Articles

Review of Radical Political Economics

The David Gordon 42(3) 293­–306

© 2010 Union for Radical
Political Economics
Memorial Lecture: Finance Reprints and permission: http://www.
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without Financiers: Prospects DOI: 10.1177/0486613410375416

http://rrpe.sagepub.com

for Radical Change In Financial

Governance

Gerald Epstein1

Abstract
In response to the financial crisis of 2007–2010, governments in the United States, Europe,
and elsewhere have invested billions of dollars in financial institutions to prevent them from
going bankrupt and from further disrupting the global economy. Despite these massive public
bail-outs, a government and “elite” consensus has emerged that these nationalized or quasi-
nationalized financial institutions should be privatized as soon as possible, and that, apart from
modest changes in financial regulation, our economies should return to the status quo ante
financial structure. I disagree. As the crisis reveals, “financier” dominated finance has a number
of devastating flaws: it creates major externalities that contribute to financial and real economic
instability; it promotes short-term investment strategies; it contributes to inequality; and it
undermines economic efficiency and the achievement of social goals in the real economy. I
argue that a better strategy for achieving economic recovery, restructuring, and widely shared,
sustainable prosperity is to use public investments in the financial sector to build on the
successful post-World War II experiences of publicly oriented financial institutions to create a
stronger presence of “finance without financiers.”
JEL classification: E02, E44, G28

Keywords
finance, financial restructuring, David Gordon

1. Introduction

It is a great honor for me to be here this evening at the URPE summer conference to deliver the
David M. Gordon Memorial Lecture. David was my colleague and a mentor when I was a young
faculty member at the New School for Social Research more than 25 years ago. Thus I am

1
University of Massachusetts, Amherst

Corresponding Author:
Gerald Epstein, gepstein@econs.umass.edu
294 Review of Radical Political Economics 42(3)

especially grateful to have this opportunity tonight to honor him and his enormous contributions
to URPE, to heterodox political economy, and to our understanding of economics more
generally.
Re-reading David’s last book, Fat and Mean, published in 1996, has also been very enlighten-
ing. Among other things, it still seems amazingly current. His introduction describes the working
and middle-class voter anger and frustration with the Democratic Party, its turn away from Clinton
and the Democrats in the 1994 mid-term elections, as Clinton and the Democrats had turned away
from them and toward Wall Street. David quotes from R. W. Apple from the New York Times:
“The frustrations run deep, perhaps deeper than at any other time in modern American history.”
David, like many, attributed the frustration to the fact that the economy has been failing
American workers for more than a generation. In Fat and Mean, he tried to answer the question,
why? David’s answer was that workers have been subjected to a wage squeeze, largely caused by
bloated, bureaucratic structures of firms that had to continually squeeze the workers to maintain
themselves. This in turn caused the firms to become less productive and fed a vicious cycle of
“bloat and squeeze” (Gordon 1996). This vicious cycle was made worse by the “stick” style of
corporate management that pushed workers to the edge and ignored the productive and creative
contributions they could make to the firm. As productivity failed to grow rapidly, the squeeze just
became worse and worse.
Whatever one may think about “fat and mean” as the explanation for the great wage stagna-
tion of the last few decades, or the anger, frustration, and division that characterize much Ameri-
can political discourse, it is clear that in the decade or so since David published Fat and Mean
other powerful forces have added to the wage squeeze pressures and to the destructive evolution
of American and indeed global capitalism.
David described the bloated corporate bureaucracy as fat and mean, but we now see that there
is another huge capitalist bloat weighing people and the economy down: banker bloat. If the non-
financial corporation were fat and mean, today, finance is fat and fatter.1 As my colleague Jim
Crotty has shown in enormous detail, this financial bloat has grown in enormous and destructive
ways (Crotty, 2009a, 2009b). For example, financial profits as a share of total corporate profits
grew from 10 percent in the early 1980s to 40 percent in the mid-2000s. In 1981, U.S. private
debt was 123 percent of gross domestic product; by the third quarter of 2008, it was 290 percent.
Importantly, the biggest rise in indebtedness took place in the financial sector itself. The gross
debt of the financial sector rose from 22 percent of GDP in 1981 to 117 percent in the third quar-
ter of 2008 (Crotty 2009b).
Much of this increase in profits and revenue was siphoned off by top financiers or rainmakers
as Jim Crotty calls them. Not only have their incomes—mostly in the form of bonuses—been
massive, but their pattern reflects a highly destructive pattern. They rise tremendously in the
bubble, but when their actions crunch their economy and often the financial firms themselves
they still continue to receive large bonuses. This obviously creates a huge incentive for financiers
to take on excessive risk, and it also creates enormous pressure for them to squeeze others in the
firm and the economy–including the taxpayers–to keep their bonuses nice and fat.
This “banker bloat” and the perverse incentives for excessive debt and risk taking that it has
engendered not only squeeze workers and taxpayers, but they have squeezed and now crunched
much of our economy. This lecture addresses the question: can we restructure finance to get rid
of this excess, end the wage squeeze, and create a financial system that serves the people rather
than the other way around?
It is interesting that even though David did not think the financial system was a major part of
the problem, he did think reforming the financial system could be a part of the solution. In Fat

