Economic Udpate: Public Service vs Private Profit

Summary

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Economic Update with Richard D. Wolff

Episode: Public Service vs Private Profit

Date: December 21, 2017

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Overview

In this episode, Richard D. Wolff explores the tension between public service and private profit through the lens of recent news events and systemic economic critique. The first half of the show features Wolff's economic updates, focusing on issues such as corporate threats, inequality, and failed regulation, while the second half centers on an in-depth conversation with David Jette, legislative director for Public Bank LA. Together, they delve into the concept, benefits, and feasibility of publicly owned banks as alternatives to extractive private financial institutions.

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Key Discussion Points & Insights

1. Banks vs Democracy: The Morgan Stanley–Corbyn Clash

(00:10–09:00)

• Wolff recounts how Morgan Stanley warned clients that a Labour government under Jeremy Corbyn represented as big a risk as Brexit.
• Corbyn’s retort accused Morgan Stanley of being "speculators and gamblers who crashed our economy in 2008," highlighting record CEO pay and massive bonuses while ordinary people suffer.
• Wolff contrasts Corbyn’s bold critique with the silence of most U.S. politicians, except Bernie Sanders, criticizing a common political excuse: if you tax or regulate banks, "they’ll just leave."
• Insight: Banks’ threats to leave are empty; governments have powerful countermeasures they rarely use.
• Quote:

  “A bank that threatens the government when the government is doing its legally entitled taxing and regulating activities...should provoke in a government counterthreats, countersteps. That’s what Mr. Corbyn is suggesting.”
  – Richard D. Wolff (08:40)

2. Consequences of Inequality & Luxurious Outliers

(09:01–12:40)

• Instead of reciting statistics, Wolff illustrates inequality’s effects with examples of ultra-rich consumer products (e.g., $200,000 Range Rovers, $188,000 Porsches).
• As the rich get richer, businesses target them, while 6,500 malls fail.
• Memorable Moment: Wolff’s tongue-in-cheek car reviews spotlight economic absurdity:

  “For those of you with a charming Christmas present perhaps on your mind, the Porsche Panamera Turbo SE hybrid is the world’s most powerful luxury sedan...$188,000 will get you that one. Some people have it and then the rest of us read about it.”

3. Information for Sale: The New York Times Paywall

(12:41–14:10)

• The New York Times halves its free monthly online articles from 10 to 5.
• Insight: Reduction in free access is a dramatic example of public information being subordinated to private profit.
• Quote:

  “If you needed an example of the subordination of the distribution of information...to profit, there it is. Think about it.”

4. Federal Reserve Statements & the Illusion of Financial Security

(14:11–18:44)

• New Fed chair Jerome Powell claims there are no longer any U.S. banks “too big to fail,” despite the growth of mega-banks post-2008 crisis.
• Wolff recalls Ben Bernanke’s infamous 2007 statement, failing to foresee the financial collapse, likening Powell’s overconfidence to Bernanke’s.
• Quote:

  “He [Bernanke] was as wrong as wrong can be. And that’s the case with Mr. Powell. Likely too.”

5. Class Action Bans & Regulatory Futility

(18:45–25:24)

• Congress reverses protections against companies forcing binding arbitration (instead of class actions), making it harder for consumers to challenge corporate harm.
• Insight: Regulating capitalism is Sisyphean—the powerful use money and influence to undermine regulations right after they’re passed.
• Quote:

  “Regulating capitalism is a thankless long-term failure as a strategy...the minute that regulation is passed, after momentous opposition, they then go to work to undo the regulation...It’s only then a matter of time before the regulation is eviscerated.”

6. Corporate Negligence: The Sicilian Oil Dump (ENI Case)

(25:25–28:44)

• Wolff describes ENI secretly dumping toxic waste off Sicily for decades, leaving locals sick.
• Argues the profit imperative, not “monstrous” individuals, drives such behavior.
• Quote:

  “Suppose the workers and the customers together ran such a business. Would they have made themselves sick in this way? Or might they have found a better way?”

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Featured Interview: David Jette on Public Banking

(28:45–55:10)

What Is a Public Bank?

(29:03–31:00)

• Definition: Public banks are municipally or state-owned, pursuing social missions alongside financial stability.
• Profits are returned to the public (city budgets, infrastructure).
• Quote:

  “You’re talking about an institution that is owned entirely...by the city of Los Angeles and inures to the benefit of that city.” – David Jette (30:00)

Public Money for Public Good: LA’s Case

(31:01–35:16)

• LA holds ~$8 billion in private banks, paying $100 million annually in bank fees.
• A public bank could recycle these deposits, fund local projects, and save costs.
• Cities could borrow at lower rates, avoid Wall Street’s risky/extractive practices, and reinvest in the community.

Fragility & Ethics of Private Banks

(35:17–38:21)

• LA struggled to find a bank not embroiled in legal or ethical scandals for public deposits.
• Private banks (e.g., Wells Fargo) have histories of fraud, unethical investments (e.g., Dakota Access Pipeline), and low accountability to the public.
• Public banks confer democratic accountability via governance by elected/appointed officials and community representation.

