Towards a New Banking System. Part 1

As a necessary first step in the process of conceptualizing a new banking system, we would do well to answer a basic question that is generally lost in the shuffle when discussions of the banking system arise, as they so often do these days. Namely, what is the primary purpose of a bank?

Most would agree that a bank’s primary purpose is to act as an intermediary between prospective borrowers and lenders. Certainly banks have other functions, but providing checking accounts and storage facilities for valuables, to name two auxiliary services that banks provide, is of substantially lesser importance than acting as a facilitator/distributor of unspecified sums of credit between borrowers and lenders.

Given that the United States’ economic model is still, at least nominally, capitalistic, albeit with its share of distortions, the function of credit intermediary is clearly a vital one, and yet, how difficult is it to act as a functionary for borrowers and lenders? In truth, it isn’t too terribly difficult, and yet, banks, in the main, operate with some very substantial advantages given their relatively easy task. I am not even referring to the set of massive advantages, which should more accurately be labeled abuses, presently being meted out on behalf of banks, but instead have in mind traditional advantages built into the banking system, advantages that suggest that U.S. banking should more properly be referred to as a franchise/cartel given the dominant manner in which the Federal Reserve System operates.

Precisely what I have in mind with respect to “advantages” is the traditional method by which banking institutions have made profits. Generally, for the prudent banking institution, the “spread trade” where banks borrow short term from one another, or The Federal Reserve itself, at low rates of interest, and lend longer term to the public at higher rates, aka “borrowing short and lending long”, has proven to be the primary means by which the banking franchise has garnered, as it were, its steady and virtually riskless returns.

However, somewhere along the way, approximately in the late 1990s, banking institutions, primarily the outfits with names one is now overly familiar with, became more avaricious than usual, and embarked on a process that led to the destruction of the proverbial goose that laid the golden egg. A discussion of the process by which that occurred is not within the scope of this piece, but suffice it to say that our present banking crisis was sown, with the willing assistance of the political class, by the banks themselves who were no longer satisfied with their traditional very low risk means of profit generation.

In this writer’s view, the banking franchise modus operandi that enables the schema of “borrowing short and lending long” has always been of questionable utility to the society at large, giving as it does a special and arguably unfair advantage to the banks themselves. And now, in light of ongoing egregious abuses by the big banking system, one is impelled to out right challenge their longstanding basic advantage. As a result of bank’s (at least the largest banks) systematic irresponsibility, I argue that the time has come to ask, if not demand, the forfeiture of what was once banking’s core advantage.

My view is that going forward, whatever banking system we have must cheapen the cost of money for the public at the expense of the banking system itself. If there is to continue to be a central bank system of some sort, and my view is that there could be one, but that, at the very least, its present charter would have to be rewritten such that its franchise function is revoked, the public must be able to access credit at something closer to wholesale than retail. In short, there is no justification for any prospective borrower with decent collateral to pay anything but a modest amount over prime.