of a face-to-face meeting and conversation, please so advise.
L.M. Arndt, San Rafael California
Why would it not be a good idea for our government, i.e., We The People, to own and operate the banks in our nation? By L.M. Arndt

The banking “industry,” as we know, is not an industry at all and creates nothing of real value. Moreover, it requires, indeed demands, a constant infusion of money in order to cover the interest it charges.

Nevertheless, it provides an essential service, very much like other governmental services such as streets and highways, police protection, food safety, environmental quality, a justice system, and national defense.

Contrary to popular belief, the Federal Reserve, the “central bank” of the United States, is not owned by the U.S. government, nor is it a single “bank” but comprises 12 regional Federal Reserve banks. The system is, at least theoretically, controlled by a governmental agency, its Board of Governors, but actual oversight power is held by the Federal Open Market Committee composed of the president of the Federal Reserve Bank of New York and presidents of 4 other Federal Reserve banks, serving on a rotational basis. The regional Federal Reserve banks issue shares of non-tradable stock to member banks, whose stock may in turn be held by banks in other nations, giving rise to the claim that foreigners own the system. The governmental web site describes the system as “independent within the government.” If the original intent was to create a banking system separate from and uncorrupted by politics, history has amply demonstrated abysmal failure.

Until 1933, collateral to back up the nation’s money supply was the gold stored at Fort Knox, but the real wealth of a nation lies in its land and its people, i.e., the common wealth. Forests can be managed to produce a sustainable yield – or they can be mismanaged, with clear-cutting that causes erosion, silting of streams, and destruction of fish stocks. No tourist ever traveled to California to see Big Tree stumps.

So it is with farmland, streams and rivers, towns and cities. Poor farming practices, polluted streams, deteriorating buildings, all reduce the nation’s common wealth. So it is with the citizenry. Well-educated citizens are able to fulfill higher-level jobs and therefore are of greater value. Healthy citizens have a longer working life and require fewer medical services. Responsible, creative and engaged people make wiser personal and political choices and are of greater benefit to the nation. People who are in dire economic straits, suffering poor health, ignorance and apathy will fill our prisons and overwhelm our welfare systems.

For a nation to increase its “common wealth” requires a sensible, operational basic economic system. That we do not have, nor do most nations in the world. In the current monetary system in the U.S., banks MAKE MONEY by lending and then use the debt as an asset to lend more, on and on, which is what has brought this economic crash, not the first, I might add – and coincidentally has sucked up even more wealth into the pockets of the already very wealthy. Year after year, this system has redistributed wealth upward.

We desperately need a REVERSAL of the entrenched wealth-redistribution system!

So here’s my concept: Suppose that our GOVERNMENT, i.e., We The People, OWNED THE BANKS! Government, using our common wealth as collateral, would issue our currency. Yes, “national banks” would be “NATIONAL” banks, taking deposits, making loans, managing credit cards, etc. All the interest currently being siphoned upward into the pockets of bankers would be used to operate our government. That’s a tremendous amount of money, and I’m wondering if it might not be enough to SERIOUSLY lower taxes or even eliminate taxes entirely!

Under an economic system of truly “national,” i.e., government-run, banks, corporations would continue in business (although limited in size so that NO such entity becomes “too big to fail”). Entrepreneurs could easily get loans to start new businesses. Small companies could get loans for operation of their businesses. Ordinary people would have money to spend or save, credit cards would charge a reasonable rate of interest, and usury would become only an unpleasant memory.

Estimates of the bailout now nears $3 trillion. Rather than throwing it at privately owned banks and lenders, our government could buy controlling interests in smaller banks, those otherwise likely to be bought up by banking behemoths. With ownership of these banks, government could immediately begin to make loans and thereby ease the current credit crunch. We wouldn’t need the likes of CitiCorp with its usurious interest rates, punitive fees and charges, and its inherent arrogance and irresponsibility.

In order to have a truly healthy economic system, one that does not continue to redistribute wealth upward, we’d need to make some other corrections as well:-

  • Raise the minimum wage,
  • End subsidies to corporations that offshore jobs,
  • Ban the practice of avoiding taxes by setting up offshore offices,
  • Require that our government fulfill its traditional obligations rather than out-sourcing and privatizing (which the Bush administration has done in many areas, up to and including our military),
  • Eliminate the special Social Security tax and put Social Security into the federal budget.
  • Impose any necessary taxes on an equitable, progressive basis. (Even Adam Smith wrote that “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”)

It seems to me that a fully nationalized banking system would introduce more freedom and more fairness into our society and that it would result in a truly healthy and sustainable economy.

An economy cannot continue to grow ad infinitum (nor can anything else, including population). If we humans want to continue our lives on Earth, we will have to begin to think about a sustainable future. End

An interesting article related to the here