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Will 2021 Be Public Banking’s Watershed Moment?
Will 2021 Be Public Banking’s Watershed Moment?
By Ellen Brown Juris Doctor
By Ellen Brown Juris Doctor
Just over two months into the new year, 2021 has already seen a flurry of public banking activity. Sixteen new bills to form publicly-owned banks or facilitate their formation were introduced in eight U.S. states in January and February. Two bills for a state-owned bank were introduced in New Mexico, two in Massachusetts, two in New York, one each in Oregon and Hawaii, and Washington State’s Public Bank Bill was re-introduced as a “Substitution.” Bills for city-owned banks were introduced in Philadelphia and San Francisco, and bills facilitating the formation of public banks or for a feasibility study were introduced in New York, Oregon (three bills), and Hawaii.
In addition, California is expected to introduce a bill for a state-owned bank later this year, and New Jersey is moving forward with a strong commitment from its governor to implement one. At the federal level, three bills for public banking were also introduced last year: the National Infrastructure Bank Bill (HR 6422), a new Postal Banking Act (S 4614), and the Public Banking Act (HR 8721). (For details on all these bills, see the Public Banking Institute website here.)
As Oscar Abello wrote on NextCity.org in February, “2021 could be public banking’s watershed moment.… Legislators are starting to see public banks as a powerful potential tool to ensure a recovery that is more equitable than the last time.”
Why the Surge in Interest?
The devastation caused by nationwide Covid-19 lockdowns in 2020 has highlighted the inadequacies of the current financial system in serving the public, local businesses, and local governments. Nearly 10 million jobs were lost to the lockdowns, over 100,000 businesses closed permanently, and a quarter of the population remains unbanked or underbanked. Over 18 million people are receiving unemployment benefits, and moratoria on rent and home foreclosures are due to expire this spring.
Where was the Federal Reserve in all this? It poured out trillions of dollars in relief, but the funds did not trickle down to the real economy. They flooded up, dramatically increasing the wealth gap. By October 2020, the top 1% of the U.S. population held 30.4% of all household wealth, 15 times that of the bottom 50%, which held just 1.9% of all wealth.
State and local governments are also in dire straits due to the crisis. Their costs have shot up and their tax bases have shrunk. But the Fed’s “special purpose vehicles” were no help. The Municipal Liquidity Facility, ostensibly intended to relieve municipal debt burdens, lent at market interest rates plus a penalty, making borrowing at the facility so expensive that it went nearly unused; and it was discontinued in December.
The Fed’s emergency lending facilities were also of little help to local businesses. In a January 2021 Wall Street Journal article titled “Corporate Debt ‘Relief’ Is an Economic Dud,” Sheila Bair, former chair of the Federal Deposit Insurance Corporation, and Lawrence Goodman, president of the Center for Financial Stability, observed:
The creation of the corporate facilities last March marked the first time in history that the Fed would buy corporate debt… The purpose of the corporate facilities was to help companies access debt markets during the pandemic, making it possible to sustain operations and keep employees on payroll. Instead, the facilities resulted in a huge and unnecessary bailout of corporate debt issuers, underwriters and bondholders….This created a further unfair opportunity for large corporations to get even bigger by purchasing competitors with government-subsidized credit.
….This presents a double whammy for the young companies that have been hit hardest by the pandemic. They are the primary source of job creation and innovation, and squeezing them deprives our economy of the dynamism and creativity it needs to thrive.
Sheila Bair, former chair of the Federal Deposit Insurance Corporation, and Lawrence Goodman, president of the Center for Financial Stability, observed
In a September 2020 study for ACRE called “Cancel Wall Street,” Saqib Bhatti and Brittany Alston showed that U.S. state and local governments collectively pay $160 billion annually just in interest in the bond market, which is controlled by big private banks. For comparative purposes, $160 billion would be enough to help 13 million families avoid eviction by covering their annual rent; and $134 billion could make up the revenue shortfall suffered by every city and town in the U.S. due to the pandemic.
Half the cost of infrastructure generally consists of financing, doubling its cost to municipal governments. Local governments are extremely good credit risks; yet private, bank-affiliated rating agencies give them a lower credit score (raising their rates) than private corporations, which are 63 times more likely to default. States are not allowed to go bankrupt, and that is also true for cities in about half the states. State and local governments have a tax base to pay their debts and are not going anywhere, unlike bankrupt corporations, which simply disappear and leave their creditors holding the bag.
How Publicly-owned Banks Can Help
Banks do not have the funding problems of local governments. In March 2020, the Federal Reserve reduced the interest rate at its discount window, encouraging all banks in good standing to borrow there at 0.25%. No stigma or strings were attached to this virtually free liquidity – no need to retain employees or to cut dividends, bonuses, or the interest rates charged to borrowers. Wall Street banks can borrow at a mere one-quarter of one percent while continuing to charge customers 15% or more on their credit cards.
