Publisher’s Column: Taibbi Vanquishes Vampire Squid

Jay Owen Reforming Global Finance, Community Development Solutions


Publisher’s Column:  Taibbi Vanquishes Vampire Squid 

This and other highlights of the Public Banking 2013 Conference now available for free viewing on the Public Banking Institute’s website here.

As one of the many people producing the Public Banking 2013 Conference, Conversation and TPP Forum, it was satisfying beyond measure to have public banking be the context as speaker after speaker provided powerful insights regarding our economy, government, banking and our very identity as Americans.  This national 3-day conference reminded us that public banking is the “big tent” that many of us believe is needed to both bridge the political spectrum and to unify Americans in support of building a more democratic economy with public finance serving the greater good and not simply those with capital to invest.  We are indebted to our many speakers who served us so well with their depth of knowledge, experience and sometimes charming approach.  Be sure to listen to their videos — I’m sure it’ll be inspiring!

Marc Armstrong
Executive Director
Public Banking Institute
[email protected]org

Public Banking 2013 Retrospective

Matt J. Stannard, Founder, Political Context, where this article first appeared

By any standards, the 2013 Public Banking Conference, held at beautiful Dominican University in San Rafael, California, was a success. In a political world where like-minded groups seldom converge on practical policy blueprints, it was an astounding success. Hundreds of committed attendees–Occupy activists, religious groups, labor, environmentalists, legal activists, journalists and progressive economists–came together for three days of heady conversations and inspiring presentations, and by all accounts, everyone left with something resembling a vision.

Understanding the socioeconomic context under which the Conference took place is useful in seeing why so many leading activists and scholars felt the imperative to attend. Whilecorporate profits soar, municipalities are dying. Governments bail out big banks and leave ordinary people out in the cold. An artificial scarcity permeates the public sector, a product of ideology and grab-and-go capitalism, and the deliberate starving of public services. The city of Philadelphia recently closed 23 public schools–not just failing schools, but successful ones. And, they opened their coffers for a $400 million prison. Budget cuts are making it harder for abused women to leave their abusers. The corporate media, in the words of Buzzflash-Truthout editor Mark Karlin, renders the poor, and really anyone outside of the corporate elite, voiceless, faceless. The reality is that you are not news; your existence is hardly worthy of note, with the obligatory exception of an occasional “gee it’s tough to live like this” profile of a “welfare mom” or person unemployed and looking for work for three or four years.

As far as economics is concerned, it appears that the only persons entitled to speak about financial policy options are those of the privileged class, and particularly those who have been enriched by the current system (including politicians).  Add to that at the ever present class of “journalistic punditry,” who if they are on national television (or major market local television stations) de facto belong to the entrenched wealthy.

Public Banking Institute Executive Director Marc Armstrong believes the stakes are higher than they have ever been. “‘Public finance’ has been wholly and completely taken over by private banks in each of our respective governing agencies,” he says. “This takeover has been so complete that no government or quasi-government institution has remained untouched by the investment banks, which use their blood funnel to vacuum up the cumulative interest that drains economies of necessary money supply.”

A consensus is emerging that “the era of Big Finance capitalism” must end–not as an ideological matter, but a practical one, as PBI Conference speakers Margaret Flowers and Kevin Zeese wrote in an essay published yesterday. The question, of course, is what practical steps citizens and collective bodies might take to ensure that the transition is smooth, democratic, and constructive. It is in this larger background that the Conference took place–a time when good people are desperately seeking solutions that are not only practical, but palatable—and not only to ordinary working people, but to the handful of genuinely conscientious people who’ve managed to gain positions of political and cultural leadership in a quite imperfect world.

“What impressed me about the conference was the very rapid growth of the public banking movement,” says Tim Canova, Professor of Law and Public Finance at NOVA Southeastern University and a strong voice for public banking. “I met activists from all corners of the country working at the local level to start public banks in their own communities.  This also reflects a growing consciousness of the political importance of credit and the historical role of public banking in efforts to achieve sustainable economic development.”

