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Author Topic: What If Banks Were Publicly Owned?  (Read 57 times)
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August 23, 2018, 10:34:54 AM

Trinity Tran is a powerful speaker. Addressing a rally in downtown Los Angeles for New York congressional nominee Alexandria Ocasio-Cortez, the 33-year-old activist and organizer thundered, “We are witnessing the emergence of a solution, from profit and greed to collective prosperity. We can empower our community from the ground up. It’s time to take our power back.”

Tran’s organization, Public Bank LA, is leading the revival of an idea that had largely been discarded until the financial crisis. In November, Los Angeles voters will have the opportunity to approve a public bank for the city. If the measure passes, it would become the first government-owned bank developed in the United States since 1919.

The term “public bank” may confuse some into thinking that Los Angeles is about to create a bunch of branch offices where residents can open a free checking account. The idea is much more ambitious. Public bank enthusiasts want to finance local improvements in housing, infrastructure, and community development by employing the money citizens already pay to state and local governments for services. To them, it’s about democratizing the financial system.

The public has yet to be brought in on this idea, until now at least. The Los Angeles vote represents the first popular referendum on public banking since the financial crisis brought the public bank idea back into the conversation. For the vote to go their way, activists will have to demystify a technical financial concept, and answer charges from critics that a city-owned bank will prove too risky and too costly for taxpayers.

The activists say they’re ready for the challenge. “Until now, activists have been fighting in the ivory towers of legislatures, and off the radar of the populace, even though it’s in their best interest,” said Phoenix Goodman, an organizer with Public Bank LA. “We have the opportunity to bring this down to the grassroots, where it belongs.”

If you live in a city, anytime you buy something that includes sales tax, pay a parking ticket, swipe your transit card or renew a business license, money goes to the city treasury. It doesn’t immediately fly back out into the paycheck of a police officer or schoolteacher. All state and municipal governments have cash reserves they hang onto. The numbers are significant; Los Angeles has a current portfolio of close to $10 billion.

Cities and states typically store this short-term cash in bank accounts or plain-vanilla investments. Big banks like Wells Fargo or JPMorgan Chase use the funds to generate profits, through loans or trades, or whatever else they can conjure. They, for example, fund private prisons that house immigrant families. They fund pipelines that carry fossil fuels and are displacing Indigenous Americans from their land. And big banks continue to act badly with relative impunity ― wrist-slap fines ultimately paid by shareholders, and no executive seeing the inside of a jail cell.

Divestment activists have demanded that cities abandon big banks, with some success. In Los Angeles, activists won a separation from Wells Fargo, holder of $101 million in city bank deposits. But they soon discovered that the alternative to Wells Fargo is just another Wall Street giant. Community banks and credit unions lack capacity and often face legal hurdles and onerous collateral requirements to handle public funds.

“We knew divestment from one big bank to another predatory bank was unsustainable,” said Tran, who led the divestment movement in Los Angeles. Soon after, Tran co-founded Public Bank LA, which demanded a city-owned institution to keep government revenues out of Wall Street’s hands. A public bank could use those dollars as a deposit base, she argued, funding loans within the community for local public works projects, small businesses, or affordable housing.

These needs are critically unmet at the local level. Banks are reluctant to finance projects with a perceived risk, like affordable housing, and private investors don’t see the return on investment in replacing water pipes. If a city or state wants to fund something big, they usually turn to either the municipal bond market ― a $3.8-trillion financial industry giant that adds significant lifetime interest costs, or public-private partnerships with investors who have a profit motive at heart.

Because a public bank is not a for-profit business, it can offer lower interest rates than private options, saving billions of dollars over time. And because the city owns the bank, any interest income would flow back into its coffers. That reduces financing costs and facilitates more lending. Plus, the money stays at home, circulating in the local economy rather than traveling into an investor’s pockets or a risky trading scheme.

This may sound like it came out of a late-night college dorm brainstorm session, but public banking is used routinely around the world, including in one of the reddest U.S. states. The Bank of North Dakota, established in 1919 by progressive farmers seeking independence from big banks, makes loans throughout the state and partners with community banks on larger projects. It doesn’t lend out state deposits. But like all banks, it creates new money by extending credit, with deposits balancing the books. Public banks, then, expand the money supply available for economic development, and keep that money circulating where it was created.