Local governments extend credit to their communities through loan funds, but these “revolving funds” can lend only the capital they have. Depository banks, on the other hand, can leverage their capital, generating up to ten times their capital base in loans. For a local government with its own depository bank, that would mean up to ten times the credit to inject into the local economy, and ten times the profit to be funneled back into community needs. A public depository bank could also borrow at 0.25% from the Fed’s discount window.
North Dakota Leads the Way
What a state can achieve by forming its own bank has been demonstrated in North Dakota. There the nation’s only state-owned bank was formed in 1919 when North Dakota farmers were losing their farms to big out-of-state banks. Unlike the Wall Street megabanks mandated to make as much money as possible for their shareholders, the Bank of North Dakota (BND) is mandated to serve the public interest. Yet it has had a stellar return on investment, outperforming even J.P. Morgan Chase and Goldman Sachs. In its 2019 Annual Report, the BND reported its sixteenth consecutive year of record profits, with $169 million in income, just over $7 billion in assets, and a hefty return on investment of 18.6%.
The BND maximizes its profits and its ability to serve the community by eliminating profiteering middlemen. It has no private shareholders bent on short-term profits, no high-paid executives, no need to advertise for depositors or borrowers, and no need for multiple branches. It has a massive built-in deposit base, since the state’s revenues must be deposited in the BND by law. It does not compete with North Dakota’s local banks in the retail market but instead partners with them. The local bank services and retains the customer, while the BND helps as needed with capital and liquidity. Largely due to this amicable relationship, North Dakota has nearly six times as many local financial institutions per person as the country overall.
The BND has performed particularly well in economic crises. It helped pay the state’s teachers during the Great Depression, and sold foreclosed farmland back to farmers in the 1940s. It has also helped the state recover from a litany of natural disasters.
Its emergency capabilities were demonstrated in 1997, when record flooding and fires devastated Grand Forks, North Dakota. The town and its sister city, East Grand Forks on the Minnesota side of the Red River, lay in ruins. The response of the BND was immediate and comprehensive, demonstrating a financial flexibility and public generosity that no privately-owned bank could match. The BND quickly established nearly $70 million in credit lines and launched a disaster relief loan program; worked closely with federal agencies to gain forbearance on federally-backed home loans and student loans; and reduced interest rates on existing family farm and farm operating programs. The BND obtained funds at reduced rates from the Federal Home Loan Bank and passed the savings on to flood-affected borrowers. Grand Forks was quickly rebuilt and restored, losing only 3% of its population by 2000, compared to 17% in East Grand Forks on the other side of the river.
In the 2020 crisis, North Dakota shone again, leading the nation in getting funds into the hands of workers and small businesses. Unemployment benefits were distributed in North Dakota faster than in any other state, and small businesses secured more Payroll Protection Program funds per worker than in any other state. Jeff Stein, writing in May 2020 in The Washington Post, asked:
What’s their secret? Much credit goes to the century-old Bank of North Dakota, which — even before the PPP officially rolled out — coordinated and educated local bankers in weekly conference calls and flurries of calls and emails.
According Eric Hardmeyer, BND’s president and chief executive, BND connected the state’s small bankers with politicians and U.S. Small Business Administration officials and even bought some of their PPP loans to help spread out the cost and risk….
BND has already rolled out two local successor programs to the PPP, intended to help businesses restart and rebuild. It has also offered deferments on its $1.1 billion portfolio of student loans.
According Eric Hardmeyer
Public Banks Excel Globally in Crises
Publicly-owned banks around the world have responded quickly and efficiently to crises. As of mid-2020, public banks worldwide held nearly $49 trillion in combined assets; and including other public financial institutions, the figure reached nearly $82 trillion. In a 2020 compendium of cases studies titled Public Banks and Covid 19: Combatting the Pandemic with Public Finance, the editors write:
Five overarching and promising lessons stand out: public banks have the potential to respond rapidly; to fulfill their public purpose mandates; to act boldly; to mobilize their existing institutional capacity; and to build on ‘public-public’ solidarity. In short, public banks are helping us navigate the tidal wave of Covid-19 at the same time as private lenders are turning away….
Public banks have crafted unprecedented responses to allow micro-, small- and medium-sized enterprises (MSMEs), large businesses, public entities, governing authorities and households time to breathe, time to adjust and time to overcome the worst of the crisis. Typically, this meant offering liquidity with generously reduced rates of interest, preferential repayment terms and eased conditions of repayment. For the most vulnerable in society, public banks offered non-repayable grants.
the editors write:
The editors conclude that public banks offer a path toward democratization (giving society a meaningful say in how financial resources are used) and definancialization (moving away from speculative predatory investment practices toward financing that grows the real economy). For local governments, public banks offer a path to escape monopoly control by giant private financial institutions over public policies
This article was first posted on ScheerPost. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.”
