An excerpt of David Dayen’s new book, We Own the Future: Democratic Socialism—American Style, published by The New Press, was reprinted by The American Prospect. It is clear that we don’t need to hold back by the belief that fixing our financial system is too hard, or simply unheard of. On the contrary, there are plenty of ways to fix it, and clear examples to show us how. Read on for a glimpse at why Dayen sees public banking as a sensible and feasible solution to America’s broken banking system. For the full excerpt, visit https://prospect.org/economy/building-the-people’s-banks/.
A more radical solution would be a public bank that does more than take deposits from individuals. The Bank of North Dakota, established in 1919, has only one depositor: the state. Those deposits, mostly tax revenues that have yet to be paid back out in salaries or services, form the base from which the bank makes in-state loans for economic development, including infrastructure projects and a student loan program.
A public bank serves as a substitute not so much for private sector banks as for the $3.8 trillion municipal bond market. When state or local governments fund large-scale projects not covered by taxes, they generally either borrow from the bond market at high interest rates, or enter into a public-private partnership with investors, who often don’t have community needs at heart and slap already beleaguered municipalities with outrageous underwriting fees. A public bank can offer lower interest rates and fees, because it’s not a for-profit business trying to maximize returns. Second, because the bank is publicly owned, any profit flows back to the city or state, virtually eliminating financing costs and providing governments with extra revenue at no cost to taxpayers.
The Bank of North Dakota, for example, has earned record profits for fourteen straight years, during both the Great Recession and the state’s more recent downturn from the collapse in oil prices. Over the last decade, hundreds of millions of dollars in bank earnings have been transferred to North Dakota.
The objection that governments have no money to lend is spurious. Banks don’t lend out their deposits, but create new money by extending credit. The deposits simply balance a bank’s books. Public banks, then, expand the local money supply available for economic development.
Public banking and democratized investment vehicles could reimagine the role of finance as more than just blind profit seeking. A bank built to serve the public can channel its resources to actual public needs. It can give the American people a defined voice in the direction of their money. Instead of being at the mercy of financiers, they’d be participating in a fundamentally democratic process.
If you put these ideas together, you end up with something close to what academics Morgan Ricks, Lev Menand, and John Crawford proposed in 2018. They call it the FedAccount. The FedAccount would be a personal account for all individuals and businesses at the Federal Reserve, the same as what financial institutions already have with the nation’s central bank. The FedAccount would supply debit cards, direct deposit, online bill pay, and mobile banking. And post offices could serve as the retail storefront location for the enterprise.
Money that banks stash at the Federal Reserve earns the federal funds rate, not the infinitesimal rates Americans receive on their bank accounts. Banks instantly transfer funds to one another through their FedAccounts, a privilege that would be opened up to the rest of us. Because businesses would also have FedAccounts, that would curtail transaction fees for retailers and create a cheaper substitute for cash, available to all. And while personal bank accounts are only guaranteed through the FDIC up to $250,000, FedAccounts can never default, no matter how large the account balance, because the Federal Reserve prints America’s money.
This would obviously increase financial access and improve the payment system. It would also eat away at the giant deposit bases of the big banks, reducing their size and potentially their risk to the financial system. But most important, it would allow the Fed to more directly influence economic policy.
Rajiv Sethi of Barnard College has explained that profits from the Fed’s balance sheet—and it earned $65 billion in 2018—could be directly transmitted to Americans in times of recession, to create an immediate fiscal boost. The money would go directly to debtors to pay off their bills, instead of creditors who benefit from changes to interest rates, the Fed’s current policy tool. Because millions of people would have FedAccounts, the Fed’s balance sheet would grow even larger, with more profits to channel during economic downturns.
In other words, the people’s money would be put to work for the people. And while the authors of the FedAccount proposal restricted the Fed from direct consumer and business lending, you could envision that being added on. If you believe money is a public resource and not a privately supplied product, government allocation of credit takes on the role of sensible distribution of resources. The FedAccount could tie together all facets of a public bank, built with the public’s well-being at the forefront.
A bank built to serve the public can channel its resources to actual public needs. It can give the American people a defined voice in the direction of their money. Instead of being at the mercy of financiers, they’d be participating in a fundamentally democratic process.
Americans are currently stuck with a decrepit payment system, miscreant banks, interest-bearing bank accounts that bear no interest, and a financial sector that’s thoroughly unconcerned with their lives, as they push past the public to trade their way to fortunes. Cryptocurrencies like Bitcoin inspire such frenzy because people are looking for an alternative to a broken financial system.
The architecture for that alternative already exists. It exists in regulators armed with the power to segregate functions and promote public safety. It exists in enforcement agents who can identify risk and simply eliminate it for the public good. It exists in federal agencies and central banks with missions to facilitate economic activity and prevent public suffering.
It also exists in our history, layered with numerous triumphs by ordinary people over financial greed. Progressive-era activists demanded and brought public banking to North Dakota. After the Depression, a young prosecutor named Ferdinand Pecora used a Senate committee charged with studying the causes of the crisis to lay bare the rank corruption in the banking system, leading to landmark New Deal regulation that kept the country safe from runaway finance for fifty years. Activists reeling from Reverend Martin Luther King’s death fought for the Fair Housing Act and an end to redlining. The Community Reinvestment Act of 1977, another grassroots initiative, strengthened fair lending laws by requiring broad investment across low- and moderate-income communities. The Consumer Financial Protection Bureau began as a proposal in a magazine by a Harvard professor named Elizabeth Warren, and thanks to popular support it became the only agency in the federal government with a core mission to prevent financial scams. As Wells Fargo pursued its rapacious schemes, a group of tellers and line-level employees formed the Committee for Better Banks to expose it, which culminated in the resignation of CEO John Stumpf.
In short, we know how to fix finance. We have a shelf full of ideas for this purpose, and a demonstrated capacity to leverage people power to make them reality. The only missing ingredient to accomplish this is the political will that a reinvigorated left can generate. The progressive surge onto the House Financial Services Committee provides an opportunity. Now activists and policy makers must work together not to squander it, so finance is finally, permanently, put on a leash. Nothing could be more vital to rendering a more just and prosperous America.
For the full excerpt, visit https://prospect.org/economy/building-the-people’s-banks/.