Abstract
Historically, there has been little agreement between advocates of radical financial reform and socialist theoreticians. However, in the new circumstances of the twenty-first century, a productive synthesis of these two traditions might be possible. Drawing on the franchise model of credit creation elaborated by Robert C. Hockett and the dysfunctions created by the extreme concentration of private financial institutions, this article outlines a reform agenda that would both democratize finance and facilitate the flow of funds into valuable forms of investment that are currently starved for resources. If the new institutions envisioned in this proposal were able to take root and expand, they could ultimately facilitate a transition to socialism, defined as the subordination of the market to democratic politics.
This article proposes a strategy for radical financial reform that could be implemented in the United States or in other developed market economies. 1 It builds on the argument elaborated by Robert C. Hockett in “Finance without Financiers” that credit creation is ultimately dependent on the power and resources of governments. 2 As Hockett shows, that authority has usually been deployed to underwrite the profitability of banks and other for-profit financial institutions. The proposal here is that governmental authority would be used to build up a network of decentralized, nonprofit financial institutions that would significantly improve the allocation of credit with positive results for economic welfare. 3 If these positive economic results were to materialize, radical financial reform might then provide the critical missing element that could facilitate a democratic and gradual transition to socialism. 4
The radical financial reforms proposed here are intended to extend the influence of democratic decision making into the economy in several distinct ways. First, differential access to credit is now one of the central factors in reproducing social, economic, and political inequalities. 5 The very rich can borrow tens of millions of dollars at extremely favorable interest rates whereas low-income households might be able to borrow a few hundred dollars from payday lenders or loan sharks at confiscatory interest rates. By improving credit access for poor and working-class people and for their organizations, these reforms could narrow that gap. This, in turn, could increase the ability of people to pursue both individual and collective plans such as starting a new business that might be for profit or collectively owned, pursuing more education, or working to upgrade a neighborhood.
Second, as private financial institutions are incrementally displaced by public and nonprofit ones, there would be an increase in democratic input into decisions about what activities are financed at the most favorable interest rates. At present, flows of finance at low interest rates favor hedge funds, private equity funds, and speculative investments in financial instruments. These flows have created “a winner takes all economy” that has significantly increased employment insecurity and income and wealth inequality and created the concentration of wealth and income documented by Thomas Piketty and his colleagues. 6
The alternative envisioned here involves two significant changes. First, there would be a dramatic increase in the financial resources held by locally based and nonprofit financial institutions that would prioritize the borrowing needs of those communities, resulting in more financing of affordable housing, small businesses, nonprofits, and employee cooperatives. Second, large-scale investments in research and development, infrastructure, clean energy, and energy conservation would be financed by a network of nonprofit financial entities structured to be responsive to public input.
Through these two channels, an ever-greater share of the investment flows in the economy would be responsive to the preferences of the public. 7 To be sure, this shift would require an ongoing process of social learning—a different kind of financial literacy. People would need to understand the different consequences for society of subsidizing investments in speculative financial instruments versus subsidizing investments in affordable housing. 8 Nor is the goal that all investment decisions would be determined by public deliberations; there would still be significant room for private investment. Rather the idea is a gradual democratization of decisions about critical investments that shape the society’s future. Over time, the public would have a greater voice in decisions governing investments in infrastructure, energy use, land use, transportation, education, health care, and new technologies.
This radical reform agenda has become politically relevant now because the process of financialization over the last four decades has channeled credit creation into several narrow tracks, so that a number of increasingly vital economic activities have been left without sufficient access to credit at reasonable interest rates. If these reforms were implemented, the federal government would provide enhanced subsidies making it possible for both existing and newly created nonprofit financial institutions to develop the expertise required to finance these critical economic activities sustainably.
The debate in the United States over the Green New Deal that began after the 2018 midterm elections suggests that there is now a political constituency that favors major structural reforms to the US economy to address the global climate crisis and the ever-intensifying inequality of wealth and income. If that constituency were to achieve greater levels of political support, the financial reforms proposed here would dovetail with the Green New Deal agenda.
In fact, the US federal government has a long history of creating new credit channels to finance previously neglected types of economic activity. It happened in 1916 with the Farm Loan Act and in 1932 with the passage of the Federal Home Loan Bank Act, which became the basis for the New Deal’s dramatic expansion of home mortgage financing. 9 More recent federal initiatives expanded the availability of credit for small businesses, student loans, community development, and alternative energy initiatives. In short, what is proposed here represents a deepening of earlier efforts rather than a completely new direction. Moreover, as a legacy of earlier reform projects, the United States has a remarkably strong infrastructure already in place to provide support to nonprofit financial institutions.
The full version of this financial reform agenda includes reforms to the global financial system that would work in synergy with the domestic reforms. 10 I will not address those global reforms at any length for reasons of space, but they embrace three key elements. First, there is a need to reduce the dollar’s global role and to create a global credit institution along the lines of Keynes’s proposal in the 1940s for an International Clearing Union. 11 Second, the amount of lending organized through nonprofit global development banks would be greatly increased. Finally, a global transaction tax and other measures would lower the flows of private global capital. Suffice it to say, those global reforms are plausible because the current international monetary and financial system is plagued with very serious problems. The system almost collapsed in the 2008–9 global financial crisis, and the subsequent decade has seen a slow and precarious economic recovery. 12 The stance of the US government has been the major obstacle to global reform, since there is broad interest around the world in revising what has become a dysfunctional global set of rules and institutions.
The argument of this article will be developed in five parts. The first section places the proposals in the context of historic debates over financial reform. The second lays out two critical factors that have opened up the possibilities of a new financial reform politics. The third section describes the reforms and explains why it might be possible to mobilize majority support for them. The next sections lay out the standard dilemmas of socialist transition and show how radical financial reform could make it possible for a socialist government to manage that transition successfully. The last section is a brief conclusion.
Financial Reform in Historical Context
Recent events in Greece suggest the possibility of a surprising convergence between radical financial reform and socialist politics. Starting in 2010, austerity policies imposed by the European Union produced high unemployment and economic misery. On January 25, 2015, Syriza—a left-wing party opposed to austerity—won the Greek parliamentary election and was able to form a government. What followed were months of painful negotiations with the Troika—the European Commission, the European Central Bank, and the International Monetary Fund—over the terms of a new loan that Greece needed if it was to stay in the Eurozone. The Syriza finance minister, Yanis Varoufakis, a leftist economist, became extremely unpopular with the Troika negotiators because of his unrelenting insistence that Greece be released from the prison of austerity. Ultimately, Varoufakis was replaced as finance minister, and the Syriza government conceded to a continuation of austerity. 13
After leaving the government, Varoufakis revealed that his department had been working on a contingency plan if Greece could not come to terms with the Troika. The plan responded to the threat that the European Central Bank would stop providing lines of credit to Greece’s banking system, which would force Greek banks to close their doors. The resulting absence of credit would bring the entire Greek economy to a standstill.
