Following the Money: Public Banks and Financing Local Economies: Making Low Cost Community Loans or Sending Lots of Money to Wall Street

Bioneers Eco-Nomics ARTICLE

Los Angeles paid $170 million in 2017 just in bank fees. Plus $1.1 billion in interest. So it’s just an inefficient system. We’re sending our money off to Wall Street

Following the Money: Public Banks and Financing Local Economies
Following the Money: Public Banks and Financing Local Economies

Ellen Brown is an attorney and leading public banking advocate, founder of the Public Banking Institute, and Senior Fellow of the Democracy Collaborative. She is the author of hundreds of articles and 13 books, including the best-selling Web of DebtThe Public Bank Solution and Banking on the People. She also co-hosts the “It’s Our Money” radio program on PRN.FM. Bioneers sat down with Brown to discuss the speculative economy, public banking, and whether we could be headed toward another major financial crisis.

BIONEERS: Let’s start with a big picture. We’re more than 10 years past our 2008 financial crisis triggered by Wall Street banks. Can you talk about some of the worst effects that we’re still seeing now?

ELLEN: The rich are getting richer, as most people are aware, and the rich, of course, own the media, so they report that the economy is doing fine. But for the lower 80% of the population who are net debtors, it’s getting worse. Consumer debt is ballooning. We have a massive homeless problem. We have a shortage of houses and jobs.

There’s a deficit of money in the system. And it’s not just the U.S. Virtually all countries are heavily in debt. So if everybody’s in debt – countries, businesses, individuals – who are they in debt to? They’re in debt to the banks. Banks create our money supply, not governments, as most people think. They create it as debt — as loans. They just write the figure into your account when they make a loan, and then that money has to be paid back, plus interest. So there’s a catch: more money has to be paid back than was created in the original loan, so there’s never enough money to pay off the debts.

BIONEERS: When you said that the rich are getting richer, you’re saying that as they get richer, they’re capturing that capital and it’s not going back into the economy?

ELLEN: Exactly. It’s extraction – extracting money out and putting it into the speculative, wealthy money-making-money economy. It’s a closed loop, driving asset prices up without producing anything new.

BIONEERS: Many economists are agreeing that there are bubbles again, and that we’re in for another financial crisis. Do you agree? What do you see as the indicators of something like that?

ELLEN:I definitely agree. One indicator is that the Federal Reserve has been raising interest rates, at least until recently, and virtually every time they raise interest rates, it creates a recession. Their argument is that we’re at technical full employment, so if everybody’s working, they’ll demand more money, wages will go up, and that will create inflation.

We’re not even close to true full employment. But that’s their argument, that we’re dangerously close to full productivity, and therefore if they raise interest rates, that’ll slow the creation of money in the economy in the form of credit. But it puts a huge burden on businesses that now have to pay more, along with students, consumers and governments.

It’s estimated that at current rates, the U.S. government will be paying close to a trillion dollars just in interest every year, which is more than we pay for the military. That would eat up our tax base. So it’s unsustainable and it’s unnecessary. There are other ways we could work this system that would be sustainable.

BIONEERS: What are the dangers of wealth funneling into what you call the “speculative economy”?

ELLEN: The speculative economy is a big casino. When you buy a stock, the money you spend does not go back to the company. The only money that the company gets is with the initial public offering. After that, it’s literally a casino. The prices keep going up and up, and there’s little relationship between the stock price and the real value of the stock. But it doesn’t matter. You buy it because you think somebody else, some “greater fool,” as they say, will buy it at a higher price, and you’ll make money off of it. 
But if you are in that position, you’re not using that money to buy your groceries. That’s play money. It’s extra money that you’ve got, and you just keep speculating until you lose. You lose the bet, and then you get wiped out, and some wealthy person gets more. It’s a game of Monopoly. The game was designed to show that the rich get richer. The hotel owners always win in the end. They suck out the profits, and they win.

BIONEERS: Did publicly owned institutions fare better during the financial crisis?

ELLEN: Eighty percent of the Chinese banking sector is publicly owned. And they just sailed through the crisis. They continued with this remarkable 10% growth for a while.

Public banks lend counter cyclically. They put more credit out there when the private banks are pulling in their credit. That keeps the economies going. North Dakota has its own public bank, and it survived the credit crisis better than any other state. Even today, the Bank of North Dakota is doing brilliantly well. There was an article in 2014 in the Wall Street Journal that said that the Bank of North Dakota was more profitable than JP Morgan Chase and Goldman Sachs. The author of that article said that it was due to oil. But that very year, oil collapsed, and the Bank of North Dakota continued to report record profits. They have a very efficient business model. That’s what I say their profits are due to.

