Public banking can help bridge the racial wealth gap in the post-pandemic recovery

By using public money to create local funds, public banks can reverse decades of racist disinvestment to repair Black and Brown communities hardest hit by the COVID-19 recession.

By Ameya Pawar and  Harish I. Patel | July 7, 2020 (Chicago Tribune)

Local and state governments are facing massive budget deficits after economically sensitive revenue streams tanked as a result of the extreme but necessary social distancing measures brought on by the global coronavirus pandemic. How can they afford to pay for bold new policies and programs as part of the economic recovery? 

The federal government can leverage the Federal Reserve to print money to pay for programs, just as they are doing now by backstopping big banks and corporations. But state and local governments don’t have those powers so their options have been limited to increasing debt, raising taxes, or imposing austerity measures. Until now. State and local governments can create money by leveraging the billions in public money they currently deposit in private banks. 

Imagine harnessing our deposits to create the money we need to finally address inequality, disinvestment, and institutional racism across our city and state, all without sacrificing returns. How? A public bank is owned and operated by a state or local government, and works for local stakeholders. They can coordinate with state and local governments to finance things like affordable housing and public options for broadband and childcare. Most importantly, a public bank can help reverse the racial wealth gap by lending to Black and Brown families in search of inexpensive capital available mostly to white people. 

Banks are a critical part of a predatory and extractive eco-system that crushes workers and communities, and this must change now. 

When an individual deposits their paycheck into a checking or savings account, the bank keeps a fraction of the deposit in reserves and lends the rest out. This process repeats over and over, creating “new money” in the economy. The bank uses government deposits in the same way, but on a larger scale. Where these loans get made should be a matter of public concern. Instead of financing small enterprises in our local communities, billions of dollars in deposits have been used to finance private prisonsimmigrant detention centersoil pipelines, and private equity (shareholder returns on Wall Street). Instead of lending to local stakeholders, banks are prioritizing the needs of distant shareholders. The same is true for our pension funds where Wall Street banks siphon off billions in management fees while simultaneously working to defund government through tax avoidance. 

Banks are a critical part of a predatory and extractive eco-system that crushes workers and communities, and this must change now. As the economic toll of the pandemic surfaced, Congress took action and passed the Coronavirus Aid, Relief and Economic Security Act, allocating hundreds of billions in loans to small businesses through the Paycheck Protection Program. Banks had the job of distributing the dollars to mom and pops across the country. Instead, the primary beneficiaries were big businesses and even enterprises connected to members of Congress. Investigative journalists found that big banks prioritized their biggest and most profitable customers for PPP loans, generating billions in origination fees. Overall, 82% of the $170 billion tax provision included in the CARES Act will benefit individuals making more than $1 million per year. 

Meanwhile, most small businesses owned by Black and Brown people were left out to dry. Many went out of business. Which bank did the best job in steering PPP money to small businesses? The nation’s first and only public bank: the Bank of North Dakota. 

Banks create money by using deposits to create new loans, and the loans create new deposits, and the cycle continues. The loans take form in mortgages, commercial paper, and government financing. The decision to extend or deny credit is an act of public policy. Credit flows impact tax revenues, population shifts, and even the climate. And so we ask: Does it make sense to privatize so much public policymaking power to private corporations/banks?

Critics of public banking point to the Community Reinvestment Act, low-income housing tax credits, bank philanthropy, and opportunity zones as the most appropriate channels to invest in communities. The problem with these market-based tools is that they give banks the decision-making power on what and where to invest. Most banks do the bare minimum and often their investments or philanthropy are dwarfed by their business practices. For example, a recent WBEZ Chicago and City Bureau analysis found that between 2012 and 2018, banks lent out $57 billion for home purchases. Sixty-eight percent of the mortgages were in majority-white communities, while majority-Black communities (that make up so much of the city) got just 8% and majority-Latinx communities got just 8.7%. In other words, Black depositors financed the purchases of white homebuyers, an outflow of capital that can be likened to financing the racial wealth gap. 

