Nationalizing the Banks and Greening the Monetary System

Could nationalizing the banks help fix two major problems with the monetary system? Economists and conservatives, recently including Alan Greenspan, are starting to talk about the need to nationalize U.S. banks in order to stabilize the financial system. At the least, it would prevent the banks from using bailout money for junkets. At best, it could provide an opportunity to fix some fundamental flaws in our monetary system.

The two most basic problems with our monetary system are that 1) money is backed by debt, and 2) compounded interest ensures that a certain percentage of people will go bankrupt. Rather than explain all of that here, I refer you to Richard Douthwaite’s Ecology of Money and an essay here.

When dollars are only backed by debt (money is loaned into existence), banks must keep lending in order to keep the money supply stable. Otherwise, when loans are paid back, or when companies are unable to pay back loans and go bankrupt, the money ceases to exist, it just disappears, which is the actual cause of a recession. In order to prevent this house of cards from collapsing, banks must always be creating new loans. But when the debt stops flowing, the money supply starts to contract, which is what happened after banks realized that the credit default swaps based on subprime loans were overvalued.

Money could be based on something real instead of just based on debt. The gold standard had its own problems. Douthwaite proposes an energy-backed-currency-unit (ebcu) that would help the world address climate change. The ebcu’s value would be backed by the limited number of emissions permits allowed under a global emission cap. In the future, greenhouse gas emissions might be more valuable than gold, and because they will get scarcer over time, they will become more valuable. The ebcu would reign in the inflationary fiat paper money system.

The debt basis of our money puts pressure on banks to keep making loans, but the positive interest rate makes those loans more and more expensive. Loans must be repaid with interest, but all money is loaned money, so where does the money to pay back the interest come from? The zero-sum answer: some people must go bankrupt to allow for others to repay their loans. A great source for more information on the interest rate is Margrit Kennedy’s book Interest and Inflation Free Money. Kennedy's book also points out how the growth rate of compound interest is totally unsustainable. One penny invested over time will eventually be worth more than the whole planet. The weird way that the interest rate affects economists estimates of future costs has profoundly affected the debate over the costs of averting climate change, resulting in some economists immorally arguing that it is too expensive to do anything, and it is more economically efficient to sit and fry. One of the few economists questioning this logic was the UK's Sir Nicholas Stern (google: Stern Review, discounting, interest rate, climate change). The interest rate also causes prices to become distorted, and makes capital projects look unaffordable. This is too bad because we need lots of capital projects to transform our energy and transportation infrastructure into low-carbon non-fossil-fuel systems. A steady-state economy will be impossible within the constraints of a debt-backed, positive-interest monetary system. One possible solution is to alter the monetary system to adopt an altered form of the interest rate more like the Swedish JAK Bank model.

So, in summary, the current banking crisis could provide the opportunity to improve our monetary system to fix two major flaws. A new currency that is not tied to debt could be backed by greenhouse gas emissions permits. And banks would be able to loan money without charging compounded interest that forces people into bankruptcy.

Of course, much of the public will not ever learn about the problems of the monetary system because the media will only publish stories that reinforce pre-existing ideologies by focusing on who to blame for the recession: either the private sector (greedy bankers and Bernie Madoff), or the public sector (government-backed loan programs and poor oversight from Christopher Cox's SEC). The Wall Street Journal and Fox News will conveniently forget about how Dubya wanted to privatize Social Security just a few years ago. I already saw one backlash blog posting calling to privatize Congress rather than nationalize the banks. But whether to privatize or nationalize is not the issue. Just like in the first few chapters of Peter Barnes' book Capitalism 3.0, the solution to the problem will not come from either government or corporations, it will come from changing the system. Hopefully, some commentators will recognize the role of debt-backed currency and compound interest play in the current economic downturn, and maybe there will be articles in the media about the monetary system. Booms and busts are not part of the regular business cycle; they are part of the debt/interest monetary system. If the banks need to be taken over by the government until things are sorted out, it may provide a good and rare opportunity to fix these two problems.

Maybe this teachable moment will help create a monetary reform movement in this country. The movement could be based on Richard Douthwaite's The Ecology of Money, and help us create a new monetary system that will reduce greenhouse gas emissions and green our economy.