Politics is about power. Every presidential candidate in both primaries, with the lone exception of Bernie Sanders, relies primarily on powerful, wealthy interests to fund her or his campaign. This campaign finance structure compromises the intellectual integrity of politicians backed by big money, limiting both the goals of their policies and the means available to achieve them. These politicians often find themselves incapable of differentiating between the public interest and the interests of their wealthy constituents. This corrupting influence of power lies at the core of the disagreement between Hillary Clinton and Bernie Sanders on their plans for the financial sector.
Throughout her career, Clinton has received huge amounts of money from the giant banks and funds that dominate the financial sector. Perhaps because she cannot imagine a financial sector without giant banks and funds at its core, Clinton focuses on regulating rather than abolishing them. Sanders, too, seeks to regulate the power of these giant entities, but he also plans to weaken their power by reinstating the Glass-Steagall Act, which would break up the big banks. He has also signaled that he would seek eventually to replace big banks with more democratic structures – the credit unions and community banks that he called, in the last Democratic debate, the future of US banking.
Their disagreement is essentially about the distribution of economic power within the financial industry. Clinton effectively argues that consolidation within the industry is not connected to the industry’s recent high-profile mistakes. The best way for the industry to achieve better results, Clinton says, is for the government to regulate bad practices. Sanders contends industry concentration is the root of the problem. A more decentralized financial sector, Sanders frequently argues on the stump, is the key to getting the financial sector to fuel a strong US economy rather than profit at its expense. By shifting capital to credit unions and community banks, Sanders hopes to spur financial investment in creating jobs, goods and services in the United States. Such a shift in power, especially toward credit unions, can significantly deepen democratic control of the financial industry.
To understand the two candidates’ disagreement, it’s best to take a step back to think about financial sector basics: capital formation for productive investment. What that means is banks and other investment vehicles are supposed to pool together our savings and then lend some of the savings out to fund the businesses that employ the people who make the products and provide the services that we need and desire. Today’s financial sector is no longer concerned with the second part of its mission: productive investment. It invests its money, the basis for which is our savings, to achieve the highest rate of return found anywhere in the world. Gone is the emphasis on creating jobs and funding small businesses in the United States. Accordingly, real US unemployment is unable to fall below 10 percent nearly eight years after the start of the Great Recession and multinational corporations dominate our economy at the expense of small businesses. Our financial sector no longer provides its promised social return.
Conflicting Views on the Glass-Steagall Act
The first plank of Sanders’ proposed reform is to reinstate Glass-Steagall. This would break up the banks – the core of our financial sector that has defaulted on the social element of its purpose – by not allowing them to leverage our Federal Deposit Insurance Corporation-backed savings for risky, nonproductive investment. The law would also vastly diminish the financial sector’s concentrated economic power by limiting the size of the dominant entities and, thus, their attendant political power.
Clinton, in contrast, does not support Glass-Steagall. At a community forum in Davenport, Iowa, this October, she contended that her economic plan offers “a more comprehensive approach [than Glass-Steagall] to what we need to do to rein in these institutions, including the big banks.” However, the main initiatives in her plan for Wall Street – which involve giving prosecutors more time to go after banks, taxing some high-frequency traders, keeping the Dodd-Frank financial reform law in place, strengthening rules against risky hedge fund investments and regulating hedge funds – do nothing to challenge the fundamental power of the big banks.
Clinton contends that Glass-Steagall is not productive. Because she sees big banks and multinational corporations as positive economic forces, she believes Glass-Steagall would only weaken the means to achieve a socially productive financial sector. Clinton takes financial sector campaign money and surrounds herself with advisers who see the world through the prism of its interests as it is presently constructed. As a result, it is not surprising that Clinton’s current reform proposals do not challenge the dominant position of the giant banks and funds within the financial industry.
Alternatives to Big Banks
The second plank of Sanders’ proposed reform involves rebuilding the financial sector from the ground up, with the credit unions and community banks that he called, in the last Democratic debate, the future of US banking. Clinton, in contrast, has expressed a commitment to giant banks and funds as the preferred financial sector building blocks.
Community banks refer broadly to relatively small, local and privately owned banks with less than $1 billion of aggregate assets. Institutionally, they are smaller versions of the big banks: centrally controlled by executives for private profit.
Credit unions, on the other hand, are a democratic competitor to today’s dominant financial entities. They are nonprofit financial cooperatives that are member-owned and controlled on a “one person, one vote” basis. They tend to make loans to small, local businesses and to consumers for economically productive purchases like homes and cars, and to emphasize extension of credit to people of color and moderate and low-income families often ignored by bigger banks. They could be the primary building block for a democratic financial system. And, as demonstrated by the $1 trillion of assets our country’s credit unions currently manage, they are capable of achieving significant scale.
The Bronx’s Bethex Federal Credit Union is a good example: It serves more than 5,000 members, has $22 million in assets and works primarily to empower local residents with a wide range of services, including loans for students and businesses. Hope Credit Union of Jackson, Mississippi, is another example. It has generated more than $1.7 billion of financing for more than 130,000 people in the Delta region, and half of its loans go to people of color and women, while more than one-third of its members were unbanked before joining.