Varoufakis and his team planned to use the nation’s tax identification system to construct a parallel credit system that could function while the Greek banking system was out of commission. In the absence of the clearing of checks by banks, individuals and businesses would be able to pay their bills by having this newly created parallel banking system debit or credit their tax account by the amount required. Those with continuing debt positions would have to pay some interest, but many of those who were economically active would see their debits offset by inflows of payments from others. Once this system was in place, ordinary economic activity could continue even without a banking system, and it might even be possible to reverse years of austerity in Greece if those running the parallel system made access to credit available at favorable interest rates. Some businesses that had been previously starved for credit could conceivably expand their operations. The idea was to use the government’s authority to create a public system of credit creation.
To be sure, this plan was never implemented, and its mere existence was seized on by other political parties in Greece to tell voters that the Syriza government was reckless and dangerous. Nevertheless, the incident is important because it represents a rare moment of convergence between two political and intellectual currents that have been deeply at odds for many decades. The first is the tradition of Marxian socialism that has historically adopted quite orthodox positions on questions of finance. Polanyi argues that after World War I, socialist intellectuals were virtually unanimous in advocating a return to the gold standard; even when socialist parties won national elections, they were usually quite reluctant to engage in deficit financing or other unorthodox policies. 14
The second tradition is more heterogeneous; it includes thinkers of both the right and the left who imagined that redesigning the mechanisms through which credit is allocated in the economy could be a path to significant economic and political improvements. 15 We can call this group radical financial reformers; representative figures include C.H. Douglas, who inspired “social credit” parties in a number of English-speaking countries and various left-wing proponents of local money systems based on labor time. 16 In The General Theory, John Maynard Keynes pays tribute to Silvio Gesell, a German-born thinker who lived for a time in Argentina and proposed the concept of stamped money. 17 Currency would lose its value unless it was stamped each month, and the cost of the stamps would provide a powerful incentive against hoarding. 18
With a few notable exceptions, there has been little love lost between these two traditions. 19 For one thing, fascists in the 1920s and 1930s often made use of these alternative credit ideas as part of their effort to blame whatever economic hardships people were suffering on the machinations of Jewish bankers.
Moreover, Marxists historically argued that reforms of the financial system were unlikely to make a significant difference as long as the existing system of private property remained unchanged. Even in critiques of finance capitalism, the argument was that financial firms were exerting greater ownership and control over the production process.
However, the Syriza incident suggests that there is now a possibility of a creative synthesis between these two traditions. This possibility is facilitated by the centrality of financialization in the current world economy and a willingness of socialist intellectuals to recognize that the power of private property can be diminished through regulatory initiatives and the creation of alternative institutions. 20 I will suggest here that radical financial reform could actually provide the means to overcome the formidable barriers to a democratic transition to socialism. Elected left governments from the 1930s onward that promised radical change have had to contend with capital flight and capital strikes when they try to implement measures that threaten the interests of property holders. This kind of disruptive resistance generally results in a downturn in economic output that undermines political support for the leftist government. Wright uses the concept of “transition trough” to describe these periods of diminished output that have repeatedly frustrated democratic socialist advances. 21
But what if an elected left government were able to take advantage of an incremental program of financial reforms that had created a parallel financial system alongside the existing financial structures? It might be possible that after a ten-year interval when these parallel financial institutions became rooted in the economy, the left government would be able to survive a direct conflict with propertied interests because the historic weapons of capital strikes and capital flight would no longer be sufficient to cause a sharp economic downturn. In short, radical financial reform could weaken the structural power of capital to resist a broader program of socialist transition. In this sense, the democratization of finance would be the paradigmatic real utopia because over a decade or two, it might transform the balance of power in the struggle to shape the social order.
What Has Changed?
There are two reasons that a synthesis between socialist theory and radical financial reform might now be feasible. The first is that changes in the economy have created a serious mismatch between the existing financial system and actual investment needs. One key change has been a shift in the role of large corporations in the economy. To be sure, the United States and other developed market economies continue to be dominated by giant corporate entities; several of these firms now boast market capitalization exceeding $1 trillion dollars. However, this continuity obscures some important changes.
Today’s dominant firms, such as Facebook and Apple, employ far fewer people and account for a much smaller share of aggregate investment than did such firms as General Motors and General Electric a generation ago. Facebook employs fewer than 40,000 people, and Apple has only about 90,000 employees in the United States. 22 To be sure, they accomplish this leanness in different ways. Facebook relies on hundreds of millions of users to produce content, while Apple depends both on subcontractors in Asia who produce its products and on networks of independent developers to produce new apps for its mobile devices.
The tendency to offload risky and expensive investments to others has become a standard corporate strategy in this period. Uber, Lyft, and Airbnb expect drivers or homeowners to purchase new automobiles or upgrade their rental units. Many of the biggest firms have embraced “open innovation,” meaning they depend on small and medium-size enterprises to do the difficult and risky work of innovation. 23 When a big firm sees a new product or process that has potential, they either license it or simply purchase the firm that did the development work.
Another element of the relative decline in corporate investment is the growing importance to developed economies of infrastructure investment. Infrastructure is, almost by definition, a public good; private firms are usually unable to make these investments on their own. The public sector must either pay most of the cost itself or make deals with private firms that assure them a future flow of profits. Either way, financing infrastructure involves a fiscal burden on the public sector.
The urgent reality is that the cost of needed infrastructure has been rising relentlessly. Populations are increasingly concentrated in urban areas that require much more infrastructure per capita in order to manage flows of goods, people, energy, water, and sewage. Moreover, new transportation and communication technologies usually do not displace earlier ones, so simultaneous investments in multiple systems are needed. Transportation now requires infrastructure spending for water-borne transport, roads, railroads, air travel, and space travel. In communications, we have landlines, broadcasting, cable systems, mobile phones, the existing internet, and plans for a much more advanced system for transmitting vast amounts of digital data. Furthermore, most infrastructure projects—both maintenance and new construction—are labor intensive as compared to manufacturing, which drives up their relative cost. Finally, climate change is necessitating major new investments to make cities more resilient and protect populations from deadly storms and rising sea levels.
These trends that diminish the corporate role in investment create a mismatch because the existing financial system is structured to direct the flow of capital toward large firms. Much of the society’s savings, such as pension funds, are invested in the stock market. However, big corporations in the aggregate no longer raise money by issuing new stocks; they have been returning money to investors through dividends and share buybacks. 24
Government entities at all levels continue to have access to capital at very favorable interest rates, but the public sector’s ability to fund critical infrastructure spending has been constrained by fiscal crisis and conservative antispending ideology. Republicans have repeatedly created huge federal budget deficits by passing massive tax cuts that benefit big firms and the very rich. However, when the Democrats control the presidency, the Republicans have fought ferociously against public spending programs that would increase the federal deficit.