Public banking is not a new idea. Interest in the creation of state-run banks was spreading nationwide three years ago when John Nichols described the phenomena in the pages of The Nation. And, of course, the Bank of North Dakota has long been a model of sustainable economics in the midst of the chaos created by private capital. “In North Dakota, public debt is financed by its own public bank, allowing for interest to be paid back, in the form of lower taxes or increased public services, to the very people who pay the interest,” says Marc Armstrong. “North Dakotans have thrown off these supposed masters of finance, replacing them with public servants, working for the Bank of North Dakota, to further the interests of their people.”

In its simplest manifestation, a public bank is a democratically-run, fiscally transparent bank designed to serve community stakeholders rather than capital shareholders. The profits of public banks are returned to the public, whereas privately owned banks increase taxpayer costs through compound interest and are compelled to return profits to shareholders. Public banks issue credit at low-cost or no-cost to cities and states. Public banks can offer “bridges” to residential, agricultural, and public works financing, as the BND did during the Great Depression. BND also partners with the private sector, encouraging entrepreneurial startups and providing check-clearing, liquidity, and bond account safekeeping to private banks. PBI President Ellen Brown adds:

A new publicly owned bank would have a clean set of books, untainted by the Wall Street addiction to gambling in complex derivatives; and its profits would go back to the local government and community, rather than being siphoned off in exorbitant salaries, bonuses, and dividends. A publicly-owned bank could funnel credit where it is needed most, directly into the local economy.

Although this blueprint for public banks was the guiding vision of the Conference, several complimentary economic themes emerged from the vast array of speakers there. Rabbi Michael Lerner explained the Debt Jubilee movement. Margaret Flowers, Kevin Zeese, David Brodwin, Georgia Kelly, and Arthur Stamoulis held an important forum on the very disturbingTrans-Pacific Partnership, a threat not only to ideas like public banking, but to huge other sectors of public goods. OpEd News founder Rob Kall gave a rousing presentation on the general concept of bottom-up economics, while speakers like Gar Alperovitz and David Cobbshared their visions linking ideas like public banking to the larger vision of a participatory, sharing-oriented economy. Space and time do not permit a comprehensive review of the Conference, but Leilani Clark’s very accessible treatment of the Conference at Bohemian.comis worth reading. And interested wonks may read the entire Conference program here.

Rolling Stone economic crusader Matt Taibbi was perhaps the highest profile guest at the Conference. He joined Icelandic parliamentarian Birgitta Jonsdottir, PBI President Ellen Brown, and Alperovitz in a thoughtful discussion on the relationship between the corruption of the private financial sector and the promise of public solutions. He also made himself available forinterviews before and after that discussion. Last month, I had expressed some hope that, after attending the conference, Taibbi would move from criticizing big banks to endorsing public banking. During our walk to a reception on the day of Taibbi’s attendance, a few friendly conference attendees quietly explained to him the mechanics of the idea (although I’m sure he already knew a great deal about it). Discussions continued through the reception and after the public discussion that evening, and he seemed excited to be among so many like-minded folks, and genuinely reluctant to leave. His post-conference tweet demonstrated that he was sold on the idea. “Want to thank all the folks from the Public Banking institute for the event last night,” he tweeted. “- amazing time – an idea whose time has come.”

In between speakers, the PBI media team interviewed both attendees and movement leaders. The interviews and speeches were webcast by the Community Media Center of Marin team, and according to that organization’s director, hundreds watched the webcasts from their home computers.

Soft-spoken but surgically analytic, PBI President Brown was the intellectual center of the Conference. Brown’s work has been instrumental in building awareness of the economic and legal facets of public banking. This interview with Brown is informative, as were her presentations at the Conference. Brown continues her prolific work in an article published last week at Counterpunch, where she takes on the student loan crisis from a decidedly egalitarian (and practical) perspective:

Other countries make loans available to their students interest-free. For more than twenty years, the Australian government has successfully funded students by giving out what are in effect interest-free loans. They are “contingent loans,” which are repaid only if and when the borrower’s income reaches a certain level. New Zealand also offers 0 percent interest loans to New Zealand students, with repayment to be made from their incomes after they graduate.

Brown’s website is also up now for book orders for her new book, which premiered at the Conference, The Public Bank Solution.