We have plenty of hard work ahead of us to reverse the racial wealth gap in the post-pandemic economy.  (In addition to big public investments in affordable housing and clean electricity/replacing fossil fueled infrastructure in our homes and communities), here are some ideas that are financeable through public banking:

  •  ‘Baby’ bonds:  The state and city can create investment accounts for newborns and let compound interest do the rest. This nest egg would be made available to the child at age 18 that can be used to attend post-secondary training, start a business, or buy a home. While there are federal baby bond proposals, Springfield and Chicago can seed accounts locally by in-sourcing state and city investment portfolios (including pensions) to public banks, saving hundreds of millions in fees. Just the savings in fees can finance a baby bond program that creates a real nest egg that can help close the racial wealth gap.
  • Affordable mortgages: Banks have access to the Federal Reserve, opening up access to the same cheap money big banks can utilize. This access can help a public bank lend to prospective Black and Brown homeowners with non-predatory rates.
  • Access to capital: Just 1% of American venture capital-backed founders are Black. This is racist, and our state and cities are losing out on new job creation and economic output. Public banks can ensure startup, growth, and acquisition capital is available to entrepreneurs in Black and Latinx communities.
  • Worker cooperatives: There are thousands of light industrial and manufacturing firms owned by soon-to-be retiring baby boomers. Public banks can make acquisition capital available to worker cooperatives to purchase these businesses.
  • Cannabis and reparative policies: The Illinois recreational cannabis industry is projected to grow into a $2 billion industry. A public bank can provide cannabis business revenue safe harbor while using the deposits to advance reparative investments in communities harmed by the war on drugs.

These are just a few proposals to help drive a racially just economy post-COVID-19. Most importantly, each one of these ideas solves social problems and creates returns for local stakeholders. By using public money to create money locally, public banks can reverse decades of racist disinvestment.

America is at an inflection point. We cannot return to the pre-COVID-19 economy. That economy — despite booming corporate profits and soaring stock prices — was using its invisible hand to choke the life out of Black and Brown communities. We don’t need more studies, investigative reports, or protests to know that private banks will not change.

Public banks are not uncommon. In addition to public banks in North Dakota and Alberta, nearly 40% of banks globally are publicly ownedGermany and Japan use their public banks to finance transformative infrastructure. In the United States, Sen. Bernie Sanders and Sen. Elizabeth Warren support them. Last year, Gov. Phil Murphy of New Jersey issued an executive order to create a public bank implementation board and California Gov. Gavin Newsom signed a bill authorizing cities and counties to charter public banks. Too many people and communities have been victims of bank excess and extraction. Banking is a utility and must be treated as such. (In Colorado, Sen. Jonathan Singer got a state opinion that public banks are already constitutional in CO, and several legislators are looking at sponsoring a bill this upcoming session – there’s great potential for TCO to lead and help accomplish something really big here.)

“Public problems require public solutions,” Felicia Wong of the think tank the Roosevelt Institute recently wrote. We cannot agree more. Illinois legislators can pass a bill allowing counties and cities to establish public banks, and Chicago can ask voters to amend the city’s charter to launch a public bank via referendum. Now is the time to establish public banks, and we don’t have a moment to waste.

  • A public bank isn’t financed from the state budget, but assets or potential assets the government holds, including:
    • existing deposits now in the major banks
    • existing investments that are not earning that much or are too risky and could be directed into a public banks instead
    • converting existing government revolving loan programs like CHFA (housing), water, and others; and
    • redirecting some of PERA’s investments, some of which are risky and not performing that well (fossil fuels, for example!)
  • Another source is of course revenue bonds, which in the present severe crisis may need to be very large to create enough lending to offset the recession The bonds would be low risk because the loans would be made for things that pay for themselves or are covered by existing taxes (see below).  Rep. Matt Gray will likely be of significant help and leadership on this after the November election because he’s a bond and public finance lawyer who can be very influential with other legislators and with bringing bankers on board or securing their neutrality.
  • Interest saved – for the public sector, low overhead and significant income its first year.  Colorado is so much bigger than a city, like Santa Fe, NM.  There a study, known as “Brass Tacks”, led by Dan Metzger, a Ph.D. physicist turned public banking expert, Nichoe Lichen, and others, and cost nothing, but showed that the bank would make a profit starting the first year, by refinancing the city’s bonds and thereby saving the interest and producing significant income for itself—$500,000 net profit the first year, and ~$5million by year five as I recall.  And it would have very low overhead, small staff, modest salaries, no ads, no branches, no ATMs, no fees to big banks, no dividends to pay to shareholders, etc., just like the Bank of North Dakota.
  • Earlier some legislators were concerned public banks are not legal under the Colorado constitution.  But with Rep. Jonathan Singer’s help we got a legal memorandum from Legislative Legal Services that concludes it’s “probably” legal, but makes a strong legal case for it, and adds that legislation for a public bank would carry a heavy presumption of constitutionality in its favor and opponents would have to prove it’s unconstitutional “beyond a reasonable doubt”, a very heavy burden to carry considering the strong case OLLS makes for it, including as a TABOR enterprise that gets around constitutional restrictions otherwise imposed by the TABOR amendment.