On Sunday, March 12, to prevent any chance of a systemic financial crisis, federal banking regulators announced that they would bail out the wealthy techie depositors of Silicon Valley Bank (SVB) and Signature Bank, overriding the normal rules of banking. The next day, the Biden administration violated a campaign promise by approving the Willow Project, one of the largest oil and gas developments on federal land in US history.
The contrast between these two decisions was jarring for environmentalists, who have pushed to protect the economy from climate-related risks. Their case is simple: Soon, oil and gas projects will no longer be viable investments, for economic, legal, and practical reasons. (The Willow Project already requires ConocoPhillips to refreeze melting tundra.) Once investors see these investments as null, they will panic. And if the targets of that panic include banks bigger than SVB, it could trigger a global financial crash.
But as the SVB collapse made clear, even smaller banks can trigger panics. Moreover, the Federal Reserve’s recent investigation into its own failures demonstrated that it missed clear warning signs and took little enforceable action on the regulatory violations it did catch. The investigation, conducted by the Fed’s top regulatory official, Michael Barr, and released in April, recommended only abstract tweaks internal to the Fed and thus difficult to verify. It seems we can’t trust the central bank’s governors to choose to do good for the planet.
While climate advocates say there’s still time before we have an all-out emergency, regulators should force financial firms to diversify their portfolios, keep larger amounts of emergency capital on hand if they invest in dirty energy, or flat-out refuse to lend to fossil fuel companies, given the high risk factor. But there is a conceptually simpler—if politically harder to enact—way to protect the rest of the economy from bank crashes and, in the process, help reorganize our economy for the climate-change era: nationalize consumer banking.
The current system of regulating banks, which are indispensable to the world economy, doesn’t work. Regulators try to predict the biggest possible future financial risks, judge which firms are large and interconnected enough to crash the world economy, test how they would hypothetically respond to the predicted risks, and make recommendations to banks from there. In other words, there is a lot of guesswork involved, and no one can predict economic shifts with certainty.
Meanwhile, most people use banks primarily to store money and access payment systems like debit cards or payroll; they don’t intrinsically care about the bank’s investments. If people just want a risk-free way to store money and make payments, the government can offer that. In fact, it already does: Private banks that join the Federal Reserve System get fully guaranteed accounts and access to the Fed’s lightning-fast payments system. Legislation offering the public what we already offer to private banks would solve most people’s problems with the financial system.
While the secondary effects would be complex, this change would make the financial sector dramatically less interconnected and prone to system-wide crashes. Regulators could let banks fail more easily; the financial lobby would be far less powerful in Washington; and it would expose the absurdity of entrusting all of our economic planning to for-profit financiers, which could prompt deeper shifts in our political economy.
Right now, we’re forced to discuss everything our economy needs in terms of whether it provides a high return on investment for private financiers, offering despicable tax and regulatory giveaways in the process. But with public consumer banking, private banks would be less essential to the rest of the economy—meaning government wouldn’t need to implicitly backstop the industry. Alongside stricter traditional regulations, this would make it far riskier for Wall Street to finance fossil fuels.
A simpler financial industry would also be a less politically potent one. Without private banks as the skeleton of economic life, we could debate more democratically which industries to build out, which to shrink, and how they should be structured. None of this would mean Soviet-style central planning. Rather, it would help create a mixed-economy social democracy.
The private financial sector already tosses a climate-conscious sheen over its normal horrific practices via environmental, social, and governance (ESG) investing. But the best thing it could do for the planet would be to get very public—very quickly.