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Protect Yourself From Your Bank

From Bitcoins to credit unions, how not to get hosed in the next financial crash. Last in a series.

By Nick Fillmore 19 Dec 2013 | TheTyee.ca

Nick Fillmore is a Toronto-based freelance journalist who has won several awards for his investigative stories. He earlier worked for close to 30 years with the Canadian Broadcasting Corporation, including time heading CBC Radio's Investigative Unit. His blog is here. Feedback welcome here.

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Digital Bitcoins (physical version seen here) have been called the 'revolutionary currency of the future.' But can they really bring down the Big Banks? Photo: Wikipedia.

Back in 2006, into 2007, too-big-to-fail superbanks, complacent governments and boosterish business media ignored the few economists who predicted there would be a financial crisis. Today, governments lack the will or the legal weapons to control the greed endemic to elite bank culture.

Given the persistence of that culture in big banks, I am not at all optimistic that we will avoid another, even more serious, financial collapse in the not-so-distant future.

To prepare for that day -- and perhaps avoid it altogether -- we need to reduce the power of big banks, weakening their grip on society's financial resources, and challenging their support for destructive, neo-liberal economic policies.

Ordinary people and public-interest organizations have to do two things: First, we must demand that our governments crack down on reckless, corrupt bankers and protect our money in the process.

Second, we have to take matters into our own hands, rewarding and inventing independent financial systems that we can trust and control.

As I reported earlier in this series, normally powerful governments, such as those in the U.S. and Eurozone, have either been unable or unwilling to crack down on the out-of-control financial sector. To a considerable extent this is because big bankers and financial-sector regulators are cut from the same cloth, come from the same circles, hold the same free enterprise views and indeed are often the very same people.

In particular, the U.S. government is under assault from the bankers' massive lobbying efforts. In 2012, JPMorgan Chase spent the most of any U.S. bank on lobbying for softer rules: $8 million. Wells Fargo and Citigroup spent at least $5 million each.

Despite President Barack Obama's tough talk about "fat cat" bankers, his actions have been less than forceful. He has largely chosen people recently up to their necks in murky Wall Street back-room deals to now police their old associates.

If Obama really does care about the plight of ordinary Americans, he sometimes sends the wrong message. His first vacation golf game after winning re-election was with his chief Wall Street fundraiser.

Volcker will help

Last week, five important oversight agencies in the United States adopted the so-called Volcker rule. It will, to some extent, prevent banks from using the savings and investments of everyday people to engage in high-risk ventures for their own benefit, such as dabbling in hedge funds and derivatives. However, critics point out that the rule has no shortage of loopholes that banks will be able to benefit from.

It should interest Canadians that both Finance Minister Jim Flaherty and then-Bank of Canada governor Mark Carney opposed even the Volcker Rule's leaky reforms. Each man separately told U.S. authorities -- without offering proof -- that the new U.S. law would have a negative impact on savings and borrowing costs in Canada.

Avoiding the next train wreck

This series has explored several threats hanging over the banking industry, such as small reserve funds, derivatives and outright greed and fraudulent behaviour.

If the private banking system is to become safer, and have less control over our lives, a number of things need to happen:

Break up the banks: Both in Canada and the U.S., governments need to reduce the size of major banks, so that the collapse of any one of them will not devastate part of the economy. Equally, regulators need to limit inter-connections among banks, to try to prevent the domino-effect collapse of two or more banks at one time.

In Canada, the Harper government is moving in exactly the wrong direction: helping six large banks become even larger and more powerful. A better course would be to limit banks' growth to the size they need to work internationally, without getting so large that they would damage the economy if they run into financial difficulty.

Put thieves in jail: One of the main reasons that rampant, billion-dollar corruption continues in the financial sector is because not one executive at any of the dozen or so most corrupt giant international investment banks has gone to jail, or even been prosecuted.

The famously "law and order" Harper government should toughen up laws that allow a bank to write off a fine, instead of sending an executive or top trader to jail.

Mandate deep reserves: Cash reserves of only seven per cent in Canada and 10 per cent in the U.S. are ridiculously small against risky bets into the billions of dollars (think derivatives). Because the newly-approved Volcker rule appears to have a variety of loopholes that still allow big U.S. banks to endanger the accounts of ordinary people, and because Canada doesn't even have that protection, the minimum reserve requirement should be increased to perhaps 20 per cent of a bank's loans and investments.

