The current banking system in the U.S. doesn’t meet the equity or environmental aims of the Green New Deal. But the push to establish government-run banks that do is gaining momentum as an alternative.
For the latter half of 2016, the Standing Rock Sioux and activist allies from all over the country camped out in North Dakota to protest the construction of the Dakota Access Pipeline, which was likely to harm their native lands through an invasive engineering process and inevitable oil spills.
Wells Fargo was one of around 15 banks that directly invested in the pipeline, and in drawing the connection between the bank and that controversial project, activists began to call attention to just how broad and diverse the banks’ reach was. Cities like Seattle, San Francisco, Los Angeles, and Albuquerque use Wells Fargo to hold their finances–everything from taxes to parking meter dollars. Activists in all those cities, and more, began to call on their local governments to divest from Wells Fargo, and pull their money from the bank.
“But the question was: If we pull money out of Wells Fargo, where would it go?” says Ellen Brown, the chair of the Public Banking Institute, a research nonprofit formed in 2011 to further the conversation around alternatives to the current banking system in the U.S. Large, private banks are so intertwined with the way American government operates that divesting from that system is not a simple task. It wasn’t enough for a city to just pull its money from Wells Fargo and drop it in another bank. (Seattle even attempted to do that and, unable to find another bank that would hold its money, ultimately renewed its contract with Wells to the chagrin of activists.)
Instead, organizers began to rally around the idea of a different type of financial institution: public banks. As the name implies, they are publicly owned, often by cities, and accountable to the people who live there, not their shareholders. Big private banks like Wells Fargo tend to invest the money they hold in immediately profitable ventures, like securities trading and yes, oil projects, because the people who own stock in the banks demand large returns. In contrast, public banks are owned by the government, and their primary obligation is to support constituents. They can do this through making low-interest loans to small businesses or to necessary infrastructure projects. In the past several years, public banking has gone from a fringe idea, buoyed by the controversy around DAPL, to a viable policy route that cities from San Francisco to Washington, D.C., are considering. And cementing its place in the public discourse, public banking was citied in the text of the Green New Deal resolution drafted in February by Representative Alexandria Ocasio-Cortez (D-NY) and Senator Ed Markey (D-MA).
This story is part of our series A Green New Deal for Business, looking at how the environmental and economic aims of the resolution might transform industries in the U.S. You can read more here.
WHAT IS A PUBLIC BANK?
In contrast to the big, privately owned banks in the U.S., public banks are owned by government entities; theoretically, they could operate at the city, state, or federal level. They’re funded with revenue from constituent taxes or from the federal government, and as such, are intended to be accountable to public interest and demands, as opposed to big private banks, which are beholden to shareholders. “In a million cases where a bank officer has to choose between advancing the private profit of the bank versus what is good for [the social aims] banking is supposed to serve, these officers follow the idea that the bottom line of the bank is their first concern,” says Richard Wolff, professor of economics at the New School.
Public banks can be set up by a government to hold government deposits. But before they can begin doing that, they would need some initial startup capital, which they could generate through public bond sales, crowdfunding, or a long-term loan from the Federal Reserve. Once the public bank is set up, it can loan capital to local projects. This is where the difference between public banks and private banks really becomes apparent. A report from the environmental justice organization Demos describes how big banks are less likely to make loans to small businesses or projects like affordable housing construction, which might not generate strong enough financial terms to merit the cost of underwriting a loan. And for the loans they do make, they charge steep interest—often in the double-digit percents—to ensure they take in a profit. This high-interest lending applies to cities that borrow for public projects, too. A now-notorious example of this is the new span of the Bay Bridge between Oakland and San Francisco. The project cost around $6.4 billion to complete, but because the California Department of Transportation took out loans from Wall Street banks and private investors to pay for it, the state agency ultimately had to cough up around $13 billion—double the cost—to account for interest. The same load of interest payments is also crippling the state’s attempt to build a high-speed rail corridor (which is something the Green New Deal specifically calls for).
Public banks, in contrast, can lend at very low interest rates because they’re trying to keep their capital consistent, not make a profit. Furthermore, the interest that they do charge ultimately comes right back into the same, publicly owned banking mechanism, so it can be loaned out again to local projects or to community banks that serve residents. Essentially, it’s a way to circulate financial resources through an economy in a way that’s responsive to local needs. Furthermore, public banks managed by a government, which would have to come up with a charter for how the bank functions and who it’s responsible to. The charter could put a cap on executive pay, for instance (Jamie Dimon, CEO of JPMorgan, takes home over $31 million each year), and designate that its investments should prioritize agreed-upon aims, transportation access, affordable housing, or clean energy projects.
The model is not without precedent in the U.S. Last year, American Samoa created a public bank, and the Bank of North Dakota was established in 1919. State tax dollars are deposited into the bank, which was set up to help farmers get access to credit when they were denied by private institutions. Now, BND works in tandem with other financial institutions in the state, like credit unions, by seeding them capital to help them make loans to local businesses and initiatives (in part because of BND, North Dakota has more credit unions and local financial institutions per capita than any other state). Because BND is publicly owned, it does so at much lower interest rates (in contrast to Dimon, BND CEO Eric Hardmeyer takes home an annual salary of around $250,000). Demos reports that because of BND, North Dakota has more loans to local banks and small businesses per capita than any other state. It also makes student loans at some of the lowest interest rates in the country.
Interest in BND has spiked in part because of how the bank performed during the financial crisis of 2008. In 2014, a report found that BND was more profitable than Goldman Sachs and had a better credit rating than J.P. Morgan Chase, in large part because of its public ownership model. It’s worth noting, though, that BND does make loans to profitable state industries like oil, which many public banking advocates in other states would protest. This illustrates, however, how a public bank responds to local interests: Support for the oil industry is high in North Dakota, but elsewhere, a publicly agreed-upon charter for a bank could direct its investments elsewhere.
