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Oct 172011

Based on a post from 14 March 2009

In early 2009 independent economic policy analyst, Geoff Gitlen, modestly proposed an intriguing solution for future banking crises that Occupy Wall Street activists would do well to embrace: reorganize all banks as non-profit organizations.

[Note: The following is my interpretation of the Gitlen Plan. If it isn't in quotation marks, Mr. Gitlen didn't say it.]

The rationale for the Gitlen Plan is straightforward and unexceptional. Already, credit unions in the USA operate as non-profit organizations, and it would be a small step to expand this to include all institutions that are regulated by the Fed or the Office of the Comptroller of the Currency (OCC). Commercial banks already are among the most heavily regulated firms in the economically developed parts of the world. Bank managers are encumbered by all manner of restrictions on how they can conduct their businesses, and they are burdened by social requirements, e.g., ethnic, gender, racial, and socioeconomic preferences in lending that favor individuals who are members of politically favored groups. Meanwhile, depositors are insured against loss, which removes one source of critical oversight.

Reorganizing banks as non-profit organizations would be much less radical than having the central government buy controlling interests in them, as we saw in 2008/2009.

For starters, non-profit status would remove the perverse incentives that lead the managers of insured banks to engage in highly risky and politically motivated — or mandated — practices. If banks operated so as to cover their expenses, but not to seek excessive profits, the same way that the Red Cross, the United Way, and other large charities operate, bank executives still could earn salaries that are many times the national average, work in prestigious and comfortable offices, and jet around the world to exotic places and hobnob with power brokers and washed-up pop stars.

However, they would not be under pressure from shareholders to take on the kinds of risks that led to the S&L Crisis and the recent housing/subprime mess.

Gitlen argues, given that banks do not operate as normal commercial enterprises, why take half-measures? Rather than perpetuate one-foot-on-the-brake-one-foot-on-the-gas [accelerator] policies, where regulators compel banks to pursue social goals on the one hand, and banks have coopted regulators* on the other hand, Gitlen argues that we should heave this syncretic mess overboard to the sharks and crabs and embrace an institutional structure that could be more harmonious with the realities of modern banking.

The Gitlen Plan is in stark contrast to libertarian calls for deregulation, free banking, and market discipline, which have no hope of gaining political traction in today’s climate, where otherwise intelligent individuals can decry the current crisis — with utterly straight faces and in the sincerest tones — as a failure of unbridled capitalism, even though the firms at the center of the crisis are among the most heavily regulated in the world, outside of healthcare. With this kind of doublethink passing as conventional wisdom from the corner pub to the halls of Congress, we must choose among viable options and put away our dog-eared copies of Atlas Shrugged, Human Action, and Das Kapital for now.

Gitlen has identified one such option:

Reorganize banks as non-profit organizations, and let those individuals who work for banks and chafe at the notion of working for a charitable organization seek employment in private equity funds and offshore finance centers, like Bermuda, Grand Cayman, Hong Kong, Nassau, and Singapore.

As in all things in life, there is a cost for every benefit, and the Gitlen Plan is not cost-free, but the choice is not between utopia and the status quo, but between available options. Given the worldwide movement for change loosely organized under the Occupy Wall Street banner, the Gitlen Plan could be the most viable option.

Invest accordingly.

Prof. Evans

* For more on regulatory capture and the current crisis, see Buiter (2008) (Warning: PDF).