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financial crisis
How to Bust the Bankers’ Club
C. J. Polychroniou speaks with progressive economist Gerald Epstein about why alternative banking is possible and urgently needed.
Feb 29, 2024
It’s been almost a year since the banking crisis kicked off last March. On Friday, March 10, 2023, Silicon Valley Bank, or SVB, a state-chartered commercial bank based in Santa Clara, California, collapsed after facing a sudden bank run and capital crisis. SVB’s collapse was the second largest bank failure in U.S. history since Washington Mutual in 2008. Two days later, New York-based Signature Bank also collapsed due to yet another bank run. But that was not the end of bank failures in 2023. On May 1, the San Francisco-based First Republic Bank, plagued by many of the same problems as those that doomed SVB and Signature Bank, also went under and was seized in turn by regulators who promptly sold all of its deposits and most assets to JP Morgan Chase. Two more banks would go on to declare insolvency later in the year, bringing the number of failed banks to a total of five.
Indeed, 2023 was the worst year for U.S. banks since 2008. But why do U.S. banks continue to fail after the reforms that were implemented in the aftermath of the 2008 global financial crisis? Why does the business model of commercial banks remain so fragile? World renowned progressive economist Gerald Epstein, author of the recently published book
Busting the Bankers’ Club: Finance for the Rest of Us, tackles these questions in the interview that follows. Epstein is professor of economics and co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst.
C. J. Polychroniou: Jerry, in your new book Busting the Bankers’ Club, you describe the business model of commercial banks in the age of neoliberalism as “roaring banking” and you juxtapose it with that of “boring banking,” which prevailed from the New Deal era right through the Reagan era. Under “boring banking,” banks were prohibited from many of today’s financial engineering practices and financial shenanigans. The result was relative financial stability and economic growth. Obviously, bankers hated this business model, but what factors made possible the transition from “boring banking” to “roaring banking?” Was it simply because of the “logic” of the free-enterprise system at work, or did it happen because of actual intervention in the realm of policymaking?
Gerald Epstein: Like much historical change, the evolution from “boring banking” to “roaring banking” was the outcome of the underlying dynamics and pressures of the economic system and specific historical conjunctures, all with plenty of involvement of actual human beings and classes.
The major Wall Street bankers were never happy with the New Deal financial regulatory rules that made it harder for them to charge excessively high interest rates, make highly leveraged bets, or engineer fraudulent Ponzi or “pump and dump” frauds against customers. The numbers on Wall Street bankers’ incomes show why. As The Bankers’ Club reports, prior to 1929, bankers scarfed down incomes almost twice as high as the average wage in the economy; but after the Depression and up until the late 1970s, their incomes were about average for the whole economy. As my colleague James Crotty put it, these bankers wanted to break out of their New Deal cages to restore their superior incomes and power.
So, starting in the 1960s the major Wall Street banks organized “the Bankers’ Club,” an army of politicians, lawyers, economists, regulators, and fellow business associates to incrementally poke holes, then ditches and finally massive canals through the wall of New Deal financial regulations. According to Robert Weissman, now president of Public Citizen, these financial firms spent over $5 billion, just counting from the early 80s, on the club and its activities. This effort led, most famously, to the repeal of the Glass-Steagall Act in 1999 under the Clinton administration, which then officially ended the separation of commercial from investment banking.
The Bankers’ Club had a different idea: Tear down the New Deal model and usher in a new era in banking, the “roaring banking” system of mega financial institutions and high-risk banking strategies.
These efforts, carried out by real (mostly) men, were aided by underlying dynamic changes in the U.S. and world economies. The U.S. experienced phenomenal economic growth in the aftermath of World War II, and the world also witnessed the resurrection of the European and Asian economies. In due time, competition facing the U.S. in trade and finance intensified, leading to the demise of the Bretton Woods system of fixed exchange rates and relatively stable interest rates. Massive military spending by the U.S. government on the war in Vietnam from 1964 to 1973 combined with the effects of the geopolitics of energy driven by the formation of OPEC led in the 1970s to large increases in commodity prices and inflation, again putting upward pressure on interest rates to keep up with inflation. Then-Fed Chair Paul Volcker jacked up interest rates in an attempt to break the inflationary pressure, once again destabilizing the interest rate structure in banking. All of these forces put enormous pressure on the New Deal framework, partly because the system depended on relatively stable interest rates. The New Deal model chose to stabilize interest rates in order to try to stabilize bank profits and promote borrowing and investment in non-speculative activities.
Thus, something had to give. In principle, the government could have reformed the system. But the Bankers’ Club had a different idea: Tear down the New Deal model and usher in a new era in banking, the “roaring banking” system of mega financial institutions and high-risk banking strategies.
