Chart of the Week: "Too Big To Fail" Is Failure

The economic crisis is unparalleled since the Great Depression, and US Person is not alone in referring to it as "the Second Great Depression". There is now a consensus that the crisis was precipitated by a combination of easy credit, lax government regulation, and the explosive growth of finance capitalism.  The chart above shows the disproportionate growth in wealth of the fianancial sector compared to manufacturing and households in our economy.  As the hearings in the House of Representatives will hopefully demonstrate, the nation is in the grip of the Money Power as embodied by Wall Street financial institutions as never before in our history. The very fact that national government leaders felt compelled to give unprecedented financial aid to private speculators largely responsible for destablizing excesses, tells us that the current system has failed {11.28.09}. It has failed because the system compensates bankers to take inapproriate risk to generate short term profit.  This fact is reflected in the growth of Wall Street bonuses compared to the stagnated income of ordinary Americans:

The tax proposed by President Obama to recover the cost of bailing out 'the masters of the universe' is a good beginning to reforming the financial system, but the entire concept of a financial institution being "too big to fail" is warped.  No individual insolvent institution should be so large that its failure endangers the entire banking system.  The banking system should be decentralized, and banks should be run in a manner to meet the credit needs of the public, not the profit motives of the super rich.  A humble example of what can be achieved by a  publicly owned state bank can be seen in North Dakota.

While larger more populous states like California and Michigan are teetering at the edge of default, North Dakota is declaring a surplus so large that taxpayers will average $650 savings in 2009 taxes.  And they are not cutting services to the bone just for a tax refund.  At the center of this unusual economic strength is the only state-owned bank, the bank of North Dakota.  Established in 1919, the waning era of populous agrarian revolt, the bank has since been a credit machine promoting agriculture, commerce and industry for the state.  North Dakota has the lowest unemployment rate in the nation at 4.1%.  BND acts as a 100% publicly owned central bank, unlike the Federal Reserve which is owned by  private banks that make up its membership. Local banks do the most lending, so BND acts a secondary market for local bank loans.  Its residential loan portfolio is over $500 billion in a state with a population of only 700,000.  BND avoided the credit crisis when secondary markets for loans collapsed in 2007 through prudent management. To be sure, there are no eight digit bonuses paid to BND executives. The bank earns a health 25% return on equity without speculating with complex, high-risk derivatives. When the state failed to meet its budget a few years ago BND stepped with financing for the shortfall.  California has no such state institution to help it meet an $20 billion budget shortfall, and must ask an unsympathetic federal government to give it $7bn in aid.

US Person can hear the perspicacious say, "we had this argument before, and Andy Jackson lost".  But it is equally obvious the Federal Reserve has been captured by the Money Power. The central bank's primary purpose of regulating the supply of money has been overshadowed by it becoming a hand maiden to the highly leverage international banking system{11.09.09}.  A return to a decentralized state banking system would not present the problems of multiple currency issue that it did in the 19th centrury. Greenback issue and monetary policy would remain the function of a smaller, transparent Federal Reserve Bank under joint congressional supervison pursuant to Congress' constitutional powers over currency.  Obama cannot stop with just a tax, no matter how satisfying the concept may be to exploited taxpayers.  The 'masters' must once again be made the servants of the people.