Public Banks Now
The California Senate has voted to enact AB 857, the Public Banking Act, which sets the standards and opens the door for municipal public banks throughout the state.
A second vote on the amended bill in the Assembly, which advanced it by a narrow margin last month, should follow tomorrow. If Governor Gavin Newsom signs the bill into law, California will be the first state since North Dakota in 1919 to enact a statewide public banking statute, and the first in history to define and regulate the formation of public banks under an ongoing licensing regime. And while these banks are likely to start small in cost, number, and competitive scale, these first steps toward a new horizon will hasten the dawn of a new American economy, one that is accountable to the wellbeing of the people and the planet.
Lobbyists from the California Bankers Association and their affiliated industry groups tried their best to kill this bill, and they succeeded in pressuring moderates in the legislature to water it down, by limiting the ways public banks can compete with private banks. But in the end, they failed to overcome the urgent desire of Californians to divest from banks which finance extractive and exploitative businesses, defraud their customers, and take risks that lead to trillion dollar, taxpayer funded bailouts and global economic collapse. Lawmakers recognized the need to declare independence from Wall Street and establish publicly-owned, public-purpose banks with more transparency, more accountability, and with an unshakeable commitment to local, equitable, sustainable and restorative investment.
Lawmakers did not realize this on their own.
As a hired security force hired by Dakota Access LLC descended on the protest at Standing Rock, they coordinated with state and federal authorities to provide “counterterrorism measures” to protect the pipeline project from the threat of peacefully gathered Lakota water protectors and their allies, who were camping in freezing temperatures and whose rights to tribal autonomy and free speech were being presently litigated at the UN. Folks traveled from all over the country to stand with Standing Rock, and when the state and fossil fuel industry united to snuff out that resistance, those folks went back to cities all over America with a bone to pick with the financiers and enablers of that attack.
Wells Fargo was a co-financier on the project, although as the bank itself points out, it contributed just 4.8% of the project’s credit facility, while 17 other banks provided forms of financing. That Wells Fargo was also the subject of investigation for illegally cross-selling products to customers without their consent (for which it has paid hundreds of millions in settlements to customers and shareholders) widened the target. And the bank’s involvement in the illegal foreclosure of homes following the financial crisis made them a target for housing justice activists all over the country.
Wells Fargo also happened to be the primary or sole provider of banking and financial services to cities and counties up and down the state of California. Due to collateralization and scale requirements made on banks which hold public funds, most local or community banks are not able to provide depository services to public agencies and municipalities, especially those of a certain scale, like Los Angeles, San Francisco, and Oakland/East Bay. But when the only bank permitted to hold a city’s money is disqualified by their own malfeasance, either by regulation or by popular demand, that city is faced with a dilemma. Do you change the law to allow for unethical banks to make a profit on banking public funds? Do you defy voters in their demands? Or do you try to find another option?
One city, San Jose, found that competitive bidding did not solve the problem. Faced with a choice between only two qualified bids for their banking business – Wells Fargo and JP Morgan Chase – the city could either waive their wage theft prevention laws (which disqualified JP Morgan Chase after they settled multiple counts with the state) or ignore Wells Fargo’s sub-satisfactory CRA rating (which disqualified them.) This dilemma faced almost every city in the state, and altogether they represented a crisis – of faith in the finance industry, and ultimately faith in our local leaders to protect public funds from misappropriation and exploitation.
What is a city that cares about how its money is invested supposed to do?
In Los Angeles, a movement to divest from Wells Fargo and from other extractive Wall Street institutions rose up around the outrage from Standing Rock and the overwhelming need for increased local power just as the Trump administration took power. City leaders were bombarded with demands from protesters and lobbyists alike to find better ways to use the city’s financial leverage to create new investments at home, to address the housing crisis and get the city off of dirty fossil fuels. This dynamic was at play all over the country, with Washington state exploring legislation, and the new governor of New Jersey saying he supported an inquiry as well. Divestment movements gained steam at the same time local governments looked for some way to respond to stifling inequality, federal overreach and widespread desperation at the seeming powerlessness of voters to achieve change through electoral means.
