A New Strategy for the Left

For over a century, liberals and radicals have seen the possibility of change in capitalist systems from one of two perspectives: the reform tradition assumes that corporate institutions remain central to the system but believes that regulatory policies can contain, modify, and control corporations and their political allies. The revolutionary tradition assumes that change can come about only if corporate institutions are eliminated or transcended during an acute crisis, usually but not always by violence.

But what happens if a system neither reforms nor collapses in crisis?

Quietly, a different kind of progressive change is emerging, one that involves a transformation in institutional structures and power, a process one could call “evolutionary reconstruction.” At the height of the financial crisis in early 2009, some kind of nationalization of the banks seemed possible. “The public hates bankers right now,” the Brookings Institution’s Douglas Elliot observed. “Truthfully, you would find considerable support for hanging a number of bankers…” It was a moment, Barack Obama told banking CEOs, when his administration was “the only thing between you and the pitchforks.” But the president opted for a soft bailout engineered by Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers. Whereas Franklin Roosevelt attacked the “economic royalists” and built and mobilized his political base, Obama entered office with an already organized base and largely ignored it.

When the next financial crisis occurs, and it will, a different political opportunity may be possible. One option has already been put on the table: in 2010, thirty-three senators voted to break up large Wall Street investment banks that were “too big to fail.” Such a policy would not only reduce financial vulnerability; it would alter the structure of institutional power.

Still, breaking up banks, even if successful, isn’t the end of the process. The modern history of the financial industry, to say nothing of anti-trust strategies in general, suggests that the big banks would ultimately regroup and reconcentrate and restore their domination of the system. So what can be done when “breaking them up” fails?

The potentially explosive power of public anger at financial institutions surfaced in May 2010 when the Senate voted by a 96-0 margin to audit the Federal Reserve’s lending (a provision included ultimately in the Dodd-Frank legislation, which was designed to protect American taxpayers and consumers from financial corruption and to make the financial system more accountable)—something that had never been done before. Traditional reforms have aimed at improved regulation, higher reserve requirements, and the channeling of credit to key sectors. But future crises may feature a spectrum of sophisticated proposals for more radical change offered by figures on both the left and right. For instance, a “Limited Purpose Banking” strategy put forward by conservative economist Laurence Kolticoff would impose a 100-percent reserve requirement on banks. Because banks typically provide loans in amounts many times their reserves, this would transform them into modest institutions with little or no capacity to finance speculation. It would also nationalize the creation of all new money as federal authorities, rather than the banks, would directly control system-wide financial flows. A variety of respected liberal as well as conservative economists have welcomed this strategy—including five Nobel laureates in economics.

On the left, the economist Fred Moseley has proposed that for banks deemed too big to fail “permanent nationalization with bonds-to-stocks swaps for bondholders is the most equitable solution…” Nationally owned banks, he argues, would provide a basis for “a more stable and public-oriented banking system in the future.” Most striking is the argument of Willem Buiter, the chief economist of Citigroup no less, that if the public underwrites the costs of bailouts, “banks should be in public ownership…” In fact, had the taxpayer funds used to bail out major financial institutions in 2007–2010 been provided on condition that voting stock be issued in return for the investment, one or more major banks would, in fact, have become essentially publicly controlled banks.

Unknown to most Americans, there have been a large number of small and medium-sized public banking institutions for some time now. They have financed small businesses, renewable energy, co-ops, housing, infrastructure, and other specifically targeted areas. There are also 7,500 community-based credit unions. Further precedents for public banking range from Small Business Administration loans to the activities of the U.S.-dominated World Bank. In fact, the federal government already operates 140 banks and quasi-banks that provide loans and loan guarantees for an extraordinary range of domestic and international economic activities. Through its various farm, housing, electricity, cooperative and other loans, the Department of Agriculture alone operates the equivalent of the seventh largest bank in America.