CAPITOL HILL CITIZEN
by Ellen Brown.  JUN 14, 2026

Not So Wonderful for Taxpayers

In early May, BlackRock quietly froze redemptions in several of its private-credit funds, limiting withdrawals in vehicles that had been marketed as offering easy liquidity.

The move was legally valid, but investors felt that the contractual fine print had been weaponized against them. It was the most visible stress fracture to date in a $3 trillion shadow-banking market that has grown almost entirely outside federal oversight.

The financial press treated it as an isolated liquidity issue, but it is the same structural weakness that brought down the Savings and Loan industry – only scaled up, securitized, and deeply embedded inside today’s financial system.

The S&L collapse of the late 1980s established the template that has governed every major crisis since: deregulate, speculate, collapse, bail out, consolidate, repeat. That bailout cost taxpayers an estimated $124 billion to $160 billion, much of it still carried on the federal debt today.

The public was told the industry would repay the cost over forty years, but it never did. The bill was simply pushed into the future, and that future is now.

The BlackRock freeze is the latest chapter in this never-ending bailout saga. The same regulatory forbearance that enabled junk-bond speculation in the 1980s has allowed today’s shadow-banking giants to grow without meaningful oversight.

And when the bets turn sour, the risks will again migrate toward the public balance sheet. To understand why the system keeps breaking in the same way, we need to return to the moment when the old community-based banking model was dismantled and replaced with a crisis-driven, bailout-dependent regime.

The S&L bailout normalized the idea that the public would absorb the losses while private actors captured the gains. It set in motion a forty-year transformation of American banking that has continued through the 2008 derivatives crisis to the collapse of Silicon Valley Bank to the current private equity crisis to the quadrillion dollar derivatives time bomb.

To understand how this transformation evolved, we need to return to the moment when the old community-based banking model was dismantled and replaced with a crisis-driven, bailout-dependent regime.

The World George Bailey Built and How It Was Destroyed.

For most of the 20th century, America’s savings-and-loan industry operated like the Bailey Building & Loan in It’s a Wonderful Life. Federally chartered thrifts took in local deposits and made long-term home mortgages.

Ceilings on deposit interest rates kept things stable, while the Federal Savings and Loan Insurance Corporation (FSLIC) backstopped depositors. It was a form of banking that was boring, local, and safe. Thrifts financed the postwar housing boom that created the American middle class.

That system began to crack in the late 1970s, when doubledigit consumer price inflation driven by the 1973 OPEC oil embargo prompted Federal Reserve Chairman Paul Volcker to aggressively raise interest rates.

By 1981, the prime interest rate had reached 20%. Thrifts were stuck with low-yield, longterm mortgages generating lower interest than they would have to pay to keep depositors from fleeing to higher-yielding money-market funds.

Where to find the money to fill this gap? Congress’ response was the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Garn-St. Germain Depository Institutions Act of 1982. These laws demolished the interest- rate caps and dramatically broadened the investment powers of the thrifts, allowing them to chase risky but lucrative deals in commercial real estate, junk bonds, and other speculative ventures.

The grift was detailed by Michael Waldman in his 1990 book Who Robbed America? A Citizen’s Guide to the Savings and Loan Scandal. Waldman documents how the new rules turned sleepy community institutions into high-stakes casinos almost overnight. S&Ls could now pay whatever rates they wanted to attract “brokered” deposits – “hot money” from anywhere.

They could invest in anything from shopping centers to Michael Milken’s junk-bond machine at Drexel Burnham Lambert. Regulatory forbearance and political pressure from a handful of senators called the Keating Five fanned the flames. By the mid-1980s, roughly one-third of the nation’s 3,800 thrifts were in serious trouble.

Waldman viewed the S&L crisis not as a market failure but as a deliberate heist enabled by deregulation, greed, and political capture. Hundreds of thrifts were looted, billions of dollars vanished into junk bonds, and real-estate speculation and outright fraud ran rampant, leaving ordinary depositors and taxpayers holding the bag. In his introduction to Waldman’s book, Ralph Nader called it “an unprecedented frenzy of speculation and business criminality.”

