h1

The 700-bank solution

September 24, 2008

Georgists know why the economic meltdown was unavoidable.  It could be postponed and, to some extent, redirected, but it was inevitable as long as big profits could be anticipated from speculation in privilege including landownership.

And furthermore, we know what needs to be done to avoid the next meltdown.

But what do Georgists say should be done to facilitate the recovery from the present economic distress?  I will offer my suggestion, a pragmatic approach to what’s already underway.

Politicians propose to spend $700 billion to bail out the lending institutions, buying mortgage-backed securities even tho “nobody” understands exactly what the specific securities contain.  I think my idea is better.

Don’t let the government buy any securities

Spend the $700 billion to establish 700 banks, each capitalized at $1 billion.  Conservatively, this would allow each bank to lend at least $5 billion, perhaps $10 billion.  So $3.5 trillion, or more, of lending capacity becomes available, plenty to meet the needs of the economy.

Locations of the 700 bank headquarters should be distributed to states and counties, more or less proportional to population.  Every state gets at least one, and I don’t have a problem with allowing immediate branching into any county that doesn’t already have branches of at least 3 banks.

Who will own the banks? The people.  More precisely, each registered voter gets an equal share.  Each bank could issue 10 million shares, par value $100 each.  If there are 140 million registered voters, each voter gets 50 shares.  In each case, the shares are in a specific bank geographically near the recipient, assigned using an algorithm based on public data.

Of course the registrants can sell or buy their shares, with the government guaranteeing a floor price of $95/share for a limited time, until the banks actually get into operation.  Thus every registered voter can get $4750 in cash, if desired.

Banks are nominally controlled by their Boards of Directors, who are elected by the stockholders, but an initial board will be needed for each bank, and it would be impractical to ask the initial shareholders to choose a board before each bank has started operations.  One possibility is to simply choose randomly, every 40 thousandth shareholder would be elected to the initial 5-member board of the bank she owns stock in.  The salary for this initial board would be fixed for a year (until a new board can be elected), perhaps $1,000/meeting with a maximum of 12 meetings would be appropriate.  There would also be random selection of 5 alternates, in case one or more of the selected board members did not wish to serve.

Of course the banks would be subject to appropriate regulation.  Probably they should be chartered as state commercial banks.

Now this is not a perfect scheme, and doubtless some of the banks will be less successful than others, but it would guarantee that credit is available to those borrowers who are good risks, and it would distribute purchasing power to people.  It would avoid the moral hazard of bailing out mismanaged companies.  Financial institutions will go bust and their employees laid off, but there will be lots of job opportunities with the new banks.

Somebody please tell me why it would not work.

Update Sept 25 2008, a response to Bob Matter’s thoughtful comment:

1. Not enough to time to implement a plan of such scope.

There’s enough time to price and purchase opaque derivative securities but not to open 700 straightforward banks?  There are so many out-of-work bank staff– and more to come.  I agree that this is a considerable task, but there are lots of people who know how to do it, and would have started their own banks already if they could raise the capital.
2. Too much added expense. 700 more buildings to rent, heat, light, and maintain, 700 sets of phone lines to pay for, computers, personnel, etc. etc. We have a banking infrastructure in place now. There is plenty of vacant commercial space pretty much throughout the country. Of course there will be a cost, but each bank is a billion-dollar institution before they even take a deposit; they could spend 1/10th of 1% for physical facilities and startup staff.

3. Even this plan would ultimately lead to failure. The core problem of allowing private ownership of real property needs to be addressed. Until that time we will just keep repeating the boom-bust cycle. Interested parties can read the solution to today’s financial “crisis” in _Progress and Poverty_ by Henry George.

Henry George explains the root cause of economic meltdowns, and they will not be avoided until something like his proposal is put into effect. If he were here today, what would he propose as a way out of this depression?
I claim only that my proposal is far better than what the authorities propose.  I don’t claim that it is better than doing nothing, which would result in considerable inconvenience but probably a quicker recovery than what we’ll get.

What’s really encouraging now is how much opposition is appearing to the whole idea of any bailout.  I wish that meant it was unlikely to happen.

Advertisements

One comment

  1. > Somebody please tell me why it would not work.

    1. Not enough to time to implement a plan of such scope.

    2. Too much added expense. 700 more buildings to rent, heat, light, and maintain, 700 sets of phone lines to pay for, computers, personnel, etc. etc. We have a banking infrastructure in place now.

    3. Even this plan would ultimately lead to failure. The core problem of allowing private ownership of real property needs to be addressed. Until that time we will just keep repeating the boom-bust cycle. Interested parties can read the solution to today’s financial “crisis” in _Progress and Poverty_ by Henry George.

    -RJM



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: