Ontario’s provincial debt is fast approaching 300 billion, and is rapidly growing as you read this (debtclock.ca). This huge debt is due to provincial government borrowing from private banks at high compounded interest.
Have you ever wondered how private commercial banks can afford to pay out all those multi-million dollar year-end bonuses before Christmas? In the US, Pacific Investment Management paid its former chief investment officer, Bill Gross, a bonus of about $290 million. It is gross. And Canada’s big banks gave out $12.2 Billion in bonuses, 13 percent more than year before. No austerity in the banking sector in Canada! Where do those more-than-generous bonuses come from? From the usury the People of Canada pay to the greedy private banks. Usury is not a law of nature; it comes from human greed.
Big private banks might be too-big-to-fail, and according to U.S. Attorney General Eric Holder, they might be even too-big-to-jail (prosecute). Soon, they may turn out to be too-big-to-bail. But they are not-too-big-to-abandon as depositories for government funds. If the State of North Dakota can bypass Wall Street with its state-owned public bank, and declare financial independence, so can Ontario and all other provinces across Canada bypass Bay Street.
“Forming a provincial, regional, or municipal public bank need not be slow nor expensive. An online bank could be run out of a municipal Treasurer’s office and operational in a few months. And the bank could be turning a profit immediately without spending the local government’s own revenues,” says Ellen Brown of publicbankinginstitute.org.
Every great journey starts with the first small step. I am not sure if Toronto could be considered as being “small” (I guess it is relative), but it is important to start small. Even though it seems to good to be true, the City of Toronto has just taken such first small step on a truly epic journey. Perhaps this may seem like one small step taken by Kristyn Wong-Tam, but hopefully it will turn out to be one giant leap for us all, the People of Canada. God Save the Queen. The public banking revolution has started in Canada!
Public banking was first introduced in America by the Quakers in the original colony of Pennsylvania. Other colonial governments also established publicly-owned banks. The concept was later embraced by the State of North Dakota, the only state to currently own its own bank. As of the spring of 2010, North Dakota was also the only US state sporting a major budget surplus; it had the lowest unemployment and default rates in the country; and it had the most community banks per capita, suggesting that the presence of a state-owned bank has not only not hurt but has helped the local banks.
Public banking is banking operated in the public interest, through institutions owned by the people through their representative governments. Public banks can exist at all levels, from municipal, regional, to provincial, to national, or even international. Any governmental body which can meet local banking requirements may, theoretically, create such a financial institution. Public banking is distinguished from private commercial banking in that its mandate begins with the public’s interest. Privately-owned banks, by contrast, have shareholders who generally seek short-term profits as their highest priority. Public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity. The costs of public projects undertaken by governmental bodies are also greatly reduced, because public banks do not need to charge interest to themselves. Eliminating interest has been shown to reduce the cost of such projects, on average, by 50%. When the public interest demands, the mission of public banks is to respond immediately, to assure the long-term prosperity of the community (see: Introduction to Public Banking).
The State of North Dakota is the only US state that has a state-owned public bank, the Bank of North Dakota. The Wall Street Journal has reported that the public Bank of North Dakota outperforms Wall Street private banks (see: ellenbrown.com). Why shouldn’t we, in Canada, learn from this good example, and establish our own provincial public bank, the Ontario Public Bank? Could opening province-owned public banks across Canada get us out of the financial crisis? People in Santa Fe, Seattle, Tacoma, San Francisco, Philadelphia, Allentown, Pittsburgh, Reading, Vermont, Maine, Colorado, Washington, Hawaii, New Mexico, Arizona, seem to think so. For example, the state of Vermont, several months after reclaiming $50 million of state deposits from private Canadian Toronto-Dominion Bank for reinvestment into the state’s economy, has taken intermediate steps to establish state-owned public bank. 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], 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 theguardian.com
“We live under a tyranny today that is just as intolerable and unjust as that in 1776, but violent revolution is no longer an option. Our oppressors own the military and the media, and their FEMA camps are waiting for us. If change is to come, it must be peaceful and legal, beginning with a revolution in the minds and hearts of the people. The message of the Public Banking in America Conference was that we can throw off the yoke of the international financial elite by making money and credit a public utility; and the most feasible place to start is at the local level, with publicly-owned banks.” — Ellen Brown www.ellenbrown.com
Key Questions and Answers for
Elected Officials and Policy Makers
Treasury Staff, Bankers,
Taxpayers and Voters
During the early 1900s, North Dakota’s economy was dangerously dependent on a single industry—agriculture, an industry controlled by financial interests outside the state. To diversify the economy and regain control of its financial future, North Dakota created a unique asset: the state-owned public Bank of North Dakota. North Dakota is the only state in the union with a public state-owned bank.
The following video documents the rise of the Non-Partisan League and its struggle to overthrow the out of state interests that controlled the North Dakota economy and chronicles the political infighting, the dirty tricks, the back room deals, and the amazing series of events that led to the creation of this public bank. The video features historians, economists, bank staff members and members of the Industrial Commission discussing how the bank came into existence, how it has responded over the years to its mission, and its evolving role in promoting commerce, agriculture and industry:
Why is socialism doing so darn well in North Dakota?
North Dakota’s thriving public bank makes a mockery of Wall Street’s casino banking system, and that’s why financial elites want to crush it.
By Les Leopold www.alternet.org
North Dakota fully supports its state-owned public Bank of North Dakota (BND), a socialist relic that exists nowhere else in America. Why is financial socialism still alive in North Dakota? Why haven’t the North Dakotan free-market crusaders slain it dead? Because it works!
In 1919, the Non-Partisan League, a vibrant populist organization, won a majority in the legislature and voted the bank into existence. The goal was to free North Dakota farmers from impoverishing debt dependence on the big banks in the Twin Cities, Chicago and New York. More than 90 years later, this state-owned bank is thriving as it helps the state’s community banks, businesses, consumers and students obtain loans at reasonable rates. It also delivers a handsome profit to its owners — the 700,000 residents of North Dakota. In 2011, the BND provided more than $70 million to the state’s coffers. Extrapolate that profit-per-person to a big state like California and you’re looking at an extra $3.8 billion a year in state revenues that could be used to fund education and infrastructure.
One of America’s Best Kept Secrets
Each time we pay our state and local taxes — and all manner of fees — the state deposits those revenues in a bank. If you’re in any state but North Dakota, nearly all of these deposits end up in Wall Street’s too-big to-fail banks, because those banks are the only entities large enough to handle the load. The vast majority of the nation’s 7,000 community banks are too small to provide the array of cash management services that state and local governments require. We’re talking big bucks; at least $1 trillion of our local tax dollars find their way to Wall Street banks, according to Marc Armstrong, executive director of the Public Banking Institute.
So, not only are we, as taxpayers, on the hook for too-big-to-fail Wall Street banks, but we also end up giving our tax dollars to these same banks each and every time we pay a sales tax or property tax or buy a fishing license. In North Dakota, however, all that public revenue runs through its public state bank, which in turn reinvests in the state’s small businesses and public infrastructure via partnerships with 80 small community banks.
How the State Bank Creates Jobs
Banks are supposed to serve as intermediaries that turn our savings and checking deposits into productive loans to businesses and consumers. That’s how jobs are supported and created. But the BND, a state agency, goes one step further. Through its Partnership in Assisting Community Expansion, for example, it provides loans at below-market interest rates to businesses if and only if those businesses create at least one job for every $100,000 loaned. If the $1 trillion that now flows to Wall Street instead were deposited in public state banks in all 50 states using this same approach, up to 10 million new jobs could be created. That would effectively end our destructive unemployment crisis.
No Bailouts for the BND
Banking doesn’t have to be a casino. It doesn’t have to be designed to create gambling opportunities so bank traders and executives can make seven- and eight-figure salaries.
As state government employees, BND executives have no incentive to gamble their way toward enormous pay packages. As you can see, the top six BND officers earn a good living, but on Wall Street, cooks and chauffeurs earn more.
The very existence of a successful BND undermines Wall Street’s claim that in order to attract the best talent big banks need to offer enormous pay packages. Yet somehow, North Dakota is able to find the talent to run one of the soundest banks in the country? The BND is living proof that Wall Street’s rationale for sky-high executive pay is a self-serving fabrication (for more information on financial inequality please see my latest book, How to Earn a Million Dollars an Hour ).