Expanding the Power of Credit Unions
Progressives who believe in Sanders’ vision of democratizing the economy should pressure all of the presidential candidates to embrace the vision that Sanders has articulated: a vision of expanding the power of credit unions within the financial sector.
Here are five ways that an administration committed to democratizing our financial sector – most realistically a Sanders administration, unless the other candidates change their platforms to embrace a similar vision of economic democratization – could act to expand the power of credit unions.
1. Reinstate Glass-Steagall while encouraging individuals to withdraw their savings from big banks in favor of credit unions
As discussed above, Glass-Steagall-type separations of commercial and investment banking would greatly diminish the size of the big banks. This would greatly reduce their capacity to coordinate campaign contribution and lobbying efforts, and would make them more vulnerable to competition from credit unions and their smaller counterparts.
Additionally, with the media coverage afforded US presidents, the new president would inherit a direct line of communication with the public. In the five weeks following the Occupy-inspired “Bank Transfer Day” on November 5, 2011, roughly two-thirds of a million Americans created $4.5 billion in deposits for credit unions by withdrawing their savings from conventional commercial banks. With a president supporting such a program, even more significant transfers could likely be achieved. This would catalyze the development of a democratically managed, owned – and accountable – financial sector.
2. Establish connections between credit unions, postal banks and the Federal Reserve, bypassing the big banks
With Congress unable to pass legislation, the US government’s response to the Great Recession has largely come from the Federal Reserve’s monetary programs. Through its policy of quantitative easing, the Fed directly capitalized the country’s largest banks with $3.5 trillion between 2009 and 2014. The goal was to increase credit extension, thereby creating jobs and boosting consumer spending power.
Rather than hoping this indirect credit extension found its way to everyday Americans – and that the middlemen big lenders didn’t skim too much off the top – the Fed could have directly capitalized credit unions. The money would have been more likely to find its way into the hands of the people who needed it, as credit unions could have put the money to work building the economy from the ground up.
And if Congress ever comes to terms with the supply-side myth of stimulus through tax cuts, it could directly stimulate purchasing power by ordering the Fed to directly deposit money in personal postal bank accounts or individuals’ accounts with credit unions.
3. Mandate competitive advantage for credit union savings rate by law
Japan has long mandated by law that the postal savings rate be the highest available interest rate to small savers. The policy, widely adopted in the region, facilitated the accumulation of large amounts of savings and has been a central policy for what came to be known in the 1990s as the East Asian economic miracle – the development of international economic competitiveness by Japan, Hong Kong, Singapore, South Korea and Taiwan over the last half-century.
The US government is already heavily involved in the commercial banking sector, offering FDIC insurance for depositor’s accounts with up to $250,000 at over 6,200 member institutions. Mandating a competitive advantage for credit unions could further move the financial sector toward democratic control and ownership.
It’s worth considering that a law mandating a competitive advantage for credit unions would likely be grounds for a challenge by multinational corporations under the Trans-Pacific Partnership’s proposed investor-state dispute settlement provisions, one example among many of the ways the “trade” agreement privileges the status quo and makes impossible certain needed democratic reforms. The law could be argued as discriminatory toward any other financial entity for favoring credit unions on the basis of the territory or nationality in which they operate. Territorial-based investment, though, is necessary for developing local economies, something that has not and will not be achieved without deliberate policies.
4. Publicly funded training and education about credit unions
Knowledge and expertise of credit unions needs to be vastly expanded for their role to expand in our financial sector. Government at all levels can facilitate this by funding the creation of departments for training in cities throughout the country similar to the employee ownership centers for which Sanders has introduced legislation in the Senate.
5. Learn from those who have already begun to build a more democratic economy
Coalitions like the Next System Project and the New Economy Coalition are already hard at work building democratic economic institutions. They have built credit unions and worker-owned cooperatives to democratize wealth, community land trusts to provide affordable housing, and have developed investment strategies to facilitate the economic transition to these democratic institutions.
Two investment strategies and one cooperative business structure stand out. The Working World has set up a venture capital fund that makes small loans to help start worker-owned businesses throughout the United States and South America. The Center for Economic Democracy makes venture capital equity investments in worker-owned businesses and then, once the business gets off the ground, sells its shares back to the worker-owned businesses. The Evergreen Cooperatives, a set of cooperatives in Cleveland that operates according to the union co-op model, has brought economic development to Cleveland’s impoverished inner city by tapping into the purchasing power of “anchor institutions” of the local economy, like hospitals and universities.
And two professors in particular have written thoughtful and sophisticated models for systemic economic change. Dr. Gar Alperovitz – in America Beyond Capitalism and What Then Must We Do? – analyzes in greater depth many of the institutional models discussed above. And Dr. Erik Olin Wright – in Envision Real Utopias – engages political and economic strategies to achieve institutional transformation.
An administration committed to democratizing the financial sector could learn from these practitioners and scholars, using their programs as models to be developed around the country. It could engage them in developing its own policies, and it could even bring some in as part of its core economic advisers, providing a genuine change in economic vision to the White House.