When states and municipalities set up public banks, money and hence energy is withdrawn from Wall Street creating the perfect revolution with the result that the husk of Wall Street shrivels up and dies like a plant deprived of nutrients … without a shot being fired.
By John Lawrence
Nothing could be less radical than a public bank because the state of North Dakota already has one and it has been working successfully for the citizens of North Dakota. No one would accuse North Dakotans of being socialists or would they? No new ground to break here!
Instead of money leaving the state and going to Wall Street, money stays in the state where it is lent out in the form of student and business loans with the profits being shared by the citizens of North Dakota instead of going into the pockets of private bankers in New York.
The Bank of North Dakota (BND) administers lending programs that promote agriculture, commerce and industry. Financing economic development is the thrust of Bank of North Dakota’s efforts. The Bank is authorized by the legislature to assist financial institutions in the state by providing lending programs with economic development opportunities. A portion of the Bank’s profits are returned to the citizens of North Dakota through legislative appropriation and economic development programs.
Alternatively, a public bank’s profits could be used to cover state budget deficits and even to reduce state income taxes, something that states like California could benefit from.
But some say public banking is socialism. Capitalism demands and even dictates that banking should be in the private sector. Ellen Brown responds in her book, “The Public Bank Solution, From Austerity to Prosperity” as follows:
Not at all. Socialism is government ownership of the means of production – factories, farms, businesses and land. Public banking is not about government ownership of property but about government oversight of the system of debits and credits that undergirds a functioning economy ensuring that the system operates efficiently, fairly, securely, and to the benefit of all. Banking, money and credit are not market goods but are economic infrastructure, just as roads and bridges are physical infrastructure. Banking and credit need to be public utilities for a capitalist market economy to run properly. By providing inexpensive, accessible financing to the free enterprise sector of the economy, public banks make commerce more vital and stable.
Exactly. Capitalism is nothing more than a set of rules, a set of rules that has been heavily lobbied to benefit the richest and most powerful. To purists capitalism is the laissez faire system of supply and demand with no interference from government. Well, when have we had that? Only in some libertarians’ wet dreams.
Was capitalism what we had before we had the Glass-Steagall rule separating commercial and investment banking or was it in the time period that Glass-Steagall was in effect (1933-1999) or was it after Glass-Steagall was abolished which produced the crash of 2008 or is it today with the new Dodd-Frank banking rules?
Basically capitalism is whatever the government says it is. Today the free enterprise system is rigged by central banks and other large institutions. One guy, Ben Bernanke at the Federal Reserve, sets interest rates. Other interest rates like the Libor rate are rigged by the banking system itself.
There is no pure price discovery by the law of supply and demand. For pure capitalism to be in effect interest rates would have to be set by the markets not government bureaucrats.
The fact that the US central bank, the Federal Reserve is printing money at the rate of $85 billion a month (quantitative easing) and giving it to the big Wall Street banks represents, if nothing else, a departure from pure capitalism. And that money doesn’t go to economic development the way money deposited in the Bank of North Dakota does. That money goes into the casino economy.
Ben Bernanke has no plans to “taper,” that is raise interest rates even modestly or stop giving $85 billion a month to Wall Street because the bond market would flip out bringing the whole unstable edifice of present day US and Western capitalism crashing down as it did in 2008.
Ellen Brown gives a fair description of the state of US capitalism circa 2013:
The Western banking system today has all the earmarks of a giant Ponzi scheme on the verge of collapse: a global credit crisis extorting massive bailouts from the taxpayers; a derivatives casino with a US notional (or nominal) exposure of $300 trillion; governments refusing further bank bailouts; “bail in” policies in which the largest banks are being instructed to confiscate their depositors’ funds if necessary [as happened in Cyprus], in a last-ditch effort to keep their doors open. “Systemically risky” hardly describes the condition of the giant derivative banks, which are like a house of cards waiting for a strong wind. Fortunately, there is a safer, more sustainable way to design a banking system.
The point is that public banking has been the salvage of other countries and jurisdictions when the Wall Street private banking system in collusion with the Federal Reserve has come crashing down. For instance, North Dakota with its public banking system survived the crash of 2008 quite nicely, thank you very much. North Dakota is the only state to escape the recent credit crisis with a budget surplus every year since 2008. It has the lowest unemployment rate in the country, the lowest credit card default rate and no state government debt at all.
But North Dakota is not the only example of a well functioning public banking system, one that evaded the stategems of Wall Street which caused municipal bankruptcies throughout the western world, for instance in Birmingham, AL and San Bernardino, CA, not to mention Milan, Italy.
Internationally, publicly owned banks are quite common and countries with strong public banking systems generally have strong, stable economies. According to an Inter-American Development Bank paper presented in 2005, the percentage of state ownership in the banking industry globally was over 40% by the mid-1990s.
