Public Banks for Public Works

Ellen Brown, J.D.The Pennsylvania Project &The Public Banking InstituteFriends Center, Philadelphia

October 18, 2014

Return to our populist roots: The Wizard of Oz as monetary allegory.

The prototype: the 1894 march of Coxey’s Army on Washington.

Frank Baum: editor by day, populist by night.

Coxey proposed two bills.

• Good Roads Bill: $500 million in legal tender U.S. Notes to construct roads.

• Non-interest-bearing Bonds Bill: state and local governments could issue interest-free bonds to borrow U.S. Notes from the federal Treasury.

Turned away at the Capitol steps.

The wizard was powerless.

But Baum was also a theosophist: You are what you believe.

We can have it all.

2008-09:

Only one state escaped the credit crisis—the only state with its own bank.

North Dakota also has: •the nation’s lowest unemployment rate•one of the lowest foreclosure rates•lowest default rate

Globally, 40% of banks are publicly-owned.

In North Dakota, it was not about socialism but state sovereignty.

The Bank of North Dakota model:

• Depository for all state revenues.• DBA of the state.• Partners with local banks. • $40M annual dividend; ROE of 17-26%.

Perks for the state

• Dividends and cheap credit lines replace rainy day funds.

• Prompt, efficient disaster relief ( ’97 Grand Forks flood)

• 40-50% savings on infrastructure

40% of the cost of public projects goes to interest.

Public Housing 77%

Drinking Water38%

Garbage Collection 12%

From Margrit Kennedy

For example . . .

Bay Bridge retrofit: principal, $6 billion;interest, $6 billion.

Bullet train: principal, $10 billion; interest, $9.5 billion

Without interest, California could be $72 billion richer.

General Obligation, Revenue, & other bonds, 2013

0%10%20%30%40%50%60%70%80%90%

100%

interest

principal

•$92 billion principal + $72 billion interest = $164 billion – nearly double.

New liquidity rules could cause interest rates to soar.

Compare Greece . . .

Another threat to state revenues: Dodd-Frank has replaced bailouts with “bail-ins.”

Even "secured" government deposits could be at risk.

• Blue line: FDIC fund• Green line: deposits• Red line: derivative

exposure, 5 largest banks

How to eliminate interest and protect public deposits?

Own the bank!

Where to find the money . . .Capital: $20M from rainy day fund or bond issue x 3% interest = $.6M cost of capitalDeposits: $200M - $20M reserve = $180M

x 0.3% interest = 0.54M cost of deposits

$180M invested in bonds earning 3% = $5.4M profit - $1.14M (cost of funds)Net profit: $4.26M (21%)

The magic of leverage

Projected ROE using pension funds @ 8%.

Capital: $20M from pension fund x 8% interest = $1.6M cost of capitalDeposits: $200M - $20M reserve = $180M x 0.3% interest

= .54M cost of deposits Invested in bonds earning 3% = $5.4M profit - $2.14M (cost of funds)Net profit: $3.26M (16.3%)

The magic of leverage

Minimal operating costs

• No bonuses, fees, commissions

• No high-paid CEOs• No need for buildings,

branches, tellers• No need to advertise

What if the state needs its deposits? The bank can borrow.

• Banks do not lend their deposits. They create deposits when they make loans.

• They balance their books by borrowing:– Fed funds @ 0.25%– Money market @ 0.15%

• Smaller banks can hold higher reserves

Projected ROE holding 30% in reserve.

Capital: $20M from surplus fund or bond issue x 3% interest = $.6M cost of capitalDeposits: $200M - $60M reserve = $140M x 0.3% interest

= .42M cost of deposits $140M invested in bonds earning 3% = $4.2M profit - $1.02M (cost of funds)Net profit: $3.18M (16%)

The magic of leverage

Projected ROE @30% reserve using pension funds.

Capital: $20M from pension fund x 8% interest = $1.6M cost of capitalDeposits: $200M - $60M reserve = $140M x 0.3% interest

= 0.42M cost of deposits $140M invested in bonds earning 3% = $4.2M profit - $2.02M (cost of funds)Net profit: $2.18M (11%)

The magic of leverage

Banking crises are making public banks more popular.

• Safer for depositors.• Countercyclical

lending.• Less corrupt, more

efficient, more profitable.

Twenty U.S. states have introduced bills for publicly-owned banks . . .

. . . and many municipalities are in active pursuit.

• Santa Fe, NM• Brunswick, GA• San Francisco, Ca• Philadelphia, PA• Pittsburgh, PA• State of Vermont• Boston, MA

• Reading, PA• Sonoma, CA• Mendocino, CA• Seattle, WA• Tacoma, WA• Chattanooga, TN• Collier County, FL

The door has been opened.It’s time to push through.

NPL Convention, ND

For more information – PublicBankingInstitute.org

EllenBrown.com