Through his decades of advocacy, Nader repeatedly exposed the pattern – financial deregulation that turns community institutions into casinos, bailouts that socialize losses while privatizing gains, and the rise of a derivatives-fueled shadow banking system that dwarfs the real economy.

Charles Keating and the junk-bond leveraged buyout boom.

Charles Keating embodied the new “greed is good” mentality. In 1984, he used Drexel junk bonds – high-interest, high-risk debt securities issued by the investment firm Drexel Burnham Lambert – to acquire Lincoln Savings & Loan of Irvine, California.

Within years, he had leveraged $51 million into a $454 million junk-bond portfolio. Much of this was Drexel paper – junk bonds issued by his associates at Drexel – creating a circular, self-sustaining market for risky investments.

This expansion was made possible by federal deregulation, which allowed S&Ls to gamble with federally insured deposits. Keating took Lincoln’s assets and pivoted away from safe mortgages, ballooning the balance sheet with speculative real estate and risky development loans. When these high-stakes bets failed, Lincoln’s collapse alone cost taxpayers more than $2 billion.

Keating ultimately served prison time for securities fraud, but many others followed his playbook. Blackstone Group, founded in 1985, jumped into distressed thrifts early. That same year, Larry Fink incubated BlackRock inside Blackstone to manage fixed-income and mortgage-backed securities.

Dozens of thrifts loaded up on the high-yield junk bonds that Michael Milken’s machine at Drexel churned out. These bonds were the fuel for leveraged buyouts (LBOs) – hostile takeovers by Wall Street banks and the new private-equity shops – firms that specialize in buying companies to restructure them.

They would acquire a target company using massive amounts of borrowed money, then place the debt used to buy the company on the targeted company’s own books, forcing it to pay for its own takeover.

Waldman’s book catalogs the human cost: small businesses crushed by predatory lending, retirees wiped out when thrifts sold them worthless debt disguised as “safe” investments, and entire communities hollowed out when real-estate bubbles popped.

The bailout that protected the wrong people.

When the music stopped, the government moved fast. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 created the Resolution Trust Corporation (RTC) to deal with the insolvent thrifts. The RTC ultimately resolved 747 of them, holding more than $400 billion in assets.

Depositors were made whole through FSLIC/FDIC insurance – about $123.8 billion in taxpayer funds by the end of the decade, plus another $29 billion borne by the thrift industry itself. The ultimate net cost to taxpayers has been estimated at around $124 to 160 billion.

To calm public anger, Congress and the regulators insisted that the bailout would not be a permanent burden. The banking industry, they said, would repay the cost over forty years through assessments and fees. The problem was that there was no enforcement mechanism – no dedicated trust fund, no transparent accounting, no requirement that the money actually be tracked or reported. As the years passed, the promise faded.

The RTC was dissolved. The accounting was folded into general government operations. The public’s memory dimmed. And the banking industry, far from repaying the cost, emerged from the crisis larger, more concentrated, and more politically powerful than before.

The S&L crisis was the turning point when the United States shifted from a system of community-based finance to one dominated by megabanks, speculative capital, and a regulatory apparatus that treats crises as opportunities for consolidation.

The “forty-year repayment” plan was less a financial plan than a political talking point — a way to defuse outrage and move the crisis off the front pages and far into the future. But that future is now, and the bill has come due.

The forty year payoff that never happened.

The RTC was supposed to sell off the seized assets and recoup as much as possible to offset the FSLIC/FDIC insurance payouts. Instead, it dumped distressed real estate, loans, and junk-bond portfolios at firesale prices – often pennies on the dollar in the weakest markets – to quickly get the needed cash. Private investors, including early private-equity players like Blackstone, scooped up the bargains.

As markets eventually recovered, those buyers turned the assets into windfalls, while taxpayers ate the permanent loss on the difference between market value and what was actually recovered. Official numbers show the RTC ultimately recovered roughly 85 percent of the “appraised value” of the assets it handled.

That sounds respectable, but it is misleading. When compared to the original “book value” – what those assets were worth before the crisis – the recovery was closer to 50 percent. The buyers were sophisticated Wall Street operators who could wait out the real estate cycle.

The government socialized the losses to protect depositors (a worthy goal), but privatized the upside to the very firms that had helped fuel the speculation, so that the losses fell on the taxpayers rather than on the perpetrators of the fraud.

