This is the fourth of twelve articles on improving the economy within these criteria: Use of targeted investments; no increase in the national debt; no austerity today or tomorrow (such as raids on Social Security and Medicare) and no reduction in net tax revenues. To date we have presented a proposal to issue a limited amount of debt-free United States Notes (“Greenbacks”) such as funded the Civil War and the Reconstruction; a proposal for a National Economic Bank similar to those of the world’s fastest-growing economies, to be initially capitalized by Greenbacks; and a proposal re-create the original Bank of the United States as established and put to good use by the Founding Fathers.
Addressing Root Issues
The public banking movement, which stems from the great success of the public bank of North Dakota since 1919 and of state and local level public banks throughout the world (notably throughout Germany), directly addresses the monetary and credit roots of our modern recessions. This is refreshing, after so much debate about peripheral issues like federal budget decisions and calls for tax and regulatory relief. A straight-line extrapolation of the national debt reductions of the second term of the Clinton Administration shows we were on course to eliminate the federal debt by the year 20ll, without the kind of austerity some are insisting on today. When was the last time in the world we saw such austerity serve an economically useful purpose? Some propose tax cuts and regulatory relief, as tried during the Bush Administration. Did they lead to an improvement in the economy or a reduction in the national debt then? Whichever way we go on these issues, it is a sideshow. It is not addressing the root issues, the credit and monetary issues, which we all know from Economics 101 are the root causes of our modern-day recessions.
Why should we say credit and monetary as if they were one word? Because, under our fractional reserve banking system, a large part of our money supply is created as banks lend and re-lend money. When the banks stop lending money, they also stop creating money. The formula always holds: too little money chasing readily available goods and services results in a recession. Our purpose is not a rant against Wall Street, but just a bit more must be said to paint the picture of the need for public banking.
We have created a monster by giving into Wall Street in ways that controvert the free market system. We have made it easy to lend recklessly and play in derivatives that were actually defined as gambling games and not permissible for banks to engage in during the 1920’s. There have been bail-out’s and bonuses where any other business would feel the full consequences of excess risk. There have been large-scale purchases of toxic mortgages and mortgage-backed securities and other toxic securities by the government where no other industry has such a dumping ground. Being able to cash in those assets and infusing the banks with $16 trillion dollars of bail-out money (according to the recent first-ever audit of the Federal Reserve) gives the banks plenty of liquidity, which was the goal, but what we hoped was that the banks would lend the money. Being given a guaranteed 6% interest in their stock in the Federal Reserve provides income without risk. What we have created is staying power to sit out a recession rather than go out there and lend.
Do periodic recessions benefit banks? Andrew Mellon has been notoriously quoted as saying, “during recessions, assets return to their rightful owners” (meaning the banks.) Between foreclosures and bankruptcies, vast amounts of assets wind up in the hands of the banks. Home-owners who have never made a payment late are in “default” on their loans because of decreased housing values, and cannot re-finance when step loans increase. Unavailability of credit means businesses cannot re-finance loans that become due. This very murky picture is worth mentioning on historical grounds, as the pioneering public bank of North Dakota was founded in 1919 to protect farmers in that state from rampant foreclosures. It is, unabashedly, a movement with populist roots. They are also pro-business roots, though with an orientation more to Main Street rather than Wall Street. That’s not all bad. Without our thousands of Main Streets, Wall Street could not exist.
WHAT ARE PUBLIC BANKS?
Public banks can be set up by states or even cities. They can be capitalized by public employee and other labor pension funds, and can sell subscriptions. Their core deposits can come from tax and other revenues from city, county and state governments. The cash management fluctuations of city, county and state governments are enormous, as the receipt and use of revenues rarely match. There must be substantial “rainy day” funds. One governmental authority may be saving to pay off a bond when due, while another borrows for other purposes. They are constantly involved with the banking system, with huge amounts of money flowing back and forth with Wall Street. In an example given on the web site of the Public Banking Institute (PBI), Ellen Brown cited the State of California as of the end of 2010. At that time, it had general obligation and revenue bond debt of $158 billion, of which $70 billion or 44% was owed for interest. She points out: “If the state had incurred that debt to its own bank – which then returned the profits to the State – California could be $70 billion richer today. Instead of slashing services, selling off public assets and laying off public employees, it could be adding services and repairing its decaying infrastructure”. Yet, as she points out elsewhere, that’s only part of the picture. By keeping state money working in the real, physical economy in the state rather than wherever and however distant banks and investment houses want to use it, a state benefits from the economic growth the state is able to foster.