1
I do not mean this a criticism of the “heavy” people, of which I am certainly one.
Epstein 295

and Mean, David developed a five point program for economic reform. The fourth step in his
five step program was to “establish a National Cooperative Investment Bank that would provide
investment credits and subsidies to firms with cooperative and democratic structures” (Gordon
1996: 248). David noted that governments in many countries used the financial sector to subsi-
dize and encourage desired social goods and social practices, and thought that government sub-
sidized or run, socially oriented financial institutions could provide carrots for productive and
egalitarian purposes, in this case to encourage cooperative industrial institutions and practices.
David explicitly noted the recently passed Community Development Financial Institutions Fund
(CDFI) created under the Clinton administration to provide financial assistance to community-
based banks and organizations in community development projects (Gordon 1996: 248).
David Gordon’s National Cooperative Investment Bank is an excellent example of what I mean
by “finance without financiers.” As I try to illuminate in what follows, there is a very strong case
for dramatically expanding the role of “finance without financiers” in our economy, to enable our
economies to get out of the destructive grip of financialized capitalism, and to mobilize and allo-
cate social resources to achieve social goods such as reducing poverty and making the transition
to a green economy. In this paper, I try to argue that this “finance without financiers” is not only
important, but it is also feasible. But to make it a reality will take an enormous political battle, and
here, despite the economic crisis, the odds are still against us.
But the crisis has also created opportunities. It has forced the governments of rich countries to
invest more public money and play a bigger role in organizing financial institutions and markets
than at any time since the middle of the 20th century. Fearing a repeat of the credit market panic
that followed the failure of Lehman Brothers Inc., governments in Europe and the United States
have invested massive amounts of public funds in private financial institutions. According to the
Bank of England, central banks and governments in the United States, United Kingdom, and
euro area have invested or promised almost 15 trillion dollars of support since the crisis broke
out in January, 2007 (Bank of England, June, 2009: Table 1C). In the United States, this amounts
to almost 75 percent of GDP (in the U.K. it is almost 90 percent of GDP). At the time of writing,
it is unclear how much more will need to be invested to stabilize the financial systems of the
world’s major economies. The Congressional Oversight Committee’s report of August, 2009,
warns that billions of “toxic” assets remain on the balance sheets of U.S. banks and these could
create major financial problems–especially for small and medium-sized banks–if the economy
fails to recover in good time or, worse, if the economy takes another downturn (Congressional
Oversight Committee 2009b). In Europe, officials have refused to run public “stress tests” or
reveal the true extent of the banking problems that remain, but analysts estimate that major prob-
lems include massive problematic European bank loans to some Eastern European countries
(European Central Bank 2009: 101–105).
Yet, despite the massive failures of the past, the hands-off public policy approach to financial
sectors, and the subsequent need for public subsidies of struggling financial institutions, most
governments in the Europe and the United States have chosen to return, for the most part, to the
status quo ante.2 It holds that governments should develop an “exit strategy,” which effectively
means they should clean up the balance sheets of these banks and then re-privatize them as quickly
as possible. The current mantra is that “governments do not know how to run banks,” but the fact
of the matter is governments and other stakeholder-driven entities have managed many banks for
many periods and have often done so very well. These institutions of “finance without financiers”

2
See, for example, Stephen Fidler, Sara Schaefer Munoz, and Alistair Macdonald, “U.K. Banks Get Stron-
ger, Reforms Weaker,” Wall Street Journal, August 13, 2009, who describe how banks in most financial
centers are “…successfully fending off government moves to rein in the industry on the heels of the finan-
cial crisis.”
296 Review of Radical Political Economics 42(3)

have delivered many public benefits in a range of countries over a long period of time. What we
need now is a much stronger role once again for “finance without financiers.” That is, we need
publicly oriented financial owners and managers to operate a larger share of the financial system
in rich countries. We do not need governments to automatically develop “exit strategies” or to
entirely re-privatize their financial systems. Instead, governments should develop programs to
utilize the ownership stakes they have in financial institutions and to develop publicly oriented
banks to better serve the needs of the real economy. These publicly oriented financial institutions
can take many forms: fully nationalized large banks that engage in the full range of banking activi-
ties; nationalized banks that serve specific purposes, such as making green investments or sup-
porting cooperatively owned business or credit for small business owners; or public support for
smaller local banks or a network of smaller local banks. These new financial models will have to
be appropriate to the current state of globalization and technology, but the impact of these phe-
nomena on the likely success of publicly oriented finance is likely to be less serious than com-
monly believed. As discussed in this paper, these changes will actually make “finance without
financiers” easier and more effective.
It is important to recognize that financial competition, as well as fads and norms, do place
enormous pressures on even initially publicly oriented institutions to join the herd. Thus it will
be crucial to develop social governance structures to prevent “finance without financiers” from
becoming “finance for financiers.” These social governance structures will need to have several
components, including democratic governance by those effected by the financial institutions’
actions, strong financial regulation over-all to prevent massive gaps in practices between pub-
licly oriented financial firms and the market, and compensation and/or tax schemes which reduce
the benefits in the system for destructive financial practices. Where possible, these social gover-
nance structures should build on existing local practices and institutional structures, where pos-
sible, rather than being invented whole cloth or imported wholesale from abroad.

2. What Should Finance Do?

Standard mainstream analysis posits that financial markets serve a number of essential functions
in capitalist economies; they: 1) intermediate between savers and borrowers; 2) mobilize savings;
3) allocate credit to their most profitable and productive uses; 4) engage in maturity transforma-
tion; 5) provide liquidity; 6) facilitate inter-temporal allocation of consumption and wealth;
7) reduce risk (Mishkin 2008).
The recent financial crisis, as well as the poor social performance of liberalized financial mar-
kets over the last several decades, has shown that liberalized financial markets do not conform to
mainstream financial theory. The poor performance of mainstream financial theory and neoliberal
financial practices compel a search for more adequate theoretical foundations for understanding
what finance should do. Schumpeterian analyses emphasize the role of finance in mobilizing sav-
ings for productivity enhancing investment, including for the creative destruction that accompa-
nies economic growth. Other economists have emphasized, instead, the destructive aspects of
finance, raising questions about how socially creative wild-cat finance really is. Marx described
the financial fraud and deceit that reached dizzying heights during speculative booms and busts;
Keynes brilliantly showed how finance often enriches the rentiers at the expense of productive
investment and can undermine the overall stability of the financial system itself; Minsky, Crotty,
and Kindleberger detailed domestic and international endogenous cycles of boom and bust that
only strong government controls could tame (Tett 2009). These raise questions about negative
externalities created when financial institutions and regulators fail to take into account the nega-
tive impacts their decisions can have on other financial institutions and the real economy. Behav-
ioral financial theorists question the “rationality” of financial actors. And critics of many stripes
Epstein 297

have derided the short-term orientation that financial markets impose on the economy, through
imposition of shareholder value imperatives and short-term trading strategies in derivatives mar-
kets, for example.
Another prominent stream of economic thought has emphasized the key role of the state in
managing finance to increase the creative and reduce its destructive aspects. This literature
emphasizes the public role in underwriting, guiding, and utilizing finance for private and public
purposes. Gerschenkron showed the importance of the state in mobilizing finance, especially in
“late developers.” Zysman (1983), Amsden (2001), and Eichengreen (2007) emphasized specifi-
cally the role of the state in helping to structure and mobilize finance for development and eco-
nomic restructuring, when economic restructuring was a state goal, for example, after the Second
World War in Europe, Japan, and the United States. The important work of Robert Pollin (Pollin
1995) and Ilene Grabel (Grabel 1997) update and extend these approaches.
Drawing inspiration from this strong historical and theoretical literature, systems with appro-
priate structures of “finance without financiers” are more likely to promote social goals such as
widely shared prosperity, Gerschenkronian development, Schumpeterian dynamism, and Min-
skyian stability than are financial systems based primarily on neoliberal principles, dominated by
financiers.

