How Would a Public Bank Work?

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The comment of the week this week comes in response to an interview with Michael Hudson, where Hudson proposes that a public bank would be a structural answer to the power of finance.

In the responses to this interview, viewer Barry Benjamin asks:

What are public banks? How are they started? How are THEY protected from greed and corruption? I am not against public banks, but I want to know as much or more about the public bank structure as I do when I put my money in any bank. Are credit unions something close to or going in the right direction towards a ‘public bank’?”

to which another viewer, Vijay Nayar, gives the following insightful answer:

The concept ‘public bank’ is vague, but limited, so it is best to define in terms of its limits.  One of the major limits that influence the behaviour of a bank is how accountability is determined.  That is, what is “success” and what is “failure” which is used to evaluate those that work and run the bank.

For private banks, “success” and “failure” are defined by the value of the shares for the stock-holder.  If a bank can manage to dupe people with savings accounts into having low interest rates, high interest on any loan they take, and for all risk to be on people rather than the bank, then that is “success”.  Nothing else matters, not joblessness, homelessness, lack of availability of credit, favouritism, nepotism, discrimination, etc.  The only times those things matter is if the public finds out, and has the power to do something about it.  If the public has no power, then they don’t matter.

For credit unions, “success” is defined by a vote of the account holders.  I use a credit union myself, and I get a vote because I’m an account holder.  Credit unions are non-profit, so increases in revenue result in expansion of services or increase in interest paid to the account holders.  The downside is that they are small and local.  They help people get homes, help small businesses, but they’ll never be able to tackle a large infrastructure project like a power plant, roads, etc.

For a public bank, “success” is defined by representatives who are accountable to the general public.  There are many ways of doing this:  you could make it part of the executive to be appointed by the president, you could make it a separate office to be voted for (like you vote for your Senator), or you could have the bank run on a set of principles that are public and may only be changed by voter propositions.  You can also do a combination of other ideas.

So why bother?  For one, you save money by not having to cater towards the CEOs and shareholders of big banks.  Two, it’s accountable to the public, if the result is not one of public benefit, you have a say to change it.  Three, loans can be made available for projects that are wildly beneficial, but private banks will not support due to lack of profit.  For example, starting an American electric car company would be hugely beneficial (once they break into economies of scale), but such a venture would only get maybe 3-5% profit, an option not palatable to big banks using speculative credit default swaps to net much more.

Remember when they started the TARP program?  The idea was to increase the safety for banks, so they would help increase asset liquidity, which would make loans available so people and businesses wouldn’t have to lay people off.  Well the banks just kept the money, people lost their homes, people lost their jobs.  Of course, that dropped demand, so that means businesses sell fewer products, and the process continues.

If we wanted to increase the availability of loans, a public bank could have increased the availability of loans on public terms we all accept.  It’s far more direct and efficient than begging and pleading with bankers to not pocket all the money we give them or use it to manipulate the very people we were hoping they’d help.”

What are your thoughts? Is a public banking option a feasible way to address the demands of the Occupy Wall St. Movements?

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