How to Liberate America from Wall Street Rule X a Report from the New Economy Working Group

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How to Liberate America from Wall Street Rule x A Report from the New Economy Working Group

Participating Organizations Business Alliance for Local Living Economies Capital Institute Democracy Collaborative Green America Institute for Policy Studies Living Economies Forum 1 New Economy Network New Rules Project How to Liberate America from WallPublic Street Banking Rule Institute A Report from the New Economy WorkingRSF Social Group Finance YES! Magazine Ec m the New onomy W t fro orkin por g G Re ro A up How to Liberate America from Wall Street Rule

July 2011

Primary Author: David Korten

Contributors: Alissa Barron, Gar Alperovitz, Sarah Anderson, Ellen Brown, John Cavanagh, Chuck Collins, John Fullerton, Jared Gardner, Alisa Gravitz, William Greider, Fran Korten, Michelle Long, Stacy Mitchell, Doug Pibel, Don Shaffer, Michael Shuman, Sarah Stranahan, Gus Speth, and Sarah van Gelder

New Economy W ORKING GROUP Equitable Economies for a Living Earth

Participating Organizations

Business Alliance for Local Living Economies Capital Institute Democracy Collaborative Green America Institute for Policy Studies Living Economies Forum New Economy Network New Rules Project Living Economıes Public Banking Institute RSF Social Finance Forum YES! Magazine

This document is provided for educational purposes at no charge2 to the reader. Reproduction is encouraged in all forms, except that reproduction for sale or for any for-profit use is expressly forbidden. How to Liberate America from Wall Street Rule EditedA by Report Doug from Pibel. the DesignedNew Economy by Tracy Working Loeffelholz Group Dunn. Cover photo by Sönke Hartmann ACKNOWLEDGEMENTS

This report addresses issues and options largely ignored by the current public conversation on financial reform. It confronts the need to not simply fix or reform Wall Street but rather to create a Main Street-based money and banking system accountable to local communities and responsive to their needs. The intention is to redirect the conversation to deeper issues and options that the establishment has so far kept off the table. The essential issues are straightforward matters of values and power readily understood by most everyone—as this report intends to demonstrate.

This report is prepared and issued by the New Economy Working Group (NEWGroup), an informal alliance coordinated by the Institute for Policy Studies (IPS) and comprised of IPS, YES! Magazine, the Business Alliance for Local Living Economies (BALLE), and the Liv- ing Economies Forum, plus individual members Gar Alperovitz, Stacy Mitchell, and Gus Speth. It is co-chaired by John Cavanagh and David Korten, and coordinated by Noel Ortega. NEWGroup’s mission is to articulate and popularize a bold vision and implementing strategy for a New Economy that works for all of Earth’s people and the living systems on which their well-being depends. See the Appendix for NEWGroup’s statement on what we mean by a New Economy.

This report grows out of an ongoing New Economy Transitions discussion series organized by NEWGroup and the New Economy Network—an informal alliance of individuals and organizations coordinated by Sarah Stranahan.

Many individuals and organizations played critical roles and contributed important ideas to the extended conversation on which this report is based. Individuals who made significant contributions by way of concepts, proposals, and feedback include: Alissa Barron, Gar Alp- erovitz, Sarah Anderson, Heather Booth, Ellen Brown, John Cavanagh, Chuck Collins, John Fullerton, Jared Gardner, William Greider, Fran Korten, Michelle Long, Stacy Mitchell, Doug Pibel, Don Shaffer, Michael Shuman, Sarah Stranahan, Gus Speth, and Sarah van Gelder. Participating organizations in addition to the New Economy Working Group partners include: Capital Institute, Democracy Collaborative, New Economy Network, New Rules Project of the Institute for Local Self-Reliance, and Public Banking Institute, and RSF Social Finance.

All of these individuals and organizations have reviewed the final report. They do not necessarily endorse all of the report’s premises, conclusions, and recommendations. All, however, agree on the need for a lively public conversation on the issues and options presented. All are committed to advancing that conversation.

Final responsibility for the report’s content, including errors and omissions, rests with David Korten as the primary author. Korten is co-chair of the New Economy Working Group, co-founder and board chair of YES! Magazine, founder and president of the Living Econo- mies Forum, and a founding board member of the Business Alliance for Local Living Econo- mies (BALLE). His books include Agenda for a New Economy: From Phantom Wealth to Real Wealth, The Great Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He has MBA and Ph.D. degrees from the Stanford Business School. In his earlier career he served as a captain in the U.S. Air Force, a Harvard Business School professor, a Ford Foundation project specialist, and Asia regional adviser on development management to the U.S. Agency for International Development.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Recent Quotations

“In policy terms, the success of the financial sector is not an end in itself, but a means to an end—which is to support the vitality of the real economy and the livelihood of the American people. What really matters to the life of our nation is enabling entrepreneurs to build new businesses that create more well-paying jobs, and enabling families to put a roof over their heads and educate their children.”

Sheila Bair, FDIC Chair, March 16, 2011

“Financial systems are important servants of the economy, but poor masters.”

Martin Wolf, Financial Times chief economics commentator, April 20, 2010

“Of all the many ways of organizing banking, the worst is the one we have today.”

Mervyn King, Governor, Bank of England, October 25, 2010

“I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good.”

Paul Krugman, “The Market Mystique,” New York Times, March 26, 2009

Bank of America protest Boston, 2010 Photo by Aaron Donovan

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group TABLE OF CONTENTS

AcknowledgEments 3 Executive Summary 6 How to Liberate America From Wall Street Rule 8 Finance for a 21st Century America 10 Money as a System of Power 12 The Case for System Redesign 14 A Well-Functioning Money System 14 A Proven Model 15 Wall Street Takeover 16 A Bipartisan Project 16 At the Expense of Community Banking 17 Subsidies for a Doomsday Machine 18 Moral Failure 18 Blaming the Victim 19 Bad Science 19 Flawed Legal Doctrine 20 The Purpose of Business 21 Money System Design 22 Basic Market Principles 22 Money Creation in the Current System 23 Agenda for a Main Street Money System 24 1. Rebuild a National System of Community-Based and Accountable Financial Institutions 25 2. Create a State Partnership Bank in Each of the 50 States 28 3. Restructure the Federal Reserve to Limit Its Function to Money Supply Management and Subject it to Federal Oversight and Public Accountability 29 4. Create A Federal Recovery and Reconstruction Bank 31 5. Rewrite International Trade and Investment Rules to Secure National Ownership, Self-reliance, and Self-determination 32 6. Implement Measures to Secure the Integrity of the Money/Banking/Finance System 35 Citizen Action 36 APPENDIX: Navigating the Transition to a New Economy 39

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group EXECUTIVE SUMMARY

n 2008, Wall Street plunged the U.S. econ- to advance a host of policy initiatives that led to omy into the worst crisis since the Great the erosion of the middle class, an extreme con- Depression. Wall Street received a gener- centration of wealth, a costly financial collapse, ous public bailout and quickly recovered. high rates of unemployment, bankruptcy, and Main Street continues to languish. Politi- housing foreclosure, accelerating environmental ciansI and pundits rarely inquire into the rea- systems failure, and the hollowing out of U.S. sons for the disparity. Doing so would expose industrial, technological, and research capacity. the reality that the United States is ruled as a Wall Street profited all along the way and declared plutocracy, not a democracy, and would focus its social engineering experiment a great success. citizen anger on the structure of the institution- This report presents a six-part agenda for al system that gives Wall Street bankers their ending Wall Street’s disastrous experiment and power. creating a community-based, publicly account- The 2008 financial crash was a direct and able money and banking system responsive to inevitable consequence of a social engineering the needs and opportunities of the United States experiment conducted by Wall Street interests in the 21st century. that allowed Wall Street financial institutions to consolidate their control of the creation and al- 1 location of money beyond the reach of public accountability. The priority of the money system Reverse the process of banking consolidation shifted from funding real investment for building and build a national system of community- community wealth to funding financial games based, community-accountable financial in- designed solely to enrich Wall Street without the stitutions devoted to building community burden of producing anything of real value. wealth. Break up the megabanks and imple- The proper function of money is to facilitate ment tax and regulatory policies that favor ap- the sustainable and equitable utilization of re- propriate-scale community financial institutions sources to fulfill the needs of people, commu- and, in particular, community financial institu- nities, and nature. This calls for a community- tions organized as cooperatives or owned by non- based and democratically accountable system profits devoted to community wealth building. of money, banking, and finance that functions to create and allocate money as a well-regulated 2 public utility. Such a system would be remarkably similar Create a State Partnership Bank in each of to the one that financed the United States’ victory the 50 states to serve as a depository for state in World War II, produced an unprecedented pe- financial assets. State banks can keep these riod of economic stability and prosperity, made funds circulating in state by partnering with America the world’s industrial powerhouse, and community development financial institutions created the American middle class—a system on loans to local home buyers and locally owned that was working well until Wall Street launched enterprises engaged in construction, agricul- its “financial modernization” experiment. ture, industry, and commerce. Wall Street interests mobilized in the 1970s 3

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group 3 markets and the money/banking system. Such measures properly favor productive in- Restructure the Federal Reserve to limit its vestment and render financial speculation and responsibility to managing the money sup- other unproductive financial games illegal and ply, subject it to federal oversight and pub- unprofitable. lic accountability, and require that all newly created funds be applied to funding public in- Critics will argue that the proposed actions frastructure. Assign responsibility for the regu- represent unwarranted governmental interfer- lation of banks and so called “shadow banking” ence in the market. In reality, Wall Street insti- institutions to specialized regulatory agencies. tutions are themselves creations of government and would not exist without governmental in- 4 tervention. Virtually every major Wall Street financial institution is a corporation created by Create a Federal Recovery and Reconstruc- a government-issued charter extending rights tion Bank to finance critical green infrastruc- and privileges not available to an individual. ture projects designated by Congress. It would The money that fuels Wall Street’s speculative be funded with the money that the Federal Re- frenzies originates with the Federal Reserve, a serve creates when it determines a need to ex- creation of government. Most Wall Street cor- pand the money supply. Rather than introducing porations would have gone out of business in that money into the economy through Wall Street the financial crash of 2008 if not for a massive banks, it would instead be introduced through bailout from the U.S. Treasury and the Federal the Federal Recovery and Reconstruction Bank. Reserve. It is fully appropriate, indeed mandatory, for 5 government to intervene to hold to account institutions it bears responsibility for creating and Rewrite international trade and investment securing against their own folly. The Federal rules to secure national ownership, self-reli- government’s practice of creating, subsidizing, ance, and self-determination. Bring interna- and protecting private institutions that serve tional rules into alignment with the foundational no valid public purpose and refuse to accept re- assumptions of trade theory that the ownership of sponsibility for the public consequences of their productive assets belongs to citizens of the country actions must end. in which they are located and that trade between Leadership in implementing the proposed nations is balanced. Hold corporations operating agenda will depend on citizens acting in concert in multiple countries accountable for compliance with their state and local governments to advance with the laws of each country of operation. public understanding of the issues raised here, moving their business from Wall Street to Main 6 Street financial institutions, promoting cooperative or nonprofit ownership of financial institu- Implement appropriate regulatory and fiscal tions, and advocating implementing legislation. measures to secure the integrity of financial