Although participants left the Conference with a lot of inspiration and satisfaction, there was also wide recognition that more building remains to be done. “I believe we need to engage a larger diversity of people and especially younger people in discussions about how public banking would address the challenges in their own lives and their own communities,” Canova told me. “We also need to recognize that we are part of a much larger democracy movement that goes well beyond banking. The financial crisis and sick economy have revealed the rot in our politics, law, and institutions.  It has revealed that we have a broken democracy. The public banking movement must be at the vanguard of the movement to restore our democracy.”

Of course, there will be more PBI events in the future, and public banking is on the agenda at other conferences, such as GreenFest 2013, to be heldSept. 7-8 in Middlebury, Connecticut. Meanwhile, the real test will be whether interest in public banks continues to spread around the country, and whether activists can translate vision into genuine policy. New York Assemblywoman Sandy Galef recently proposed a state bank for New York, while other proposals continue to emerge, and strong voices continue to push for the idea to explode in the public fora.

Matt J. Stannard
PBI Media Director
Founder, Political Context

More Conference Reviews:

Banking without Banksters
Martin Berg, Alternet

Bravo to the  Public Banking Institute for suggesting an alternative vision of what banks are and for raising a basic question: what should a bank do, and who should it serve?

I attended the Institute’s recent conference, which drew activists and interested citizens from around the country to San Rafael, California, to hear about public banking and to brainstorm about ways to fund a new economy that creates a sustainable economy for all of us, since current government officials and bankers are doing such a lousy job at it.

The varied presentations included nuts and bolts sessions on the steps involved in developing a plan and pushing for a public bank, reports on worker-owned cooperatives across the country, as well as an eye-opening session on how the government has been  selling off our most gorgeous post offices, many built as part of the federal government’s robust effort to get the country back to work during the Great Depression – the Works Progress Administration.  continued here…

Public Banking– A Major Answer to the Progressive Question of What to Do in the Face of Corporatization of America

Rob Kall

I’m at the second annual conference on public banking. Last night over 600 attendees listened to Matt Taiibi, Ellen Brown, Birgitta Jonsdotter and Gar Alperovitz talk about funding the new economy.

The “new economy” means an economy that gets out from under corporatization of America, out from under corporate domination of the economy. 


Matt Taiibi told us about how, when he was covering John McCain’s presidential campaign, McCain came up with the phrase “drill baby drill,” and the campaign journalists covering him laughed at the idea. But Taiibi asked them if they knew what was actually the cause of the high gas prices that inspired McCain’s catch phrase. None of them, including Taiibi knew. That set Taiibi on a learning curve into the arcane world of modern finance. He pointed out how vulnerable these big banks are, how “nobody believes in these companies ability to be good companies…”

And when asked the question ” How much do we really need to know how bad it is?” he replied, ” Me personally, I only look at one little tiny thing at a time, otherwise I’d go crazy. People have outrage fatigue at this point””


Taiibi also mentioned that Eric Holder had an early history of excusing banksters– that when he worked for Clinton, he had written an opinion that would excuse prosecutors from going after big companies because of the effect on the companies– an opinion that is now used as a rationale for not prosecuting employees of these too-big-to-fail companies. 


Birgitta Jonsdotter, pirate party member of the Icelandic parlaiment, is a real rebel, who is playing an international role in shaking up the world’s response to big, bad banksters. She talked about how they prosecuted and jailed the banksters that took down the Icelandic economy, and then nationalized the banks. 


Ellen Brown announced her new book, The Public Banking Solution, which Jonsdotter says is “one of the most important books you can read this year. Brown talked about some of the reasons public banking offers so much potential at all public levels, down to municipal levels, and reported that there are legislative efforts under way in 20 states. But the number that grabbed me the most was the fact that 40%  of banks around the world are public banks– and many of them are in the BRIC countries which have weathered the recent economic storms much better than companies with private banks. China’s banks are 99% public owned, which makes it much easier for public companies, like the steel company doing the re-newal of the Golden Gate Bridge, to compete with US companies depending on private, higher cost financing. 

Gar Alperovitz talked about how already there is a taking back of the economy underway in the US, with 10 million workers employed by worker-owned companies and 130 million participating in different forms of co-ops. He pointed out how Elizabeth Warren’s suggestion that the Fed issue money to cover student loans at the same rate that too-big-to-fail banks get demonstrates how public banks could use money creation in powerful ways to make things change. 