Wall Street Is Gunning for Bank of North Dakota
As you can well imagine, our financial elites would love to see this successful (socialist!) bank disappear. Its salary structure and local investments makes a mockery of Wall Street’s casino banking system. But the bigger threat comes from the possible spread of this public banking concept to other states. Already, there are 20 or so state legislatures that are exploring state banks. Collectively, more public banks would pose an enormous threat to the $1 trillion in state and local bank deposits that now run through Wall Street.
But elite financiers also stand to lose much more. In the 49 states without a public bank, there’s no safe place to turn for loans to rebuild schools and finance other public infrastructure projects. That creates an enormous opportunity for Wall Street firms to hook localities on expensive bond programs — like capital appreciation bonds, which can lead to repayments equaling 10 times the original loan. Investment bankers and advisers also make enormous fees by selling expensive, high-risk financial schemes to state and local governments (read an investigative report). But such schemes are useless in North Dakota where the state bank provides the capital the state needs for a fraction of the long-term costs.
Trade Agreements: Wall Street’s Weapon of Mass Destruction
Clearly, from Wall Street’s perspective, the North Dakota bank must go, and all other state efforts to replicate it must be thwarted. Wall Street’s stealth weapon may be lodged within the latest corporate trade agreement called the Trans-Pacific Partnership (TPP), which currently is being negotiated in secret. We already know that Wall Street is seeking to remove all tariff restrictions that prevent the U.S. financial services industry from doing business in countries like Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The biggest banks also want the treaty to eliminate “non-tariff” barriers including regulations that create “unfair” competition with state-owned financial enterprises.
Depending on the final language, it is possible that the activities of the Bank of North Dakota could be ruled illegal because “foreign bankers could claim the BND stops them from lending to commercial banks throughout the state,” according to an analysis by Sam Knight in Truthout. How perfect for Wall Street: a foreign bank can be used as a shill to knock out the BND.
The Public Bank Movement
A small but highly dedicated group of financial writers, public finance experts and former bankers have formed the Public Bank Institute to spread the word. Working on a shoestring budget, its president Ellen Brown (author of The Public Bank Solution: From Austerity to Prosperity), and its executive director Marc Armstrong have become the Johnny Appleseeds of public banking, hopping from state to state to encourage legislatures to explore state-owned banks.
The movement is gathering steam as it holds a major conference on June 2-4 at Dominican University in San Rafael, CA featuring such anti-Wall Street hell raisers as Matt Taibbi and Gar Alperowitz, along with Brigitte Jonsdottir, a member of the Icelandic parliament, and Ellen Brown.
Is America Up For This Fight?
Since the crash, the financial community has largely managed to wriggle off the hook. In fact, fatalism may be replacing activism as we sense that maybe Wall Street is simply too big and too powerful to change. After all, the big banks seem to own Washington, as too-big-to-fail banks are permitted to grow even larger and more invulnerable to prosecution and control.
But this new public banking movement could have legs, especially if it teams up with those fighting for a financial transaction tax (see: National Nurses United.) Most Americans remain furious about how financial elites profited from the crisis — before, during and after — while the rest of us pick up the tab. Americans know deep down that Wall Street is the predator and we are the prey.
The state-owned and operated Bank of North Dakota proves that it doesn’t have to be that way. This is the time to fight for public state banking in a big way. You game?
THE CASE FOR MORE PUBLIC BANKS
By Joe Rothstein, Editor EINNews.com
This is a tale of two banking systems, one public, the other private. Both part of the exceedingly urgent imperative to fix what ails the capitalist system.
Let’s start with the public banking system, and its only U.S. example, a bank owned and operated by and for the people of North Dakota. The Bank of North Dakota is “more profitable than Goldman Sachs Group, Inc. has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.” That’s a quote from no less an authority than the Wall Street Journal.
The Bank of North Dakota began operations 95 years ago, born of farmers tired of being price-exploited by grain monopolies and by private banks always at the ready to foreclose and take their land at the first sign of crop trouble.
These days the bank uses its deposits to smooth out the inevitable rough edges of farming. Even more important, the bank underwrites the expansion and creation of small and medium size business within the state to help keep North Dakota one of the most economically sound of the 50 states.
The Bank of North Dakota operates pretty much the way we used to think of banks, as somewhat boring institutions where you can park your money safely and be sure that the pooled assets were being put to work for the good of the community. Each and every year it turns over millions in “profits” to North Dakota’s general fund to help pay for public services.
The Bank of North Dakota didn’t speculate in risky derivatives, and doesn’t finance questionable loans to pump up its profits, so it barely noticed the financial calamity known as the Great Recession. It doesn’t pay its executives exorbitant salaries or bonuses. In fact, the bank guarantees its own deposits, rather than using the federal FDIC guarantee system. And it works. Not just because of the shale oil boom that hit in 2009. Mind you, this bank has been doing its thing since 1919.
Now let’s turn to Vermont. In 2011 the for profit TD Bank (short for Toronto Dominion) held $2.3 billion of the state’s $10.9 billion total deposits. Despite that dominance, TD made only $416,800 in SBA loans to Vermont’s small businesses. In reaction to the outflow of Vermont depositor money 19 of 23 Vermont communities, at town meetings, voted to urge the state Legislature to create a public Bank of Vermont, along the lines of the Bank of North Dakota.
TD and other major private banks mobilized to kill the public banking legislation, but what they couldn’t stop was enactment of a law to dedicate 10% of the state treasury’s cash balance toward making loans and investments within the state.
As Vermonters discovered, despite their overwhelming support for creation of a bank whose mission is to serve their interests, private banking wields a potent club when it comes to legislating at any level in the U.S.
Not quite so elsewhere in the world. Half of the assets in Germany’s banking system are in the public sector, and more is in cooperative savings banks. These public entities consistently have a higher return on capital than the German private banking system and actually pay more in taxes than their private counterparts. Switzerland’s public banking system is similar. India is in the midst of significant economic growth, having dodged the worst effects of the Great Recession largely due to prudent management of India’s public banking sector.
Notably, with all of the banking scandals that have been exposed in recent years, none have touched the public banks. There have been so many banking scandals lately you can be excused for having your attention to new ones wander and your sense of outrage blunted. As a refresher, we’re talking about more than the trillions that have been lost because so many of our major banks and financial institutions packaged and sold loans that never should have happened, and then lost heavily on bets that the bubble they created wouldn’t burst.
J.P. Morgan Chase & Co., Bank of America, Citibank and others cumulatively have paid more than $40 billion of their shareholders’ money to settle fraud actions brought by the U.S. Justice Department.
Not only did the reckless action of major banks bring down the world’s economy, they’ve been nailed for manipulating the once trusted interest measure known as Libor, they’ve created artificial energy and other shortages to add profit to their investments in industries such as utilities and mining, they’ve been convicted of bribing foreign leaders, they’ve foreclosed on properties that weren’t in default, and, amazingly, they’ve returned to the same risky derivative investments that forced taxpayers to bail them out in 2008.
HSBC, one of the world’s largest banks, has just had its international headquarters in Geneva raided by Swiss authorities after revelations that the bank laundered money for the drug trade, international arms dealers, and brutal foreign dictators. Along with other “private banking” services, HSBC counseled clients on how to illegally hide taxable income and wealth.
Finally, 7 years into the cascading revelation of banking scandals, Attorney General Eric Holder announced in mid-February that his Justice Department will decide within 90 days whether to hold Wall Street banking executives criminally responsible for the frauds committed by their banks related to the 2008 economic crisis.
Whether or not those charges are brought, the past 7 years have taught us that the world of international finance is fundamentally out of alignment with the interests of all but the handful of rich and powerful people who play in that world.
If allowed to continue, the world’s wealth will continue to be sucked to the top, leaving personal and social shambles down below. What we have with the mega-banks and the others in the Wall Street elite isn’t capitalism. Call it what you will, but by any name it’s dangerous.
More state and community banking wouldn’t be the entire needed remedy, but along with other measures—probably breaking up the mega-banks themselves—it would be a giant step toward more local economic stability and a more even playing field. All of which the patron saint of capitalism, Adam Smith, considered necessary for capitalism to work.
