I talked Sunday about Move Your Money with Guy Raz of NPR’s Weekend All Things Considered (summary; audio from about 3:45). We covered a lot of ground, from what’s in it for individuals to shift towards community banks and credit unions (better service and lower costs, in many cases) to how this could begin to reign in Too Big To Fail financial institutions (slowly, but surely).
Unfortunately, there wasn’t enough time to discuss what comes next – i.e., what happens when the location of political candidates’ own money starts to matter. As early as this fall’s primaries, expect to hear people ask politicians in debates and through various kinds of interactions: (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?
These questions strike to the heart of democratic responses against overly concentrated financial power throughout US history – a topic we take up in Chapter 1 of 13 Bankers.
In the 1830s showdown between elected officials and big banks, President Andrew Jackson went toe-to-toe with Nicolas Biddle of the Second Bank of the United States. Both sides won several rounds and finally it came down to this – could Jackson really move the money of the US government away from the Second Bank? He could and did. And despite being threatened – by bankers, naturally – with dire consequences, the US had a very good 19th century.
The essence of the second confrontation was neatly captured by the title of Louis Brandeis’s 1914 book, Other People’s Money – and How the Bankers Use It. Brandeis, a future Supreme Court Justice, saw clearly through the nature of the “Money Trust” – recognizing that its power was based, essentially, on its access to and control over funds deposited by regular people.
In effect, the industrial revolution had spread wealth and disposable income, but – through the rise of powerful investment banks – actually concentrated economic and political power.
Reformers struggled for several decades with how to constrain the biggest banks, without choking economic growth and while protecting individual depositors, in this new economy. The solution, reached after much difficulty and finally in response to popular demand, was the regulations of the 1930s.
From that time, until the early 1980s, financial empires based on retail deposits were greatly constrained in terms of the risks they could take – and without retail deposits, it was hard to become big enough to do serious damage to the economy.
After 30 years of deregulation and financial “innovation”, our problem today is rather different. The idea of banks being so big they can extract enormous resources from the state would have been incomprehensible to Jackson and ludicrous even to FDR – in their day the federal government did not have anywhere near enough resources to “save” massive failing banks as we have done in the past few years.
The essence of our current difficulties is that so many people – both in power and from all walks of life – still actually think our biggest banks are good for their customers and for society as a whole, so we must hold our noses and live with them. This view must be challenged, directly and repeatedly.
In this context, moving your own money is more than an important gesture, and if enough people get on board, it will make a difference. More likely, thinking hard –and talking with others – about your various monetary transactions also beings to change the rules of the political game. How can politicians claim to be against Too Big To Fail banks when they actually have an account or a credit card or a mortgage at one such offender? Shouldn’t state officials be held accountable for where they park the taxpayers’ funds? Which governor wants to risk reelection while heavily dependent on big banks? Who got what kind of commission last time a government body issued bonds?
This set of litmus tests can be seized on by left or right – both, in fact, can reasonably claim some inheritance from Jackson and Brandeis. Expect competition from all sides to prove their candidates are less beholden to the dangerous and debunked ideology of Reckless Finance.
Move your politicians.
By Simon Johnson
The Baseline Scenario 
And despite being threatened – by bankers, naturally – with dire consequences, the US had a very good 19th century.
Well, except for the panic of 1837, the depression of 1839, the panic of 1857, the recession of 1865, the panic of 1873 (and following Long Depression), the depression of 1882… Each of which involved a > 20% contraction in GDP.
OK I admit those are not from memory.
The 1930-1980 period is a much better example. (And Teddy Roosevelt’s trust-busting is a better analogy, in my opinion.)
Of course I agree with your conclusions, Prof. Johnson. But I am not sure we do our case any favors by trying to portray the 1800s as an economic utopia. What’s next, calling for a return to the gold standard? :-)
Moving monies out of one of those TBTF banks can add up to something better…. My initial account was with First Woman’s Bank of West Los Angeles – the company closed out of mismanagement by senior management. Then transferred to UCLA’s Credit Union. Then to Great Western. Then to Home Savings. Then to Washington Mutual. Then to Chase. Then to PayPal. (Having a disciplined approach to personal finances also helps.)
Excerpted from “Modern Trotsky” – just replace “Russia” with the “U.S” and “war” with “expansionist financial powers.”
”In the end, it was the continuation of an unpopular, offensive and expansionist war that led to the Provisional Governments failure. Instead of trying to forge a new road ahead following the March Revolution, the new government instead went on with business as usual. They did not implement the reforms necessary to win the support of the population. They thought that overnight, after the first revolution, Russian had been transformed and an era of democracy would ensue. Without a government will to actually change policy, it was perhaps doomed from the beginning.”