Here’s how it works in North Dakota. In all but a few loans for public infrastructural purposes, their state bank (BND) has functioned as a participation lender in cooperation with community banks. Loans originate with the community banks, and both the risks and the rewards are shared by the partnering banks. As the PBI website article on the subject puts it, “another way to look at it is this: the public sector sets up the standards that identify how liquidity is injected into the economy, and the private sector not only gets to vote on each deal but has skin in the game for each deal. They can’t throw them over the fence, which is what had been happening in the public sector mortgage securitization market”. This partnership approach has resulted in smaller, local, in-state banks having an opportunity to participate in large loans, giving North Dakota the most community banks per capita and the lowest number of bank failures in the US. It is a system that is geared to local use of local money, providing credit to farms and industries and Main Street businesses that the big international banks might turn their noses up at during good times and especially during bad times.
Through this mechanism, North Dakota’s public resources are leveraged. Furthermore, the sum of all the lending done by all the banks creates money in the local economy through the fractional reserve system. Through profitable operations over a long history, the BND has been able to build its resources while also turning over to the State general fund over $300 million during the last 10 years. This has allowed North Dakota to have, throughout the recession, the biggest state budget surpluses, the lowest default rates and the lowest unemployment rate in the country. This all began long before shale “fracking” was thought of.
There is much more to be said on the subjects of the history and the future of public banking in the US and other countries. A wealth of information is provided on the web site of the Public Banking Institute. There are presently bills to establish public banks in 20 states and active movements to do so in other jurisdictions. (For those of us who are D.C. locals, movements are well underway in the District, Maryland and Virginia.)
As we conclude this newsletter on Sunday afternoon, June 2, a large conference on this subject (June 2-4) is beginning in San Rafael, CA. Details and even the opportunity to view the simulcast of the various sessions can be found on the web site of the Public Banking Institute.
Let’s take inventory:
- Targeted investments to improve the economy
- No increase in the national debt
- No austerity required
- No forfeitures in net tax revenues
- A system that has worked well since 1919 in North Dakota and throughout the world including extensive use in Europe’s healthiest economy, that of Germany
What’s wrong with that?
Addressing Root Issues
The public banking movement, which stems from the great success of the public bank of North Dakota since 1919 and of state and local level public banks throughout the world (notably throughout Germany), directly addresses the monetary and credit roots of our modern recessions. This is refreshing, after so much debate about peripheral issues like federal budget decisions and calls for tax and regulatory relief. A straight-line extrapolation of the national debt reductions of the second term of the Clinton Administration shows we were on course to eliminate the federal debt by the year 20ll, without the kind of austerity some are insisting on today. When was the last time in the world we saw such austerity serve an economically useful purpose? Some propose tax cuts and regulatory relief, as tried during the Bush Administration. Did they lead to an improvement in the economy or a reduction in the national debt then? Whichever way we go on these issues, it is a sideshow. It is not addressing the root issues, the credit and monetary issues, which we all know from Economics 101 are the root causes of our modern-day recessions.
Why should we say credit and monetary as if they were one word? Because, under our fractional reserve banking system, a large part of our money supply is created as banks lend and re-lend money. When the banks stop lending money, they also stop creating money. The formula always holds: too little money chasing readily available goods and services results in a recession. Our purpose is not a rant against Wall Street, but just a bit more must be said to paint the picture of the need for public banking.
We have created a monster by giving into Wall Street in ways that controvert the free market system. We have made it easy to lend recklessly and play in derivatives that were actually defined as gambling games and not permissible for banks to engage in during the 1920’s. There have been bail-out’s and bonuses where any other business would feel the full consequences of excess risk. There have been large-scale purchases of toxic mortgages and mortgage-backed securities and other toxic securities by the government where no other industry has such a dumping ground. Being able to cash in those assets and infusing the banks with $16 trillion dollars of bail-out money (according to the recent first-ever audit of the Federal Reserve) gives the banks plenty of liquidity, which was the goal, but what we hoped was that the banks would lend the money. Being given a guaranteed 6% interest in their stock in the Federal Reserve provides income without risk. What we have created is staying power to sit out a recession rather than go out there and lend.