Joe Rothstein can be contacted at: firstname.lastname@example.org
Banking on Colorado: Bringing Our Money Home
When the Great Recession of 2008 hit, small and medium sized businesses suffered a sharp reduction in borrowing ability as the large banks, which have come to dominate our credit markets over the past two decades, sharply reduced their lending to these businesses. Instead, the large banks used the government bail-out money — given them for the purpose of stimulating of the economy through lending — to invest in the more lucrative but riskier derivative market, or to simply to take bad subprime mortgages off their books. Without access to affordable credit, small and medium sized businesses across the country laid off workers, stopped buying from suppliers, and went out of business. This deepened the crisis, pushing community banks’ loan portfolios into distress and state and local government budgets into deficit.
In Colorado, as in most other states, falling tax receipts have forced our state and and local governments to cut back on public services at the precise moment when their residents and local businesses needed them most. This damaging cycle has not abated in most of the country, and only partially in Colorado, despite the recovery of the handful of Wall Street financial firms, who set off this crisis in the first place.
This financial crisis and its aftermath have exposed how little control communities have over their local economies. When economic disasters hit, state and municipal policymakers have few tools at their disposal to stop the flight of money out of their local economies and have no reliable way to keep money flowing to local banks, local businesses, and local governments.
As a result, states across the country have begun considering proposals to move general revenue deposits out of the large multi-national banks that dominate the banking business today, and use them to capitalize a new local public structure, a public bank, with the mission of growing their local economies. These public banks — also known as partnership banks — would protect government investment and be accountable to the public.
Such a bank could be modeled on the 95-year-old and very successful public Bank of North Dakota (BND), which over the period of its existence has contributed to the health of local community banks, state budgets, medium and small businesses, and job growth. In fact, North Dakota was the only state to not take an economic downturn during the Great Recession. While other states were experiencing large government budget deficits and sharp reductions in investment in local economies, the BND increased its lending into the economy, employment actually increased, and the state experienced record budget surpluses.
To inform the public about the benefits of public banking and to foster public banking initiatives within the state of Colorado, Be The Change – USA has founded the organization Banking on Colorado, a new and growing movement in Colorado filled with people of diverse backgrounds and interests who are deeply committed to changing our financial system. We welcome you to join our movement, which is as big in scope and courage as the Civil Rights movement of the 1950s and 60s.
A central part of this effort is to advance the concept of public banking. To this end, Be The Change – USA, supported by a grant from the Denver Foundation, and along with the Rocky Mountain Employee Ownership Center, the Community Forum, and the Public Banking Institute hosted a conference in Denver on Saturday, January 31, 2015, Banking on Colorado: Bringing Our Money Home, featuring local and national leaders in the public banking movement.
The conference was well attended — with over 120 registrants. It informed Colorado citizens – public officials and their constituents – about:
- The dominance of the large, multi-national banks in our economy with their often abusive, fraudulent, and sometimes criminal operations,
- Why the current financial system ignores or even harms local economies and the middle class,
- The financial challenges faced by homeowners, entrepreneurs, small businesses, and students because of the current financial system,
- What public banking is and how it benefits its constituents,
- Why public banks lend counter-cyclically, to increase lending in a recession, and decrease or control lending to prevent bubbles,
- The bold story about a new, sustainable economy based on respect, compassion, dignity, and democracy, and
- The ability to help kick-start the implementation of public banking through the power of our diversity and numbers
Public banks support Main Street, not Wall Street – by supporting community banks, growing small businesses, creating jobs, and lowering government debt.
Nomi Prins is a Senior Fellow at Demos, former Managing Director at Goldman Sachs; former Senior Managing Director at Bear Stearns. Author, “All the Presidents’ Bankers: The Hidden Alliances that Drive American Power”, and “It Takes A Pillage: Epic Tale of Power, Deceit & Untold Trillions.”
Colorado needs a public bank
After we bailed out the “too-big-to-fail” Wall Street banks in 2008 and 2009, things appeared to have improved. Today, Wall Street is rebounding and the job market is looking up. But the folks on Main Street working for low hourly wages or Coloradans paying tens of thousands of dollars in student debt with no end in sight, who lost their homes, or are working part time jobs with no benefits are not so sure.
Colorado entrepreneurs seeking green energy solutions and small business start-ups scramble for funding. Needed infrastructure projects like repairing our state bridges are not keeping up with civil engineers’ recommendations. Meanwhile, the marijuana industry has no place to bank its cash.
In 1729, Benjamin Franklin gave credit to the colonial government of Pennsylvania for restoring prosperity by lending money beginning in 1723. Franklin later blamed Britain’s decision in 1764 to prohibit further lending and printing of paper currency by colonial governments as the chief cause of the Revolution because it rapidly caused widespread unemployment and poverty.
Apparently, North Dakota paid attention to Franklin. This year, North Dakota celebrates its 96th year of having a state-owned bank, the Bank of North Dakota, and is the only state that has one. Arguably, as a result of its bank, North Dakota was the only state not to suffer budget deficits or declining employment as a result of the 2008 crash. Its unemployment rate was and remains the lowest in the nation at 2.8 percent. And it has had larger budget surpluses each year since 2008, no bank failures, and has remitted $900 million in taxes to the people of North Dakota. Critics attribute North Dakota’s success to its increased oil revenues, but its big increase in oil income did not occur until 2010, and Alaska and Montana have had more oil but still had budget deficits and high unemployment. Today, North Dakota has one of the lowest rates of home foreclosures, and consistently has the lowest rate of credit card default and student loan default in the United States.
The Bank of North Dakota makes most of its loans through local community banks, shares the risk, and often guarantees their loans. It invests in North Dakota and its citizens.
A public bank here in Colorado working together with our locally owned community banks is a promising option for expanding real prosperity and well-being here. It would be required to lend in Colorado. Its mission would not include paying commissions or bonuses, making risky investments in subprime loans or derivatives, or profiting at the expense of our community. A public bank’s mission would be to serve our communities by helping them thrive and our citizens prosper — through supporting small and medium sized businesses, green energy, lower student debt, reduced home foreclosures, sustainable farming, infrastructure, and more.
To this end, the first-ever conference on public banking in Colorado was held in Denver in late January. The conference, Banking on Colorado, featured national authors and local panelists representing Colorado farming, student debt, home foreclosures, green energy, a community bank, and small businesses.
Earl Staelin is a Denver trial lawyer and co-sponsor of the Public Bank Initiative, which would amend the Colorado Constitution to establish a state-owned bank.
Vermonters Lobby for Public Bank—And Win Millions for Local Investment Instead
Advocates didn’t get the public bank they wanted. But the compromise they reached in the end was still a rare and significant win over Wall Street banks.
By Alexis Goldstein www.yesmagazine.org
Right before 2014 came to a close, Wall Street won an enormous victory in the year-end spending bill. The so-called “CRomnibus” bill, which included language written by Citigroup lobbyists, gutted a key piece of Wall Street reform meant to prevent future bailouts of big banks with taxpayer money.
Reducing a state’s need to borrow from Wall Street, public banks threaten private banks’ profits.
This win came after the financial industry spent years chipping away at the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed in 2010. Wall Street lobbyists gained little victories along the way, but never stopped asking for more. By making bold and ongoing asks, Wall Street was able to win, even when lawmakers sought a compromise.
There’s another group of Americans, however, with a different agenda for the future of banking—people who are also pushing hard for policy change. They’re advocates of public banking, and they want to see new banks created that would be owned and operated by the government, usually at the state or city level. (This would greatly increase the amount of investment capital available for small business development, local infrastructure, and affordable public transportation, none of which are much favored by private banks seeking a high return on investment.)
Gwendolyn Hallsmith is one of those advocates. She’s currently the executive director of the Public Banking Institute, but she worked previously as a public servant in Montpelier, Vermont, where she resides and ran for mayor in 2014. Hallsmith also spent some time in divinity school, and you can hear it in her voice—which is soft but strong and deliberately paced.“Perhaps the only thing more dangerous than giving a politician the microphone is giving a former pastor the microphone,” Hallsmith joked at a recent forum on public banking.
To Hallsmith, the main advantage of a public bank is lower-cost financing, which can enable the state to pay for things like building affordable housing, repairing infrastructure, and expanding educational opportunities. And each of these projects creates jobs. Public banks “allow cities, counties, and states to finance important public priorities without needing to rely on Wall Street and pay the hidden interest tax that Wall Street imposes on all our money,” Hallsmith said.
The quest to achieve public banking at the state and local level has been a long slog. Until quite recently, you had to go back almost 100 years to find the last major victory: the founding of the bank of North Dakota, the only state-run public bank in the United States, which was established in 1919.