3. Experiences with “Finance without Financiers”

It is well known that after the disasters of the Great Depression and the Second World War, gov-
ernments in the United Kingdom, Europe, Japan, and even the United States asserted much
greater control over central banks and the financial industries than they had had in the previous
period (Capie 1999). Ministries of planning and finance, as well as central banks, were exten-
sively involved in credit allocation mechanisms for economic restructuring and economic
growth. Central banks utilized a variety of credit allocation techniques to accomplish these goals,
and in most cases these techniques were supported by capital and exchange controls on interna-
tional capital movements. Ministries of finance and treasury departments played major roles,
along with central banks, in directing credit and organizing financial institutions to serve public
purposes. In addition, many financial institutions were nationalized in whole or in part, and their
managers were directed by governments to address social needs. Hence, through strict regula-
tions, credit allocation techniques, and/or through public ownership and control, “finance with-
out financiers” became widespread in the “advanced” countries following the Great Depression
and the Second World War.
Analysis by Lester Thurow and the U.S. House Banking Committee (1972) in the early 1970s
identified three main techniques for protecting or promoting priority sectors commonly used
during this period: (1) asset based reserve requirements; (2) government borrowing in the capital
market and re-lending to preferred sectors; and (3) competition by government financial institu-
tions for primary saving flows and lending captured flows to preferred sectors (for example,
through the government postal savings system). In the United States, the first and second were
primarily used, but there are some important examples of significant roles of government finan-
cial institutions. Here I first focus on the rise and fall of the government housing finance institu-
tions because herein lies some important lessons for “finance without financiers” for today.

4. The Successes and Failures of Fannie Mae

During the 1930s, the U.S. government implemented major innovations in government involve-
ment in finance. President Hoover and then Roosevelt created a number of institutions, including
the Reconstruction Finance Corporation (RFC), which was initially used to re-capitalize banks
298 Review of Radical Political Economics 42(3)

and other firms, and then to finance war procurement during the Second World War; and housing
finance institutions, to prevent foreclosures and provide liquidity to housing finance markets
(Knodell 1994; Butkiewicz 2002).
The RFC, which was closed down in 1953, largely because of political opposition of Repub-
licans who opposed government financial interference in the markets and opposition by private
financial institutions who feared competition from the RFC. Though ultimately tainted by scan-
dals, the RFC is widely thought to have played important roles in rescuing private financial
institutions, and helping allocate credit to achieve important social goals, particularly during
World War II. Though the housing finance institutions also started off in promising fashion, and
initially achieved important social goals, they were pushed into becoming hybrid institutions –
partially private and partially public – which led to their perversion and ultimate collapse.
The problem was when the government sponsored enterprises (GSEs) were partially priva-
tized. This created enormous, perverse incentives for the government to act to maximize private
wealth at the public’s expense and to utilize its wealth to build a political machine that main-
tained its position.
There was nothing inevitable about this evolution. The government could have retained the
GSEs as proper government agencies, without creating these perverse incentives. But to do so
would have required the government to properly account for the costs and risks associated with
doing so, and placing these on the central budget. This it was unwilling to do. As a result, it took
the ultimately risky strategy of maintaining a contingent liability for the debts of the GSEs, with-
out at the same time instituting adequate controls.
What options does the government have moving forward? These have now been fully nation-
alized, at least temporarily, and placed under a uniform regulator. The government should use
this opportunity to develop a structure to clarify the important social roles of the GSEs, keep
those roles public, under strong regulations and management, and then privatize the other roles
without any government guarantees, explicit or implicit. That means that the institutions cannot
become too big to fail. Otherwise, the U.S. tax payer will once again be liable to socialize the
costs of very considerable private benefits.

5. The Current State of Finance Without

Financiers in the United States
The GSEs have now been nationalized, and below I discuss some issues related to what they and
other “social” financial institutions can and should do. But so as not to leave the impression that
the GSEs are the only candidates in the United States for “finance without financiers,” in this
section I will briefly survey a somewhat broader field of potential institutions and programs.
First it is important to recognize the significant public stakes in other, massive financial insti-
tutions. The U.S. government now owns a majority stake in AIG, the insurance giant. It also
owns substantial shares of Bank of America and Citibank, as well as a handful of other institu-
tions, including GMAC, the financing arm of GM. These are institutions which the government
could, in principle, be exerting much more significant control over than they are to promote
social goals such as financing green investments, infrastructure schemes, cooperative firms for
employment generation, and so forth.
Second are community development financial institutions (CDFIs), that David Gordon identi-
fied. CDFIs may be banks, credit unions, nondepository loan funds, or venture funds that strive
to provide affordable and appropriate financial services to people and communities who tradi-
tionally lack access to such services (Bernanke 2009: 2-3). Depending on the institutions and
local needs, they may offer financing for homeownership, rental housing, commercial real estate,
health care, small businesses, microenterprises, charter schools, and child care facilities, among
Epstein 299

