Friday, March 25, 2011

Three part series on public banking

Part 1
Changing face of America: more wealth in fewer hands
By Mike Krauss
Bucks County Courier Times

I just spent two weeks traveling the country for the first time in two years. Warnings of America's demise notwithstanding, I was struck as always by the vitality and diversity of America. Some things never change - and some things do.

For more than 30 years, wages in the United States have remained flat as costs of living rose. The vast wealth of America is now concentrated in fewer hands as at no time since the days of the "robber barons." Wall Street was allowed to crash the American economy, and catastrophic unemployment and a tidal wave of home foreclosures are taking a terrible toll.

There is all sorts of statistical evidence to support that observation, but as I traveled about I had the far more powerful evidence of my eyes.

I long ago became accustomed to the sight of the homeless in our cities, but now they can be found as you go about the day in suburbia - along with a lot of vacant homes.

Over lunch, a college friend described the work he and his wife have done for many years to get people off the streets, especially the past winter. The demographic of the homeless has changed.

"Mike," he said with sad wonder, "they look like you and me."

The homeless no longer are the mentally ill pushed out of institutions or the chronically unemployed. They are former middle class Americans, educated and once prosperous, Little League, church and PTA meetings - all gone.

I met two who had managed to escape the catastrophe, sort of. One was a well-dressed, well-spoken middle-aged woman now working the cash register at a large store in New York. College educated, she had lost her job and home; the job at the register was all she could find.

Another was a Transportation Safety Administration security person at the airport in Philadelphia. He holds a degree in physics from Penn State. Despite promises of the high-tech future, which you'd think would hold a place for that young man; it was the only work he could find.

And from speaking with the young adults in my family and their friends, I know that many are not finding any work.

But they may be more fortunate than those students I met on the campus of one of the state universities that will see its funding cut by 50 percent, if the new governor of Pennsylvania has his way. At least those already graduated were able to afford their education (With a lot of debt, of course).

I took the train from New York to Washington, past the abandoned wreckage of the former manufacturing might of America, lost overseas to the ruthless devotion of corporate America and the profits needed for a bump in stock prices when the quarterly reports come out.

Some of the neighborhoods along the tracks as you come into Philly, Baltimore and Washington look like London after the blitz. Row homes, some boarded up, some occupied, some with the walls fallen away.

Nice place to raise kids.

Passing through, I thought of Camden across the river in New Jersey, where parents must raise kids in neighborhoods that will see few police officers. They've been laid off.

Then I traveled about the Washington, DC inhabited by the army of well-fed, well-clothed, well-housed, well-educated and well-cared for people who govern America, and had to ask myself, "What's wrong with this picture?"

They really need to go. But they are too well dug in. So what's the remedy? How do ordinary Americans take their country back and rebuild what was once the greatest and most broadly shared prosperity the world has even seen?

Some senators have revived the idea of an infrastructure bank as a place to start. But that takes tax money, requires a buy in from Wall Street and an agreement from Congress to give up control of what projects get built and where. So the future of the idea is uncertain.

But there is an alternative with the potential for a far greater and more wide ranging impact.
Public banking leverages existing funds at the state, county and even municipal level for low-cost credit for not only infrastructure, but student loans, mortgages, business and a wide range of jobs creating economic development.

And instead of bureaucrats in another federal financial scheme deciding what gets done in America, local officials and local bankers and their customers make the call. It is a very efficient way to distribute credit.

And instead of insuring more profit for Wall Street, all profits from public banks flow back to the state, county or municipality that created them: revenue from normal banking activities, and not new taxes.

Public banks in American states, cities, counties and municipalities hold the key to unlock once again the productive capacity of the American people, in a way that federal bureaucrats and members of Congress never can.

Part 2
Affordable credit and the second American revolution
By Ellen Brown and Mike Krauss
Bucks County Courier Times

The current economic crisis, including cutbacks at federal, state, and municipal levels, is directly related to the lack of liquidity and available credit in the local economy, which has contributed to collapsing state revenues.

