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Varoufakis: “Let the banks burn”

Secretary General of MeRA25 Yanis Varoufakis greeted the party’s 5th anniversary with an article entitled “Let the banks burn.”

In his article in the monthly column in Project Syndicate, the former finance minister referred to the shocks of the banking system, judging that it cannot be corrected.

“That’s the bad news. But there is also good news: We no longer need to rely, at least not as we do today, on any private, for-profit, destabilizing network of banks. The time has come to blow up an incorrigible banking system that benefits only property and stock owners at the expense of the majority. Miners have discovered the hard way that society does not owe them a permanent subsidy for harming the planet. It is time for bankers to make a similar discovery,” he wrote among others.

Excerpt: Yanis Varoufakis: Let the banks burn

The banking system we take for granted is unfixable. The good news is that we no longer need to rely on any private, rent-seeking, socially destabilizing network of banks, at least not the way we have so far.

The banking crisis this time is different. In fact, it is worse than in 2007-08. Back then, we could blame banks’ sequential collapse on wholesale fraud, widespread predatory lending, collusion between ratings agencies, and shady bankers peddling suspect derivatives – all enabled by the then-recent dismantling of the regulatory regime by Wall Street-bred politicians, like US Treasury Secretary Robert Rubin. Today’s bank failures cannot be blamed on any of this.

Yes, Silicon Valley Bank had been foolish enough to assume extreme interest-rate risk while serving mostly uninsured depositors. Yes, Credit Suisse had a sordid history with criminals, fraudsters, and corrupt politicians. But, unlike in 2008, no whistleblowers were silenced, banks complied (more or less) with the post-2008 beefed-up regulations, and their assets were relatively solid. Moreover, none of the regulators in the United States and Europe could credibly claim – as they did in 2008 – to have been blindsided.

In fact, regulators and central banks knew everything. They enjoyed full access to the banks’ business models. They could see vividly that these models would not survive the combination of significant increases in long-term interest rates and a sudden withdrawal of deposits. Even so, they did nothing.

Did officials fail to foresee herd-like panic-stricken flight by large, and thus uninsured, depositors? Perhaps. But the real reason central banks did nothing when confronted by banks’ fragile business models is even more disturbing: It was central banks’ response to the 2008 financial crash that had given birth to those business models – and policymakers knew it.

The post-2008 policy of harsh austerity for most and state socialism for bankers, practiced simultaneously in Europe and the US, had two effects that shaped financialized capitalism over the last 14 years. First, it . More precisely, it ensured that there is  capable of restoring the balance between money demand and money supply while also averting a wave of bank failures. Second, because it was common knowledge that no single interest rate could achieve both price stability and financial stability, Western bankers assumed that, if and when inflation reared its head again, central banks would increase interest rates while bailing them out. They were right: this is precisely what we are witnessing now.

Faced with the stark choice between curbing inflation and saving the banks, venerable commentators appeal to central banks to : to continue hiking interest rates while continuing with the post-2008 socialism-for-bankers policy, which, other things being equal, is the only way to stop the banks from falling like dominoes. Only this strategy – tightening the monetary noose around society’s neck while lavishing bailouts on the banking system – can simultaneously serve the interests of creditors and banks. It is also a surefire way to condemn most people to unnecessary suffering (from avoidably high prices and preventable unemployment) while sowing the seeds of the next banking conflagration.

Lest we forget, we have always known that banks were designed not to be safe, and that, together, they comprise a system constitutionally incapable of abiding by the rules of a well-functioning market. The problem is that, so far, we had no alternative: Banks were the only means of channeling money to the people (through tellers, branches, ATMs, and so forth). This turned society into a hostage of a network of private banks that monopolized payments, savings, and credit. Today, however, technology has furnished us with a splendid alternative.

Imagine that the central bank provided everyone with a free digital wallet – effectively a free bank account bearing interest equivalent to the central bank’s overnight rate. Given that the current banking system functions like an antisocial cartel, the central bank might as well use cloud-based technology to provide free digital transactions and savings storage to all, with its net revenues paying for essential public goods. Freed from the compulsion to keep their money in a private bank, and to pay through the nose in order to transact using its system, people will be free to choose if and when to use private financial institutions offering risk intermediation between savers and borrowers. Even in such cases, their money will continue to reside in perfect safety on the central bank’s ledger.