For nongovernmental entities such as households, nonprofits, and small and medium-size firms, credit might be available, but it is usually at very high interest rates. This is critical because an investment financed at a 4 percent interest rate might have a very high probability of success, but the same project financed at 14 percent is likely to be far riskier. Think, for example, of a nonprofit agency wanting to build affordable, multifamily housing. The higher interest rate translates directly into higher rent charges that could easily undermine the original intention of making the units affordable. In short, the consequence of the mismatch is that many potentially productive investments do not occur, resulting in less aggregate investment and slower growth in economic output.
We can identify four distinct categories of economic activity in the United States that are chronically constrained by the absence of credit at reasonable rates. We will discuss each one in turn.
Infrastructure Spending Including Green Investments
Estimates from the American Society of Civil Engineers (ASCE) are that the United States will have an infrastructure deficit of something on the order of $4.6 trillion over the next decade. 25 Governments at the federal, state, and local level have been experiencing fiscal stress for a generation and are reluctant to take on the increased debt burden required to finance vitally needed infrastructure maintenance and improvement. There have been limited experiments with public-private partnerships to address infrastructure needs, such as privately financed toll roads, but the results have not been particularly promising.
Moreover, the ASCE estimates do not include the huge costs of the clean energy infrastructure required to address climate change. There is now ample evidence that a variety of outlays by households and firms to reduce energy consumption or to install solar panels or wind turbines will produce a high return on investment. 26 For example, replacing incandescent bulbs with LED bulbs can pay for itself in a year, and insulating walls and attics in single-family homes can often recoup the expenditures in two to four years. In some states with prices at current levels, solar panels will pay for themselves in four or five years. Making these types of investments could have a huge effect in reducing greenhouse gases, but many are not being made because households and firms lack sufficient cash reserves and most existing financial intermediaries have shown little interest in these forms of lending.
Lending for Small and Medium-Size Businesses and Nonprofit Groups
Repeated surveys show that many small and medium-size businesses feel credit constraints that limit the opportunities to expand their activities. 27 Again, the major barrier is the rate of interest that they have to pay for credit. If one has to borrow on a credit card at an annual interest rate of 18 percent, very few opportunities for expansion exist that are likely to produce returns that would cover that debt burden. However, if the rate of interest were closer to 4 percent, for example, there would be a far greater menu of opportunities.
One of the key issues in this kind of lending is the question of collateral. Financial intermediaries are generally far more interested in lending when the loan is backed by assets that can be forfeited in the event of a default. The consequence is that lending in this sector tends to be tilted in favor of those engaged in real estate development. Firms in other sectors of the economy face much higher hurdles in gaining access to credit.
The problem of credit is thus particularly vexing for high-tech start-ups seeking to produce new products or new processes. Firms that have grown from start-ups to major corporations are widely celebrated as central to the vitality of the United States economy. But the reality is that many of start-ups fail to cross what is called “the valley of death”—the interval between proving the concept for a new product and having a commercial prototype. 28 For many high-tech firms, this period can be five to ten years. Although a variety of federal programs, such as the Small Business Innovation Research Program, help firms through the early years of the process, survival becomes more difficult with every passing year.
No Predatory Lending to Households
The deepening economic inequality in the United States has meant that many households in the bottom half of the income distribution are effectively excluded from any kind of nonpredatory access to credit. As Jacob Hacker has shown, household income for many is highly unstable. Dramatic ups and downs are common as a result of health crises, spells of unemployment, encounters with the legal system, or marital instability; and such shocks are usually not offset by government transfer payments. 29 This instability of household income leads to extremely low scores on measures of creditworthiness. 30
Beyond the sheer misery of being denied credit on reasonable terms, the consequence is that it is far harder for millions of households to engage in “bootstrap” operations that have historically been routes to upward mobility. 31 For example, small-scale entrepreneurial efforts such as running a food truck or fixing up decaying housing are impossible without some source of cheap credit. Similarly, it is difficult to finance the acquisition of new skills by adults without borrowing.
Nonprofit Development of Affordable Housing
The United States faces an acute crisis of affordable housing. 32 The focus of developers has been on building high-end apartment towers that produce high economic returns. Those who are not rich have to compete for older housing, much of which is located in less desirable neighborhoods. And population pressure on this existing housing stock has driven rents to unprecedentedly high levels. Many households are forced to pay more than half of their incomes in rent for apartments that are small or poorly maintained; younger people have returned to the parental home in increasing numbers. If capital at reasonable rates were available, many more nonprofits could enter this field and either build new units or upgrade existing structures.
This mismatch has become so acute in the United States, in part, because of a series of mergers and takeovers that have given a relatively small number of very large banks a dominant role in both consumer deposits and outstanding loans. As of 2018, the top ten banks were responsible for 53.7 percent of outstanding loans. 33 Moreover, there is evidence that the very largest of these banks have significantly reduced their small-business lending since the 2008 crisis, with the consequence that such borrowers face even higher interest rates. 34
Financial Mismatch
In summary, the financial mismatch is blocking huge amounts of productive investment that would improve the lives of millions of people. At the same time, the mismatch encourages destabilizing speculative activity and destructive financial practices. Since the corporate sector is no longer in need of outside capital, the financial sector directs ever-growing quantities of cheap credit to speculation in financial assets. The consequence has been the spectacular growth of hedge funds, private equity funds, and trading in complex derivative instruments. As was clearly demonstrated in the global financial crisis in 2008–9, this increased speculative activity can be deeply destabilizing.
This financing mismatch creates a political opportunity for radical financial reform, since the growth of speculation is dangerous and accelerates the growth of income inequality. At the same time, the lack of finance for needed productive activity makes millions of people worse off than they would be otherwise and slows the response to the crisis of climate change.
The second factor that facilitates a new synthesis between socialism and radical financial reform is that we now have a better perspective on the workings of the credit system than did earlier generations of left theorists. This new understanding, outlined by Robert C. Hockett in his contribution to this issue, is basically the franchise theory of credit creation. The argument is that in the modern era of central banks as lenders of last resort, the state basically grants a franchise to private actors to engage in the process of credit creation. Without the state’s ultimate agreement to protect these franchise holders from failure, they would not be able to engage in the process of creating credit out of thin air. But this process of credit creation is essential; without it, economic activity would quickly decelerate in the absence of access to credit at reasonable rates.
