The Public Bank Option

Building an Ark

By Mike Krauss

Bucks County Courier Times

Ellen H Brown is an attorney, researcher, author and daughter of U.S. diplomats. And observant.

In the aftermath of the Wall Street collapse and the catastrophe it let lose, she noticed that while forty-nine of the fifty states and thousands of municipal governments were drowning in red ink and deficits, one state was not: North Dakota.

She investigated and discovered that unlike the other states, the people of North Dakota owned their own central bank, a mini Federal Reserve, the Bank of North Dakota (BND), and as one North Dakota banker put it, “When the crash hit, the BND never blinked, and the credit kept flowing.”

Affordable credit is the life blood of modern economies, providing families and individuals who are not wealthy the essential tool to create some wealth and prosperity, and enabling businesses to grow and create jobs.

The BND is not a commercial bank. It partners with, and does not compete with local banks, credit unions and financial institution. allowing them to make larger loans than otherwise possible, or “buying down” interest rates, making loans more affordable so that local banks can approve more loans.

This is a no branches, no tellers, no ATM, no advertising, no mega salary or mega bonus bank. Low overhead and very profitable. Last year the bank returned $94 million in profits to the state – non tax revenue – for a budget surplus.

The BND has a current loan portfolio of $3.2 billion at work creating jobs in a state of 670,000 people, about the population of the county where this newspaper is published. Unemployment in North Dakota is 2.6%.

The story line out of Wall Street and Washington is that the BND has nothing to do with the prosperity of that state. It’s all about the shale gas boom.

Nice try.

The BND was putting in $30 million a year to the state before the shale gas boom. North Dakota’s neighbor states all have gas and oil, and went into budget shock when the crash came.

Pennsylvania is in a shale gas boom, but unemployment is at 5.7 percent,  not counting those who have given up looking for the jobs that are not there, and lawmakers had to close yet another budget deficit - $1.4 billion.

Small wonder twenty state legislatures now have some kind of public bank legislation pending. But getting a bill through a state legislature is a long slog, So municipalities, cities and counties, which are more agile, are taking the lead.

Last month, Santa Fe, NM became the first American city to move formally to consider how to establish its own bank. More will follow.

Why the urgency?

An unprosecuted and unrepentant Wall Street parties on.  The next crash is only a matter of time. It will take much of what is left of the prosperity of the American people with it, including municipal deposits banked on Wall Street.

But a public bank can hold those municipal deposits, securely and not leveraged to back the almost insane $200 trillion plus of derivative gambles that now sit on the balance sheets of the largest U.S. banks, just waiting for the piper to come calling.

Public banks can do something else of immediate benefit to taxpayers: drive down debt service.

Newly formed public banks can immediately grow their assets and balance sheets, and grow gradually into credit creation,  by buying up high cost municipal debt, replacing it with lower cost debt and driving down the debt service that is often a large part of municipal budgets.

The latest Consolidated Annual Financial Report (CAFR) available for county in which this newspaper is published shows total debt of $330.2 million, of which $79.5 million is interest. And as reported in this newspaper, the county’s debt service obligation will increase by 17 percent in 2014.

That has to be paid for by taxes.

Ellen Brown founded the American public banking movement. In a recent essay she explains that creation of public banks is more than tax relief and prudent management of public funds; it may be a vital necessity -  a way to build an Ark to safeguard public funds in the coming flood that Wall Street will let lose.

The Great Depression on steroids

The coming Wall Street collapse

By Mike Krauss

Bucks County Courier Times

The story line coming out of Washington and the Federal Reserve is that life is getting better all the time for the American people. It is a false narrative, pure propaganda.

The reality is that the overwhelming majority of the American people remain trapped in a slow moving social catastrophe, almost six years of bankster induced austerity – savage budget cuts and crippled public services, crumbling infrastructure, high unemployment, home foreclosures, bankruptcies, failing schools, crushing student debt, higher taxes and more public debt.

It is reported that most Americans could not lay hands on $400 to cover an emergency, while the gap in income and wealth between the less than one percent and the rest of the American people grows ever more obscenely wider. Some recovery.

At the heart of this travesty lies the slavish devotion of the federal government – the Congress, administration and the regulatory agencies – to the predatory banks on Wall Street.

We all know this.

What we may not all know is that nothing has been done to change the business practices of the banks that collapsed the prosperity of a nation; and on account of this, they have gone on doing what they had been doing.

It is only a matter of time before those practices induce another, more devastating collapse – the Great Depression on steroids.

But, you say, the Dodd-Frank reforms cleaned up that mess. Think again. Dodd- Frank was written by an army of Wall Street lobbyists, as were the rules to implement even its most mild of corrections.

Party on, Wall Street.

There have been only two tangible results of Dodd-Frank. One is to push ever more community banks and credit unions out of business, allowing Wall Street to gobble up more customer deposits to back their bets. The other is that affordable credit has dried up, as the Wall Street banks abandon lending to businesses in our communities to chase the mega profits in the derivatives casino.

The “too-big-to-fail” U.S. banks have collectively gotten 37% larger since the 2008 banking crisis. The six largest banks now control 67 percent of all banking assets.