The crypto brotherhood will accuse me of pushing for a Big Brother central bank that sees and controls every transaction we make. Setting aside their hypocrisy – this is the same crew that demanded an immediate central-bank bailout of their Silicon Valley bankers – it bears mentioning that the Treasury and other state authorities already have access to each transaction of ours. Privacy could be better safeguarded if transactions were to be concentrated on the central bank ledger under the supervision of something like a “Monetary Supervision Jury” comprising randomly selected citizens and experts drawn from a wide range of professions.

The banking system we take for granted is unfixable. That’s the bad news. But we no longer need to rely on any private, rent-seeking, socially destabilizing network of banks, at least not the way we have so far. The time has come to blow up an irredeemable banking system which delivers for property owners and shareholders at the expense of the majority.

Coal miners have found out the hard way that society does not owe them a permanent subsidy to damage the planet. It is time for bankers to learn a similar lesson. Project Synticate

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  1. The world never corrected the underlying mistakes that caused the crisis of 2007-2008. The system was not reformed.

    However, our comfortable lives and the things we have would not have been possible without a credit system. But that system took a wrong turn. It started when Clinton and Greenspan abolished the Glass-Steagul Act of 1933 which separated commercial banking from investment banking. Clinton’s legislation to prohibit mortgages lenders from refusing mortgages to people who were not entitled to them (based on anti-racism arguments) set the world up for toxic MBS and CDS and other “financial instruments”.
    And when it all went wrong, banks that made bad investments were bailed out. After that, the financial sector doubled down with QE near zero interest rates, etc., setting up the conditions for the current situation.

    Ultimately, it is up to politicians to reform the system…….God help us all.

    • “And when it all went wrong, banks that made bad investments were bailed out…”

      I mostly agree with your post but I would slightly extend the above sentence:

      “…almost, but not quite, everywhere”.

      Acting under the advice of the IMF, the Icelandic government voted to do the same as every other country. The President, however, decided to put it to the people in a referendum. Following the overwhelming vote of the Icelandic people the Icelandic banks were not bailed out but were allowed to collapse. Many senior executives were sent to trial and were jailed for their irresponsible actions. The government then set about rescuing the banks customers, both depositors and borrowers.

      In most countries the retail side of banking was quite sound and it was the investment side, especially derivatives, that were involved in fraudulent activities. It is perfectly possible to support the retail side and let it continue serving its customers and let those involved in and benefiting from the fraud take the hit. Unfortunately governments are highly reliant on the tax revenues that mostly come from the profits of fraud and money laundering so governments have no incentive to stop these activities.

  2. Bitcoin is the answer. Scare, limited supply, digital, decentralized, almost zero fees and instantaneous transactions on lightning network, 24/24,etc…The more adopted and mature it becomes, the less fluctuation in price it will have. For now, it proved to be a very good hedge against inflation (on the long term).

    • Elisabeth Warren

      Totally agree!!

    • Hmm, I only say SVB (Silicon Valley Bank and the other one) based on bitcoin both of them…. Bitcoin, seems to me, is like a pyramid game. If you are in first and have the foreseeing to withdraw in good time then you are “home”, otherwise you are a loser! And, dont forget all the electricity it takes to create bitcoin in this time of electricity shortage…..

      • Fiat currency is the biggest pyramid scheme. On the contrary, Bitcoin is the digital version of gold. Easier to verify, limited (gold supply increases on average 2% per year, so in 35 years it doubles), dividable (to very small pieces, not like gold), you can transfer billions of dollars from a country to another in seconds (not like gold), doesn’t shutdown on weekend and stop trading in the evening like traditional banking systems, nobody can confiscate it from you, nobody can print more from it like how they print fiat currency out of thin air and cause inflation which makes us poorer, electricity consumptions FUD is created by bankers and alt coiners to try to attack Bitcoin (60% of energy consumed by Bitcoin comes from renewable energy resources), banks consume much more energy than bitcoin, private jets, laundry machines, etc…

  3. Try to imagine a world where there is no hunger and everyone has a roof over their head.
    Where politicians work for citizens again and not for the lobbyists of mighty corporations.
    The World bank and IMF are disbanded and their leaders put on trial for crimes against humanity.
    Imagine a world where there are no borders and no racism whereby migrations leave their mother lands only out of interest and for education, not because of conflict, persecution, famine or lack of hope.
    Where we cease destroying the environment, through cutting and burning forests much older than we are, stealing from the animals their territory.
    Where the dolphins, porpoise, and whales can roam the oceans and seas without fear.
    And we only take from the seas and oceans what we need and without devastating the hidden sea bed.
    In such a world there are no places for the likes of Bezos, zuckerberg, or Musk.
    Just imagine that it could be