But interest has been picking up around the country. Santa Fe, New Mexico, voted in October to conduct a study on the feasibility of a city-run public bank. And in December, the Seattle City Council’s finance committee hosted experts in public banking to explore the topic.
But nowhere have the steps toward public banking been more successful than in the state of Vermont. There, Hallsmith and other advocates won a small victory against Wall Street through an effort so relentless and strategic that it would have made any banking lobbyist proud. They combined savvy organizing with data-driven reports and policy briefs to prove the benefits of a public bank—like avoiding fat interest payments to Wall Street banks—for the state’s economy.
And because the original bill put forward by Vermont state Senator Anthony Pollina and others included multiple demands—create a public bank, direct 10 percent of the state’s reserves to initially fund it, and establish an advisory committee on how best to invest locally—advocates won a decent compromise in the end.
They may not have gotten the state bank they wanted, but they were able to pass new rules that make the Vermont state treasury’s cash balances available for low-cost loans to local projects.
$10 million additional dollars for local investment
The step Vermont took is called “10 Percent for Vermont.” Under this law, passed in June, up to 10 percent of the state treasury’s cash balance—which as of November was about $350 million—can be used for lending and investment within the state. The law also created a Local Investment Advisory Committee to advise the treasurer on “funding priorities” and “mechanisms to increase local investment.”
Pollina was one of the main champions of the law. Pollina has been a state senator since 2010, but has a long career in politics; in 2000, he ran for governor as a member of the Vermont Progressive Party against Howard Dean.
“It’s just logical that you’d want to invest it in your own cities,” he said, describing the program as an “economic development tool.”
“It’s just logical that you’d want to invest it in your own cities.”
The final version of the 10 Percent for Vermont program did not create a public bank. But it helped to accomplish some of the same goals, like providing low-cost financing for state projects that might otherwise not be able to secure affordable or long-term funding.
It’s not new for Vermont to enable its treasurer to lend locally—the state has had several similar programs in place since 2012. But typically, according to Hallsmith, the state would “borrow the money from Wall Street to do it.” Now, state officials can use the money from the state treasury’s deposits to do this kind of lending directly.
In 2014, the treasurer’s office made several local investments that counted toward the “10 Percent” total, but were authorized under previous laws. One example is the Vermont Clean Energy Loan Fund, which allocated $6.5 million in loans to encourage energy efficiency in residential home projects in the state, such as in Shelburne and Rutland counties. Another is a $2.8 million loan to Vermont’s Housing Finance Agency to support 111 units of multifamily affordable housing. A third is a loan fund approved in June that allocated $8 million for improved energy efficiency in state government buildings, with the goal of reducing their energy use by at least 5 percent (the state currently spends $14 million a year on energy bills).
All told, in 2014, Vermont’s treasury lent out $24.5 million to local projects. Even though this money was authorized by prior legislation, it still counts toward the 10 percent of the state’s cash balance—that is, $35 million—that the treasury may lend to the community. That means there is still approximately $10 million in additional funds available for local investment—money that the treasurer would not have been able to lend were it not for the 10 percent program.
The long fight for a public bank in Vermont
Public bank advocates, state Treasurer Beth Pearce, and the Vermont Bankers Association (VBA) all agree that 10 Percent for Vermont is off to a good start. Christopher D’Elia of the VBA said the program has “worked very well under the treasurer’s leadership” and that he believes “the taxpayers will receive a very nice rate of return.”
But the road to get there began with the more dramatic goal of a true public bank in Vermont.
The effort picked up steam in January 2012, when the Vermont House introduced legislation to conduct a study on creating a state bank, with 67 legislators co-sponsoring the bill. That February, the think tank Demos released a policy brief outlining the potential benefits. They pointed out that the for-profit TD Bank is a juggernaut in the state, holding over $2.3 billion of Vermont’s $10.9 billion total, in 2011. And yet, in 2010 the bank only made $416,800 in Small Business Association 7(a) loans (which are loans provided to small businesses that meet certain requirements), a 90 percent decline from the volume of similar loans it made in 2008.
Momentum kept building: In May 2013, the League of Women Voters of Vermont voted to conduct a study on the feasibility of a public bank. That December, a coalition of organizers, business, and individuals called Vermonters for a New Economy published a report again laying out the case for a public bank in the state. The report argued that a state bank could create more than 2,500 new jobs and add $192 million to Vermont’s Gross State Product (which is the economic output of a state. You can think of it as the state version of GDP). And because the state no longer would have to borrow money from private banks to finance important projects, the report found a public bank could save the state $100 million in interest payments over 20 years.
A report published by the Vermonters for a New Economy argued that a state bank could create more than 2,500 new jobs.
All three studies showed significant benefits, and state legislators were starting to listen. Last January , six Vermont state senators (Anthony Pollina, Claire Ayer, Eldred French, Dick McCormack, Jeanette K. White, and David Zuckerman—all Democrats except for Pollina and Zuckerman, who are members of the Vermont Progressive Party) proposed a stand-alone bill to implement the 10 Percent for Vermont program within the Vermont Economic Development Authority (VEDA), which would be granted a banking license and thus become the second state bank in the United States. In addition, an advisory committee would be created to “to enlist the help of private enterprise and encourage the use and growth of the program.”
The idea didn’t sit well with the treasurer’s office or the Vermont Bankers Association. Both argued that a public bank might hurt the state’s bond rating. Advocates countered that North Dakota’s public bank hadn’t damaged its rating, which was almost as high as Vermont’s—AA- versus AA+.
The VBA remained hopeful that the state legislature would not follow through with its plan to create a state bank—noting in a January 2014 report that the Vermont Congress showed “willingness to consider other options.” But Vermonters for a New Economy continued to build pressure through a campaign of “Town Hall” discussions. In March, 23 Vermont towns voted on resolutions urging the creation of a state bank, with 19 towns ultimately approving it. The votes were not legally binding, but they demonstrated broad support because each town needed to generate petition signatures for at least 5 percent of its legal voters to even hold the votes.
At the end of March, Pollina abandoned the stand-alone version of the public bank bill and instead inserted a modified version as an amendment into a large, must-pass economic development bill (seven other senators offered the amendment along with Pollina).
Now, instead of VEDA implementing the 10 Percent program and getting a banking license, the treasurer’s office would oversee the program and chair the Advisory Committee. This amendment didn’t completely abandon the idea of a public bank: It mandated that the Advisory Committee give a report in January that include a recommendation on whether to eventually turn VEDA into a public bank.
But the VBA opposed even that. And after Pollina’s amendment, it announced that it planned to fight in the Vermont House to get the public bank recommendation removed from the overall economic development bill.
The Vermont Bankers Association was successful in that. But the 10 Percent program survived, albeit in an amended form.
Can other states learn from Vermont’s fight?
Approximately $10 million is left to be invested from the 10 Percent program, and there are many options. Presentations to the Local Investment Advisory Committee have provided plenty of ideas for how to invest that money.
In November, the committee met to discuss potential investments in infrastructure, like water supply projects or bridges. (During the meeting, Karen Horn of the Vermont League of Cities and Towns pointed out that one-third of the state’s bridges are structurally deficient). And in December, committee members discussed possible transportation investments. This month, the treasurer’s office reports on its progress with the 10 Percent program, make a preliminary recommendation on how to loan the rest of the money, and will take proposals through March 1.
The 10 Percent program was also given a built-in sunset, so the program will either end or be renewed in July. The loans already made won’t go anywhere—the $2.8 million in loans for new affordable housing, for example, is good through 2024. But, once all the loan money is paid back, the treasurer’s office won’t be able to loan the additional $10 million locally if the program isn’t renewed.
The Bankers Association remains firmly against a state bank: “We see no reason to create a state bank in Vermont,” d’Elia said.
“The sunset shows again how difficult this struggle is and how strong the opposition can be,” Pollina said. “We are fighting the banking interests every step of the way.”
But the odds for renewal seem good. Even d’Elia of the Vermont Bankers Association said that his group supports a continuation of the 10 Percent program. “We would be supportive of the program continuing in the sense that, as the money comes back in, it gets lent out again,” d’Elia said.
But when asked if he would support an increase in the program, d’Elia expressed familiar concerns about cash flow and the state’s bond rating. And the Bankers Association remains firmly against a state bank: “We see no reason to create a state bank in Vermont,” d’Elia said.
