Sunday, December 9, 2012

Ellen Brown lectures on Public Banking in the land of Adam Smith

We who seek change in how our culture operates must admire Ms. Brown.  On one hand, she gets up every morning convinced she has discovered one of the best ideas in economics and has decided to use her considerable energy to promote it.  On the other hand, she has to see that in USA, only one state has managed to get a state-owned bank up and running effectively—and that state is out in the middle of freaking nowhere.  It takes a real leap of faith to come to the conclusion that you have seen the future while walking the streets of Bismarck, North Dakota.

Yet here she is, spreading her good news in Scotland—the country that gave us Adam Smith, after all.
DECEMBER 9, 2012
From North Dakota to Scotland

Exploring the Public Bank Option


The Royal Bank of Scotland (RBS) and the Bank of Scotland have been pillars of Scotland’s economy and culture for over three centuries. So when the RBS was nationalized by the London-based UK government following the 2008 banking crisis, and the Bank of Scotland was acquired by the London-based Lloyds Bank, it came as a shock to the Scots. They no longer owned their oldest and most venerable banks.

Another surprise turn of events was the triumph of the Scottish National Party (SNP) in the 2011 Scottish parliamentary election. Scotland is still part of the United Kingdom, but it has had its own parliament since 1999, similar to U.S. states. The SNP has rallied around the call for independence from the UK since its founding in 1934, but it was a minority party until the 2011 victory, which gave it an overall majority in the Scottish Parliament.

Scottish independence is now on the table. A bill has been introduced to the Scottish Parliament with the intention of holding a referendum on the issue in 2014.

Arguments in favor of independence include that it will allow the Scottish people to make decisions for Scotland themselves, on such contentious issues as having nuclear weapons in their seas and being part of NATO. They can also directly access the profits from the North Sea oil off Scotland’s coast.

Arguments against independence include that Scotland’s levels of public spending (which are higher than in the rest of the UK) would be difficult to sustain without raising taxes. North Sea oil revenues will eventually decline.

One way budgetary problems might be relieved would be for Scotland to have its own publicly-owned bank, one that served the interests of the Scottish people. True economic sovereignty means having control over the national currency, credit and debt.

The Public Bank Option

It was in that context that I was asked to give a presentation on public banking at RSA Scotland (the Royal Society of Arts) in Edinburgh on November 22nd. Among other attendees were a special adviser and a civil servant from the Scottish government. The presentation was followed by one by public sector consultant Ralph Leishman, Director 4-consulting, who made the public bank option concrete with specific proposals fitting the Scottish context. He suggested that the Scottish Investment Bank (SIB) be licensed as a depository bank, on the model of the state-owned Bank of North Dakota. Lively debate followed. more
Brown goes on to describe how North Dakota's Public Bank works in practice.  I have lived in North Dakota.  It requires actual courage to get out of the car because conditions are so harsh.  People who choose to live in such conditions while going to work at a bank that pays civil-service wages are culturally quite unique.  But Brown believes the numbers these tough westerners use to prove the soundness of their thinking.

Of course, maybe she is missing something obvious like...perhaps the reason only North Dakota has their Public Bank is that only there were conditions so harsh that the theological bullshit that keeps bankers in power becomes so ridiculously trivial compared the hazards of just getting to work.  Since those folks cannot afford to fight both the climatic reality of the high prairie and Predatory banking simultaneously, they choose to create a replacement for Predatory banking so they could survive.

Anyway, the Scotsman (which looks like a real newspaper / website with paid writers) dispatches a guy to cover Ms. Brown's presentation.  This is what he wrote.

Alf Young: Cashing in on state-owned banking

North Dakota's farming-based economy is doing rather well
Saturday 24 November 2012

AS THE debate over reform continues, one answer is to keep financial institutions in the public sector, writes Alf Young

Disturbing splits are emerging at the top of the Bank of England over how to reform our battered, post-crash banking system to ensure it doesn’t blow up again. In testimony this week to the parliamentary commission on banking standards, the Bank’s departing governor, Sir Mervyn King, called yet again for a more radical division of retail and investment banking actitivies than that envisaged by the Vickers Commission.

King, who leaves his post next summer, wants the Vickers ring-fencing proposals implemented now. But he also wants them reviewed in the light of experience, to determine “whether we need to go further”. But while King worries banks might run rings round regulators and burrow under any ring-fence, his deputy and the frontrunner to succeed him, Paul Tucker, is not convinced that full separation of retail and investment banking can ever be made to work.