At this same time, legal cannabis businesses were clamoring for access to the banking system (a continuing problem for them.) Cities wanted to help them, after all, these businesses needed to pay taxes and fees, as well as their employees, and needed checking services to do so. Amassing large amounts of cash in placed where marijuana is sold, often in unlicensed businesses, is a security concern for the entire neighborhood. Caught between these pressures, large cities started to listen to the activists at their doors and explore public banks.
National leaders in the movement, like Ellen Brown and the Public Banking Institute, made critical contacts with on-the-ground climate and economic justice organizers to usher them into the movement, connecting them to each other and to the decades-long effort to reexamine how money works in our economy, and how the abuse of that money power has led to where we are today. This movement tapped into the anger still broiling from the days of Occupy, anger that had not been adequately addressed by the previous administration or state and city leadership. Instead, Wall Street was digging deeper everyday into the pockets of taxpayers and even between individuals and family members (look at the business model of the apps you use to split a bar tab), enmeshing itself into the very the fabric of American life. It was increasingly clear that independence from that behemoth would be popular, necessary, and urgent.
The only lasting answer to this problem was a full and permanent divestment out of privately-owned financial institutions, and into public banks.
A public bank would have the backstop of guaranteed public deposits and a mandate to invest its funds locally in ways that improve living standards for residents. There would be no shareholders, no cross-jurisdictional antics to avoid regulation and oversight, and no systemic risk generated by financial engineers in Manhattan. Modeled after the Bank of North Dakota, but also the Sparkassen in Germany and other public banks around the world, a system of local public banks could help cities leverage their position as major customers of financial services (and the generator of safe, tax-incentivized municipal bonds) to demand greater financial independence and the concentration of investment in their localities, leading to higher employment and wages.
Public Bank East Bay (formerly of Friends of the Public Bank of Oakland) were at the forefront of these efforts. Activists there advanced the project so far that they were poised to found their bank even before AB 857 gave them an explicit way to do so. San Francisco opened a task force to explore the possibility and state and local treasurers began their examinations as well. Quickly, it became clear that intermingling public funds with cannabis money would be bad politics and likely impossible as long as marijuana is classified Schedule 1. But even with that issue off the table, the appetite for greater financial independence in the form of public capital sources was growing, and with more attention came more knowledge, more scrutiny, and more opposition.
The big banks ignored this effort as long as it was a handful of activists in a handful of towns. An effort to change statewide banking regulations, creating public entities that would compete with entrenched financial powerhouses, would not go unopposed. Knowing that the fight to create local public banks would be futile without unity with other California cities, and without the cooperation of regulators operating against a defined legal framework, organizers from these local movements founded the California Public Banking Alliance, with the primary goal of modeling and sponsoring legislation to make local public banks a reality. In one short year, this alliance mobilized activists behind legislation to do just that.
Organizers from twelve cities and localities met with regulators, legislators, community banks and credit unions, as well as city leaders and utilities administrators to devise a lightweight bill that would define public banks, set up the rules of the road, and leave the details of the banks themselves up to the localities that would found them. The result is AB 857, and the promise now is that these same cities will found the banks they need and move their money home, where it belongs.
What’s the difference?
Those of us in the public banking movement like to brag that ours is the progressive agenda item that everybody likes, because it has the promise to pay for everything else. This is, of course, an exaggeration. Public banks cannot fully finance a transition to renewable energy, and they will not transform the entire housing market overnight. Finance makes nothing, it only charges interest. Only labor will provide the energy and knowledge necessary to make these changes. Ultimately, capital should not be the driving power in our lives, regardless of whether it is public or private. People are and should be distrustful of bankers and politicians who promise to change things for the better with something as paper and abstract as a balance sheet, or a social impact investment vehicle.
But the services that banks provide are hard wired into how we deal with money, resources, debt, and productivity in our economy. Banks are granted special powers that no other business possesses – the ability to (essentially) create money for the purposes of lending. This power, known as fractional reserve lending, as well as the institutional capabilities that it creates through securitization, collateralization, and arbitrage put banks at the nexus of all economic power in our world. Right now, we entrust almost 100% of that power to private parties, namely the major shareholders of commercial banks and the executives they select, who use it to enrich themselves and stretch the rest of us as thinly as they can manage without disrupting their cash flows. We like to believe we live in some kind of democracy, or at least a representative republic, but truly we are forever in the debt of financial institutions which manage our mortgages, our currencies, our sovereign and consumer debt, and by extension, our daily lives.
Why we trust these private individuals with this power is a long story. In many ways, they created this power for themselves long ago, when the great fortunes built on colonial violence and slavery found a global marketplace ripe for monopolization in the wake of their terror. These fortunes devised moneys which would be issued by private banks but backed by taxpayers guarantee, in more ways than one, and then deployed that money to the service of their own ends. The development of the United States was mined from labor and recorded in dollars, all for the benefit of a very few. Now, those banks trade on public capital markets, and ostensibly any of us could be a shareholder. But the true power of how resources are allocated in our world is reserved for the boardrooms of those banks, which have proven impenetrable to democracy and even the law itself.
Everyone knew that Wall Street was greedy, and venal, and corrupt. We knew that they would sell a reverse mortgage to a senior, sell the note to a poor government, charge a huge fee for the trouble, and then speculate against the asset themselves. But in the wake of the Great Financial Crisis, the world woke up to their gross incompetence. Suddenly these masters of the universe did not appear to know what they were doing. Suddenly, their great wealth and acumen, which once signalled their meritocratic brilliance, was exposed for the shell game that it truly was, and no sum of piddling donations to a handful of friendly charities would distract from their abject failure to manage the risk of our global economy. Capitalism, loosely defined as the private ownership of productive and finance capital and its primacy in a market economy, was not the efficient and resilient system it purported to be. The market-based magic of the invisible hand did not incentivize Bear Stearns to avoid defrauding their investors, and it did not incent Standard & Poors to provide accurate credit assessments of collateralized debt obligations. It did not stop the government from repealing Glass-Steagall and exposing consumer deposits to investment risk from the derivatives markets. The market did not work the way they said it would, because they broke it, on purpose. Alternatives were needed, and a new generation of economists and labor and housing activists were ready to provide it.
In his book Our Common Wealth: The Return of Public Ownership in the United States, Thomas Hanna of Democracy Collaborative says “We may now be finding that the concept of public ownership is finally breaking free of […] the two competing and unrealizable dogmas of the twentieth century – ‘a centralized and planned version of socialism and a free market unregulated capitalism.'” Models of public ownership, both ancient and new, and free of the Soviet central planning that laissez faire capitalists rail against so vociferously, are gaining ground all over the country. Community land trusts, workers co-ops, social impact investing, are all fresh and attractive models to the up and coming generation of workers who see no chance of a stable retirement or even a stable climate in their lifetimes. This radical reorientation of our system of monetary and productive value responds to the generation-scale distrust of finance capital and a disposes of the false hope of humble prosperity, that wage labor might lead to some comfortable middle class existence in an America where a private equity firm owns everyone’s home. It is a sorely earned lesson, but also an opportunity to expand these models and give them real form at full scale. People are fed up and they want to try something new.
For banking, this means bringing capital under democratic control, one city at a time.
As cities and counties found public banks, they take that money power into their own hands and discipline it across the needs and desires of their constituencies. As that capital grows, the power of those people grow, as does their independence from existing systems of financial control. The people in a city can make demands of their banks, to restrict investment into those areas where they can reverse inequality, or mitigate climate change. They have the power to make those demands because their banks cannot move out of state, or into tax havens, and their shareholders cannot hide in giant towers away from view. Their shareholders are the people, and they demand a return on their investment in more than dollars.
It also means supporting the small number of financial institutions and commercial models which expand public and worker ownership of assets and means of production. Public banks can focus on these innovative models of ownership, and they can compete with extractive and predatory debt products, like payday and title loans, that are currently the only options for a large share of the working class. People have a right to their full wages, and paying fees and interest because a bank doesn’t consider you a profitable enough customer to provide you a checking account is an injustice. Public banks can unlock the basic functions of money itself for thousands of residents, simply by offering a checking account. More money in the pockets of the working class means more real growth in local economies. This helps the tax base of localities, which leads to more investment in public infrastructure like transportation and education. This is what Wall Street and the shadow banking sector is stealing from us every day – our wages, our commonwealth, our future – and it’s what we can recover by founding smart, focused and resilient public banks.