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group HOW TO LIBERATE AMERICA FROM WALL STREET RULE

eginning in the 1970s, Wall Street the U.S. Congress produced a report released in interests carried out a bold social late 2010 documenting Federal Reserve commit- engineering experiment in market ments of $12.3 trillion in emergency funding for deregulation in the guise of pro- Wall Street in the form of low or no interest loans moting market freedom and finan- and the purchase or guarantee of distressed se- Bcial modernization. This experiment removed curities—all in addition to the Congressionally most restraints on the concentration of corpo- authorized bailout. rate power and placed it beyond the reach of The Fed provided nothing for the Main Street democratic public accountability. economy on which the vast majority of people As a consequence, the banking system to depend for employment and the necessities of which We the People have yielded the power to daily life. create and allocate money is now controlled by a The Federal Reserve funding brought the small group of bankers, financiers, and traders Wall Street bailout total to $13 trillion. Yet Wall accountable only to themselves and dedicated Street itself produces nothing of value and has only to maximizing their personal financial re- all but forsaken the primary purpose of a finan- turn. cial sector—to support the efficient, generative The excesses of these largely unregulated production and distribution of real goods and and unaccountable institutions resulted in the services. financial crash of 2008 and plunged the United Wall Street took the bailout money, subse- States and the world into the worst economic quently reported record profits, and rewarded it- crisis since the Great Depression of the 1930s. self with record bonuses. On April 26, 2011 the The U.S. Congress responded almost instantly Standard & Poor’s index of 500 corporations hit with some $700 billion to be quickly disbursed 1,347.24, its highest level since June 17, 2008, by the U.S. Treasury to bail out the Wall Street which was several months before the meltdown. institutions responsible for the crash. The Main The Main Street experience is quite a dif- Street economy received $787 billion in stimu- ferent matter. A primary rationale for the Wall lus funding to be doled out over several years. Street bailout was to get money flowing to the It might seem that Main Street got the great- people and businesses that produce and distrib- er support. However, while Wall Street mobilized ute real goods and services to get them working its media PR machine to focus public anger on again. That is not what happened. the Main Street stimulus funding, the Feder- As of May 2011 some 13.9 million Ameri- al Reserve was implementing a far larger Wall cans were formally classified as unemployed Street bailout operation. An audit ordered by and an additional 800,000 had given up looking

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Photo by Simona Monteleone for work. Gallup estimated that 19.2 percent of directed the money that went to Wall Street to those Americans who wanted work were under- funding good jobs rebuilding America’s physi- employed. More than 656,000 Americans were cal infrastructure, retrofitting our buildings for homeless in 2009. Home foreclosures continue: energy and water conservation, and converting In May 2011, banks and lenders held 872,000 to renewable energy. We would now be experi- foreclosed homes and another million were in encing an economic boom, reducing our nation- the foreclosure process. Estimates of the num- al dependence on foreign oil and environmen- ber of food insecure people in the United States tally devastating coal and gas mining, reducing run to more than 50 million. Experts estimate household expenses for energy and transporta- that $3 trillion would repair and rebuild Amer- tion, and securing the future of our children by ica’s crumbling physical infrastructure, a small reducing the environmental stress on Earth. portion of the $13 trillion the Fed and Treasury The dysfunctional Wall Street money system showered on Wall Street. did none of this and those in charge show no The money system demonstrated its ability interest in voluntarily doing so. There is no pros- to instantly generate whatever amount of money pect for a Main Street recovery so long as Wall was needed to restore Wall Street profits and bo- Street institutions continue to control the cre- nuses. It failed, however, to come up with the ation and allocation of money. money needed by the real-wealth Main Street The Wall Street crash and subsequent devas- economy to put people to work providing needed tation sparked a lively debate and led Congress goods and services. to pass much heralded, but largely toothless, fi- When skilled workers are unemployed and nancial reform legislation. The focus was mainly needs essential to the future of our children are on reducing the risk of a future collapse. unmet solely because of a lack of money, we Most proposals for Wall Street reform do not have a defective money system in serious need address the foundational issue. Nor do propos- of radical redesign. als for a return to a gold standard or a system of A more functional money system would have complementary community currencies.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group The real issue is a failed system created by 3. What are the proper institutional ar- a Wall Street-driven social engineering experi- rangements for a money system designed to ment. Main Street recovery depends on a bot- serve our essential national priorities? tom-to-top restructuring of the institutions that 4. How can we replace the institutions of hold the power to create and allocate the money the failed system we have with institutions on which modern economic life depends. that serve the necessary priorities of a 21st Our common human future depends on cre- century nation? ating a New Economy that functions in sustain- While pundits and politicians may call the pro- able balance with Earth’s biosphere, meets the posals recommended by this report unrealistic, needs of each of Earth’s nearly 7 billion people, they are not so for those of us of an older genera- and gives every person a voice in making the tion. The proposed system is in fact quite similar critical resource allocations that shape their to the sensible and easily understandable system lives. See the Appendix “Navigating the Transi- of predominantly local financial institutions that tion to a New Economy.” pulled the United States out of the Great Depres- It will require an accountable, service-orient- sion, financed the U.S. victory in WWII, created ed system of money, banking, and finance based the American middle class, and built the world’s on values, rules, and institutions very different most powerful and envied economy. than those currently in place. The essential first step is a national conversation about the institutions of money and finance centered on a set of questions rarely raised in the current national conversation: 1. What are our essential priorities for our nation in the 21st century? Finance for 2. What is money? What is wealth? What a 21st Century is the relationship between the two? America

merica at the beginning of the 21st century is suffering the aftermath of its excesses in the last quarter of the 20th century. We are poorly prepared Ato address the challenges and opportunities of a 21st century world that bears only passing re- semblance to the one the United States dominated for more than a half century. The com- munications revolution that allows citizens to communicate instantly and organize globally is fast eroding the foundations of the modern forms of imperial global rule at which the United States excelled, and the global economy’s bur-

Editorial cartoon by Tom Cheney den on nature already exceeds what the bio- for the New Yorker sphere can sustain.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group and guards in overcrowded prisons. We reward Wall Street speculators with tax breaks and public bailouts while inner city communities struggle to survive at the margins of an economy that offers them no place or future. We can recover. We can embrace the imperative to rebuild our infrastructure and economy as an opportunity to re-establish our role as a true world leader. We can create a 21st century America with an energy efficient 21st century Newly laid-off workers in green infrastructure and manufacturing base. a Missouri unemployment line We can renew the American Dream of a vibrant middle-class nation in which those who are will- The world has changed. We in America, how- ing to work hard and play by the rules can expect ever, cling desperately to memories of our role to have good jobs at a family wage with benefits, as the world’s last superpower. We continue to food on the table, good schools for their children, embrace the myth that a growing economy will a comfortable home, and a secure retirement. ultimately end poverty and heal the planet. We We can create a New Economy that secures organize our lives around a crumbling and out- the dream based on the efficient and sustainable moded energy intensive infrastructure. We feed use of our own resources without the burden of our addiction to levels of wasteful consumption maintaining a massive military establishment the biosphere can no longer sustain with import- to secure our access to the resources of other ed oil and products we no longer have the means nations. We can simultaneously reduce our ma- to manufacture, financed by unpayable foreign terial consumption and increase our happiness debts that mortgage our children’s future. Failing and quality of life. to create jobs to employ Americans to do useful Success will require many changes. Among work, we absorb the otherwise unemployed in an them is the redesign of the institutional systems outsized military establishment and as prisoners by which money is created and allocated.

✓ What is Money? Money is essential to modern commerce as a medium of exchange. In earlier days, money took the form of material objects. As commerce grew, certificates redeemable in gold became popular. Most contemporary money is no more than a number stored on a computer hard drive and has value only because people agree to accept it in exchange for things of real value, like their labor. The fact that most money is nothing but a number is not necessarily a problem, so long as we are clear that money itself has no intrinsic value and structure the money creation process to facilitate beneficial exchanges that build the real wealth of individuals, families, communities, and nature. The fact that money is only a system of accounting entries becomes a serious problem when the economy is managed to make the inflation of financial assets its defining purpose and a few individuals are allowed to game the system to enrich themselves free from the exertions of contributing to the production of real wealth.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group the ideal of a one person, one vote democracy is almost inevitably trumped by a one dollar, one vote plutocracy. Most people use money every day and rare- MONEY ly think to ask: “What is money? Where does AS A SYSTEM it come from? Who decides who gets it and for what purpose?” OF POWER Ask an economist “What is money?” and the answer will likely be, “A medium of exchange, a measure of worth, and a storehouse of value.” ost people know that the structure Ask how it is determined who gets it and the of political institutions determines answer will likely be, “the market.” But given the whether political power is con- current concentration of wealth in America, “the centrated in the hands of an elite market” seems to be doing a very bad job of put- rulingM class or is decentralized and distributed ting the money where it’s needed. through democratic institutions accountable to Rarely, if ever, do we hear mention in the the sovereign people. There is far less discussion public discourse that money is simply an ac- and recognition of the fact that the structure of counting entry of no intrinsic value—indeed a society’s financial institutions similarly deter- no existence—outside the human mind. Nor do mines whether economic power is centralized we hear mention that the illusion that money and concentrated or decentralized and distrib- is wealth and that people who make money are uted. Yet the allocation of financial power large- creating wealth allows Wall Street to get away ly determines the allocation of political power. with operating the world’s largest and most prof- When financial power is highly concentrated, itable con game.

✓ Phantom Wealth Phantom wealth is anything that has exchange value, but no intrinsic value. Money that exists only as a number on a computer hard drive is the prime example. It manifests in financial assets that appear or disappear as if by magic as a result of accounting entries, debt pyramids, and the inflation of asset bubbles unrelated to the creation of anything of real value or utility. The high-tech-stock and housing bubbles created phantom wealth in massive amounts. Wall Street is highly proficient at creating phantom wealth. Indeed, it takes pride in its ability to inflate financial assets without bearing the burden of producing anything of real value.

