To put the problem bluntly, banks and our financial systems are a problem that needs a stern hand. There are three different three different banks: a central bank of a sovereign country, one that should monitor interest rates, deposits by other banks, and administer loans for government projects – federal, state, and local; investment banks, these provide the credit system for private borrowing by corporations and various proprietor concerns; and the public bank that provides a multitude of services for the general public. My view is that while the object of all banks is to make a profit, they also should be subject to the public trust because they are necessary to the functioning of an economy. Simply put, banks provide a public service and should be allowed to earn a profit. Perhaps the real problem is that they should be treated as a public utility like electric, telephone, and gas companies. Let us examine these entities one by one.
The public bank does a number of functions. It takes in deposits for savings, assuming the rate of return is sufficient. They provide checking services, of which debit cards act as a convenience for check writing. They issue mortgage and automobile loans. They provide personal loans. They provide services to companies and corporations in payroll functions. In short, they do quite a bit for the community in several different capacities. The watch word is community. Bank branches must be community oriented. That means that loans for housing mortgages, auto loans, and other personal loans must be originated locally and held locally. Now I like the idea of credit unions back when they were credit unions. Individuals became members by opening accounts and depositing their funds. Right now one sells stock in a bank holding company, issues bonds for capital, and then becomes a bank. The stockholders may live in a different state or even a different country, the same as the bond holders. Frankly, this is wrong. The local community should be the source of funds and ownership for the local community bank. I don’t mind having several community banks but I object to giveaways and freebies. I would forbid that outright. You will pay for the services you want. A checking account should have a monthly fee that everyone pays for the service. The owners should be local and having to deposit funds into savings and checking make you owners. And if you are a local resident, you should be allowed to buy stock in the local bank and well as buy bonds for its capitalization. So, the local bank should have a restricted geographical area. It will loan funds in that area only, it will sell stock to residents in that area only, and it will restrict bond sales to residents in that area only. Its board of directors, its operations officers, its tellers and other workers must live in the area they work. Why? Because when you live and work in a small area you know a good many of the people with whom you do business. This cuts down on nonperforming loan origination. You see, a bank needs money to make money. That means it must take in capital from the sales of stock and bonds. Then it must attract accounts for savings, checking, payroll, and other services. If one is going to pay interest then one needs to earn a rate of return that provides the payment of that interest as well and the fee or management expense of earning that interest. If a bank is going to pay 4% on passbook savings, the those saving need to earn about 6% if the bank is to turn a profit. Checking accounts require that people pay the fees necessary to process the checks written against such accounts. Normally, we might consider that 90 to 95 percent of the money in consumer checking accounts will be spent during the month. Hence, very little of the checking account funds can be spent. Savings accounts usually need only a 25% reserve to satisfy withdrawals. That provides quite a large fund for lending. But we really do not want to let loans become too large a percentage of our funds. Normally one might expect to lend no more that 50% of the savings and we might expect the lending to be less, perhaps 30% maximum. As for the capital raised by stock issues and bond issues, we should never lend more that 50% of that capital. Non performing loans should never be more than one percent. After all, the bank must know with whom it is lending money to. We also allow banks to collect origination fees that recover the expense of the loan origination. When appraisals must be done, then their cost should be covered as well. Automobile loans should be made at higher rates than mortgages. Personal loans made at higher rates that automobile loans, and so on. This is how the bank earns it money. The higher the risk the higher the interest on that risk. Incidentally, There will be no mortgage on a home loan for more than 15 years duration. There will be no interest only loans, period. Interest only encourages speculation. Credit will be given to those who demonstrate the ability to repay that credit. Yes, I know, there are more details but I’m sure you get the idea.
We must put a barrier between the retail banks I have detail previously and the investment banks. Why? Because the two have very different objectives. Simply put, investment banks are more concerned with investing more funds into larger projects. These banks should be limited to the national borders, else the enticement to speculate in foreign countries. I am against letting foreign companies establish subsidiaries in the US and we do not need our corporations to do the same. Foreign trade should be at arms length else speculation interferes with trade. It is that simple. By allowing our investment banks to speculate in foreign countries we encourage the formation of foreign subsidiaries that tend to be subject to bribes to do business, keep profits aboard for the purpose of tax avoidance, and the exploitation of cheaper sources of labor that may be based only the pegging of that foreign currency to the dollar. When a country subsidies its own businesses for the purpose of obtaining work at an unfair advantage to other countries then problems ensue. Industry moves to the less costly country to do business in. A tariff structure should be utilized to eliminate such unfair advantage. Else we suffer from a decrease in employment. But investment banks need to find good investment in our country. The must reflect good investment strategy and avoid non performing loans as much as possible.
Finally, the central bank should not be at the beck and call of the banking industry not the political administration of the federal government. We want our our central bank to provide loans to all levels of governmental infrastructure. Since capital is scarce and subject to tax revenues, this means that projects that should never see the light of day won’t. It there is only so much money top go around and the various levels of governments are restrains from borrowing, then all projects are funded on a pay as you go basis. The competition for funds means that boondoggles get little funding, if any. This is one way to eliminate waste in government spending. the central bank must also be the lender of last resort. But we want this to be used very rarely. Hence, the central bank will compel retail banks and investment banks to keep on deposit with the central bank a certain percentage of funds. These funds should draw a minimum of interest and I have no problem with the various governments using such funds for the purposes that advance the social purpose. Each government shall pay the premium for such use. This is a multiplier effect and we would expect that the central bank will control such spending with borrowed money. Remember, lending of funds allows growth in an economy but that growth must be limited to that of the population growth. And export growth should be self funding since it will be speculative in nature. Let other countries ruin their financial institution, we should keep them on a short leash. This is how we should do banking. I decree it so.