The Bank of North Dakota: Proof of Concept

(39:36–43:26)

• Only U.S. public bank, founded 1919 to serve local farmers.
• Successes: More resilient local banks, profits returned to the state, insulating North Dakota from financial crises.
• Quote:

  “North Dakota has the best community banking industry out of all the other states in the United States...and that independent spirit insulated them from a lot of the turmoil on Wall Street.” – David Jette (41:10)

Broader Feasibility and International Models

(44:16–48:07)

• Any city or state could create a public bank; politics and legislation are the only hurdles.
• Germany’s Sparkasse system: around 400 regional public banks finance clean energy and infrastructure, demonstrating profitability and popularity.
• Quote:

  “That network of banks has been largely responsible for financing the green energy revolution in Germany...” – David Jette (47:00)

Opposition from Private Banks & Public Support

(48:08–51:34)

• Private banks resist public banking, lobbying against it.
• However, public banking is popular because it promises to lower costs and reduce taxes without sacrificing services.

Governance: Toward More Democratic Banking

(51:35–53:50)

• Discussion of possible governance models—ideally, a mix of community, workers, and political officials.
• Emphasis on transparency, democratic input, and keeping public banks accountable to their communities.

How to Get Involved

(53:51–55:10)

• Start with a local divestment campaign to push cities to stop investing public money in harmful or extractive industries.
• Build public understanding that “the people’s money needs to be invested to the people’s benefit.”

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Notable Quotes & Timestamps

• “Speculators and gamblers who crashed our economy in 2008... nurses, teachers, shop workers, builders. Just about everyone is finding it harder to get by. While Morgan Stanley’s CEO paid himself 21.5 million pounds last year... You are right to feel threatened. We are going to change things.”
  – Jeremy Corbyn (quoted by Wolff, 01:45)

• “A bank that threatens the government when the government is doing its legally entitled taxing and regulating activities...should provoke in a government counterthreats.”
  – Wolff (08:40)

• “The most important thing to understand here is that municipalities already use banks...our proposition...is that we stop lending that money to banks at zero interest and we start lending it to ourselves.”
  – David Jette (33:00)

• “Regulating capitalism is a thankless long-term failure as a strategy.”
  – Wolff (24:50)

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Important Segments & Timestamps

• Banks vs Government: Morgan Stanley vs Corbyn — 00:10–09:00
• Inequality & Luxury Products — 09:01–12:40
• NYT Paywall as Profit Motive — 12:41–14:10
• Fed's “No More Too Big to Fail” Claim — 14:11–18:44
• Class Action, Regulation & Arbitration — 18:45–25:24
• Italian Oil Dump Scandal & Systemic Critique — 25:25–28:44
• Public Bank LA Intro & Foundations — 28:45–31:00
• LA Public Bank Practical Benefits — 31:01–35:16
• Private Banking’s Scandals & Limits — 35:17–38:21
• Bank of North Dakota as Model — 39:36–43:26
• International Public Banking (Germany’s Sparkassen) — 46:13–48:07
• Private Bank Opposition — 48:08–51:34
• Democratizing Public Bank Governance — 51:35–53:50
• Getting Involved in Public Banking — 53:51–55:10

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Tone and Style

• Wolff’s style is trenchant, critical, and dryly humorous.
• Jette is earnest and fact-laden, providing clear explanations for lay listeners.
• The episode balances policy analysis, real-world examples, and “big picture” system critique.

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Summary

“Public Service vs Private Profit” lays bare the failures of profit-dominated financial systems and points to public banking as a potent, democratic alternative. Through sharp critique of bank power and insightful real-world case studies, Wolff and Jette advance a vision of finance that re-centers community needs, accountability, and a public purpose, leaving listeners with both hard questions about the status quo and a practical framework for change.

Transcript

[A]

