BANKWARS (episode one)

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Vermonters Vote for the Public Bank at Town Halls, but Big Banks Strike Back at State House

Associated Press reported in “Over a Dozen Towns Support Public Bank Idea” that the majority of communities asked to support the creation of a public bank in Vermont have approved the measure at town meetings. Supporters argue that instead of keeping its money in large global banking institutions, the state could save money, create jobs and eventually generate revenue by creating a state bank. The proposal would turn the Vermont Economic Development Authority, a nonprofit agency that makes loans, into a bank. A bill pending in the Legislature would put 10 percent of the state’s funds into it.

John Nichols of The Nation reports in “Vermont Votes for Public Banking” that “the votes were overwhelming. Vermont is not the only state where public banking proposals are in play. But the town meeting endorsements are likely to provide a boost for a legislative proposal to provide the VEDA with the powers of a bank.”

Robb Mandelbaum, in the New York Times writes that “public banking advocates point most hopefully to efforts in Vermont” to emulate the model of the Bank of North Dakota, which “funnels deposits from state agencies back into the state’s economy through a variety of loan and other development programs.”

GWENDOLYN HALLSMITH Co-founder of Vermonters for a New Economy, and the new executive director of the Public Banking Institute, Hallsmith said today: “It is clear that the bank lobby has a lot more traction in the State House than the cities, towns, and the citizens. It has been our contention that the state-chartered banks stand to gain by the legislation, and that their interests and the interests of the large out-of-state banks diverge on this issue.”

According to Vermonters for a New Economy, the bill is encountering fierce opposition, not from ordinary Vermonters, but mostly from lobbyists for big private banks. When Senate Finance Committee hearings began on March 18, the Finance Committee invited only representatives of big banks to testify concerning the proposal. This led a local paper, the Barre Montpelier Times Argus, to call the bill “politically unpopular” even though a large majority of towns supported it in the town meeting campaign.

A study by Vermonters for a New Economy, the Gund Institute at the University of Vermont, and the Political and Economic Research Institute at the University of Massachusetts states that a public bank would create “over 2,500 jobs” and add hundreds of millions in additional gross state product in the state.

According to the Public Banking Institute, public banks are counter-cyclical, meaning they are “capable of reducing the negative impact of recessions, because public banks can make money available for local governments and businesses precisely when private banks decrease lending.”

ANTHONY POLLINA State Senator in Vermont, Pollina introduced S. 204, the bill that would grant the Vermont Economic Development Authority a banking license and direct 10 percent of the Treasurer’s bank deposits to VEDA for investment in Vermont.


Big Banking Interests Strike Back


Matt Stannard is policy director at Commonomics USA and a researcher at the Public Banking Institute.

Wall Street Doesn’t Want Community Bankers to Know the Truth about Public Banking

After seven years of economic instability caused by irresponsible financial practices, the big banks haven’t learned their lesson, and neither have many policymakers. Legislation enacted at the end of 2014 allows Wall Street banks to hold risky assets (such as interest rate swaps and other derivatives) in the banking unit backstopped by FDIC deposit insurance. This places the U.S. taxpayer on the hook for bailouts when these banks again go under due to derivatives failures. Changes adopted at the end of the year by the Federal Reserve threaten to increase interest rates for municipalities, raising the costs of municipal projects, school funding, roads, bridges, and other public service and infrastructure needs. Big banks continue to wreck our economy.

The people are pushing back. Public banking now occupies legislative agendas and/or local campaigns in Hawaii, Illinois, Arizona, Washington, Colorado, New Mexico, Wisconsin, Illinois, Maine, New Hampshire, Connecticut, and Pennsylvania.

In response to the enthusiastic embrace of public banking in Seattle, Washington, James Haley of the Community Bankers of Washington recently asserted that public banks will compete with community banks. He argued that the Bank of North Dakota, far from being a successful model of a public bank supporting small banks, has committed “mission creep.” Haley even asserted that public banks would support risky financial ventures. These are curiously uninformed arguments. Justin Dullum, in the January 20 Northwest Weekly, transcribed them uncritically and without inviting assessment from other experts. The result was an extremely distorted picture of public banking and no picture at all of what BND does for community banks.

