Stop The Nonsense Talk About Public Banking

I find it interesting that a continuing objection to public banking is rooted in the fear that the funds deposited in these banks will not be cared for, or may be misappropriated, even though public banking is successful in many countries around the world and the Bank of North Dakota has been operating just fine for a century. What makes a bank safe is management controls.

Lack of controls encourages, even invites, risky behaviors. The repeal of Glass-Steagall, which provided controls for private banks, led to the collapse of private banks in 2007/08 as these banks turned into casinos, betting on junk portfolios, most often referred to as derivatives. So, the solution to securing good banking practices of a public bank is to write adequate controls into the legislation. This would include appointing people with banking experience to run the public bank as well as incorporating checks and balances with reviews by boards, commissions and legislatures.

If you fear public banking because of security reasons, you must also raise the same issues about private banks and remember that private and public depositor’s money bail them out when they fail. Written by Congress into the Dodd-Frank bill that replaced Glass-Steagall are provisions that the private banks can confiscate depositors money (called “haircutting”) to recapitalize the bank in case of bank failure. This means monies held in these banks not only by you and grandma, but also money from states, counties, cities and other government entities. How Dodd-Frank Made It Legal for Banks to Confiscate Funds During a Banking Crisis from the Epoch Times:

“Thanks to Dodd-Frank, if you happen to hold your money in a savings or checking account at a bank, and that bank collapses, it can legally freeze and confiscate your funds for purposes of maintaining its solvency.”

This has actually taken place elsewhere, as in Italy where depositors woke up one day to find out that their accounts had been totally or partially confiscated.This from the Italian site The Local (Man kills himself as bank failure wipes out savings)

The 68-year-old hung himself at his home in Civitavecchia, a port town near Rome, after the so-called “save banks” plan wiped out €100,000 in savings held at Banca Etruria, one of the four lenders included in the government rescue deal announced on November 22nd.

Similarly during the banking crisis in Cyprus on March 16, 2013 ( We’ve All Been Warned - the Cyprus “Bail-In” Model is coming to a Country Near You). The initial proposal was this:

“Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.”

The final deal was this…financially hanging depositors or having them commit suicide (below also from We’ve All Been Warned):

March 25, 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).

And if you think the Federal Deposit Insurance Corporation (FDIC) is going to bail out depositors, guess again. It has about $107 billion in assets (financed by the member banks). How far do you think that will go when those same banks, the so-called well-run private banks, are in the hole for trillions of dollars? What then of dealing with reimbursement demands of depositors? Each account made whole up to $250,000? You are dreaming.

[Note: When you give money to a bank you become a creditor. That means that the bank owes you X amount, i.e., your balance. The bank owes a lot of other entities money (like suppliers, contractors, etc.) but they are in a higher priority position to be paid back. They get paid first if the bank fails. You are at the end of the line of creditors with your miserable IOU (bank statement) in your sweaty hand as you stand in line outside the locked bank. Years later, if ever, and after the others have been paid, the remaining bank assets are apportioned to the depositors. Could be 7¢ on the dollar, or 25¢, or zero ¢ .]

Time to get serious about public banking and stop this nonsense about how great the private banking system is.

So I ask you to join in the vital conversation about public banking by offering your suggestions on the structural safeguards a public bank should have, so that at least government entity revenues* will not be threatened. Send your ideas to Sen Hasegawa at Bob.Hasegawa@leg.wa.gov. Remember also that a business plan containing most of the concepts about the management of a Washington public bank was to have been delivered by the Evans School of Business from the University of Washington. That plan has been delayed for over eight months.

*NB: Remember that the public bank of Washington will be created for for government entities not individual depositors. Low cost public banking for individual depositors could easily be provided by creating a postal bank nationwide such as proposed by the Campaign for Postal Banking.