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USNWR gives nod to public banks
North Dakota shines like a bright star in the dark night of America's depression. Since North Dakota is the only state with a publicly-owned bank, North Dakota is the only state with a strong economy and high employment, despite the depression.
A public bank is controlled and initially funded by a government entity, rather than by private investors. The Bank of North Dakota is, in essence, an extension of state government. The state deposits all its revenue in the bank, and sometimes borrows from the bank. The CEO of the bank does not report to a board of directors (as he would in a private bank) but to a commission composed of the governor and other officials. (A professionally-produced documentary of the impact and 90-year history of the Bank of North Dakota can be viewed on YouTube. It's a fascinating and colorful story.)
"Globally, 40 percent of banks are publicly owned," says Ellen Brown, chair of the Public Banking Institute and author of Web of Debt. She adds: "The countries with public banks mostly beat the credit crisis."
Public banking played an important role in America's past, too. The U.S. Post Office ran the Postal Savings System until 1966. This brought affordable banking services within reach of all Americans for the first time.
The private banking industry has deep structural flaws that cannot be fixed, given their controlf of Washington.
Public banks offer many benefits:
Local Lending: Public banks can be chartered and managed so they lend locally, within the jurisdiction that set them up. (The U.S. banking system was substantially a state-level system until the big banks ordered the government to de-regulate them, so they could dominate nationally.)
Lower Risk: Public banks can be prohibited from speculating in risky and unregulated derivatives. This would prevent the need for repeated bailouts.
Greater Impact: Public banks magnify the money the state can deploy for economic development and infrastructure investment. Because of the way our "fractional reserve banking" scam works, each dollar the state sends to a public bank can support at least many dollars of investment in loans for local business.
Money to Cash-Strapped States: A public bank generates earnings, and charges interest to borrowers and generates earnings. Since it doesn't have to pay dividends or show earnings to outside investors, it can give its earnings to the state (after retaining some earnings to support growth.) Or, it can offer the state below-market borrowing costs and forgo earnings.
Should a Public Bank Compete with Existing Private Banks?
No, public banks now proposed are prohibited from direct lending to consumers and businesses. They make very few loans directly. Instead, they partner with local banks, who know their customers. Public banks can co-lend with community banks, or else buy completed loans from community banks, freeing up the local banks' balance sheets so the local banks can lend again.
[COMMENT: In some ways, public banks can work like Wall Street, but wth a crucial difference. They work for everyone, instead of everyone working for the bank. All Americans outside of North Dakota ultimately work for Wall Street and the big private banks.]
Naturally the big private banks value their monopoly, and don't want states to have a new source for borrowing, and a new place to invest extra cash. They want Americans to remain their slaves, and Wall Street's slaves. Thus the Federal Reserve Bank of Boston attacked public banks in report on the North Dakota model, claiming the income states can gain having a public bank is "relatively minor", that the risk of losses is "real", that the transfer of the state's capital from private banks to a public bank "could disrupt the state's economy,” and so on. Anything to protect the tyranny of big private banks.
Because of the depression, lending standards have tightened greatly since 2007. Fewer small business loan applications meet current underwriting criteria. Thus there is less money in circulation, which increases the depression all the more. Smaller companies often need more technical assistance than banks are willing to provide. However a public bank could absorb credit risk and help pay for technical assistance. It would thus multiply the efforts of community development banks.
Since the big private banks control all, advocates of public banking have adjusted their strategies. Rather than take on the big private banks (a hopeless battle), the Public Banking Coalition promotes public banking as means to diversify the industry. Marc Armstrong, executive director of the Public Banking Institute, says, “The central issue is how to get capital to Main Street businesses, which don't benefit from the nearly $40 trillion dollars in mutual funds and IRAs that flow to the Fortune 1000 companies."
Efforts to start public banks should focus on locations with a diverse economy, a relatively spread-out population, manageable size, and a political climate that is more pragmatic than partisan. An example is Sonoma County in California, an agricultural and winemaking region with some high-tech businesses, and a population three fourths the size of North Dakota.
Marc Armstrong of the Public Banking Institute says it is essential to cultivate support among those with a financial interest in the success of public banking. Armstrong sees two kinds of allies: Community banks that need a partner so they can take on more and larger deals—and individual investors who want a safe and easy way to invest in local business.
To cement these alliances, a crucial question must be resolved: Will public banks act like development banks, earning lower risk-adjusted returns, but spurring economic development? Or will public banks be managed to take less risk and deliver a market rate of return, diminishing their value to the local community banks?
Different markets may require different strategies.
"Public banking is a keystone," concludes Armstrong. "Tens of billions of dollars from individual investors and pension funds could flow into local economies if we get this right."