Anyone wishing to get an accurate picture of what, precisely, BND does for community banks ought to listen to this seven-minute audio clip, based on a 2012 roundtable discussion that included Eric Hardmeyer of the Bank of North Dakota, Rick Clayburg of the North Dakota Bankers Association, and Gary Peterson of Lakeside State Bank in North Dakota. Of the 2008 economic meltdown, Clayberg said that the Bank of North Dakota was able to purchase loans from smaller banks, improve their equity, and help them “ride out the economic downturn.” He added that legislative oversight strengthens the scope and effectiveness of BND, and that the legislature authorized BND to assist in post-flooding redevelopment in 2010. He emphasized that the participation of local lenders is a decisive agent of implementation in all of these processes. Gary Peterson was enthusiastic about BND’s role in aiding community banks, calling the parties “true partners.” He said that it would be much more difficult to find loan participants without the backing of BND.

The BND helps, and does not compete against, community banks. During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average. Not just more lending, but more productive lending: BND enables community banks to devote more assets to productive lending rather than safe holdings like government securities. This is because the BND enables higher than average loan-to-asset ratios—better than their neighbors, and better than the nation.

North Dakota will also weather the coming decline in community banks (they are failing and closing rapidly, with terrible effects on localities) quite well relative to the rest of the country. The state, which has the most community banks per capita in the U.S., is expected to lose two banks in 2015, compared to the national average of 6.34 per state. This is important when we consider that community banks are the lifeblood of local economies. One commentator calls them the “99 percent,” an apt metaphor even if community bankers don’t always see themselves that way.


Mr. Haley asserts that public banks will become competitors, growing “financially dangerous.” According to the FDIC, 81% of banks in North Dakota are community banks–the highest ratio in the United States. Their partnership mandate, created by the legislature, contemplated Mr. Haley’s concerns, and although there’s a miniscule amount of other depositors, the BND is nearly exclusively a state money bank. Deposits from individual customers make up less than 2% of BND’s total, hardly the “mission creep” to individual depositors contemplated by Mr. Haley. Haley’s claims that the BND “offers checking accounts and loans to everybody” and is a “widely functioning bank” are wild exaggerations. BND backs loans made by community banks, and offers a bland checking account for individual depositors, but does not loan those depositors money, and doesn’t have ATMs or debit cards. Haley’s concern about offering personal services would seem petty even if the BND were a fun place for consumers to bank—but in any case, it isn’t.

Interest payments to big banks bleed dry the institutions upon which we rely for basic services and day-to-day governing. Those banks control the financing of America’s municipalities. Those banks have exhibited no evidence of having reformed after 2008. Regulations are ignored, gamed, or gutted. That’s what the public banking movement is pushing back against.  Another longtime opponent of public banking recently said that it was “a cure worse than the disease.” If we want to use such tired metaphors, the “disease”, here are: a vested profiteering franchise, playing with our national and global survival, while constantly evading regulation, engaging in schemes and scams with legal impunity, and profiting from the crises they create. The Bank of North Dakota has never done anything like those, and future public banks will not do so either, because they will be under direct government control and their mandate will explicitly forbid them engaging in that sort of secret too-big-to-jail “activities” that private banks are infamous for.

It is high time to test our “cure”.  In fact, we already know it works! 

Martin Wolf is widely considered to be one of the world’s most influential writers on economics. He is the associate editor and chief economics commentator at the Financial Times:

“One of these radical ideas was proposed by Martin Wolf in the Financial Times. He suggests stripping private banks of their remarkable power to create money out of thin air. Simply by issuing credit, they spawn between 95% and 97% of the money supply. If the state were to assert a monopoly on money creation [via public central bank, and public banks], government could increase their money supply without increasing debt. Seigniorage (the difference between the cost of producing money and its value) would accrue to the state, adding billions to national coffers. Private commercial banks would be reduced to being servants, not masters, of economy.” —  George Monbiot

Scott Baker and Walt McRee provided valuable assistance in the writing of this article. Any errors, however, are solely my own. 