Welcome, friends, to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives. Our jobs, our debts, our incomes, those of our children and those looming down the road. And boy, are they looming after the United States Senate passed an absolutely remarkable tax bill this last few weeks, if indeed it took that many weeks. I'm your host, Richard Wolff. I've been a professor of economics all my adult life. And that, in a way, has prepared me to provide these economic updates to cover the events of the recent past and put them in some sort of perspective. I want to begin with a struggle going on in the United Kingdom. It pits, on the one hand, one of the largest banks in the world, Morgan Stanley, based in New York, but a global bank like the monster banks of today usually are, and an up and coming political leader in Great Britain named Jeremy Corbyn. This struggle has been unfolding for a while, but really hit fever pitch a few weeks ago. And the ramifications are still gurgling around, which is why I want to talk to you about them. Here's how it began. Morgan Stanley sends communications to its banking clients and recently sent a communication saying that people should not just be very worried about Brexit. That's the process by which Britain is leaving the European Union. That it was part of that people know all about, but that the clients of the bank should be just as worried because an equivalent risk is posed by a government led by the Labour Party, whose leader is Jeremy Corbyn. Mr. Corbyn did not wait very long to respond, and he reacted by reminding the people of Britain what he thought and indeed, what many of them think of Morgan Stanley. Let me quote Mr. Corbyn to you, speculators and gamblers who crashed our economy in 2008. He continues with the following. Nurses, teachers, shop workers, builders. Just about everyone is finding it harder to get by. While Morgan Stanley's CEO paid himself 21.5 million pounds last year, it'd be more than that in dollars. And UK banks paid out 15 billion pounds in bonuses. You are right to feel threatened, Mr. Corbyn told the bank. We are going to change things. You are not going to be taking advantage of the British people in the future the way you have with the Conservatives in the past. That was his message. I find it remarkable for two reasons. One, we don't see that from the opposition in the United States. The Democratic Party's leaders, with the exception of Bernie Sanders, have been notably quiet when it comes to criticizing the banks, and never in language even vaguely like Mr. Corbyn's. But there's a second issue here that's even more important. The conventional excuse given by politicians as to why they don't criticize the banks, for example, in the manner of Mr. Corbyn, has been the if we were to criticize them, and even more if we were to tax them what we ought to, regulate them as we ought to, why then they'll just leave and we'll all be worse off. What a convenient excuse. I would guess it was written in the boardroom of a bank by a hired PR executive. Why? Because the threat is phony and empty. And let me explain why. In a game of threats between a bank and a country, it's the bank that has to worry. Let's suppose a government passes a tax on a bank and let's suppose it's the American government and the bank is Morgan Stanley, an American based bank, and it were actually to proceed to leave. Does that mean the government has no counter threat? That the government has no steps it can take either to prevent or to punish a bank that leaves the country to evade a legally imposed tax? And the answer is, of course it has weapons. Imagine a president who went to the people and the businesses of America and said, I suggest you don't patronize a bank that behaves in this asocial way. Imagine a president or a Congress which began to look into all the things that bank has been and is currently doing to ascertain where, when and how it violates the law with an attentiveness you don't normally see. Does the bank really wish to engage these kinds of risks? Might a government decide not to do business with any company that is in turn doing business with a bank that behaves that way? The American government has done that before to other entities around the world. Why stop there? In other words, a bank that threatens the government when the government is doing its legally entitled taxing and regulating activities. A bank that threatens to leave can and should provoke in a government counterthreats, counter steps. That's what Mr. Corbyn is suggesting. It's a mystery to me, but not really why American politicians can't and won't say things like this which would level the playing field and stop leading our politicians to be such easy pushovers for lame, empty excuses to allow the super rich to, to continue to get their favoritism. My next update is about inequality in the United States. Well, I'm not going to go over the statistics. I've done that in earlier programs and I assume many of you know how grossly unequal the income and wealth distributions of the United States have become. The extraordinary wealth of the top 5 or 10% and the economic difficulties surrounding everybody else. But I wanted to bring to your attention one of the consequences of this kind of inequality. It leads businesses to go where the money is. That is businesses that serve your average person, your poor or working class or middle person. Those are the businesses that are having trouble. Trouble as in the 6,500 malls that will close in 2017 because they can't sell enough stuff. But of course, the capital that is not invested anymore in producing for the mass of people who can't buy is now finding profit by producing flowers. The tiny number who can. Here are three examples I found to bring to your attention. The 2019 Corvette ZR1 convertible. Don't get too excited, but let me tell you about has a 755 horsepower LT5 6.2 liter supercharged engine. For those of you that are planning to do the kind of driving that requires 755 horsepower. But there it is. I wanted you to know about it. And the ZR1 convertible will start at $123,995. They will both be going on sale in the spring of of 2018. Can you wait? The next automobile that caught my attention when I got on a roll with this was the Land Rover. This is the 218 Range Rover SV Autobiography SUV. It's getting a be a real mouthful to describe these cars. Well, this one comes with a 557 horsepower supercharged V8 engine. And it starts at just under $210,000 for this little item and the last one. For those of you with a charming Christmas present perhaps on your mind, the Porsche Panamera Turbo SE hybrid is the world's most powerful luxury sedan. How do I know that? Because they say so. This hatchback sedan gets 680 total horsepower, more than the 911 GT3 and the Cayenne Turbo SUV. I hope these letters mean something to you and they don't to me. I'm just reading it off. $188,000 will get you that one. Some people have it and then the rest of us read about it. Then my eyes were caught by yet another milestone. The New York Times, which is read around the world as what we call the newspaper of record for the United States. Sort of like the Le Monde is in France or Die Zeit in Germany or Toronto Globe and Mail in Canada and so on. The kind of the newspaper that kind of represents the country. So when a newspaper with that kind of a position makes a big step, it's worth talking about. What's the step that the New York Times recently took? It's going to cut access, electronic access through the Internet to stories in the newspaper. Free access from 10 stories a month to 5. If you want to read more than 5 stories a month in this daily newspaper, you will have to pay. In other words, the distribution of the news from the newspaper of record of the United States of America is going to be cut back to interested people around the world in order for the newspaper company to make more money. If you needed an example of the subordination of the distribution of information, which is the only way a community can govern itself in a rational way, the subordination of information distribution to profit, there it is. Think about it. The next update has to do with Mr. Jerome Powell. He is the new head of the Federal Reserve, the institution of the United States government whose job is to manage the monetary system, to control the quantity of money in circulation at least as far as it can, to shape the pattern of interest rates, and thereby to shape the economic life of the United States. He said something so astonishing the other day that I want to report it to you and compare it to something said by a predecessor head of the Federal Reserve, whose name you may remember, Ben Bernanke by name, who was the head of the Fed for quite a few years before Janet Yellen took that position. Here's what Mr. Powell, the new head of the Fed, said that caught my attention. We no longer have here in the United States, he said, any banks that are, quote, too big to fail. Let me remind you that in the collapse of the American banking system in 2008, the lead into the catastrophe was taken by the biggest banks in the United States who went to the federal government. I'm talking about Wells Fargo, bank of America, Citibank, Morgan Stanley. You know them. Their names are