CJP: The neoliberal era is replete with financial crises and bank failures. In 2008, the world experienced the worst economic disaster since the Great Depression because of a financial crisis that originated in the U.S. There was a sharp decline in economic activity which led to a loss of more than $2 trillion from the global economy while millions of people lost their homes and unemployment skyrocketed. Yet, the regulations that followed in the aftermath of the 2008 global financial crisis were essentially cosmetic, as evidenced by the collapse of five major banks in 2023. What were the reasons that SVB, Signature Bank, and First Republic Bank failed, especially since the Board of Governors of the Federal Reserve System insisted at the time that the banking system was “sound and resilient”?
GE: It is good that you bring up the collapse of SVB and the failures of Signature Bank and First Republic, since we are about to reach the one-year anniversary of these important events which occurred in early March 2023.
The Dodd-Frank Act, signed into law by then-President Barack Obama in 2010, was supposed to bring about the end of the “too-big-to-fail” (TBTF) banks and government bailouts. But a year ago when these banks got into trouble, the turmoil threatened to spread panic into the broader U.S. financial markets, signaling a possible series of bank runs in It’s a Wonderful Life style throughout the system. The Dodd-Frank Act had tried to forestall these types of events by making larger banks (those with assets of at least $50 billion) be subject to more careful monitoring by the Federal Reserve, requiring them to hold more capital of their own so that they could withstand larger shocks, and have greater liquidity (cash or cash-like assets) in order to help forestall bank runs. But during the Trump administration, these “medium-sized banks” lobbied to be exempt from the tougher rules. A major player in the fight was Silicon Valley Bank.
The Fed was still acting as chairman of the Bankers’ Club rather than steward of the public interest.
But on March 10, 2023, after a major bank run hit Silicon Valley Bank, it was forced to close. The Fed did not bail out the bank’s executives, but guaranteed the deposits of its remaining depositors even when these were far above the $250,000 amount covered by Federal Deposit Insurance Corporation insurance. When contagion spread to other banks in the U.S., the Fed guaranteed all deposits, no matter how big.
In April, the Federal Reserve published a major exercise of “self-crit” in its handling of SVB, prior to and after the crisis. It’s pretty accurate assessment included the following four problems:
- SVB’s board of directors and management failed to manage their risks.
- Federal Reserve supervisors did not understand SVB’s vulnerabilities.
- When the Fed supervisors did understand risks, they did not take sufficient steps to prevent a crisis.
- The Fed should not have allowed SVB to fly under the radar even though Congress had raised the threshold bank size in order to strictly monitor and regulate banks.
Though accurate as far as they go, these criticisms miss a crucial point: These are essentially the same problems that allowed bigger banks to instigate the Great Financial Crisis in 2008-2009. The Fed itself had done much to block more fundamental reforms during the Dodd-Frank negotiations and afterward as the rules were finalized. And the Fed under Jerome Powell supported the weakening of rules for the medium-sized banks.
In other words, the Fed was still acting as chairman of the Bankers’ Club rather than steward of the public interest. This, the Fed’s post-mortem would not admit.
CJP: Speaking of the Federal Reserve, in your book you do label it as the “chairman” of the Bankers’ Club. Briefly explain what you mean by that, and does the Fed actually have any input in regulatory reforms proposed by lawmakers?
GE: The Federal Reserve, the central bank of the United States, has two main functions. It is in charge of U.S. monetary policy, which includes trying to manage short-term interest rates and the overall supply of money and credit in the economy. And it also has a major role to play in regulating and supervising banks, including the mega banks or what I call the “roaring banks.” The Federal Reserve has been delegated these powers by the U.S. Congress, which, along with the president, establishes the mandates, or major goals, which the Federal Reserve is supposed to try to achieve. The question of the Fed’s mandates or goals has been a subject of long-term political fights in the United States, which explains why the Federal Reserve is a “contested terrain.” I say that the Fed is the “chairman” of the Bankers’ Club because history shows that, for most of the time, the big banks and the capitalist class at large win the contest for dominance of the Fed, both with respect to its monetary policy and regulatory policy. For example, after a long political battle, the Federal Reserve was given by Congress a dual mandate: to achieve high employment and stable prices (steady and low inflation). In addition, more recently, the Federal Reserve was given a mandate to maintain financial stability. But if one studies the Fed’s record, we find that when there is a conflict between keeping inflation very low (which finance normally prefers) and achieving full employment (which workers tend to prefer) the Fed almost always chooses low inflation. And when it comes to regulating banks tightly in order to maintain financial stability, or bailing them out after they get into trouble, the Fed has preferred to simply bail them out. More generally, the Fed offers significant favors to the banks, and in return expects the banks to protect its operations from the intrusive hands of Congress and the president.
