The banking crisis is different this time. In fact, it is worse than in 2007-08. Back then, we could blame the sequential collapse of banks on wholesale fraud, widespread predatory lending, collusion between rating agencies and bankers suspected of selling derivatives.

By Yanis Varoufakis

All of this was facilitated by the then recent dismantling of the regulatory regime by Wall Street-bred politicians such as US Treasury Secretary Robert Rubin. The current bank failures cannot be blamed on any of this.

Yes, Silicon Valley Bank had been foolish enough to take on 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 have been silenced, banks have (more or less) complied with the strengthened post-2008 regulations, and their assets were relatively sound. Moreover, none of the US and European regulators could credibly claim – as they did in 2008 – that they had been caught by surprise.

In fact, regulators and central banks knew all about it. They had full access to the banks’ business models. They could clearly see that these models would not survive a combination of significant increases in long-term interest rates and a sudden withdrawal of deposits. Yet they did nothing.

Did officials fail to foresee the panicked herd flight of large and therefore uninsured depositors? Perhaps they did. But the real reason why central banks did nothing in the face of the fragility of their business models is even more disturbing: It was the central banks’ response to the 2008 financial crisis that gave rise to those business models, and policymakers knew it.

The post-2008 policy of harsh austerity for the majority for the majority and state socialism for the bankers, practised simultaneously in Europe and the United States, had two effects that shaped the financialised capitalism of the last fourteen years. First, it poisoned the West’s money. More specifically, it ensured that there was no longer a single nominal interest rate capable of restoring the balance between demand and supply of money, while preventing a wave of bank failures. Second, since it was common knowledge that no single interest rate could achieve both price stability and financial stability, Western bankers assumed that, if inflation reared its head again, central banks would raise interest rates while bailing them out. They were right: this is precisely what we are witnessing today.

Faced with the choice of curbing inflation or saving the banks, venerable commentators are appealing to central banks to do both: to keep raising interest rates while continuing the post-2008 policy of socialism for bankers, which, all other things being equal, is the only way to prevent 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 sure way of condemning the majority of people to unnecessary suffering (through avoidable high prices and avoidable unemployment) while sowing the seeds of the next banking conflagration.

Let us not forget that we have always known that banks were not designed to be safe and that, taken together, they form a system constitutionally incapable of respecting the rules of a properly functioning market. The problem is that, until now, we had no alternative: banks were the only means of channelling money to people (through ATMs, branches, cash machines, etc.). This has made society hostage to a network of private banks that monopolise payments, savings and credit. Today, however, technology has provided us with a splendid alternative.

Imagine if a central bank were to provide everyone with a free digital wallet, i.e., a free bank account with interest equal to the central bank’s overnight interest rate. Since the current banking system operates as an anti-social cartel, the central bank could use cloud-based technology to provide free digital transactions and savings storage to everyone, with their net income paying for essential public goods. Freed from the obligation to keep their money in a private bank, and to pay a fortune to transact using its system, citizens will be free to choose whether and when to use private financial institutions that offer risk intermediation between savers and borrowers. Even in such cases, their money will still reside in perfect security in the central bank’s ledger.

The cryptocurrency brotherhood will accuse me of pushing for a Big Brother-like central bank that watches and controls every transaction we make. Leaving aside their hypocrisy – this is the same gang that demanded an immediate central bank bailout of their Silicon Valley bankers – it is worth mentioning that the Treasury and other state authorities already have access to our every transaction. Privacy could be better safeguarded if transactions were concentrated in the central bank’s ledger under the supervision of something like a “Monetary Oversight Jury” composed of randomly selected citizens and experts from a wide range of professions.

The banking system we take for granted is beyond repair. That is the bad news. But we no longer need to rely on any private, rentier and socially destabilising network of banks, at least not in the way we have done so far. The time has come to blow up an irredeemable banking system that benefits 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 for damaging the planet. It is time for bankers to learn a similar lesson.

Yanis Varoufakis, Co-founder of the Democracy in Europe Movement (DIEM25), is an MP and spokesman of this group in the Greek Parliament and professor of economics at the University of Athens. A former minister in the Syriza government, from which he resigned because of his opposition to the EU-Greece Third Memorandum, he is the author of, among others, “The Global Minotaur”. Original in Project Syndicate. Published by “Bitácora” of Montevideo, 10.04.23. Politika retrieved the text in Other News.