As Momentum Grows, Public Bank Supporters Should Stay the Course in the Face of Opposition

Mar 28, 2015.

2014 found the movement for public banking growing throughout the nation. Discouraged by foot-dragging and reversals on national banking reform, and alarmed over continuing municipal budgetary shortfalls, groups in New Mexico, Washington state and elsewhere stepped up efforts to put public banks on their cities’ and states’ agendas. These local groups were emboldened by news that the Bank of North Dakota, the nation’s only public bank, continues to outperform big private banks.

2015 promises at least as much momentum. In Maine, Illinois, Arizona, New Hampshire, and Hawaii, state legislatures are debating public bank legislation. The Santa Fe City Council passed a feasibility study, Coloradans are pushing for a referendum, and local candidates in Madison, Wisconsin and Spokane, Washington are waving the public bank flag.

It’s no surprise, then, that this momentum has been answered by a minor ripple of skepticism and opposition. In our experience, push-back has emerged from two sources. Wall Street interests are legitimately concerned that public banks will curtail too-big-to-fail banks’ monopoly on financing public institutions, infrastructure, and projects. Meanwhile, community bankers sometimes shun the promise of public banks because community bankers don’t always know which side they’re on.

These concerns are understandable. But in assessing the actual evidence for and against public banks, we see time and again that the quality of opposing arguments doesn’t rise to the challenge. Many of the arguments against public banking are simply inaccurate, while others rely on blatant misinterpretations of otherwise good research. Mark Calabria of the Cato Institute recently published twopieces asserting that public banks have historically failed, and citing research allegedly indicting government involvement in banking. But Mr. Calabria’s history was off the mark, and the research he cited–published by Harvard University and the National University of Taiwan–was both out-of-date (predating the 2008 recession), and was not even about public banks at all (rather, it was about banks in developing countries, and/or banks with some level of government shareholding; its researchers explicitly excluded our model of public banks from consideration).

Meanwhile, in response to the enthusiasm in Seattle and throughout much of Washington for public banks, James Haley of the Community Bankers of Washington recently asserted that public banks will compete with community banks and embrace risky ventures–two things the Bank of North Dakota simply doesn’t do.

And in fact, the Bank of North Dakota provides a long-living, well-established example of the promise of public banks, with a century-long record of serving its state and helping it flourish when other state budgets have gone underwater. BND does this by paying large dividends to the state, all the while financing public projects, student loans and (of particular significance to community bankers who may be ambivalent on public banking) small banks throughout the state. According to the FDIC, 81% of banks in North Dakota are community banks–the highest ratio in the United States. During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average.

This lending hasn’t just been more plentiful, but also more productive. BND enables community banks to devote more assets to productive lending rather than unproductive holdings like government securities. This is because the BND enables higher than average loan-to-asset ratios. North Dakota will also weather the coming decline in community banks (they are failing and closing rapidly, with terrible effects on localities) quite well relative to the rest of the country. The state, which has the most community banks per capita in the U.S., is expected to lose only two banks in 2015, compared to the national average of 6.34 per state. This is important when we consider that community banks are the lifeblood of local economies.

It’s natural for people to fear change. But the status quo is scary enough. Big, private banks caused the 2008 Great Recession; they continue to suck municipal money into risky financial ventures and charge interest that often nearly doubles the cost of public projects. Mark Calabria’s remark that public banks are a “cure worse than the disease” is curious when you consider that the disease is a vested profiteering franchise, playing with our national and global survival while constantly evading regulation, engaging in schemes and scams with legal impunity, and profiting from the crises they create.

Given the weakness of those opposing arguments, the risks endemic to big private banks, and the outstanding recent track record of public banks, simple risk analysis says we should try public banking out in the states and cities that vote for it. After all, we already know it works.

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