other purposes. They often work with traditional lenders to attract private capital. The Shore
Bank in Chicago is one of the better known examples of a CDFI. In 1994, Congress created the
CDFI Fund housed with the Treasury Department. The Treasury estimates that it attracts $15 in
non-federal funding for every $1 it invests in a CDFI. Today, there are more than 1,000 certified
CDFIs with a collective $25 billion in assets. This is a very small number. Moreover, the finan-
cial crisis has created major problems for the CDFIs, as it has for all financial institutions. Grant
funding for CDFIs is falling, and repayment problems are on the increase. While the net charge-
off rate in 2007 was .55, by 2008 it had grown to 1.7. A survey in 2009 found that two-thirds of
foundations were planning to cut funding to CDFIs (Bernanke 2009: 4).
Obviously, much more could be done, as David Gordon suggested. The Treasury Department
could invest much more money into CDFIs devoted to job creation, green transition, coopera-
tives creation, and other social goods. And while there appears to be some discussion of steps to
improve the CDFI situation, there seems to be very little discussion of such major steps. Advo-
cates for expanding and protecting CDFIs propose: 1) making more federal funds available
(liquidity, capital, and project finance); 2) getting money to CDFIs fast in the current crisis to
protect them and their stakeholders; and 3) establishing and enforcing obligations on the part of
all financial institutions to support community finance (Seidman 2009: 6). This includes expand-
ing loan guarantees, subsidies, and investments by the GSEs; and tax credits for housing and
small businesses by the SBA. Yet, there is no plan afoot to do this at the level that is required to
make a substantial difference.
Third, there is a large pool of investments going into so-called “socially responsible” invest-
ments. According to the 2007 Report on Socially Responsible Investing Trends in the United
States (the latest one which is available), before the crisis hit, there were $2.7 trillion in assets
invested in “socially responsible” investments. This represented roughly 11 percent of assets
under professional management in the United States. Of this, however, only $25.8 billion were
invested in community investment (Social Investment Forum 2007). Again, these are operating
on the margins of the financial markets.
Finally, there are massive amounts invested in worker pension funds. Much has been written
on how to use these for socially desirable goals, but relatively little has been done.

6. Finance without Financiers in the Aftermath

of the Global Economic Crisis
Here I briefly discuss four approaches to longer term social ownership and control.

6.1 Full Public Ownership and Control of the General Purpose Bank
Some have argued that all of the insolvent or nearly insolvent banks should be fully nationalized
and maintained as public banks (Moseley 2009). Moseley, for example, argues that these banks
should be run “according to public policy objectives (affordable housing, green energy, etc.),
rather than with the objective of private profit maximization.” In addition to providing financing
for important social objectives, the permanent nationalization would, according to Moseley, have
other advantages as well. In the short run, it could help the economy recover by increasing lend-
ing to households and businesses, where as now banks are just hoarding cash. In addition, it
would improve the equity of the financial rescue plans. Says Moseley, unlike the “current bailout
policies” it would “not involve a massive transfer of wealth from taxpayers to bondholders” and
stockowners.
In the longer run, according to Moseley, nationalized banks would be “freed from the need to
maximize short-term profit” and therefore would avoid buying toxic assets and promoting
300 Review of Radical Political Economics 42(3)

financial asset bubbles, actions that have led to the current crisis. “Instead, the deposits of these
megabanks would be invested in decent affordable housing to all. With housing more affordable,
mortgages would be more affordable and less risky.”
Moseley’s claims that bank nationalization would stabilize the over-all economy are based on
his assumption that many large banks would be nationalized. But, in fact, that seems very unlikely
and so, instead, it seems to make more sense to think of bank nationalization as affecting a few
large banks and then relying on macro-prudential regulations and other factors to help stabilize
the overall economy.
From that perspective then, the main arguments for longer term bank nationalization are two:
1) their usefulness for helping to achieve important public economic goals; and 2) equity (and
fairness) concerns: making sure that the taxpayers get benefits from their investments in these
banks and these benefits are distributed more equitably than bank incomes and profits.
Here I will focus on the first since the second is more or less well known and even
self-evident.

6.2 Role of Public Banks in Achieving Public Goals

Public banks can play a very important role in this context. They can be large and multi-purpose,
they can be smaller and more decentralized, or they can be small and networked to achieve
economies of scale in terms of support, insurance, and risk pooling.
In the current context, there are both short-term and long-term goals that could be well served
by socially oriented banks. In the short term, such banks could provide lending to businesses and
provincial (or state and local) governments that are trying to maintain employment and services
and expand production. Nationalized banks will be more oriented to provide these kinds of loans
rather than sitting on excessive reserves or paying out dividends to stockholders trying to keep
the private capital cushion high enough to prevent nationalization, or paying excessive salaries
and bonuses to top executives and “rain makers” who will not be needed in the national banks
because these kinds of high stake trading activities are very unlikely to occur.
In this longer term, these same priorities would be more central to the operations of the
“nationalized bank” than a typical privately owned institution. That is, the nationalized bank
would place more evidence on lending to businesses, governments, and households engaging in
real investment and employment generation, rather than investing in proprietary trading, specu-
lation and mergers, and acquisitions.
In the medium to long term, the bank could develop expertise in those areas of great need for
the European and U.S. economies. All of these economies have major longer-term structural
needs, including making a transition to climate-safe economies.

