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The Case for More Public Banks

February 23, 2015

By Joe Rothstein

This is a tale of two banking systems, one public, the other private. Both part of the exceedingly urgent imperative to fix what ails the capitalist system.

Let’s start with the public banking system, and its only U.S. example, a bank owned and operated by and for the people of North Dakota. The Bank of North Dakota is “more profitable than Goldman Sachs Group, Inc. has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.” That’s a quote from no less an authority than the Wall Street Journal.

The Bank of North Dakota began operations 95 years ago, born of farmers tired of being price-exploited by grain monopolies and by private banks always at the ready to foreclose and take their land at the first sign of crop trouble.

These days the bank uses its deposits to smooth out the inevitable rough edges of farming. Even more important, the bank underwrites the expansion and creation of small and medium size business within the state to help keep North Dakota one of the most economically sound of the 50 states.

The Bank of North Dakota operates pretty much the way we used to think of banks, as somewhat boring institutions where you can park your money safely and be sure that the pooled assets were being put to work for the good of the community. Each and every year it turns over millions in “profits” to North Dakota's general fund to help pay for public services.

The Bank of North Dakota didn’t speculate in risky derivatives, and doesn’t finance questionable loans to pump up its profits, so it barely noticed the financial calamity known as the Great Recession. It doesn’t pay its executives exorbitant salaries or bonuses. In fact, the bank guarantees its own deposits, rather than using the federal FDIC guarantee system. And it works. Not just because of the shale oil boom that hit in 2009. Mind you, this bank has been doing its thing since 1919.

Now let’s turn to Vermont. In 2011 the for profit TD Bank (short for Toronto Dominion) held $2.3 billion of the state’s $10.9 billion total deposits. Despite that dominance, TD made only $416,800 in SBA loans to Vermont’s small businesses. In reaction to the outflow of Vermont depositor money 19 of 23 Vermont communities, at town meetings, voted to urge the state Legislature to create a public Bank of Vermont, along the lines of the Bank of North Dakota.

TD and other major private banks mobilized to kill the public banking legislation, but what they couldn’t stop was enactment of a law to dedicate 10% of the state treasury’s cash balance toward making loans and investments within the state.

As Vermonters discovered, despite their overwhelming support for creation of a bank whose mission is to serve their interests, private banking wields a potent club when it comes to legislating at any level in the U.S.

Not quite so elsewhere in the world. Half of the assets in Germany’s banking system are in the public sector, and more is in cooperative savings banks. These public entities consistently have a higher return on capital than the German private banking system and actually pay more in taxes than their private counterparts. Switzerland’s public banking system is similar. India is in the midst of significant economic growth, having dodged the worst effects of the Great Recession largely due to prudent management of India's public banking sector.

Notably, with all of the banking scandals that have been exposed in recent years, none have touched the public banks. There have been so many banking scandals lately you can be excused for having your attention to new ones wander and your sense of outrage blunted. As a refresher, we’re talking about more than the trillions that have been lost because so many of our major banks and financial institutions packaged and sold loans that never should have happened, and then lost heavily on bets that the bubble they created wouldn’t burst.

J.P. Morgan Chase & Co., Bank of America, Citibank and others cumulatively have paid more than $40 billion of their shareholders’ money to settle fraud actions brought by the U.S. Justice Department.

Not only did the reckless action of major banks bring down the world’s economy, they’ve been nailed for manipulating the once trusted interest measure known as Libor, they’ve created artificial energy and other shortages to add profit to their investments in industries such as utilities and mining, they’ve been convicted of bribing foreign leaders, they’ve foreclosed on properties that weren’t in default, and, amazingly, they’ve returned to the same risky derivative investments that forced taxpayers to bail them out in 2008.

HSBC, one of the world’s largest banks, has just had its international headquarters in Geneva raided by Swiss authorities after revelations that the bank laundered money for the drug trade, international arms dealers, and brutal foreign dictators. Along with other “private banking” services, HSBC counseled clients on how to illegally hide taxable income and wealth.

Finally, 7 years into the cascading revelation of banking scandals, Attorney General Eric Holder announced in mid-February that his Justice Department will decide within 90 days whether to hold Wall Street banking executives criminally responsible for the frauds committed by their banks related to the 2008 economic crisis.

Whether or not those charges are brought, the past 7 years have taught us that the world of international finance is fundamentally out of alignment with the interests of all but the handful of rich and powerful people who play in that world.

If allowed to continue, the world’s wealth will continue to be sucked to the top, leaving personal and social shambles down below. What we have with the mega-banks and the others in the Wall Street elite isn’t capitalism. Call it what you will, but by any name it’s dangerous.

More state and community banking wouldn't be the entire needed remedy, but along with other measures—-probably breaking up the mega-banks themselves—-it would be a giant step toward more local economic stability and a more even playing field. All of which the patron saint of capitalism, Adam Smith, considered necessary for capitalism to work.

(Joe Rothstein can be contacted at

Joe Rothstein is editor of U.S. Politics Today. His career in politics spans 35 years, as a strategist and media producer in more than 200 campaigns for political office and for many political causes. He was a pioneer in professional political consulting and one of the founding members of the American Association of Political Consultants. During his career Mr. Rothstein has served as editor of the Pulitzer Prize-winning Anchorage Daily News and adjunct professor at George Washington University's Graduate School of Political Management. He has a master's degree in journalism from UCLA.