To answer your question more directly, the Fed has a big influence on the regulations that Congress eventually passes, as one can see from the inordinate influence that Alan Greenspan had in the legislation to gut Glass-Steagall, and the inordinate role that Ben Bernanke and the Fed had in ensuring that Dodd-Frank regulations were riddled with loopholes.
CJP: The Dodd-Frank Wall Street Reform and Consumer Protection Act has been treated as one of the most significant U.S. regulatory reforms since the Great Depression. But it does remain a highly flawed regulatory framework, and even plugging all the holes in it won’t do the job, you argue in your book. What are the strategic shortcomings of the Dodd-Frank approach to financial regulation?
GE: To identify the flaws in Dodd-Frank, one can start by identifying the causes of the major financial crises we have experienced as well as the rocks and hard places the regulators found themselves between in responding to these crises. These causes are:
- Financial institutions that were allowed to become too big to fail, to manage, to regulate, and to jail.
- Lack of accountability for bad actors who took on excessive risk, even engaged in fraudulent activities, and were left free after the crash to take the money and run and hit the restart button on their next gig.
- Insufficient limits on the debt that these financial institutions could take on and the interconnectedness they could create between themselves and other financial institutions so that when one financial institution got into trouble it could threaten to bring down others like a house of cards.
- Insufficient controls on the short-term financing of long-term or excessively risky financial investments.
- Leaving dark holes in the financial system, that is, institutions and markets that are subject to little or no monitoring, much less regulation. These include hedge funds, private equity firms, and others. Post-crisis problems often emerged from these dark corners of the financial markets.
- Lack of precaution in the implementation of new financial products, so that dangerous products could infect the financial system before sufficient controls could be fashioned.
- No quid pro quos for government support: for example, bailouts with no strings attached.
Dodd-Frank did not really address these problems, and the Trump administration weakened the Dodd-Frank rules even further. As such, these problems are still very much with us.
CJP: What measures do you propose for improving financial regulation, so we won’t have bank failures and severe recessions triggered by financial crises?
GE: At a minimum, we must address these “causes” of the problems that I identified above:
- Cut down the size of the mega banks. For example, implement a modern Glass-Steagall Act that would reduce the maximum size of these banks and separate core banking functions from riskier, more speculative ones.
- Make traders and CEOs responsible for the steps and missteps they take. For example, implement “clawbacks” so that the incomes they are promised to receive from trades or decisions are held in escrow and only paid out when the investment pays off, without the need for government support. These bankers also need stricter legal consequences for breaking the law, including jail time for egregious offenses.
- Strict capital, leverage, and liquidity requirements for all banks that have significance for the overall economy, including “medium-sized banks” on the order of Silicon Valley Bank.
- Comprehensive monitoring and regulation of all financial institutions, markets, and products; no dark holes in the financial system.
- A precautionary principle for new financial innovations, such as Artificial Intelligence (AI) cryptocurrencies. Rules should ensure that these are safe and effective before they are allowed to be introduced into the core financial system. If anything, they should first be tested on the fringes where they cannot do significant harm.
- Support from the Federal Reserve or the U.S. Department of the Treasury in the case of a crisis should only be forthcoming as a last resort and should only come with strict strings (and quid pro quos) attached: Those responsible should be held accountable; the bank should have to change its business model to a safer form; the bank should engage in social services for the community, much like an individual legal offender, at least until it has paid back its bailout funds in full. A more reasonable quid pro quo is that the bank should always have to engage in more socially responsible behaviors simply by virtue of benefiting from this implicit insurance policy from the Federal Reserve or the U.S. government.
This last point touches on an important and more general issue. Financial regulation, at least since the New Deal, has been a negative screen: a list of things banks should NOT do. However, we have many crucial societal problems that the financial system should be taking a more proactive role to help solve. These include, for example, helping to build a green energy economy and ending our reliance on fossil fuels. Also, and this is equally important, contributing to the economic development of marginalized communities. Financial institutions that get government support—and that means ALL of them—should not only avoid crashing our economy but also contribute to our society’s important needs.
CJP: In Busting the Bankers’ Club, you advocate the establishment of banks without bankers because financial regulation alone will not be sufficient to address the plethora of problems (poverty, inequality, discrimination, climate change) facing the contemporary United States. How far can public banking go in addressing these problems, and how do we overcome the resistance of the political system to radical proposals that aim toward the making of a democratic economy?
GE: Yes. Private banks, no matter how regulated, or how incentivized to do socially useful activities, will not be sufficiently motivated to provide many of the key long-term social goods that we need: green energy, healthy communities for all, sufficient financial resources for the development of our rural areas. The reason is that these banks focus on maximizing profits in the short to medium term. Many of these other activities are socially profitable but might not be sufficiently privately profitable, at least in the short to medium term. As a result, we need more publicly oriented financial institutions, such as public banks that are dedicated to broader social goals.