As might be expected, these public banks are largely found in the BRIC countries – Brazil, Russia, India and China – which have made the greatest strides in the world economy in the last decade. Publicly owned banks comprise about 60% of the banks in Russia, 75% in India, more than 69% in China and 45% in Brazil. On a currency adjusted basis the economies of the BRICs are already larger than the US and the UK combined.
According to a May 2010 article in The Economist, the BRICs sailed through the banking crisis of 2008 largely because of their strong and stable publicly owned banks. And the BRICS are forming their own alliances challenging the International Monetary Fund and the World Bank as the dominant global financial institutions.
They had their first formal meeting in Yekaterinburg, Russia in 2009. They represent an alternative to western style financial institutions. They have asked South Africa to join with them forming “BRICS.” At their 2013 meeting in Durban, South Africa, they formally declared their intention to start a BRICS Development Bank to underwrite infrastructure projects within their own nations. This will soak up excess labor and keep unemployment low, something that the US dominated economic sphere has failed to do.
The BRICS are also calling for an alternative to the dollar as the world’s reserve currency. The BRICS account for around three quarters of the world’s currency reserves, have few serious fiscal issues and are net government creditors. They are coming on like gangbusters driven by their strong public banking sectors. While the US and the City of London are speculating in trillions of dollars worth of derivatives, the BRICS are engaging their public banking sectors in real economic growth and infrastructure development.
In Brazil, Lula da Silva (“Lula”) became President in 2003. He rescued his largely insolvent country by enlisting its public National Economic and Social Development Bank (BNDES) to direct a fire hose of credit towards a whole host of infrastructure development projects such as road construction, dam building, bridge building, museum refurbishing etc.
The BNDES was largely responsible for turning the economy around. It is the main source of long term loans in Brazil’s economy. In 2009 the BNDES gave out more than $57 billion in loans, more than the World Bank which totaled only $47 billion. And because of this extension of credit, Brazil was not that affected by the global economic downturn known as the Great Recession of 2008.
What Lula accomplished in Brazil was similar to and in fact modeled on the Reconstruction Finance Corporation, one of the New Deal entities put into effect by President Franklin D Roosevelt. While the central banks of the Western world are focused on backstopping the world’s private banks (the US Fed gave out over $7 trillion to them in 2008), development banks like the BNDES direct credit to the real producing economy.
Brazil has wisely put its pension fund in the BNDES where, rather than being invested on Wall Street in derivatives and other speculative ventures, it was invested in the infrastructure needed to rebuild Brazil.
To be continued … Check out Part 1 and Part 2
John Lawrence
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are credit unions a step in the right direction?
They are a step in the right direction, but Wall Street is lobbying to have the laws changed which give them a favorable tax status. If public banks became successful, we should expect that Wall Street would use their lobbying power to do everything they could to stop them.
See Banks pushing for repeal of credit unions’ federal tax exemption
John- What questions should we be asking mayoral candidates on the topic of banks and banking? I think the City still does it banking (2.75 billion dollar budget) through Bank of America. We still are dealing with foreclosure issues; small businesses are still unable to get sufficient credit lines at low interest rates; non-profits are unable to refinance loans at lower rates.
I’ve followed your series closely. Thank you for so much information provided in such an accessible manner.
Anna, we should ask them to establish a public bank like North Dakota did. Then the pension fund and city accounts receivable could be deposited in the San Diego Public Bank. This would mean that all profits which now go to Bank of America would devolve to the citizens of the city of San Diego. These profits could be used to make the city solvent as well as to increase funding for neighborhoods among other things.
Why should profits made off the pension fund or off the city’s revenues go to Wall Street of which Bank of America is very much a part? Also loans could be made readily available for local businesses and student loans at reasonable interest rates. Right now Wall Street is not loaning to small business; it’s much more profitable to gamble in the derivative casino.
The problem for cities and pension funds is that the Federal Reserve has kept interest rates near zero so any funds deposited at Bank of America, for example, will draw practically no interest. That’s why Wall Street has enticed them into fancy derivatives so they can at least get some return on their deposits. However, this subjects the money to all kinds of risk, and the risks have ended up bankrupting many cities and causing huge losses to pension funds. If these monies were deposited in a public bank which can then loan out ten times the amount of deposits due to fractional reserve banking like any other bank does, then the money so deposited by the city could be earning several percent interest (whatever the going rate is) rather than sitting in Bank of America earning no interest or put in the gambling casino where it is likely to undergo huge losses if history is any example.