Eliminate derivatives: Derivatives used irresponsibly could destroy huge parts of the world's economy. Regulators must act in the public interest and ban financial instruments, such as exotic derivatives, that contribute absolutely nothing to society or the real economy.

This isn't the first time derivatives have endanger economies. In 1936, U.S. President Franklin Roosevelt outlawed all derivatives, to stop predatory speculators from manipulating the prices of wheat and corn. In 1982, free-market fanatics convinced President Ronald Reagan to reintroduce all kinds of derivatives, no matter how dangerous.

I'd also banish the heinous derivatives called credit default swaps, which -- believe it or not -- are bets on things such as whether a country or company will go broke. Sometimes the banks even bet against governments they have assisted.

(In idle moments I imagine the conversation over dinner: Wife: "How was your day dear?" Husband: "The usual. I bet $2 billion on Spain going broke by the end of the year." Wife: "But didn't your bank loan Spain several billion just the other day to help it get out of trouble?" Husband: "So?")

End the revolving doors: Both Canada and the U.S. have inadequate controls on conflict-of-interest among bank regulators. Both need stronger restrictions on the movement of senior executives back and forth between the financial industry and government.

A few years ago, a Washington public-interest group recommended that governments set up independent offices to review all senior level appointments, "to determine whether a prior position in the private sector would make the person ineligible because of the likelihood of frequent conflicts" with expectations of impartiality.

Of course, governments must also show good judgment in filling important financial oversight posts. Obama showed deplorable judgement when he proposed earlier this fall that Larry Summers be named head of the U.S. Federal Reserve, one of the most powerful financial offices in the world. Summers is far too chummy with bankers, and during the Clinton years oversaw the deregulation that led to the 2008 financial crisis. (A few liberal-minded Democrats stopped the appointment.)

Canada has the same revolving door problem. We should invest in training public service finance experts in the public-interest elements of the banking business. (And hire only reluctantly the hundreds of MBAs, steeped in neo-liberal values at our far-too-many business schools.)

Expand credit unions and launch public banks: In both Canada and the U.S., governments should foster more credit unions, caisses populaires, and banks owned by the public.

Credit union membership in Canada is on the decline, and Finance Minister Flaherty darkened its future further in his 2013 budget by removing credit unions' tax-exempt status. Credit unions need to have greater freedom to serve the public -- and more Canadians need to join them.

Credit unions are well established in the U.S., serving close to 100 million members. According to Money Talks News, there are seven reasons why they're better for their customers than commercial banks:

The United States has only one state-owned bank, the Bank of North Dakota, but it's a great one: with banks crashing all around it during the recession, it thrived because its programs serve the public. Something it calls its Partnership in Assisting Community Expansion, for example, provides loans at below-market rates to businesses that create at least one new job for every $100,000 they borrow. This bank's president earns a (comparatively, among bank presidents) miserly annual $230,000 salary, and surely does more for it than most multi-millionaires on Wall Street.

Even so, commercial bankers would love to eliminate the Bank of North Dakota entirely, and silence all talk of establishing similar banks in about 20 other states, threatening the $1 trillion in state and local bank deposits that now land on Wall Street.

Leave money-creation to the Bank of Canada: According to some analysts, Canadian taxpayers could save billions of dollars if our governments borrowed from the Bank of Canada, instead of from commercial banks.

"For the past four decades," says the Canadian Centre for Policy Alternatives, (CCPA) "our governments at all levels have increasingly been borrowing from the private banks, and paying steep interest on those mounting debts.

"Each year, governments across Canada now pay some $60 billion in interest on their debts -- interest payments that need not be incurred," the CCPA says, if Canada returned to an earlier time, when it was the Bank of Canada's job to issue original money-creating debt.

Government-owned banks in both Canada and the U.S. once created money for public use. The Bank of Canada was created in 1935 to help the country recover from the Great Depression, when private banks could not do the job. The Bank of Canada provided the money to help Canada win the Second World War, and later helped cover the expense of creating Medicare and setting up other social programs.

In the early 1970s, Western governments started worrying about rising inflation. Along with most of the rest of the international community, Canada adopted socially corrosive neo-liberal economic policies, abandoning the goal of full employment, among others. And instead of creating it cost-free, at the Bank of Canada, the federal government started getting its money instead from the private sector.