There are activist groups in more than 20 states across the U.S. who are pushing for public banks of various kinds. The most successful ones so far are located in California, but New Jersey is also moving closer to establishing a public bank and there is a strong public bank campaign underway in Massachusetts.
The Federal Reserve should give the same level of support to public banking organizations as it has to private banks.
Still, there are several general obstacles to implementing an ecosystem of public banks adequate to face the problems we have. One is the intense opposition of the Bankers’ Club even though most of these public bank initiatives are structured to minimize competition with the private banks. For example, they do not take deposits; they do not lend directly to customers but rather to other banks who then lend to final customers, etc. Apparently, the Bankers’ Club simply does not want to legitimize any competitive sources of finance that could undercut their power.
Moreover, even if you add up all the public banking initiatives, they would still not be large enough or widespread enough to make a huge dent in the problems we are facing. What we need are national public banking institutions. For example, the Inflation Reduction Act (IRA) created a small Green Development Bank that, with support, could grow and thrive. A more activist and socially oriented Federal Reserve could play an important role here. The Federal Reserve should give the same level of support to public banking organizations as it has to private banks. And it should broaden its tools to promote key social goals: For example, the Fed could buy Green Bonds. It has already bought asset backed securities to bailout the banks.
How do we overcome resistance from the Bankers’ Club and right-wingers to these kinds of reforms? Two things: Join the Club Busters, those activists who are trying to block the Bankers’ Club and promote more socially useful institutions; and protect democracy by helping to get money out of the financial system (eg. repeal
Citizen’s United), expand voting rights, and fight against fascism.
In the last chapter of my book, I suggest that we all bite off what we can chew. Look around and join others who are fighting one of more of these battles. Join them and pitch in. As our forces gather, we will have impacts that build on each other. If some of our initiatives get blocked, other initiatives will move forward.
There are many Club Busters around the country, and indeed the world. In the U.S. we have public banking organizations,
Americans for Financial Reform, Better Markets, Rainforest Action Network, and many others. Support politicians who fight for these issues, including Elizabeth Warren, Sherrod Brown, Jeff Merkley, and Alexandria Ocasio-Cortez.
There are plenty of places to join others and take a stand. That’s how we fight the Bankers’ Club.
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How to Diffuse the Derivatives Time Bomb
Current laws allow the big international banks to run the largest derivatives casino that the world has ever seen.
Feb 18, 2024
This is a sequel to a Jan. 15 article titled “Casino Capitalism and the Derivatives Market: Time for Another ‘Lehman Moment’?”, discussing the threat of a 2024 “black swan” event that could pop the derivatives bubble. That bubble is now over 10 times the gross domestic product of the world and is so interconnected and fragile that an unanticipated crisis could trigger the collapse not just of the bubble but of the economy. To avoid that result, in the event of the bankruptcy of a major financial institution, derivative claimants are put first in line to grab the assets—not just the deposits of customers but their stocks and bonds. This is made possible by the Uniform Commercial Code, under which all assets held by brokers, banks, and “central clearing parties” have been “dematerialized” into fungible pools and are held in “street name.”
This article will consider several proposed alternatives for diffusing what Warren Buffett called a time bomb waiting to go off. That sort of bomb just detonated in the Chinese stock market, contributing to its fall; and the result could be much worse in the U.S., where the stock market plays a much larger role in the economy.
The Chinese Derivative Crisis
A January 30 article on Bloomberg News notes that “Chinese stocks’ brutal start to the year is being at least partly blamed on the impact of a relatively new financial derivative known as a snowball. The products are tied to indexes, and a key feature is that when the gauges fall below built-in levels, brokerages will sell their related futures positions.”
Further details are in a January 23 article titled “‘Snowball’ Derivatives Feed China’s Stock Market Avalanche.” It states, “China’s plunging stock market is leading to losses on billions of dollars worth of derivatives linked to the country’s equity indexes, fueling further selling as retail investors offload their positions… Snowball products are similar to the index-linked products sold in the 2008 financial crisis, with investors betting that U.S. equities would not fall more than 25% or 30%,” which they did.
Chinese shares rose on February 6, as officials took measures to prop up the ailing market, including imposing new “zero tolerance” curbs for malicious short selling.
The Greater U.S. Threat
The Chinese stock market is much younger and smaller than that in the U.S., with a much smaller role in the economy. Thus China’s economy remains relatively protected from disruptive ups and downs in the stock market. Not so in the U.S., where speculating in the derivatives casino brought down international insurer AIG and investment bank Lehman Brothers in 2008, triggering the global financial crisis of 2008-09. AIG had to be bailed out by the taxpayers to prevent collapse of the too-big-to-fail derivative banks, and Lehman Brothers went through a messy bankruptcy that took years to resolve.
