An Action Agenda
What is created by human choice can be changed by human choice. Wall Street's useful and essential functions -- serving as a depository for savings, financing home ownership and business development, insuring against risk, and clearing check and credit card transactions -- can be organized in ways that are more efficient, accountable, and responsive than the current Wall Street model.
The New Economy goal is a money system designed to assure transparency and public accountability, a stable non-inflationary money supply, meaningful and fairly compensated employment for all who seek it, environmental balance, and democratic accountability to people and community. The defining features of such a money system will be nearly the mirror opposite of the defining features of the existing money system. [See Money System Thought Experiment]
The following are recommended actions.
- Create a Diverse and Decentralized System of Accountable Financial Institutions Rooted in Communities
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Banks serve an essential function when they act as local financial intermediaries, receiving local savings as deposits that they lend to finance local businesses and home buyers. They best fulfill this beneficial function when they are human-scale, rooted in the communities they serve, and publicly accountable. The more diverse the ownership structure of individual banks -- for-profit, nonprofit, cooperative and government -- the more responsive the system is likely to be to the broad spectrum of individual and community needs.
The federal government can advance the creation of a diverse and decentralized banking system by taking over failed banks, breaking them up, and restructuring their individual branches as locally owned community banks, savings and loans, or credit unions. This process can also be advanced by legislating limits on bank size, anti-trust action, and/or implementing regulations and tax penalties that render banking conglomerates unprofitable.
- Federalize the Federal Reserve
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The Federal Reserve, which presents itself as a federal agency yet operates in secret beyond public accountability, is currently responsible for money supply management and general oversight of the banking system. It generally answers to and serves the bankers it is supposed to oversee, which explains why it has failed in its regulatory functions. In general it encouraged and supported the excesses responsible for financial collapse. The Fed’s responsibility for assuring bank solvency makes it prone to favor practices that increase the banking system's bottom line, even when these may compromise consumer or larger public interests and even put the stability of the banking system at risk. The Federal Reserve either must be federalized and operated as a federal agency or dismantled and its functions transferred to a true federal body.
The resulting federal agency should be expected to strengthen the reserve and equity ratio requirements for all financial institutions to help assure their solvency. This need not, however, eliminate their ability to increase or shrink the local money supply in response to changing community needs and opportunities. The federalized Federal Reserve or its federal equivalent would also be responsible for managing and balancing the respective contributions of government and the diversified banking system to the overall money supply regionally and nationally for the purpose of maintaining employment and environmental balance while minimizing inflationary and deflationary pressures.
- Utilize the Federal Government's Money Creation Powers
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There is a valid need to constrain deficit spending by governments, but it makes no sense for the federal government to fund deficits by borrowing at interest money that private banks create with an accounting entry that the government can just as well make itself. Some experts call for eliminating the ability of banks to create money and shifting this function entirely to government. Others warn against creating any monopolistic concentration of the power to create and allocate money, suggesting instead the creation of a more diversified banking system as we are recommending above. We believe a mixed system would allow the federal government to share in the money creation function along side a diversified and localized banking system designed to serve community needs, with a federalized Federal Reserve responsible for overall money supply management.
- Regulate the Money System as a Public Utility
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The money system is properly designed and managed to serve the real wealth economy as a regulated public utility. Regulatory and tax policy properly support a system of locally rooted financial institutions, with a preference for those owned by state and local governments or organized as cooperatives or nonprofit community service institutions. These policies should further seek to render outsized banks, financial speculation, predatory lending, financial fraud, and the shadow banking system of unregulated hedge funds and private equity funds illegal and/or unprofitable.
Wall Street market fundamentalists defend financial speculation as a beneficial instrument for managing risk and increasing market liquidity. Living Earth economies rely on cooperative or government managed insurance pools to manage shared risk (for example the social security program) and favor patient investment over market liquidity. Appropriate measures to dampen financial speculation include a speculation tax on financial trades and a graduated system of short-term capital gains taxation starting with a tax rate of 100 percent on profits from assets held for less than a few days.
A real wealth money system would be designed to achieve a separation and balance of supervisory and regulatory powers between a federalized Federal Reserve responsible for managing the money supply, a strengthened FDIC responsible for securing bank solvency, a consumer protection agency, and elected legislative bodies responsible for the allocation of public monies.