I gave a talk at the meeting on Bottom Up Economics– discussing how bottom up can be seen as a value, that policies can be assessed based on whether they are top-down or bottom up, and that bottom up approaches like public banking are concrete ways to move our culture towards a kinder, more compassionate way of being, as Rabbi Michael Lerner, of Tikkun, described in his talk on the Jubilee– the idea that the old testament– in the torah, talks about forgiving all debts every fifty years. What a concept!


I had a chance to sit, before the conference, with Birgitta Jonsdotter, for about 90 minutes.  continued here…


Featured Article: Introduction to The Public Bank Solution

by Ellen Brown, JD

This book is a sequel to The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, first published in 2007 and now in its fifth edition. Since then, Lehman Brothers collapsed and took much of the global economy with it; debt and unemployment have soared; many local and national governments are on the verge of bankruptcy; public services have been slashed and public assets sold off; and the derivatives casino has shot up to the sort of notional values we used to consider imaginary.  In the latest affront, banks in Cyprus were instructed to confiscate the funds of their depositors, and we’ve learned that banks globally that are considered “systemically important” are being instructed to follow suit if necessary to keep their doors open.  All this has brought renewed attention to the banking crisis and a sense of urgency in finding solutions.
The Web of Debt looked at how the power to create money has been usurped by a private banking oligarchy, and how it can be restored to the people at the federal level. This book expands the focus to more local, grassroots alternatives for getting back the money power by owning some banks ourselves. To that end, it explores the considerable proven successes of the public banking model both historically and in the contemporary world.  The structure is as follows:

  • Section I looks at the train wreck looming in our current banking system, and compares that system with the various public banking models of the up-and-coming BRICs (Brazil, Russia, India and China).
  • Section II tracks the power struggle between public and private banks through history, going back 5,000 years.
  • Section III looks at the history of that struggle from the Federal Reserve through World War II. 
  • Section IV looks at developments after World War II.
  • Section V proposes contemporary public banking solutions—federal, state and local—and compares them to the alternatives: austerity, “bail ins,” and confiscation of savings and deposits, public and private.

To solve our crippling economic problems, we need some new approaches. By studying historical and contemporary models, we cansee what works, and formulate a practical plan for prosperity today.

Ellen Brown, JD, is the Chairman and President of the Public Banking Institute and author of Web of Debt and The Public Bank Solution.

Derivative Losses, Bad Bets, And Aggressive Assumptions Leave Detroit’s Pensions Massively Underfunded

Tyler Durden
Originally published in Zero Hedge

Late last week, Detroit’s emergency manager Kevyn Orr, outlined his plan to stop a disaster becoming a catastrophe in the slumping city. The initial suspension of payment on pension obligation bonds is just the start as Orr warns unsecured creditors may only receive up to 10 cents on the dollar as about $2.5 billion in general unsecured debt won’t be recovered. Rather incredibly, the city’s General and Police and Fire retirement systems have a combined underfunding of $3.5 billion made worse by “aggressive actuarial assumptions,” and “investing in risky development projects around the city and loans that will never be repaid.” Under more realistic assumptions the funding status of the two pensions drops from 83% and 100% to 65% and 78% and he notes that “if these pension funds’ assets had just been invested in a conservative way,” as opposed to the political and reach-for-yield driven extravagance, “they probably would be fully funded now.” The bottom line is not just creditor haircuts but,”significant cuts in accrued, vested pension amounts for both active and currently retired persons.”

The Truth is Mightier than the Squid!  Matt Taibbi Slays Vampire Squid with the Squid Sceptor — a giant pen! See videohere.

In this Newsletter

  • Hundreds Gather for Public Banking and Economic Justice
  • Other Public Banking 2013 Reviews
  • Featured Article:  Introduction to the Public Bank Solution
  • Derivatives Losses in Detroit
  • Upcoming Events (sidebar)
  • Public Banking in the News (sidebar)
  • Cost of Public Projects is Rising (sidebar)
  • The Peoples’ Bank (sidebar)

Hot off the press!  Order your copy today!

The Founders’ Circle will be announced in July.  To be a part of the Founders’ Circle, donors have provided $1K or more to the Public Banking Institute.  If you wish to be recognized as supporting public banking, please donate here.  If you prefer to mail a check, send it to:

Public Banking Institute
PO Box 2195
Sonoma, CA  95476

We’ll use it to pay the remaining $3500 in bills and to fund travel for this upcoming fall.  Thank you to the many people who have donated!

