Book review: How The Other Half Banks

The depiction of unity between banks and people is a lie and explains why 40% of US citizens do not have access to credit, as American law professor Mehrsa Baradaran explains to JP O’Malley.

THE late George Carlin, a prominent stand-up comedian, actor, social critic, and author, once declared that the best thing about “the American dream” was that you had to be asleep to believe it.

He certainly had a point. Consider the following oxymoron: in American society the less money you possess, the more it costs to access it.

Today, 90% of the population in the US consider themselves ‘middle class’. And yet, up to 40% of American citizens still have no access to a bank account that has the most basic functions of credit. As a result, many must rely on alternative ways to store their money, and pay their bills on a weekly basis.

In her latest book, How The Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, Mehrsa Baradaran — a professor of Law at the University of Georgia — argues that the very fact that the fringe banking sector exists, exemplifies how class-tiered the financial system in the US really is.

Not only is the system deeply flawed and blatantly discriminatory, it also excludes millions of Americans from the most basic of banking services.

“So much Federal Government money is funnelled into the banking system with the premise that it trickles down, or it will be lent out at a reasonable rate,” Baradaran explains when we begin talking.

“Now normally market prices are determined by supply and demand. But there really isn’t a market price for credit, like there is for other things in the market.”

Baradaran uses the price of a house as a perfect example of something tangible in the economy that works within the parameters of the law of supply and demand in standard economic theory.

Credit, however, she insists, does not work the same way.

“Supply of credit is really a policy decision made by the Federal Government. So you have policy decisions setting the price for credit that goes to this big industry. But when that industry doesn’t lend to 40% of the American public, that really wavers some of the most important channels of our democracy.”

In the US, when a bank cannot pay its bills, the Federal Reserve gives the bank a short-term loan. This ensures the bank is able to survive without having to sell off valuable assets.

This relationship between the federal government in the US and the banking sector ensures banking is unlike any other businesses. Mainly because other businesses must create their own wealth, without the use of other people’s money, or cheap loans when they fall short.

This special relationship between governments and banks, however, is not unique to the US.

“Every banking system in the world is intertwined with government,” Baradaran explains. “This became very clear during the global financial crisis in 2008 where there wasn’t a single country that was able to let their banks fail. It’s the business of banks to deal with other people’s money. So when you have that basic structure, there is heavy government involvement.”

In her book, Baradaran brings the reader right back to the aftermath of the financial crisis of 2008. She recalls that President George W Bush at the time said that he supported giving the banks this “urgently-needed money” so that they could “avoid collapse and resume lending.” Two weeks later, Barack Obama, then a presidential candidate, sung the same theme tune too: “All of us have a responsibility to solve the crisis because it affects the financial well being of every single American,” he said at the time.

Put simply, politicians claimed that this was not just a Wall Street crisis, but a national one. The message from both Bush and Obama was pretty straight forward: the banks and the people were a collective unit. If the banks fell, the people would go under too.

But this depiction of unity between the banks and the people is a blatant lie, says Baradaran.

Presently, she explains, two banking systems exist in the US: government-supported banks that serve the wealthy; then for the rest of the population there is a wild-west type-system of fringe loan sharks and check cashing joints. The latter option being extremely costly, time consuming, and filled with endless bureaucratic runarounds.

The banks — post crisis — have thus emerged amazingly unscathed: with astonishing ease and profitability.

The average hardworking American, meanwhile, Baradaran explains, cannot get their hands on even the most basic form of credit to survive in an economy that is effectively built on debt.

This is another one of the great paradoxes of how mainstream banking in the West works. But, like all efficient bureaucratic systems, the ironic confusion is there for a reason of course: to protect the rich and leave those at the bottom of this spider-webbed- hierarchical-structure utterly powerless.

Debt, Baradaran argues, is the foundation of our economy in the West. In fact, we even measure the economy’s success based on consumer spending, not on saving.

Pace World War Two, government policies in the US especially, encouraged people to spend in order to grow the economy.

Why, then, do western governments continue to lecture the electorate that the public deficit must constantly be reduced, and that we need to bring the public finances down at all costs? “There is a great deal of misunderstanding about this subject in the public realm,” Baradaran insists. “You see this in the debates about public debt, people say: imagine it’s like a family budget that you have to balance. But the governments finances do not operate like that.