well known. These banks went to the government, particularly in the last four months of 2008, and basically made the following. We are bankrupt. We are about to fail, which means we are about to tell the depositors who've put their money in our bank, individuals and businesses alike, that we can't give them access to their money because we don't have it anymore. We invested it and loaned it in ways we cannot recover. And if we declare bankruptcy, all of these individuals and all of these businesses will, in turn, by not having access to their money, be unable to pay their bills, plunging everybody they owe money to into the same Catastrophe. You, the government said these bankers can't let this happen. Why? Because. Because we, the bankers said are too big to fail. If you let us fail, we'll take the whole system down with us. Talk about threats. And dutifully, the Department of the treasury and the government and the Federal Reserve at that time caved in and bailed them all out. Since that time, most of those banks get ready now have gotten bigger than they were then. But the new head of the Federal Reserve isn't worried at all. In his judgment, we don't have banks anymore that are too big to fail. If you believe that, friends and neighbors, then let me remind you of a famous statement made by the then head of the Federal Reserve, Ben Bernanke in May 2007. That's just before the capitalist system crashed, led by the banks. Mr. Bernanke publicly made the following. We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. In May 2007, to remind you, millions of Americans were unable to cover their mortgage payments, which plunged millions of banks into trouble because they had made these mortgage loans to to these Americans. And there was Mr. Bernanke explaining to anyone who would listen, yes, it's unfortunate for the mortgage market, it's unfortunate for those people, it's unfortunate for the banks who lend to them. But let me quote. We do not expect significant spillovers from the subprime market to the rest of the economy. He was as wrong as wrong can be. And that's the case with Mr. Powell. Likely too. Before moving on, let me remind you that we maintain two websites that are full of information and capabilities that I think will interest you. The first is rdwolf with two f's.com and the second is democracy at work. That's all one word, democracyatwork.info these two websites allow you to communicate to us what you like and don't like about the program, what you would like us to cover. These two websites allow you to follow us on Facebook, Twitter and Instagram. They provide information, linkages and a blog that you may find interesting material that we upload every day to expand the reach of the work we do, but also to enable you to be partners with us for you to make use of this information in your conversations with friends, neighbors, relatives, co workers. We want to reach as many people as possible and partnering with you by means of these websites is a way for us to do that. And for those of you that are listening on the radio, if you would like to see this program as a television program. There's an easy way for you to do that. Visit patreon.com p a t r e o n patreon.com economicupdate the name of the program. And you can watch this program on television in that way. Returning to our economic updates, I was struck by another act of Congress recently. You know, businesses have been trying and successfully for many years to prevent the people they harm with a bad product, with a misleading advertisement in any of the ways that business harms the public and its customers. It used to be possible for individuals to begin a lawsuit to compensate themselves for the damage they've suffered and to make that something called a class action suit, a legal form in which all the people who are victimized by a company can together sue for compensation and to get the company to stop this behavior. Companies didn't like that. Surprise, surprise. So they developed a very interesting gambit in tiny print towards the end of contracts and public relations about what they do. They carry a little demand that anybody with a complaint about something they've done cannot go the route of a class action suit has to go to binding arbitration. That requires individuals to pay the high costs of a lawyer to fight it out in an arbitration and allows the company with its deep pockets to have a much more expensive law firm. And you can see what's going on here. And there had been action by aggrieved public and aggrieved customers to get a law that prevents companies from being able to get around the legal resource and recourse that people have. And a law had been passed, but with a new Congress and the power of the money that buys, particularly Republicans, but Democrats too, in the main, the Congress undid that law. So now companies are free to require binding arbitration, which vast numbers of people cannot and will not afford. And not the success that class action suits always or at least often had. This leads to a general understanding. Regulating capitalism is a thankless long term failure as a strategy. Why? Because the people who are aggrieved by the behavior of corporations, particularly big ones who get a regulation, don't understand that the minute that regulation is passed, after momentous opposition by the companies, they then go to work to undo the regulation, to amend it, to change it, and, and they have the money and they have the incentive to keep at it in the way that the aggrieved public doesn't. It's an unfair setup. It's only then a matter of time before the regulation is eviscerated, destroyed. The abusive behavior by the company resumes. The victimization of the public, of the employees, of the customers, becomes so outrageous that they rise up and oh no, pass another regulation and that repeats the whole game. Eventually people have to learn the problem is the system. Regulating it doesn't solve that problem. So long as we let businesses that do the production of the goods and services we need be run by people whose first priority, whose bottom line is their profit. Whenever there's a clash between that and what we the public, or we the employees need, you know as well as I do what gets sacrificed and what gets the priority. Regulation can't solve the problem. The last update we have time for comes from Italy and indeed from Sicily, the southernmost part of Italy, and has to do with oil companies and something they have done for years. In this case, the oil company is eni. It's the largest oil company in Italy and it has run an oil refinery in Gala, G E L A in Sicily for 54 years. For the last 10 years there's been a battle between the government of Sicily and ENI. Why? Because it turns out that the ENI oil company dumped huge amounts of toxic waste in a 3 mile long undersea deep dump off Sicily, close to Gala, where hundreds of people over the last decades have had an unusual kind of illness, actually a set of different illnesses, trying every which away to figure out what it was, where it came from. And they have now persuaded scientists and others to look into it, with the result that I'm reporting to you. The problem is that secretly, unknown to the people there, for decades, an oil company dumped toxic waste under the water off of Sicily. When you hear about these stories, please remember one key fact. Whatever other horror this brings up when you imagine what's going on, this company did what companies in general do. It was stuck with a toxic byproduct of whatever it was producing, in this case, oil. Now it had to do something with this toxic byproduct. It could have tried all manner of chemical and other procedures to make it not toxic. Failing that, it could have tried to find safe places far away from human beings to encase this toxic material. So it doesn't hurt anybody. Those kinds of efforts are expensive over long periods of time, if you can even find them. They didn't want to spend the money. They wanted to be more profitable. And had they spent the money, it would have increased their costs. The people running this oil company are not monsters. They're not all that different from you and me. They're not the problem. A system that works this way is imagine an oil company run by the people who are its customers, who need the oil to run their vehicles, to heat their homes, to run their businesses. Suppose the workers and the customers together ran such a business. Would they have made themselves sick in this way? Or might they have found a better way? If you answer a better way, you. You've become a critic of capitalism too. Thanks for paying attention. Please stay with us. We will be back after a very short intermission. Welcome back, friends, to the second half of this edition of Economic Update. I'm very pleased and glad to welcome to this program at this time David Jette. He's a writer and social finance activist from Los Angeles. He began his career as co founder of the nonprofit artist cooperative Brimmer Street. After that he moved to the world of tech finance and asset management and now he works as a legislative director for Public bank la, a movement to establish a People's bank of Los Angeles. And that's why he's here with us today. Welcome to the program, David.