Perhaps the VBA is right to be nervous about a possible expansion of the program. After all, by reducing a state’s need to borrow from Wall Street, public banks threaten private banks’ profits. But thus far, it’s advocates who may have paid a steeper price than private banks: Hallsmith alleges that she was fired from her job as a public servant because she advocated for a public bank in her private time. She has an open case with the Vermont State Supreme Court.
But Hallsmith remains positive about the public bank movement and its momentum: “Once we realize the power of credit creation—using money we are now sending to Wall Street—I don’t think there will be any stopping it,” she said.
Could other cities and states stand to benefit from emulating what Vermonters have done? Pollina thinks so, noting that similar programs “could help states and cities dig out of the Grand Recession.”
That’s exactly the kind of idea that thinkers like Mike Krauss of the Public Banking Institute are hoping to spread across the country.
Public banking is “a way to enable prosperity at the local level,” he said.
Vermont’s continued work on expanding local lending is a small step toward such prosperity. And if advocates can continue to combine their demands for a public bank with increases in local lending, they can ensure a small win for their city or state, even when the effort ends in a compromise. Those advocating for public banks in the rest of the country would do well to learn from the fight waged in Vermont.
VERMONT’S PUBLIC BANKING ADVOCATES RELEASE ECONOMIC STUDY
Advocates of public banking, so far unsuccessful in their quest to get the Vermont Legislature to study the possibility of setting up a state-owned bank, have taken the task upon themselves. At a news conference Tuesday in the Cedar Creek Room of the Statehouse, Sen. Anthony Pollina, P/D-Washington, and others presented research commissioned by the group Vermonters for a New Economy.
The research was conducted by the Political Economy Research Institute at the University of Massachusetts-Amherst and prepared by Gary Flomenhoft, fellow at the Gund Institute for Ecological Economics at the University of Vermont. It was paid for by the Donella Meadows Institute of Norwich.
Flomenhoft said about $236.2 million of new credit could be created in the state, as well as 1,000 jobs and $100 million in savings. For the full report, see the document link below.
The numbers are neither comprehensive nor final, Gwen Hallsmith said. She’s an organizer with Vermonters for a New Economy and a board member at Donella Meadows. Hallsmith is also the director of planning and community development for the City of Montpelier, but she emphasized she was not wearing that hat at the news event.
“This is not the kind of study we (are) pushing the state to do,” Hallsmith noted. She indicated that more data points would be incorporated into a legislative study, which also would ask more questions. “(This) is really a very small study that can be seen as the first step for more work that needs to be done to understand this fully,” she said.
For example, a longer timeframe might be necessary if the state were to officially engage the issue. The New Economy study based its calculation of new credit on the the state’s average daily balance of unrestricted funds in fiscal year 2013. State Treasurer Beth Pearce noted in a memorandum to Pollina in July that “cash balances are very volatile,” and as recently as 2003 the state had to borrow money for operational costs.
Aside from more numbers, some persistent questions that advocates hope will be addressed in a legislative study include the amount of capital that would be required to start a state bank; the arrangements between the state bank, state lending agencies and private banking institutions; and risk management.
Pollina stressed that the goal of the research was not to undermine local banks, but to examine the possible economic impacts of a state-owned bank. His proposal, loosely modeled after a state bank that North Dakota set up in 1919, would move the state government’s cash deposits from commercial banking institutions into a state-owned bank.
A state bank could consolidate the state’s existing lending agencies into a new financial and organizational architecture, Pollina said in an earlier interview. The Vermont Economic Development Authority, Vermont Housing Finance Agency, Vermont Student Assistance Corp. and Vermont Municipal Bond Bank technically are not banks, although they do make loans.
Public Banks: Can It Work For Pennsylvania?
It’s a model that’s done wonders for North Dakota but would this model be ideal for Pennsylvania? Region’s Business takes a look at both sides.
By Rosella Eleanor LaFevre philadelphia.regionsbusiness.com
America’s major commercial banks, investment firms and mortgage lenders recklessly gambled on subprime mortgages and in mid-2007, these institutions began to crumble. In September 2008, Lehman Brothers announced bankruptcy, Bank of America pays $50 million for Merrill Lynch and the government took over Fannie Mae and Freddie Mac. The last two independent investment banks, Goldman Sachs and Morgan Stanley, became bank holding companies subject to greater oversight by the Federal Reserve. JPMorgan Chase bought Washington Mutual Bank’s branches and assets, making the closing of Washington Mutual the biggest bank failure in U.S. history.
Congress rejected a $700 billion Wall Street financial rescue package called Troubled Asset Relief Program (TARP) on Sept. 29, 2008, sending the Dow Jones Industrial average down 778 points. On Oct. 3, 2008, Congress passed a revised version of TARP and President George W. Bush signed off. By one estimate from the Federal Reserve, the U.S. lost close to $14 trillion — one year’s worth of economic activity — during the recession, which lasted from 2007 through 2009.
This recession, the effects of which Americans are still experiencing like a terrible hangover, raised a lot questions about the system. Whoever thought subprime mortgages were a good idea? Should we have let the banks fail? Why haven’t the irresponsible leaders of those commercial banks, investment firms and mortgage lenders been charged criminally? Americans are starting to ask: “Are public banks a viable way to reduce the risk of a future recession and create a sound, effective and responsible banking industry?”
Public banks, also referred to as “partnership banks,” “development banks” and “state banks,” use deposits from states and their agencies (or cities and their agencies, or municipalities and their agencies, or counties and their agencies) to empower community banks, credit unions and savings and loans to provide credit to those other banks won’t. A public bank functions as a bankers’ bank, a “wholesale” bank that provides core services, including participation loans, to smaller banks (There are 22 bankers’ banks in the U.S., and even once a public bank is established, community banks may choose to continue working with private bankers’ banks).
Although public banks are enacted and funded by the government, they’re run by a professional banking staff and publicly audited each year. Public banks generally don’t have multiple branches but offices in one location, and they don’t usually originate business loans, take deposits from businesses or individuals, or offer consumer banking services. The upfront costs of establishing and maintaining a public bank are low.
Among those who understand the concept, there is debate about the need for and viability of public banking. On Oct. 1 of this year, the New York Times ran a discussion under its “Room for Debate” section with eight experts’ opinions on the question, “In Banking, Should There Be a Public Option?” As Ellen Brown, president of the Public Banking Institute, argued that public banks are key to capitalism, Mark A. Calabria of the libertarian public policy research organization, The Cato Institute, wrote that public banking would inhibit economic growth.
After reading Ms. Brown’s book, “The Web of Debt,” John Hemington of Washington County, Pa., reached out to her and asked what people could do if they wanted to prevent a future crisis. Mr. Hemington became one of the founders of the Pennsylvania Public Bank Project, which first aimed at creating a state public bank but now works to create a network of local public banks before approaching Pennsylvania’s Congress.
“My concern was that even at that early time, it was really clear that the commercial banking sector wasn’t functioning [properly]. It was essentially running a giant casino-type gambling function,” said Mr. Hemington, now serving on the Project’s advisory board. “The idea that there could be an alternative to the big banks was intriguing.”
Currently, the largest 0.2 percent of banks — just 12 institutions — hold 69 percent of industry assets. As the 2007-2009 crisis demonstrated, no bank is too big to fail; four of the 10 largest depository institutions failed or were bailed out by the government. Of the nation’s smaller banks, roughly six percent failed during the recession. During that period, none of the community banks in North Dakota failed, which some credit to the state’s public bank. In fact, North Dakota survived the recession with just a two percent unemployment rate.
“The too-big-to-fail banks are a black hole. They’re not doing what they are supposed to, which is direct credit and capital into the productive economy,” said Mike Krauss, chairman of the Pennsylvania Public Bank Project. “This is a disaster waiting to happen. We need to decentralize our banking industry.”
Public banking is designed to strengthen local banking markets, sometimes at the cost of the Wall Street banks, said Mr. Krauss. When backed by a public bank, local banks can work together to finance lending that the banks couldn’t do independently. Public banking support helps local banks compete with big banks and keeps customers coming back. By investing government funds into the local economy, public banks are better able to foster small business and create jobs, said Mr. Krauss.
Most state and local governments in the U.S. currently deposit their funds in Wall Street banks, because few community banks have, on their own, the funds necessary to back up the state or local governments’ deposits. In the current system, governments don’t have access to lines of credit, so budget surpluses go into rainy day funds that collect very little interest and hardly benefit taxpayers. With public banks, governments have access to their money when they need it and can use these banks to route their public lending programs and stimulate the local economy. Also, as public banks begin to profit from lending, governments could conceivably lower taxes.