According to the most recent quarterly report from the Office of the Controller of the Currency, five "too-big-to-fail" banks now have more than 40 trillion dollars each in exposure to derivatives.

Derivatives, like the interest rate swaps that cost Philadelphia and its school district about $500 million, are bets -  and bets on bets, and bets on bets on bets, waiting for one large failure to send Wall Street into a frenzy of calling in the bets, desperate to salvage their paper profits before the losers go bust.

Who will be the big losers in the next crash? Depositors.

Dodd-Frank prohibits taxpayer funded bailouts like that of 2008. So, in the coming crash the Wall Street banks will go under? Of course not.  Instead, they will be “bailed in” by seizing depositors funds. The dry run was Cyprus.

But, you say, that’s my money! No, it isn’t. Legally, when you deposit money in a bank, it belongs to the bank, and what the depositor has is an IOU; which gets paid if there is any money left in a bank meltdown.

And there won’t be. The reserves of the FDIC will get blown away in days, if not minutes. And the 2005 bankruptcy “reform,” gives the counter parties to derivative bets “super priority” status to get paid off before “unsecured creditors.”

That’s you, and any local government which parks its money on Wall Street; money needed to meet payroll, for example.

This pending catastrophe is not something members of Congress, the president, or the real power in the U.S., the Federal Reserve, want to discuss.

But those responsible for public funds must pay attention to what the “invisible hand” at the Federal Reserve is doing, understand that it controls the American system of banking and finance and the U.S. economy, and that it works for the banksters on Wall Street and no one else.

In the next column, how the American people can survive another banking catastrophe.

Philadelphia: broke unless you count the $11 billion

Putting the common wealth to work for the common good

By Mike Krauss

The finances of Philadelphia and its school district continue their roller coaster ride from one crisis to the next, taking the people of the city – and the children – along for the ride.

The latest jolt was delivered by the School Reform Commission (SRC), the unelected junta that controls Philadelphia public education. Meeting in an almost clandestine session, the SRC abrogated a long standing contractual agreement  with the teachers and compelled them to make contributions to their health care benefits.

Some will look at this and say, “Well, I pay for my health care, so why not teachers.” Sounds reasonable, until you consider the facts.

Teachers make a considerable investment in their own education.   Many are burdened with the debt they incurred for that education. They want to see a return on that investment, like any smart private business person, the kind who sit on the SRC.

In contract negotiations, health care is a part of the teachers’ compensation, in place of higher pay. It makes more sense to buy health care as a group and get lower premiums, than to take more salary and buy health care individually.

So the action by the SRC is in fact a pay cut, which was justified by two arguments which don’t stand up to scrutiny.

The first is that the savings by the district can be immediately distributed to our struggling schools for such critically needed items as teaching material, counseling, nurses and all the many critical aids to good teaching that have been cut.

The teachers are made to pay for what the people’s government will not.

What’s next? Will  police be asked to pay for their uniforms and weapons? Will firefighters be asked to pay for their protective gear?

The second argument for this pay cut for the teachers is that “There’s no more money.” But that is not so. This city has lots of money. It is just not managed to maximum benefit for the city.

The people of Philadelphia hold more than $11 billion in investments, managed by the Pension and Retirement Board, the Treasurer or various agencies and authorities. It is managed, in the case of the Pension and Retirement Board, by more than 100 different managers of different types of investments, financial products.

The Pension and Retirement Board regularly moves that money around from one investment to another, generating fees and commissions for the managers, but no appreciably greater return than had the money sat in the stock market.

Virtually none of the $11 billion is invested in and at work in the city, creating jobs and the tax revenues that can support a first class, world class education for our children.

There is an alternative.

Some portion of those investments – say  5 percent, or about $550 million - can be redirected into an equity position in the formation of a pubic Bank of Philadelphia, modeled on the hugely successful public Bank of North Dakota (BND).

Those funds are then leveraged as with any bank, in partnership with our community banks, credit unions and development agencies to generate many times that amount in affordable credit – the life blood of modern economies – flowing into the city.

For job creation, neighborhood improvement, infrastructure, sustainable business, better schools and more  - all those things the people of this great city deserve, but are told are not affordable.

The BND last year returned $94 million of profit to the state’s general fund, helping to post yet another budget surplus. No layoffs or cutbacks. It has $3.2 billion dollars invested in that state’s economy, with a population half that of Philadelphia, helping to drive unemployment to 2.6 percent. It helps reduce the interest paid on bond issues – public debt – and interest paid is to the people and into their own bank.

Perhaps most important, the state deposits its own money in its own bank, safely away from the casino on Wall Street, whose banks have done this city great harm but only small favors.

For too long, Philadelphia’s leaders have fought the annual budget battle with the same old tools – layoffs, cutbacks, more taxes, more debt or givebacks from employees.

Public banking is the new tool this city needs to build a new future of broadly shared prosperity, opportunity and justice for all its sons and daughters.

And get the city and its children off the roller coaster.

Mike Krauss is Chairman of the Pennsylvania Project and a founding director of the Public Banking Institute. www.publicbankingpa.org