Why banks need to become like utility companies

The local impact from the breakdown of the financial system is painfully obvious. Schools are facing painful budget cuts next year.Local mom and pop establishments are vanishing.Companies large and small are downsizing and big-box stores like Circuit City, Linens & Things, and EXPO Design Center are closing their doors for good.Our neighborhood is bearing the brunt of a failed banking system that needs fixing.

The recent fallout highlights the need for two distinct banking types: I call them Utility Banks and Investment Banks. Utility Banks are a reliable and predictable source of money for consumers and businesses that drive economic growth.These banks provide consumer loans, business loans, construction loans, checking and savings accounts. Investment Banks, on the other hand, are a source of money for complex and higher risk needs such as mergers & acquisitions, hedge funds, and other speculative ventures.

Utility Banks need to be safe and predictable, and we should be able to rely on them as we do our public utilities.Just as electricity and water are essential services for the health and welfare of our community, a reliable source of money is crucial for a stable economy. A stable banking system benefits more than businesses and schools: non-profits that serve the many charitable causes in our neighborhood rely heavily on financial donations from individuals.The reach of these non-profits throughout our community is profound.

By allowing commercial banks to move into investment banking Congressional leaders from both parties failed to protect the underpinnings of our economy.We learned this lesson during the Great Depression, fixed the problem, and then decades later we removed this safeguard. After bank failures helped fuel the depression, the Glass-Steagall Act of 1933 outlawed commercial banks from engaging in investment banking. One benefit was that customer deposits weren't at risk of loss due to bad ventures of the investment banks, thereby increasing consumer confidence. In 1999, Glass-Steagall was repealed by the Gramm-Leach-Bliley Act. Since then we've seen an expansion craze by large banks. To continually boost profits, Citibank expanded into hedge funds, brokerage services, insurance, investment banking, credit cards, and their loan underwriting standards were virtually eliminated.

Had we separated Utility Banks from Investment Banks, and maintained quality banking standards, we wouldn't be facing these problems. It's time to structure commercial banks so they can be as reliable as electricity and water, to help fuel a healthy, growing economy. We also need to regulate investment banks so their risky ventures don't threaten the foundation of the entire global economy, let alone ours.

Taxpayers are in a bind - we understand the need for a strong local economy, job market and housing market. I think most people understand the need for government to help stabilize the utility aspect of banking to protect deposits and to lend money to consumers and businesses.But we resent the fact that Wall Street investment banks were not regulated or managed properly and now we're footing the bill and losing jobs locally because of that. 

Everyone benefits from a utility banking system.Stable employment and housing are surely central to that.Just as important, our children who attend public schools and families receiving assistance from non-profits benefit too.