Nomi Prins is a former Goldman Sachs Managing Director. She is very familiar with derivative investment products that we have talked about here. Recently she was in Colorado to talk about the need for a return to local community banking. With the highly leveraged too big to fail banks being an ongoing risk to the entire banking system, she is encouraging local communities and states to think about setting up public banks or more local and community banks using public/private partnerships.
The state run Bank of North Dakota is sometimes cited as a successful example of this model. You can listen to her talk about this here.
In the Q&A session after her talk, there is an excellent discussion of the derivatives issues we have written about here. It is well worth you time to listen to. The information in the Q&A session ties in very well with our recent blog article on this topic.
Something to think about:
If we do get a derivatives meltdown some day in the future, the so called "too big to fail" banks might actually fail along with the entire existing banking system. The IMF and the BIS (Bank of International Settlements) have both issued warnings about it. There is no way to know what the true risk of this is, and it is a waste of time to worry about it. It's not something any of us could prevent if it did happen. It's certainly not anything we should want to see happen because the resulting chaos would be significant and disruptive to people's lives.
The question to think about though, is how would things move forward after such a crisis? It's hard to know of course. But one possible scenario is that we might actually revert back to a system kind of like Nomi Prins is talking about here. A system where local communities come together to form local banks that really are just banks. Not highly leveraged, high risk investment banks. Banks that just make dull good old fashioned loans to the local community to help provide needed goods and services. Loans that require solid collateral.
None of us can know the future. But it is worth listening to this concept as Nomi Prins talks about it here. Who knows, someday these may the only banks available. Even if we avoid a systemic crisis, there is still a need for this type of low risk "normal bank" where people can keep their money without it being at risk for high risk investment activity by the bank.
It is going to be interesting to see how the future really does unfold. Nomi Prins is trying to make a thoughtful contribution on the subject. We need more people looking for constructive solutions like this for people to consider, not less.