6.3 Model 1: Large and Multi-purpose Banks

Large and multi-purpose banks can:
1. Specialize in funding for green initiatives, both small and large. These can include lending
to 1) business with new technology ideas, serving some of the role of venture capitalists but not
requiring such a massively high rate of return and hurdle rate as they do; 2) smaller business
loans directed at projects such as home and building refurbishing, that can help green the econ-
omy (Pollin et al. 2009); 3) underwriting government bonds issued for important social goals
such as green technology, education funding, mass transportation; having a large player in the
public bond arena that can compete with and try to keep more “honest” the other players in this
market would be of great use to municipal, state, and provincial governments; 4) in the United
States (and some European countries?) student loans can be underwritten—as economies must
retool for the green future and other future challenges; in the United States, for example, playing
Epstein 301

a role in the education loan business to once reduce corrupt and monopoly practices could help
reduce excessive fees and loan costs; 5) public banks, if they have enough market power, can
help enforce standards in the financial market place in those areas where demanders of bank
services will prefer these higher quality services; in other words, a large bank that enters the
marketplace enforcing higher standards can help promote a dynamic of a “race to the top” in the
provision of high quality banking services.
There are activities that the public banks will be prohibited from engaging in: the rampant
deal making in toxic assets; proprietary trading; and exotic financial engineering unrelated to
public purposes.
Where will the banks get the assets to engage in these actions: they will get it from depositors
and other capital providers. The public bank will be seen as extremely safe, with a government
guaranty provided to depositors and other providers of long-term credit, but the rates of return
paid will not be as high as possibly available in other financial markets and institutions. This
can be sustainable, however, only if there is strong monitoring of the investment portfolio of the
bank to make sure that their investments are relatively low-risk or achieve important social
goals for which there are high social rates of return. In the latter case, the direct subsidy cost of
the government on the activity has to be accounted for and appropriated by Congress and the
fiscal authorities. In this way, the bank may be able to take some significant risks to achieve
social objectives, but these have to be transparent and paid for transparently by Congress and
fiscal authority. Budgets for such activities must be appropriately considered through the nor-
mal appropriations process.
Thus, these public banks can advertise to depositors that by investing in them they are truly
investing in America, and that their investments are safe. Combined with the broad deposit net-
work this should provide a large amount of credit funds available to invest in the real economy.
Presumably, a significant part of the nationalized bank will not be relevant to the new public
entity. These are sections which have engaged in the kinds of financial engineering, trading, and
speculative activities that the new public bank will not be engaging in. These parts of the bank
should be sold off and the profits should be used to defer the costs to the public of the takeover.

6.4 Model 2: Smaller More Specialized Public Banks

A second approach would be to carve out a smaller bank with one or more specialized goals. For
example, the government could create the “Green Bank of America,” one that would specialize
in lending to private businesses and governments for green activities. Other examples would be
the “European Education Bank,” and/or “The European Infrastructure Bank,” which would focus
on underwriting (possibly in public/private partnerships) the creation of more infrastructure,
particularly those meeting social goals such as green transportation. In this case, the government
would then divide the “good bank” into two or more parts and retain those that would specialize
in these actions and sell off those that would be privatized. The public bank would want to retain
the depositor base in order to fund these more specialized activities.
Another example would be the “Co-op Bank of the United States,” where the bank would
fund worker’s, farmer’s, or community cooperatives, or other cooperative businesses, including
cooperative banks. To be sure, larger banks could have these different specializations as separate
departments within them.

6.5 Model 3: Public Utility Model

Another model is to turn the nationalized banks into public utilities, perhaps with joint public/
private ownership. This is an approach similar to what was common in the United States in the
early post-World War II period. This would be a return to what Paul Krugman (2009) has called
302 Review of Radical Political Economics 42(3)

“boring banking.” Banks would fund basic investments as they did in the 1950s -1980s in the
areas of basic corporate loans, housing, business, and state and local governments. They would
have to hold a high level of capital and have a significant liquidity cushion. In exchange, they
would have strong government guarantees on deposits and other long-term borrowing which
would enable them to attract deposits and credit at competitive rates. Thus, public utility banks
would have relatively stable earnings and modest rates of returns. They could attract capital from
pension funds and other investors wanting this risk and return profile.
The major differences between the public utility model and the nationalized model are:

1. The banks would not be subject to close day-to-day management of their operations in
which they were expected to satisfy specialized public goals. Of course, the broad
restrictions imposed on these banks would force them to act broadly in a consistent
manner with public goals.
2. Their profits would only accrue to the public as a portion of the government’s share of
the capital of the banks.