“Concentrations of power, no matter how beneficently they appear to have acted, nor what advantages they seem to possess, are inherently dangerous. Their good behavior in the past may not be continued; and if their strength were hereafter grasped by presumptuous hands, there would be no automatic check and balance from equal forces in the industrial market. And in the absence of this protective mechanism, the demand for public regulation, public ownership, or other drastic measures would become irresistible in time of crisis. Dispersal of private economic power is thus one of the ways to preserve the system of private enterprise.” United States v. United Shoe Machinery Corp., 110 F. Supp. 295, 347 (D. Mass. 1953, Wyzanski, J.).
I would suggest looking at the Canadian Financial model as to how we should proceed forward: http://en.wikipedia.org/wiki/Banking_in_Canada
Canada has seen only one failed bank since the great depression (what I remember.)
When Enron was engaging in its financial shinanigans, the Canadian banks were the first to pull out as counterparties. When the mortgage excesses started to appear, once again they were the first to get out of the CMO market.
When the Canucks say jump, the Canadian banks shit their pants.
Oh and I should point out one super-regulator, not 7 federal regulators and 50 state regulators like we have in the states.
I’d don’t think there is that high a satisfaction rate in Canada for out political system. We have a French separatist party that at one time formed the majority opposition party. And now we have a prime minister a former Western separatist and has back-tracked on his long-standing promise to end senate patronage. (In Canada, our senators are appointed not elected.)
But having said this … there are laws in Canada that prevent the kind of lobbying that goes on the United States. But I am not sure about how the details of our campaign finance laws work.
If there is another Canadian on this blog who knows … by all means let us know.
Regardless of lobbying or separatist angst, neither have much to to with sound banking. To be sure lobbyists pray on our political soul, more so they they prey on Canada, but yet Canada can seem to govern while we can not. That is an aside, the Canadian financial system is sound while ours is not.
No matter, wine takes me to happier places, so should it take you.
The irony in the is the US government is subject to capture by lobbyists funded by TBTF banks that are back stopped by taxpayers’ bailout money that some estimate will take a — generation or more — to pay off.
All very confusing …
TBTF is not the problem. The problem is a lack of governance. A lack of oversight. Banks and banksters should not be allowed to get rich at the expense of those that invest their money, so that they can modestly enjoy better prosperity.
Regardless, the Canadian form of governance is the best.
The money that politicians move around as part of a municipal, state or federal budget comes from taxes that we pay. We should have a say on where it is moved.
The former Liberal finance minister Paul Martin gets credit for the reputation of the Canadian financial system. Maybe Barack Obama should meet with Paul Martin … Canadians can only feel undying gratitude.
I might add our current prime minister is a free-market economist and former Western separatist …
I think every Canadian in their right mind is grateful the Tories were not in power in the decade leading up to the 2008 global financial meltdown … if the right-wing had been in power our economy might have tanked the way Iceland did …
Every America should challenge our socalled politicians to answer these questions at every possible opportunity.
“… (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?
Then every American should move thier money out of the “den of vipers and thieves” in the TBTF oligarchs and into local community banks or credit unions. We all must do our due diligence, and put our money into well managed local institutions, and in doing so, send a harsh message to the den of vipers and thieves in the TBTF oligarchs that there are other options out there, and we are applying them.
Nice work Professor Johnson!
I will need to steal this public domain quote.
You ask for that, and the bankers and Repubs will have the Wal-Martards on your front porch screaming how you’re a freedom-hating socialist in no time flat. Not that I disagree with you in the least, I’m just pointing out how sadly impossible that idea is here in the U$A.
It does make me sad that the politicians will probably keep their money right where it is, thankyouverymuch, and the big players will stick with the big banks as well. Those off us that are angry and moving savings will probably barely amount to one percent of a bank’s funding, and probably don’t use enough loans and/or credit to matter to them either.
I wish we had a way to REALLY hurt them, without waiting for politicians.
To put alongside Move Your Money, here’s some slogans which should encompass all our dealings with these “politicians”:
Where’s Your Money?
Where’s Our Money? [Meaning they must justify every vote in terms of does it channel taxpayer funds to help the people, or to the pockets of racketeers.]
Every American should demand answers from our socalled politicians to theses simple questions: “(1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?” Then every American should disolve any involvement with the “den of vipers and thieves” of the TBTF oligarchs, and transfer all their money to local banks or credit unions. It is our responsibility to make sound decisions and do our due diligence, to transfer this wealth to well managed healthy instititions.
Amerika, and all our socalled politicians, including Obama are owned and controlled by the predatorclass, and predatorclass oligarchs. Our socalled politicans do not care about us, or have any concern for the peoples wellbeing or best interests. Politicians, including Obama, only care for, and advance the best interests of the predatorclass, because of they are bought and paid for. I refer my fellow commentarians to the Declaration of Independence:
“When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”
There are solutions 3-D, but they will not be pretty or bloodless. All that is required is the courage to just stand up, and say – NO MORE!!! Politicians will never help us. The predatorclass is bent on devouring and enslaving us. We the people must muster the courage to stand up and demand accountability from the den of vipers and thieves on Wall Street.
