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.

Monetary Reform to address the Financial Crisis

Here are my recommendations to the President and Treasury Secretary for how to handle the financial crisis:

1. Government should bailout the people, not the corporations. Why give more money to Wall Street, when average people are struggling to pay their mortgages? Investment in green infrastructure jobs will build the economy. Stimulus checks unattached to anything are inflationary, but other types of payments should be implemented, including the Sky Trust, which would reward people for reducing their greenhouse gas emissions.

2. If government acts as the short-term investor of last resort, it must demand several things in return: a) stock that will be owned by the American taxpayers, held in trust, and that will pay dividends to all Americans equally on a per capita basis, similar to ESOPs and the ideas listed by Jeff Gates in his book "The Ownership Solution," b) enforceable pledges and action plans from companies to alter their business practices towards sustainability for the next 30-50 years, and their bailouts would be contingent on the companies' progress towards sustainability goals, especially for high-GHG-emitting companies like General Motors, c) demand that companies receiving bailouts reduce their ridiculous executive compensation back to normal levels and implement a common sense ratio between the lowest paid employee and the highest as advocated by Ben Cohen, d) oversight and prosection to limit the obvious corruption that follows any disbursement of hundreds of billions of dollars, e) when necessary, fire the executives who caused the problems and install new, more trustworthy leadership.

3. Convene a monetary reform group that would offer recommendations to change the following unsustainable parts of the monetary system: a) fractional reserve banking, b) debt as the only backing for our fiat currency, c) the positive compound interest rate that impoverishes people and causes poor people to pay rich people in order to rent the currency that should actually be a public utility.

4. Implement monetary reform with some of the following characteristics: a) create a local currency that circulates only at the regional level, supporting locally owned businesses and services, b) allow states to issue currency instead of just bonds that must be repaid with interest, c) alter the national currency so that it can be issued as a public service backed by something besides debt and without the positive compounding interest rate - some possibilities are the JAK banking model, d) initiate the creation of an energy-backed currency unit for foreign exchange transactions, based on the EBCU energy backed currency unit advocated by FEASTA.