Real Wealth ✓Real wealth has intrinsic value, as contrasted to mere exchange value. Life, not money, is the measure of real-wealth value. Examples include land, labor, knowledge, and physical infrastructure. The most valuable forms of real wealth are beyond price and are unavailable for market purchase. These include healthy, happy children, loving families, caring communities, and a beautiful, healthy, natural environment.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Wall Street has become very clever at com- tutions that control the creation and allocation bining financial games and creative accounting of money shape the fate of nations, businesses to inflate its own financial assets without the large and small, and the boom and bust cycles burden of producing anything of real value. It of economic life. They determine who will live in promotes public policies that depress wages to opulence and who will face death by starvation. make money increasingly scarce for the people Where money flows, there will be jobs; where it who produce real goods and services. It then doesn’t flow, jobs will be in short supply and un- lures the folks who do real work and are strug- employment will be widespread. gling to make ends meet into borrowing against The money system is not a given. It is a func- their homes and credit cards, locking them into tion of human-created design. It can be designed ever growing debt with hidden fees and usuri- to operate as a transparent public utility that

✓ Markets Cannot Substitute for Caring In modern societies, markets and money are important, but neither should rule our lives. In the earliest human societies, money was unknown. People organized their lives around the relationships of family, clan, and tribe. They cared for one another and allocated resources to secure the well-being of all. Resource allocation decisions were local and based on the needs of the community. Over several millennia, money gradually became a substitute for mutual caring as the foundation of the social, economic, and political fabric of society. This process accelerated during the latter half of the 20th century. In contemporary 21st century westernized societies, most of us now organize our lives around earning, spending, borrowing, and saving money. Money is our ticket to food, shelter, transportation, education, recreation, health care, and nearly every other essential of daily life. This extreme dependence on money has sweep- ing implications for values and the distribution of power in society. To restore social health this process must be reversed to reduce our dependence on money in favor of restoring caring relationships in the many critical as- pects of our lives that best remain outside the market.

ous interest rates. Wall Street institutions thus funds productive investments to the benefit of acquire an ever growing portion of the money in all and is democratically accountable to the peo- circulation for their private accounts, thereby ple who depend on it to secure their livelihoods. accumulating ever growing claims on society’s Or it can be designed to facilitate the expropria- real goods and services, and its material assets. tion of society’s real wealth by the system’s most In a society in which access to most of the powerful players—at an unconscionable cost to necessities of daily life depends on access to people, community, and nature. money, the money system becomes the equiva- The existing Wall Street-controlled money lent of a computer’s operating system. It deter- system is a powerful example of the latter. mines how everything else functions. The insti-

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group tem responsive to 21st century reality requires a system restructuring comparable in scope to that of the Roosevelt era.

THE CASE A Well-Functioning FOR SYSTEM Money System REDESIGN A well-functioning money system would direct money to where it connects underutilized re- his is not the first time we’ve seen the sources with unmet needs to provide jobs for money system take down the economy. everyone seeking employment. In so doing, it The financial collapse that brought would support a locally rooted New Economy the Great Depression of the 1930s [See appendix, “Navigating the Transition to a Twas caused by an earlier version of much the New Economy”] that aligns and integrates with same Wall Street excess that caused the crash the structure and dynamics of Earth’s biosphere of 2008. The Roosevelt administration replaced and self-organizes toward four system condi- the phantom-wealth Wall Street system of that tions: day with the real-wealth Main Street money system that financed the United States victory in 1. Ecological Balance World War II, produced an unprecedented pe- 2. Equitable Distribution riod of economic stability and prosperity, made 3. Living Democracy America the world’s industrial powerhouse, and 4. Financial stability created the American middle class. America prospered. Wall Street, however, bri- This money system would: dled at the constraints on its power and profits • Make credit readily available at favorable rates and mobilized in the 1970s to roll back the re- in response to local needs and opportunities for forms. Wall Street now refers to financial deregu- productive investments that build real commu- lation as “financial modernization.” In the pursuit nity assets and enhance community health and of short-term financial gain, Wall Street interests happiness. advanced a host of policy initiatives that led to the • Support family-wage jobs with benefits that erosion of the middle class, an extreme concen- eliminate the need to borrow to support basic tration of wealth, a costly financial collapse, high consumption needs. rates of unemployment, bankruptcy, and housing • Fund needed public investment in physical, foreclosures, accelerating environmental systems social, and environmental capital. failure, and the hollowing out of U.S. industrial, • Eliminate financial speculation, usury, and technological, and research capacity. Wall Street fraud. profited all along the way and declared its social • Recirculate money within bioregional econo- engineering experiment a great success. mies. Reforms aimed at merely reducing unproduc- • Manage the money supply to maintain full em- tive Wall Street risk-taking do not address the ployment with minimal inflation. fact that we are experiencing a system failure like the failure of 1929. Ending the financial chi- The current official money system fails on ev- canery and creating a functional financial sys- ery count.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group in corporate securities to preclude their taking advantage of insider knowledge gained in their roles as lenders, and created the Federal Depos- it Insurance Corporation to guarantee deposits in federally insured banks. The Bank Holding Company Act of 1956 further rooted the money system in local economies by prohibiting a bank holding company head- quartered in one state from acquiring a bank in another state and from engaging in non-banking activities or acquiring voting securities of non- bank companies. These rules maintained local market accountability by limiting the concentra- Jimmy Stewart in “It’s a Wonderful Life,” tion of market power and limited unproductive about a small community building and loan that risk taking by banks that enjoyed Federal guar- worked for the good of its depositors antees and access to cheap credit from the Fed- and the town eral Reserve. These restrictions supplemented the state A Proven Model laws that generally governed banks prior to the 1970s, and limited them to doing business with- The system of community banks, mutual sav- in their home state as regulated public utilities ings and loans, and credit unions put in place as providing basic banking services. Some states a result of the Great Depression is a system with outlawed branch banking altogether and limited proven capacity to perform the desired func- each bank to a single physical location. tions. It is a model still familiar to Americans Traditionally, local financial institutions made who lived through the 1940s, ’50s, and ’60s. Its and held home mortgages with local savings. Since effectiveness is a matter of historical record. they and their depositors bore the risk of default, Those years were not good for everyone—so- there was a strong incentive to assure that bor- ciety was riddled with discrimination based on rowers were credit worthy and that the mortgaged race, age, and gender. The discrimination contin- properties were sound. ues to this day, with communities of color com- This well-regulated, decentralized banking monly targeted for predatory lending schemes. system provides a working model for the system The community-based system proposed here is we need to restore financial and economic integ- designed to support full and equal participation rity and prosperity. by everyone. This can be achieved through a To better understand the wisdom of the post- combination of regulation and effective owner- depression banking system, it is helpful to re- ship participation in financial services institu- view where things went wrong over the last 40 tions by members of excluded communities. years. Banking laws put in place in response to the Great Depression strictly limited bank size, functions, and interest rates. The Glass-Stea- gall Act expanded the regulatory powers of the Federal Reserve, prohibited banks from trading

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group that tax capital gains at a lower rate than ordinary income. This disparity drove a number of changes. First, most corporations reduced or eliminated dividend payments, which are taxed WALL STREET as ordinary income, and self-financed growth with retained earnings to inflate share price— TAKEOVER which produces capital gains. Corporations thus had less need to borrow. rosion of the regulations that secured Furthermore, when corporations did bor- the system’s integrity began in the row, they found it cheaper to borrow from the 1970s with a Supreme Court decision bond market than from a bank. This shift cut that allowed banks to solicit custom- sharply into the earnings of Wall Street banks. ersE across state lines and to charge whatever in- Yet financial institutions not subject to banking terest rates were allowed by the state in which rules, such as hedge funds and private equity the bank was physically located. This opened funds, were making eye-popping returns. Con- the way to charging interest rates considered sequently the banks lobbied to free themselves usurious in the state in which a loan was made. from restrictions applied to them, but not to The Depository Institutions Deregulation and other financial institutions they viewed as their Monetary Control Act of 1980 abolished caps competitors. on mortgage interest rate charges. The Alterna- Wall Street claims that the re-engineered fi- tive Mortgage Transactions Parity Act of 1982 nancial system increased financial efficiency. opened the way to the adjustable rates, balloon From its perspective, it was more efficient be- payments, and interest-only loans that played a cause it increased profits and lowered borrowing major role in the 2008 financial collapse. costs for Wall Street corporations. But from the The Wall Street-engineered system redesign perspective of public benefit, it was highly inef- shifted the focus of the money/banking/finance ficient. The costs of borrowing for small busi- system from investment in real wealth cre- nesses, home buyers, and consumers increased. ation to a focus on using money to make money The system’s priorities shifted from funding pro- through unproductive speculation, arbitrage, ductive investment to financing speculation. usury, deception, and market manipulation. As Speculators profited and major Wall Street play- community banks were bought up and consoli- ers swelled the ranks of Forbes magazine’s list dated into larger regional and national banks, of billionaires. The real economy and the less banks began to transfer mortgage lending risks wealthy bore the price. to investors in bond markets through mecha- nisms that eliminated the incentive for them to assure the creditworthiness of borrowers. A Bipartisan Project The redesign process was driven in part by the ideology of market fundamentalism, which The dismantling of regulatory safeguards began claimed, in effect, that anything that makes a with the Democratic Carter administration. The profit for Wall Street benefits society and should Republican Reagan administration drove it for- be legal. By the distorted Wall Street reckon- ward as a defining ideological mission. ing, any government interference reduces public The Democratic Clinton administration later benefit. picked up from Reagan to dismantle the remain- The process was also driven by tax policies ing constraints on Wall Street concentration and

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group excess. The Riegle-Neal Inter- state Banking and Branching Efficiency Act of 1994 com- pleted the removal of barriers to interstate banking and opened the door for cross-state mergers and acquisitions. The Financial Services Modern- ization Act of 1999, which effectively repealed Glass-Steagall, eliminated barriers to depository banks acquiring and engaging in insurance, in- Editorial cartoon by Polyp.org.uk vestment banking, and brokerage functions. The lios fund small businesses. Locally owned banks actions of these three ad- and credit unions offer the same banking ser- ministrations unleashed vices at lower costs and with less systemic risk. the frenzy of speculative See chart “Average Fees by Size.” excesses that ultimately According to Mitchell, in 1994 the five larg- brought down the global est U.S. banks held only 12 percent of total U.S. economy in 2008. deposits. Fifteen years later, in 2009, they held

The Wall Street-driven social engineering ex- nearly 40 percent. The current cap on bank size periment in deregulation shifted the locus of fi- would allow as few as ten banks to control the nancial power from Main Street to Wall Street, entire U.S. banking system. freed financial institutions from public accountability, redirected the focus of the financial system from funding production to funding speculation, and created what Financial Times chief New Rules Projects economics commentator Martin Wolf described Community Banking Initiative as a “financial doomsday machine.” Average Fees by Size of Financial Institution in 2009 At the Expense Giant Large Medium Small $35 of Community Banking $30

Stacy Mitchell, New Rules Project senior re- $25 searcher, notes that since the onset of banking deregulation, more than half of the local banks $20 with assets of $1 billion in assets or less have $15 disappeared, with disastrous consequences for small community-oriented businesses. Small $10 and mid-sized banks now control only 22 per- $5 Overdraft NSF Stop Payment Order cent of all bank assets but account for 54 percent (bounced check) of small-business lending. The country’s largest Source: Moebs Services Notes: Data includes banks, thrifts, and credit unions. Small institutions are defined 20 banks control 57 percent of bank assets, but as those with $100 million in assets or less. Medium are those between $100 million and $1 billion in assets. Large institutions are $1 billion to $50 billion in assets, and only 18 percent of their commercial loan portfo- giant ones have more than $50 billion.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Subsidies for activities that government should be regulating and taxing out of existence. The result is the fi- a Doomsday Machine nancial doomsday machine that drives toward ever more risky and unproductive financial excess—and will continue to do so until either it is restructured, or government’s financial capacity is exhausted and the entire financial system goes into terminal, unrecoverable collapse.