Public Banking Coalition Update:

Join in on the next monthly conference call:  Friday, July 12th, at 9am Pacific.  If you are new to this, simply register hereand you’ll be sent the information.  If you live in the San Francisco Bay Area and wish to be a part of getting a public bank started in any of the many chartered cities and counties, join the San Francisco Bay Area Public Banking Working Group for a 30-45 minute call atnoon pacific on the 1st and 3rd Tuesdayof every month.  We’ll be giving each other updates and coordinating as we work to create the first public bank in the SF Bay Area.  Register here.

Most Recent Archives on KPFA from the Public Banking Conference, June 2-4, 2013. Don’t miss the  6/19 broadcast on what’s happening with the US Postal Service.

Guns and Butter – June 19, 2013 at 1:00pm
“Art in New Deal Post Offices and Postal Banking in the USA” with Gray Brechin, Ying Lee and Jim Stauber

Guns and Butter – June 12, 2013 at 1:00pm
“The Trans Pacific Partnership Forum” with Georgia Kelly, Arthur Stamoulis, Margaret Flowers and Kevin Zeese

Guns and Butter – June 5, 2013 at 1:00pm
“End Corporate Rule: Move To Amend” with David Cobb


Upcoming Events

  • Jul 1, 5pm PDT (everyMondayPublic Banking Coalition Messaging call —Register here.
  • Jul 2, noon PDT (1st and 3rd Tuesdays of every month) — San Francisco Bay Area Public Banking Working Group call — Register here.
  • Jul 12 — FINAL! Public Banking Coalition “Get Organized” call — Register here.
  • Jul 24, noon PDT — NEW! Webinar — Understanding the Money and Banking System, Marco Vangelisti — Register here.
  • Aug 7-11Madison Democracy Conference (Ellen Brown, Marc Armstrong)
  • Sep 18-20, League of California Cities 2013 Conference and Expo in Sacramento, Public Banking Booth (Marc Armstrong, Ken Bukowski, and others), Volunteers needed for staffing (send email to[email protected]org)

For Ellen’s schedule, please see her blog.


Public Banking in the News

Web of Debt blog, “The Crime of Alleviating Poverty: A Local Community Currency Battles the Central Bank of Kenya,” Ellen Brown and Jamie Brown, June 28, 2013

Dollars & Sense, “Banking on the Public,” Abby Scher, June 26, 2013, “Courting Disaster Porn,” Scott Baker, June 26, 2013

Venture Beat, “State Crowdfunding and State Banking will Moot the JOBS Act,” Kevin Lawton, June 21, 2013, “Review of Bill Still’s Jekyll Island Movie,” Scott Baker, June 16, 2013

Dissident Voice, “Washington D.C. is starting to see the obvious,” Kevin Zeese and Margaret Flowers, June 12, 2013

North Bay Bohemian, “Direct Deposit” Leilani Clark, June 5, 2013

West Fair Online, “Assemblywoman Seeks a State Bank,” Bill Fallon, June 4, 2013

North Bay Business Journal, “Experts Explore Energy, Debt, Climates Challenges,” Gary Quackenbush, June 3, 2013

Between the Lines, “Cyprus Banking Bailout Plan Provokes Fears of Confiscation of Depositor Funds in US and UK,” Interview with Ellen Brown, April 3, 2013

Cost of Public Projects is Rising and Pain Will be Felt for Years
by Mary Williams Walsh
Originally published in New York Times DealBook.

States and cities across the nation are starting to learn what Wall Street already knows: the days of easy money are coming to an end.

Interest rates have been inching up everywhere, sending America’s vast market for municipal bonds, a crucial source of financing for roads, bridges, schools and more, into its steepest decline since the dark days of the financial crisis in 2008.

For one state, Illinois, the higher interest rates will add up to $130 million over the next 25 years — and that is for just one new borrowing. All told, the interest burden of states and localities is likely to grow by many billions, sapping tax dollars that otherwise might have been spent on public services.

The same concerns about rising rates that have buffeted the world’s stock markets recently have also affected the market for municipal bonds. The muni market, despite a modest rally on Wednesday, is headed for one of its worst months in years.