What will these banks look like?
AB 857 does not proscribe a certain form or size of bank, and it does not tell localities what their banks should invest in or how to capitalize or fund them. These decisions are likely to be very region-specific. Both Los Angeles and San Francisco face a homelessness crisis, and may want to focus on affordable housing. Santa Rosa has suffered terrible fires, and may want to focus on climate change mitigation and disaster relief. Some cities may focus on the unbanked and underbanked. All of these priorities can be served by public banks, but they may not all be compatible within the same institution, at least not at first. Part of the desire for local, municipal banks, as opposed to a state-level megabank, is to target investment based on these local needs, and to have a resilient, co-insured multiparty system that can withstand shocks to one part of the state or another. But more importantly, public banks will be more accountable to the people the closer they are to those same people. A single public bank operated from Sacramento, under the oversight of the governor or some panel of officials, is less likely to respond to democratic demands and local investment needs, and risks the same problems as we have with a Wall Street dominated system. AB 857 allows cities to decide how they want to set up their banks, and sets the rules for how to do it. That’s it.
This approach allows local leaders to see what public banks can do for them and their constituents, and to craft business models that accomplish those goals. It limits public banks to the areas where they can be most useful, and protects taxpayers from overzealous public officials who want to run their own banks. Every bank founded under AB 857 will have many steps before approval, and ongoing checks and balances to keep them in line and protect public funds.
The projects these banks invest in will be varied. Existing public banks in North Dakota and Germany are responsible for critical lending to public sector development, as well as student loans, renewable energy infrastructure, and disaster relief. In Germany, the Sparkassen public banks are responsible for on the order of 70% of loans made to renewable energy projects, in a country that has outpaced the rest of the world in achieving independence from fossil fuels. North Dakota resisted many of the shocks of the financial crisis partly because of the resilience of its local banking industry, at the center of which is the public Bank of North Dakota. That bank has returned $1B in dividends to the state over the last decade, proving that public banking can be among the most profitable and sustainable financial models in the world. Bank in California may make loans to affordable housing developments, green energy improvements to housing and commercial real estate, short term lending to qualified borrowers shut out of the existing financial system, and basic refinancing of existing municipal debt. Everything that a private bank does for local governments and businesses, a public bank can do. And as these models prove themselves, lawmakers will see how crucial they can be to a thriving, independent economy, and they will expand. Eventually, a parallel banking system will emerge, one that does not invest in private prisons or fossil fuel extraction, and does not ship profits to Panama or the Cayman Islands to be laundered. Consumers, governments, businesses, everyone will have the option to divest from the old economy and into a new one, one that works for everyone, including the Earth itself.
Now that AB 857 is likely to become law, public banking activists will return to their cities and counties and take up the mantle for their local public banks. Now we have a roadmap to where we want to go, and city leaders will have fewer uncertainties about whether such banks are safe or even possible. They are possible, they are safe, here is the guide. In Los Angeles, we will bring the question to the people with more clarity than when we first posed Measure B last year. No longer will ambiguities in state law scuttle attempts to chart this path. Local governments can now sit down with their local treasurers, with labor unions, local businesses, and determine with their constituents what kind of bank they need. Wall Street banks, which take and take, and lie and lie, will no longer hold these localities hostage to their monopoly interests and force a false choices between expanded public infrastructure and credit availability for local governments. Public money can now find its way into investments tied to real human needs in a sustainable vision of the future economy, for the benefit of all.
City leaders would be smart to study up on public banks and the new financial reality they will create in California. Activists and organizers should understand what public banks can do in the short term, and be watchful of attempts to co-opt or steal these institutions on behalf of entrenched financial or political interests. Public banks need solid foundations, built on accountability and efficiency, because the people deserve sturdy institutions to pass on to future generations. The private fortunes that dominate our economy understand this, and that is why they endure. The people of California need to seize back that common wealth, and put it to work for working people, and not the lucky or unscrupulous few.
California is leading the way toward an equitable and sustainable economy. Public banks are a beachhead in that fight, and one that we will never surrender.
David Jette is an organizer for Public Bank LA and California Public Banking Alliance.