B (28:45)

Thank you very much.

A (28:47)

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 (29:03)

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 (30:02)

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 (30:14)

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 (30:26)

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 (30:39)

Yes, yes.

A (30:40)

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 (30:52)

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 (35:17)

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 (35:34)

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 (36:26)

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 (37:06)

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 (37:54)

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 (38:22)

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 (38:45)

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 (39:36)

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 (40:49)

I mean, they kept the money inside the state.

B (40:52)

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 (42:16)

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 (42:59)

That's right.

A (43:00)

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 (43:26)

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 (44:16)

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 (44:25)

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

A (44:30)

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

B (44:34)

They absolutely could.

A (44:34)

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 (44:42)

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 (46:13)

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 (46:37)

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 (48:08)

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 (49:19)

Right.

A (49:20)

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

B (49:24)

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 (50:05)

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

B (50:09)

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

A (50:12)

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 (50:24)

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 (51:35)

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 (52:31)

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 (53:50)

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 (54:07)

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 (54:47)

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

B (54:51)

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 (55:10)

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.