The Pennsylvania Public Bank Project initially proposed a state public bank, which could’ve been funded by the sale of state-owned liquor stores, but assessment of the financial situation across the state told Mr. Hemington and his colleagues that it was too soon for a public bank. While the west side of the state was flush with fracking money, the east struggled. So the Project has shifted focus and is instead working to build a network of local public banks. “We think this is a tool that local governments need in their tool chest,” Mr. Krauss said.
Following the recommendations of the Pennsylvania Public Bank Project, Mayor Vaughn D. Spencer of the city of Reading, PA established a community development corporation and is hiring an executive director who will work towards establishing a municipal finance corporation. This is the first step towards creating a public bank and will allow the city greater control over its revenue.
“This is something that we had been looking at for a while — how we’re using our money we’re depositing in big banks,” said Mayor Spencer, who wanted to find a better way to deposit and use city revenue. “[The public bank option is] an idea we’re beginning to see possibly come to fruition.”
Efforts are underway to create a detailed business plan for a public bank in the city of Philadelphia, which Mr. Krauss said the Pennsylvania Public Bank Project will bring to City Council in early 2014. While it takes roughly $8-10 million to establish a public bank, Philadelphia has $12.4 billion in investments, including pension investments of $6.5 billion, eight separate enterprise agencies and other funds, which Mr. Krauss said are performing poorly. “The city of Philadelphia is hurting and everyone knows it. In Philadelphia, there’s a sense of urgency,” Mr. Krauss said. “We’re gonna give [City Council] a concrete place to start from [to establish a public bank].”
By 2015, Mr. Krauss thinks his organization will be ready to approach Pennsylvania Congress about launching a state-owned public bank.
Some, like Nick DiFrancesco, president and CEO of the Pennsylvania Association of Community Bankers, see no room for a public option in the state’s banking industry.
“The public bank option really does nothing to enhance available services in Pennsylvania,” Mr. DiFrancesco said. “The people and communities of Pennsylvania are already served by a diverse industry that is meeting the personal and economic needs of the Commonwealth. Some are mutual (community owned), some member owned and some are stock. Some serve farming, while others serve our housing markets. Still others focus on economic development, serving existing and start-up businesses. There really is no need for a public bank option in Pennsylvania’s marketplace.”
The President and CEO of Fox Chase Bank, Tom Petro, doesn’t believe public banks are answer because when a public bank fails, its taxpayers foot the bill, he said. “Fannie Mae and Freddie Mac have failed. And we Americans will be footing the bill for that for years to come,” said Mr. Petro. According to recent reports, Fannie Mae posted profits amounting $10.1 billion in the second quarter of 2013 and has paid down its $116 billion debt to the federal government.
While there is some political opposition to the idea of public banking, like with the Cato Institute’s Mr. Calabria, Mr. Krauss has seen nonpartisan support of the idea. “I’ve seen Occupiers and Tea Partiers in the one room, all approving,” he said. “I wouldn’t have bet money on that but now that I understand it, I can see why.”
For Mr. Krauss and Mr. Hemington, the answer to the question, “Are public banks a viable way to reduce the risk of a future recession and create a sound, effective and responsible banking industry?” is definitely yes.
“We want very much to strengthen Main Street at the cost of weakening Wall Street,” Mr. Krauss said.
Interested in attending a one-day workshop for community and neighborhood leaders on forming a public bank of Philadelphia? On Saturday, October 12 head to Arch Street United Methodist Church (50 N. Broad St.) from 8:30am to 12pm
Green light for city-owned San Francisco public bank
By Ellen Brown www.truthdig.com
When the Occupiers took an interest in moving San Francisco’s money into a city-owned bank in 2011, it was chiefly on principle, in sympathy with the nationwide Move Your Money campaign. But recent scandals have transformed the move from a political statement into a matter of protecting the city’s deposits and reducing its debt burden. The chief roadblock to forming a municipal bank has been the concern that it was not allowed under state law, but a legal opinion issued by Deputy City Attorney Thomas J. Owen has now overcome that obstacle.
Establishing a city-owned San Francisco public bank is not a new idea. According to City Supervisor John Avalos, speaking at the Public Banking Institute conference in San Rafael in June, it has been on the table for over a decade. Recent interest was spurred by the Occupy Movement, which adopted the proposal after Avalos presented it to an enthusiastic group of over 1000 protesters outside the Bank of America building in late 2011. David Weidner, writing in the Wall Street Journal in December of that year, called it “the boldest institutional stroke yet against banks targeted by the Occupy movement.” But Weidner conceded that:
Creating a municipal bank won’t be easy. California law forbids using taxpayer money to make private loans. That would have to be changed. Critics also argue that San Francisco could be putting taxpayer money at risk.
The law in question was California Government Code Section 23007, which prohibits a county from “giving or loaning its credit to or in aid of any person or corporation.” The section has been interpreted as barring cities and counties from establishing municipal banks. But Deputy City Attorney Thomas J. Owen has now put that issue to rest in a written memorandum dated June 21, 2013, in which he states:
- A court would likely conclude that Section 23007 does not cover San Francisco because the City is a chartered city and county. Similarly, a court would likely conclude that Article XVI, section 6 of the State Constitution, which limits the power of the State Legislature to give or lend the credit of cities or counties, does not apply to the City. A court would likely then determine that neither those laws nor the general limitations on expending City funds for a municipal purpose bar the City from establishing a municipal bank.
- A court would likely conclude that the City may own stock in a municipal bank and spend City money to support the bank’s operation, if the City appropriated funds for that purpose and the operation of the bank served a legitimate municipal purpose.
A number of other California cities that have explored forming their own banks are also affected by this opinion. As of June 2008, 112 of California’s 478 cities are charter cities, including not only San Francisco but Los Angeles, Richmond, Oakland and Berkeley. A charter city is one governed by its own charter document rather than by local, state or national laws.
Which Is Riskier, a Public Bank or a Wall Street Bank?
That leaves the question whether a publicly-owned bank would put taxpayer money at risk. The Bank of North Dakota, the nation’s only state-owned bank, has posed no risk to depositors or the state’s taxpayers in nearly a century of successful operation. Further, in this latest recession it has helped the state achieve a nationwide low in unemployment (3.2%) and the only budget surplus in the country.
Meanwhile, the recent wave of bank scandals has shifted the focus to whether local governments can afford to risk keeping their funds in Wall Street banks.
In making investment decisions, cities are required by state law to prioritize security, liquidity and yield, in that order. The city of San Francisco moves between $10 billion and $12 billion through 133 bank accounts in roughly 5 million transactions every year; and its deposits are held chiefly at three banks, Bank of America, Wells Fargo and Union Bank. The city pays $2.7 million for banking services, nearly two-thirds of which consist of transaction fees that smaller banks and credit unions would not impose. But the city cannot use those smaller banks as depositories because the banks cannot afford the collateral necessary to protect deposits above $250,000, the FDIC insurance limit.
San Francisco and other cities and counties are losing more than just transaction fees to Wall Street. Weidner pointed to the $100 billion that the California pension funds lost as a result of Wall Street malfeasance in 2008; the foreclosures that have wrought havoc on communities and tax revenues; and the liar loans that have negatively impacted not only real estate values but the economy, employment and local and state budgets. Added to that, we now have the LIBOR and municipal debt auction riggings and the Cyprus bail-in threat.
On July 23, 2013, Sacramento County filed a major lawsuit against Bank of America, JP Morgan Chase and other mega-banks for manipulating LIBOR rates, a fraud that has imposed huge losses on local governments in ill-advised interest-rate swaps. Sacramento is the 15th government agency in California to sue on the LIBOR rigging, which Rolling Stone’s Matt Taibbi calls “the biggest price-fixing scandal ever.” Other counties in the Bay Area that are suing on the LIBOR fraud are Sonoma and San Mateo, and the city of Richmond sued in January. Last year, Bank of America and other major banks were also caught rigging municipal debt service auctions, for which they had to pay $673 million in restitution.
The question is, do taxpayers want to have their public monies in a bank that has been proven to be defrauding them?