The critical feature of the franchise model is that it makes clear where power actually lies. As franchisees, the private financial intermediaries that create credit are obviously dependent on the government. Without the franchise arrangement, the risky activity of credit creation would sooner or later lead them to fail. However, these institutions also have a very strong interest in hiding the reality of this dependence because government authorities must also regulate the financial sector and place limits on the riskiness of their portfolios. Since the banks and other financial institutions make greater profits by taking on higher levels of risk, they are constantly facing conflicts with regulators about the appropriate level of risk. 35
Their main strategy for gaining leverage on the regulators is to insist that the dependence runs in the opposite direction. They do this by arguing that banks and other financial institutions engage in the critical task of intermediation—connecting lenders and borrowers. They further claim that if they are unable to engage in the vital task of intermediation, economic activity would slow to a crawl and government revenues would fall precipitously. It follows that financial intermediaries must be granted maximal freedom to direct credit where it is needed. Excessive regulation of finance will “kill the goose that lays the golden eggs.” Of course, the argument gains force because of the widely held belief that the fastest route to prosperity is to depend on the self-regulating dynamic of markets. 36
Because the franchise model cuts through this ideological haze, it opens up a whole set of alternative policy options. One is to replace the current framework of financial regulation with the public utility model. That model is based on the idea that when a private firm is granted monopoly rights to provide electricity or natural gas to homes and businesses in a certain geographical area, it is appropriate for regulators to control the amount of profit that the firm can earn from that business. In exchange for giving a particular financial institution the franchise to create credit, the government should set a maximum amount of profit that the firm could earn. Such an approach would have the great advantage of discouraging financial institutions from taking on higher levels of risk, since they would not be able to retain profits in excess of the government-set ceiling.
The more radical option is for the government to expand the category of franchisees that are authorized to create credit to entities that are not organized to pursue profitability. This expansion can happen in two ways. One is for the government to create in-house franchisees that would be public sector agencies with the ability to create credit. The other is to encourage the creation of nonprofit institutions or entities organized by local or state governments that would be credit-creating franchisees. In both these scenarios, granting the franchise would have to be accompanied by regulatory measures, since public or nonprofit entities would still have incentives to engage in irresponsible or unsustainable credit creation. 37 But as we have argued, the United States has implemented parts of this scenario in the past. Hence, the reforms that are proposed do not create something fundamentally new but simply expand the scale of what already exists.
Another advantage of the franchise framework is that it highlights how much agency governments already exercise in shaping their nation’s financial system. In the United States, for example, there was a very long history of a highly diversified banking sector with thousands of small and medium-size banks. That changed in the 1980s when the Reagan administration decided that insufficient industry concentration was hurting the competitiveness of US banks in the global economy. 38 Government policies drove a huge wave of mergers and takeovers over a quarter century that ended with a handful of giant banks controlling more than 50 percent of all consumer deposits. In Germany, in contrast, a very different set of government policies worked to preserve a tripartite structure in which the terrain was divided among private banks, landesbanks (state banks), and cooperative banks. 39
The point is that even theorists who draw on a Marxian framework for understanding the dynamics of capitalism have to acknowledge what we can call the relative autonomy of the financial superstructure. 40 The logic of extracting surplus value at the point of production does not dictate a particular form or structure for a society’s financial system. There is great diversity in the structure of financial institutions in different developed market societies, with some relying heavily on public sector financial entities and others demonstrating considerable regulatory effectiveness in keeping destabilizing speculative finance in check. In short, state policies have been and continue to be critical in determining what a nation’s financial industry looks like. All of this suggests that reform initiatives in this sphere could be successful. 41
The Reform Proposal
The franchise framework alerts us to the reality that the federal government has repeatedly mobilized to finance activities that were otherwise facing prohibitively high interest rates. Financing for the intercontinental railroad was organized through federal land grants to the railroad companies. The firms then used the land as collateral to float bonds in the United Kingdom that financed the actual construction. In 1916, after decades of agrarian protest over the lack of cheap credit for farmers, Congress passed the Federal Farm Loan Act that funded cooperative lending institutions for agricultural credit. In 1932, the Federal Home Loan Bank Act created the infrastructure for the development of savings and loans to provide mortgage credits to homeowners. 42 In 1958, federal legislation created Small Business Investment Companies that had access to guaranteed financing through the Small Business Administration. This was the mechanism that created the modern venture capital industry.
In 1994, the Clinton administration pushed through legislation creating the Community Development Investment Fund, which makes equity investments in institutions that have been qualified as Community Development Financial Institutions (CDFIs). Many of these began as grassroots initiatives to revitalize impoverished communities. As of 2018, there were 1,000 CDFIs with total assets of $130 billion. In 2010, additional legislation made it possible for these CDFIs to float bonds that were guaranteed by the federal government. 43
Also in 2010, the US Congress approved a $30 billion Small Business Lending Fund that provided low-interest loans to community banks that were willing to increase their small-business lending. Ultimately, only about $4 billion of government lending was approved, but it is estimated that the program boosted small-business lending by $19 billion. 44
The reforms proposed here are intended to operate on a much larger scale than those previous initiatives. But the point is that Congress, usually as a result of grassroots pressure, has repeatedly shown a willingness to use the federal franchising power to create credit to finance activities that were neglected by established financial institutions. This could happen on a much larger scale with sufficient pressure by an organized movement.
The Specifics
The reform project involves creating a complete set of new or revitalized nonprofit financial institutions with the ability to provide the credit required to fund the four systematically underfunded activities described earlier. The government would extend its financial franchise to permit the scaling up over a ten-year period of these alternative financial institutions. Moreover, as these institutions matured, they would provide attractive savings and investment instruments for people who wanted an alternative to giant banks and mutual funds. As this parallel system expanded, it would finance high levels of productive activity, and it would change capital flows to reduce the size and power of entrenched financial institutions.
Before we get to the details, an important issue needs to be addressed. At the core of conservative rhetoric is the notion that governments should live within their means and authorize only expenditures that are equal to revenues in any given year. But this notion, of course, is contrary to how both businesses and households operate. Private economic actors distinguish between current expenditures and capital expenditures, and they routinely borrow to finance home purchases or the building of new productive capacity on the theory that such outlays produce a flow of services over a long life span that will exceed the annual payments required to pay off the debt. Governments, of course, also make capital expenditures such as building new airports or roads or sewage treatment plants. It follows logically that governments should also maintain separate accounts for current and capital expenditures and that it is appropriate for them to borrow to finance some share of these capital outlays.
Over the last thirty years of fiscal crisis and heightened anxieties about government borrowing, there has been a strong tendency to rely on gimmicks to finance urgently needed capital outlays. In some states, for example, governments have made deals with private firms to build new highways with the promise that the firm will be able to collect all of the tolls for fifty or hundred years. In Chicago, for reasons that are unclear, the city turned over the collection of revenue from parking meters to a private firm. Such measures have been justified with the rhetoric of privatization, but they make neither economic nor political sense.
In short, there are certain vital government outlays that should be financed entirely out of current revenues or through direct government borrowing. Off-budget mechanisms, such as financing through a public infrastructure bank or loan guarantee arrangements or credit creation by nonprofit entities, are appropriate for other categories of outlays where risks are greater, returns are uncertain, or the mix between public and private benefits is more complicated. But, of course, establishing decision rules concerning which expenditures should be financed through which type of mechanism ought to be the result of a process of democratic deliberation.
