By James O
After the private banking system tanked the world’s economy in 2008, there has been a lot of outrage directed at banks. Countless books and articles have described how our private banking system caused such a mess, and why our politicians were wrong to socialize the losses—but not the gains—of the banks. And although there have been attempts to re-regulate the private banks in recent years, there is actually an alternative solution. Instead of working to convince our representatives (who depend on banks for campaign contributions) to ignore armies of lobbyists and write legislation regulating these entities against the will of their executives and shareholders, we can create our own public banks that give back to our communities, promote clean energy, and finance co-operative ownership structures. In other words, we can create our own credit and finance systems from the ground-up.
This is not a new idea. Approximately 40% of the world’s banks are public; many of them are large and successful. The Japan Post Bank is the largest bank in the world as measured by deposits. In fact, there is already precedent within the United States for a public banking system: the state of North Dakota has operated its own public bank successfully since 1919. Unlike many private sector banks, the Bank of North Dakota emerged from both the Great Depression and the 2008 financial crisis in good shape. The people of North Dakota have done well for themselves by following the advice of Karl Marx, who had recommended just a few decades earlier to place “credit in the hands of the state, by means of a national bank.”
Creating a public banking system could remove waste and corruption from our financial system. Private bankers have proven to be corrupt and short-sighted middlemen, taking as much as they can for themselves and using their privileged position to create increasingly complex financial transactions that extract wealth from others. Sometimes it is subtle (e.g., LIBOR manipulation), and sometimes bold (e.g., creating fraudulent accounts), but in almost all cases our legal system has shown a remarkable tolerance for this kind of wealth redistribution that benefits the bankers. Regulators and prosecutors who find wrongdoing (if we are lucky) impose fines representing only a portion of the ill-gotten gains; this is not so much a deterrent as it is a de facto kickback. Private bankers are allowed to manipulate and defraud everyone else, as long as the government gets some small portion of it back in the form of fines and fees. This is inefficient, and it imposes costs on everyone else.
The current system works well for people who work in private finance, but not so well for everyone else. A recent report from the New York State Comptroller noted that the average salary on Wall Street had risen to $422,500, while median household income sits at just $61,000 (about one-seventh the size of an average Wall Street salary). At the same time, working people deal with high interest rates, predatory overdraft fees, and a payday lending industry that preys on the poor who are excluded from banking. This isn’t the kind of economy we deserve.
If we commit to breaking this cycle and creating something new, there is a lot to be gained. Alexandria Ocasio-Cortez has repeatedly noted that her Green New Deal proposals are to be financed by public banks, similarly to how the New Deal was financed with the help of the Reconstruction Finance Corporation. But that’s just the start. If we create a new system of public finance, we can make a serious push for worker cooperatives, community land trusts, and affordable housing projects.
New York City is a great place to start developing public banks now. Symbolically, it is the heart of the global financial system. Practically, it is a place that desperately needs a better banking system than the one that currently fuels the city’s displacement and gentrification machine, while simultaneously creating “banking deserts” in the Bronx. Politically, New York City is a region that still has a strong and mobilized left wing, as the elections of Julia Salazar and Alexandra Ocasio-Cortez demonstrate.
There is some political will among NYC politicians to engage in more responsible banking, even though the overturn of the “Responsible Banking Act,” passed by the City Council in 2012, shows how high the obstacles to regulation are. New York City has billions of dollars that it collects through taxes and fees, and that money has to go somewhere. By law, the city is required to deposit those funds into certain "designated banks" (i.e., private banks that often use the money to fund oil pipelines, private prisons, etc.). The Responsible Banking Act sought to evaluate the practices of the designated banks and make sure that the city's funds were put to socially useful purposes (such as local loans). Unfortunately, the law was struck down by a federal judge after the city was sued in 2015 by the New York Bankers Association, Inc. The judge agreed with the banking group that the minor oversight imposed on the banks (e.g., requesting information about their practices) constituted impermissible "regulation" and was therefore "preempted" by federal and state law.
By creating a public bank, NYC wouldn't face the same legal obstacles because it wouldn't be "regulating" private banks. Rather, it would be creating its own bank to handle its own money in a responsible way. There are still some issues that remain to be decided, such as: (i) who would make up the board of directors, (ii) what investment criteria would the bank follow in extending loans, and (iii) how to ensure accountability and transparency within the public bank. These are absolutely critical issues, and we will need to spend a good deal of time—both within DSA and within the broader coalition—evaluating the successes and failures of past examples. We will also need to be creative and forward-thinking, if we want this new bank to stimulate a new economy that focuses on cooperative ownership structures and clean energy.
So what can do we do about it? The NYC-DSA’s Debt & Finance Working Group has been working in the Public Bank NYC coalition with the New Economy Project to promote public banking at the city-wide level. This involves research, public outreach, and communication with local politicians. We hope that in the year 2019, we can put the phrase “public banking” into the public discourse the same way that the DSA helped to elevate the issues of “Medicare For All” and “Universal Rent Control.” But we need your help if we want to accomplish anything here. We need the general DSA membership to mobilize, to pull together, and to canvass the city just like we did for Sen. Salazar and Rep. Ocasio. We can do this, and we can win.
There will be a Debt & Finance WG meeting on February 11 at 7pm (location TBD), a Public Banking discussion at the next North Brooklyn meeting at the end of February, and another Public Banking meeting sometime in March (details TBD).
Anyone who is interested in getting involved, especially with research, should email email@example.com (especially attorneys and people with a finance background).