Huge props for this series. I’ve never known the difference between debentures and dentures, but I can recognize salary increases for CEOs and managers that are interplanetary, and the private banks need competition. Civic or State banks that report to the public and are overseen by publicly appointed regulators might do a better job for the same reason public schools function on smaller budgets than privates. One small way to recognize the potential is the setting of salaries by law. It would be interesting to see if conservatives would argue that no good bank manager would accept the position under these circumstances. And one wonders if North Dakota’s managers are constantly subjected to offers by B of A and Chase.
The other great attraction for me is your argument that state development banks can enter into funding of infrastructure development, the most immediate and healthy cure for unemployment. Thanks for reminding us of that.
And for the startling stats on No. Dakota’s healthy economy.
Thank you, John, for easy-to-read, informative, humorous articles on a subject we all
should be interested in. I recently had the luck with Mission Federal Credit Union to be saved $30,000. dollars which I was about to wire to an internet dealer in silver.
The bank manager overheard me and came over to the clerk I was dealing with. She
exclaimed, “That sounds like a scam!” and went into the back room and brought me a
newspaper article about this company. I followed the steps she gave me, and got a
federal investigator who said they’d been watching this firm for years. With the help
of my experience, they were closed down and I got most of my down payment back!
I’m very grateful to my local credit union for being alert and would recommend Mission Federal Credit Union.
Mina, you have to watch out for these scams! The problem is that the Fed has kept interest rates at zero so people are tempted to pursue flaky deals on and off Wall Street in order to get some return on their money. This especially applies to seniors who have a finite amount to last them the rest of their life. Bernanke’s policies at the Fed have screwed seniors pushing them into risky deals.
John, Thank you for your research and clear explanation. How do we break free of the stranglehold the big banks and the Fed have on our monetary system? How do we establish public banks in all 50 states and get people to use them? Even here in MA, one of the “bluest” states in the country, no one even talks about public banks!
Paul, As Frank says in his subsequent comment: “The promise of state public banks like North Dakota’s — which 20 U.S. states are now in various stages of assessing and developing legislative bills for …”, many states are now investigating the establishment of public banks. Check out the website, Public Banking Institute.
John,
The promise of state public banks like North Dakota’s — which 20 U.S. states are now in various stages of assessing and developing legislative bills for — v.s the primary reliance on private mega banks today brings up some parallels with the great debate between Alexander Hamilton and Thomas Jefferson about the Constitutional right to establish a national bank.
Thomas Jefferson’s vehement general distrust of private banks , including a national bank, is captured in his well-known words,
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set Government at defiance. The money issuing power should be taken from bankers and restored to the people where it properly belongs.” … “The principle of spending money to be paid by posterity, under the name of funding is but swindling futurity on a large scale.”
Jefferson went on to say that states should have charter banks that could issue money. For him, money creation was essentially the sacred right and duty of a state to exercise for the benefit of communities and individuals. Privatization of the money supply was seen as a form of economic tyranny — making people the slaves of banks and payers of the high cost of their own slavery.
Further, Jefferson felt the Constitution did not give the national government the right to establish a national bank. His arguments were largely based on following words in Amendment X , “Any powers not specifically given the national government or specifically denied to the states were given to the states or the people.”
Of course, as most know, Alexander Hamilton won this debate that culminated in a national bank act based largely on the so-called “elastic clause” (Article 1, Section 8, clause 18 of the Constitution) and Amendment X giving the “right to make laws
‘necessary and proper’ to carry out the powers given Congress.” Hamilton felt Congress had the right to startup a large national banking institution. He cited as further support the Preamble to the Constitution that describes the purposes for creating a new government including, ” forming a more perfect union and promoting the general welfare.”
I would only add, wouldn’t opening the doors to state banks today equally meet these purposes?
In Andrew Jackson’s words, “If Congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations.” Abraham Lincoln voiced similar warnings, “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be the master and become the servant of humanity.”
Last but not least, Napolean Bonaparte came really down-to-earth with his prophetic, but unwitting, warning of the inevitable excesses of private financial institutions,
“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes … Money has no motherland; financiers are without patriotism and without decency their sole object is gain.”
Despite these sage warnings, Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote:
“I’m a most unhappy man. I have unwittingly ruined my country. A great industrial nation is now controlled by its system of credit. Our system of credit is concentrated (editor’s note: and globalized). The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world, no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.” (editor’s note: then came the Great Depression).
If this doesn’t sound like “DEJA VU” all over again today, I don’t know what does!
As you have said so well John, we need a new diversify banking regime incorporating competing public banks that take deposits from taxpayers locally and recycle them locally for the betterment of communities and individuals … where profits and interest benefit taxpayers as the primary bank stakeholders rather than mainly to the benefit of global shareholders in mega banks.
If public banking is such a viable alternative, why hasn’t it been adopted?