This is the moment for Americans to work together in their communities and states, to do what Wall Street, Washington and the Federal Reserve no longer can or will do – create a sustainable supply of affordable public credit, locally generated and locally directed for education, mortgages, jobs creating economic development, infrastructure and other public purposes.

When banks are lending, the economy can expand as needed to keep the trading medium (credit) circulating. When banks are not lending, the economy contracts as debt is retired.

Defaults are inevitable, because there is not enough money in circulation to pay back the loans that created the money, along with the interest that was not created in the original loan.

For our economy to recover and truly grow, lending needs to increase. The Federal Reserve-led private banking system has failed to perform this critical function.

The Fed extended its easy credit terms to bail out the Too Big To Fail (TBTF) banks that failed and caused the crisis. But the vast amounts of credit injected into the system were used to shore up the balance sheets of the banks and for investment in short-term, high-yield instruments rather than to expand credit on Main Street – your street.

Local governments and local economies have been left to fend for themselves. Across the nation, governors are forced to slash spending to balance present budgets, but at a terrible cost to the future. Tens of millions of ill fed, ill housed, just plain ill and poorly educated Americans are a recipe for disaster.

Federal Reserve Chairman Ben Bernanke says the Fed can’t grant local governments access to those same easy credit terms that saved the TBTF banks -- not because the Fed can’t find the money (it found $12.3 trillion for Wall Street and favored corporations) but, says Bernanke, because it is not in the Fed’s legislative mandate.

In other words, Wall Street owns the Fed. The people just pay the bills.

Meanwhile, the contraction of the real estate market that resulted from Wall Street derivatives speculation and reckless “securitization” has severely reduced not only the tax base of local governments, but the assets of the mid-sized and smaller banks, limiting their ability to re-infuse local economies with the liquidity required to create jobs and return public revenues to a level at which states and municipalities can maintain vital services.

States are borrowing at about 5% interest while banks are borrowing at the extremely low Fed funds rate of 0.2%. In addition, states have to worry about such things as credit ratings, late fees and interest rate swaps, which have proven to be very good investments for Wall Street and very bad investments for local governments.

How can states or large municipalities tap into the cheap and ready credit lines accessible to banks? By owning a bank themselves.

Banks literally create money when they issue loans. They do not lend their own money or their depositors’ money, but simply extend credit created on their books, which is extinguished when the loan is repaid. This is the source of over 90% of the money in the U.S. economy.

Banks require capital (equity plus earned income) to satisfy bank capital requirements, and they require deposits to create a pool of liquidity from which they can borrow to clear outgoing checks; but neither the capital nor the deposits are actually lent to customers in the process of extending bank credit.

State and local governments across the United States have huge amounts of capital that could be leveraged into loans. They collectively own trillions of dollars’ worth of assets accruing by virtue of their citizens’ tax dollars, as well as real estate and “rainy day,” pension and other special purpose funds.

Instead of investing this money at very modest interest rates in Wall Street financial institutions, the money can be turned into many times that sum in loans – if the state or municipality owns a bank.

At an 8% capital requirement, a bank can leverage capital by a factor of 12.5, so long as it can attract sufficient deposits (collected or borrowed) to clear the outgoing checks. By consolidating their assets into their own banks, state and local governments can leverage their own funds to finance their own operations; and they can do this essentially interest-free, since they will own the bank and will get back any interest they charge to themselves.

These are the possibilities offered by public banking.

In a growing movement, eight states have legislation pending to either set up or study the best practices of state wide public banks, modeled on the very successful Bank of North Dakota. More states are lining up.

State treasurers, governors, mayors and local elected officials across the U.S. are looking at both the affordable credit and millions of non tax revenue dollars generated annually by the BND, and they are considering how that model can be adapted to their needs.

A Second American Revolution is taking form. It begins with a decentralized alternative to a failed banking system dominated by the “money center” banks and a Federal Reserve and federal government they own: public banking -- banking in the public interest.

Ellen Brown is the author of Web of Debt and Chairman of the Public Banking Institute (PBI).

