http://www.truth-out.org/news/item/42558-the-public-bank-option-safer-local-and-half-the-cost
[If you don't like who your bank invests in, change your bank to one
that shares your values (or a credit union).
links in on-line article]
The Public Bank Option -- Safer, Local and Half the Cost
Friday, November 10, 2017
By Ellen Brown, The Web of Debt Blog | News Analysis
Phil Murphy, a former banker with a double-digit lead in New Jersey's
race for governor, has made a state-owned bank a centerpiece of his
platform. His victory on November 7 could lead to the nation's second
state-owned bank in a century.
A UK study published on October 27, 2017 reported that the majority of
politicians do not know where money comes from. According to City A.M.
(London) :
More than three-quarters of the MPs surveyed incorrectly believed
that only the government has the ability to create new money. . . .
The Bank of England has previously intervened to point out that
most money in the UK begins as a bank loan. In a 2014 article the Bank
pointed out that "whenever a bank makes a loan, it simultaneously
creates a matching deposit in the borrower's bank account, thereby
creating new money."
The Bank of England researchers said that 97% of the UK money supply is
created in this way. In the US, the figure is about 95%. City A.M.
quoted Fran Boait, executive director of the advocacy group Positive
Money, who observed:
"Despite their confidence in telling the public that there is 'no
magic money tree' to pay for vital services, politicians themselves are
shockingly ignorant of where money actually comes from.
"There is in fact a 'magic money tree', but it's in the hands of
commercial banks, such as Barclays, HSBC and RBS, who create money
whenever they make loans."
For those few politicians who are aware of the banks' magic money tree,
the axiom that the people should own the banks – or at least some of
them – is a no-brainer. One of these rare politicians is Phil Murphy,
who had a double-digit lead in New Jersey's race for governor. Formerly
a Wall Street banker himself, Murphy knows how banking works. That helps
explain why he has boldly made a state-owned bank a centerpiece of his
platform. He maintains that New Jersey's billions in tax dollars should
be kept in the state's own bank, where it can leverage its capital to
fund local infrastructure, small businesses, affordable housing, student
loans, and other state needs.
That means New Jersey could soon have the second publicly-owned
depository bank in the country, following the very successful
century-old Bank of North Dakota (BND). Other likely contenders among
about twenty public banking initiatives now underway include Washington
State, which has approved a feasibility study for a state bank; and the
cities of Santa Fe in New Mexico and Los Angeles and Oakland in
California, which are exploring the feasibility of their own city-owned
banks.
A Bank Is Not Simply an Intermediary
An article in City Watch LA critical of the idea of a city-owned bank
observed that Los Angeles formerly had a bank that failed, closing its
doors in 2003 due to insolvency. The argument illustrates the confusion
over what a bank is and what it can do for the local government and
local communities. The Los Angeles Community Development Bank was not a
bank. It was a loan fund, and it was designed to fail. It was not
chartered to take deposits or to create deposits as loans, and it was
only allowed to lend to businesses that had been turned down by other
banks; in other words, they were bad credit risks.
With a loan fund, a dollar invested is a dollar lent, which must return
to the bank before it can be lent again. By contrast, as the Bank of
England acknowledged in its 2014 paper, "banks do not act simply as
intermediaries, lending out deposits that savers place with them." A
chartered depository bank can turn one dollar of capital into ten
dollars in bank credit, something it does simply by creating a deposit
in the account of the borrower. If the bank's books don't balance at the
end of the day, it borrows very cheaply from other banks, the Federal
Home Loan Banks, or the repo market. It borrows at bankers' rates rather
than retail rates, and that is one of the many perks that a
publicly-owned bank can recapture for local governments. Borrowing from
banks rather than the bond market actually expands the circulating money
supply, stimulating the local economy.
Compelling Precedents
Public sector banks, while rare in the US, are common in other
countries; and recent studies have shown that they are actually more
profitable, safer, less corrupt, and more accountable overall than
private banks.
This is particularly true of the Bank of North Dakota, currently the
only publicly-owned depository bank in the US. According to the Wall
Street Journal, it is more profitable than Goldman Sachs or JPMorgan
Chase. The BND is risk-averse, lends conservatively, does not gamble in
derivatives or put deposits at risk. It is able to lend at lower than
market rates because its costs are very low.
The BND holds all of its home state's revenues as deposits by law,
acting as a sort of "mini-Fed" for North Dakota. It has seen record
profits for almost 15 years. It continued to report record profits after
two years of oil bust in the state, showing that it is highly profitable
on its own merits because of its business model. It does not pay
bonuses, fees, or commissions; has no high paid executives; does not
have multiple branches; does not need to advertise; and does not have
private shareholders seeking short-term profits. The profits return to
the bank, which either distributes them as dividends to the state or
uses them to build up its capital base in order to expand its loan
portfolio.
The BND does not compete but partners with local banks, which act as the
front office dealing with customers. It does make loans that community
banks are unable to service, but this is not because the borrowers are
bad credit risks. It is because either the loans are too big for the
smaller banks to handle by themselves or the smaller banks cannot afford
the regulatory burden of lending in rural communities where they get
only a few loans a year.
Among other cost savings, the BND is able to make 2% loans to North
Dakota communities for local infrastructure -- half or less the rate
paid by local governments in other states. The BND also lends to state
agencies. For example, in 2016 it extended a $200,000 letter of credit
to the State Water Commission at 1.75% and a $56,000 loan to the Water
Commission to pay off its bond issues. Since 50% of the cost of
infrastructure is financing, the state can cut infrastructure costs
nearly in half by financing through its own bank, which can return the
interest to the state.
Phil Murphy winning of the New Jersey governorship and success in
establishing a New Jersey state-owned bank, could cause a wave of public
banks to follow, as more and more elected officials come to understand
how banking works and to see the obvious benefits of establishing their own.