Do periodic recessions benefit banks? Andrew Mellon has been notoriously quoted as saying, “during recessions, assets return to their rightful owners” (meaning the banks.) Between foreclosures and bankruptcies, vast amounts of assets wind up in the hands of the banks. Home-owners who have never made a payment late are in “default” on their loans because of decreased housing values, and cannot re-finance when step loans increase. Unavailability of credit means businesses cannot re-finance loans that become due. This very murky picture is worth mentioning on historical grounds, as the pioneering public bank of North Dakota was founded in 1919 to protect farmers in that state from rampant foreclosures. It is, unabashedly, a movement with populist roots. They are also pro-business roots, though with an orientation more to Main Street rather than Wall Street. That’s not all bad. Without our thousands of Main Streets, Wall Street could not exist.
WHAT ARE PUBLIC BANKS?
Public banks can be set up by states or even cities. They can be capitalized by public employee and other labor pension funds, and can sell subscriptions. Their core deposits can come from tax and other revenues from city, county and state governments. The cash management fluctuations of city, county and state governments are enormous, as the receipt and use of revenues rarely match. There must be substantial “rainy day” funds. One governmental authority may be saving to pay off a bond when due, while another borrows for other purposes. They are constantly involved with the banking system, with huge amounts of money flowing back and forth with Wall Street. In an example given on the web site of the Public Banking Institute (PBI), Ellen Brown cited the State of California as of the end of 2010. At that time, it had general obligation and revenue bond debt of $158 billion, of which $70 billion or 44% was owed for interest. She points out: “If the state had incurred that debt to its own bank – which then returned the profits to the State – California could be $70 billion richer today. Instead of slashing services, selling off public assets and laying off public employees, it could be adding services and repairing its decaying infrastructure”. Yet, as she points out elsewhere, that’s only part of the picture. By keeping state money working in the real, physical economy in the state rather than wherever and however distant banks and investment houses want to use it, a state benefits from the economic growth the state is able to foster.
Here’s how it works in North Dakota. In all but a few loans for public infrastructural purposes, their state bank (BND) has functioned as a participation lender in cooperation with community banks. Loans originate with the community banks, and both the risks and the rewards are shared by the partnering banks. As the PBI website article on the subject puts it, “another way to look at it is this: the public sector sets up the standards that identify how liquidity is injected into the economy, and the private sector not only gets to vote on each deal but has skin in the game for each deal. They can’t throw them over the fence, which is what had been happening in the public sector mortgage securitization market”. This partnership approach has resulted in smaller, local, in-state banks having an opportunity to participate in large loans, giving North Dakota the most community banks per capita and the lowest number of bank failures in the US. It is a system that is geared to local use of local money, providing credit to farms and industries and Main Street businesses that the big international banks might turn their noses up at during good times and especially during bad times.
Through this mechanism, North Dakota’s public resources are leveraged. Furthermore, the sum of all the lending done by all the banks creates money in the local economy through the fractional reserve system. Through profitable operations over a long history, the BND has been able to build its resources while also turning over to the State general fund over $300 million during the last 10 years. This has allowed North Dakota to have, throughout the recession, the biggest state budget surpluses, the lowest default rates and the lowest unemployment rate in the country. This all began long before shale “fracking” was thought of.
There is much more to be said on the subjects of the history and the future of public banking in the US and other countries. A wealth of information is provided on the web site of the Public Banking Institute. There are presently bills to establish public banks in 20 states and active movements to do so in other jurisdictions. (For those of us who are D.C. locals, movements are well underway in the District, Maryland and Virginia.)
As we conclude this newsletter on Sunday afternoon, June 2, a large conference on this subject (June 2-4) is beginning in San Rafael, CA. Details and even the opportunity to view the simulcast of the various sessions can be found on the web site of the Public Banking Institute.
Let’s take inventory:
- Targeted investments to improve the economy
- No increase in the national debt
- No austerity required
- No forfeitures in net tax revenues
- A system that has worked well since 1919 in North Dakota and throughout the world including extensive use in Europe’s healthiest economy, that of Germany
What’s wrong with that?