[B]

Thank you very much.

[A]

Okay, let's start by definitions. What is public banking? How is it different from the private banks that we in America are mostly used to? What's all of this about that you are engaged in promoting and developing?

[B]

Right. Well, everybody is familiar with the idea of a private bank. It's a private institution owned by private shareholders, takes deposits and it makes loans. That's the most basic function of a bank. A public bank is really not that different. The main difference is for whom. Right. The the public bank is owned by the public, usually a municipal or state entity, and as a result it makes loans with a slightly different set of priorities, usually a social mission built into its charter or exercised by its board of governors and its executives. They operate as profit seeking entities like any other bank would. They seek to make a return on their investments and to recover principal. But the big difference is that you're not talking about trying to maximize shareholder returns quarter to quarter. You're talking about an institution that is owned entirely, let's say, by the city of Los Angeles and inures to the benefit of that city.

[A]

So the profits, for example, that a public bank would earn go into the budget of the city that owns and operates the bank rather than into private individual's personal income. Right?

[B]

Yes. The board of governors would decide how dividends are paid, whether they're recapitalized into the bank to expand its lending capacity or if those dividends are paid back into the city budget.

[A]

Okay. Or it might also, if I understand it might be committed to some sort of social mission or public project. And it might use the profits of the bank for that sort of thing too.

[B]

Yes, yes.

[A]

Help build a school or expand a highway or whatever else the city that owns it or the state that owns and operates it would designate as a useful function.

[B]

Exactly. Most public banks are founded with a social mission of some kind. And that is to say that they serve a constituency rather than shareholders, a local population at a municipal level. You're talking about financing loans for affordable housing, for infrastructure projects, transportation, student loans, agriculture loans, emergency funding, those kinds of lines of credit that cities will tend to need now and then right now they would usually issue a bond or they'll keep a rainy day fund. A bank can extend that kind of credit. But the most important thing to understand here is that municipalities already use banks. Right? They already keep their money somewhere. Los Angeles, for example, and I'll use Los Angeles as an example quite a bit. They have about $8 billion in a rolling credit and enrolling checking accounts. Among all of this operational accounts across the airports, the dwp, which is water and power, and all of the taxes it collects, it keeps about that much money in commercial banks. It earns next to zero interest on that balance. In fact, it pays about 100 million in fees every year in origination fees, wire fees, and servicing fees to those private banks. That's right. That's money that is coming out of tax dollars and then going to the banks to service this banking activity. Of course, it does cost money to bank. Right. These services are not free, and just creating a public bank doesn't eliminate that. But the most important thing to realize is that deposit bank, those deposits from the city enable the banks to lend more. So banks can lend at a scale relative to how many deposits they take in deposit is like a loan that the bank is taking out with their depositor. So you walk into a bank and you deposit $100. The bank now has your $100. Theoretically, they're supposed to pay an interest on that account, let's say 1%, which is much higher than the actual accounts pay right now. But theoretically you give them $100 and then later you'll get back $101. That's a loan. So what banks are doing is they borrow from their depositors and. And then they go out and they lend to other people at a higher interest rate and they make that arbitrage. The city, by keeping its money in a bank, is lending that money to that bank at zero interest. So our proposition, and we can point to many models throughout the world and in the United States is that we stop lending that money to banks at zero interest and we start lending it to ourselves. We can take that very large deposit base, capitalize the bank with some equity and start to lend to projects within our own region to make sure that that money isn't extracted by Wall street firms and reinvested all over the world in high yield, higher risk speculative investments, but are put to work in loans and projects that directly benefit the voters whose money it is in the first place. It also gives the city a special advantage. Banks can borrow from the Federal Reserve, I believe at about 0.4% right now. That's the reserve rate. And that power allows them to have liquidity and it allows them to leverage that interest rate and again go out and lend to other people. When a city borrows, it does so at the bond rate, right? Most city borrowing is done through bonds. They pay an upfront origination fee and bond rates can be between 3, 5, sometimes 7%. Depends on how good the credit of your city is. And you're of course selling these bonds to private investors. So once again you're borrowing from people, usually very high income households and institutions for the privilege of developing your city, right? Of getting that capital. This is despite the fact that the city itself has a rotating capital fund which the bank is lending against. So what we're proposing is that instead of cities borrowing at the bond rate while lending all this money to banks for free, that we set up an independent institution that's run on behalf of taxpayers that can take city and county deposits, make loans within the city, borrow from the Federal Reserve at a.4% interest rate, which will lower costs across the board for infrastructure, all kinds of city services right off the bat, and then take that capital income from public money and put it back into the region and into taxpayers pockets.

