States, Cities and Pension Funds Have Gone into Debt to Wall Street When They Could Have Started a Public Bank and Paid Interest to Themselves
By John Lawrence
Public banks plow their revenues back into community needs like infrastructure, education, health facilities, local enterprises and other public banks. When municipalities, cities, states, countries and even smaller jurisdictions like school districts fund their deficits with Wall Street, the profits go into the pockets of executives and investors.
Currently, only the state of North Dakota has a public bank. As a consequence North Dakota suffered very little from the Great Recession of 2008, has a robust economy and no budget deficit. California on the other hand struggles every year with its budget because it pays a lot of interest on its loans to Wall Street. If California had a public bank similar to North Dakota’s, it would have no budget deficit at all and could fund its infrastructure needs out of its own revenues.
Many pension funds have gone bust lately because the cities funding them have gone bankrupt. Take Detroit for example. In bankruptcy court investors will be given priority and pensioners will be screwed. If Detroit had had a public bank instead of going into debt with Wall Street, this needn’t have happened.
How do public banks differ from private banks? First, they are nothing new. Public banking has been around for centuries. All banks, both public and private, with the exception of central banks like the Federal Reserve, create money by what is know as ‘fractional reserve banking.’ They take in deposits and based on those deposits as collateral they loan out a multiple of those deposits, typically ten times the amount of their deposits.
The general rationale is that not everyone will want their money back at the same time. If they do, that constitutes a run on the bank, and the bank is in trouble.
The Fed and other central banks simply create money out of thin air. The Fed prints money via a few keystrokes on a computer. Currently, the Fed is buying $85 billion worth of US government securities every month, a phenomenon known as ‘quantitative easing’. Since by law the Fed cannot purchase US Treasury bonds directly, it uses Wall Street banks as a middleman.
Wall Street then makes a nice cut simply by buying the Treasuries in order to sell them to the Fed. The money created for the bonds goes onto the Fed’s balance sheet where it can stay ad infinitum because nobody or no government is going to go after the Fed to pay it back.
European countries like Greece and Cyprus have gotten themselves into trouble because they have given up their national currencies and adopted the euro. Since only the European Central Bank can print euros, these countries have borrowed money to offset their deficits from Wall Street. As they get deeper in debt, Wall Street raises the interest rate they have to pay and it becomes a downwards spiral from which they are unlikely to recover.
If they had maintained their national currencies, their central banks could simply print the money needed to offset their deficits like the US does. Instead Wall Street has them in a death grip. Many European cities have also been bankrupted this way especially if they have bought fancy derivatives from Wall Street like interest rate swaps.
Take Milan for example. Milan, Italy’s second-biggest city, is one of dozens of Italian municipalities that undertook swaps — contracts in which a fixed interest rate is exchanged for a floating one — in the hopes of saving on interest payments. Instead, they ended up getting screwed as interest rates went up. They essentially placed a bet that interest rates would not go up and when they did, they ended up owing more to the Wall Street banks than they would have if they had just paid straight interest in the first place.
The same thing happened to Detroit, and that’s what got it and other US bankrupted cities like Birmingham, Alabama in trouble. The banks are secured creditors that will be paid in bankruptcy court before the pensioners will. There probably won’t be much left for the pensioners after the banks take their cut.
What does this have to do with public banking? It turns out a lot. Ellen Brown is the leading advocate of public banking. In her books Web of Debt and The Public Bank Solution, she explains what a public bank is, how it differs from private banking and all the advantages it offers, the main advantage being that the profits flow into public coffers instead of into private pockets. The wealth so created goes to the people that the public bank serves – whether that is a state, a municipality, a country or even a hospital district – instead of to Wall Street. For example, the public state Bank of North Dakota uses its profits to reduce state income taxes among other things.
Ellen Brown states:
“A functioning economy needs bank credit to flow freely. What impairs this flow is that the spigots are under private control. Private banks use that control to their own advantage rather than to serve business, industry, and societal needs. They can turn credit on and off at will, direct it to their cronies [like hedge funds], or speculate with it; and they collect the interest on loans as middlemen. This is not just a modest service fee. Interest has been calculated to compose a third of everything we buy.
“Anyone with money has a right to lend it, of course, and any group with money can pool it and lend it; but the ability to create money-as-credit ex nihilo (out of nothing), backed by the “full faith and credit” of the government and the people, is properly a public function, and the proceeds should properly return to the public. The virtues of an expandable credit system can be retained while avoiding the parasitic exploitation to which private banks are prone, by establishing a network of public banks that serve the people because they are owned by the people.”
For instance, monies collected as interest on loans by the Bank of North Dakota (BND), a public bank, are not shipped off to Wall Street but remain in the state. They can be used for student loans at reasonable rates without predatory fees for defaults.
The BND website states: “The Dakota Education Alternative Loan (DEAL) is one of the most competitive alternative loans in the nation. North Dakota students or those who attend school in ND pay zero fees, have the option of a fixed interest rate of 5.70% APR or a variable interest rate of 1.78% APR effective July 1 and can count on quality local customer service. Variable rates can change quarterly and may increase. Rate will never exceed 10%.” And the bank lets you consolidate other loans, something private banks won’t let you do. Deferment and forbearance options are available, something private banks are much less user friendly about. The state of Oregon is considering a similar alternative for student loans.
This article has just scratched the surface of public banking. Follow on articles will get more in depth. The public banking option can exist at all levels from central banks of entire nations to banks devoted, for instance, to just one hospital district. The main thing to keep in mind is that with public banking the profits stay local where they can be devoted to solving local problems. They don’t need to be shipped off to Wall Street where they will support a debt based economy controlled by Wall Street for Wall Street’s benefit.