"No More Detroits": Can Public Banking Save Cities?

On Tuesday, U.S. bankruptcy judge Steven Rhodes certified that Detroit was "officially bankrupt," with the AP reporting: "Detroit Bankruptcy Decision Puts Pensions at Risk." The Sacramento Bee reports in "Bankrupt Detroit Can Cut Pensions; Implications Big for California," that San Bernadino and other locales in California could suffer similar fates. The New York Times reports today that the Illinois State Legislature is following suit by approving cuts in that state's retirement benefits.

However, many activists have suggested that public banking -- state or municipally-owned public banks operating as public utilities -- could save cities millions of dollars by avoiding bond debt, keeping interest rates low, and feeding interest back into the communities and municipalities supported by the democratically-run banks. The video "No More Detroits" puts forward this argument, as does the article "Why Cities Should Use Public Banks Instead of Big Banks." See also, a view from the right just published in the Alaska Dispatch: "Alaska Could Walk Away from Wall Street with a Public Bank of its Own."

ELLEN BROWN, via Matt Stannard, matt at publicbankinginstitute.org, @publicbanking
Brown is president of the Public Banking Institute and author of The Public Bank Solution and Web of Debt. She recently wrote "The Detroit Bail-in: Fleecing Pensioners to Save the Banks," which states: "In Detroit, it is the municipal workers who are being bailed in, stripped of a major portion of their pensions to save the banks. Bank of America Corp. and UBS AG have been given priority over other bankruptcy claimants, meaning chiefly the pensioners, for payments due on interest rate swaps they entered into with the city. Interest rate swaps -- the exchange of interest rate payments between counterparties -- are sold by Wall Street banks as a form of insurance, something municipal governments 'should' do to protect their loans from an unanticipated increase in rates. Unlike ordinary insurance, however, swaps are actually just bets; and if the municipality loses the bet, it can owe the house, and owe big. The swap casino is almost entirely unregulated, and it is a rigged game that the house virtually always wins. Interest rate swaps are based on the LIBOR rate, which has now been proven to be manipulated by the rate-setting banks; and they were a major contributor to Detroit's bankruptcy."

Brown puts forward the solution suggested by Lansing Mayor Virg Bernero, Rick Snyder's Democratic opponent in the last gubernatorial race. Bernero proposed "a state-owned bank. If the state or the city had its own bank, it would not need to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government's capital into credit, back that credit with the deposits created by the government's own revenues, and return the interest to the government as a dividend, following the ground-breaking model of the state-owned Bank of North Dakota."

MARK ARMSTRONG, via Matt Stannard, matt at publicbankinginstitute.org
Executive director of the Public Banking Institute, Armstrong recently wrote "How America Can Replace Wall Street Financing With Public Banks," which states: "North Dakota doesn't issue general obligation bonds because the state has its own bank to finance public infrastructure. Last year their public bank, the Bank of North Dakota, issued a $50 million loan to fund a new water pipeline. The paid interest on this loan is reported as profits to the bank and -- guess what -- it gets returned to the state general budget, benefiting the very same people who paid for the water."