With this proviso, we can establish three design principles for the process of radical financial reform. The first is that the newly created institutions should be structured as not for profit. This is critical for two reasons. First, profit maximizing is the fundamental source of financial instability identified by Hyman Minsky. 45 Financial institutions that seek to maximize profits face the constant temptation to increase the riskiness of their loan portfolios because higher risk equals higher returns. For Minsky, the only way to hold this temptation in check is through regulation, but both the power and zeal of regulatory institutions tend to fluctuate with changes in the political balance of power and fading memories of the last financial disaster. Nonprofit institutions are not immune to this temptation; there are examples of nonprofits that have been overly aggressive and bid up the salaries of their executives. But the combination of a nonprofit orientation, some mechanisms of democratic accountability for these entities, and strong regulatory institutions will reduce significantly the danger of Minskyan instability.
The second reason they should be nonprofits is that lending is basically a labor-intensive activity. Face-to-face work is usually needed to extract from borrowers the disclosures that are necessary to evaluate their creditworthiness. And it is here that profit-making financial intermediaries run into problems. Hiring loan officers is expensive, and the number of transactions that each loan officer can handle in a given day or week is limited. When banks compare the profits to be generated by loan officers with the profits generated by portfolio managers who buy and sell various securities, the portfolio managers invariably win.
For-profit banks have addressed this problem through automation. They have eliminated the high staffing costs of various forms of lending by using computer programs to score and evaluate loan applications. But such techniques tend to redefine creditworthiness as resemblance to a statistical norm. If the applicant looks similar to people who have paid off loans in the past, then he or she will receive credit on reasonable terms. If not, he or she will be denied credit or, as with subprime mortgage lending, be required to pay a substantially higher interest rate than other borrowers. Since failure rates of small-business loans are high, the computerized algorithms tend to limit credit to firms that have already proved themselves or to firms that have collateral in the form of real property. This practice tends to bias credit availability toward real estate development and away from other endeavors.
But nonprofit institutions with a mission defined as facilitating economic development in a particular geographical area will be motivated to employ loan officers who develop the skills necessary to provide credit to individuals and firms who fall outside the parameters of the standard lending algorithms. Such institutions are far more likely to employ criteria of creditworthiness that emphasize the particular history of an individual or firm. With appropriate support from government, they would also be in a position to engage in synergistic lending by extending credit to multiple firms in the same area.
The second design principle is decentralization, which will vary from extensive to moderate depending on which niche these institutions are seeking to fill. In the case of lending to households and small businesses and funding clean energy, for example, the idea would be similar to the 1916 and 1932 legislative initiatives—to encourage the creation of many new financial institutions at the local level that would rely on local knowledge to distinguish between promising and risky loans. In the case of infrastructure spending or support for high-technology start-ups, the idea would be to divide the work across five or ten institutions with some degree of regional specialization. The goal is to avoid recreating the centralization and giant size of the dominant Wall Street institutions. Maintaining decentralization is also a way to assure that none of these institutions grow too large and there continues to be some element of competition, so that those seeking funding have multiple options.
The final design principle is specialization: each of these financial institutions should focus on one or two niches in the market. They would not attempt to become financial generalists. Financial intermediaries require specialized knowledge to become proficient in distinguishing between prospective borrowers with a reasonable chance of success and those likely to fail. Moreover, the criteria for distinguishing between meritorious and deficient proposals are quite different for energy retrofits, small business loans, or infrastructure projects.
One can see this logic at work in the field of venture capital, where a handful of relatively small firms have been extraordinarily successful in providing critical financing to firms that ended by being spectacularly successful. The venture capital partners have been deeply rooted in Silicon Valley for decades, so they have developed a strong intuitive sense of what is likely to work and what is not. Moreover, the transaction is not an arm’s length one: the venture capital partners play an ongoing role in giving the firms they support advice, network connections, and other types of help. Nevertheless, success is probabilistic. Venture capitalists make their money from the 5 or 10 percent of supported firms that end up experiencing rapid growth and successful stock market offerings.
In short, venture capital is a knowledge industry that works because partners accumulate a deep understanding of the challenges that firms in their market sector will face. 46 In the same way, loan officers or cooperating entities in this network of nonprofit financial intermediaries will develop parallel forms of expertise that allow them to become more effective over time in deciding which loans to approve and which to deny. Moreover, as their knowledge develops, they will also be able to give loan applicants useful advice that can help improve their success in using the funds productively. But such expertise is far more likely to develop in the context of specialization, where loan officers are dealing repeatedly with, for example, infrastructure projects or the retail sector, so that they are able to learn from past experiences.
Alternative Financial Institutions
The proposal here involves four distinct elements that are designed to work together to produce a highly effective parallel credit system. In each case, legislation will be needed to create or expand existing institutions. In addition, ongoing government efforts, including new regulatory measures, will be needed to make sure these efforts are successful and do not produce perverse consequences.
An expanded sector of nonprofit retail financial institutions
There are numerous models for nonprofit financial institutions that collect deposits from a geographical area and then relend the funds for mortgages and to finance local business activity. Schneiberg describes how mutual banks were created in the pre–New Deal period as part of an infrastructure of local bottom-up institutions that played an important economic role, particularly in the upper Midwest. 47 Deeg describes the important role that public and cooperative banks have played in financing economic activity in Germany, especially investments by small and medium-size enterprises, over recent decades. 48 Mendel and her coauthors describe the complex web of locally based financial institutions that have supported the development of the social economy in Quebec starting around 1996. 49
The main emphasis here is on credit unions because they already have a significant presence within the US financial marketplace. Credit unions are nonprofit financial institutions organized as cooperatives, in which each member has one vote and the opportunity to elect the organization’s leadership. As a consequence of the historic popular distrust of Wall Street in the United States, much of the regulatory and support structure for credit unions to play an expanded role already exists. The US government has a dedicated system of deposit insurance and regulation for credit unions, and credit unions are eligible to be part of the Federal Home Loan Bank system that provides small banks with credit lines to help them through temporary liquidity crises. Furthermore, credit unions have accumulated a strong track record of functioning well even in economic downturns.
However, it also must be recognized that on the whole, credit unions in the United States have not been particularly dynamic or innovative in recent decades. Part of the issue is that existing legislation tightly restricts small-business lending by credit unions. But even credit unions originally created by the energies of social movements tend to become routinized and limited in focus as they age. Finally, until the process of computerization had progressed quite far, credit unions simply could not compete with commercial banks in the range of services they provided.
Now, however, even very small institutions of this type—organized in networks—are able to provide clients with a broad range of financial services. Credit unions can, for example, provide access to a network of automatic teller machines and the ability to wire funds to other destinations. And these small institutions need not hire all of the staff required to do the appropriate due diligence for small-business lending; they could contract with small, nonprofit consultancies that develop expertise in particular business domains and work with a range of different financial intermediaries.
