North Dakota has one. Maybe New York should, too.
That was the thrust of Assemblywoman Sandy Galef”™s legislation, rolled out June 3 ”“ A 1696 ”“ that would create a commission “to investigate the feasibility of establishing a New York state bank.”
“I have been approached by constituents, economists and banking experts who believe that a state bank would be a boon to our economy, particularly in making credit available to small businesses, and helpful to our municipalities for their infrastructure needs,” Galef said in post-announcement statement.
“For the past few legislative sessions, we legislators were forced to make cuts to school aid and services to our most vulnerable,” the Ossining Democrat said. “Our municipalities are hurting and while we are introducing efficiencies to government such as consolidations and shared services, we need to do more. We need to have all options on the table, which is why I have introduced legislation to explore the feasibility of a state bank.”
Galef was joined by Scott Baker, New York coordinator for the Public Banking Institute.
“There is no fiscal crisis. There is an allocation-of-funds crisis and a credit-creation crisis,” Baker said. “We can solve both by re-purposing some of New York state”™s revenues to provide startup capital for a state bank. Thereafter, we can use tax dollars to provide ongoing credit, as the Bank of North Dakota has done successfully since 1919.”
Town of Lewisboro Councilman Dan Welsh said, “Local governments should support the creation of a public bank. It”™s a proven strategy which can lower borrowing costs for desperately needed investments in long-neglected infrastructure, support small business by directing credit to local banks, and provide a revenue stream to plug the gap at the state level among other benefits. On its face, it demands the study and due diligence called for under this sensible bill.”
Barbara L. Edwards, chairwoman of the Leadership Resource Group of Westchester County, said, “Public banking will give New York State influence over the process of financial intermediation and will allow the government to use the banking industry as a lever to advance its economic development efforts. A public bank is a strong step towards providing a prosperous future for our citizens.”
I was happy to attend the press conference about this timely and important bill. Here is the full text of my presentation:
Public Banking Press Conference – June 3, 2013
At a time when even our U.S. Attorney General says that the Too-Big-To-Fail banks might even be Too-Big-To-Prosecute, 465 small and medium-sized banks have failed from the start of the current financial crisis in 2008 through 2012.
Yet there is one state where banking is almost conducted in the opposite way as everywhere else: North Dakota. Due in large part to the support from the Bank of North Dakota (BND – est. 1919), there have been zero bank failures in 10 years. The state’s small and medium-sized banks provide loans to small businesses, and it is small businesses that provide the most jobs.
Furthermore, the loan to asset ratio of small and medium-sized banks in North Dakota is typically around 75%, significantly higher than otherwise comparable states that do not have a State Bank. It is as low as 31% for some of the private mega-banks, who use the bulk of their money to finance mergers and acquisitions, which often destroy jobs; manage wealth for the already wealthy; and speculate in derivatives, which causes excessive risk and wild gyrations in the markets and may even create inflation for anyone using commodities, which is everyone.
Public Banks invest state money in State needs, not in Wall Street gambles – money which was raised through taxes but which often has to be borrowed back at interest rates of 4-6 percent! Presently, agency and pension funds are invested in risky, often under-performing asset classes – by managers who charge millions in fees. In contrast, the Bank of North Dakota manages $6.2 billion in assets conservatively and constructively, has had a 20+% ROE for over 10 years, and has been profitable for over 40 years, far longer than the current oil & gas windfall.
Public Banks can also respond directly to community needs and even occasional emergencies in a way that private banks cannot, as the Bank of North Dakota did during several recent floods by suspending loan re-payments.
The Bank of North Dakota helped take North Dakota through the worst fiscal crisis since the Great Depression with a surplus – the only state in the union to do so in 2008.
A Public Bank, based on the North Dakota model, would collect all state taxes, and then, using fractional reserve lending, create, or partner with local banks in creating, loans across the state. Publically paid bankers would run it, conservatively. It would not be an Economic Development Corporation or a slush fund for pet projects.
A Public Bank would not make derivative purchases, nor re-package its loans to outside investors. The loan arrangements it would make with local banks would stay on its books, and be fully transparent, guaranteeing the kind of fiduciary responsibility that can only come with skin-in-the-game.
Two other considerations ought to be on top of every legislator’s mind regarding banks:
1) The need to Ensure Fiduciary Responsibility
The FDIC and Bank of England’s joint paper from December 2012 effectively treats bank depositors as bank creditors. The example of Cyprus was not an outlier; it was a taste of policies to come under Dodd-Frank and the FDIC.
What do public finance officials have to say about protecting city, county, and state deposits from turning into bank capital? What is their plan to prevent city, county, and state governments from becoming creditors for the TBTF banks, the next time these banks lose a multi-billion dollar bet? This has nothing to do with whether deposits are collateralized. It’s about the risk of our local government being treated as a creditor and not a depositor. Because of their fiduciary responsibility to the public, we request that our public finance officials answer the question: what is the risk we have in doing business with too-big-to-fail banks that are apparently now able to seize deposits and convert them to capital?
2) The need to Reduce Debt Servicing Costs
North Dakota has zero debt servicing costs because it has no debt.
Why are state and local governments, school districts, and public hospitals paying Wall Street banks billions of dollars of interest on municipal bond and capital appreciation bond debt, when we could be paying that same interest to ourselves by issuing credit with a public bank? This credit can be used to fund infrastructure, build schools, replace or repair bridges, etc. We request that elected officials put debt servicing costs (both interest and fees) under the same microscope as labor and other costs.
No one should be naïve enough to believe there will not be another big-bank led crisis. The TBTF banks have only grown larger and more vulnerable, with the six largest financial institutions having assets of nearly $9.6 trillion, a figure equal to about two-thirds of the nation’s gross domestic product. Yet, worldwide, there are more assets in Public Banks (60%) than in private banks.
In the 2012 legislative session, 20 bills and resolutions were pending in 15 states to study the issue or to create a state bank or investment trust.
In New York State, we are forming a coalition of legislators, academics, activists, and community-service groups to call for a State Bank. Please investigate some of the resources below and join us!
New York Public Banking Resources
Facebook: https://www.facebook.com/publicbankingnewyork
Yahoo Listserv: http://finance.groups.yahoo.com/group/publicbankingnewyork/
Online Petition: http://www.change.org/petitions/support-a-public-state-bank-for-new-york-state
Public Banking Institute: http://publicbankinginstitute.org/home.htm
WesPAC Public Banking Presentation (video): http://wespac.org/2013/05/16/test/
Scott Baker, NY State Coordinator for the Public Banking Institute
President of Common Ground-NYC http://www.commongroundnyc.org/
But what about community banks? Many of them aren’t involved in the mess the Wall St. got into. We don’t have to create another bloated state run agency, even if it’s operating as a bank.
We have plenty of investments that will come to NY. It’s in the form of fracking. But even if NYS set up a bank, NYS is still anti-business. Look at our ranking according to CE magazine.
Are you aware the the Trans-Pacific Partnership Agreement being negotiated in secret will effectively ban State banking? This was discovered because a some leaked pages of some of the negotiated sections of the treaty.