It became obvious during the Panic of 1907 that the Federal Government had no controls over banking practices in the United States. The Panic was caused by speculators attempting to corner the market on United Copper Company stock. Failure to do this led to the collapse of the Knickerbockers Trust Company, New York City’s third largest trust. The failure spread fear throughout the City’s Trusts. Panic extended across the nation as large numbers of people withdrew their deposits from regional banks. At the time the United States did not have a central bank to inject liquidity back into the market. The following year a Senate commission investigated the crisis and proposed future solutions, leading to the creation of the Federal Reserve System in 1913.
The Federal Reserve (FED) is the central banking system of the United States. It was created in December of 1913 by the passing of the Federal Reserve Act. This was largely in response to a series of financial panics, particularly the Panic of 1907. It consists of twelve regional Federal Reserve Banks located throughout the United States, with the main branch in Washington, D.C. The chairman of the Federal Reserve heads this bank. Over time the roles and responsibilities of the FED have expanded and its structure has evolved. It is still in this process of evolution as new financial crises occur.
It was through the Federal Reserve and the Treasury, with the compliance of Presidents Bush and Obama that the nation was saved from total economic disaster caused by the Real Estate Debacle of 2008 that was brought about by the Financial Institutions within the United States. The assorted banking houses had been bundling and selling mortgages for about the last thirty years; maintaining control over these mortgages with no cash investment in them and then continually using the funds from the sales to issue new mortgages. The banks made fat profits from continually handling all this paper.
There had been a need for more funds in the National Cash Flow and, in this manner; the banks kept adding money to the economy. By 2007 the level of money creation reach a point of insanity with a larger and larger percentage going to the banks. At this point most bankers were in denial that the system could crash and the insanity continued until the crash came toward the end of 2008.
The problem that existed from the 1970s on was a great need for a continual increase in currency in the National Cash Flow to keep up with needed economic growth. The FED was not in a position to fulfill this need; the banks did so; and the process became a way of life until it was abused and over-abused and the bubble burst to the point of destroying the economy, if the Federal Government had not interceded and saved it.
Paul Volcker headed a committee that proposed new laws that would reign in bank excesses and put the country on a solid financial footing again but bank lobbyists got these proposals watered down and since 2009 the major banking houses have again endangered the economy by their excesses. This does not even consider the damage that has been done to a multitude of individual households where, in many cases, the homeowners have lost their homes through bank foreclosures, a number of which were illegal. The Federal Government has responded with massive fines for malfeasance but with no criminal cases against any banks or individuals who have brought these abuses into being. It is time for a change in the situation. For one or many forms of reform to bring these banks into line with the needs of the American public.
The only way this can be done is to upgrade the powers of the Federal Reserve so they can fully and effectively carry out their function of keeping the public safe from the excesses of the financial institutions and also keep the economy at a healthy level.
How can this be done? The major banking houses must once again become institutions that deal specifically with people and businesses. They must become either commercial banks or investment banks; they can no longer be both. And if some or many continue as investment banks then the FDIC (Federal Deposit Insurance Corporation) must no longer insure their deposits.
Also the Federal Reserve must have its power extended to be able to instantly add or subtract currency from or to the National Cash Flow. In addition Congress needs to take a revolutionary step, it has to increase the power of the FED so that it is able to lend money directly to homeowners and small businesses. Each of the Twelve Federal Reserve Banks must also get the power to set up their own lending banks within each of the Twelve FED Zones.
After the 2008 & 2009 Bailouts the banks did not function as they had before the crash. They hoarded their funds and looked for investments that would give them large returns; these were largely in the futures market. In essence from 2009 on the major banks, which had been saved by the Federal Government and indirectly the taxpayers, found ways to exploit the general public for their own benefit. They actually worked against economic recovery. The contention at that point in 2009 that once the Financial Institutions were saved they would return to their traditional roll was a myth since the large banks were solely motivated by the profit motif and could care less about the welfare of the individual worker and homeowner, or for that matter, the welfare of the country.
Since private enterprise, particularly private enterprise backed economically by the Federal Government cannot be trusted with the welfare of the nation it has become necessary for the Government to insure that welfare and that can only be done by the Government taking over the financial structure of the nation in the name of the “People” for the “Common Good” and not for profit.
There will be problems in establishing this system but they can gradually be resolved. There are the smaller banking houses and the Credit Unions that have generally functioned for the welfare of the general public. Should they continue to be part of the system? Do they continue to have FDIC insurance? These questions will be answered as we go along.
The major banks in the United States, JP Morgan Chase, the Bank of America, Wells Fargo, to cite a few examples, have grown in size since the 2008 Disaster. They are today too big to fail. Their demise could bring down the economy of the United States and possibly also some of the European nations. In essence they hold the world prisoner while they act making all sort of economic decisions for their own benefits using public funds.
We need, at this point, to take a closer look at the banks and their ownership and control. The stockholders obviously own the financial institutions but the people who control these companies and make all the decisions would be the CEO and all the upper management. The actual owners of the banking concerns have almost no say in what happens in these companies.
The compensation packages of the upper echelon runs into the multi-millions of dollars. The stock dividends of a company like the Bank of America runs into the pennies. The Bank of America pays one cent per share per quarter or four cents per share of stock each year. One hundred shares of stock that cost anything from $14 to $17 per share pay four dollars a year. For an investment of $1,500 the shareholder earns $4.00 per year. For an investment of $15,000 he earns $40.00 a year. That is a return of .0027%, twenty-seven thousands of one percent. By putting that much money in a commercial bank the return is at least one tenth of one percent. So much for owning stock in The Bank of America! The other major banks pay more but not significantly more in dividends.
What happens to all the fabulous profits that the Bank of America makes? Most of it goes to management as salaries, compensation, and bonuses. If the Bank of America is a true example of American banking then the financial institutions are making money for the sake of making money.
It is a sad commentary if one remembers President Franklin D. Roosevelt’s comment that he made once during the Great Depression and again later during World War II that an individual can only spend so much during a year, that to earn far more is a total waste in terms of society and that this excess should be taxed.
The heads of the various banks earn more, in many cases, in one year than they can reasonably spend in a lifetime. Jamie Dimon, the CEO of JP Morgan Chase had his yearly compensation package cut, after bank losses, from 22 million to only 11 million a year. This, then, becomes the function of banks in the United States and beyond. It is a silly or stupid reason for running the finances of a nation.
The American economy deals with the needs of over 350 million people. This is a complex issue. The large banking houses have failed the public. To what extent should they be allowed to continue to exploit them? Or should these major Financial Institutions go off on their own in a Free Market System, functioning within the law and succeeding or failing without protection from the Federal Government and the taxpayers?
Taken together all the games, illegal and otherwise, that the banks have played have been in the trillions of dollars, the fines that the banks have paid have been in the billions of dollars. How many trillions have the banks extorted; how many average Americans have the banks ruined; and how many additional trillions will they extort before this current system is changed? Even with new Volcker rules the current system is bankrupt, incapable of working for the welfare of the people.
It is time for a basic, realistic change in the way finance works within the nation. The needs of the people are far more important than the quirks of the modern day bankers.