Blow up the banking system! A free account for all is possible

Money Whether Silicon Valley Bank or Credit Suisse - this crisis was foreseeable. Its causes are as clear as the way to tame the financial markets: everyone should now get a free account at the central bank

by Yanis Varoufakis

[This article posted on 4/2/2023 is translated from the German on the Internet, Yanis Varoufakis: Sprengt dieses Bankensystem! So zähmen wir die Finanzmärkte.]

Private banks are no longer needed. This time, the banking crisis is different. In fact, it's worse than in 2007 and 2008, when we could attribute the successive bank failures to large-scale fraud, widespread predatory lending, collusion between ratings agencies, and shady bankers peddling questionable derivatives - all made possible just by the deregulation that politicians with roots on Wall Street were responsible for, such as Robert Rubin, who as U.S. Treasury secretary between 1995 and 1999 stripped away the Glass-Steagall Act and with it the separation of credit and investment banking. The reasons for today's banking turmoil are different.

Yes, Silicon Valley Bank was foolish enough to take extreme interest rate risks while serving mostly uninsured depositors. Yes, Credit Suisse had a sordid past filled with criminals, fraudsters and corrupt politicians. But unlike 2008, no whistleblowers were silenced, the banks complied (more or less) with post-2008 tighter regulations, and their assets were relatively sound. Moreover, none of the regulators in the United States or Europe could credibly claim that they had been blindsided, as they had been in 2008.

How the West Poisoned Its Money

In fact, regulators and central banks knew everything. They had full access to the banks' business models. They could see perfectly well that these models would not survive the combination of a sharp rise in long-term interest rates and a sudden withdrawal of deposits. Yet they did nothing. Didn't those in charge foresee that herds of large, uninsured depositors would flee in a panic? Possibly. But the real reason for central bank inaction in the face of fragile bank business models is even more troubling: it was central bank reaction to the 2008 financial crash that had produced these business models - and policymakers knew it.

Gentrification can't be stopped and other lies. Harsh austerity policies for the vast majority of people and state socialism for bankers, both practiced at the same time in Europe and the U.S. after 2008 - this had two consequences, as they have characterized the financialized capitalism of the past 14 years. First, this course poisoned the West's money. More precisely, it ensured that there was no longer a single nominal interest rate that could restore the balance between money demand and money supply while preventing a wave of bank failures. Second, since it was widely known that no single interest rate was capable of achieving both price stability and financial stability, the bankers of the West assumed that central banks would raise their interest rates as soon as inflation reappeared - and bail them out at the same time. They were right: that is exactly what we are experiencing now.

The banking system is not supposed to be safe at all

Faced with the choice of either containing inflation or bailing out the banks, venerable commentators are appealing to central banks to do both: keep raising interest rates while continuing socialism for bankers. This, they say, is the only way to prevent banks from toppling like dominoes. Only this strategy - tightening the monetary noose around society's neck while saving the banking system - can serve the interests of creditors and banks at the same time. It is also a surefire way to condemn most people to unnecessary suffering (through avoidably high prices such as avoidable unemployment) while simultaneously setting the fuse for the next bank fire.

Lest we forget what we have always known, banks were not meant to be safe. Together, they form a system that is inherently incapable of abiding by the rules of a well-functioning market. The problem is that we have had no alternative: Banks have been the only means of getting money to people (via counters, branches, ATMs, etc.). As a result, society became hostage to a network of private banks that monopolized payments, savings and lending.

A free account for everyone

Today, however, technology presents us with a great alternative. Imagine if the central bank provided everyone with a free digital wallet - effectively a free bank account with interest at the central bank's overnight rate. Given that the current banking system operates like an anti-social cartel, the central bank could just as easily use cloud-based technology to provide free digital transactions and savings to everyone, with the net revenue going toward important public goods of general interest.

Freed from the constraint of having to keep their money in a private bank and pay a lot of money for transactions through its system, people are free to decide if and when to use private financial institutions that act as risk intermediaries between savers and borrowers. Even in such cases, their money will still be in perfect safety in an account at the central bank.

Hard cost for crypto enthusiasts

The crypto community will accuse me of talking the talk of a Big Brother central bank that sees and controls every transaction we make. Aside from their hypocrisy - this is the same bunch that called for an immediate central bank bailout of their Silicon Valley bankers - it's worth noting that Treasury and other government agencies already have access to our every transaction. Privacy could be better protected if the central bank's transactions were concentrated under the oversight of a kind of "Monetary Supervision Jury," composed of randomly selected citizens and experts from a wide range of fields.

The banking system we take for granted is not fixable. That's the bad news. But we no longer need to rely on a private, profit-driven, socially destabilizing network of private banks, at least not as we have been doing. It's time to blow up a hopelessly dysfunctional banking system that benefits the wealthy and shareholders at the expense of the majority. Coal miners have learned the hard way that society does not owe them permanent subsidies for destroying the planet. It's time bankers learned a similar lesson.

Yanis Varoufakis, former Greek finance minister, is chairman of the MeRA25 party and professor of economics at the University of Athens. This text first appeared at project-syndicate.org.

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