Like the gas & oil industry, the banking industry was teetering on the verge of collapse well before COVID-19. Many feel a recession worse than 2008 lies ahead. A public bank could insulate NM from the consequences. Read On.
Why Do We Need Public Banking? Because Wall St. Won’t Reform Itself & It Is on the Verge of Collapse… Again
From a piece in The Atlantic, “The Looming Banking Collapse:”
“Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed. You may think that such a crisis is unlikely, with memories of the 2008 crash still so fresh. But banks learned few lessons from that calamity, and new laws intended to keep them from taking on too much risk have failed to do so. As a result, we could be on the precipice of another crash, one different from 2008 less in kind than in degree. This one could be worse.”The Atlantic: “The Looming Banking Collapse”
The Atlantic does a detailed, deep dive into how Wall St. has again invested exorbitantly in risky ventures called “collateralized loan obligations” or CLOs. The article goes on to describe what a CLO is, how Wall St. has circumvented all efforts to contain their greed and resist extremely risky investments and how perilously close we are to a financial collapse worse than 2008. The Atlantic found that in December, “the Financial Stability Board estimated that, for the 30 ‘global systemically important banks,’ the average exposure to leveraged loans and CLOs was roughly 60 percent of capital on hand. ”
Just how risky are investments in CLOs? In a word: very. From The Atlantic:
So what sort of debt do you find in a CLO? Fitch Ratings has estimated that as of April, more than 67 percent of the 1,745 borrowers in its leveraged-loan database had a B rating. That might not sound bad, but B-rated debt is lousy debt. According to the rating agencies’ definitions, a B-rated borrower’s ability to repay a loan is likely to be impaired in adverse business or economic conditions. In other words, two-thirds of those leveraged loans are likely to lose money in economic conditions like the ones we’re presently experiencing. According to Fitch, 15 percent of companies with leveraged loans are rated lower still, at CCC or below. These borrowers are on the cusp of default.The Atlantic: “The Looming Banking Collapse”
The situation calls to mind George Santayana’s trenchant observation: “Those who cannot remember history are doomed to repeat it.” And The Atlantic points to exactly how little we have learned from 2008:
“The present situation is so dire in part because the banks fell right back into bad behavior after the last crash—taking too many risks, hiding debt in complex instruments and off-balance-sheet entities, and generally exploiting loopholes in laws intended to rein in their greed. Sparing them for a second time this century will be that much harder.”The Atlantic: “The Looming Banking Collapse”
The article outlines precisely how close we are to financial collapse. It injects significant urgency into the effort to create a NM State Public Bank. Click here to read more from The Atlantic about how the the private banking system could be on the verge of collapse.
Public Banking: A Financial Option that Works for You
So, what is a public bank?
“A public bank is a bank that is controlled by and principally funded by a government body rather than by private investors. In essence, it is an extension of the governing body that created it — state, county, or city government. The governing body for the bank deposits all its revenue, taxes, fees, and other earnings in the bank. In addition, it can borrow from their bank. The officers of the bank report to a board or commission defined by the charter of the bank so as to ensure freedom from conflicts of interest, commitment to follow sound banking principles, and service to the public interest. Further, a public bank does not pay exorbitant salaries and bonuses, and they have no advertising, no branches, no tellers, or ATMs, and they do not pay commissions or fees, making it very sound financially. “Banking On Colorado: “What Are Public Banks and How Could They Benefit Us”
In essence, instead of giving the state’s money to Wall St. so it can invest in risky foreign ventures without scrutiny and at extremely high risk, we invest state funds in a locally controlled public bank that then invests those funds in NM infrastructure, renewable grid development, expansion of commercial hemp production, development of local food systems, and other initiatives that benefit NM.
Public banking is not some wild extremist idea. A public bank has existed in North Dakota sine the 1930s and, as the article below describes, North Dakota has used their state deposits to create the US’s most stable state economy (oil and gas didn’t hurt). While the rest of the nation was reeling economically during 2007-2008 recession, North Dakota barely noticed, with car sales and housing construction booming.
“While dozens of states, including neighboring ones, have desperately begun raising fees, firing workers, shuttering tourist attractions and even abolishing holiday displays to overcome gaping deficits, lawmakers this week in Bismarck, the capital, were contemplating what to do with a $1.2 billion budget surplus.”New York Times: “A Placid North Dakota Asks, Recession? What Recession?’
Public banking is not some aberrant North Dakota institution. Throughout the world, about 20 percent of banks are publicly owned, with those countries with public banks suffering far less than the rest of the world during the recession.
So, if public banking is so good, why don’t we have more state public banks? I think we all know the answer to that question. Wall St. rakes in huge profits from state deposits. Those profits benefit the 1%, with big banks almost never investing in local small businesses. State public banks represent a serious threat to Wall St. There is the real prospect of one or two successful state banks causing other states to follow suit and even for Congress to consider a national public bank. Wall St. sees this as an existential threat, as well it should, and thus they have promulgated the usual alt-fact and fear-based campaign to cast doubt on the viability of public banking. We’ve seen in NM how the gas and oil industry can avoid regulation, fair leasing rates, and responsible penalties leaks. The power of the banking industry dwarfs that of gas and oil.
In a future post we will publish a second piece on public banking and the effort led by the Alliance For Local Economic Prosperity to bring a public bank to New Mexico. The time is ripe. If we are to insulate NM from future economic recession or worse, forming a state public bank should be the state’s highest priority. For more information on public banking, check out the resources below.
- “An Introduction to Public Banking,” From PublicBanking.org.
- “A Placid North Dakota Asks, Recession? What Recession?
- “The One Strategy that Could Finance the Entire Green New Deal,” from Fast Company.
The video below is quite good as the moderator, Kim Iverson, clearly “gets” the urgency of our need for a public bank, and Ellen Brown, one of the founders of the public banking movement and author of two tremendous books on the subject, is adept at laying out the ways in which private banks risk our futures for their profit.
In solidarity and hope,
Paul & Roxanne
Thank you Paul and Roxanne,
Keep sending videos. And the time is ripe for public banking!
I’m confused. Doesn’t a public bank still have to be a part of the Federal Reserve in order to clear checks and wires, etc.? The Fed charges for each of those transactions. The debt situation with banks has always been a HUGE problem, as well as their lack of reserves. They are only mandated to keep a small percentage in reserves and their FDIC insurance fund, to protect depositors, is very low compared with the Credit Union Share Insurance Fund. Very interesting. Hope to learn more about this public banking option and how it will work.
It should be noted that the Atlantic piece by Frank Partnoy (“The Looming Bank Collapse”) has received substantial criticism as to its estimates and conclusions, and not just from the ‘usual suspects’ such as the Wall Street Journal. A detailed reply to Partnoy’s article can be found at:
This piece is from Nathan Tankus, who is the Research Director of the Modern Money Network and who has published not only in the traditional financial press such as the Financial Times and Business Insider but also in such progressive outlets such as Truthout and the financial blog Naked Capitalism.