That is just a stupid boogeyman’s argument. The people who are having this debate have very little understanding about the economy.” This is proof, if any more were needed, Baradaran insists, that the social contract between governments and banks has become lopsided and highly undemocratic.

“There used to be this quid-pro-quo idea that the government are happy to provide private insurance bailouts, if the banks stay small, and lend out money accordingly,” says Baradaran. “But the one thing banks are supposed to be good at — providing credit to people — they no longer do. That is a major breach of a contract.”

Baradaran claims that we really need to ask the following question: why are we giving the banks all of this money if they refuse to do the one thing we ask them to do in return: provide us with credit to survive? Baradaran wants to makes it abundantly clear that she was not against the banking bailout itself per se. In fact, she says, the arguments that were put forward against the bailout were widely misguided, on both sides of the political spectrum.

“On the right, the argument against the banking bailout was that there is too much government involvement,” she explains.

“Then on the left, the argument is: it’s cronyism, and the government are helping their buddies.” The reality, she believes, is very different: “The government did actually have to help the banks. But after that emergency measure, we then need to ask: okay what does this mean going forward? That’s not a conversation we’ve had in the United States.”

The main problem, Baradaran insists, was not keeping banks afloat with public finances, but the nature of how the culture of banking in the West— and in the US especially— drastically changed over the course of the late 20th century.

Beginning in the late 1970s and the early 1980s, the banking sector started facing an identity crisis, Baradaran explains. After decades of operating a safe and regulated mode of banking that was implemented by President Roosevelt during the 1930s, and the egalitarian reforms of the New Deal, the model then began to fall apart. “Under Roosevelt there was a major restructuring process of banks in the United States: it was basically safe and regulated. So we had 60 years with no banking crisis,” she explains.

Fast forward to the 1980s, however, and the narrative of American banking began to transform dramatically. “During this period, nobody at the higher-level policy asked: do we really want Bank of America to swallow up every bank in the country, and be so big that there is nothing we can do about it?” Baradaran insists. “Perhaps what we should have said was: ok we need five major banks, but lets make sure these banks are regulated and controlled in a way that their failures are not catastrophic.” What happened instead, though, was the government’s focus changed from the paramount objective of keeping banks small, powerless and safe, to ensuring that banks stayed profitable and efficient. Banks thus began to engage in risky behaviour that was immediately profitable, but extremely destabilising in the long run. Banks then began to imagine that they were just like any other corporations. In other words: banks made out that governments should no longer have to make any demands from them.

But isn’t this a blatant lie and a paradox: banks claiming they have no relationship with the government? “Absolutely,” says Baradaran. “Bank failures are not treated like corporate failures.

“And once we understand that, we need to work back and say: ok so if we cannot let the banking system fail, how then do we want to restructure this system? Because other corporations are able to fail. And that is the key difference,” Baradaran makes clear.

Also, corporations don’t deal with the leverage that banks deal with, Baradaran points out. She uses the giant computer corporation, Apple, as a case study to prove her thesis: the company operates almost entirely in cash and has no debt whatsoever, she explains. “Now compare that to Lehman Brothers, which had a 28:1 leverage ratio. So banks are never like other corporations, because they are in the business of safe guarding other people’s money.”

How crucial was the major right turn towards neoliberalism in the last quarter of the 20th century — through the policies of Milton Friedman and the Chicago School — in all of this?

And did the oil crisis of the 1970s also play a part too? “Yes, that ideological shift that came with the Chicago School, and the conservative revolution with Margaret Thatcher and President Reagan, definitely played a part,” says Baradaran. “But there was other market changes also.”

Baradaran cites foreign competition, and technology, as important contributing factors too. She also mentions the reign of Alan Greenspan — who served as chair of the Federal Reserve from 1987 to 2006 — as a major turning point: especially his belief in the unfettered ideology of free market principles at all costs.

“In some fields perhaps the deregulation of banks was justified and in order,” says Baradaran.

“The main problem, however, was this myth that banks were just like any other corporations. The free market folks bought that idea, and sold it up the chain.

“The problem, of course, we now know, was they just went too far.”

How The Other Half Banks Exclusion, Exploitation, and the Threat to Democracy

Mehrsa Baradaran

Harvard University Press, €27.00


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