The Bank of North Dakota has earned profits for 14 straight years, during the Great Recession and North Dakota’s more recent downturn from a collapse in oil prices, according to its 2017 annual report. Moreover, it supports the most vibrant community bank network in the country, with more branches and higher lending totals per capita than any other state. No North Dakota bank failed during the financial crisis.

North Dakota’s public bank has faced criticism, however, for investments supporting fossil fuels. A bank controlled by a California city won’t necessarily share the same lending portfolio.

“We want to create a bank that is answerable to one shareholder: the public,” said David Jette of Public Bank LA. “San Francisco and Oakland need affordable housing, Los Angeles needs more transportation infrastructure. These are things a public bank can do.” The Los Angeles City Council, recognizing a potentially cheaper way to finance city improvements, certainly got the message. Led by council President Herb Wesson, council members unanimously passed the initiative to put the public bank vote on the November ballot.

But the challenges to establishing a new public bank are significant. A Los Angeles chief legislative analyst report released in February stated that the city charter would need to be amended to accommodate a public bank. That’s what the ballot initiative would execute. The report also said that state and federal law would need to change as well, and that the city would need to apply for a state bank charter, come up with collateral and insurance to protect deposits, and provide startup funds to capitalize the bank and hire administrative staff.

“There is substantial cost and risk associated with operating a public bank,” said Beth Mills, a spokeswoman for the Western Bankers Association, a trade association and a leading opponent of the ballot measure. “Presumably the bank would be capitalized with taxpayers dollars. How would any losses resulting from loan defaults be paid at a public bank ― would taxpayer dollars be at risk?” Mills added that any savings from financing would be wiped out by the expense of hiring attorneys, compliance officers and consultants.

As well as money from deposits, a public bank would need additional capital, which could be used to cover losses if they arise. That could come from a municipal bond offering or public pension investments. In effect, outside investors would be lending to the public bank and betting on its success.

Los Angeles activists are also joining forces with counterparts in six other California cities to form the California Public Banking Alliance, which would work with the state to develop a standard license and a framework for regulating public banks. “We want to build a network of banks to be interdependent and support one another,” said Jette. “Los Angeles is a great place to test this out on a voting public.”

Even if the vote passes and all goes smoothly, a public bank in Los Angeles would still be years away. But if it works, the public banking concept has revolutionary potential. It could employ constituent deposits for the public good. It offers an escape valve for city officials to revitalize neighborhoods without necessarily having to raise taxes. And to the activists, it reimagines the role of finance as more than just a profit-seeking beast.

“Simply by founding a public-owned institution based on public needs, you bend the course of financial history toward regular people,” said Jette. “We can control our own financial fate. And if we win this, we will take that everywhere.”


Here we have an interesting proposal. A shift towards "publicly owned" banking instutitions run by the government.

There's a common theme at work here where noble sounding proposals often appear to have good intentions and lofty goals. Unfortunately what is lacking are specifics. Insufficient details offered as to how these good intentions and lofty goals might be made a reality.

Lacking a good roadmap and a sound engineering plan, many of these well intentioned programs fail to amount to more than vain attempts to throw money at problems. I'm certain banking can be improved. But can it be improved without specific focus on this area? If a person asked supporters of the public bank movement to name a single element which makes state run banks "better" than privately owned banks, could they offer a valid response?

With programs like banks which function as pillars of civilization and society, I think what people want most are guarantees. The typical government way of doing things which amounts to massive delays, cost overruns and similar negative financial trends is typically incompatible with finance.

If people were offered a choice between a privately owned and operated 401k retirement plan and social security, which is run by the US government. I think most would take the 401k. The general trend involves privately run institutions creating more value than state run alternatives. But I'm certain some would disagree with that assessment. What do people think?

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August 24, 2018, 10:14:48 AM

In my country most of them are. I mean they are still owned by bigger companies and banks because when you publicly open your bank I can buy shares of it, you can buy shares of it but also bigger banks can own it as well, and since they have the money for it they just pay for it and get like %40 of it from public stock market and no one can say anything about it.

I do not see how we can't actually just see it as a blessing since you can literally be partners of a bank which is also partners with an insanely big another bank. They do not get bankrupt that easily so you basically own a small portion of a bank that is going to just get bigger, good investment if you ask me.

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August 24, 2018, 03:04:51 PM

Here we have an interesting proposal. A shift towards "publicly owned" banking instutitions run by the government.

