In the wake of the financial crisis that the U.S. is still clawing its way out of, a handful of ideas have begun to surface that might actually shore up our still-floundering economy and, potentially, avert future devastation. (No, not the eminently gutless Dodd-Frank bill.) Rather, public banks — also known as state banks or partnership banks — provide a path for the people to harness some economic power of their own in order to build a broad-based, ground-level prosperity which is rooted in their community.
John David, of the Public Banking Institute, recently outlined the basic public banking model for Shareable in great and accessible detail. As evidence of the almost 100 years of success of the Bank of North Dakota (BND), David writes, “Currently, North Dakota ― in part due to the BND’s beneficent influence ― has the lowest unemployment rate in the nation (just over 4%), has no debt to service, has a $1.1 billion surplus, has experienced no bank failures in the state, and is the only state in the last two years to avoid a budget deficit.” Basically, while so many other states were capsizing on the waves of job loss and crashing on the rocks of failed mortgages, North Dakota maintained a smooth and steady course.
Thanks to BND's impressive and indisputable history, the legwork has already been done, the game plan all mapped out. Other states simply need the political will to move their own economies out of the turbulent waters ruled by the pirates of Wall Street. Thankfully, we're starting to see just that sort of action.
In California, AB 750 “would establish the investment trust blue ribbon task force to consider the viability of establishing the California Investment Trust, which would be a state bank receiving deposits of state funds.” The bill, having passed through various committee vetting and approvals, goes to a vote on June 1. With its efforts, California joins Oregon, Washington, Massachusetts, Arizona, Maryland, New Mexico, Maine, Illinois, Virginia, Hawaii, and Louisiana in pursuit of a public bank.
Demos, a non-partisan public policy organization, in conjunction with the Center for State Innovation, recently issued a studied look at the potential for partnership banks across the country, including an eye toward the 11 states already considering such legislation. These various proposals would “move general revenue deposits out of the Wall Street banks that dominate the banking business today, and use them to capitalize a new local public structure with a mission to grow the local economy.”
In essence, Main Streets and state capitols alike would flourish, if given the chance and the resources. Local economies and state budgets would both be bolstered by a “bankers' bank” system — one that increases revenues (partially through dividends earned on loans to small businesses and community banks) without raising taxes.
The study found that, using the BND model, public banks would:
- Create new jobs and spur economic growth. Partnership banks are participation lenders, meaning they partner — never compete — with local banks to drive lending through local banks to small businesses. If Washington state had a fully operational partnership bank capitalized at $100 million during the Great Recession, it would have supported $2.6 billion in new lending and helped to create 8,212 new small business jobs. A proposed Oregon bank could help community banks expand lending by $1.3 billion and help small business create 5,391 new Oregon jobs in its first three to five years. All of this would be accomplished at a profit, which partnership banks should share with the state.
- Generate new revenues for states directly, through annual bank dividend payments, and indirectly by creating jobs and spurring local economic growth. The table above shows projected dividends for established partnership banks in the states considering such proposals, based on BND’s 2009 dividend payment to North Dakota’s General Fund.
- Lower debt costs for local governments. Like the Bank of North Dakota, partnership banks can get access to low-cost funds from the regional Federal Home Loan Banks. The banks can pass savings on to local governments when they buy debt for infrastructure investments. The banks can also provide Letters of Credit for tax-exempt bonds at lower interest rates.
- Strengthen local banks, even out credit cycles, and preserve real competition in local credit markets. There have been no bank failures in North Dakota during the financial crisis. BND’s charter is clear that its goal is to “be helpful to and to assist in the development of [North Dakota banks]... and not, in any manner, to destroy or to be harmful to existing financial institutions.” By purchasing local bank stock, partnering with them on large loans, and providing other support, partnership banks would strengthen small banks in an era when federal policy encourages bank consolidation.
- Build up small businesses. Surveys by the Main Street Alliance in Oregon and Washington show at least 75% support among small business owners. In markets increasingly dominated by large corporations and the banks that fund them, partnership banks would increase lending capabilities at the smaller banks that provide the majority of small business loans in America.
In his Shareable piece, John David took the possibilities even further, suggesting that public banks might:
- Stimulate the economy by prioritizing the creation of essential jobs;
- Cut investment costs in half or more with low-interest financing for homeowners and businesses;
- Make health care affordable;
- Issue import-replacement loans to develop in-state versions of products that are currently imported;
- Issue credit cards at affordable interest, say 6%;
- Tie a portion of the increase in state revenues from the bank to tax reduction;
- Offer zero-interest loans as community equity loans for public infrastructure/benefit;
- As the Ithaca Hours Bank does, offer such loans to individuals for home improvements, etc.
He also imagines a network of these institutions that would, essentially, create a shareable banking system, inasmuch as there ever can be such a thing: “Sister public banks could align and strengthen their efforts, exchanging exposures among themselves so as to self-insure. Through networking them, we will create a national community credit-generating system, a large source of investment dollars that has been sorely lacking. That would transform the ongoing race to the bottom into prosperity for all.”