[A]

So your argument basically is that this is better for the citizens say of Los Angeles or any community than relying on the private banks. It holds on to more of the public money and puts it to better uses that will advantage the community than if they use the private system.

[B]

Yes, we've already seen how fragile the financial system can be in Los Angeles. We've just seen the city council put out a request for proposals for banking services and they disqualified banks that did not receive a satisfactory CRA credit rating or basically a good boy rating. Wells Fargo, for example, was, I think they settled that account or at least they were charged with fraud over their cross selling scandal. So that actually disqualified them from Providing services to the city. So the city is going to have to find another bank to put that money in. In an era of consolidation, when banks are being, you know, just, you know, Concentrated. Yeah, concentrated more and more. A city that cares about where its money is stored will run out of options. Eventually you will run out of banks that have not committed fraud.

[A]

Would be hard to do these days given money laundering, the Libor scandal, the mortgage collapse, the charging of fees that are not legitimate. I mean, almost every major thing that a bank can do that's either unethical or illegal, the big ones in this country have been found to be doing. Seems to me that a large city like Los Angeles may really have, if it's going to be true to the notion of not doing business with a institution that has failed to live up to decent standards, that the public bank may have no competitors if it gets established.

[B]

Yes, you do. See, large cities like this have some leverage. They can make demands of banks, but in general, the banks don't follow through. And I mean, we're talking about fraud, right? We're talking about market fixing, those kinds of things. But there's plenty of other things that banks are involved in that most taxpayers, most voters, are not for. Investing in fossil fuels and the development of new energy through energy transfer partners. At the Dakota Access pipeline. Wells Fargo was intimately part of that investment. And that actually sparked a big divestment movement in LA that actually birthed the Public Bank, LA organization that I'm a part of, where people didn't want to help finance these projects which, you know, destroy the environment and they extract value from the environment and workers.

[A]

So the public, in a public bank, the public could, through its votes and so on, influence what is done with its own money. Whereas if you deposit it in a private bank, it becomes the private bank that decides where the loans go and not. So the private bank is responsible to its shareholders in some sense, the public bank to the public. Would this be reasonable then, to say that the public bank is a more democratic institution?

[B]

Basically, absolutely, because. So your average public bank is governed by political appointees or elected officials. And insofar as you will vote for those individuals or the people who appoint them, it's considerably more democratic than Goldman Sachs or Wells Fargo, which theoretically the stockholders elect. But there's only a handful of major shareholders that really make those decisions.

[A]

Okay. One of the things that I know is, in the minds of people listening and watching this program is the. Is the idea of a public bank, a fantasy, a utopian dream, something in the distant future? Or is it something that exists in the world today, exists perhaps in the United States today, something we can point to and say we already have an example, a history, an empirical record of what's been going on. And I mean, this is a rhetorical question, you know, and I know that the answer is yes, we have examples. So let's start with the one here in the United States that gets all the attention once you learn about this, which is the bank of North Dakota. Tell us a little bit about it.

[B]

Right, so the bank of North Dakota is the only currently operating public bank in the United States. It's very successful. It was founded in 1919. At the time, banks were foreclosing en masse on farms in North Dakota, mainly banks located in Minneapolis. And the farmers of North Dakota got together and they started what they called the non partisan League, which was a sort of not right or left movement, but really a localist stay out of our state kind of movement, saying we want to keep our money here and we want to make sure our farmers and our banks are thriving and not out of state banks. They captured both houses of the legislature in the following election and immediately created a state owned grain mill and elevator and the public bank, the bank of North Dakota. They amended the constitution of North Dakota to require that all state revenues and accounts be held at the bank guaranteeing at a deposit base. And they put in charge of the bank the industrial council or committee, which consists of the Governor, the Attorney General and the Agriculture Commissioner of the state. They then proceeded to make loans to farmers, some of them at competitive interest rates and others at discounted rates. They did have some trouble to North Dakota.

[A]

I mean, they kept the money inside the state.