Another possible and complementary strategy would be to rely on networks of public banks, building on the example of the Bank of North Dakota. Activists across the country are trying to persuade city governments to establish a local public bank that could both hold the many accounts of municipal agencies and significantly expand the availability of credit for small businesses, nonprofits, and affordable housing. Although organized to be independent of city hall, these public banks would have diverse boards that represented different local constituencies. As with credit unions, networks of these local public banks could provide customers with the full range of financial services. 50
Whatever the combination of credit unions, public banks, and community banks, the idea would be that the federal government could set off a wave of entrepreneurial effort by pursuing two steps.
Step 1 would be a federal matching funds program set up to capitalize or recapitalize new or existing nonprofit financial intermediaries. Given the enormous costs that the society has paid for its dysfunctional financial system, an outlay of $50 billion over five years would be a small price to pay to create a vigorous, locally oriented financial system. The idea is that local investors would raise $10 million to capitalize a new credit union or nonprofit bank or public bank and the government would provide an additional $10 million—in the form of a low interest, thirty-year loan. Or similarly, a sleepy bank or credit union would be recapitalized with an additional $20 million that would be matched by $20 million from the federal government. The matching funds would simultaneously signal the government’s strong support for these new institutions and create strong incentives for grassroots efforts to build this new sector.
Step 2 would be a new system of loan guarantees to support lending by these institutions. Along with the capital infusion, the federal government could also immediately provide loan guarantees for these institutions to lend to households, businesses, nonprofits, and government agencies for conservation or clean energy projects. The value of these investments has been well documented. Again, the urgency of a green transition would justify the relatively small budgetary commitment that would be involved since these loans for energy-saving should have a very small failure rate. But this would be an efficient means to underwrite a dramatic initial expansion in the loan portfolios of these institutions.
On a less rapid timetable, a system of loan guarantees must be built to support long-term lending to small and medium-size businesses. The design requires care, because these loans are riskier and the dangers of abuse and fraud are substantially greater. The goal would be to create something similar to a guarantee program that exists in Germany where the risks are distributed across different institutions. One might imagine, for example, 25 percent of the risk being covered by the Federal Home Loan Bank Board, 25 percent by the Federal Reserve System, 25 percent by the Treasury, and the final part being carried by the originating institutions. Because these guarantees are designed to support somewhat risky loans at the local level, it is assumed that there will be periodic losses from businesses that fail, but those losses would be spread across strong institutions whose revenues would be increased by the stronger growth resulting from more vigorous lending to small and medium-size firms.
One complexity here is that many small local credit unions or community banks are unlikely to be able to develop the expertise in-house to engage in this kind of business lending. However, nonprofit consultancies that develop this kind of expertise can and should emerge and work with a network of credit unions to identify worthy projects eligible for the government loan guarantees. To protect against fraud, it would also make sense to license the nonprofit consultancies and subject them to some ongoing regulatory scrutiny.
The success of this strategy ultimately requires that millions of citizens be willing to change the way they invest their savings. At present, roughly 92 million people belong to credit unions in the United States, and these institutions control about 10 percent of consumer deposits—about $600 billion. With such a strong starting base, it is plausible that people would be willing to move much more of their savings from big commercial banks to credit unions once they saw a broad effort to revitalize the sector. The goal at the end of a twenty-year transition period would be to reverse the current ratio: 90 percent of deposits in the credit unions and only 10 percent left for commercial banks.
Nonprofit investment banks
These new institutions could be created as nonprofit entities jointly owned by large public pensions funds or by other nonprofit financial intermediaries. They would compete directly with existing investment banks that underwrite bonds. This would give local governments and public agencies an alternative to dealing with existing Wall Street firms when they decide to issue new municipal bonds. This alternative is important because the relationship between municipalities and Wall Street has been marked by both predation and corruption. 51 These institutions would also be able to finance large-scale infrastructure projects. But in evaluating these infrastructure projects, these nonprofit investment bankers could add an additional creditworthiness criterion. They would also consider whether the planning of the project involved sufficient democratic input and engagement from citizens in poorer and more marginal communities.
Finally, these new institutions would also be able to securitize loans written by nonprofit financial intermediaries. For example, loans to individuals and businesses to finance solar power or to build multifamily housing could be consolidated into bonds that would be sold to investors. Through this instrument, the credit unions would have an infusion of new capital to expand further their lending activity. To be sure, this securitization process would have to be carefully regulated to prevent any participants from playing the “pass the trash” game that was so central to the subprime mortgage disaster. But with all of the key participants operating on a nonprofit basis, the incentives for large-scale fraud would be diminished.
The issuance of these bonds would provide individual investors, pension funds, and other institutions a safe and socially productive outlet for their savings. The intuition here is that most people are not looking for outsized returns on their personal saving; they want primarily security and predictability. Bonds that reliably paid 3 percent or 4 percent per year would be attractive, especially when people understood that these investments were contributing to sustainable economic growth that was improving their own communities.
The consequence over time would be a dramatic transformation in the structure of most people’s retirement portfolios. Instead of the current mix, which is heavily weighted toward equities, the bulk of retirement savings would be made up of various types of publicly issued and safe bonds. As the public gradually retreated from corporate stocks, there would be a decline in share values, and proponents of significant reforms in corporate governance would gain significant leverage. In order to make their shares more attractive, big firms would now be forced to compete in a process of “definancialization.” This would include bans on share repurchases, significant reductions in executive compensation, improvements in corporate governance that included recognizing other stakeholders, and an abandonment of the short-term time horizons associated with maximizing shareholder value.
A public investment bank
Given the centrality of infrastructure spending, there is also the need for a national investment bank that would be able to create credit to fund needed infrastructure projects. On the principle of decentralization, this should be organized through five or six regional units that operated with a high degree of autonomy while also being able to share knowledge about the complexity of particular types of infrastructure projects. This bank would be able to raise capital by selling bonds to the public through one or another of the public investment banks.
But the principle of competition would also operate in that a city, a state, or some kind of regional entity would have several different options for funding a particular infrastructure project. It might go to one of the public investment banks to sell bonds or it might arrange to finance the project through the closest office of the public investment bank. The competition would reinforce the need for all of these entities to develop staff expertise, and it would maintain pressure on them to make the loans available at the lowest possible interest rates.
However, the public infrastructure bank also requires arrangements to assure democratic accountability. Both the headquarters and the regional offices would have management boards that included representatives of various constituencies such as business, labor, community groups, and elected officials. Congressional oversight would also be required to assure that the institutions were consistently serving the public and that large-scale infrastructure projects were carried out in ways consistent with both social and environmental impact studies. Since some large-scale infrastructure projects can reshape entire geographic regions, procedures must be developed to assure broad public involvement in these decisions.
A nonprofit innovation stock market
A final measure is needed to assure a higher level of investment in innovative small firms working at the technological frontier. Such firms have chronically been starved for capital, and they have been heavily dependent upon various government programs for their survival. Moreover, since the path to long-term survival is so difficult, many of these entrepreneurs see little choice but to sell their firms to large corporate buyers with the consequence of less diversity and competition in the economy.