See:  Benefits for cities and municipalities of a Public Bank


Wall Street Interests Deceive the People about Public Banks

At the beginning of March, responding to the impressive wave of state-level public banking movements in the news, Mark Calabria of the Cato Institute wrote a template that became two different published OpEds. The Denver Post titled Calabria’s piece “Colorado would be wise to reject state-owned banking,” while American Banker titled the piece “Promises of Public Banks Don’t Match Reality.” The wording differs in the two pieces, but the message points are the same. In the course of delivering those points, Mr. Calabria distorts other scholars’ published research, gets some historical anecdotes wrong, and plays on tired old fears of “government control” while glossing over the rampant, widespread corruption of Wall Street banking.

See:  Coverage of HSBC in Britain’s Telegraph is a fraud on its readers

Although ostensibly associated with libertarian thought, Cato really argues in the interests of its supporters, who, in addition to the Koch family, include American Express, Chase Manhattan, CME Group, and Citicorp/Citibank. Mr. Calabria does not disclose Cato’s or his own financial interest in maintaining those corporations’ business, which might well be undercut by the success of both public and community banks. These are not “libertarian” interests in the sense of being genuinely committed to local control or even qualitatively less regulation. These companies know that regulatory systems covering powerful private banks are easier to game, and the rewards are big for those who can play the system. Public banks are regulated too, but their structurally limited power and absolute transparency create substantially fewer incentives for corruption. That Mr. Calabria can’t find any anecdotes of corruption from a currently existing public bank nearing 100 years of age (the Bank of North Dakota) is more informative than his Bill and Ted-style trip through history.

We can extract nine major arguments from Mr. Calabria’s piece:

1. Historically, public banks have failed because of governmental involvement and corruption.

Again, this has not been true in the case of the Bank of North Dakota, which has neither failed nor been subject to corruption. Mr. Calabria attempts to indict the BND for different reasons later, but BND is the most topical example in this discussion, and it isn’t failing and it isn’t corrupt.

As for pre-BND history, Mr. Calabria gets some of it wrong, beginning when he mis-identifies the first known public bank. This isn’t worth slogging through, though; Mr. Calabria is doing little more in his historical treatment than making extremely subjective claims without citations, covering a rather large span of history. It’s impossible to make any generalization about government-involved banking in early American history, because there were so many different ways to do it. In Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions, Susan Hoffmann explains:

Between the two extremes of mostly private commercial banks and almost entirely public state central banks there existed just about every arrangement imaginable. The state shared in ownership of some banks but not in governance (beyond specifying the banks’ constitutions). When the state was involved in a bank’s governance, its representation on the board of directors ranged from minimal to a majority plus public selection of the president. The capital of state banks consisted of various combinations of specie, mortgages on land and slaves, and bonds issued by the chartering state, other states, or the United States.

Readers are urged to read Ellen Brown’s The Public Bank Solution for a historical treatment of public banks dating from 3,000 BC to the present. Ms. Brown’s treatment doesn’t sugarcoat the problems some public banks had. But placing those problems next to the problems created by too-big-to-fail banks will give readers a sense of perspective.

2. The failure of the Vermont public bank of 1806 is an indictment of public banks.

Jim Hogue’s excellent analysis of the Vermont State Bank reveals, yet again, that Mr. Calabria’s analysis is selective and oversimplified. Profits at the VSB were $11,000 in 1808, $22,000 in 1809, $33,000 in 1810, and $44,000 in 1811. Governor Galusha, who had initially opposed the bank, admitted that “the establishment of a public bank in this state has saved many of our citizens from great losses, and probably some from total ruin.” Private corrupt financial interests ended up undermining and discrediting the bank, apparently on purpose.  Vermont-based journalist Ken Picard calls the closure of the State Bank “inexplicable,” pointing out, as does Hogue, that the bank was profitable and enjoyed widespread political support. Hogue’s most important conclusion is that the reasons for both the creation and the ultimate demise of the Vermont State Bank underscore the need for banking to be a public utility instead of a private business.