As a model, the public utility model might be more acceptable in the United States than a fully
nationalized bank would be. And avoiding issues of social versus private rates of return might
make this bank somewhat easier to operate, as it would then just have to subject itself to a market
test. Its major disadvantage is that it would not be as useful as a tool for achieving specialized
social goals as would a public bank as described above.

7. Governance, Financial Regulation, and Policy Space

7.1 Social Governance: Oversight, Incentives, and Management

One lesson we can draw from our case studies is that there is crucial need for strong “social
governance” if publicly owned financial institutions are to remain effective agents of the public.
In other words, just because institutions are publicly owned does not mean they will be publicly
oriented.
I define “social governance” as the institutional arrangements which structure the manage-
ment of public banks under social control. The key to effective social governance is to have
democratic management systems that effectuate not just transparency, but accountability to a
broad array of stakeholders. This is in contrast to the “shareholder value” notion that requires the
firm to be accountable to shareholders only. Social governance requires that the firm be account-
able to stakeholders including workers connected with the firm, community members that are
effected by the firm’s actions, and, where relevant, other institutions like state and local govern-
ments, which may be strongly impacted by the firm’s actions. Of course, if the bank is publicly
owned, then the public owners must also be appropriately represented.
Social governance may take various forms in different countries since the past history and the
institutional framework is different from one country to the other (path dependency). But the most
effective approaches are likely to involve “checks and balances” to ensure that a wide range of
important stakeholders have voice.
To implement such social governance, it not only makes sense to pay careful attention to local
institutions and customs, but it may be sensible to build on currently existing institutions. For
instance, in Germany the co-determination system which involves both managers and labor unions in
the decision process could provide a useful point of departure for the building of social governance.
In France, the “Comité d’entreprise,” which brings together managers and unions for decisions on
social matters, can be used to become the major institution of social governance.
Epstein 303

In the United States public banks should have a board of directors which are “hands-on”
directors, consisting of government officials from Treasury and other relevant government insti-
tutions. For example, if the bank’s charter is to serve as a “green bank,” then, perhaps, the Energy
Department as well as stakeholder representatives such as labor, small business, state and local
government, as well as specialists with expertise in green transformation, would have manage-
ment oversight.

7.2 Compensation Policies

Pay scales both inside the public financial institution, as well as for other financial firms, will
have an important impact on the success of “finance without financiers.” The pay of bank staff
and executives must be high enough to attract excellent talent (so cannot be on the normal
governmental scale, presumably), but at the same time would be nowhere near as high as has
been made by Wall Street rainmakers and CEOs in the roaring ‘90s and ‘00s. The goal, presum-
ably, would be to attract excellent, experienced, and skilled people who nonetheless have a strong
public orientation. There may need to be limits on financial pay in private sector firms–perhaps
through taxation policy–in order to prevent the gap between the public employees and private
ones from becoming so large that they undermine the public orientation of the managers of
public firms.

8. The Importance of Strong Financial Regulation

For any of these schemes to work, there has to be strong financial regulation overall. Crotty and
Epstein (2009) describe a set of regulations that would make the overall financial system more
stable, more efficient, and more equitable in the United States.
First of all, without appropriate financial regulation, our financial systems would inevitably
lead to more booms, crashes, and overall instability. All financial institutions – these public ones
included – have difficulties operating in such an environment. This boom and bust cycle could
place enormous strains on the incomes and even solvency of the public banks.
Second, without strict and successful regulations, the attraction of very high short-run rates of
return and extremely high salaries and bonuses in the private financial sector could pervert the
public purposes of public banks by eroding the efficacy of monitoring and regulation, by pulling
away expertise and management skill, by making it more difficult to attract capital during finan-
cial bubbles, and by eroding the confidence of regulators in the necessity and usefulness of the
public banks.
Third, strict financial regulations would help the public banks make the transition from insol-
vent private banks to successful public ones. The public bank would be able to attract good talent
because, among other reasons, these bankers would realize that they cannot do enormously better
in the private sector; the kinds of investment skills learned in the public bank will also be useful
in the private banks and vice versa, making it easier to find skilled bankers who are more willing
to adopt to the culture of public banking. Over time and more generally, there would more likely
be self-reinforcing dynamics as the divergence between returns and actions of public and private
banks would be less than what would occur in the absence of strict regulation and the return of
“wildcat” finance.