Editorial cartoon by Ingram Pinn for the Financial Times

The Wall Street takeover has created a little-noted anomaly. Public support and oversight pro- MORAL grams for the banking sector, including deposit FAILURE insurance, mortgage guarantees, and liquidity support, were put in place to support a system of independent local banks that functioned as a he Wall Street crash revealed a system- well-regulated public utility to provide essential ic pattern of extreme greed, deception, financial services to local real-wealth economies. and disregard for any consequence oth- It was a sensible and effective public-private er than personal financial gain. With partnership. Tthe continued absence of adequate regulatory However, these once-sensible government oversight, the deception and fraud continue at programs now guarantee and subsidize loosely great cost to hard-working Americans who are regulated too-big-to-fail private banks that fi- trying to play by the rules. nance speculation, financial bubbles, predatory For example, there have been persistent re- lending, asset stripping, and investment fraud— ports of banks foreclosing on properties without proper documentation. Paul Krugman reports that more recently, investigations by state at- torneys general have uncovered a persistent practice of banks approaching owners of homes scheduled for foreclosure with bogus offers of mortgage modification they have no intention of actually approving. It is a tactic used to extract additional payments and fees from the borrowers to drain them dry financially before ultimately kicking them out of their homes. The crash also revealed the extent to which the Wall Street system created perverse incentives for top management to make decisions that generated risk-free gains for themselves by shift- ing risks to others—including their own share- Editorial cartoon by Eric and Bill Teitelbaum for Tribune Media Services holders. See the inset, “Shareholders Beware!”

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Editorial cartoon by Pat Bagley for the Salt Lake Tribune

Blaming the Victim society, or the biosphere. This elevates greed, long considered a deadly sin, to the status of a moral imperative and legitimates a system that Adding insult to injury, Wall Street interests attracts and promotes to top management po- have sponsored well-funded campaigns to con- sitions sociopathic personalities who feel com- vince the public that government fiscal crises fortable with the system’s perverse moral code. created by the financial crash, the subsequent The system in turn affirms their psychological bank bailouts, and tax breaks for people with disability and rewards it as an asset. incomes over $250,000 are actually due to The financial instability, environmental de- “greedy” teachers, police, firefighters, and public struction, extreme inequality, and political cor- unions rather than greedy bankers. ruption created by Wall Street’s experiment in market fundamentalism should have put this logical and moral perversion to rest long ago. The Bad Science healthy function of society depends on individuals acting with integrity and accepting responsi- Wall Street’s guiding market fundamentalist bility for the consequences of their actions. This ideology rests on the empirically, logically, and is a foundational moral teaching of every major ethically flawed premise that society does best faith tradition and is within the means of every when each individual and enterprise seeks to morally and psychologically mature adult to up- maximize financial return without regard to the hold. It is the standard to which we should all be consequences for other people, the health of held, including corporations and their managers.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Flawed Legal Doctrine agers breached their fiduciary duty by causing a firm to break the law when it was profitable to In The Failure of Corporate Law, (pp. 73-74) Pro- do so.” fessor Kent Greenfield of Boston College observes Such perverse legal interpretations affirm the that the law normalizes, and even defends, cor- inclinations of the unscrupulous and give them porate law breaking. He summarizes the recom- moral and legal cover as they subvert justice and mendation of widely quoted legal scholars Fran democracy by avoiding prosecution for a negoti- Easterbrook and Daniel Fischel that “corpora- ated fee and buy legislation to make their crimes tions should, with some exceptions, seek to legal. It works well for the ethically challenged maximize profits even when they must break the for whom personal profit is the operant ethical law to do so… . As long as the expected penalties standard. It is obviously a disaster for society. from illegality are less than the expected profits, A perverse legal doctrine may absolve indi- the corporation should act illegally.” According vidual corporate managers of legal responsibility to Professor Greenfield “there is not a single con- for their actions; it does not absolve them from temporary example of a court finding that man- their personal moral responsibility.

✓ Shareholders Beware! Corporate CEOs are often criticized for neglecting all interests other than those of their shareholders. Those were the good old days. Corporate governance expert Robert A. G. Monks explains how the structure of the incentive programs of top Wall Street bank managers now leads them to place both shareholders and the public at risk to maximize their personal financial gain. Compensation plans for top corporate managers are designed, in theory, to reward them for maximizing shareholder returns. To this end, executive bonuses are commonly tied to achieving a target increase in the percentage return on equity. As noted in a report of the federal Financial Crisis Inquiry Commission, “One way a firm can boost its return on equity is to buy back some of its own stock; this reduces the size of its [equity] capital and means that its earnings get spread over a smaller base. Another option is to increase its leverage, or borrowing.” Buying back shares reduces the number of shares in the market, thereby increasing earnings per share and driving up the share price. To maintain its total capital base, however, the firm needs to increase borrowing, which essentially means trading equity for debt. The combination increases leverage, i.e., the debt-to-equity ratio, and thereby increases the firm’s risk of default if markets turn down. Pervasive across Wall Street prior to the crash, this pattern of system gaming by top managers explains why Wall Street firms were so heavily overleveraged and had no cushion when the market turned down. Some managers also took a hit, but most walked away with personal fortunes. Shareholders, taxpayers, unemployed workers, and foreclosed homeowners were left to absorb the losses when the bubble bust.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group The Purpose of Business ✓ Dilemma of the Aspiring From a societal perspective the primary reason Philanthropist for any business to exist is to serve its commu- Many wealthy individuals are nity by providing useful goods and services and donating substantial portions of their fulfilling, living-wage employment. A fair profit fortunes to organizations working to is a means to financial viability and a reward for advance economic justice and envi- saving and risk taking. ronmental sustainability. Few are There is, however, an important difference aware that the problems their philan- between a fair profit and maximum profit. To thropy addresses are caused by the make profit the defining purpose of the enter- same institutions through which they prises is to convert a means to an end. build their fortunes. This distinction is particularly important for Some young people take this as a banks and other financial services institutions. model and choose conventional Wall Their power to determine who gets access to Street careers as a way to build a per- credit and who does not is easily abused. Finan- sonal fortune for the purpose of later cial services are as essential to the health and funding beneficial philanthropies. well-being of a modern community as is the pro- They might consider instead devoting vision of water and electricity. It is essential that their careers to developing and serv- they all be managed responsibly in the public ing ethical businesses that create real interest. value and contribute to eliminating The ownership structure of financial insti- the systemic causes of injustice and tutions plays a critical role in creating internal environmental destruction. incentive structures that can support either destructive or responsible behavior. Michael Lewis, a former trader at Salomon Brothers, once a prestigious Wall Street invest- sharks, or even allowed mezzanine CDOs to be ment bank, observes that when Salomon Broth- sold to its customers. The short-term expected ers converted from a private partnership into a gain would not have justified the long-term ex- public corporation in 1981, the partners “made pected loss. (pp. 258-259) a quick killing and transferred the ultimate financial risk from themselves to their sharehold- When institutional structures incentivize im- ers.” This inspired a wave of such conversions, moral behavior, they cultivate a culture of excess unleashing excessive risk taking and helped set and irresponsibility not just as a norm, but even the stage for the 2008 financial crash. Lewis an ideal. Many Wall Street employees come to notes in The Big Short, their jobs with high personal moral standards, but the pressure put on them to set aside their No investment bank owned by its employees personal values by the perverse incentives and would have leveraged itself 35:1, or bought and culture of Wall Street’s defective institutional de- held $50 billion in mezzanine CDOs [a high-risk sign is enormous. category of collateralized debt obligation]. I doubt Cooperative or local public ownership makes any partnership would have sought to game a clear link between the rights and power of the rating agencies, or leapt into bed with loan ownership and the broader public interest. Local

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group businesses owned by individuals who recognize Basic Market Principles their responsibility to the community in which they live and work also make that connection. Wall Street presents itself as the champion of The link is broken, however, when ownership democracy and market capitalism. It in fact rep- shares are publicly traded in distant financial resents a concentration of economic and politi- markets and subject to speculation by “owners” cal power that is both anti-democratic and anti- who have no personal connection to the enter- market. The antidote for Wall Street’s distorted prise or to the community it serves. values and abuse of power is a system that aligns with four basic market principles.