Much as home mortgage rates are making home buying a bit more costly as they rise, so, too, are the rates at which states and cities borrow money. Public officials — and taxpayers — may feel the effects for years. Perversely, the places with the greatest distress are likely to see their borrowing costs rise most.

Over the last few days Georgia, Philadelphia, the Metropolitan Transportation Authority in New York and others have delayed sales of new bonds, citing the precipitous plunge in prices that is driving up interest rates.

Gov. Pat Quinn of Illinois attributed the extra cost to the state’s failure to shore up its finances, particularly its rickety pension system. Illinois has the lowest credit rating of any state, and as interest rates rise they tend to rise fastest for the weakest borrowers.

“Borrowing money when you’re already in debt doesn’t seem like a good idea to me,” said Felicia Hill, a 44-year-old Chicago woman who wondered how the state could bear the rising cost. “I think it could have waited, when we have bigger problems in Illinois.”

The sell-off in the municipal bond market has followed the general rout in the overall bond market, which was set off when Ben S. Bernanke, the chairman of the Federal Reserve, indicated that the strength of the economic recovery might allow the central bank to pull back on its $85 billion-a-month bond-buying program earlier than anticipated.

The Fed was not buying municipal bonds, but the market reacted anyway. Investors expected interest rates to rise, and because prices move in the opposite direction, the values of the municipal bonds they already held dropped.

Investors apparently started selling, not wanting to be the last one out. That caused a flood of bond sales. For the week ended June 19, $3.368 billion flowed out of mutual funds that hold tax-exempt municipal bonds, according to the Investment Company Institute. The outflow for the previous week was $3.236 billion.

Such sell-offs tend to hit the municipal bond market hard because it has many individual investors who buy bonds to hold them, either directly or through mutual funds, rather than financial institutions that trade them quickly.

“The mutual fund’s customer has proven to be fickle in these volatile periods, and you get the sticker-shock effect,” said Chris Mauro, the head of municipal bond strategy at RBC Capital Markets. The trend starts to feed off itself and can last for a long time, he said. “As they liquidate, there’s pressure on the mutual funds to raise cash, which puts more selling pressure onto the market.”

Some analysts thought the sell-off was made worse by the actions of Detroit as it flirted with bankruptcy. The city’s emergency manager, Kevyn Orr, proposed inflicting severe losses on its bondholders earlier this month as he struggled to keep the city from declaring what would be the largest municipal bankruptcy in history. That prompted investors to sell Detroit bonds, and raised questions about whether Detroit’s approach could set an example that other distressed cities would follow.

Some local governments that had planned to issue bonds this week decided to wait and see whether the market improved. But Illinois was among those that could not afford to wait. It had been conserving money by delaying road maintenance and the building of new schools.

Abdon Pallasch, an assistant state budget director, cited in particular the risk of delaying reconstruction of the city’s commuter rail system in hopes of obtaining better rates on the bonds, which have a total value of $1.3 billion. He said service had been halted on the Red Line, Chicago’s oldest, inconveniencing 80,000 commuters a day.

Mr. Pallasch said that state finance officers had calculated the state’s $130 million market penalty by comparing the rate Illinois will pay on these bonds with the rates being paid on similar bonds issued by states with AA ratings. That, he said, was Illinois’s credit rating before the state’s pension problems boiled up.

Illinois has shortchanged its pension system for many years and has now fallen so far behind that it cannot catch up without diverting money away from other programs. Governor Quinn has tried several times without success to push pension overhauls through the legislature. Moody’s Investors Service downgraded the state’s credit to A3 in June, soon after one failed legislative effort, and Fitch went to A-, the equivalent in its ranking system.

Although those ratings are the lowest of any state, they are still several notches above junk grade.

Governor Quinn said that the state was paying an average interest rate on the bonds of 5.042 percent. He called on lawmakers to enact pension changes “byJuly 9, so we can stop the bleeding, prevent future downgrades and jump-start Illinois’s economy.”

Daniel Berger, senior market strategist for Thomson Reuters Municipal Market Data, said the pension-related downgrades cited by the governor were important factors but not the only ones.

He said that market conditions had driven the interest rate on a typical 10-year municipal bond up by more than one percentage point since the beginning of May. The rate for longer-maturity bonds were more than 1.25 percentage points higher.