In a December 2010 article on Seeking Alpha titled “Derivatives: The Big Banks’ Quadrillion-Dollar Financial Casino,” attorney Michael Snyder wrote, “Derivatives were at the heart of the financial crisis of 2007 and 2008, and whenever the next financial crisis happens, derivatives will undoubtedly play a huge role once again… Today, the world financial system has been turned into a giant casino where bets are made on just about anything you can possibly imagine, and the major Wall Street banks make a ton of money from it. The system… is totally dominated by the big international banks.”
The Speculators Dominate the Regulators
In a 2009 Cornell Law Faculty publication titled “How Deregulating Derivatives Led to Disaster, and Why Re-Regulating Them Can Prevent Another,” Prof. Lynn Stout proposed stabilizing the market by returning to 20th-century derivative rules. She noted that derivatives are basically wagers or bets, and that before 2000, the U.S. and U.K. regulated derivatives primarily by a common‐law rule known as the “rule against difference contracts.” She explained:
The rule against difference contracts did not stop you from wagering on anything you liked: sporting contests, wheat prices, interest rates. But if you wanted to go to a court to have your wager enforced, you had to demonstrate to a judge’s satisfaction that at least one of the parties to the wager had a real economic interest in the underlying and was using the derivative contract to hedge against a risk to that interest… Using derivatives this way is truly hedging, and it serves a useful social purpose by reducing risk.
…Under the rule against difference contracts and its sister doctrine in insurance law (the requirement of “insurable interest”), derivative contracts that couldn’t be proved to hedge an economic interest in the underlying were deemed nothing more than legally unenforceable wagers.
…Hedge funds, for example, should really call themselves “speculation funds,” as it is quite clear they are using derivatives to try to reap profits at the other traders’ expense.
The rule against difference contracts died in 2000, when the U.S. embraced wholesale deregulation with the passage of the Commodity Futures Modernization Act (CFMA):
The CFMA not only declared financial derivatives exempt from CFTC or SEC oversight, it also declared all financial derivatives legally enforceable. The CFMA thus eliminated, in one fell swoop, a legal constraint on derivatives speculation that dated back not just decades, but centuries. It was this change in the law—not some flash of genius on Wall Street—that created today’s $600 trillion financial derivatives market.
The Casino Gets Special Privileges
Not only are speculative derivatives now legally enforceable, but under the Bankruptcy Act of 2005, derivative securities enjoy special protections. Most creditors are “stayed” from enforcing their rights while a firm is in bankruptcy, but many derivative contracts are exempt from these stays. Similarly, under the Dodd Frank Act of 2010, derivative claimants have “superpriority” in the bankruptcy of a financial institution. They are privileged to claim collateral immediately without judicial review, before bankruptcy proceedings even begin. Depositors become “unsecured creditors” who can recover their funds only after derivative, repo, and other secured claims, assuming there is anything left to recover, which in the event of a major derivative crisis would be unlikely.
That’s true not only of the deposits in a bankrupt bank but of stocks, bonds, and money market funds held by a broke or dealer that goes bankrupt. Under the Bankruptcy Act of 2005 and Sections 8 and 9 of the Uniform Commercial Code (UCC), “safe harbor” is provided to entities described in court documents as “the protected class.” The customers who purchased the assets have only a “security entitlement,” a weak contractual claim to a pro rata share of a residual pool of fungible assets all held in the name of Cede & Co., the proxy of the Depository Trust and Clearing Corp. (DTCC). As Wall Street financial analyst John Rubino put it in a January 27 podcast:
What we used to think of as a bank bail-in where they take your deposit in order to support a failing bank, that is now spread across the entire financial economy where whatever you have in an account anywhere can just disappear, because they’re going to transfer ownership of it to these big dominant entities out there in the financial system that need those assets in order to keep from blowing up.
Derivative speculators are considered “secured” because they post a portion of what they could wind up owing as “margin,” but why that partial security is superior to the 100% security posted by the depositor or purchaser is not explained. The “protected class” is granted “safe harbor” only because their bets are so risky that to let them fail could crash the economy. But why let them bet at all?
The Solution of the Regulators
The fix of the G20 leaders following the global financial crisis, however, was to force banks to clear over-the-counter derivatives through central counterparties (CCPs), which stand between buyer and seller and protect either party if the other blows up. By March 2020, 60% of credit default swaps and 80% of interest rate swaps were centrally cleared. The problem, as noted in a December 2023 publication by the Bank for International Settlements, is that these measures taken to protect the system can actually amplify risk.
CCPs tend to ask for more collateral than banks did in the pre-crisis world; and when a CCP hikes its initial margin requirement to cover the risk of default, this applies to everyone in the market, meaning cash calls are synchronized. As explained in a May 2022 Reuters article:
It’s logical that CCPs ask for more collateral during a panic: That’s when defaults are most likely. The problem is that margin calls seem to have made things worse. In March 2020, for example, a so-called “dash for cash” saw investors liquidate even prime money-market funds and U.S. Treasury securities.