Amerika has devolved into a kleptocracy. The predatorclass, thefew purchase, own and control the government. If we wish to inhabit a democracy, – then it is long past time to stand up, be heard, and demand real change. If not, – then we deserve whatever fiery pit and hell the predatorclass hurls us into.
I hope that direct action works but I doubt it, human nature shows that most people are pretty apathetic when it comes to acting in such a fashion. What caught my eye was a much bigger issue which I think should be firmly on the agenda.
I have written on this same subject and also into a brick wall of indifference and suspicion. It needs a much wider readership and tackles much of the disconnects attacked in Baseline Scenario. seehttp://tinyurl.com/yecmr7u
I think this quote from Yves Smith yesterday pretty much says it all.
“The big reason banks are too big to fail is that they control infrastructure which has become critical to commerce. Most important, they control the credit markets. And credit is essential to any economy beyond the barter stage.”
Just that this discussion’s going on is a massive-fail for those banks.
So tell managers of your retirement fund, you 401k fund, your favorite non-profit — move my money, as well as your town, state, and federal politicians.
Krugman said this in today’s NY Times. Interestingly, he downplayed TBTF. This seems in opposition to the ideas on this website.
Think global, act local. Keep your money local.
Why President Obama & Congress can’t get serious (nor do they feel inclined to do so….):
“And you spoke to Lloyd Blankfein 24 times in 6 days. Why?” (Goldman Sachs CEO Lloyd Blankfein) http://www.nydailynews.com/money/2010/02/01/2010-02-01_goldman_ceo_may_rake_in_100m_bonus.html
“Well, first of all I doubt I spoke with Lloyd Blankfein 24 times in 6 days …”
“The phone records say he did. But they also show he talked constantly with Wall Street executives, he says to keep track of the markets.”
The transcript:
http://www.cbsnews.com/stories/2010/01/31/sunday/main6159822.shtml?tag=cbsnewsSidebarArea;topnews
The video:
http://www.cbsnews.com/video/watch/?id=6155395n&tag=related;photovideo
There is such a great debate going on here on our money problems:
http://americaspeaksink.com/2010/02/the-count-down-to-the-baby-boomers-is-here/comment-page-1/#comment-3857
Will “13 Bankers” be available on Kindle? I couldn’t tell from the Amazon listing.
We do but it’s a bit like a circular firing squad.
We can implement a debt strike. One month of no payments on any debt by any borrower ought to definitely get the attention of the banksters as well as their creatures, the politicians.
I saw that some group has called for a strike in April but I don’t think it’s gotten much traction.
I will explain on my own site why DYNAMIC REGULATORY BREAKING will allow to turn around limitations to reckless finance, even if all banks were small. So small is not enough, that is what may be behind the success of Canadian banking Krugman exhibits as a demonstration that TBTF is not the fundamental problem (and I agree).
The truth is that the DERIVATIVE UNIVERSE is Too Big To Fail, as it is, and it is sucking the universe dry. Basically it should be outlawed, and only financial innovation that is proven SAFE, and EFFECTIVE, in the fullness of time, should be allowed.
JP Morgan, for example, has presently 80 trillion dollars of derivatives, about twice world GDP, whatever that means. Even if JP Morgan was cut in half, one bank having one world GDP, or even a tenth would be too much.
Solution: allow derivatives only fully provisioned for commercial operators (full provision means no leverage…)
Overall, banks are trusted to create most of the world’s money, so they ought to be beyond any suspicion, and thus under extremely close scrutiny, and forced to only invest in the real economy.
PA
http://patriceayme.wordpress.com/
I heard the interview and I have to say not only did the NPR guy sound a little biased (incredulous) in his questions, but the industry guy who followed seemed a hatchet man spreading FUD. It seemed like a free PSA for large banks and it was very masterfully recited to sound both reasonable, but direct you toward the big banks clutches.
Things like, “If the small banks get too many customers then maybe they won’t be able to handle them or worse, will lose the customer service”… Yada, yada, yada…
Depressing really.
Asking politicians where they put their and your money? That’s rich. The Chairman of our County Commission just got sentenced to two years in federal prison for public corruption.
But I do have a question. After every election, our city manager takes the city commissioners to New York to “meet the Muni Bond Dealers and learn how the system works”. Last spring it was revealed that bond dealers were assigning deals at given rates rather than bidding at auction. Never heard anymore, isn’t bid rigging illegal?