Compounding the risk is the reason Cyprus “bail in” shocker, in which depositor funds were confiscated to recapitalize two bankrupt Cypriot banks. Dodd-Frank now replaces taxpayer-funded bank bailouts with consumer-funded bail-ins, which can force shareholders, bondholders and depositors to contribute to the cost of bank failure. Europe is negotiating rules imposing bail-ins for failed banks, and the FDIC has a U.S. advisory to that effect. Bank of America now commingles its $1 trillion in deposits with over $70 trillion in risky derivatives, and has been pegged as one of the next banks likely to fail in a major gambling mishap.
San Francisco and other local governments have far more than $250,000 on deposit, so they are only marginally protected by the FDIC insurance fund. Their protection is as secured creditors with a claim on bank collateral. The problem is that in a bank bankruptcy, state and local governments will fall in line behind the derivative claimants, which are also secured creditors and now have “super-priority” in bankruptcy. In a major derivatives calamity of the sort requiring a $700 billion bailout in September 2008, there is liable to be little collateral left for either the other secured depositors or the FDIC, which has a meager $25 billion in its insurance fund. Normally, the FDIC would be backstopped by the Treasury – meaning the taxpayers – but Dodd-Frank now bars taxpayer bailouts of bank bankruptcies caused by the majority of speculative derivative losses.
The question today is whether cities and counties can afford not to set up their own municipal banks, both to protect their money from confiscation and to take advantage of the very low interest rates and other perks available exclusively to the banking club. A government that owns its own bank can keep the interest and reinvest it locally, resulting in government savings of an estimated 35% to 40% just in interest. Costs can be reduced, and taxes can be cut or services can be increased. Banking and credit can become public utilities, sustaining the local economy rather than mining it for private gain; and banks can again become safe places to store our money.
Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt and its 2013 sequel, The Public Bank Solution. Her websites are WebofDebt.com, PublicBankSolution.com, and PublicBankingInstitute.org
Public Banking in Costa Rica: A Remarkable Little-known Model
In Costa Rica, publicly-owned banks have been available for so long and work so well that people take for granted that any country that knows how to run an economy has a public banking option. Costa Ricans are amazed to hear there is only one public depository bank in the United States (the Bank of North Dakota), and few people have private access to it.
So says political activist Scott Bidstrup, who writes:
For the last decade, I have resided in Costa Rica, where we have had a “Public Option” for the last 64 years.
There are 29 licensed banks, mutual associations and credit unions in Costa Rica, of which four were established as national, publicly-owned banks in 1949. They have remained open and in public hands ever since—in spite of enormous pressure by the I.M.F. [International Monetary Fund] and the U.S. to privatize them along with other public assets. The Costa Ricans have resisted that pressure—because the value of a public banking option has become abundantly clear to everyone in this country.
During the last three decades, countless private banks, mutual associations (a kind of Savings and Loan) and credit unions have come and gone, and depositors in them have inevitably lost most of the value of their accounts.
But the four state banks, which compete fiercely with each other, just go on and on. Because they are stable and none have failed in 31 years, most Costa Ricans have moved the bulk of their money into them. Those four banks now account for fully 80% of all retail deposits in Costa Rica, and the 25 private institutions share among themselves the rest.
According to a 2003 report by the World Bank, the public sector banks dominating Costa Rica’s onshore banking system include three state-owned commercial banks (Banco Nacional, Banco de Costa Rica, and Banco Crédito Agrícola de Cartago) and a special-charter bank called Banco Popular, which in principle is owned by all Costa Rican workers. These banks accounted for 75 percent of total banking deposits in 2003.
In Competition Policies in Emerging Economies: Lessons and Challenges from Central America and Mexico (2008), Claudia Schatan writes that Costa Rica nationalized all of its banks and imposed a monopoly on deposits in 1949. Effectively, only state-owned banks existed in the country after that. The monopoly was loosened in the 1980s and was eliminated in 1995. But the extensive network of branches developed by the public banks and the existence of an unlimited state guarantee on their deposits has made Costa Rica the only country in the region in which public banking clearly predominates.
Scott Bidstrup comments:
By 1980, the Costa Rican economy had grown to the point where it was by far the richest nation in Latin America in per-capita terms. It was so much richer than its neighbors that Latin American economic statistics were routinely quoted with and without Costa Rica included. Growth rates were in the double digits for a generation and a half. And the prosperity was broadly shared. Costa Rica’s middle class – nonexistent before 1949 – became the dominant part of the economy during this period. Poverty was all but abolished, favelas [shanty towns] disappeared, and the economy was booming.
This was not because Costa Rica had natural resources or other natural advantages over its neighbors. To the contrary, says Bidstrup:
At the conclusion of the civil war of 1948 (which was brought on by the desperate social conditions of the masses), Costa Rica was desperately poor, the poorest nation in the hemisphere, as it had been since the Spanish Conquest.
The winner of the 1948 civil war, José “Pepe” Figueres, now a national hero, realized that it would happen again if nothing was done to relieve the crushing poverty and deprivation of the rural population. He formulated a plan in which the public sector would be financed by profits from state-owned enterprises, and the private sector would be financed by state banking.
A large number of state-owned capitalist enterprises were founded. Their profits were returned to the national treasury, and they financed dozens of major infrastructure projects. At one point, more than 240 state-owned corporations were providing so much money that Costa Rica was building infrastructure like mad and financing it largely with cash. Yet it still had the lowest taxes in the region, and it could still afford to spend 30% of its national income on health and education.
A provision of the Figueres constitution guaranteed a job to anyone who wanted one. At one point, 42% of the working population of Costa Rica was working for the government directly or in one of the state-owned corporations. Most of the rest of the economy not involved in the coffee trade was working for small mom-and-pop companies that were suppliers to the larger state-owned firms—and it was state banking, offering credit on favorable terms, that made the founding and growth of those small firms possible. Had they been forced to rely on private-sector banking, few of them would have been able to obtain the financing needed to become established and prosperous. State banking was key to the private sector growth. Lending policy was government policy and was designed to facilitate national development, not bankers’ wallets. Virtually everything the country needed was locally produced. Toilets, window glass, cement, rebar, roofing materials, window and door joinery, wire and cable, all were made by state-owned capitalist enterprises, most of them quite profitable. Costa Rica was the dominant player regionally in most consumer products and was on the move internationally.
Needless to say, this good example did not sit well with foreign business interests. It earned Figueres two coup attempts and one attempted assassination. He responded by abolishing the military (except for the Coast Guard), leaving even more revenues for social services and infrastructure.
When attempted coups and assassination failed, says Bidstrup, Costa Rica was brought down with a form of economic warfare called the “currency crisis” of 1982. Over just a few months, the cost of financing its external debt went from 3% to extremely high variable rates (27% at one point). As a result, along with every other Latin American country, Costa Rica was facing default. Bidstrup writes:
That’s when the IMF and World Bank came to town.
Privatize everything in sight, we were told. We had little choice, so we did. End your employment guarantee, we were told. So we did. Open your markets to foreign competition, we were told. So we did. Most of the former state-owned firms were sold off, mostly to foreign corporations. Many ended up shut down in a short time by foreigners who didn’t know how to run them, and unemployment appeared (and with it, poverty and crime) for the first time in a decade. Many of the local firms went broke or sold out quickly in the face of ruinous foreign competition. Very little of Costa Rica’s manufacturing economy is still locally owned. And so now, instead of earning forex [foreign exchange] through exporting locally produced goods and retaining profits locally, these firms are now forex liabilities, expatriating their profits and earning relatively little through exports. Costa Ricans now darkly joke that their economy is a wholly-owned subsidiary of the United States.
The dire effects of the IMF’s austerity measures were confirmed in a 1993 book excerpt by Karen Hansen-Kuhn titled “Structural Adjustment in Costa Rica: Sapping the Economy.” She noted that Costa Rica stood out in Central America because of its near half-century history of stable democracy and well-functioning government, featuring the region’s largest middle class and the absence of both an army and a guerrilla movement. Eliminating the military allowed the government to support a Scandinavian-type social-welfare system that still provides free health care and education, and has helped produce the lowest infant mortality rate and highest average life expectancy in all of Central America.
In the 1970s, however, the country fell into debt when coffee and other commodity prices suddenly fell, and oil prices shot up. To get the dollars to buy oil, Costa Rica had to resort to foreign borrowing; and in 1980, the U.S. Federal Reserve under Paul Volcker raised interest rates to unprecedented levels.