3. Fannie Mae and Freddie Mac illustrate the failure of government involvement in banking.

Fannie Mae and Freddie Mac had little to do with the housing bubble of the late 2000s; Wall Street capitalists peddled their high-risk subprime schemes beyond the Freddie and Fannie system, and it was private-label securities rather than anything done by Fannie and Freddie that led to the financial meltdown, according to the bipartisan Financial Crisis Inquiry Commission. Fannie and Freddie indeed failed due to bad business decisions, but there is no connection between those decisions and the kinds of mandates that would be contained in a public banking charter; Mr. Calabria doesn’t even assert that any such similarities exist. One recurring conclusion readers can’t help but make as they compare Cato’s work to PBI’s is that both public and private institutions can get it right, or not get it right. The public banking movement seeks to create public financial institutions that responsibly support community-oriented private ones.

4. The German Landesbanken carried the bulk of losses related to the 2008 subprime crisis.

Arguing that the German Landesbanken were responsible for subprime crisis losses ignores the pressure the big banks exerted on  the German public banks to accept risky securities and debt obligations. In any case, BND and German banks still weathered the Great Recession better than their private counterparts. Evidence much more recent than what Mr. Calabria relies upon concludes that the Landesbanken have been, and continue to be, highly successful public banks. Germany has 11 regional public banks (Landesbanken) and several municipal public banks for consumers (Sparkassen). We’ll discuss Sparkassen a bit later. Concerning Landesbanken, Ellen Brown explained in 2012:

Germany and Japan are export powerhouses, in second and third place globally for net exports. (The U.S. trails at 192nd.) One competitive advantage for both of these countries is that their companies have ready access to low-cost funding from cooperatively owned banks.

In Germany, about half the total assets of the banking system are in the public sector, while another substantial chunk is in cooperative savings banks. Germany’s strong public banking system includes 11 regional public banks (Landesbanken) and thousands of municipally owned savings banks (Sparkassen). After the Second World War, it was the publicly owned Landesbanks that helped family-run provincial companies get a foothold in world markets. The Landesbanks are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that drive the country’s export engine.

Because of the Landesbanks, small firms in Germany have as much access to capital as large firms. Workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive. In January 2011, the net value of Germany’s exports over its imports was 7 percent of GDP, the highest of any nation. But it hasn’t had to outsource its labor force to get that result. The average hourly compensation (wages plus benefits) of German manufacturing workers is $48—a full 50 percent more than the $32 hourly average for their American counterparts.

5. The Bank of North Dakota’s record is tarnished by its connection with fossil fuels.

This is a curious non sequitur. If Mr. Calabria intends to imply that the BND’s success hinges on the oil boom, Ellen Brown convincingly refuted that assumption in 2011 and again in 2014 (“the BND’s return on equity was up to 23.4% in 2009 – substantially higher than in any of the years of the oil boom that began in 2010”); if anything, the causal arrow goes in the other direction. If it’s a swipe at BND and North Dakota for propping up fossil fuels, that’s a curious argument considering that public banks could efficiently and quickly fund a transition to renewable energy. Under either interpretation, the success of the BND is in no way undercut by its support for North Dakota’s extraction infrastructure. Most of us at PBI (and we guess most of you) want a post-carbon economy. Public banks are a key way to get there.

6. North Dakota would have received more interest on its deposits with private banks.

Profitability from high interest is precisely what we are fighting against when the projects or businesses being financed are essential for the public good, and produce long-term growth that far exceeds the value of a bank’s short-term profits. Mr. Calabria also fails to mention the dividends BND annually pays into the state, the benefits of BND’s disaster relief and emergency programs, or their ability to quickly create the infrastructure that facilitated North Dakota’s oil boom.

For points 7 and 8 below, Mr. Calabria relies on a couple of studies that he says indict public banks. The problem is that the authors of the studies are explicit in defining “government” banks as quite distinct entities, definitions so specialized that the Harvard study doesn’t even include the Bank of North Dakota in its analysis—because the BND isn’t the kind of bank its authors are studying.  Indicting the Bank of North Dakota by using aggregated descriptions of “government banks” that, by definition, exclude the Bank of North Dakota is, to put it bluntly, intellectually dishonest.

