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Moving Toward Federalism: The Big Bad Banks and the 2016 Election

by David Yee, published

From the time of the Founding Fathers to the Civil War, there was always a very vocal, though sometimes small in numbers, opposition to creating national banks.

One of the strongest reasons against a national bank was that many of the Founders had seen what had happened in the Bank of England during the century prior to the American Revolution.

To pay for endless wars, the Bank of England manipulated the currency, offered fiat currencies that the public distrusted, and often engaged in unscrupulous practices, such as funding the other side's military through secret lending.

From 1790 to 1828, our politicians did a relatively good job of controlling the debt. They were still paying off the Revolution, the Louisiana Purchase, and the War of 1812. But during times of plenty they used the tax money to pay down debt, and borrowed only when necessary when times were lean.

By 1828, the federal debt was $67.4 million, still a lot of money in those days, but substantially down from the peak of $127 million just after the War of 1812.

When Andrew Jackson took office in 1829, one of his major objectives was to destroy the Second National Bank, created to stabilize the currency after the War of 1812.

Through executive order, Jackson withdrew all government funds from the Second National Bank, paid down the national debt, and set up state level institutions to handle monetary functions.

The result was the worst economic disaster the young country ever faced. After Andrew Jackson's presidency, the national debt grew, usually unchecked other than sporadic periods of fiscal responsibility.

Big Bad Banks of 2016

Not a week goes by that presidential-contender Bernie Sanders doesn't put a meme on his Facebook site criticizing the power and neglect of the American banking system.

Republican presidential hopeful

Rand Paul has called on numerous occasions for a full audit of the Federal Reserve. And while the Federal Reserve already is audited more thoroughly and transparently than your local bank, that isn't enough for Paul, because what he really wants is more oversight.

And the list of politicians who are out for the banks could go on and on -- some solely focusing on the Federal Reserve system, others focusing on the private banking industry that is too big to fail, others focusing on the predatory lending practices of "easy credit," and still others focusing in on the cronyism and backroom dealings that led to the Great Recession.

In 2015 -- much like 1820 -- American's simply don't fully trust the banking system.

Some of the reasons make perfect sense, while some of them are only a defense response to a society with a growing debt burden.

They're complicated

Banking is complicated, and not everyone has an MBA in finance or economics. The banking system creates money out of thin air through the money multiplier effect, creating over $10 for each new $1 the federal government creates.

Banks live and die by the actuarial tables, and almost all decisions are made through the financial computation of net present value.

In short, the average American is talking to someone speaking a different language when the mechanics of banking is being discussed, and it worries them. After all, it is their money too.

They're a great conspiracy

Almost any good conspiracy theory has the Federal Reserve playing a nefarious role. After all, it's an organization that literally controls our money supply and interest rates, supposedly all done in secret.

Sadly, this one holds little value. The Federal Reserve is audited with much greater frequency and scrutiny than a private bank, and those results are public information (you just need to know where to look and speak "banker" to understand the spreadsheets).

They're irresponsible

Okay, on this point, the gut intuition of most Americans is probably correct. Who in their right mind actually believes they can afford a home that costs 45 percent of their pre-tax earnings? Banks constantly set people up for failure by increasing their loan volume with marginal loans.

Even worse, the coming student loan bubble is going to make the Wall Street banking crisis look minor in comparison. These are loans that require no credit check, no co-signer, generous payback terms, and numerous full deferments. While most of these loans are funded through the federal government's lenders, some banks have taken up private student loans, loans with higher interest rates, but fewer entanglements.

To many, the American dream has become buying up everything they wanted on credit -- then being "owned by the banks" as interest payments exceed principle.

Keep Credit in the Spotlight

The one good thing about this election is that banks, lending, and credit are being kept in the spotlight for Americans to reflect. It isn't the banks that are the problem -- it's the fact that we are as a people just as irresponsible with credit as our government is.

We don't need to break up the banks, audit the Fed, or end the student loan programs; we need to learn as an American people how to actually live within our means.

Only then can we expect to make any headway on our collective national debt, because once we've figured out how to live responsibly, we can demand the same actions from our politicians.

Photo Credit: Gerry Boughan /

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