Part 3
Put public assets to work for taxpayers
By Mike Krauss and Tom Sgouros
Bucks County Courier Times

Across the nation, states, counties and municipalities are faced with plummeting revenues, huge deficits and the necessity of higher taxes or deep cuts in vital services. A lack of affordable credit cripples economic expansion that would generate increased revenue over the long term.

But not in North Dakota. Partnering with local banks for almost 100 years, the public Bank of North Dakota has provided a steady flow of affordable credit to farmers, students, homebuyers and businesses. The bank has cut municipal borrowing costs and debt service and kept the taxpayers money in the state, working for them, and not going out of state to benefit the private banks.

The bank's profits are put to two uses: reinvested in more credit, or returned to the only shareholder, the people. In past 10 years, the bank has contributed more than a third of a billion dollars to the general fund, without new taxes.

No wonder then, that as other states consider public banking, they look to North Dakota. But, there are other public banking options.

Cities or counties with substantial financial resources could establish their own bank, and smaller municipal governments could obtain similar benefits by pooling resources into what would in effect be a municipal mutual bank.

Municipal governments are heavy users of financial services, both as depositors and borrowers. The banks that provide these services are all for-profit corporations. It is possible to secure these same services for far less cost, and to use debt service payments to build - instead of drain - municipal fund balances, through a mutual bank, run by and for its municipal depositors/owners.

As with any public bank, the profits of a municipal mutual bank can be retained by the bank to increase its capabilities, or shared among the participating municipalities as non tax revenue.

A bank founded by a partnership of municipalities would be able to assume a proportion of any outstanding or proposed debt of the members and their authorities, allowing that debt to be serviced at a substantially lower interest rate that could save taxpayers millions of dollars annually.

Because the bank would be able to offer credit at low interest rates, municipalities would have no need for "rainy day" funds that generate little income while tying up resources.

With only a small number of customers, demanding as they may be, a bank such as the one proposed here could be effectively run by a relative handful of people, with a minimum of staffing overhead or real estate expense. Important functions like check processing and account record keeping can be accomplished using financial industry vendors.

On the depositor side, the bank would not need to earn a profit from each of its routine functions, so services like checking and account management could be provided at cost to the member municipalities.

Though the main purpose of the bank would be to service municipal financial needs, it will also be possible to serve the needs of the community, as would a county or state public bank, by for example extending low-cost credit - albeit on a smaller scale.

A bank with a lending capacity measured in the hundreds of millions of dollars could be formed by a handful of the municipalities in which this newspaper is circulated.

Without stock to sell or to speculate with, and with the depositors setting policy on lending and fees, no one will get rich running a mutual bank, though it can be a perfectly viable enterprise, paying dividends to its depositors in money and better services.

But sitting as we are in the middle of a catastrophe created by out-of-control financial flimflams passed off as "innovation," it must be emphasized that such a bank as proposed here is a return to the roots of finance - old fashioned, prudent and risk averse. A mutual bank is an old form of banking, and the first savings banks in the United States were mutual banks.

Lower cost banking services, lower cost borrowing, control over these costs, control over borrowing costs, stronger municipal bottom lines (through partial ownership of an appreciating asset and interest payments that accrue to their own bottom lines), consolidation of accounts, joint financial services offering economies of scale, increased credit and lower cost, long term financing for large projects - all are potential benefits of a municipal mutual bank.
Efforts are underway in Pennsylvania and many other states to create statewide public banks.

But action in the state Legislatures requires overcoming the strenuous lobbing of the commercial banking industry. Despite the many benefits for the people, it may be a protracted struggle.

But cities, counties and municipalities closer to the people can move more quickly. We urge elected municipal officials and finance managers to explore the best practices of public banking and learn how its benefits may be secured for the taxpayers they serve.