The S&Ls themselves were liquidated, while their executives and owners often walked away with “golden parachutes” or light penalties. But the real winners were the Wall Street firms that had supplied the junk bonds, advised on the deals, and now bought the distressed assets cheaply.

The balloon payments are due now.

Lawmakers assured the public that the bailout would not become a permanent burden. The cost, they said, would be repaid “over time,” largely by the financial industry itself.

To make that promise credible, Congress created two special financing vehicles – the Financing Corporation (FICO) in 1987 and the Resolution Funding Corporation (REFCorp) in 1989 – which issued thirty and forty year bonds to cover the losses.

The thrift industry would pay the interest, and the long maturities would give regulators time to recover assets and rebuild the insurance fund. In practice, the repayment never happened. Banks did pay the interest on the FICO bonds through mandatory assessments on deposits, in fees that continued until 2019.

But the fees were imposed on all banks, not just the wrongdoers. So it was a hidden tax on the people, since to balance their books banks had to reduce the interest paid to depositors – and the principal on those bonds was always scheduled to be paid by the Treasury.

The REFCorp bonds – the largest portion of the bailout financing – were zero coupon instruments, meaning no interest was paid annually. Instead, the entire principal plus the imputed interest would come due at maturity.

Those maturities fall between 2026 and 2030. As the Peter G. Peterson Foundation notes, “payments for the S&L crisis will cease in 2030, when all REFCorp bonds will have matured.”

The thrift industry never repaid the bailout. The cost was simply pushed forty years into the future, buried in the federal debt, and forgotten. Now, as the final balloon payments come due, the Treasury – already overextended – will almost certainly roll the remaining obligations into long term government debt, where they will accrue interest indefinitely. The bill for the S&L crisis was not eliminated. It was deferred. And the public is paying it now.

The pattern repeats — 2008, 2023 and now.

The S&L crisis established a template that has repeated ever since. In 2008, deregulation, securitization, speculative excess, and outright fraud produced a housing market collapse that dwarfed the S&L disaster.

The public was told that a bailout was necessary to prevent economic catastrophe. The assets of failed institutions were sold at steep discounts to larger, better connected firms. The result was further consolidation and even greater concentration of financial power.

In 2023, the failures of Silicon Valley Bank, Signature Bank, and First Republic were symptoms of the same structural fragility: interstate mismatches, concentrated depositor bases, and a regulatory rollback that exempted midsized banks from enhanced oversight.

When these banks failed, the response followed the familiar pattern. Regulators guaranteed deposits, arranged emergency acquisitions, and assured the public that the system was sound. JPMorgan Chase – already the largest bank in the country – absorbed First Republic with government assistance.

The private equity crisis and the shadow banking reckoning.

The predatory leveraged buyout culture born in the Savings & Loan era has metastasized into a private equity industry that now dictates the stability of the U.S. financial system. Today, firms like Blackstone and BlackRock represent the logical endpoint of a decades-long regulatory retreat: a system designed to socialize massive losses while privatizing the gains for a handful of billionaire fund managers.

Congress and federal regulators are currently sleepwalking into a slow-motion banking crisis. At its center is a collapsing commercial real estate (CRE) market, where over one trillion dollars in debt is set to mature by the end of 2027. These office towers and retail centers, hollowed out by a shifting economy and high interest rates, no longer support the massive debt loads placed on them by private equity landlords.

The danger is not just to the buildings, but to the regional and midsize banks that hold the bulk of these loans. These banks are the primary lenders to our local communities, and their balance sheets are being poisoned by the aggressive, high-leverage gambles of firms like Blackstone, which has already begun defaulting on high profile office bonds.

The derivatives casino – the S&L playbook on steroids.

The same mechanism that fueled the S&L collapse is now supercharged in the derivatives market. Unlike traditional hedging, modern derivatives allow institutions to bet on the price of oil, stocks, mortgages, or interest rates without owning the underlying asset. These synthetic bets can be created in unlimited volume.

The result is a global derivatives book whose notional value is now estimated by some analysts to exceed a quadrillion dollars – many times larger than the real economy. Collateral posted to back these bets can be rehypothecated – pledged, repledged, and repledged – multiplying leverage exponentially.