Suddenly interest on bank loans started adding up, ballooning the public debt.

"This enormous debt burden deprives our governments of revenue that could be used for much-needed improvements to social and economic services and also to help civil society groups that work for the public welfare," George Crowell wrote for the CCPA in June 2011.

A little-known group with a big message, COMER, the Committee on Monetary Economic Reform, has been advocating since the 1980s that we go back to the past. COMER charges that "the Bank of Canada and Canada's monetary and financial policy are dictated by private foreign banks and financial interests contrary to the Bank of Canada Act."

COMER is trying to win permission from the courts to sue the Canadian government, "for not using the Bank of Canada to provide funding for Canadian health care, education, social services, and transportation with interest free funding."

The Harper Conservatives reject the idea of taking government borrowing away from the commercial banks. They claim that inflation would get out of hand. The claim is unproven; at least as plausible is that they prefer to leave control of the economy in the hands of wealthy friends and campaign donors.

In fact, governments have become so skilled at manipulating monetary policy that it's very likely that using the Bank of Canada to finance certain things -- such as durable public assets: schools or urban infrastructure -- would not be inflationary. Moreover, as numerous analysts have pointed out, inflation is hardly the biggest problem face the still semi-depressed Western economy at the moment.

It's impossible to guess how many billions of dollars Canadians could save by using our own government bank, instead of borrowing every penny from for-profit banks. To the neo-liberals in charge in Ottawa and other Western capitals, it hardly matters: right-wing ideology prohibits contemplation of a move in that direction.

Will Bitcoin break the banks?

Those are things we should do together as a country to reduce the "system risk" of Canada's banks. But there are also things we can each do to reduce our individual bank risk.

For some, that might be ditching conventional, national-brand, "hard" currency entirely in favour of a new and entirely unregulated option. Bitcoins are kept in a digital wallet in your computer or a website. You can send Bitcoins over the Internet to a person, to buy goods, or for other purposes. (In Vancouver, you can even withdraw exchange Bitcoins for Canadian dollars at a few ATMs.)

It's too soon to tell whether the trans-national, ephemeral cyber currency Bitcoin seriously threatens any aspect of the traditional banking system -- it's certainly cast alarm among its participants.

"This is the revolutionary currency of the future," says Joseph David, a Calgary currency-changer, "decentralized, not controlled by any government, and no one can shut it down or freeze accounts."

Some governments and banks have accepted the Bitcoin, but some bankers fear the new currency will take away business. On the defensive, some banks are trying to destroy it before it becomes established.

Canadian banks decided early to fight the Bitcoin, at least for now. Most of Canada's so-called "Big 6" banks have gone so far as to freeze or close accounts owned by the handful of Canadians who own the digital currency.

The future of the Internet currency has yet to be decided. However, anyone who strongly dislikes the for-profit banking system might like to tuck a little money into the cloud.

Going it without the banks

Another way to decrease the power of giant for-profit banks and take that power for ourselves, is to take our money out of their hands. In the U.K., MoveYourMoney had helped 2.4-million customers leave Britain's traditional banks by the middle of 2013.

This is a significant amount. "This represents a five per cent point loss of the market share of current accounts," said the MoveYourMoney website, "and demonstrates a massive response from ordinary people to a year of scandal by voting with their feet and switching who they bank with."

The most convenient alternative to a bank for most Canadians: a local credit union.

For borrowing, crowdfunding has allowed groups and businesses in several countries to walk away from the big banks and still raise money for a variety of projects. In 2012, crowdfunding websites sent out appeals to help people raise $2.7 billion. This represents an 81 per cent increase over 2011.

In Canada, crowdfunding is coordinated by the National Crowdfunding Association of Canada.

Another approach that has tremendous potential to free people from their big corporate bank is the growing practice of microfinance. Widely-known for its use in developing countries, similar small lending could assist people in Western countries in setting up local projects.

Mifos.org is one of the best organizations promoting microfinance, distributing its own open source software around the globe. Another group, Cyclos, has three projects in Canada.

Going small and local, whether through micro-finance or joining your town credit union, may seem risky to some. Keeping your savings exposure in any one bank below the insured limit of $100,000 is only prudent. But what's clear is that either is preferable to having your money sucked down into the whirlpool of collapsing financial assets the next time the Big Banks tip the world economy into free-fall.

Find the series in its entirety here.  [Tyee]

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