7. Research concludes that “higher government ownership of banks is associated with slower subsequent development of the financial system.”

This is Calabria’s citation of the Harvard study, which is from 2002 and uses data from 1960-1995, long before 2008 and the collapse and bailout of the big banks, and also before the recent peak years of the BND’s performance. It is vital that readers wanting to compare research read the actual study, because it’s clear that it makes very few conclusions relevant to a discussion of whether states, cities, and counties should set up BND-style banks. In fact, because of the way the authors define “government-owned banks,” the study lists the United States as having no such banks—the BND is not listed. “We do not include Central Banks, Postal Banks (which generally do not lend money to firms and are described as nonbanking institutions), investment banks, other specialized financial intermediaries (trust companies, home loan banks) or worldwide development banks such as the World Bank,” the authors explain. This research doesn’t apply to the BND or the type of banks PBI and its allies envision.

8. Research concludes that “political interference with bank lending decisions generally results in worse economic outcomes.”

This is Calabria’s representation of a paper by Taiwanese professor of finance Chih-Yung Lin, of the National University of Taiwan, “Why Do Government Banks Perform Worse? A Political Interference View.” That paper’s author sets out to examine why government-owned (not BND-style) banks fail in developing countries, and the author clarifies that “government banks in developed countries escape relatively unscathed while those in developing countries suffer significantly.” The data supporting the general conclusion that “government banks” perform worse comes from “71 emerging economies.” The author repeatedly reminds readers that this is not true in developed countries. Again, in this study, a “government-owned bank” is not a BND-style public bank, but rather any bank where the government has a shareholding exceeding 20% of total shares.

Even if the data were applicable, the author is more open about his value assumptions than Calabria is. Chih-Yung Lin cites explanations such as “government banks are designed to maximize social welfare rather than profit,” according to the social agency view.  The research includes anecdotal factors such as the replacement of bank executives following presidential elections. The actual conclusion of the paper is that political interference, in the form of ideology-driven or party-driven replacement of bank personnel, undermines the financial performance of public banks. Of course, there is no evidence that the BND suffers from political interference with its decisions. Charters and legislation prevent such problems.

9. “Government-owned banks also tend to under-price risk in order to appeal to voters.”

There is no contemporary or definitive evidence of this. The administrators of the BND would have no reason to do so. Nobody’s job depends on the outcome of a single election, and nobody’s political career in North Dakota would be made or broken because of BND.

Mr. Calabria’s research is old, does not account for too-big-to-jail banks, doesn’t apply to the Bank of North Dakota’s century of success, distorts the research of others, and hastily reasons from insufficient and inapplicable examples. More recent research consistently reaches optimistic conclusions about publicly-owned banks. To use just one example, Ellen Brown’s 2015 compilation of research on Sparkassen is devastating to Cato’s arguments:

In January 2015, the SPFIC published a report drawn from Bundesbank data, showing that the Sparkassen not only have a return on capital that is several times greater than for the German private banking sector, but that they pay substantially more to local and federal governments in taxes. That makes them triply profitable: as revenue-generating assets for their government owners, as lucrative sources of taxes, and as a stable funding mechanism for small and medium-sized businesses (a funding mechanism sorely lacking in the US today).

Brown continues: “Swiss public banks, too, have been shown to be more profitable than their private counterparts” (citing yet another study). This research review is newer and more comprehensive. She cites Professor Kurt Von Mettenheim, who concluded in 2011 that public savings, cooperative, and public development banks outperform for-profit banks. Brown also points out the subjectivity of performance criteria: Western politicians call unpaid loans to public entities deficits, while China views the spending as productive. This is especially important when considering public projects or paying for policy implementation. Low-interest loans “produce more public policy for less cash,” according to Mettenheim and Olivier Butzbach.

Stakeholders have different values than shareholders. Even if Calabria were reasoning correctly from his research (and we don’t think he is), he is reasoning from different fundamental values and definitions than we are.

Several people assisted in the writing of this article. Thanks to Scott Baker, Marc Armstrong, Ellen Brown, Walt McRee, Earl Staelin, and Douglas Alde. Any errors, however, are solely my own. 





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