1. Size It is common sense that no bank should be too big to fail. More to the point, no bank should be too big to be held accountable by the place-based MONEY SYSTEM community it serves. The market ideal is a con- DESIGN dition of perfect competition among numerous small enterprises that function within a framework of community values and compete for consumer favor and community support based on ur common future depends on re- price and service. Competition among numerous designing the money/banking sys- community-based financial institutions offering tem to: essential banking services would subject them O all to positive market discipline and eliminate the risk that the failure of an individual insti- 1. Shift the locus of control over money tution would seriously damage even the local creation and allocation from Wall Street to economy, let alone the entire global economy. Main Street. 2. Assure public accountability and instill 2. Ownership a culture of service and moral responsibility. When ownership is rooted in the community of 3. Direct the flow of money to produc- place in which a local financial institution is lo- tive real-wealth Main Street investments cated, owners have a natural stake in assuring that create family wage jobs and produce es- that management decisions reflect the financial, sential goods and services in response to the social, and environmental interests of the com- self-defined needs of people and community. munity rather than the financial interests of 4. Harness the Federal Reserve’s money anonymous absentee owners. There are many creation powers to finance investment in es- appropriate models, as discussed below. sential public goods rather than to fuel Wall Street financial bubbles. 3. Transparency A foundational principle of market economics The measures proposed here will likely draw specifies that markets work best when both buy- criticism from market fundamentalists, who ex- er and seller act with full information. Democ- press alarm at any restraint on Wall Street pow- racy also requires that decisions bearing on the er, but they will in fact serve to restore respon- public interest be open to public view and that sible market discipline.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group voters be fully and accurately informed. Given parent, focused on productive investment, and that the flow of money determines the flow of subject to clear and appropriate market rules, power in modern society, democracy requires the greater the level of public accountability, that the financial system be transparent at every the less the potential for abuse, and the less the level from the Federal Reserve to local commu- need for government oversight to assure system nity banks and credit unions. Secrecy creates a stability and integrity. barrier to essential public scrutiny and invites corruption and insider dealing contrary to the Money Creation public interest. in the Current System 4. Regulation Under our current money system, the Federal Markets need rules to maintain the conditions Reserve is responsible for managing the money of efficient market function. No firm can be al- supply and has a variety of tools for expand- lowed to acquire monopoly power. Full costs ing and contracting it. The tool of immediate must be internalized in market prices. Deci- relevance to this discussion is the Fed’s ability sion makers must be legally accountable for to create new money with a simple accounting the harms they do. Decision making bearing on entry and then put that money into circulation the public interest must be open to public scru- by extending credit to member banks or buying tiny. Setting and enforcing appropriate rules treasury bonds or other public or private securi- through transparent and publicly accountable ties. This money then becomes available to the political processes is an essential governmental banking system to lend to borrowers. function. By the rules of fractional reserve banking, a These are all well-tested, common-sense bank must maintain an amount in reserve equal principles much like those implemented in the to a set percentage of its deposits. Assuming a design of the financial system that once made 10 percent reserve requirement, the new money the U.S. economy the envy of the world. As a introduced into the system by the Federal Re- general rule, the more the power to create mon- serve allows the banking system to expand the ey is decentralized, equitably distributed, trans-

✓ Money Without Growth Critics of the bank-credit money system commonly observe that the demand to repay newly created bank-credit money with interest creates an artificial imperative for the economy to grow simply to generate demand for new debt to create the money required to pay the interest due on prior debt and prevent systemic default. This is an accurate criticism of a Wall Street money system controlled by a privileged class of financiers who in effect rent the money supply to the rest of the society. The problem, however, is not inherent in interest. It is inherent in the division of society between a financial oligarchy that lives from returns on money and those who must borrow to make ends meet. A system of cooperatively owned financial institutions that allow members to rotate between borrower and lender roles and to essentially pay interest to themselves does not create an aggregate growth imperative. Nor does it lead to an inevitable concentration of wealth.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group makes a crucial distinction between generative and extractive economic systems and investments. A Main Street banking system that serves and is accountable to a community of place for funding productive investment is an example of a generative system. A Wall Street banking system controlled by an unaccountable financial oligarchy devoted solely to maximizing financial returns for its exclusive benefit is an example of an extractive system. The purpose of the following agenda is to replace the extractive Wall Street money system we have with the generative Main Street money system on which a pros- perous national and human future depend.

AGENDA FOR A MAIN STREET Farmers Market, Madison, Wisconsin. Photo by Mingfong Jan MONEY SYSTEM money supply by 10 times as credit flows from one bank as a loan to another as a deposit. The ost financial reform proposals fo- reality is more complex, but for current purpos- cus on regulatory measures in- es we will assume that each new dollar intro- tended to limit the damage caused duced into the banking system by the Fed even- by the current system. Such mea- suresM are necessary, but inadequate. tually multiplies to $10 of new credit circulating through the economy. To create economic health, the banking sys- This arrangement can work to the benefit of tem must be restructured to direct the focus the society; if the banking system directs the away from extractive finance—the predatory ex- money it creates into the real-wealth economy to propriation of real wealth—to generative finance fund productive investment and exchange. that expands the pie of real wealth to the ben- When, however, this power is monopolized by efit of all within the limits of healthy biosystem a financial oligarchy solely for self-enrichment, function. it becomes a form of theft, the ultimate instru- The desired transition will require a sus- ment of tyranny, and an intolerable and unsus- tained and orderly process of rebuilding the tainable burden on society. money/banking system from the bottom up as In her forthcoming book tentatively titled Pri- a well-regulated community-accountable pub- vate Ownership for the Common Good, Marjo- lic utility. Necessary measures include restor- rie Kelly, author of The Divine Right of Capital, ing tax and regulatory rules that 1) restrict bank

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group size, 2) limit public guarantees and subsidies to examples of institutions committed to serving financial institutions engaged exclusively in per- communities of color and other groups that the forming basic banking functions, and 3) render banking industry has historically underserved extractive finance illegal and/or unprofitable. or targeted for exploitation. The following are some specific proposals As a group, these smaller community-based suggestive of the possibilities, working up from financial institutions provide a foundation the community to the global level. on which to rebuild a system of community- oriented, real-wealth financial services institu- 1 tions that operate within a strong regulatory framework as transparent public utilities. Rebuild a National System of There are opportunities to achieve real economies of scale and the benefits of risk diversifi- Community-Based and Accountable cation without absorbing or driving out competi- Financial Institutions tors or losing accountability to the communities served. We might begin with the rule of thumb The well-regulated system of locally rooted and that for-profit community banks with conven- accountable financial institutions that we had tional private ownership should be limited to $1 prior to the 1970s provides a reasonable first ap- billion in assets. proximation of the system we must now create. A larger limit may be appropriate for banks Local financial institutions provide the commu- with cooperative ownership structures—for ex- nities they serve with a capacity to mobilize oth- ample credit unions and mutual savings and erwise idle productive resources in response to loans—that firmly link them to the interests local needs and opportunities. Fortunately, we of the places in which they do business. There still have remnants of this system on which to might also be exceptions for for-profit financial rebuild. institutions owned by nonprofit foundations that The New Rules Project reports that the Unit- reinvest profits in the community either through ed States still has about 8,000 credit unions and expanded lending or grants to community orga- more than 7,600 community banks ($1 billion in nizations. The inset “Financial Innovators for a assets or less). Partly as a result of the success 21st Century America” describes some promis- of the “Move Your Money” campaign, which en- ing experiments. courages people to transfer their bank accounts The financial innovations that will build a to local financial institutions, credit unions are 21st Century America are found on Main Street, thriving and experiencing a major expansion in not Wall Street, and center on creating a sys- deposits and lending. tem of Community Development Financial In- Local financial institutions can be just as cus- stitutions (CDFIs), also known as Community tomer unfriendly, discriminatory, and predatory Development Banks, that give priority to build- as any Wall Street bank, but they are more likely ing and sharing community wealth. These are to define themselves as service providers to the privately held, federally insured for-profit banks communities in which they are located. They too and thrift institutions supported by socially mo- need regulations that discourage socially dam- tivated investors who believe that financial insti- aging behavior. A select few are experimenting tutions should put community service ahead of with innovative ownership structures that sup- maximizing profits, and who accept a less than port a strong community-service, social-mission market return for the satisfaction of putting orientation. These include a number of inspiring their personal and institutional wealth to work

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group building a future they can be proud to leave to tion of the banking system. their children. CDFIs finance affordable housing, small busi-  Strengthen and expand the community re- nesses, community facilities, consumers, and investment act that requires banks to meet mixed use and commercial real estate in low in- a minimum standard for reinvesting in the come communities. They also support the devel- communities in which they are located, rec- opment and application of green technologies. ognizing that this should be the primary pur- The basic standards of integrity and commu- pose of any state or federally chartered bank. nity service to which CDFIs are held are properly applied to all financial services institutions in a  Create a Cooperative Community Bank- moral economy, including those serving more ing Institute to provide technical support to affluent communities. groups interested in establishing member- According to the Social Investment Forum, owned financial services and to manage the the combined assets of community development restructuring of banks closed by the FDIC to banks, community development credit unions, break them up and convert them to coopera- community development loan funds, and com- tive community financial institutions. Give munity development venture capital funds in- particular priority to previously underserved creased from $5 billion in assets in 1999 to $41.7 communities. billion in 2010. The Forum calls “community investing…the unsung hero in thousands of towns  Instruct the FDIC that when it takes over a and neighborhoods across America, where it qui- failed bank, rather than facilitating the merg- etly has added jobs, local services, and support er into a larger competitor bank, it will turn for small businesses where traditional lenders the failed bank over to the Cooperative Com- have been unable or unwilling to do so.” munity Banking Institute to restructure and The following actions are recommended at the reorganize. federal level to break up concentrations of financial power and restore and support a system of  Implement an updated version of Glass- Main Street financial institutions as the founda- Steagall to prohibit banks from trading in, tion of America’s 21st Century Banking System: creating a market for, brokering, or financing the purchase of securities, and holding  Implement strict anti-trust enforcement to securities for their own account other than restore market competition and assure that federally guaranteed U.S. Treasuries. no bank is too big to fail or to be held accountable to market forces and democratic  Close the tax loopholes that allow profit- public oversight. able Wall Street banks to avoid U.S. taxes. All banks that operate in the United States  Scale bank taxes, fees, equity and reserve should be chartered and pay taxes in the requirements, and all public subsidies and United States on all profits properly attribut- guarantees for the banking sector to favor able to U.S. operations. smaller community banks over larger Wall Street banks. Introduce a graduated financial assets tax on banks with more than $10 billion in assets to motivate the voluntary breakup of large banks and the deconcentra-