One market shock, margin call, or geopolitical upset can cascade through the chain, turning phantom assets into very real losses. This is not hedging in the traditional sense – farmers hedging against bad weather at harvest time. It is speculation layered on speculation, built on the assumption that the public will always be there to absorb the losses.

What we lost and what could have been built.

A little-discussed consequence of the S&L collapse is the erosion of community banking. Before the crisis, local lenders played a central role in financing small businesses, affordable housing, and local development.

They knew their communities, understood local conditions, and were accountable to their depositors. The S&L crisis wiped out thousands of these institutions. The survivors were absorbed by larger banks with no local ties.

The result was a decline in relationship based lending and a rise in standardized, algorithm driven credit decisions. Small businesses face greater barriers to credit. Rural and low income communities struggle to attract investment.

Local economies have become more vulnerable to national and global financial trends. There was another path available – a public interest banking model that would have preserved the strengths of the S&Ls while eliminating the vulnerabilities that made them easy targets for speculation and fraud.

The state-owned Bank of North Dakota offers a century long example of how public banking can stabilize a financial system, support community banks, and keep credit flowing during crises.

North Dakota has six times the national average of community banks per capita, largely due to the BND’s partnership loans with community banks, credit unions, and CDFIs, strengthening rather than competing with local lenders.

The BND acts as a “miniFed” for the state’s banks, providing liquidity, loan participations, and support during downturns. At the federal level, postal banking once provided safe, low cost services to millions of Americans. Globally, public infrastructure banks have shown that public lending can be efficient and fiscally responsible.

The forty year reckoning.

The S&L crisis was the beginning of a new era in American finance – an era defined by deregulation, moral hazard, and the steady erosion of democratic control over the financial system.

The failures of 2008 and 2023 were the predictable outcomes of a system designed to privatize gains and socialize losses. The question for 2026 is whether we will continue to accept a financial structure that treats the public as a perpetual guarantor of private risk, or whether we will finally build a system that serves the public interest. The forty year window is closing, the bill is still due, and the public deserves an accounting.

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Ellen Brown is an attorney, author of 13 books, and founder of the Public Banking Institute. Her website is EllenBrown.com.

First Published on Capitol Hill Citizen Substack.

Shared via Creative Commons.

By Ellen Brown / Original to ScheerPost
12 March 2023

On Friday, March 10, Silicon Valley Bank (SVB) collapsed and was taken over by federal regulators. SVB was the 16^th largest bank in the country and its bankruptcy was the second largest in U.S. history, following Washington Mutual in 2008. Despite its size, SVB was not a “systemically important financial institution” (SIFI) as defined in the Dodd-Frank Act, which requires insolvent SIFIs to “bail in” the money of their creditors to recapitalize themselves.

Technically, the cutoff for SIFIs is $250 billion  in assets. However, the reason they are called “systemically important” is not their asset size but the fact that their failure could bring down the whole financial system. That designation comes chiefly from their exposure to derivatives, the global casino that is so highly interconnected that it is a “house of cards.” Pull out one card and the whole house collapses. SVB held $27.7 billion in derivatives, no small sum, but it is only .05% of the $55,387 billion ($55.387 trillion) held by JPMorgan, the largest U.S. derivatives bank.

SVB could be the canary in the coal mine foreshadowing the fate of other over-extended banks, but its collapse is not the sort of “systemic risk” predicted to trigger “contagion.” As reported by CNN:

“Despite initial panic on Wall Street, analysts said SVB’s collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.

‘The system is as well-​capitalized and liquid as it has ever been,’ Moody’s chief economist Mark Zandi said. ‘The banks that are now in trouble are much too small to be a meaningful threat to the broader system.’

No later than Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. It will pay uninsured depositors an ‘advance dividend within the next week.’”

A fuller report on the collapse of SVB will have to wait on developments that occur over the weekend and soon thereafter.