… [R]ampant margin calls have intensified a financial panic twice in as many years, with central banks effectively bailing out markets in 2020. That’s better than in 2008, when taxpayers had to step in. But the problem of margin calls remains unsolved.
… Central counterparty (CCP) clearing houses should consider asking clients for more collateral during good times to reduce the risk of destabilizing margin calls during a financial panic, a Bank of England official said on May 19.
Yet all this, as Michael Snyder observes, is to allow the big international banks to run the largest derivatives casino that the world has ever seen. Why not just shut down the casino? Prof. Stout’s suggested solution is for Congress to return to the pre-2000 rule under which speculative derivative bets were not enforceable in court. That would include reversing the “superpriority” privileges in the Bankruptcy Act of 2005 and the Dodd-Frank Act. But it won’t be a quick fix, as Wall Street and our divided Congress can be expected to put up a protracted fight.
What If the DTCC Goes Bankrupt?
In a 2015 law review article titled “Failure of the Clearinghouse: Dodd-Frank’s Fatal Flaw?,” Prof. Stephen Lubben points to a more ominous risk from pushing all derivatives onto exchanges; and that concern is shared by former hedge fund manager David Rogers Webb in his 2024 book The Great Taking. The exchanges are supposed to be safer than private over-the-counter trades because the exchange steps in as market maker, accepting the risk for both sides of the trade. But in a general economic depression, the exchanges themselves could go bankrupt. No provision for that is made in the Dodd-Frank Act, which purports to decree “no more bailouts.” Still, reasons Prof. Lubben, the government would undoubtedly step in to save the market from collapse.
His proposed solution is for Congress to make legislative provision for nationalizing any bankrupt exchange, brokerage, or Central Clearing Counterparty before it fails. This is something to which our gridlocked Congress might agree, since under current circumstances it would not involve any major changes, wealth confiscation, or new tax burdens; and it could protect their own fortunes from confiscation if the DTCC were to go bankrupt.
Other Possible Federal Solutions
Another alternative that not only could work but could fix Congress’s budget problems at the same time is to impose a 0.1% tax on all financial transactions. See Scott Smith, A Tale of Two Economies: A New Financial Operating System, showing that U.S. financial transactions (the financialized economy) are over $7.6 quadrillion, more than 350 times the U.S. national income (the productive economy). See my earlier article summarizing all that here. On a financial transaction tax curbing speculation in derivatives, see also here, here, and here.
There are other possible solutions to customer title concerns. There is no longer a need for the archaic practice of holding all securitized assets in the street name of Cede & Co. The digitization of stocks and bonds was a reasonable and efficient step in the 1970s, but today digital cryptography has gotten so sophisticated that “smart contracts” can be attached by blockchain-like distributed ledger technology (DLT) to digital assets, tracking participants, dates, terms, and other contractual details. The states of Delaware and Wyoming have explored maintaining corporate lists of stockholders on a state-run blockchain; but predictably, the measures were opposed. The practice of holding assets in street name has proven very lucrative for the DTCC’s member brokers and banks, as it facilitates short selling and the “rehypothecation” of collateral.
In October 2023, the DTCC reported that it has been exploring adopting DLT; but the goal seems only to be speedier and safer trades. No mention was made of returning registered title to the purchasers of the traded assets, which could be done with distributed ledger technology.
South Dakota’s Innovative Solution
The most readily achievable solution is probably that in a South Dakota bill filed on January 29. The bill is detailed in a February 2 article titled “You Could Lose Your Retirement Savings in the Next Financial Crash Unless Others Follow This State’s Lead,” which observes:
…[I]f your broker… were to go bankrupt, the broker’s secured creditors (the people to whom the broker owes money) would be empowered to take the investments that you paid for in order to settle outstanding debts….
To avoid a catastrophe in the future, a nationwide movement is desperately needed to alter the existing Uniform Commercial Code. Of course, that won’t be easy to accomplish, especially because bank lobbyists and other powerful financial interests will almost certainly fight kicking and screaming to stop policymakers from taking away their advantage over consumers.
The good news is, this “great taking” can be stopped at the state level. Americans don’t need to count on a divided Congress to get the job done. Because the UCC is state law, state lawmakers can take concrete steps to restore the property rights of their constituents and protect them in the event of a financial crisis.
On Monday, South Dakota legislators introduced a bill that would do just that. The legislation would ensure that individual investors have priority over securities held by brokerage firms and other intermediaries.
It would also alter jurisdictional provisions so that cases are determined in the state of the individual investor, rather than the state of the broker, custodian, or clearing corporation. This would ensure that individual investors are able to rely on the laws of their local state.
Hopefully, other states will follow South Dakota’s lead. Tennessee, for one, is reported to have such a bill in the works.
