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: www.publicbankinginstitute.org.