BIONEERS: What have been some other positive effects of North Dakota’s public banking sector?

ELLEN: By law, all of the state’s revenues are deposited into the Bank of North Dakota. The bank’s charter says it will not compete with local banks. Instead, it partners with them. Local banks have all the branches and tellers, and they’re doing the basic banking. If they need help with loans that are too big, that they would otherwise have to let a Wall Street bank take on, they tap the Bank of North Dakota. It allows their state to use its own credit without being exploited by out-of-state banks.

The bank was set up in 1919 because the farmers realized they were being exploited by what was basically a cartel. The railroad, the banks, and the granary were all one system. It was extractive, extortionate, and the farmers were going bankrupt. When they realized they were losing their farms and that was the reason, they got together as the “Non-Partisan League”, and they won an election and set up their bank.

That’s basically what it is for them. It’s about keeping money in the state and leveraging it for their own purposes. When you realize that banks actually create money, it makes sense that that power should belong to the people. They’re creating money out of their own capital and their own deposits. It’s just a more efficient way to use their own money.

Los Angeles paid $170 million in 2017 just in bank fees. Plus $1.1 billion in interest. So it’s just an inefficient system. We’re sending our money off to Wall Street. They have no obligation to reinvest it in our communities, and they don’t. Their mandate is to make as much money as they can for their shareholders. So they invest in the big money makers, even though we the people don’t approve. It might be oil, it might be prisons, it might be fracking. But if it makes money, they’re not worried about the environment. They don’t have those standards.

The Bank of North Dakota is making low-cost loans into the community for the particular sectors that they support, and any excess profits go to the state. Then the state can spend that money on the things that people need.

BIONEERS: If we have another financial crisis, how do you see the bailout process transpiring?

ELLEN: Theoretically, the Dodd Frank Act was all about no more bailouts. But the Dodd Frank Act specifies avoiding bailouts by doing bail-ins. Bail-ins means taking the depositors’ money instead of the taxpayers’ money. So they’re taking our money either way.

If you’re a too-big-to-fail bank and you are insolvent, you’re required, under Dodd Frank, to take the money of your creditors and turn it into capital of the bank. So you used to think you had money in the bank, now what you’ve got is a share of a bankrupt bank. Depositors are theoretically protected by FDIC insurance. But the pot of money in the FDIC fund is very small, and what they’re insuring is $6 trillion in deposits.

There was another alternative that was raised when Obama was President, which was to nationalize the banks. What they call nationalization is that we take over the debts and clean up the books, and then we hand them back to private investors. The reason they didn’t do it was that it would be too expensive to pay off the debts of these bankrupt banks.

Hopefully somebody will raise this idea again. If you nationalize the banks, you don’t need to pay off those debts, since banks actually create money on the money they lend. You could have the Federal Reserve buy the bad debts in the same way it bought the dodgy mortgages or the mortgage-backed securities off the banks and rebuilt their asset base by replacing these mortgage-backed securities with good assets that they could call capital. They could do the same thing here: put the bad debts of the banks on the Federal Reserve and just leave them there. You don’t need to balance the books. The Federal Reserve can carry that debt indefinitely.

BIONEERS: How popular is the idea of public banking? Have there been polls done?

ELLEN: No, all we know is that there’s obvious growing support. We have over 50 activist groups in different cities and states around the country working on their legislators. We have 25 pieces of active legislation. Some of them are getting close. Progress is slow. But we’re essentially changing the whole system, so you expect it to be a little bit slow. I think the biggest resistance – not counting the big banks themselves and people with a vested interest in protecting their jobs, like bureaucrats and politicians – is from people who don’t understand what we’re talking about.

BIONEERS: What drew you to this subject matter? What would success look like to you?

ELLEN: I actually wrote 10 books on health, and the politics of health. At some point I realized that if you wanted to fix the health system, you had to fix the banking system. That’s how I jumped over into writing about banking.

Right now, we have all these little “siloed” movements that are really good, but they just don’t have enough power by themselves. What they all need is money. Many things need funding, and we think we’re short of funding. We think the government can’t put more money out there, but it can. Once you realize how the system works, you realize that there is too little money in the economy. We could pump a lot more in there. Rather than creating price inflation, we could generate jobs and productivity. We could build infrastructure. Infrastructure is a type of thing that you can extend credit for that will be paid back. They’re called self-funding loans.

That’s how money should work. You should spend the money first, on good things, productive things, not speculative things that’ll suck money out of the economy. Spend it into the economy, and it will pay back.