“He’s ignoring the adverse market conditions,” Mr. Berger said.

Ben Strauss contributed reporting from Chicago.

This post has been revised to reflect the following correction:
Correction: June 28, 2013

An article on Thursday about the effect of rising interest rates on the municipal bond market, using information from an Illinois official, misstated that state’s credit rating from Moody’s Investors Service. It is A3, not A2.

The People’s Bank

By Abby Rapoport
Originally Published in The American Prospect

How did deep-red North Dakota end up with the nation’s most populist financial institution?

When the financial crisis struck in 2008, nearly every state legislature was left contending with massive revenue shortfalls. Every state legislature, that is, except North Dakota’s. In 2009, while other states were slashing budgets, North Dakota enjoyed its largest surplus. All through the Great Recession, as credit dried up and middle-class Americans lost their homes, the conservative, rural state chugged along with a low foreclosure rate and abundant credit for entrepreneurs looking for loans.

Normally one of the overlooked states in flyover country, North Dakota now had the country’s attention. So did an unlikely institution partly responsible for its fiscal health: the Bank of North Dakota. Founded in 1919 by populist farmers who’d gotten tired of big banks and grain companies shortchanging them, the only state-owned bank in America has long supported community banks and helped keep credit flowing. The bank’s $5 billion deposit base comes mostly from state taxes and funds. The money is leveraged so the bank can offer loans for local small businesses and infrastructure projects; the interest, rather than going to Wall Street banks, stays in the state. The Bank of North Dakota rarely makes direct loans; instead, when a community bank wants to give a sizable loan but lacks the capital, the state bank will partner on the loan and provide a backstop. Such partnerships help ensure that small-business owners, farmers, and ranchers can access lines of credit—and they strengthen community banks, which is why North Dakota has more local banks per capita than any other state.

During times of economic crisis, from the Great Depression to the Great Recession, the state bank has been essential to cushioning the blow for North Dakotans. It offers countercyclical support, meaning that in bad times, when credit starts to dry up, it plays an even bigger role in offering credit and helping struggling small banks make loans to good candidates. But the state bank has been good for North Dakota in another way you wouldn’t expect: It’s helped bolster the state budget. Since it became profitable in the 1940s, the Bank of North Dakota has returned more than $555 million to the state’s general fund.

North Dakota’s rosy financial picture can’t all be chalked up to the bank. An oil boom in the western part of the state has created thousands of jobs, and North Dakota’s housing prices were always low, so they never inflated to the dangerous levels other states saw. But policy experts like Sam Munger, the managing director at the University of Wisconsin-Madison Center for State Innovation, say that by offering partnerships and avoiding the risky practices of commercial banks, like subprime lending, the state bank was instrumental in keeping community banks healthy. “It’s partly because you have civil servants in charge,” he says, “rather than folks whose paychecks depend on how much money the bank makes in a quarter.”

To many Americans, of course, the idea that state governments should be running banks—that they can run them better—is anti-capitalist blasphemy. But in conservative North Dakota, the bank is so well established and popular that former U.S. Senator Kent Conrad, who’s 64, says he can’t remember a time when anyone seriously challenged it. Now, across the country, some policymakers and community groups want to follow North Dakota’s lead. Since 2009, lawmakers in more than 20 states have filed legislation to either start a state-owned financial institution or at least study the prospects. Most of the efforts have fizzled, but this year lawmakers in several states are cautiously optimistic they can turn their proposals into policy—creating, if not a full–functioning state bank, then at least the groundwork for one.

It won’t be easy; the idea is so unfamiliar that it strikes many as downright kooky, if not scarily socialistic. Times were different, opponents insist, when North Dakota founded its bank in 1919. But the hurdles faced by state-bank proponents a century ago were not altogether different from what they face today.