Since the chances that any one of these firms will survive and be profitable are relatively low, a strategy is needed that allows investors to hold stakes in several of these firms with the idea that success by a small minority of firms would compensate for losses by all of the others. This is the principle on which venture capital firms operate, but venture capital is extremely labor intensive and thus very difficult to scale up to provide resources for a much larger number of firms.
The solution would be for the government to work with the nonprofit investment banks to create a new stock exchange where high-technology start-up firms would be rigorously screened and have the opportunity to sell shares up to some limit such as $10 million. The shares would not compromise the existing ownership structure of the firm, but they would entitle shareholders to a portion of the profits that the firm might eventually earn. Specialized mutual funds would then put together diversified portfolios that would take positions in hundreds or possibly thousands of these firms. Individual and institutional investors would then be able to have a stake in future innovation by purchasing shares in these mutual funds.
Some successful firms might decide to graduate from this stock market to the major stock markets, assuring a large return to those holding their shares. But other firms, including those organized as cooperatives or B corporations, might opt to remain listed and continue using the market periodically as a way to raise capital for expansion. 52 Here again, the idea is that a relatively small institutional change could have broad consequences in significantly expanding the diversity within the business environment. Most importantly, high-tech start-up firms, regardless of their form of business organization, would face improved prospects for long-term survival.
Economic Synergy
This set of financial reforms is designed to accomplish several distinct goals. They would contribute significantly to a more dynamic and more environmentally sustainable economy by generating a higher rate of productive investment in infrastructure, multifamily housing, clean energy, conservation, and small businesses. This would result in new job creation and expand the flow of services that people really need. This set of reforms is also intended to weaken the dominant position of existing financial institutions, including both giant banks and huge investment management companies such as Black Rock and Vanguard. This weakening would happen through an incremental shift of consumer savings from for-profit to nonprofit entities. Currently, something close to 90 percent of consumer bank deposits are with large commercial banks, but with the reinvigoration of credit unions and nonprofit banks, we could expect a large-scale shift of these deposits toward more locally based institutions as consumers recognize the benefits of reinvesting in their communities. At the same time, savers would have attractive alternatives to putting their retirement funds in mutual funds and common stocks. They would be able to shift to a variety of bonds issued by nonprofit investment banks or the public investment bank, and they could acquire mutual funds invested in the innovation stock market.
The combination of the new institutions and the changed consumer behavior would help move the United States away from the stock market–centered model of business development. Small and medium-size firms would have a much richer set of financing options than aspiring to become publicly traded firms. By relying on finance from nonprofit institutions or the innovation stock market, such firms would be able to raise significant amounts of capital without the risk of takeovers that occur with stock market funding. This would make it far easier for new firms to compete directly against incumbent firms. Such a diversified funding environment is far more appropriate in the era of the vanishing corporation than continuing a system of financing that was linked to an earlier historical period in which large firms accounted for a very high percentage of economic activity.
Finally, this process of reorganization would weaken the political clout of large financial institutions. With less control over consumer deposits and retirement savings, giant institutions would have to shrink and make do with reduced flows of profits. This, in turn, would reduce the resources to invest in campaign contributions and right-wing think tanks. It would become harder for them to push back against regulators and harder for them to stop the advance of their nonprofit competitors.
The Problem of Socialist Transition
The recent experience of Greece’s Syriza government exemplifies the problem faced by leftist parties that have promised their supporters a definitive break with “capitalism,” defined as the rationality of a market economy based on the pursuit of profit. Such governments generally face a combination of domestic and foreign opposition that fundamentally weakens the domestic economy, with the usual result that the leftist government retreats from its transformational agenda. In Chile in 1973, the elected government persisted in its project despite economic troubles, but mounting domestic turmoil provided the excuse for a US-backed military faction to seize power. One way or another, every time an electoral path to socialism has been attempted, it has ended in defeat.
Wright has theorized this problem in terms of the “transition trough” that an elected socialist government is likely to face. 53 The new administration is elected with a promise to raise living standards for a majority of the population, but domestic and foreign resistance generally leads to an economic downturn that inevitably erodes the government’s support because the promised increases in output and more equitable distribution fail to occur. So the critical issue is whether there are means by which both the depth and the duration of the transition trough can be minimized. If the trough is shallower and briefer, the chances are greater that the government can consolidate its domestic support and move forward with its transitional program.
The trough is generally created through the confluence of domestic and global pressures. At home, resistance to the government’s proposals means that businesses and wealthy individuals are likely to forgo new investments and large firms might begin layoffs in anticipation of weakening demand. At the same time, both foreign and domestic groups are likely to start shifting liquid capital out of the country in anticipation of a fall in the value of the national currency. The government’s ability to offset this capital flight with increased foreign borrowing is likely to be limited because of the hostility of international banks and global organizations. The result is invariably a currency crisis where the government has to take action to prevent a dramatic fall in the value of the nation’s currency. 54 The government might impose controls to slow the flight of capital, but it usually has to raise domestic interest rates in an effort to slow the outflows. Then the tighter monetary policy generally has the effect of further slowing domestic economic activity so that the transition trough becomes even deeper.
This combination is powerful because the domestic and foreign opponents are able to continue the pressure month after month. It makes sense for firms to withhold investment and make do with lower profits for a year or longer in order to defeat the leftist threat and guarantee larger profits in the future. At the same time, the outflows of capital are likely to continue, so the government has little respite from the ongoing currency crisis. The possibility of a reform-driven domestic economic expansion gets pushed off into the future as the transition trough becomes longer and deeper.
However, the kinds of financial reforms proposed here have the capacity to reduce the severity and duration of the transition trough. The central mechanism is the expansion of the not-for-profit portion of the financial system and the shrinking of the for-profit segment. The nonprofit financial institutions could be expected to maintain and expand their lending so as to blunt any kind of investment slowdown by large firms and for-profit financial institutions. Given the growing importance of infrastructure spending and the fact that employment by large corporations has already dropped, there is a distinct possibility that expanded lending by the more democratic financial institutions would maintain employment levels at pretransition levels.
Even if there were little or no domestic investment slowdown, however, the pressures of capital flight would continue. But it is here that the growing size of the nonprofit financial institutions would become relevant. Not only would they be reluctant to participate in the capital flight; they would also have the ability to increase their borrowing abroad to offset the pressures on the national currency. So, for example, a public infrastructure bank and large nonprofit investment banks, with established track records of operating effectively, would retain their capacity to borrow on global capital markets. They might in this transition period have to pay a somewhat higher rate of interest, but their increased borrowing could give the government some respite from pressures on the currency.
Moreover, if the level of domestic economic activity did not fall substantially during the transition, the government would have more legitimacy in denouncing the flight of capital as a deliberate effort at economic sabotage. As long as the economy was doing reasonably well, the claim that investors were shifting capital abroad to protect themselves from economic disaster would be less credible. This would create a political context in which the government could legitimately impose more effective capital controls to slow the outflows. The combination of those controls and increased international borrowing by large nonprofit banks might be sufficient to avoid a currency crisis.