That will probably continue to fall under less than one percent of their customers as well. It’s a great idea IF you can get enough people willing to do it.
It’s really hard to twist the arms of such massive institutions with so few people working together.
Don’t be confused.
You are right that the lack of governance and oversight is a huge problem. But that does not mean TBTF is not also a huge problem. Fixing one does nothing about the other. Both prolems need to be addressed and each requires its own solution.
As I have mentioned in previous posts, onwer (stockholders) of corporations have been so far removed from governance that they essentially have no voice, other than to sell the stock. No wonder management run corporations fore their own benefit, rather than for the benefit of the owners. This problems extends well beyond the financial sector into just about all big corporations.
“He could and did. And despite being threatened – by bankers, naturally – with dire consequences, the US had a very good 19th century.”
Mebbe so. :) But don’t forget the Civil War, Reconstruction, the Trail of Tears, the Indian Wars after the Civil War, the near eradication of the buffalo, the deforestation that resulted later in the Dust Bowl, the Robber Barons, the Long Depression, when the combination of deflation and usury bankrupted farmers, the Cross of Gold, economic slavery in the North, which was not alleviated by war, and recurrent financial panics, which we are beginning to experience again. Overall good, perhaps, but a mixed bag, with prosperity that depended upon resource depletion.
Mr. Johnson wrote:
“In effect, the industrial revolution had spread wealth and disposable income, but – through the rise of powerful investment banks – actually concentrated economic and political power.
Reformers struggled for several decades with how to constrain the biggest banks, without choking economic growth and while protecting individual depositors, in this new economy. The solution, reached after much difficulty and finally in response to popular demand, was the regulations of the 1930s. ”
Well said.
“in their day the federal government did not have anywhere near enough resources to “save” massive failing banks as we have done in the past few years.”
Today the federal government does not really have the resources either, and neither Congress nor Admninistration could not possibly commit them – that is left to the cultist entity known as the Federal Reserve, who also has not enough resources, but is widely believed to be able to pretend to commit them anyway.
One Nation, indivisible, under God, alone with him, untethered from reality in more ways than mortal minds can count…
posit that all economic activity, viewed as a thermodynamic process, merely converts exergy into money wealth that measures the rate of entropy production.
I think that all of us moving our money to these institutions would make a bigger dent in the TBTF banks bottom lines than you think. Judging by the fact that the bottom 95% of wage earners pay around 43% of taxes should correlate to a good amount money being moved. Of course, I am sure that top 5% also have alot better tax shelters than the average Joe.
Your description of the 19th century in America in terms of banking is too rosy. States printed their own money. Actually, banks printed their own money. People were always fighting about wanting their money backed by gold and silver. They wanted their money to be gold and silver. The Wizard of Oz was actually an allegory about these times. Oz is the weight of silver. William Jennings Bryan was one of the characters in the story. Then there’s that famous yellow brick (gold) road to the Emerald City (green, color of greenbacks).
After much reading and consideration, I have decided that Krugman is softheaded and liberal to a fault, but certainly seems to be substantially irrational on lots of pronouncements that he loves to make. I think that his popularity is more important to him than being a valid economic intellect. K seems to be a populist, and scary at that.
The above link is why we need a campaign finance overhaul. (Too hell with reform.)
In the 1990 (Touchstone Book) THE HOUSE OF MORGAN: An American Dynasty and the Rise of Modern Finance, Ron Chernow (writing without a contemporary axe to grind) provides the following setting for the thinking behind the Glass-Steagall Act. Noting that American Finance at the time was being perceived as virtual “hucksters” it was also noted that small investors were subject to schemes clothed in autority and the prestige of magic Financial names. Noting the obvious conflict of interests identified by Pecora, Chernow (1990:375) states that “Banks could take bad loans, repackage them as bonds, and fob {sic} them off on investors, as National City had done with Latin American loans.They could even lend investors the money to buy the bonds. A final problem…was that they forced the Federal Reserve System to stand behind both depositors and speculators. If a securities affiliate failed, the Fed might need to rescue it to protect the parent bank. In other words, the government might have to protect speculators in order to protect depositors.”
We are hearing material written before 1990 about Big Finance and Moral Hazard (nice clean term) in 1933.
It is not the problem that Finance is TBTF because of interdependency. The problem is that unchecked expansion will eventually adopt desperate strategies to continue expansion and it is not that we are dependent upon their centralizing agency as much as they are dependent upon finding new ways to expand under inversely proportioned resources. It is an inevitable strategy of failure and compromising prospect.
…and now they add mathematical models to the same scheme, create tranches of the same toxic materials under exponential set of derivatives with electronic formulas…and then they have the audacity to call it elegant and exotic or creative wealth …
…and what’s worse…
…WE BUY IT FROM THEM ALL OVER AGAIN!