By the turn of the last century, North Dakota farmers knew they were getting cheated. Wheat dominated the state, and its growers were at the mercy of Minneapolis-St. Paul’s big banks and grain companies. Most Midwestern states were “economic colonies,” says Bill Pratt, a historian of the era at the University of Nebraska. “The empire was administered from the Twin Cities.” North Dakota farmers faced double-digit interest rates, while their cousins closer to the empire’s capital only had to pay a fraction of that. The loans almost always came due during the harvest, which forced farmers to sell more wheat when prices were cheapest. Making matters worse, just about every grain elevator along the railroad was operated by the big grain companies, which offered the same price and the same grade rating—always lower than the growers needed and wanted. The final insult: When the grain was weighed, the companies used a fan to blow on the pile, supposedly to remove dust. As an article in the Wyoming Star Tribune noted in 1921, “What actually happened was that the fan removed not only the dust but during the course of the year in some of the larger elevators, fifty thousand bushels of grain as well.”

Republican lawmakers who dominated North Dakota politics were in the pockets of the banks and grain companies, so the farmers got nowhere lobbying for reform. In 1915, they began to team up with former socialist organizers eager to create a viable political operation. Calling themselves the Non-Partisan League, they began to challenge Republicans in primaries. Enthusiasm for the NPL grew quickly; by the end of 1915, the group had 25,000 dues-paying members. After the 1916 elections, the group controlled the state house and governor’s office. “They kind of caught the old-style politicians by surprise,” Pratt says. By 1918, the NPL had taken the state senate as well and set about implementing a populist agenda, which included creating a number of state-owned institutions. At the top of the list, along with a state-owned mill, was a bank.

The idea was relatively simple: Sell $2 million in bonds to finance the institution, require municipalities to make deposits to the bank to keep it capitalized, and start helping farmers access credit at reasonable rates. A powerful Industrial Commission—made up of the governor, attorney general, and agriculture commissioner—would oversee the bank, as well as other state-owned projects the NPL was launching.

Trouble was, the NPL had lousy timing. By the time it came to power after the 1918 elections, World War I was over and a postwar recession was hitting American agriculture as demand dropped off. Meanwhile, the war had stoked right-wing nationalism and the communist revolution in Russia had successfully deposed the czar, heightening fears of “red” revolt in the U.S. It was not a propitious time for radical reform.

News of the Bank of North Dakota was greeted with suspicion and fear. “North Dakota Adopts Autocratic Socialism,” blared the front-page headline of one Montana newspaper. Media coverage was largely critical (except, of course, in the NPL’s paper, The Nonpartisan Leader). National papers were particularly free with comparisons to Bolshevism; The New York Times, which featured frequent stories on the bank, ran a piece in 1921 arguing that the NPL “dreamed of duplicating in at least a great section of this country what Lenin and Trotsky did in Russia.”

Assaults on the bank had serious consequences. To appease the state’s community banks, which worried about the competition, the Industrial Commission promised not to withdraw state funds that had already been deposited with local banks. Anti-NPL politicians forced an audit, filed an unsuccessful lawsuit, and by 1920 had repealed requirements that municipalities make deposits there. As a result, the bank had almost no liquidity. Its bonds weren’t selling, and it stopped honoring its checks.

The NPL’s political opposition, the Independent Voters Association, set out to kill the Bank of North Dakota for good in 1921. It floated a state referendum on the NPL’s state-owned programs, including the bank, and engineered a recall election for the Industrial Commission members. (The recall and referendum were innovations of the NPL, now being used against it.) The election resulted in the nation’s first recall of a governor, attorney general, or agriculture commissioner. But while voters dumped the bank’s commissioners, they surprised almost everyone and voted to keep the bank.

A decade later, North Dakotans would be grateful they’d stuck with their “socialist” bank. The 1932 election, as the Great Depression raged, brought a new wave of NPL leaders to power. With the agriculture community in crisis, the bank began actively helping farmers to repay loans. While many farms were foreclosed on, giving the Bank of North Dakota thousands of acres of land, bank leadership started innovative programs to help people buy back what was once theirs. It all offered North Dakotans a fresh view of their bank as a helpful state institution—working for the common good, bailing out folks in need.

Over the following decades, the bank became a noncontroversial part of the state’s financial landscape. It made the nation’s first federally insured student loan in 1967 and became a major source of college loans. When the next great economic crisis hit, the Bank of North Dakota once again was indispensible, responding to the credit and loan crisis of the 1980s by aggressively backstopping local bank loans and providing credit that farmers could not get elsewhere.

By the 1990s, the state bank had become a major collaborator with the community banks that once feared it. A new bank president, John Hoeven, sought to make the bank a driver of economic growth, starting many of the programs for