By John Lawrence
In this fourth part of our series on Public Banking (check out Parts 1 – 3 here, here and here), we explore how a Public Bank could benefit the taxpayers and citizens of the City of San Diego.
To recapitulate, the Public Bank of San Diego (BSD) would be owned by the City of San Diego and would provide functions similar to the Bank of North Dakota which is the nation’s only public bank as of this date. All BSD deposits would be guaranteed by the full faith and credit of the City of San Diego.
The primary deposit base would be the City of San Diego itself. All city revenues and funds such as the pension fund as well as funds of city institutions would be deposited with the BSD, as would be required by law. The BSD would also accept deposits from other sources including residents, local corporations and businesses and other San Diego County government entities.
One of the primary benefits would be student loans at affordable rates and without Draconian penalties. Since profits would not have to be maximized like they must be for Wall Street banks, creative and ethical systems could be devised for paying back the loans.
For example, student loan paybacks could be made a portion of future earnings for a certain period of time with balances forgiven for certain professions like medicine or teaching providing that the recipient stayed within the City or County for a certain period of time. Because the BSD would not be a publicly traded corporation, there would not be the requirement to maximize profits as there is for Wall Street Banks who have to maximize profits in order not to be sued by their investors.
Therefore, the BSD would be involved in basic banking activities like taking in deposits and giving out loans with the profits coming from the spread between interest paid on deposits and interest gained from loans. There would be no derivatives, no interest rate swaps, no collateralized debt obligations, no mortgage backed securities, no casino gambling. It would not even be possible for speculation in the stock market since the BSD would not be a publicly traded company.
Why not you might ask?
A publicly traded company is vulnerable to a takeover by a hedge fund or some other entity. Let the Co-op Bank in the UK be a cautionary tale. The Co-op bank, similar to a credit union, was owned by its customers. However, as a publicly traded company, to the extent that the public bought stock in it, it was not actually completely owned by its customers; it was also partially owned by the investors who bought stock in it.
Ahh, there’s the rub. The Co-op Bank was eventually taken over by US hedge funds Aurelius Capital Management and Silver Point Capital (established by Goldman Sachs alums), thereby losing any pretense to be customer owned. As an aside, Silver Point was also involved in the Hostess Bankruptcy as I reported in the article Junk Food Devoured by Junk Bonds with people fearing they would not be able to eat a Twinkie again. There was nothing to fear, however, because another hedge fund bought the right to the Twinkies name out of bankruptcy and now they’re back on store shelves along with their sister products Ho-Hos, Zingers and Ding Dongs.
A credit union is another example of a cooperative bank. It is owned by its members and does not have to maximize profits. The benefits or profits go to the members and not to Wall Street executives or impersonal investors (mainly rich people). Credit unions differ from banks and other financial institutions in that those who have accounts in the credit union are its members and owners, and they elect their board of directors on a one-person-one-vote basis regardless of the amount invested. Credit unions see themselves as different from mainstream banks, with a mission to be “community-oriented” and “serve people”, not profit.
The difference between credit unions, cooperatives and public banks on the one hand and conventional banks including Wall Street banks on the other is that, for privately owned banks, profits go to the investors in that bank not to the members of a co-op or to the public. With a publicly owned Bank of San Diego, profits would go to the citizens of San Diego.
Another thing the BSD would do is to make loans to local businesses and government entities on favorable terms in order to encourage local economic development. Similar to the BND which gives loans to local medical and health care facilities for expansion, the BSD would first and foremost make loans that would provide for the maintenance and expansion of local infrastructure although it would consider loans to non-local entities that were on particularly good terms and would lead to favorable returns for local taxpayers and citizens as well.
The BSD’s profits could go to funding the pension fund for local government employees in such a way that the pension fund would not be always in the position of asking taxpayers for more money. Pension funds have increasingly been gambling with their assets in the Wall Street casino and losing requiring even more taxpayer funding than otherwise would have been necessary.
This has come about because money that should have been allocated to the pension fund was diverted to pay for popular San Diego city initiatives, such as the Petco Park ballpark, the (previous) convention center expansion, and for the cost of hosting the 1996 Republican national convention. With a public BSD there would be no need to enter the Wall Street casino capitalism arena in order to make up for losses from the diversion of taxpayer money to politically popular expenditures such as a new stadium for the Chargers. Let the money spent on Petco Park (and denied the pension fund) be a cautionary tale.
The publicly owned BSD would not gamble in derivatives making it essentially a very conservative public institution. As Ellen Brown says in Public Bank Solution: “North Dakota does not keep its revenues in Wall Street banks but deposits them in the state-owned Bank of North Dakota by law. It has a mandate to serve the public. It does not gamble in derivatives. The bank of North Dakota was the only US bank to completely escape the 2008 banking crisis.”
Ellen Brown continues:
State and local governments can, however, share in the perks enjoyed by Wall Street. They can do it by setting up their own banks. North Dakota, the only state that actually does this, is also the only state to be in continuous budget surplus every year since the banking crisis of 2008. The Bank of North Dakota was formed in 1919 to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its stated mission is to deliver sound financial services that promote commerce, agriculture and industry in North Dakota. Today it is a major source of profit for the state, generating a whopping 25% return on equity even in 2008, when revenues in other states were plummeting. North Dakota has the lowest foreclosure rate in the country, the lowest credit card default rate, and the lowest unemployment rate. It has no debt at all and it has had no bank failures at least in the last decade.
Finally, A BSD could pay a decent rate on savings accounts which would support senior citizens who are now subjected to zero percent interest on their savings and might just as well put their life savings under their mattresses. Credit cards could be provided at less than the present usurious rates charged by Wall Street banks. A public BSD could take over foreclosed homes and rent them back to prior owners until they could regain their financial footings and buy them back again. These are only a few of the things an ethical Bank of San Diego could do.
So why are we waiting? An ethical bank that profits the entire community vs a Wall Street bank that profits only its investors and executives.
It’s a no brainer.
Brian Brady says
There is only one problem with a public bank; business decisions eschew economic reality in favor of political whims. Fannie Mae and Freddie Mac are two examples.
Credit unions are an excellent alternative for people who want a not-for-profit financial institution as are mutual insurance companies. The best part about them is that they are opt-in rather than existing by the threat of force.
John Lawrence says
Credit unions are cooperatives that benefit the customers of a particular credit union usually a predefined group like teachers, for example. A public bank would benefit a public entity like a city, a county, a state or some other jurisdiction.
John Lawrence says
Tell that to the Public Bank of North Dakota which has been sound and conducted sound policies for over a hundred years while supporting and encouraging student loans, agriculture and industry in North Dakota. A far cry from the essentially privately run (albeit with government guarantees) Fannie and Freddie. Their executives were just out to make money, and if they failed the government would step in and bail them out. Ahh, there’s the rub.
Brian Brady says
“A public bank would benefit a public entity like a city, a county, a state or some other jurisdiction.”
We have one now- San Diego County Credit Union is open to anyone living in San Diego, Orange, or Riverside counties. Are you more looking for a financial institution where the taxpayers are the owners? Why would that benefit more than a member-run institution which is open to anyone and everyone in the County?
John Lawrence says
There is a difference. A credit union is owned by and benefits its members. A Public Bank of San Diego would benefit all taxpayers and citizens of San Diego and would encourage economic development in San Diego.