With this additional breathing room, the left government might be able to sustain its reform agenda long enough that the electorate would begin to experience real gains. If a reform-driven economic expansion were to begin, then some of the domestic and foreign opponents might decide that a boycott strategy no longer made sense. As some private firms and international lenders began to relent, the government would have growing room to maneuver, and its economic successes would grant it greater political legitimacy. Once past the transition trough, there would still be the possibility of reversals, but some of the critical reforms could become firmly institutionalized.
This narrative is the core claim for why radical financial reform represents a real utopia. It shows that it is possible for an elected leftist government to make the transition trough shallow and short enough that the government could survive and win the next election. But it leaves open the question how the left government would organize the stages of its reform projects and shape the rhetoric it uses for both its base and its opponents.
The strategy proposed here operates in two stages. In the first stage, the left would push through a program of radical financial reform designed to expand the scope and reach of the nonprofit financial sector dramatically. The movement’s energy would focus on nurturing these new institutions since it will take time and considerable effort to grow the network of nonprofit institutions to enable dramatic increases in its lending capacity. The second stage, in which the movement broadened its reform agenda and risked a direct confrontation with big business, would then come some ten or fifteen years later. How could this scenario play out strategically and rhetorically?
At the rhetorical level, the movement would define socialism as simply the extension of democracy to include the economy. 55 In this formulation, there is no single moment of transition from a profit-oriented economy to a socialist economy; it is rather an evolutionary process through which there is an ever-greater and deeper extension of democracy into economic decision making.
The movement would also affirm its commitment to democratic institutions and democratic norms including competitive elections fought against parties with very different political commitments. Within this framework, the movement can be quite open with its opponents and its supporters about its commitment to a gradual and deep socialist transition that will preserve democratic institutions and practices.
The movement would also explain that one of the most important planks in its socialist agenda is the democratization of the financial system. It would insist that the existing financial system, despite being underwritten and guaranteed by the government, serves oligarchic interests and fails to work for the vast majority of the population. The reforms would mean that large private financial firms would face increased competition from a network of nonprofit financial institutions. However, the theorists of the market always stress the value of competition, so what could be wrong with subjecting entrenched financial firms to some healthy disruption by new market entrants?
In raising the banner of radical financial reform, the movement would work to build a broad coalition, including small and medium-size businesses that could be persuaded of the advantages of a more democratic financial system. With sufficient electoral support, the movement could then implement the first-stage reforms. Intense opposition to those reforms by the existing financial institutions is to be expected, but the strategy to dampen such resistance would be to threaten private sector banks with the public utility model. Their choice would be either to let the financial reform legislation go through or to face much tighter regulation that would immediately threaten their profits. Since the threat posed by the reform legislation lies well in the future and is even then only a theoretical possibility, it seems unlikely that the financial interests would mount a full-scale campaign of resistance that included capital strikes and capital flight. 56
The victorious movement would also pursue other reforms that are familiar parts of the repertoire of left governments, which would include enhanced programs to transfer resources to people in the bottom half of the income distribution, strengthened labor rights, measures to combat racial and gender inequality, improved environmental regulations, a push to increase democratic participation in governance, and modest increases in taxation on corporations and the rich. The movement would, however, avoid pursuing reforms that challenged the power of big business directly, very large tax increases, for example, or requirements that corporate boards be restructured to include stakeholders such as employees and customers. The movement would stress its commitment to incremental improvements that made the economy work for all citizens.
If the scenario of capital flight and capital strikes began to unfold even with relatively modest reforms, the movement would retreat while working to hold on to the financial reforms it had implemented. It would mobilize energy at the grass roots to make sure that the network of nonprofit financial institutions was developing according to plan. In the event that the movement was voted out of office during this period, the new decentralized system of financial institutions would continue to grow if they were meeting the real needs of a variety of constituencies.
When the movement felt that the time was right, it would campaign for office with a promise to make deeper reforms that would challenge the power of the rich and large corporate entities. This is when issues of restructuring corporate governance or a major escalation of redistribution through the tax system would be on the agenda. In short, the movement would provoke a confrontation in the hope that the transition trough would be short and shallow. Having weathered this storm, the movement would then be able to create an economy that truly worked for all citizens.
Conclusion
For most of the last century, political movements committed to radical financial reform and those favoring a socialist transformation have been at odds and have often worked at cross-purposes. Today, however, it is possible to see a creative synthesis of these two traditions in which radical financial reform becomes the critical measure that makes it possible for a government committed to a democratization of the economy to survive. The argument is that both the duration and the depth of the transition trough could be minimized if a successful process of radical financial reform had previously been implemented and given the time to mature.
This article has focused almost entirely on a reform process within a particular nation. However, the vision elaborated here also has an important global dimension. At the same time that leftist political parties within nations were fighting to implement radical financial reform domestically, they would also exert pressure for reforms of the global financial and economic order. In that arena as well there is a significant opening for reform; those arrangements have become increasingly dysfunctional. The point is that winning even partial reforms at the global level, such as a global financial transaction tax, would work in synergy with domestic efforts. Such a tax, for example, would mean that those shifting capital abroad to destabilize a leftist government would have to pay a substantial up-front fee for the transaction. Moreover, as the global reform process advanced, those further steps would create a more favorable environment for these domestic transitions.
But the critical step in this real utopia is the rejection of the conventional account of the role of financial institutions in market economies. As long as people believe that such institutions are intermediaries who play the critical role of connecting savers with investors, it is very difficult to challenge their institutionalized power. But when it is understood that they are franchisees that have been granted a privilege by the government to create credit, it becomes possible to challenge that privilege and demand that it be extended to other institutions that are not preoccupied with the maximization of profits. Such a reform is essential to democratize finance and ultimately to democratize the entire economy.
Footnotes
Acknowledgements
This article has benefited from comments by many colleagues on previous drafts and earlier papers. These include Karl Beitel, Matthew R. Keller, Lucas Kirkpatrick, Jan Kregel, Greta Krippner, Margaret Somers, and Claus Thomasberger. I am also grateful to Robert C. Hockett for his important essay in this issue. My late colleague Erik Olin Wright launched the Real Utopias Project, encouraged me to pursue this topic, and commented on many earlier drafts. However, the usual disclaimer applies: I am solely responsible for the remaining weaknesses in this work.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
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This article is part of a special issue titled “Democratizing Finance” that includes an introduction, anchor articles by Robert C. Hockett and Fred Block, and commentaries by William H. Simon, Lenore Palladino, Mary Mellor, Michael A. McCarthy, and David M. Woodruff. The papers were originally presented at a workshop held in Madison, Wisconsin, in July 2018 organized by the late Erik Olin Wright as part of his Real Utopias Project.