The idea that, if retail banking could be made safe, the whole financial system would be insulated from the kind of shocks we saw in 2008, he told the commission is, in his view, “nonsense”. The whole economy could still be “blown up” by vast wholesale dealers and non-banks getting into trouble of their own. Tucker also disagreed with the Bank’s head of financial stability, Andy Haldane, that all loans and mortgages to individuals and all small business lending should be inside any ring-fence. He wants non-ring-fenced banks to still be able to lend to small businesses.

While MPs and peers on the commission were hearing such divergent views from the top people at the UK’s central bank on the scope for reforming our existing banking system, I was talking, in Edinburgh, to an American advocate of much more radical reform of our western banking landscape. Ellen Brown wants more governments to consider replacing large tracts of their private banking activity altogether – with new publicly-owned banks.

A Los Angeles-based attorney, Ms Brown is the author of Web of Debt and president of the Public Banking Institute (PBI). Banking, she argues, is not a market good or service. It’s a vital part of societal infrastructure which properly belongs in the public sector. And by taking it back where it belongs, states could regain control of that very large slice (up to 40 per cent) of every public budget that currently goes on interest charged to finance investment programmes through the private sector. Deficit reduction could get an enormous boost, by cutting out the profit-driven middle man.

Currently, only one American state owns its own depository bank. It’s been in existence since 1919 and was created by Norwegian and other immigrants, determined, through their Non-Partisan Alliance, to stop rapacious Wall Street money men foreclosing on their farms. Earlier this month, North Dakota voted three-to-two for Republican Mitt Romney, rather than Barack Obama. But, by law, in this sparsely-populated mid-western member of the union, all state revenues have to be deposited with the publicly-owned Bank of North Dakota (BND).

There are no bonuses, fees or commissions paid at BND. No advertising. No branches beyond the main office in Bismarck. The bank offers cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. This public bank underwrites municipal bonds, funds disaster relief and supports student loans. It partners with local commercial banks to increase lending across the state and pays competitive interest rates on state deposits. For the past ten years, it has been paying a dividend to this state, with a population of some 680,000, of some $30m (£18.7m) a year.

Intriguingly, North Dakota has not suffered the way much of the rest of the US – indeed much of the western industrialised world – has, from the banking crash and credit crunch of 2008; the subsequent economic slump; and the sovereign debt crisis that has afflicted so many. With an economy based on farming and oil, it has one of the lowest unemployment rates in the US, a rising population and a state budget surplus that is expected to hit $1.6bn by next July. By then North Dakota’s legacy fund is forecast to have swollen to around $1.2bn.

With that kind of resilience, it’s little wonder that twenty American states, some of them close to bankruptcy, are at various stages of legislating to form their own state-owned banks on the North Dakota model. There’s a long-standing tradition of such institutions elsewhere too. Australia had a publicly-owned bank offering credit for infrastructure as early as 1912. New Zealand had one operating in the housing field in the 1930s. Up until 1974, the federal government in Canada borrowed from the Bank of Canada, effectively interest-free.

Then there are the German Landesbanks, until some of them, led by WestLB, got caught up in an insatiable appetite for get-rich-quick financial exotica, and paid a heavy price. From our western perspective, we tend to forget that, globally, around 40 per cent of banks are already publicly owned, many of them concentrated in the BRIC economies, Brazil, Russia, India and China.

Ellen Brown cites academic studies showing that countries with high degrees of government ownership of banking were growing faster, up until the crash, than countries where banking is historically concentrated in the private sector. “So why aren’t states everywhere doing it?” asked one member of the audience on Thursday evening when the PBI president addressed an RSA-sponsored seminar on the theme “A Public Bank for Scotland?”

We may not have had any tradition of publicly-owned banking here in Scotland. But a Dumfriesshire minister did create the trustee savings bank movement in the 19th century, sadly launched on to the stock market in the 1990s when privatisation was all the rage. And our life assurance and building society sectors also first thrived on mutual principles. Now, thanks to force majeure, what’s left of Scotland’s two oldest commercial banks is now, predominately, owned by UK taxpayers.

Given the massive price we have all paid for our debt-fuelled crash, surely there is scope for a more fundamental re-think about what we really want from our banks and what structures of ownership are best suited to deliver on those aspirations? It’s a debate we’ve not yet had. The presumption remains that markets still know best. That central bankers and politicians squabbling over how best to ring-fence the animal instincts of commercial bankers is as good a guarantee as we’ll ever get that there won’t be another banking crisis a few years hence.

As we left Thursday’s seminar, I asked another member of the audience, someone with more than thirty years’ experience as a corporate financier, whether the concept of a publicly-owned bank has any chance of getting off the ground here. “I’ve no doubt it will happen,” came the surprise response. “When I look at the way our collective addiction to debt has ballooned in my lifetime, I’d even say it’s inevitable”. more

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