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group ✓ Main Street Financial Innovators We need to look to Main Street for examples of the kinds of financial innovation required to secure America’s future. Here are four examples of community banks that are pioneering unconventional community service models of ownership and governance. The Bremer Bank, featured in David Brancaccio’s PBS documentary “Fixing the Future,” is owned 90 percent by a nonprofit foundation that returns all profits to the community. The bank’s employees own the other 10 percent. The Bremer Bank operates in Minnesota, North Dakota, and Wisconsin, manages $8 billion in assets, and specializes in serving the financial needs of local farms and businesses. One PacificCoast Bank was founded as OneCalifornia Bank to serve low-income communities. Financier Tom Steyer and his wife, Kat Taylor, made an initial philanthropic investment of $22.5 million to create the nonprofit One PacificCoast Foundation. The foundation maintains control of the bank’s mission focus as the legal owner, receives all financial benefits, and engages in charitable and educational grant making in support of the bank’s social goals. In 2010, OneCalifornia Bank acquired ShoreBank Pacific, which specialized in providing loans for local businesses engaged in the restoration and sustainable management of environmental resources. The combined banks now operate as One PacificCoast Bank. Southern Bancorp, with over a billion dollars in assets, is one of America’s largest and most profitable development banks. It is a for-profit bank, but with unusual restrictions on ownership participation. Most of itsshare - holders are foundations and corporations that invested with an expectation of social rather than financial returns; most of them have no rights to receive dividends, share in profits, sell their shares, or convert the bank to a conventional for-profit model. Theboard oversees a family of companies that includes traditional community banks and 501(c)(3) nonprofit organizations. Their mission is to achieve over the course of 20 years three transformational goals for the communities they serve in Arkansas and Mississippi: 1) reduce the poverty rate by 50 percent; 2) reduce the unemployment rate by 50 percent; and 3) improve high school graduation rates by 50 percent. Southern Bancorp offers a full range of banking services to the poor, including checking accounts, credit cards, check cashing, small consumer loans, and several nontraditional financial services such as matched savings accounts and free tax preparation. The banking operations are profitable, but profits go either to -in crease the capital base to support expansion of the lending programs or recirculate back to the poorest elements of the community as banking services or philanthropy. Foundations, corporations, and high net-worth individuals participate financially through grants, loans, and financially unremunerated ownership shares. The Enterprise Cleveland Group (ECG) is an Ohio tax-exempt nonprofit CDFI that assists the growth of small businesses through loan capital and rigorous technical assistance. It manages the Enterprise Growth Fund and helped incubate the Evergreen Cooperative Development Fund (The Fund), which expects to become an independent CDFI within the next year. The fund was established by the Cleveland Foundation, the nation’s first community development foundation, working in partnership with the Democracy Collaborative at the University of Maryland and the Ohio Employee Ownership Center. Together, these groups have launched a growing network of employee-owned businesses that build community wealth and provide employment for Cleveland’s low income communities. The employee-owned companies are in turn committed contractually to dedicate at least 10% of their profits to seeding new investments as co-investors in the Fund. The Fund also raises investment funds from institutions, foundations, government programs, and individuals in the form of grants and socially responsible investment funds.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group 2 Create a State Partnership Bank in Each of the 50 States

State governments can play a major role in keep- ing money circulating within the state to fund productive investments that create jobs and Bank of North Dakota’s current home strengthen state revenues rather than flowing to Wall Street to fund derivatives, currency specu- from private citizens. It funds residential mort- lation, and financial bubbles. gages and student, commercial, and agricultur- The Bank of North Dakota (BND), which al loans and has a special program for business was established in 1919 to promote agriculture, startups. commerce, and industry in North Dakota, has Most loans in which the BND participates played an important and fascinating role in the are initiated by one of the state’s private banks, state’s history. It is the country’s only state- which then seek BND participation to keep owned bank and now serves as a model for state down interest rates and give them the capacity partnership bank initiatives in other states. to expand their lending in support of community The BND is 100 percent owned by the State economies in North Dakota. The BND is a major of North Dakota, and its officers are appointed reason why the State of North Dakota has more by and are employees of the state. It conducts its local banks per capita and a lower default rate business solely in the public interest in partner- than any other U.S. state. It also explains why ship with the state’s local private banks. Its de- its community banks were relatively unscathed posits are primarily interest-bearing accounts of by the Wall Street credit crisis. the state and its political subdivisions. Deposits As awareness of North Dakota’s experience are guaranteed by the full faith and credit of the has spread, partly due to the writings of Ellen State of North Dakota. Brown, interest has grown in applying this mod- By statute all North Dakota State funds, in- el in other states. As of March 2011, state part- cluding funds of state penal, educational, and nership bank legislation had been introduced in industrial insti- eight states: Maryland, Oregon, Hawaii, Wash- tutions must be ington, Illinois, Louisiana, Massachusetts, and deposited in the Virginia, with the support of the Public Banking BND. The BND Institute and the Center for State Innovation. accepts addition- See the Spring 2011 Legislative Guide to Public al deposits from Banking in America. Additional state bank leg- all sources rang- islative initiatives are in the works in Maine and ing from individ- California. 1920, BND’s first home ual private citi- Based on the BND experience, proponents of zens to the U.S. state partnership banks cite four major public government. It has only one physical location, benefits: however, and makes no attempt to compete with 1. Support local job creation by increas- the retail banking arms of other North Dakota ing access to capital for businesses and banks. Less than 2 percent of its deposits are farms within the state in partnership with

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group local financial institutions. ing or oversight. It considers its primary man- 2. Provide stability to the local financial date to be assuring the solvency and profitability sector and reduce defaults and foreclosures of Wall Street’s megabanks. It is a badly mis- without competing with community banks, placed priority given that these banks are man- credit unions, or other financial institu- aged to maximize the compensation packages of tions. their top managers, who acknowledge no obliga- 3. Reduce the state’s cost for basic bank- tion or commitment to serving the interests of ing services. 4. Contribute to funding governmental operations with a portion of the bank’s earnings.

It is recommended that the state governments of each of the 49 state governments that do not yet have a state partnership bank:

 Establish a state partnership bank modeled on the Bank of North Dakota with a mandate to partner with community financial institutions in funding private and public initiatives William Greider: Man with a plan that build strong local economies, rebuild for a transparent and accountable local food systems, advance conversion to Federal Reserve green energy, and create the energy efficient infrastructure essential to a 21st century the United States and its citizens. economy. In an August 3, 2009, The Nation article, “Dismantling the Temple,” William Greider, author of Secrets of the Temple and a leading Fed

3 expert and critic, called the Federal Reserve “the black hole of our democracy—the crucial con- Restructure the Federal Reserve tradiction that keeps the people and their repre- to Limit its Function to Money sentatives from having any voice in these most Supply Management and Subject important public policies… [Its] power depends crucially upon the people not knowing exactly it to Federal Oversight what it does.” and Public Accountability The Federal Reserve bears major responsibility for the 2008 financial collapse. Its former A central bank responsible for money supply chairman, Alan Greenspan, was an ardent pro- management is essential to any modern econo- ponent of market fundamentalism and architect my. The U.S. Federal Reserve fulfills this func- of the policies that unleashed and financed Wall tion for the United States. It has the power to Street excesses. Under his leadership, the Fed create money by the trillions of dollars with a failed to enforce established regulations and few computer key strokes and direct those dol- largely ignored the needs of community banks, lars to the beneficiaries of its choosing. Under while violating his own “free market” principles current rules, it does so with no public account- by providing subsidies and implicit guarantees

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group mercial banks, as well as the “shadow banking system” of hedge funds, private equity firms, and others, to a new regulatory agency established for this specific purpose.

 Instruct the restructured Federal Reserve that when it identifies a need to expand the money supply, rather than directing newly created money to Wall Street banks, the Ben Bernanke, Alan Greenspan, funds will be transferred to the account of a Federal Reserve Former Federal Chairman: Creates Reserve newly created Federal Recovery and Recon- trillions of dollars Chairman: struction Bank as recommended below. with a keystroke Ardent market to spend as he fundamentalist chooses with no and admirer of  Establish a special committee on monetary public accounting Ayn Rand policy in each house of the Congress staffed or oversight by elected members expected to acquire ex- pertise in monetary policy. Consistent with for Wall Street megabanks. When the crash the Constitutional prescription that “The came, the Fed, by then under Ben Bernanke, Congress shall have the power to coin money stepped in to shield Wall Street banks from the [and] regulate the value thereof,” these com- consequences of their reckless decisions. mittees will regularly review Fed action, con- There is an essential need for a transparent sult with the Fed on monetary policy, and and publicly accountable national central bank put forward proposals for Congressional ac- with a substantial degree of political indepen- tion to command new Fed policy directions dence to manage the money supply and oversee as they deem appropriate. banking functions. The following recommendations are adapted  Establish a nonpartisan professionally from a proposal spelled out by Greider in “Dis- staffed Congressional Monetary Policy Office mantling the Temple”: similar to the existing nonpartisan Congres- sional Budget Office to advise the Congres-  Reorganize the Federal Reserve to function sional committees responsible for monetary as a true independent federal agency subject policy oversight. to strict standards of transparency, public scrutiny, audit by the General Accounting  Establish a diverse and rotating Monetary Office, and Congressional oversight. As is Council of Elders to publicly challenge mon- currently the case, it would function under etary policy decisions of both the Fed and a board of governors appointed by the presi- the Congress to assure that monetary policy dent and confirmed by Congress and be re- options receive full public airing. The Coun- sponsible for managing the national money cil would be comprised of experienced, pref- supply to maintain full employment and the erably retired, leaders whose thinking is no value of the currency. longer defined by party politics, personal am- bitions, or institutional roles. They would be  Relieve the Fed of its regulatory function appointed by the President, with Congressio- and assign responsibility for regulating com- nal confirmation.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group card debt, meet payroll, and pay taxes. New tax 4 revenues would flow into governments to fund public programs, and new deposits would flow Create a Federal Recovery and into the banking system at the bottom rather Reconstruction Bank than the top. As the banking system itself is restructured and the public is educated in the William Greider proposed the creation of a Fed- benefits of local banking, this money can flow eral Recovery and Reconstruction Bank (FRRB) increasingly to community financial institutions in a December 6, 2010, article in The Nation, that will reinvest it in the community. “Will the Federal Reserve’s $900 Billion Revive Investing new money in productive infra- a Stalled Economy?” The logic of Greider’s pro- structure in a down economy with large-scale posal is clear and simple. The Fed now flows unemployment and unutilized productive capac- new money into the banking system at the top ity is not inflationary and need not add a penny through Wall Street megabanks in the hope they to the federal deficit or to the burden on taxpay- will choose to use it to expand the availability of ers. If only $3 to $4 trillion of the $12 trillion in credit to the real-wealth Main Street economy. keystroke money created by the Federal Reserve Instead, Greider suggests, inject the new money following the 2008 crisis had been directed to directly into the productive economy through a building an energy efficient green physical in- special institutional mechanism created to fi- frastructure, we would now have a booming na- nance essential green infrastructure under pro- tional economy and be on our way to securing visions that favor local contractors and suppli- the future of America’s children. ers who hire local workers and procure locally. As proposed by Greider, the FRRB could be The money so spent would flow directly to created by an act of Congress and given an ini- construction workers and to local contractors tial list of well-defined projects and appropria- and suppliers as local wages and profits. The re- tions to be funded with interest-free-in-perpe- cipients would use the money to make mortgage tuity performance bonds issued by the Federal payments, put food on the table, pay off credit Reserve. The FRRB would be required to repay