Another Bank Bailout Under Cover of a Virus
By Ellen Brown Juris Doctor Global News Aruba
Insolvent Wall Street banks have been quietly bailed out again. Banks made risk-free by the government should be public utilities.
When the Dodd Frank Act was passed in 2010, President Obama triumphantly declared, “No more bailouts!” But what the Act actually said was that the next time the banks failed, they would be subject to “bail ins” – the funds of their creditors, including their large depositors, would be tapped to cover their bad loans.
Then bail-ins were tried in Europe. The results were disastrous.
Many economists in the US and Europe argued that the next time the banks failed, they should be nationalized – taken over by the government as public utilities. But that opportunity was lost when, in September 2019 and again in March 2020, Wall Street banks were quietly bailed out from a liquidity crisis in the repo market that could otherwise have bankrupted them. There was no bail-in of private funds, no heated congressional debate, and no public vote. It was all done unilaterally by unelected bureaucrats at the Federal Reserve.
“The justification of private profit,” said President Franklin Roosevelt in a 1938 address, “is private risk.” Banking has now been made virtually risk-free, backed by the full faith and credit of the United States and its people. The American people are therefore entitled to share in the benefits and the profits. Banking needs to be made a public utility.
The Risky Business of Borrowing Short to Lend Long
Individual banks can go bankrupt from too many bad loans, but the crises that can trigger system-wide collapse are “liquidity crises.” Banks “borrow short to lend long.” They borrow from their depositors to make long-term loans or investments while promising the depositors that they can come for their money “on demand.” To pull off this sleight of hand, when the depositors and the borrowers want the money at the same time, the banks have to borrow from somewhere else. If they can’t find lenders on short notice, or if the price of borrowing suddenly becomes prohibitive, the result is a “liquidity crisis.”
Before 1933, when the government stepped in with FDIC deposit insurance, bank panics and bank runs were common. When people suspected a bank was in trouble, they would all rush to withdraw their funds at once, exposing the fact that the banks did not have the money they purported to have. During the Great Depression, more than one-third of all private US banks were closed due to bank runs.
But President Franklin D. Roosevelt, who took office in 1933, was skeptical about insuring bank deposits. He warned, “We do not wish to make the United States Government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future.” The government had a viable public alternative, a US postal banking system established in 1911. Postal banks became especially popular during the Depression, because they were backed by the US government. But Roosevelt was pressured into signing the 1933 Banking Act, creating the Federal Deposit Insurance Corporation that insured private banks with public funds.
Congress, however, was unwilling to insure more than $5,000 per depositor (about $100,000 today), a sum raised temporarily in 2008 and permanently in 2010 to $250,000. That meant large institutional investors (pension funds, mutual funds, hedge funds, sovereign wealth funds) had nowhere to park the millions of dollars they held between investments. They wanted a place to put their funds that was secure, provided them with some interest, and was liquid like a traditional deposit account, allowing quick withdrawal. They wanted the same “ironclad moneyback guarantee” provided by FDIC deposit insurance, with the ability to get their money back on demand.
It was largely in response to that need that the private repo market evolved. Repo trades, although technically “sales and repurchases” of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks. Repo replaces the security of deposit insurance with the security of highly liquid collateral, typically Treasury debt or mortgage-backed securities. Although the repo market evolved chiefly to satisfy the needs of the large institutional investors that were its chief lenders, it also served the interests of the banks, since it allowed them to get around the capital requirements imposed by regulators on the conventional banking system. Borrowing from the repo market became so popular that by 2008, it provided half the credit in the country. By 2020, this massive market had a turnover of $1 trillion a day.
Before 2008, banks also borrowed from each other in the fed funds market, allowing the Fed to manipulate interest rates by controlling the fed funds rate. But after 2008, banks were afraid to lend to each other for fear the borrowing banks might be insolvent and might not pay the loans back. Instead the lenders turned to the repo market, where loans were supposedly secured with collateral. The problem was that the collateral could be “rehypothecated,” or used for several loans at once; and by September 2019, the borrower side of the repo market had been taken over by hedge funds, which were notorious for risky rehypothecation. Many large institutional lenders therefore pulled out, driving the cost of borrowing at one point from 2% to 10%.
Rather than letting the banks fail and forcing a bail-in of private creditors’ funds, the Fed quietly stepped in and saved the banks by becoming the “repo lender of last resort.” But the liquidity crunch did not abate, and by March the Fed was making $1 trillion per day available in overnight loans. The central bank was backstopping the whole repo market, including the hedge funds, an untenable situation.
