In the course of an interview by Alan Minsky from a couple of weeks ago, Michael Hudson discussed a proposal for setting up a public option for banking (following the “Chicago Plan” of the 1930s and, says Hudson, Dennis Kucinich’s recent NEED Act):

Instead of relying on Bank of America or Citibank for credit cards, the government would set up a bank and offer credit cards, check clearing and bank transfers at cost. …

Providing a public option would limit the ability of banks to charge monopoly prices for credit cards and loans. It also would not engage in the kind of gambling that has made today’s financial system so unstable and put depositors’ money at risk. …

The guiding idea is to take away the banks’ privilege of creating credit electronically on their computer keyboards. You make banks do what textbooks say they are supposed to do: take deposits and lend them out in a productive way. If there are not enough deposits in the economy, the Treasury can create money on its own computer keyboards and supply it to the banks to lend out. But you would rewrite the banking laws so that normal banks are not able to gamble or play the computerized speculative games they are playing today.

Hudson also argues that distortions in our tax system that encourage debt leveraging are contributing to the fragility of the financial system and worsening inequality:

Over the past few decades the tax system has been warped more and more by bank lobbyists to promote debt financing. Debt is their “product,” after all. As matters now stand, earnings and dividends on equity financing must pay much higher tax rates than cash flow financed with debt. This distortion needs to be reversed. It not only taxes the top 1% at a much lower rate than the bottom 99%, but it also encourages them to make money by lending to the bottom 99%.

Read the whole thing.  An edited transcript of the radio KPFK interview can be found here at NEP (with Hudson adding some post-interview elaboration).