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Op-Ed: Public Banking a Solution to Dysfunctional Banking System

The American banking industry is in crisis. As a result of the Wall Street bailout and the Dodd Frank “reforms,” the concentration of assets and deposits in the “too-big-to-fail banks” is now greater than it was before they failed and were rescued.

The St. Louis Federal Reserve reported that at the end of 2011, five Wall Street firms — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. — controlled 48 percent of total U.S. banking system assets:$8.5 trillion, equal to 56 percent of the U.S. economy. The other 7,307 banks held the remaining 44 percent.

At the same time, affordable credit,  the life blood of a modern economy, remains largely unavailable or prohibitively expensive for the businesses that can power economic development and job creation.

The Wall Street–Federal Reserve banking system fails in its most important function: the effective allocation of capital into the productive economy. Investment is directed away from the production of new goods and services which create jobs, and into “financial products” which produce few jobs.

And it is going to get worse.

A recent article in American Banker described remaining smaller and community banks as under siege, forced to comply at a cost they can’t survive with Dodd Frank’s capital requirements and regulations.

Of course, that’s what Wall Street wanted and got, with its army of lobbyists and an ever helpful Congress.

It is estimated the U.S. will lose more than 2,000 of its remaining community banks in the next two years. The concentration in Wall Street will grow ever greater. Pennsylvania’s community banks will not be spared.

Local businesses banking with Wall Street firms will find themselves talking to little more than “paper pushers,” with decisions being made in regional centers, by people who know little of the businesses and have no stake in the local community or economy.

Pam Martens writes on her blog, Wall Street on Parade, “That level of concentration should be a wake-up call to a country that was brought to the brink of financial collapse because of a systemically corrupt culture on Wall Street.”

As Nobel Laureate Joseph Stiglitz and others have warned, this corruption and unprecedented lawlessness – mortgage fraud from bottom to top, compromised rating agencies, rigged Libor rates and municipal bond markets, laundered billions from Mexican and Columbian drug lords and, according to a U.S. Senate investigation, clients with terrorist ties – is having a corrosive effect on our economy: crowding out honest investment and further distorting markets.

David M. Sachs at the Psychoanalytic Center of Philadelphia explained how these practices and unchecked individual criminal behavior are destroying trust and effect markets: “Normal expectations of what is safe and dependable [are being] shattered.”

In a recent op-ed in The Washington Post, GOP stalwart Craig Shirley wrote: “Wall Street is too fearsome and corrupt for anyone’s good. We should find a way to create 50 Wall Streets, so that money can stay in the states and corruption can be kept to a minimum and law enforcement to a maximum.”

What Shirely, Martens and a growing army of problem solving Americans are talking about is public banking.

Public “partnership” banks use public funds to capitalize a bank which assists community banks to get affordable credit into the economy, for economic development and jobs creation – and grow their profits and market share.

The profits of the public bank come back to the state, city or county that charters the bank as non-tax revenue for the general fund.

And a public bank can underwrite municipal bonds, at substantially reduced interest and debt service borne by taxpayers.

Only North Dakota has its own bank. Over the past decade the Bank of North Dakota (BND) has generated an average of $30 million a year in non-tax revenue for the state and its people, and has a current commercial loan portfolio of more than $2.9 billion invested in the state’s economy through its community banks  — in a state with a population no larger than some suburban Philadelphia counties.

The bank is run by civil servants on civil servants’ salaries – no bonuses or commissions as incentive to speculate or take undue risk. The bank is overseen by a board whose members are all bankers. It is publicly audited.

The BND has been instrumental in supporting perhaps the nation’s strongest banking industry: not one failure as the economy collapsed, and more than double the national average of bank offices per capita.

The Center for State Innovation concludes: “The extra leveraging ability that the state bank provides through participation loans, the increase in municipal deposits from letters of credit, and the other supports that a state bank can provide as a ‘banker’s bank’ are all critical in helping to strengthen small and/or young banks.”

In a recent conference call with other bank CEOs around the nation, the CEO of one small North Dakota bank said: “When the crash hit, the BND never blinked and kept the credit flowing.” The CEO of a large, regional North Dakota bank said this: “With the support of the BND, we can go toe-to-toe with the big boys.”

Community banks in North Dakota are taking back market share from Wall Street, while in most of the nation they continue to lose market share.

Twenty states and an increasing number of municipalities are considering creation of public banks. A national network of public banks, providing locally generated credit for locally directed economic development and jobs creation is the long overdue alternative to a dangerously concentrated and dysfunctional banking system and the distorted markets it has produced.

Mike Krauss is a director of the Public Banking Institute and is chair of The Pennsylvania Project, a non-partisan public policy advocacy organization.

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