✓ Will corporations or nations be the instrument through which We the People exercise our sovereign powers? Responsibility for controlling and allocating the wealth of the biosphere can reside with governments or corporations, but not both. Global corporations are devoted to monopolizing control of markets, resources, tech- nology, money, and jobs for the financial benefit of their top managers and wealthiest owners. National governments are responsible for the well-being of everyone who resides within their borders and most are legally accountable to their citizens. Corporations are creations of governments and thereby of the people. They enjoy no natural right beyond what the people may choose to grant them. An unregulated corporation is like an uncontrolled cancer that seeks unlimited growth without regard to the consequences for the body on which its own existence depends. It can be a useful servant, but it is a poor master.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group the Federal Reserve only if it failed to deliver The poor are left with decreasing options as on the promised projects. The agreements and the price of basic subsistence rises ever further transactions would be wholly transparent and out of reach. By the rules currently in place, na- subject to Congressional and public oversight to tional governments are prohibited from interfer- assure accountability. The approved project lists ing, even though the security and well-being of and related appropriations would be updated by their own people are placed at extreme risk. Congress as appropriate. Our common future depends on global co- We recommend that the federal government: operation among the world’s people and governments to create economies that assure every  Create a Federal Recovery and Reconstruc- child of every nation the chance for a prosper- tion Bank to fund green public infrastructure ous, secure, and meaningful future irrespective projects authorized by Congress and financed of nationality, race, or religion. This requires new by the sale of interest free performance bonds rules that put the rights and interests of people to the Federal Reserve. ahead of the power and profits of corporations, favor a democratic distribution of power, support positive life-values of cooperation and shar- 5 ing, and limit the ability of the richest among us to roam the globe expropriating what remains of Rewrite International Trade and the world’s diminishing resource base for their Investment Rules to Secure National exclusive private benefit. The basic framework is neatly summarized Ownership, Self-Reliance, by legendary economist John Maynard Keynes and Self-Determination in a 1933 article in the Yale Review.

The current rules of the global economy give pri- I sympathize, therefore, with those who ority to the interests, rights, and power of global would minimize, rather than with those who corporations over the interests, rights, and pow- would maximize, economic entanglement among er of people and the governments responsible for nations. Ideas, knowledge, science, hospitality, their well-being. Money is free to go wherever it travel—these are the things which should of their finds an opportunity for return, no matter what nature be international. But let goods be home- the costs to the countries and peoples involved. spun whenever it is reasonably and conveniently People and nations are pitted against one anoth- possible, and, above all, let finance be primar- er in a global competition for the favor of those ily national… [Emphasis added.] who control access to money. The gap between the profligate and the des- This framework is consistent with the mar- perate grows ever wider. Countries, corpora- ket principles outlined by Adam Smith and the tions, and individuals with the largest numbers trade theory framed by David Ricardo. in their bank accounts span the world to buy In defiance of logic and experience, market up the world’s increasingly scarce land, water, fundamentalists argue that the unrestricted free energy, and mineral resources. Global corpora- flow of goods and money across national bor- tions avoid paying taxes in the countries from ders produces maximum economic benefit for which they extract their largest profits through all players. Their claim is based on the theory of creative accounting that transfers their profits comparative advantage, which says that trade is to offshore tax havens. mutually beneficial when certain essential criti-

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Editorial cartoon by RJ Matson for the St. Louis Post-Dispatch cal conditions are met. emphasis on local specialization and long, vul- Market fundamentalists conveniently ig- nerable, energy-intensive supply lines, is inher- nore the conditions: Each of the trading partner ently unstable. There is extreme and unneces- countries must be largely self-reliant in meet- sarily high risk of global system disruption as ing its own needs, trade only its surplus with its a consequence of a local disaster, such as the neighbors, keep exports and imports in balance, earthquake and tsunami that caused the Fuku- and keep capital [ownership] national. This shima nuclear meltdown. means that trade is mutually beneficial when The interlinked obligations of complex fi- each country is living within its own means and nancial derivatives products create a risk that its productive assets are owned its own citizens. the failure of a single financial institution might When the necessary conditions are met, there is bring down the entire global financial system, no international debt and there are no interna- a fear that compelled the 2008 Wall Street bail- tional capital markets or flows. out. Because of Europe’s interlinked debt obli- The borderless global economy favored by gations, financial failure in one country places market fundamentalists fulfills none of these the entire European economic system at poten- conditions and, far from being beneficial to all, tial risk. primarily benefits the economy’s most powerful Earth’s biosphere offers a well-proven sys- players who, by the removal of the restrictions of tem model that fulfills nature’s equivalent of rules and borders, are free to consolidate their the conditions required for a mutually benefi- control over the world’s real wealth as they wish cial trade system. The biosphere is locally self- for exclusive private benefit. reliant and self-organizing everywhere on Earth Furthermore, the current highly specialized with an extraordinary capacity to optimize the and interdependent global economy, with its use of locally available resources to support life.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Fishing in the Bay of Bengal. Photo by Soumya ([email protected])

A pattern of local self-reliance and system re- essential framework for humanity as we now dundancy assures system resiliency and capac- strive to bring our species into balance with the ity for continuous adaptation and innovation. It biosphere on which the lives of all the world’s offers a proven model for the design of a global people and species depend. system of resilient, locally rooted, self-reliant re- As people come to recognize and accept the gional economies that self-organize toward eco- idea of living within the generative capacities of logical balance, shared prosperity, and living de- their regional ecosystem, the need to eliminate mocracy. wasteful and destructive resource use will be- At the planetary level, our human task is to come evident. The costs of population growth will reorganize human economies to function as lo- become more apparent. Global GDP will shrink, cally self-reliant subsystems of their local eco- and overall human well-being will increase. Our systems. This requires segmenting the border- species will bring itself into balance with Earth’s less global economy into a planetary system of biosphere. And our children’s future will be as- interlinked, self-reliant, bioregional living econo- sured. mies, each rooted in a community of place and We recommend the following actions at the organized to optimize the lives of all who live global level: within the community’s borders. Regional economies properly meet most  Rewrite the rules of global commerce to needs with local production using local resourc- secure the right of each nation to regulate es in the manner of local ecosystems and benefit cross-border financial and trade flows to keep from trading their surplus with their neighbors them in balance, maintain national owner- in return for that which they cannot reasonably ship of economic assets, and optimize na- produce for themselves. This is the trade model tional economic self-reliance. David Ricardo had in mind and it provides an  Require corporations that choose to oper-

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group ate in more than one country to charter an of criminal penalties and tax policy. independent local subsidiary in each country Appropriate actions include: of operation with majority ownership by that country’s nationals. Each such subsidiary  Introduce a financial speculation tax on all would be democratically accountable to the securities transactions. A small tax will have government of its host country for following negligible impact on real investment but will its rules and paying its taxes. render most high-speed computerized trading unprofitable and eliminate an important  Create an International Finance Organiza- source of unearned financial profit and need- tion (IFO) responsible for working with member less market volatility. countries to achieve and maintain balance and stability in international trade and financial re-  Eliminate the temporary Bush tax cuts on lationships. It would issue and facilitate imple- incomes of $250,000 or more, the carried mentation of recommendations for an orderly interest loophole that taxes the earnings of process of winding down international debts, Wall Street traders at preferential capital trade imbalances, and foreign ownership of gains rates, and the capital gains tax treat- productive assets to establish the integrity and ment of profits from the sale of assets held self-determination of all the world’s domestic for less than six months. economies and to eliminate and prevent cross- border financial speculation.  Facilitate employee and community buy- outs of publicly traded corporations to re- 6 place short-term absentee owners with rooted, responsible owners. Implement Measures  Prohibit trading in securities with bor- to Secure the Integrity of rowed money. It is perfectly appropriate to the Money/Banking/Finance System borrow to finance a productive enterprise. No public purpose is served by allowing either There is no place in a healthy economy for individuals or institutions to gamble on mar- fraud, deception, usury, financial bubbles, and ket trades with borrowed money. It simply high stakes gambling. Consequently, there is invites market manipulation and instability. no legitimate reason for government to provide subsidies and protections to banks that engage  Prohibit financial institutions from trad- in such activities. There is no legitimate place ing for their own accounts in securities they in a healthy economy for hedge funds devoted sell to the public. Prohibit selling or borrow- to highly leveraged high-stakes gambling with ing against an asset not owned by the seller, other people’s money to maximize management insuring an asset not owned by the insured, fees or for private equity funds engaged in cor- issuing any security not directly backed by a porate consolidation and asset stripping. These real asset, or buying an option for a commod- activities impose intolerable costs on society ity the buyer lacks the capacity to receive while producing nothing of value in return. They and store. are appropriately treated as a form of theft and should be made illegal by appropriate regulation Implementation of these recommendations and/or rendered unprofitable by a combination will evoke charges of governmental interference

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group in the market. It is a less than compelling argu- or the sale of bonds. Bonds can still be sold to ment when applied to a sector that owes its very individual investors or to retirement and other existence to extensive government subsidies and funds engaged in making long-term investments guarantees. for honest long-term returns. Most Wall Street institutions are corporations created and granted special privileges by a government-issued charter. The government helps banks secure deposits by insuring deposi- tor accounts. Every time the Federal Reserve acts to secure and fund the banking system, it interferes with the market. CITIZEN Expecting certain standards of public ac- ACTION countability from the beneficiaries of these governmental actions to secure fairness and integrity is nothing more than a sensible quid pro quo. A more valid criticism of these proposals is ost of the recommendations put that these actions will shut down much of Wall forth above require political action Street as we know it. That, of course, is the in- by the federal government. The tention. Society will be relieved of a costly and necessary leadership is unlikely, unsustainable burden. The brainpower and however,M to come from within the Washington computing capacity now devoted to trading elec- political establishment so long as it operates as tronic documents in speculative financial mar- a wholly owned subsidiary of Wall Street. In mat- kets will be freed up to address society’s pressing ters of financial reform, as in all matters related social and environmental needs and to provide to establishing and maintaining the democrat- financial services to life-serving Main Street en- ic accountability of society’s governing institu- terprises. tions, strong and independent citizen organiza- Wall Street defenders will also raise the questions are essential. tion of how the operations of global corporations Implementation of the agenda outlined here will be financed without large Wall Street banks. will depend on effective broad-based citizen ac- This is also a false issue. As many as 70 per- tion from outside the establishment to build cent of trades on Wall Street are high frequency public consciousness of the institutional and trades made by computers that may hold a given cultural sources of their economic distress and asset no more than a few microseconds. This has engage public participation in: nothing to do with productive investment and is • Building new institutions grounded in simply a device for extracting unearned profits. community, It is a source of market instability and will not • Creating a moral culture of cooperation be missed by anyone other than the speculators and sharing, and who profit from it. • Demanding that elected officials change The proper function of finance is to fund pro- the rules to support the new institutions and ductive long-term investment in the real econo- culture. my to provide real goods and services in response Success will depend on transcending the di- to consumer demand. Most global corporations vision between conservatives who blame Wash- engaged in producing things of intrinsic value ington for their pain and liberals who blame are either self-financed with retained earnings Wall Street. Both have a piece of the truth. The