This column, meanwhile, focuses on derivatives and is a followup to my Feb. 23  column on the “bail in” provisions of the 2010 Dodd Frank Act, which eliminated taxpayer bailouts by requiring insolvent SIFIs to recapitalize themselves with the funds of their creditors. “Creditors” are defined to include depositors, but deposits under $250,000 are protected by FDIC insurance. However, the FDIC fund is sufficient to cover only about 2% of the $9.6 trillion in U.S. insured deposits. A nationwide crisis triggering bank runs across the country, as happened in the early 1930s, would wipe out the fund. Today, some financial pundits are predicting a crisis of that magnitude in the quadrillion dollar-plus derivatives market, due to rapidly rising interest rates. This column looks at how likely that is and what can be done either to prevent it or dodge out of the way.

“Financial Weapons of Mass Destruction”

In 2002, mega-investor Warren Buffett wrote that derivatives were “financial weapons of mass destruction.” At that time, their total “notional” value (the value of the underlying assets from which the “derivatives” were “derived”) was estimated at $56 trillion. Investopedia reported in May 2022 that the derivatives bubble had reached an estimated $600 trillion according to the Bank for International Settlements (BIS), and that the total is often estimated at over $1 quadrillion.  No one knows for sure, because most of the trades are done privately.

As of the third quarter of 2022, according to the “Quarterly Report on Bank Trading and Derivatives Activities” of the Office of the Comptroller of the Currency (the federal bank regulator),  a total of 1,211 insured U.S. national and state commercial banks and savings associations held derivatives, but 88.6% of these were concentrated in only four large banks: J.P. Morgan Chase ($54.3 trillion), Goldman Sachs ($51 trillion), Citibank ($46 trillion), Bank of America ($21.6 trillion), followed by Wells Fargo ($12.2 trillion). A full list is here. Unlike in 2008-09, when the big derivative concerns were mortgage-backed securities and credit default swaps, today the largest and riskiest category is interest rate products.

The original purpose of derivatives was to help farmers and other producers manage the risks of dramatic changes in the markets for raw materials. But in recent times they have exploded into powerful vehicles for leveraged speculation (borrowing to gamble). In their basic form, derivatives are just bets – a giant casino in which players hedge against a variety of changes in market conditions (interest rates, exchange rates, defaults, etc.). They are sold as insurance against risk, which is passed off to the counterparty to the bet. But the risk is still there, and if the counterparty can’t pay, both parties lose. In “systemically important” situations, the government winds up footing the bill.

Like at a race track, players can bet although they have no interest in the underlying asset (the horse). This has allowed derivative bets to grow to many times global GDP and has added another element of risk: if you don’t own the barn on which you are betting, the temptation is there to burn down the barn to get the insurance. The financial entities taking these bets typically hedge by betting both ways, and they are highly interconnected. If counterparties don’t get paid, they can’t pay their own counterparties, and the whole system can go down very quickly, a systemic risk called “the domino effect.”

That is why insolvent SIFIs had to be bailed out in the Global Financial Crisis (GFC) of 2007-09, first with $700 billion of taxpayer money and then by the Federal Reserve with “quantitative easing.” Derivatives were at the heart of that crisis. Lehman Brothers was one of the derivative entities with bets across the system. So was insurance company AIG, which managed to survive due to a whopping $182 billion bailout from the U.S. Treasury; but Lehman was considered too weakly collateralized to salvage. It went down, and the Great Recession followed.

Risks Hidden in the Shadows.

Derivatives are largely a creation of the “shadow banking” system, a group of financial intermediaries that facilitates the creation of credit globally but whose members are not subject to regulatory oversight. The shadow banking system also includes unregulated activities by regulated institutions. It includes the repo market, which evolved as a sort of pawn shop for large institutional investors with more than $250,000 to deposit. The repo market is a safe place for these lenders, including pension funds and the U.S. Treasury, to park their money and earn a bit of interest. But its safety is insured not by the FDIC but by sound collateral posted by the borrowers, preferably in the form of federal securities.

As explained by Prof. Gary Gorton:

“This banking system (the “shadow” or “parallel” banking system) – repo based on securitization – is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.”

While it is true that banks create the money they lend simply by writing loans into the accounts of their borrowers, they still need liquidity to clear withdrawals; and for that they largely rely on the repo market, which has a daily turnover just in the U.S. of over $1 trillion. British financial commentator Alasdair MacLeod observes that the derivatives market was built on cheap repo credit. But interest rates have shot up and credit is no longer cheap, even for financial institutions.

