Public Banking and A Strong Banking Industry

By: Ellen H Brown and Mike Krauss

Ellen H Brown is chairman of the Public Banking Institute, author of Web of Debt and a California corporate lawyer. Mike Krauss is a PBI board member, international logistics expert and former officer of PA county and state government.

It may be two years away, or six months. It could happen tomorrow. The next failure of the Too Big To Fail banks is only a matter if time.

Twenty eight months after the collapse of the money center banks plunged the American people into a well of economic despair, neither the effects nor the causes of that collapse have been remedied. It's business as usual.

The meaningful changes in federal law that could have corrected the failure and abuse of the TBTF banks died in the last Congress, beaten back by an army of industry lobbyists and buried under a mountain of political IOUs.

The regulatory agencies charged to safeguard the market and investors are staffed by too many finance industry allies and face severe budget cuts that will cripple the efforts of conscientious regulators.

This is a time bomb waiting to explode.

As courts reject the standing and claims of the money center banks in the foreclosure mill, and analysts question the integrity of their balance sheets, citing accounting devices used to understate, or not state at all their liabilities and exposure, the fuse may already be lighted.

Then what? Another rescue? America needs banks and banking.

America has banks, more than 7,000 local banks and an even larger number of credit unions, the vast majority of which are sound and productive. Action must be taken now to decouple American banking from the endemic failures of the money center banks of the Federal Reserve and support what works.

Public banking – banking in the public interest – can help provide a viable, sustainable banking industry that remedies the reckless risk taking, inside dealing, and lack of transparency, accountability and sound corporate governance that are at the heart of the failure of the TBTF banks.

Efforts are underway to establish such banks. Six states currently have bills pending, three to establish a state-wide publicly owned bank (Washington State, Oregon, Illinois) and three for feasibility studies to explore the possibilities (Virginia, Massachusetts, Hawaii).

Public banking can provide a new supply of the affordable credit urgently needed to underwrite sustained economic activity and job creation. And public banking can generate a sustained and significant revenue source for cash strapped states, municipalities and battered taxpayers.

A public bank is capitalized by public money, for example state tax revenue and fees, and is managed by salaried civil service professionals who have no incentive for risk taking. The managers report to elected officials directly accountable to the people.

A public bank returns a portion of its profits to the chartering governing authority and plows the rest back into increased lending activity – to homebuyers, students, farmers, small businesses, start-ups, economic development and jobs creation.

Public banks partner with and support local banks and credit unions in a variety of ways. One is “participatory lending,” in which the public bank increases total loan size, provides guarantees or “buys down” the interest rates of the loans the private banks originate.

Public banks provide wholesale, “banker’s bank” services such as check clearing, bond account safekeeping, and Fed Funds lines to capitalize on excess liquidity within the banking system at very low interest. Public banks further strengthen the local banking industry by providing capital to local banks via direct bank stock lending or buying portions of a local bank’s loan portfolio.

Public banks offer a secondary market for mortgages and make a market at lower interest for municipal bonds, with huge savings to taxpayers in debt service.

Finally, a public bank has only one shareholder to whom it pays dividends – the people of the state or municipality that created it.

The public Bank of North Dakota (BND) has been doing all these things and more for the people of that state for almost a century, and helping to sustain a strong and healthy banking industry.
In 2009, while the U.S. economy was melting down, the BND backed $68 million in FHA and VA mortgages originated by local banks, funded or renewed $472 million in commercial loans of partner banks and institutions in a more than $1 billion commercial loan portfolio, and financed 268 business and industrial projects.

In the devastating 1997 Grand Forks flood and fire, the BND provided the state with immediate cash for relief until federal disaster funds arrived, underwrote the suspension of mortgage loan payments of those wiped out, and provided more than $100 million in loans to help businesses rebuild.

Over the last ten years the BND has returned more than a third of a billion dollars to the state’s general fund.

The people of the state are getting solid returns on their money. North Dakota has a population of only about 620,000. States with larger populations and tax revenues can anticipate larger returns.

As important, North Dakota has a thriving and healthy banking industry. A recent study by the Center for State Innovation (University of Wisconsin, Madison) analyses the role of the BND and concludes that this public bank “has been effective in strengthening the banking market, leading to robust competition.”

But state legislators and municipal leaders need to move quickly, before the next failure sends the TBTF banks running back to Congress and the Fed for another rescue that further cripples an already limping U.S. economy.