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group Move Your Money campaign protesting outside a bank in Wisconsin. Photo by Karen Hickey real villain is the Wall Street-Washington axis of power controlled by members of an ambitious  Use all available means of print and elec- ruling class who seek unlimited power without tronic communication to raise public con- responsibility for, or accountability to, the rest sciousness and understanding of money as a of the society. Members of this alliance secure system of power, the corruption of the Wall their own power by skillfully playing both ends Street money system, alternatives to the of the political spectrum against one another. Wall Street system, and the ways in which in- The division, however, is not inevitable. The dividuals and organizations can make a con- issues transcend established political labels. It structive difference. is well within the means of responsible, mature adults from across the political spectrum to rec-  Organize Resilience Circles, workshops and ognize our common interest in creating institu- public teach-ins to facilitate shared learning, tions that are democratically accountable to the assure people that others share their concern will and interests of the sovereign people. and commitment, and build the connections Creating a money and banking system that essential to effective citizen mobilization. roots power and accountability in people and communities of place is essential to secure for ev-  Support the Move Your Money campaign en- eryone the opportunity to assume responsibility couraging people to move their savings, credit for their own well-being, as well as for the well-be- cards, and borrowing from Wall Street banks ing of their families, and communities. It requires to local banks. Initiate and support campaigns citizen action from individuals and organizations to encourage businesses, religious institu- working at all levels from the local to the national. tions, public agencies, retirement funds, and The following are some of the possibilities: institutional investors to do the same.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group he most powerful master is the one  Document and publicize stories of in- who rules unseen and unmentioned. novative ownership and governance mod- In modern societies, the money system els for Community Development Financial is that master. Those who control the Institutions that give community service Tcreation and allocation of money control the na- priority over profit and provide innovative tion’s values and priorities. ownership and governance models to in- When the system gives to an elite group of spire others. private bankers the power to determine who has access to money and who does not, it renders  Support U.S. Uncut and its campaigns of democracy impotent and virtually assures an nonviolent direct action designed to focus extreme and growing gap between the profligate public attention on corporate tax dodgers few and the desperate many. When the citizenry and their responsibility for public budget is uneducated in the nature of money and the deficits. implications of money system design, it is pow- erless to resist.  Initiate or support a campaign in your state Our common future depends on educating for a state-owned partnership bank. ourselves regarding the true nature of money and the implications of the structure of the insti-  Support public policy campaigns calling tutional system by which it is created and allo- for structural reforms in the money/banking cated. Only then will we create a democratically system. accountable money system that operates as our servant, not our master.  Start a credit union or cooperative community bank in your community.

 Foundations or high net worth philanthro- pists might consider leveraging their financial resources to advance local economic development by capitalizing a community bank on the model of the Bremer Bank, One Paci- ficCoast Bank, Southern Bancorp, or the En- terprise Cleveland Group.

 Unions might consider using pension funds to capitalize union owned banks devoted to financing worker co-ops on the model of the Mondragon cooperatives in Basque Spain. Farmers market in Troy, New York. Photo by Kyle McDonald

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group APPENDIX

Navigating the Transition to a New Economy

The New Economy Working Group

he clearer our vision of the economic system we seek and of Tthe ways it differs in its values and structures from the system we have, the greater our ability to prioritize policy changes that support the vision. Wall Street corporate interests designed and manage the existing economic system to maximize financial returns to themselves. This system treats the conversion of the real living wealth of the many to the phantom financial wealth of the few as a net gain for society. The system’s internal dynamics increase financial instability, wealth concentration, environmental stress, and political corruption—thus creating a growing risk of environmental social, environmental, political, and economic collapse.

Healthy System Conditions nity through active citizen participation. Financial stability to avoid needless costly The existing economic system has long been economic disruption. destined to fail because it works in opposition to Achieving these system outcomes requires a Earth’s biosphere. It uses an unsustainable fos- transition in the economic system’s sil-fuel subsidy to mine, suppress, and control Defining value from money to life, the biosphere’s dynamic generative processes in Locus of power from global to local, a suicidal quest for short-term financial gain. Favored dynamic from competition to coop- The human future depends on navigat- eration, ing a transition to a real-wealth economy—a Defining ethic from externalizing costs to New Economy—that works in cooperative inte- embracing responsibility, and gral partnership with the biosphere to secure Primary purpose from growing the financial healthy, happy lives for all. Appropriate system fortunes of the few to enhancing the health and values and institutional structures support dy- well-being of everyone. namic self-organization toward: Ecological balance between aggregate hu- Transition Strategy man consumption and the regenerative capacity of Earth’s biosphere. The strategy to achieve this system transition has Equitable distribution of real wealth to meet three essential elements: the needs of all. 1. Change the cultural stories that frame Living democracy to secure economic and the relevant actions: The prevailing cultural sto- political accountability to people and commu- ry/belief that there is no viable alternative to the

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group economic and political systems now in place may health to make money for people who already have be the single greatest barrier to change. Success- more than they need. ful transition requires replacing this story with the Solution: Living Indicators. Optimize sus- story that there is an alternative based on properly tainable human well-being by evaluating economic regulated markets and real democracy with the performance against indicators of human- and nat- potential to work for everyone. Other stories that ural-systems health. The Bhutan experiment with a must change include those by which we under- happiness index is an excellent start. stand the purpose of the economy, the nature of wealth, and the possibilities of our human nature. 2 2. Create a new economic reality by building Problem: Wall Street Money and Banking a new economy from the bottom up: Perhaps System. Wall Street control of the creation and our greatest source of hope is the fact that count- allocation of money gives control of our lives and less individuals and groups are already engaged national priorities to institutions devoted solely to in rebuilding values-based Main Street economies maximizing their own financial return through -fi comprised of independent, locally owned, human- nancial games that contribute nothing to the cre- scale enterprises devoted to serving the needs of ation of anything of real value. people, community, and nature. In addition to cre- Solution: Main Street Money and Banking ating a new reality, this contributes to changing System. Decentralize and democratize the money the story and builds a supporting political constit- system so that the power to create and allocate mon- uency for new rules. ey resides in a system of community banks, mutual 3. Change the rules of the game: Current savings and loans, and credit unions accountable to public rules and policies favor the rights and in- local people and devoted to serving local financial terests of Wall Street corporations. It is our demo- needs. It would look much like the system we had cratic right and responsibility to replace them with in the United States before the disastrous banking rules and policies that favor the rights and inter- deregulation that began in the 1970s. ests of people, communities, and nature. 3 Seven Action Clusters Problem: Wealth Concentration. Wall Street interests use their political power to cut taxes for Given the scope and complexity of the policy the rich and advance trade, fiscal, workplace, and changes required to favor the emergent New Econ- social policies that suppress wages, erode worker omy system over the self-destructing Old Economy protections, and cut services and safety nets for system, it is helpful to group needed policy actions those most in need. The ever more extreme con- into seven clusters focused on seven critical sys- centration of wealth leads to ever greater social tem pressure points. Each addresses a key source dysfunction. of Old Economy failure. Solution: Equitable Distribution. Implement fiscal, workplace, and social policies that distribute 1 income and ownership equitably. Equitable societ- Problem: Financial Indicators. The use of ies are healthier, happier, more democratic, and financial indicators like gross domestic product avoid both extravagance and desperation. and the Dow Jones industrial average to assess 4 the performance of the economy gives priority to financial values over life values. This leads to Problem: Soulless Corporations with Absen- the sacrifice of human, community, and natural tee Owners. An ideology of market fundamental-

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group ism has embedded a belief in the public culture that the sole purpose and responsibility of a busi- 6 ness enterprise is to maximize financial returns Problem: Fragmented, Colonized Local to its owners. This belief legitimates the control Economies. Fragmented local economies depen- of productive resources by soulless corporations dent on global corporations for jobs and basic possessed of artificial rights bestowed by unelect- goods and services leave people and nature cap- ed judges that seek immediate profit for absentee tive to the financial interests of distant institutions owners without regard for social and environmen- that have no concern for their well-being and no tal consequences. accountability to their interests. Solution: Living Enterprises with Respon- Solution: Self-Reliant Bio-Regional Econo- sible Living Owners. Advance public policies that mies. Pursue local economic development programs favor living enterprises with living, locally rooted, that build diversified, self-reliant, energy efficient, responsible owners who seek a living return that democratically self-organizing regional economies includes a healthy community and a healthy natu- comprised of locally owned living enterprises ac- ral environment. Cooperative, worker- and commu- countable to local owners and devoted to serving nity-owned enterprises are positive examples. Tax local needs. away the profits of short-term capital gains to discourage the speculative public trading of corporate 7 shares by absentee owners. Problem: Global Rules By and For Corpora- tions. Global rules formulated and enforced by 5 corporate dominated institutions like the WTO fa- Problem: Market Monopolies and Big Mon- cilitate and enforce the concentration of corporate ey Politics. Global corporations operate beyond power and place it beyond democratic account- public accountability to monopolize economic and ability. political power under unified management with Solution: Global Rules By and For People. no external accountability. They use this power to Restructure global rules and institutions to limit the manipulate markets, extract public subsidies, and concentration of corporate power and secure the externalize social and environmental costs—all in economic sovereignty of people by assuring that violation of foundational principles of socially ef- any corporation that operates across national bor- ficient fair market competition and one-person, ders is democratically accountable to the communi- one-vote democracy. ties in which it operates. Solution: Real Markets/Real Democracy. Create real rule-based markets and real democracy by breaking up concentrations of corporate power, New Economy barring corporations from competing with living hu- W ORKING GROUP man beings for political power, and implementing Equitable Economies for a Living Earth rules and incentives that support social and envi- The New Economy Working Group (NEWGroup) is an in- ronmental cost internalization, and fair competi- formal alliance of the Institute for Policy Studies (IPS), YES! Magazine, the Business Alliance for Local Living Economies tion. Corporations are creations of government and (BALLE), and the Living Economies Forum, plus individual government has a responsibility to assure that they members Gar Alperovitz, Stacy Mitchell, and Gus Speth. For are democratically accountable and play by proper further development of the NEWGroup framework presented market rules. here see neweconomyworkinggroup.org, livingeconomies- forum.org, and David Korten, Agenda for a New Economy: From Phantom Wealth to Real Wealth, 2nd edition.

How to Liberate America from Wall Street Rule A Report from the New Economy Working Group