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The Climate Crisis Will Be the Mother of All Financial Crises
Our rapidly heating planet is the fundamental crisis for humanity and will have repercussions on all human systems.
Jun 12, 2023
The criminal profits of large multinational corporations in 2022 might seem to indicate a reversal of the historical trend for global profit decline of recent decades, but they are only a hiccup and a massive assault enabled by the privileges of the monopolists of global capital. The fall in profitability continues and the climate crisis is already and will continue to be the main factor in the current and future financial crises.
The inflationary spiral we are still living in was triggered by the oil companies' choice to use their monopoly over the energy system to offset their falling profits during Covid lockdowns. This comes after decades of hooking the economy on fossil fuels in an absolute alliance with the political mainstream, with the complacency and sometimes even agreement of green and left-wing parties. All agreements have been torn up by now, only barbarism remains. However, on top of this assault produced by the imposition of unparalleled high prices, other imbalances beyond the control of the capitalist elite have begun to manifest themselves.
The economic and financial models are not designed for the climate crisis.
In 2022, Pakistan was submerged by the biggest floods in its history, with a third of the country under water, with over 30 million people displaced to other places and other countries. Pakistan is one of the world's largest producers of cotton and textiles. The prices of textiles, of almost all kinds of clothing, have soared. Parts of Pakistan are still underwater. Several of the people who have been displaced will not return to where they were. The likelihood of mega-monsoons happening again in the coming years is high. The heat wave currently ravaging the Asian continent has—in the middle of moderate temperature months such as March or April— caused record highs in China, India, Bangladesh, Thailand, Vietnam, Laos, and others. This heat wave coincides with territories with high humidity so that large-scale deaths are already occurring (directly due to the heat and indirectly to people with health problems, the very young or elderly).
The abundance of cotton and textile production on a global level has been squeezed, prices have increased and it will not necessarily be possible to return to previous levels without further disruption.
Maize, wheat, and rice crops were affected by drought in the United States, Europe, and China. In California, the smallest rice area since the 1950s was planted in 2022 and the harvest will be about half that of a "normal" year. In the United States the winter wheat harvest has fallen by 25%. The disruption of the flow of grain in the Black Sea because of the Russian invasion of Ukraine added on top of this drastic decrease in supply even more concentration, increased global prices of cereals, bread, pasta. Some of this production could recover by 2023 if we do not experience a scorching summer in the Northern Hemisphere, but so far the historic drought on the Eurasian continent and in North America continues.
Agriculture in the mega-artificialized plastic prairie of southern Spain suffers drastic production declines and drives up the price of vegetables and legumes. The Alqueva Dam in Portugal and the absurd amount of criminal crops currently grown in the Alentejo region are now at the limits of viability. Although we have experienced the worst drought in Europe since the 16th century and the worst drought in the history of China in 2022, this was a year in which the climate phenomenon La Niña contributed to a global reduction in temperature. In 2023 this will not happen, and probably during the year El Niño will form in the Pacific Ocean, leading to a global increase in temperature.
We already live on another planet, not the one where all the exploitative relations, the institutions, and the banking and financial system that sustained the growth of capitalism were created.
To fight rising inflation, central banks and battalions of economists trained in the schools of suicidal capitalism chose to do what they learned: raise interest rates, to take money out of the economy, and make it squeeze. Everyone who had a loan saw the value of their loan increase, while the prices of all goods increased too. Many companies that had loans—everyone, therefore—also saw their operating costs increase, which will increase wage compression, eventually leading to layoffs and, in some cases, bankruptcy. Silicon Valley Bank went bankrupt as a result of rising interest rates and because it was a bank that specialized in debt, with a large amount invested in long-term US government treasury bonds, considered probably the safest investment in the world economy.
What happened to Silicon Valley Bank and the others will happen again and again in the future. Contagion to other banks will be more and more frequent and, with higher prices, will happen by other means as well. Household debt is increasing to combat high prices. As even the rare wage increases that do occur are below inflation, the level of debt is rising just to maintain similar living standards as before. As the likelihood of the price of fossil fuels controlled by private multinationals dropping significantly is so slim and as climate disasters such as droughts, floods and forest fires are taking away the general capacity to produce goods and services on a global scale, the climate crisis will continue to express itself directly as a cost of living crisis. This means that growing debts will, in increasing amounts, go unpaid. This means more banks going bust. But maybe it's possible to cover all this with insurance, no?
No.
