Arizona needs a public bank – support SB 1395

I was reading the Denver Post over the weekend, and this op-ed caught my eye because Pamela Powers Hannley who blogs here, and her husband Jim Hannley, are active in the public banking movement in Arizona. Colorado needs a public bank:

After we bailed out the “too-big-to-fail” Wall Street banks in 2008 and 2009, things appeared to have improved. Today, Wall Street is rebounding and the job market is looking up. But the folks on Main Street working for low hourly wages or Coloradans paying tens of thousands of dollars in student debt with no end in sight, who lost their homes, or are working part time jobs with no benefits are not so sure.

Colorado entrepreneurs seeking green energy solutions and small business start-ups scramble for funding. Needed infrastructure projects like repairing our state bridges are not keeping up with civil engineers’ recommendations. Meanwhile, the marijuana industry has no place to bank its cash.

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public-banking-institute-mapThis year, North Dakota celebrates its 96th year of having a state-owned bank, the Bank of North Dakota, and is the only state that has one. Arguably, as a result of its bank, North Dakota was the only state not to suffer budget deficits or declining employment as a result of the 2008 crash. Its unemployment rate was and remains the lowest in the nation at 2.8 percent. And it has had larger budget surpluses each year since 2008, no bank failures, and has remitted $900 million in taxes to the people of North Dakota. Critics attribute North Dakota’s success to its increased oil revenues, but its big increase in oil income did not occur until 2010, and Alaska and Montana have had more oil but still had budget deficits and high unemployment. Today, North Dakota has one of the lowest rates of home foreclosures, and consistently has the lowest rate of credit card default and student loan default in the United States.

[Image: The Case for a State-Owned Bank (April 2012).]

The Bank of North Dakota makes most of its loans through local community banks, shares the risk, and often guarantees their loans. It invests in North Dakota and its citizens.

A public bank here in Colorado working together with our locally owned community banks is a promising option for expanding real prosperity and well-being here. It would be required to lend in Colorado. Its mission would not include paying commissions or bonuses, making risky investments in subprime loans or derivatives, or profiting at the expense of our community. A public bank’s mission would be to serve our communities by helping them thrive and our citizens prosper — through supporting small and medium sized businesses, green energy, lower student debt, reduced home foreclosures, sustainable farming, infrastructure, and more.

To this end, the first-ever conference on public banking in Colorado was held in Denver in late January. The conference, Banking on Colorado, featured national authors and local panelists representing Colorado farming, student debt, home foreclosures, green energy, a community bank, and small businesses.

For more information on the initiative, go to bankingoncolorado.org.

The Hannley’s are members of the Arizona Public Banking Coalition,
Arizonans for a New Economy | Arizona Public Banking Coalition (Arizonapublicbanking.org). Through their diligent efforts in speaking to Arizona state legislators, they have successfully assembled bipartisan Sponsors for SB 1395 (.pdf), a bill which would establish a state-owned bank task force to “explore and evaluate the feasibility of establishing a state-owned bank.”

SB 1395 is scheduled to be heard by the Senate Committee on Financial Institutions on Wednesday, February 18, 2015 at 2:00 p.m. in Senate Hearing Room 109.

(A quick aside: you should want to testify at this hearing against the other bill being heard by the committee, SB 1189, allowing for the interstate purchase of health insurance, which would undermine Arizona’s regulation of health insurance policies and create a race to the bottom for insurers moving to states with the least regulation of insurance plans.)

Just last week the Huffington Post reported, Why Public Banks Outperform Private Banks: Unfair Competition or a Better Mousetrap?:

Public banks in North Dakota, Germany and Switzerland have been shown to outperform their private counterparts. Under the TPP and TTIP, however, publicly-owned banks on both sides of the oceans might wind up getting sued for unfair competition because they have advantages not available to private banks.

In November 2014, the Wall Street Journal reported that the Bank of North Dakota (BND), the nation’s only state-owned bank, “is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.” The article credited the shale oil boom; but as discussed earlier here, North Dakota was already reporting record profits in the spring of 2009, when every other state was in the red and the oil boom had not yet hit. The later increase in state deposits cannot explain the bank’s stellar record either.

Then what does explain it? The BND turns a tidy profit year after year because it has substantially lower costs and risks then private commercial banks. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; has no private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesome wholesale bank that partners with local banks that have located borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives.

Lest there be any doubt about the greater profitability of the public banking model, however, this conclusion was confirmed in January 2015 in a report by the Savings Banks Foundation for International Cooperation (SBFIC) (the Sparkassenstiftung für internationale Kooperation), a non-profit organization founded by the the Sparkassen Finance Group (Sparkassen-Finanzgruppe) in Germany. The SBFIC was formed in 1992 to make the experience of the German Sparkassen – municipally-owned savings banks – accessible in other countries.

The Sparkassen were instituted in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money, and to support business start-ups. Today, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) Local public banks are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. The savings banks operate a network of over 15,600 branches and offices and employ over 250,000 people, and they have a strong record of investing wisely in local businesses.

In January 2015, the SPFIC published a report drawn from Bundesbank data, showing that the Sparkassen not only have a return on capital that is several times greater than for the German private banking sector, but that they pay substantially more to local and federal governments in taxes. That makes them triply profitable: as revenue-generating assets for their government owners, as lucrative sources of taxes, and as a stable funding mechanism for small and medium-sized businesses (a funding mechanism sorely lacking in the US today).

A similar public bank effort recently suffered a setback in the state of Vermont. The Old Economy wins a round: Public banking loses in Vermont:

Across the nation, in Pennsylvania and more than two dozen state legislatures and city councils, a well organized effort is underway to create a new tool to insure sound municipal finances and economic development:  public banks, to take hundreds of millions of taxpayer funds out of Wall Street banks and put them to work locally with our community banks and credit unions for locally directed economic development and jobs creation.

The Wall Street banks and their allies are not anxious for the competition for our deposits, and want to keep them to underwrite their speculation in derivatives and commodities.

Last November nearly two dozen town meetings in Vermont voted strongly to support the creation of a state public bank. A solid measure of voter intent.

Armed with that support and the data to demonstrate conclusively the benefits, public bank advocates pressed the state legislature for a bill to create the bank.

But the political and economic elites of the state, led by the state treasurer, closed ranks and turned that effort aside, agreeing only to vote an appropriation of ten percent of the state’s revenue reserve to fund a new economic development initiative, apart from several other existing development agencies.

Supporters of this initiative rightly claim that it will make new funds available for investment in the state, this year about another $10 million.

But it is a setback for public banking.

Vermont public banking advocates have been maneuvered into creating yet another political lending agency, of the kind typical of the old, controlled economy which the voters in the town meetings were hoping to escape.

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Supporters of public banking in other states and municipalities should take heed of this cautionary tale. The path to a new and more democratic economy does not lead through creation of yet another political lending agency of the status quo and the old economy.

The first step on that path is clearly marked: banks owned by the public.

Finally, city governments are also exploring public banks.City Governments Reignite Debate Over Public Banks (American Banker – subscription required): “Elected officials in Santa Fe and Seattle are considering plans to form municipal banks to promote affordable housing and reach out to the underbanked. Bankers are wary since such institutions could present competition.”

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