What could go wrong....
I really wonder why all the banks that were controlled by the government in almost all of Eastern Europe ended up either bankrupt, disbanded after heavy losses or sold for pennies since their running cost was higher than the revenues....

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August 24, 2018, 03:16:57 PM

Why trust it public or private, if the spreadsheet isn't kept in a decentralized way? it could be corrupted, that's where is bitcoin is better. I would trust public accounting on the blockchain, signed with PGP keys or whatever by whoever is doing the job in there so we know who is doing what.

Paying taxes would feel great if we knew exactly where the money is going and we knew it really is helping your community as a whole. However, with fiat who is to say what the hell is going on.

The other alternative is to have a market of private banks to choose from instead of having "the FED" or whatever. So customers could freely choose what's best for them. In principle I think this is the idea second layers in Bitcoin, "private Bitcoin banks" as if it were competing against each other to deliver the best product. I think this is what Hal Finney was talking about back in 2011.

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August 24, 2018, 03:49:42 PM

Adding another entity wherein there is potential profit would corrupt the government even more, so IMO it's best to just leave the banking and finance to the private sector and let the government do its own thing. At first, sure the banks would run smoothly, but given the nature of the politicians running for office these days, how sure are we about the integrity of the public banks once it's held by these crooks in their offices? Taxes are being used for personal gains, how about the profits made by public banks? Economically speaking, this is a good strategy since you can use the government's influence to expand, however on the core 'values' of the ones holding the said bank is where the problem would start.

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August 24, 2018, 04:25:51 PM
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There's a group here in the UK who have been advocating stuff like this for some time.  Positive Money have always done a really great job of highlighting the problems with the banking system, so I often refer to their material when I'm explaining stuff to friends, but I'm still not convinced that their proposed solution would be much better. 

It also remains to be seen whether their movement would ever gain enough impetus for anything to actually change.  And keeping in mind the UK, unlike the US, is a place where people generally aren't averse to public ownership and social security, so one might assume it would be more likely to happen here.  While it might be a popular notion with academics and some economists, it doesn't appear to be gaining support in any way where it might actually be implemented.  Which is one of the main reasons I'm here in the cryptoverse, since we don't need to wait for approval or permission.  We just do stuff.

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August 24, 2018, 04:32:22 PM

The fundamental issue in the US is the economic system that is practiced over there which is 90% capitalism and every of the policy from time immemorial has been towards promoting that economic system and that is why in 2018, they are still talking arguing about taking money that is meant for the public away from the big banks and even the little achievement they were able to record is just a bucket of water in a swimming pool meaning it does not make any significant difference.

Over here, this is not an issue at all because we have several public banks and private banks that are specifically towards the public. We have public mortgage banks that provide low interest rate for affordable housing, there is also public development banks that is about agriculture and long term loans, there is also a bank of industry which is about financing specific sectors of economy and the microfinance banks that make funding available to individuals.

The all blanket approach will not work rather it should be a gradual one from the top. There should be a mandatory provision for big banks to make certain portion of their borrowings to public infrastructures which the activist are clamouring being neglected after which a bank can then be created to cater for such need.

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August 24, 2018, 05:22:15 PM

I have seen corruption in public as well as private owned bank.  Even CEO of one bank was involved in playing with people's money.  Loans being granted by private banks by it's temporarily appointed officers after taking bribes.  
Some public owned bank officers also doing the same.  They are byepassing rules and regulations while doing so.  
Resulting in huge amount of Non Performing Assets (NPAs).

Big fraud rich people getting loans in millions from Public (Government ) owned banks with the interventions of corrupt politicians.  Now when there is one honest government in power ; they run away from the country when they were asked to repay their loans.  

I want to say that if the Government is not honest; there will be corruption all over the country.  But when one strong leader with honesty comes to power he certainly succeeded in controlling corruption though not fully cleaned.

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August 26, 2018, 07:45:45 AM

Here we have an interesting proposal. A shift towards "publicly owned" banking instutitions run by the government.

What could go wrong....
I really wonder why all the banks that were controlled by the government in almost all of Eastern Europe ended up either bankrupt, disbanded after heavy losses or sold for pennies since their running cost was higher than the revenues....

Each country has its own particularities and powers. It is no different from their families. Some places are very convenient for the community. Some places cause difficulties for each other. In my country, the ignorant people often rule the nation. So there will be big barriers to the market.

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