Tom Sgouros is a Rhode Island budget analyst, government finance specialist and an advisor to the PBI. For information:

Monday, March 21, 2011

WISCONSIN: Broke Unless You Count The $67 Billion

From Business Insider
Courtesy of Guest Author Ellen Brown

As states struggle to meet their budgets, public pensions are on the chopping block, but they needn’t be. States can keep their pension funds intact while leveraging them into many times their worth in loans, just as Wall Street banks do. They can do this by forming their own public banks, following the lead of North Dakota—a state that currently has a budget surplus.

Wisconsin Governor Scott Walker, whose recently proposed bill to gut benefits, wages, and bargaining rights for unionized public workers inspired weeks of protests in Madison, has justified the move as necessary for balancing the state’s budget. But is it?

After three weeks of demonstrations in Wisconsin, protesters report no plans to back down. Fourteen Wisconsin Democratic lawmakers—who left the state so that a quorum to vote on the bill could not be reached—said Friday that they are not deterred by threats of possible arrest and of 1,500 layoffs if they don’t return to work. President Obama has charged Wisconsin’s Governor Scott Walker with attempting to bust the unions. But Walker’s defense is:

“We’re broke. Like nearly every state across the country, we don’t have any more money.”

Among other concessions, Governor Walker wants to require public employees to pay a portion of the cost of their own pensions. Bemoaning a budget deficit of $3.6 billion, he says the state is too broke to afford all these benefits.

Broke Unless You Count the $67 Billion Pension Fund . . .
That’s what he says, but according to Wisconsin’s 2010 CAFR (Comprehensive Annual Financial Report), the state has $67 billion in pension and other employee benefit trust funds, invested mainly in stocks and debt securities drawing a modest return.

A recent study by the PEW Center for the States showed that Wisconsin’s pension fund is almost fully funded, meaning it can meet its commitments for years to come without drawing on outside sources. It requires a contribution of only $645 million annually to meet pension payouts. Zach Carter, writing in the Huffington Post, notes that the pension program could save another $195 million annually just by cutting out its Wall Street investment managers and managing the funds in-house.

The governor is evidently eying the state’s lucrative pension fund, not because the state cannot afford the pension program, but as a source of revenue for programs that are not fully funded. This tactic, however, is not going down well with state employees.

Fortunately, there is another alternative. Wisconsin could draw down the fund by the small amount needed to meet pension obligations, and put the bulk of the money to work creating jobs, helping local businesses, and increasing tax revenues for the state. It could do this by forming its own bank, following the lead of North Dakota, the only state to have its own bank — and the only state to escape the credit crisis.

This could be done without spending the pension fund money or lending it. The funds would just be shifted from one form of investment to another (equity in a bank). When a bank makes a loan, neither the bank’s own capital nor its customers’ demand deposits are actually lent to borrowers. As observed on the Dallas Federal Reserve’s website, “Banks actually create money when they lend it.” They simply extend accounting-entry bank credit, which is extinguished when the loan is repaid. Creating this sort of credit-money is a privilege available only to banks, but states can tap into that privilege by owning a bank.

How North Dakota Escaped the Credit Crunch
Ironically, the only state to have one of these socialist-sounding credit machines is a conservative Republican state. The state-owned Bank of North Dakota (BND) has allowed North Dakota to maintain its economic sovereignty, a conservative states-rights sort of ideal. The BND was established in 1919 in response to a wave of farm foreclosures at the hands of out-of-state Wall Street banks. Today the state not only has no debt, but it recently boasted its largest-ever budget surplus. The BND helps to fund not only local government but local businesses and local banks, by partnering with the banks to provide the funds to support small business lending.

The BND is also a boon to the state treasury. It has a return on equity of 25-26%, and it has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. In comparison, California’s public pension funds are down more than $100 billion—that’s billion with a “b”—or close to half the funds’ holdings, following the Wall Street debacle of 2008. It was, in fact, the 2008 bank collapse rather than overpaid public employees that caused the crisis that shrank state revenues and prompted the budget cuts in the first place.