In The Gods of Money (2009), William Engdahl fills in the back story. In 1971, Richard Nixon took the U.S. dollar off the gold standard, causing it to drop precipitously in international markets. In 1972, US Secretary of State Henry Kissinger and President Nixon had a clandestine meeting with the Shah of Iran. In 1973, a group of powerful financiers and politicians met secretly in Sweden and discussed effectively “backing” the dollar with oil. An arrangement was then finalized in which the oil-producing countries of OPEC would sell their oil only in U.S. dollars. The quid pro quo was military protection and a strategic boost in oil prices. The dollars would wind up in Wall Street and London banks, where they would fund the burgeoning U.S. debt. In 1974, an oil embargo conveniently caused the price of oil to quadruple. Countries without sufficient dollar reserves had to borrow from Wall Street and London banks to buy the oil they needed. Increased costs then drove up prices worldwide.
By late 1981, says Hansen-Kuhn, Costa Rica had one of the world’s highest levels of debt per capita, with debt-service payments amounting to 60 percent of export earnings. When the government had to choose between defending its stellar social-service system or bowing to its creditors, it chose the social services. It suspended debt payments to nearly all its creditors, predominately commercial banks. But that left it without foreign exchange. That was when it resorted to borrowing from the World Bank and IMF, which imposed “austerity measures” as a required condition. The result was to increase poverty levels dramatically.
Bidstrup writes of subsequent developments:
Indebted to the IMF, the Costa Rican government had to sell off its state-owned enterprises, depriving it of most of its revenue, and the country has since been forced to eat its seed corn. No major infrastructure projects have been conceived and built to completion out of tax revenues, and maintenance of existing infrastructure built during that era must wait in line for funding, with predictable results.
About every year, there has been a closure of one of the private banks or major savings coöps. In every case, there has been a corruption or embezzlement scandal, proving the old saying that the best way to rob a bank is to own one. This is why about 80% of retail deposits in Costa Rica are now held by the four state banks. They’re trusted.
Costa Rica still has a robust economy, and is much less affected by the vicissitudes of rising and falling international economic tides than enterprises in neighboring countries, because local businesses can get money when they need it. During the credit freezeup of 2009, things went on in Costa Rica pretty much as normal. Yes, there was a contraction in the economy, mostly as a result of a huge drop in foreign tourism, but it would have been far worse if local business had not been able to obtain financing when it was needed. It was available because most lending activity is set by government policy, not by a local banker’s fear index.
Stability of the local economy is one of the reasons that Costa Rica has never had much difficulty in attracting direct foreign investment, and is still the leader in the region in that regard. And it is clear to me that state banking is one of the principal reasons why.
The value and importance of a public banking sector to the overall stability and health of an economy has been well proven by the Costa Rican experience. Meanwhile, our neighbors, with their fully privatized banking systems have, de facto, encouraged people to keep their money in Mattress First National, and as a result, the financial sectors in neighboring countries have not prospered. Here, they have—because most money is kept in banks that carry the full faith and credit of the Republic of Costa Rica, so the money is in the banks and available for lending. While our neighbors’ financial systems lurch from crisis to crisis, and suffer frequent resulting bank failures, the Costa Rican public system just keeps chugging along. And so does the Costa Rican economy.
My dream scenario for any third world country wishing to develop, is to do exactly what Costa Rica did so successfully for so many years. Invest in the Holy Trinity of national development—health, education and infrastructure. Pay for it with the earnings of state capitalist enterprises that are profitable because they are protected from ruinous foreign competition; and help out local private enterprise get started and grow, and become major exporters, with stable state-owned banks that prioritize national development over making bankers rich. It worked well for Costa Rica for a generation and a half. It can work for any other country as well. Including the United States.
The new Happy Planet Index, which rates countries based on how many long and happy lives they produce per unit of environmental output, has ranked Costa Rica #1 globally. The Costa Rican model is particularly instructive at a time when US citizens are groaning under the twin burdens of taxes and increased health insurance costs. Like the Costa Ricans, we could reduce taxes while increasing social services and rebuilding infrastructure, if we were to allow the government to make some money itself; and a giant first step would be for it to establish some publicly-owned banks.
Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her blog articles are at EllenBrown.com
How the US only state-owned public bank became the envy of Wall Street
By Josh Harkinson www.motherjones.com
The Bank of North Dakota is the only state-owned public bank in the US—what Republicans might call an idiosyncratic bastion of socialism. It also earned a record profit last year even as its private-sector corollaries lost billions. To be sure, it owes some of its unusual success to North Dakota’s well-insulated economy, which is heavy on agricultural staples and light on housing speculation. But that hasn’t stopped out-of-state politicos from beating a path to chilly Bismarck in search of advice. Could opening state-owned public banks across America get us out of the financial crisis? It certainly might help, says Ellen Brown, author of the book, The Public Bank Solution: From Austerity to Prosperity, who writes that the Bank of North Dakota, with its $4 billion under management, has avoided the credit crunch by “creating its own credit, leading the nation in establishing state economic sovereignty.” Josh Harkinson spoke with the Bank of North Dakota’s president, Eric Hardmeyer.
Josh Harkinson: How was the bank formed?
Eric Hardmeyer: It was created 90 years ago, in 1919, as a populist movement swept the northern plains. Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets, the money markets maybe in Minneapolis, New York, deciding who got credit and how to market their goods. So it swept the northern plains. In North Dakota the movement was called the Nonpartisan League, and they actually took control of the legislature and created what was called an industrial program, which created both the Bank of North Dakota as a financing arm and a state-owned mill and elevator to market and buy the grain from the farmer. And we’re both in existence today doing exactly what we were created for 90 years ago. Only we’ve morphed a little bit and found other niches and ways to promote the state of North Dakota.
What makes your bank unique today?
EH: Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that’s only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism.
Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state’s own economy?
EH: Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it’s agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that’s our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history.
Are there areas that you invest in that other banks avoid?
EH: We made the first federally-insured student loan in the country back in 1967. So that’s been a big part of what we do. It’s become almost a mission-critical thing. I don’t know if you have been following the student loan industry lately, but it’s been very, very interesting as many have decided to leave. We will not though.
So you are able to invest in certain areas because they provide a public good.
EH: Yeah, or a direction, whether it’s energy or primary sector type of businesses. We have specific loan programs that are designed at very low interest rates to encourage activity along certain lines. Here’s another thing: We’re gearing up for a significant flood in one of the communities here in North Dakota called Fargo. We’ve experienced one of those in another community about 12 years ago which prior to Katrina was the largest single evacuation of any community in the United States. And so the Bank of North Dakota, once the flood had receded and there were business needs, we developed a disaster loan program to assist businesses. So we can move quite quickly to aid with different types of scenarios. Whether it’s encouraging different economies to grow or dealing with a disaster.
What do private banks think of you?
EH: The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It’s originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers’ bank or a wholesale bank. So we provide services to banks, whether it’s check clearing, liquidity, or bond accounting safekeeping. There’s probably 20 other bankers’ banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it’s beyond their legal lending limit or they just want to share risk, we’ll do that. We’re a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy.
So what’s the advantage of a publicly owned “bankers’ bank” instead of a privately owned one?
EH: Our model is we use our deposit base to help [other banks] with funding their loans, even providing fed funds lines with our excess liquidity—we buy and sell fed funds and act as a clearinghouse for check clearing activity. That would be the benefit or different model. We’re a depository bank and can bring that to bear.
If other states had a bank like yours, do you think they would have been more insulated from the credit crisis?
EH: It all gets down the management and management philosophy. We’re a fairly conservative lot up here in the upper Midwest and we didn’t do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don’t understand it, we’re not going to jump into it. And so we’ve avoided all those pitfalls. That’s not to say that we’re completely immune to everything, certainly we’ve bought some mortgage-backed securities and we’re working through some of those issues, but nothing that would cause us to be concerned.
Would states with your model have any new tools to get out of the credit crisis?
EH: Let me put it to you another way and tell you another thing that we do. We also provide a dividend back to the state. Probably this year we’ll make somewhere north of $60 million, and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we’ve turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs.
Not bad for a state with a population of 600,000.
EH: Right. And here’s another thing: Back in 2001, 2002, when we went through the dot com bust, all the states suffered some sort of budget shortfall, including the state of North Dakota. At that time our budget shortfall was fairly insignificant—$40 some million. And so it was quite easy to overcome that. The governor just simply said alright, we’re going to turn back 1 percent of all general fund agencies, and the Bank of North Dakota, you will declare another dividend to make up the balance. And so we did that. Our capital was in a fine position to go ahead and do that. So in some cases we’ve acted as a rainy day fund.