In March 2020, under cover of a national crisis, the Fed therefore flung the doors open to its discount window, where only banks could borrow. Previously, banks were reluctant to apply there because the interest was at a penalty rate and carried a stigma, signaling that the bank must be in distress. But that concern was eliminated when the Fed announced in a March 15 press release that the interest rate had been dropped to 0.25% (virtually zero). The reserve requirement was also eliminated, the capital requirement was relaxed, and all banks in good standing were offered loans of up to 90 days, “renewable on a daily basis.” The loans could be continually rolled over. And while the alleged intent was “to help meet demands for credit from households and businesses at this time,” no strings were attached to this interest-free money. There was no obligation to lend to small businesses, reduce credit card rates, or write down underwater mortgages.
The Fed’s scheme worked, and demand for repo loans plummeted. Even J.P. Morgan Chase, the largest bank in the country, has acknowledged borrowing at the Fed’s discount window for super cheap loans. But the windfall to Wall Street has not been shared with the public. In Canada, some of the biggest banks slashed their credit card interest rates in half, from 21 percent to 11 percent, to help relieve borrowers during the COVID-19 crisis. But US banks have felt no such compunction. US credit card rates dropped in April only by half a percentage point, to 20.15%. The giant Wall Street banks continue to favor their largest clients, doling out CARES Act benefits to them first, emptying the trough before many smaller businesses could drink there.
In 1969, Prime Minister Indira Gandhi nationalized 14 of India’s largest banks, not because they were bankrupt (the usual justification today) but to ensure that credit would be allocated according to planned priorities, including getting banks into rural areas and making cheap financing available to Indian farmers. Congress could do the same today, but the odds are it won’t. As Sen. Dick Durbin said in 2009, “the banks … are still the most powerful lobby on Capitol Hill. And they frankly own the place.”
Time for the States to Step In
State and local governments could make cheap credit available to their communities, but today they too are second class citizens when it comes to borrowing. Unlike the banks, which can borrow virtually interest-free with no strings attached, states can sell their bonds to the Fed only at market rates of 3% or 4% or more plus a penalty. Why are elected local governments, which are required to serve the public, penalized for shortfalls in their budgets caused by a mandatory shutdown, when private banks that serve private stockholders are not?
States can borrow from the federal unemployment trust fund, as California just did for $348 million, but these loans too must be paid back with interest, and they must be used to cover soaring claims for state unemployment benefits. States remain desperately short of funds to repair holes in their budgets from lost revenues and increased costs due to the shutdown.
States are excellent credit risks – far better than banks would be without the life-support of the federal government. States have a tax base, they aren’t going anywhere, they are legally required to pay their bills, and they are forbidden to file for bankruptcy. Banks are considered better credit risks than states only because their deposits are insured by the federal government and they are gifted with routine bailouts from the Fed, without which they would have collapsed decades ago.
State and local governments with a mandate to serve the public interest deserve to be treated as well as private Wall Street banks that have repeatedly been found guilty of frauds on the public. How can states get parity with the banks? If Congress won’t address that need, states can borrow interest-free at the Fed’s discount window by forming their own publicly-owned banks. For more on that possibility, see my earlier article here.
As Buckminster Fuller said, “You never change things by fighting the existing reality. To change something, create a new model that makes the old model obsolete.” Post-COVID-19, the world will need to explore new models; and publicly-owned banks should be high on the list.
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Ellen Brown is Vice Editor in Chief and advisor of Global News Aruba. She has been a contributor and advisor to the Editor in Chief of Global News Aruba since Global News Aruba has been founded in September 3rd, 2007. She is also the founder of the Public Banking Institute and the author of a dozen books and hundreds of articles. She developed her research skills as an attorney practicing civil litigation in Los Angeles. In the best-selling Web of Debt (2007, 2012), she turned those skills to an analysis of the Federal Reserve and “the money trust,” showing how this private cartel has usurped the power to create money from the people themselves and how we the people can get it back.
In The Public Bank Solution (2013) she traces the evolution of two banking models that have competed historically, public and private; and explores contemporary public banking systems globally. She has presented these ideas at scores of conferences in the US and abroad, including in England, Ireland, Scotland, Wales, Canada, Iceland, Ireland, Switzerland, Sweden, the Netherlands, Germany, Croatia, Malaysia, Mexico and Venezuela.
Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences that have captured the money system. She also co-authored the bestselling Nature’s Pharmacy, which has sold 285,000 copies.
Ellen ran for California State Treasurer in 2014 with the endorsement of the Green Party garnering a record number of votes for a Green Party candidate. The Public Banking Institute is at http://PublicBankingInstitute.org. She can be heard biweekly on “It’s Our Money with Ellen Brown” on PRN.FM.
Contact Dr Juris Doctor Ellen Brown, Attorney at Law and Financial Expert at : [email protected]