[B]

Yes, and this is a principle of almost all public banks is that they're very regionally focused. In fact, they're designed to avoid competition with each other and also commercial banks. And the bank of North Dakota is a great example of that because they have one branch and they have zero ATMs, and that's one way that they keep costs very low. But they also partner with community banks and community development funds, those kinds of things, in order to service your sort of retail customer customers and business customers. One of the major benefits of that is that North Dakota has the best community banking industry out of all the other states in the United States. There are more banks per capita. And those banks perform much better than community banks in other states. And part of that is because the bank of North Dakota acts as sort of a mini fed, right? It extends credit to these banks. It allows them repo credit. Right. So your after hours banking transfers in order to make sure the balance sheets all match up, they guarantee loans, they buy loans on a secondary market in order to increase the liquidity of local banks. And that independent spirit insulated them from a lot of the turmoil on Wall Street. They survived the credit crunch of 2009. They're currently thriving despite an oil bust in that state. They've returned over a billion dollars in profits to the taxpayers in North Dakota over the last 20 years. It's a per capita of about $3,500 per taxpayer that they got in free services that they didn't have to pay taxes for.

[A]

So it's very important for listeners and viewers to get that one particular point. It services the people of North Dakota by using the money of the people of North Dakota to recirculate that money inside the state. And whatever profits are made by charging interest on the loans that they make to the farmers and others in North Dakota, the profit is not going into any private hands, but flows into the state's budget. Which means that the government of North Dakota doesn't have to tax its own people and businesses the way another state might, because it has another source of income, namely the profits from circulating the people's money inside the bank.

[B]

That's right.

[A]

I can see that. Very clever to have partnered with local banks because that means the local community bank doesn't see the bank of North Dakota as a competitor, but as an ally. The competitors are the big national banks in New York and elsewhere who are unable to move in on North Dakota because in a sense, they can't compete with what that bank has done. I assume that's why it's lasted for 100 years.

[B]

Yes. Well, they wrote it into the Constitution, which, which makes it very strong. And they guarantee those deposits against the full faith and credit of the state, which is a very powerful tool. The public credit is what backs our money. And by allowing it to also back a public bank, then you're extending that immense power of public faith into a space where public faith tends not to exist. Finance is a very predatory industry. It, it's very cutthroat and there's really no quarter for social activity within that world. But as soon as you bring in the power of a state budget, a state that can compel revenue from its taxpayers, that source of strength creates a very solid base to build a bank on to guarantee principal, to guarantee deposits.

[A]

In principle, then there's no reason why the other 49 states in the United States could not replicate what North Dakota has done.

[B]

There are obviously legislative hurdles. There's politics with all of this.

[A]

Well, no doubt. But I mean, just in principle, they could all do that.

[B]

They absolutely could.

[A]

And. Or cities could do. In other words, it doesn't have to be the state. It could be a city, could even be a county. It's variable.

[B]

It is. There are many cities that are currently looking into it as well as states, philosophers. Bill Murphy was just elected in New Jersey. He's a big proponent of public banking, and I think he's going to be looking into a public bank for New Jersey, Santa Fe. The city had completed a feasibility study in New Mexico. Yes, in New Mexico. It's pretty far down the line. And California is very active in this space. The treasurer, John Chang, who's likely a candidate for governor, just his office just released a study looking at public banking as a solution to the cannabis cash. We have a burgeoning cannabis industry in California. They operate all cash. They're shut out of the banking system. That means foregone tax revenues for the state. It means dangerous amounts of cash in unprotected businesses. So the treasurer was looking for a solution to that because it's in the state's best interest to make sure these taxes are collected. But all of these areas are looking into it for their own reasons. Los Angeles looking into it because they think it's going to lower costs, which it will. They think it will foster some independence from those financial institutions which, you know, are constantly being disqualified from being able to use. And it's also kind of the end result of the divestment movement. You know, if you're going to ask your public university, your public entity of any kind, to divest from harmful business activities like private prisons or, you know, exploitative labor practices, the only end goal that will really satisfy that is a public bank where the money of the people can be invested into projects that directly benefit the people and not just go around looking for the highest return.

[A]

My understanding is that in a number of other countries, public banking is a huge part of the total banking scene. That is, public and private banks have coexisted in various ways for many decades. Could you tell us a little bit about that? Because it also established as the feasibility and the viability of this as an institution.

[B]

Yes, Germany has one of the major economies, industrial economies in the world, and it has a huge public banking sector called the Sparkhause. And There are about 400 regional banks, and they all operate independent of one another, but they are part Of a consortium. And they came out of the 19th century, sort of county level. Treasurer's office is right. You had a mayor with a public trust and they would open a little bank on the side that would take deposits from the public. That turned into essentially a public bank. And in the 20s they reformed that into a more independent institution. That network of banks has been largely responsible for financing the green energy revolution in Germany, As I think 70% of all loans made to clean energy projects were made by this public banking sector. And it's also one of the more profitable banking systems in Europe. A place that has obviously some very large banks, but they return upwards of 1.5% on assets, which is very, very good relative to other banks. Of course, they're led by a board of citizens of workers at the bank and elected or appointed officials. So they're answerable to the public. They have a public mission. They set aside profits for infrastructure development, affordable housing, sports programs. I mean, everything you could name that you would otherwise be paying with taxes, they're paying out of capital income from the people's money.

