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Banks Amok? Perhaps Not

The Greek Crisis has everyone nervous, and for good reasons. If this is what happens when a nation hits a financial crisis people around the world have to reasonably ask, “Are we next?” Every nation on this planet is deep into debt, although few are as bad off as Greece.

A lot of national debt is a threat to the world we live in for two related but distinct reasons. The first is that a nation loses the ability to make its own decisions and operate as a legitimate sovereign nation – which, in the case of democracies, means a de facto taking of power by creditors at the expense of the people. The second is that a large debt load has to be serviced by the government somehow which ultimately is a drain on the economy, reducing the standard of living and generally hurting personal opportunities.

With all this debt floating around causing so much pain it’s best to look at who holds it and how the world can get a handle on it.

"You're money's not here ... it's in your house, and yours!"

“You’re money’s not here … it’s in your house, and yours!”

There are really only three types of banks, despite a variety of legal definitions and regulatory frameworks that vary from nation to nation and state to state. They are:

Retail banks, commercial banks, savings & loans, and credit unions: These are the operations that take deposits, make loans, and clear payments between accounts. The Federal Reserve actually handles most of the check clearing between these banks. They are also the institutions that issue credit cards and so on.

Investment banks: These are larger banks that hold interests in large companies and bundle smaller loans into investment pools, such as mortgage backed securities. They are essentially brokerages that have the power to buy and sell any kind of debt obligation.

Central banks: These are the national institutions that actually issue money and regulate the other banks. They are the source of all banking in the grand scheme of things.

Who owns national debt? The short answer is that for every nation a wide variety of people and institutions own the obligations for any given nation. If we narrow ourselves to Greece itself we get a different picture than if we look at the US or any other nation, but where the mix is going to be different the general concept is the same.

ECB's new digs in Frankfurt.  Note that it looks like it's leaning a bit ...

ECB’s new digs in Frankfurt. Note that it looks like it’s leaning a bit …

Greece’s total debt is currently €315B. Of that, the largest single owner is the nation of Germany at €56B. The total owed to all other nations in Europe is €194B, which is to say that other nations fronted their own credit lines to keep Greece afloat this long. The International Monetary Fund owns €32B, the European Central Bank €20B, and Greek banks €15B.

All the rest is owned by either individuals or investment banks, a total of only €54B or  17% of the debt.

It’s not exactly fair to say that the “banksters” are the ones demanding Greece make their payments because most of the money is owed to other nations. This is essentially a family feud within Europe. But who owns the debt that these other members of the European Union fronted?

That gets much trickier, in large part because German debt, for example, is owed primarily to investment banks. It’s really Germany’s credit that’s on the line here more than anything. But is it possible for Greece’s debt to be forgiven by these nations, or for that matter for it to be assumed by a central bank that has the authority to simply print the money necessary?

It's interesting how the traditional view of a bank looks like the Parthenon.

It’s interesting how the traditional view of a bank looks like the Parthenon.

The short answer is that yes, they most certainly do have the ability to do that. And that’s the problem with blaming banks for the standoff in Greece – you have to look at the different kinds of banks that are complaining at this stage and figure out who is on the hook. Investment banks might not be happy if Greece defaults on its debt to Germany if they hold German bonds. But they still have the full faith and credit of Germany backing them, so what’s the problem?

None of this involves retail banks of any sort. While it is still a good idea to separate out the operations of retail banks from investment banks it has nothing to do with this situation. Reinstating the wall between retail operations and investment, known previously as the Glass-Steagall Act, is a powerful way to minimize the potential downside of a collapse such as Greece’s on the economy. But it’s an entirely different problem.

What, then is a central bank and what are its obligations? There is a lot of reasonable discussion regarding the Federal Reserve, the US central bank, and its increasing role in our economy. The same is true of the central bank of Europe, the European Central Bank. But the latter has plans to buy €1,000B in miscellaneous bonds, some of them governmental. They could easily absorb the inter-family debt from Greece and all other nations if they wanted to.

Oooooouch!

Oooooouch!

That would, by itself, amount to a 61% reduction in Greece’s debt and put their total debt to around 61% of GDP, a very comfortable level that is less than the current US debt (71% of GDP).

In the end, it’s very easy to blame “banksters” for the standoff in Greece. It’s very easy to take our own bad experience with banks and project it onto the situation as well. But the banks in question which need to act are not at all the same as the ones we have to stand in line for and they are not the wild & crazy manipulators who dominate the image of bad behavior at large investment banks.

This is all about what a central bank is and what their proper role is for servicing the debt of nations while managing the economy. It ultimately begs the question, “What is money?” as well, given that these are the institutions that print the stuff all around the world.

The threats to democracy and opportunity are not generated by greedy capitalists running amok. They are, at their core, about the role of independent institutions derived from national governments that can and should tightly define their proper role. It’s a very different problem than most people can imagine. The power to take care of any real problems is already there in the governments that created the central banks.

Greece isn’t alone, even if its problem is worse than most. We all have something to talk about here, including the faith in the banks and the currency that keeps everything keepin’ on. But let’s not confuse the issue with the worst demons we can imagine. This, like all problems with central banks, is a very solvable problem.

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14 thoughts on “Banks Amok? Perhaps Not

      • They think we have a problem with borrowing when it is really the governments that are deep in debt. Raise the interest rates to control government waste and spending and stop ripping off the savers.
        Leslie

  1. I’d say that in Greece, it is possible that the early retirement age, combined with pensions and generous benefits contributed greatly, or maybe caused their situation.

    • They have been generous with the public pensions, etc. That’s very true. But it was all extended with a lot of debt they were allowed to run up for over 20 years, and they should never have been loaned all that money.

    • The stock market is melting away the gains of the last year – and maybe more. It’s not quite what we expected a year ago given how much it’s run up since then, but cheap money created a tremendous bubble there, too.

    • I used the “held by public” figure, which is only 71%. The Federal Reserve owns a lot of our debt. In retrospect, I should count that, too.

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