Global insurance premiums are on the rise because risk is moving from being risk to certainty. The banking industry's close relationship with the insurance sector ensures that every climate catastrophe is also a financial crisis. And considering that risk is becoming or approaching a certainty in many cases, more and more insurers are refusing to insure investments, industrial projects, construction in dangerous zones, crops in flood or drought risk zones, and even general insurance on buildings, transport and other areas. They refuse because their business is to make a profit and because the previous distribution of risk is no longer the case and is only confirmed. All are much more dangerous and the risk of major climate catastrophes is widespread. Even when insurers don't refuse to do the insurance, they increase premiums and therefore both people and businesses are paying more to have insurance. If you consider an area like flood-prone Pakistan or a state like California, one of the most important agricultural areas in the United States whose annual fires are now permanently devastating vast areas and even cities, which insurance companies will ever be able to insure all the damage caused?
None.
So who will pay for these disasters? Can you imagine? Well, the people of that country through the State, the ultimate guarantor. This will happen with countries or territories where the state is rich, like California. In cases like Pakistan, the answer is that nobody will pay for these disasters in their entirety. States, to pay for these fossil industry-produced disasters, will have to raise taxes or divert revenues from activities like Education or Health for recovery. In capitalism, we can take for granted that the funding of the repressive apparatus, the police and armies, will not be touched, in particular because social discontent has no way not to increase.
The rising cost of living is already a consequence of the climate crisis, high prices are and will continue to be imposed on people because overall supply is falling. All the weaknesses that already existed before—weak health systems, energy monopolies, unavailable, poorly built housing stock, touristification of cities, lack of quality public transport, and precarious mass employment—will be exacerbated. Health systems are on the verge of collapse, people can't pay rents, can't commute to work without exorbitant costs, and stop paying bills and debts. And banks threaten, evict, sue, but there is no money to save them. The result? A financial crisis. Not paying the people directly, the states pay, again the last guarantor of the financial system, reducing public services and social capacity, increasing public debts, and being pressured to sell public assets.
And they will always tell us that it is necessary to save the banks, because otherwise the whole economy collapses. They will guarantee the collapse of society to save the banks, once again. But this time it is not the same as previous financial crises.
The economic and financial models are not designed for the climate crisis. Just look at the Nobel prize winner in economics, Eric Nordhaus, and his models and the proposition that considering the cost-benefit, we could allow a global temperature increase of up to 4°C. Right now we have a global temperature increase of 1.1 to 1.3°C and there are already global scale resource and product shortages. One more degree and not only will there not be remotely the amount of products needed to sustain billions of people, there will be no international trade as anything even remotely stable. Economists and their models don't realize what is or what will happen, they have generally been taught not to realize it.
The preponderance of the financial world in our societies means that this is also where we will see the world burn, economically and politically.
Exactly how the financial crises of the climate crisis will unfold is as diverse and multiple as the capitalist economy: bankruptcies because of high prices or interest rates, real estate crises, monetary crises when a country goes under water, debt crises when national production and tax revenues fall or banks, companies or insurance companies have to be saved, stranded assets when a government decides to bet on a failed and absurd project—we cannot help but point here to the stupidity of the project of a new Airport in Lisbon, of the cascade of dams to make an "Alqueva of the Tagus," of the thousands of imbecile projects that abound in the national and international press every day.
With a global temperature increase of 1.1ºC to 1.2ºC we are already in a general financial crisis of general lack of income from capitalism, despite the neo-liberal parroting that we live in the best of all worlds. Quality of life is in decline across the world because of the climate crisis and the system we live in, which refuses to solve it. The profitable investments of the last seven decades no longer exist. That is why we see so much excitement and hype with artificial intelligence, cryptocurrencies, and other intangible assets. They are the search for yield that today has to be based primarily on divestment and on products whose verifiability is low. The time when investing in cement, cars, factories, roads, and construction had guarantees of profit (even if brokered and favoured by the state, based on the idea of guaranteed future growth and profitability) is over. What is left is chaos and alienation.
On the other hand, alienation is widespread among the population and so it becomes very difficult to translate that the financial crises in which capitalism has always lived now also have an umbilical link to the climate crisis. It is on the basis of this understanding that some of the anti-systemic alliances essential to an ecosocialist political breakthrough can and must be made.
The climate crisis will be the mother of all financial crises, because it is the fundamental crisis of the human species and will have repercussions on all human systems. The preponderance of the financial world in our societies means that this is also where we will see the world burn, economically and politically.
The choice to design political programs that abandon the need for the urgent closure of fossil industry or that base the solution to the crisis on wage increases that do not entail any fundamental redistribution of power are proposals almost as alienated as the proposals of the capitalist elite.
We must not only know the current crises but use them at all times to propose the political programs of rupture necessary to stop the climate crisis and capitalism. This bridge is expressed in proposals like the Last Winter of Gas, which promotes a multi-tactic articulation and an alliance between different political groups in the simultaneous fight against the social, economic, and climate crisis. The break with the capitalist system and the road to climate chaos will have to be an articulated, international, and incisive process. The successive financial crises cannot be allowed to pass by as key moments for action.
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