Public Banks Are Less Risky Than Wall Street
Public Good vs. Corporate Greed
Rob Nichols is the president and CEO of the American Bankers Association. The byline of his piece over at The Hill on Friday probably should have lead with that so readers could prepare themselves for the misleading ideas about public banking he was peddling.
Rob claims “a scattered business focus, undue political influence and lack of oversight” are the top risks involved with the creation of a municipal bank. The organizers supporting Measure B wholeheartedly agree. That is why all three of those areas have been at the forefront of the discussions with state regulators regarding the eventual structure of the Municipal Bank of Los Angeles. If Nichols had bothered to learn about what has been discussed he would have known this.
The proposed Municipal Bank of Los Angeles would be a “bankers bank” and would not compete with local community banks or credit unions. It would not seek to compete with those institutions in providing banking services directly to Angelenos, but rather help those very institutions expand their services by partnering with them to increase the supply of capital that is available to invest in the local economy. The Municipal Bank of Los Angeles would focus on providing the same kinds of services to the City of Los Angeles that the Bank of North Dakota provides to its namesake, through the same kind of scrupulous and conservative investment strategies that have served North Dakotans so well over the last century.
A lack of FDIC insurance is not really applicable to the proposed Municipal Bank of Los Angeles — as a banker’s bank it wouldn’t be taking deposits from consumers. The Bank of North Dakota has managed to outperform Wall Street for decades and they don’t have any FDIC insurance. And even if a public bank in LA did have FDIC insurance, that insurance would only cover $250,000 per account which doesn’t go very far in municipal funding terms. For instance, at the end of 2006 when the FDIC last studied this issue in depth, state and local governments had $2.4 trillion in financial assets nationally. Of this amount, FDIC-insured commercial banks held $289.7 billion (about 12% of the total). And almost 76 percent ($219.3 billion) of those funds were not covered by FDIC insurance because the accounts exceeded the $250,000 limit. Arguing that a lack of FDIC insurance makes public banks significantly more risky is a red herring.
It’s laughable that Nichols would bring up the topic of bailing out banks into this discussion — does his memory have a gaping hole in it where events from 2008 and 2009 should live in vivid detail? I’m happy to refresh his memory here: it was the US taxpayer who bailed out the Wall Street institutions as they collapsed one after another in September 2008. That bailout cost us $700 billion. And what did we, the taxpayers, gain from it? No equity. No control. And the weak regulations that came in the wake of the collapse have all but been rolled back at this point.
Yes, it’s very likely the taxpayers in Los Angeles would end up as the final guarantor for a municipal bank, but the collapse of the banking industry in 2008/2009 already demonstrated that the taxpayers are the ones left holding the bag when things go wrong with commercial banks. If we are going to be stuck with the liability in the end, regardless of who owns the bank, why not just make our own and then reap the benefits to temper the liability?
It is also quite bizarre that Nichols seems to believe that there would be no form of professional oversight or regulation governing the Municipal Bank of Los Angeles. This couldn’t be further from the truth — the California Department of Business Oversight would, at a minimum, be responsible for ensuring that the bank is structured soundly and with an appropriate level of risk mitigation, insurance, and capitalization. Why would the City of Los Angeles opt not to hire experienced, competent professionals to manage this new bank?
The organizers at Public Bank LA have never argued that the establishment of a municipal bank would be easy. Everyone knows that the massive scale of our city creates a tremendous inertia resistant to any meaningful systemic change. But is the measure of a project’s difficulty reason enough for us to abandon it on the drawing board?
To build his case for dismissing public banking altogether, Nichols refers to the failure of nearly all of the public banks in US history without giving any context of the role that actors who opposed strong public institutions — like Andrew Jackson — have played in the failure of those banks. In addition, he makes no mention of how the existing system of private banking caused the 2008/2009 recession with a credit contraction that stripped trillions of dollars of wealth from Americans. Homes, businesses, and other forms of equity — all gone for those who had no safety net. Wall Street sneezed and America’s workers did not just catch a cold — their wealth was taken. And now he wants us to believe that a public bank jeopardizes American taxpayers?
I find it particularly amusing that Rob would cite a Lincoln speech from 1837 as some kind of a warning against political interference in a bank’s operation when, in that speech, Lincoln was actually defending the State Bank of Illinois from the obvious efforts of other members of the legislature to destroy the bank rather than seeking profit through corruption. Lincoln trusted the bank’s board of 24 governors to oversee the operation of the institution and was not concerned with political interference in the day to day operation of the bank, or the risk of the loans issued by the bank, or in a lack of operational capital as Rob Nichols would have you believe through blatant misrepresentation of the facts. Here are a few of Lincoln’s own words from that very speech demonstrating his steadfast support for public banking institutions:
“I make the assertion boldly, and without fear of contradiction, that no man . . . has ever found any fault with the Bank. It has doubled the prices of the products of their farms, and filled their pockets with a sound circulating medium, and they are all well pleased with its operations.”
For more than 180 years the benefits of public banking have been readily apparent for anyone willing to consider them. Beware of the detractors who claim that this project is too difficult for Los Angeles to manage. More often than not, they’re the ones who stand to benefit from our not even considering a public banking solution.
The regulated commercial banking sector has a long track record of refusing to invest in our local communities where that investment is needed most. They have the same long track record of doing everything within their power to squeeze as much profit out of their customers as they possibly can, all to benefit their shareholders and owners. The largest crises our city faces, housing affordability and homelessness, are both problems that can and will be solved with the right kind of investments. But there just isn’t enough profit there for Wall Street to bother funding the community land trusts, permanent supportive housing facilities, tenant co-ops, mixed income social housing communities, and easy access to transit that are all necessary pieces of the solution to these crises. Wall Street just wants us to build more luxury high rises everywhere so that the developers can demand top dollar rents and attract wealthy overseas investors.
The real risk isn’t in public banking, but in continuing to rely on the commercial banking sector to provide the financing we need here in Los Angeles. We have seen what they can do, and we demand better.