Poolside paranoia by Bill Kay

A well-meaning gathering at a plush poolside house in Santa Monica last night gave me a vivid insight into how Hitler rose to power - and how a modern-day demagog might repeat that deadly feat amid the ashes of today's economic crisis.
I was attending the launch of a book, Web of Debt by Ellen Hodgson Brown, which tries to explain the banking failures that led to the current recession and suggest remedies. Her favourite is for every US state - and, eventually - every country in the world to create its own publicly-owned bank, as already exists in North Dakota.
Brown said: "State banks could lend money to the state governments, but that is OK if it's being used for productive projects." That, like any nationalised industry, begs the question of what is productive or desirable. The beauty of nationalised banks in the present climate, is that such decisions are not being made by rapacious, money-grabbing, self-centred private bankers eager to generate huge bonuses for themselves with total disregard for public policy and the wishes of the rest of the population.
"Once you understand what credit it," said Brown, "you don't need bankers." But you do need someone to run banks, and if they also understand credit - as I would hope - then what are they but bankers? Of course they would start as outsiders determined not to repeat the mistakes of career bankers, but I predict that they would "go native" within a short time and become as bankerly as any Citigroup executive. Bank of North Dakota's website says: "It was never intended for Bank of North Dakota to compete with or replace existing banks. Instead, Bank of North Dakota was created to partner with other banks and assist them in meeting the needs of the citizens of North Dakota."
State banks are not unknown in the rest of the world, particularly in those countries with a strong agricultural economy like North Dakota. That is how France's Credit Agricole started, and communist countries have naturally had their own banks. The 1945 British Labour Government contented itself with nationalising the Bank of England, on the grounds that the central bank could and would control the commercial banks. It did so for 50 years, until the present Labour government took its supervisory powers away and gave them to the Financial Services Authority, UK counterpart of the Securities and Exchange Commission. Some UK commentators argue that that decision took the supervisors took far away from the sharp end, where the financial action is.
The evening began bizarrely, with a video of a tit-and-bum show - dignified as burlesque, as if that somehow made it respectable - which earned tut-tuts from some of the women in the audience, followed by a couple of songs. We were then given an extended advert for KTLK, a left-wing radio station that aims to balance the right-wing rants of Rush Limbaugh and his ilk. The plug came from an aspiring Limbaugh of the Left, Richard Greene, described in the press release as "master of charisma, one of the leading communication coaches in the world". I was less than whelmed, a view shared by a man at the back of the room who, after ten minutes of this self-promotion, asked impatiently when we were going to hear from Brown. Greene was reduced to whingeing uncharismatically that such disrespect was out of order. Maybe, but it did bring Brown to the mike. Lesson one to the communication coach: don't overstay your welcome.
At the outset of her talk, Brown earned gasps of disgust and grunts of approval by describing banks as Ponzi schemes, thus simultaneously smearing them as illegal and bracketing them with Bernie Madoff and Allen Stanford, two prominent villains of the stock market collapse. Her argument was that, like Ponzi schemes, they need new customers to pay off the old ones - but no more than any other business needs a constant throughput of customers. But banks are at root much simpler than that: they take in money, for which they pay a small rate of interest, and lend it at a higher rate of interest. The difference is their profit. No Ponzi required. Indeed, banks could run like savings and loans, relying on the same bunch of savers to provide cash for a standing army of borrowers.
Brown's big revelation was that banks lend more than ten times the amount of money they receive from depositors - a "secret" known as credit creation that is taught to every first-year economics student. Indeed, Brown later explained that the practice dated back to 17th century goldsmiths who noticed that their customers preferred trading promissory notes to walking around with lumps of gold. I believe it goes back a lot further than the 17th century, but the point is that it is neither new nor sinister.
The presentation went downhill from there. Brown told us that derivatives were "basically bets" - yes, but no more than any other investment as they all depend on a view of the future, even bank deposits. In fact derivatives are widely used in industry and farming to hedge against the risk of prices going bad. If that is a bet, so is an insurance policy and virtually every other financial instrument.
Then we got an attack on the Bank for International Settlements, smeared as Hitler's bank even though Brown later lauded the Fuhrer for "standing up to the banks, like Lincoln and Kennedy, who got shot for doing so". The BIS, it seems, was partly to blame for the credit crisis because of its insistence on mark to market rules and maintaining banks' capital ratio at no less than 8%, which strikes me as an edict designed to rein in bank lending rather than encouraging more foolhardiness. Brown skipped over the fact that BIS is owned by 55 central banks, including the European Central Bank and those of Russia and the US. It may not be blameless but it is certainly not the evil Swiss secret dictator that Brown made it out to be. But her dire warning was well received in a room buzzing with paranoia and conspiracy theories.
Creating state banks was the fourth of four possible crisis remedies Brown outlined. The first was nationalising the Federal Reserve, which I reckon would make next to no difference as if it steps out of line at present the government would soon slap it down. In any case, Brown admitted she "rather liked" Fed chairman Ben Bernanke "because he's a professor". Hmm.
Next came the proposal that the Fed should fund federal projects by issuing bonds - fine, but that begs the question of who is going to buy these bonds and on what terms they are going to be sold.
Thirdly, Brown suggested nationalising the present commercial banks, but only after their balance sheets had been cleaned up by getting rid of the derivatives and toxic loans. No word of the impact on the counterparties to those securities, who happen to include pension and mutual funds serving millions of ordinary Americans.
What did this chaotic jumble of an evening have to do with the rise of Hitler. I am not for a second suggesting that this well-meaning author, a lawyer who could easily be mistaken for a bank CEO's PA, might be about to march on the White House at the head of a mass army of revolutionaries. But she was feeding on the same fertile ground of fear, ignorance, prejudice, anger and simplistic solutions that enabled Hitler to overthrow the previous German government. And that is the greatest danger of this crisis: that it could spawn a populist leader who wrests power from a legitimate president whose policies are judged to have failed.
Overthrow Obama? This crowd of well-fed, affluent Democrats? Yes, because in the end even he came in for cosying up to the banks - so, Greene suggested, that he might avoid Lincoln and Kennedy's fate.
But in the end Brown revealed her true colours - as a middle-aged hippy. She said: "We hippies of the 1960s had that vision that abundance is everywhere, if we could just fix the system." Aaaawwww, sweet.
And, for the old gent who plaintively asked what he and his white-haired wife should do with their meagre savings, Brown giggled as she gave the opinion that "the stock market looks pretty good now." A closet capitalist after all.