9. Conclusions and Prospects for Change

The current financial system has failed, and in fact has not been operating well for many decades
now. It is time to restructure financial regulation and financial institutions so that they better
304 Review of Radical Political Economics 42(3)

address the considerable challenges facing our economies. But is radical restructuring of the
financial sector possible? It will not be easy.
One key reason for the stalled reform is not hard to find: the financial lobby is fired up and its
power is being felt across the political battlefront. International financial competition is also a
serious obstacle. Intense international competition among key financial centers–London,
New York, Frankfurt, Paris, Hong Kong–to attract banks, jobs, and financial capital, will create
a race to the bottom in financial regulation that finance will promote and exploit. Astute observ-
ers have noted that a global “floor” must be placed under international financial rules to protect
financial regulations at home.3 But these efforts are bogging down, as John Plender wrote in the
Financial Times. Robert Schmidt reports in Bloomberg.com that a campaign is being launched
on both sides of the Atlantic to “counter the ‘populist’ backlash against bankers. The plan targets
policy makers and the media in New York, London, Washington, and Brussels and calls for a
‘city-by-city, grass roots’ approach.”4
The bankers will win unless there is a sustained political push by unions, economists, and
those at the grass roots who stand up and demand a new financial order. But financial regulation
and reform, hard as they are to accomplish, will not be sufficient to transform the financial sector
to truly serve the needs of people, rather than the other way around. The reformers and the econo-
mists who support them must further develop and promote ideas for “finance without finan-
ciers,” embedded within systems of strong social governance, if we are going to break the
strangle hold that financialized capital has over our lives and our futures.
Better financial regulation will be necessary, but it will be far from sufficient to accomplish
these goals. A variety of ways must be found to make it more likely that financial markets and
institutions serve social purposes. As I have argued here, there are a variety of historical and cur-
rently existing models of “finance without financiers” that we can draw upon to help us strengthen
the social productivity and efficiency of finance. Of course, these will have to be tailored to local,
national, and even regional norms and goals. Now is the time to broaden and strengthen these
institutions where they exist and to create new ones where they do not. The current crisis and
significant public investments in private finance focus the public’s attention on these issues now,
and delaying measures to address these issues will risk condemning our economies to more
decades of unstable, inefficient, and inequitable finance.

Acknowledgments
Parts of this lecture draw on joint work with my colleagues Dominique Plihon, Adriano Giannola, and
Christian Weller. I thank them for their collaboration. I also thank my colleagues Jim Crotty, Nancy Folbre,
Ilene Grabel, and Bob Pollin for many discussions that have informed my thinking on these issues.

Declaration of Conflicting Interests

The author(s) declared no conflicts of interest with respect to the authorship and/or publication of this
article.

Funding
The author(s) received no financial support for the research and/or authorship of this article.

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Bio
Gerald Epstein is currently a Professor and the chair of the Department of Economics at University of
Massachusetts at Amherst. He is also co-director of Political Economy Research Institute (PERI) at Univer-
sity of Massachusetts at Amherst. He received his Ph.D. in economics from Princeton University. He has
published widely on a variety of progressive economic policy issues, especially in the areas of central bank-
ing and international finance, and is the editor or co-editor of eight volumes, including Radical Economic
Perspectives on Globalisation: Edward Elgar Press 2009); Beyond Inflation Targeting: Monetary Policy For
Employment Generation and Poverty Reduction: (with Erinc Yeldan Edward Elgar Press 2009); An
Employment-Targeted Economic Program for South Africa: (with Robert Pollin, James Heintz and Leonce
Ndikumana Edward Elgar Publishers 2006); Financialization and the World Economy (Edward Elgar Press
2004); Capital Flight and Capital Controls in Developing Countries (Edward Elgar Press 2004); Globaliza-
tion and Progressive Economic Policy: (with Dean Baker and Robert Pollin, Cambridge University Press
1998); Macroeconomic Policy After the Conservative Era: Studies in Investment, Saving and Finance (with
Herbert Gintis, Cambridge University Press 1995); and Transforming the U.S. Financial System: An Equi-
table and Efficient Structure for the 21st Century (with Gary Dymski and Robert Pollin, M.E. Sharpe 1993).
Professor Epstein’s current work focuses on the current financial crisis and alternative strategies to inflation
targeting in developing countries.