[A]

I think it's very remarkable. The German word sparcaster basically means piggy bank, you know, savings bank, A place to put your money, which is the idea being you're putting it aside and it's for a rainy day or for something special or for a gift. And it's the community doing that collectively for itself through this institution. And from everything I've ever read, they're very popular in Germany. No politician, conservative, left wing, right wing, basically would dare to say anything against it. Rather like North Korea, Dakota, where the politicians on both sides of the Republican Democratic thing keep away from criticisms because it would be bad for their political career. It suggests that in the court of public opinion, if you can get a public bank started, your prospects of being well established, well, you know, well loved in the community are pretty good. Which probably would mean that. That the big private banks see this as a danger. Do you have any story to tell us about opposition? Is there opposition from the big private banks? How is that being played out now?

[B]

Right.

[A]

Especially in a place like Los Angeles where you're making the effort to introduce it.

[B]

We are. Well, if you take North Dakota, North Dakota is not a bastion of socialist political activity, but it is a very popular bank because people feel a sense of ownership. Ownership. And it does good by them. Right. They were able to fund a new water authority and get water trucks off the road in rural areas and they had a flood in Grand Forks. And they extend a line of credit that goes a long way because you're talking about helping people without raising their taxes. In Los Angeles there's some pushback. You know, Wells Fargo was at City hall trying to argue that we shouldn't care about their CRA rating. That doesn't really mean anything they send out.

[A]

That's the negative rating they got because of the scandals that they were caught up in.

[B]

Yeah, they were cross selling accounts, which is illegal.

[A]

They created complete fictitious. I mean they got caught doing all kinds of things and it led to the end of their CEO was bounced out. I mean it was really a major shock.

[B]

Their stock took a dive. It was bad for business for them too. But the, they'll send out the charities that they donate to. They have some nominal fund that they donate into certain neighborhoods to get a few people out there to make us look bad when we come in to say we need to divest from them. But in general, banks are very unpopular and the idea of raising revenues and lowering costs without raising taxes is very popular. So I actually think that public banking is about to have a moment. There's a lot of high level politicians who are seriously considering state level banks at California city level. Like I said, it's really having that time. In Germany, the Sparkhause are the bank of first resort. That is the first place that you go and open your checking account. And it's not until you're looking to make a bigger return that you go to the bigger investment banks. It forces those banks also to lend more productively because instead of just stashing their money in government securities or making those safe bets that don't really drive the economy and move capital, it forces the for profit shareholder held banks to look around the economy and say, okay, maybe we actually do need to fund some businesses that actually hire people.

[A]

Is there any movement among the people pushing for public banks to organize them differently from private banks? In other words, is there any part of the movement that says a public bank should not have the hierarchical structure of a private bank? You know what I mean Is a board of directors of 15 people who make all the decisions and everybody else who has no input at all, who comes to work, does what he or she is told and goes home, versus a cooperative a system in which everybody has one vote and the decisions are made democratically. What this institution is going to do, how it interacts with the community it serves, and so on. Is there any of that going on? Or is the question of how the public bank is internally organized not something that the movement is concerned with we're.

[B]

Very, very concerned with who manages and runs this bank. And I think the main effort of activists like myself isn't just to put push the idea of public banking because again, politicians like it, they like ways to raise revenue that don't raise taxes. But it's creating the right bank that has the right input from the community. The Sparkhause have these boards of governors that are made up of community members, one third workers of the bank, one third, and then appointed political officials. We see that as a much better model than just a bunch of bankers who all kind of sign off on what the executive says. Obviously you're also talking about creating essentially a municipal institution. It needs to adhere to constitutional requirements, at least in the United States. And banks are inherently conservative institutions as well. So there's probably going to be a step by step approach starting with a small scale, sort of palatable version. And then once that starts to establish if LA gets a bank and then Ventura county in San Francisco and then you start to see a California network spreads to other states, then I think you'll see more variety in the governance structures. You know, whether democratic rule can come into city departments and things like that I think is a. It's beyond my analysis at this moment. But I think having representatives of the employees and also of the community and the people who will benefit from this bank is really key at the top levels of governance.

[A]

How can a person who's interested, who finds what you've been telling us persuasive or has figured it out on his own or on her own. How can you get involved in this? How can you learn about what's going on and become in some sense a participant?

[B]

Well, like I said, there are a lot of places that have public bank movements already. And I think the most natural way to start, if there isn't one in your town, is to start with a divestment push. Figure out what your city is currently invested in. I guarantee if you there's going to be tobacco, energy companies, all kinds of extractive industries and make a push for your city to divest from them, that's the first step. Then divest from the next one and then the next one. Get your community behind the idea that the people's money need to be invested to the people's benefit and not to the people's detriment, that will lead to a public bank, to the whole idea.

[A]

That a public ought to have some say in what's done with its money.

[B]

Right? Not just a say, but that it should have absolute say, and that under no circumstance should public money go to benefit industries that harm the public, that those need to be redirected, kept regional, and with real metrics and a real mission to improve the lives of the people in its region.

[A]

We've come to the end of our time. David, thank you very, very much for all that you've taught us. And let me thank all of you for tuning in, for watching, for participating, be a partner for economic update. We want to thank you for doing that. And we want to thank truthout.org, that independent, remarkable source of news and analysis that's been our partner for a long time. So thanks again, and I look forward to speaking with you again next week. Sam.