Seven States Are Now Considering Setting Up Public Banks
Faced with federal inaction and growing local budget crises, an increasing number of states are exploring the possibility of setting up their own state-owned banks, following the North Dakota model. On January 11, 2011, a bill to establish a state-owned bank was introduced in the Oregon State legislature; on January 13, a similar bill was introduced in Washington State; on January 20, a bill for a state bank was filed in Massachusetts (following a 2010 bill that had lapsed); and on February 4, a bill was introduced in the Maryland legislature for a feasibility study looking into the possibilities. They join Illinois, Virginia, and Hawaii, which introduced similar bills in 2010, bringing the total number of states with such bills to seven.

If Governor Walker wanted to explore this possibility for his state, he could drop in on the Center for State Innovation (CSI), which is located down the street in his capitol city of Madison, Wisconsin. The CSI has done detailed cost/benefit analyses of the Oregon and Washington state bank initiatives, which show substantial projected benefits based on the BND precedent. See reports here and here.

For Washington State, with an economy not much larger than Wisconsin’s, the CSI report estimates that after an initial startup period, establishing a state-owned bank would create new or retained jobs of between 7,400 and 10,700 a year at small businesses alone, while at the same time returning a profit to the state.

A Bank of Wisconsin Could Generate “Bank Credit” Many Times the Size of the Budget Deficit
Economists looking at the CSI reports have called their conclusions conservative. The CSI made its projections without relying on state pension funds for bank capital, although it acknowledged that this could be a potential source of capitalization.

If the Bank of Wisconsin were to use state pension funds, it could have a capitalization of more than $57 billion – nearly as large as that of Goldman Sachs. At an 8% capital requirement, $8 in capital can support $100 in loans, or a potential lending capacity of over $500 billion. The bank would need deposits to clear the checks, but the credit-generating potential could still be huge.

Banks can create all the bank credit they want, limited only by (a) the availability of creditworthy borrowers, (b) the lending limits imposed by bank capital requirements, and (c) the availability of “liquidity” to clear outgoing checks. Liquidity can be acquired either from the deposits of the bank’s own customers or by borrowing from other banks or the money market. If borrowed, the cost of funds is a factor; but at today’s very low Fed funds rate of 0.2%, that cost is minimal. Again, however, only banks can tap into these very low rates. States are reduced to borrowing at about 5% — unless they own their own banks; or, better yet, unless they are banks. The BND is set up as “North Dakota doing business as the Bank of North Dakota.”

That means that technically, all of North Dakota’s assets are the assets of the bank. The BND also has its deposit needs covered. It has a massive, captive deposit base, since all of the state’s revenues are deposited in the bank by law. The bank also takes other deposits, but the bulk of its deposits are government funds. The BND is careful not to compete with local banks for consumer deposits, which account for less than 2% of the total. The BND reports that it has deposits of $2.7 billion and outstanding loans of $2.6 billion. With a population of 647,000, that works out to about $4,000 per capita in deposits, backing roughly the same amount in loans.

Wisconsin has a population that is nine times the size of North Dakota’s. Other factors being equal, Wisconsin might be able to amass over $24 billion in deposits and generate an equivalent sum in loans – over six times the deficit complained of by the state’s governor. That lending capacity could be used for many purposes, depending on the will of the legislature and state law. Possibilities include (a) partnering with local banks, on the North Dakota model, strengthening their capital bases to allow credit to flow to small businesses and homeowners, where it is sorely needed today; (b) funding infrastructure virtually interest-free (since the state would own the bank and would get back any interest paid out); and (c) refinancing state deficits nearly interest-free.

Why Give Wisconsin’s Enormous Credit-generating Power Away?
The budget woes of Wisconsin and other states were caused, not by overspending on employee benefits, but by a credit crisis on Wall Street. The “cure” is to get credit flowing again in the local economy, and this can be done by using state assets to capitalize state-owned banks.

Against the modest cost of establishing a publicly-owned bank, state legislators need to weigh the much greater costs of the alternatives – slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed, and selling off public assets. Given the cost of continuing business as usual, states can hardly afford not to consider the public bank option. When state and local governments invest their capital in out-of-state money center banks and deposit their revenues there, they are giving their enormous credit-generating power away to Wall Street.


Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are and