According to a December 2022 report by the BIS, $80 trillion in foreign exchange derivatives that are off-balance-sheet (documented only in the footnotes of bank reports) are about to reset (roll over at higher interest rates). Financial commentator George Gammon discusses the threat this poses in a podcast he calls, “BIS Warns of 2023 Black Swan – A Derivatives Time Bomb.” Another time bomb in the news is Credit Suisse, a giant Swiss derivatives bank that was hit with an $88 billion run on its depositsby large institutional investors late in 2022. The bank was bailed out by the Swiss National Bank through swap lines with the U.S. Federal Reserve at 3.33% interest.

The Perverse Incentives Created by “Safe Harbor” in Bankruptcy.

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, Prof. David Skeel refutes what he calls the “Lehman myth”—the widespread belief that Lehman’s collapse resulted from the decision to allow it to fail. He blames the 2005 safe harbor amendment to the bankruptcy law, which says that the collateral posted by insolvent borrowers for both repo loans and derivatives has “safe harbor” status exempting it from recovery by the bankruptcy court. When Lehman appeared to be in trouble, the repo and derivatives traders all rushed to claim the collateral before it ran out, and the court had no power to stop them.

So why not repeal the amendment? In a 2014 article titled “The Roots of Shadow Banking,” Prof. Enrico Perotti of the University of Amsterdam explained that the safe harbor exemption is a critical feature of the shadow banking system, one it needs to function. Like traditional banks, shadow banks create credit in the form of loans backed by “demandable debt”—short-term loans or deposits that can be recalled on demand. In the traditional banking system, the promise that the depositor can get his money back on demand is made credible by government-backed deposit insurance and access to central bank funding. The shadow banks needed their own variant of “demandable debt,” and they got it through the privilege of “super-priority” in bankruptcy. Perotti wrote:

“Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral. This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. [Emphasis added.]”

The dilemma of our current banking system is that lenders won’t advance the short-term liquidity needed to fund repo loans without an ironclad guarantee; but the guarantee that makes the lender’s money safe makes the system itself very risky. When a debtor appears to be on shaky ground, there will be a predictable stampede by favored creditors to grab the collateral, in a rush for the exits that can propel an otherwise-viable debtor into bankruptcy; and that is what happened to Lehman Brothers.

Derivatives were granted “safe harbor” because allowing them to fail was also considered a systemic risk. It could trigger the “domino effect,” taking the whole system down. The error, says Prof. Skeel, was in passage of the 2005 safe harbor amendment. But the problem with repealing it now is that we will get the domino effect, in the collapse of both the quadrillion dollar derivatives market and the more than trillion dollars traded daily in the repo market.

The Interest Rate Shock.

Interest rate derivatives are particularly vulnerable in today’s high interest rate environment. From March 2022 to February 2023, the prime rate (the rate banks charge their best customers) shot up from 3.5% to 7.75%, a radical jump. Market analyst Stephanie Pomboy calls it an “interest rate shock.” It won’t really hit the market until variable-rate contracts reset, but $1 trillion in U.S. corporate contracts are due to reset this year, another trillion next year, and another trillion the year after that.

A few bank bankruptcies are manageable, but an interest rate shock to the massive derivatives market could take down the whole economy. As Michael Snyder wrote in a 2013 article titled “A Chilling Warning About Interest Rate Derivatives:”

“Will rapidly rising interest rates rip through the U.S. financial system like a giant lawnmower blade? Yes, the U.S. economy survived much higher interest rates in the past, but at that time there were not hundreds of trillions of dollars worth of interest rate derivatives hanging over our financial system like a Sword of Damocles.

“… [R]ising interest rates could burst the derivatives bubble and cause “massive bankruptcies around the globe” [quoting Mexican billionaire Hugo Salinas Price]. Of course there are a whole lot of people out there that would be quite glad to see the “too big to fail” banks go bankrupt, but the truth is that if they go down, our entire economy will go down with them. … Our entire economic system is based on credit, and just like we saw back in 2008, if the big banks start failing, credit freezes up and suddenly nobody can get any money for anything.

There are safer ways to design the banking system, but they are not likely to be in place before the quadrillion dollar derivatives bubble bursts. Snyder was writing 10 years ago, and it hasn’t burst yet; but this was chiefly because the Fed came through with the “Fed Put” – the presumption that it would backstop “the market” in any sort of financial crisis. It has performed as expected until now, but the Fed Put has stripped it of its “independence” and its ability to perform its legislated duties. This is a complicated subject, but two excellent books on it are Nik Bhatia’s Layered Money (2021) and Lev Menand’s The Fed Unbound: Central Banking in a Time of Crisis (2022).

Today the Fed appears to be regaining its independence by intentionally killing the Fed Put, with its push to raise interest rates. (See my earlier article here.) It is still backstopping the offshore dollar market with “swap lines,” arrangements between central banks of two countries to keep currency available for member banks,  but the latest swap line rate for the European Central Bank is a pricey 4.83%. No more “free lunch” for the banks.

Alternative Solutions.

Alternatives that have been proposed for unwinding the massive derivatives bubble include repealing the safe harbor amendment and imposing a financial transaction tax, typically a 0.1% tax on all financial trades. But those proposals have been around for years and Congress has not taken up the call. Rather than waiting for Congress to act, many commentators say we need to form our own parallel alternative monetary systems.

Crypto proponents see promise in Bitcoin; but as Alastair MacLeod observes, Bitcoin’s price is too volatile for it to serve as a national or global reserve currency, and it does not have the status of enforceable legal tender. MacLeod’s preferred alternative is a gold-backed currency, not of the 19^th century variety that led to bank runs when the banks ran out of gold, but of the sort now being proposed by Sergey Glazyev for the Eurasian Economic Union. The price of gold would be a yardstick for valuing national currencies, and physical gold could be used as a settlement medium to clear trade balances.

Lev Menand, author of The Fed Unbound, is an Associate Professor at Columbia Law School who has worked at the New York Fed and the U.S. Treasury. Addressing the problem of the out-of-control unregulated shadow banking system, he stated in a July 2022 interview with The Hill, “I think that one of the great possible reforms is the public banking movement and the replication of successful public bank enterprises that we have now in some places, or that we’ve had in the past.”

Certainly, for our local government deposits, public banks are an important solution. State and local governments typically have far more than $250,000 deposited in SIFI banks, but local legislators consider them protected because they are “collateralized.” In California, for example, banks taking state deposits must back them with collateral equal to 110% of the deposits themselves. The problem is that derivative and repo claimants with “supra-priority” can wipe out the entirety of a bankrupt bank’s collateral before other “secured” depositors have access to it.

Our tax dollars should be working for us in our own communities, not capitalizing failing SIFIs on Wall Street. Our stellar (and only) state-owned model is the Bank of North Dakota, which carried North Dakota through the 2008-09 financial crisis with flying colors. Post-GFC (the Global Financial Crisis of ’07-’09), it earned record profits re-investing the state’s revenues in the state, while big commercial banks lost billions in the speculative markets. Several state legislatures currently have bills on their books following the North Dakota precedent.

For a federal workaround, we could follow the lead of Jesse Jones’ Reconstruction Finance Corporation, which funded the New Deal that pulled the country out of the Great Depression. A bill for a national investment bank currently in Congress that has widespread support is based on that very effective model, avoiding the need to increase taxes or the federal debt.

All those alternatives, however, depend on legislation, which may be too late. Meanwhile, self-sufficient “intentional” communities are growing in popularity, if that option is available to you. Community currencies, including digital currencies, can be used for trade. They can be “Labor Dollars” or “Food Dollars” backed by the goods and services for which the community has agreed to accept them. (See my earlier article here.) The technology now exists to form a network of community cryptocurrencies that are asset-backed and privacy-protected, but that is a subject for another column.

The current financial system is fragile, volatile and vulnerable to systemic shocks. It is due for a reset, but we need to ensure that the system is changed in a way that works for the people whose labor and credit support it. Our hard-earned deposits are now the banks’ only source of cheap liquidity. We can leverage that power by collaborating in a way that serves the public interest.

First published on Scheerpost.com.

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