Tag Archives: New Jersey

Phil Murphy wins in NJ! Public Banking on the ballot and wins!

BREAKING: Phil Murphy wins New Jersey’s governor’s race. But it’s not only a win for Murphy, it’s also a win for Public Banks. As John Nichols of The Nation put it today, “Public banking is on the ballot today—not as the sort of statewide referendum issue … but in the form of a candidate who knows a thing or two about banking.”

Phil Murphy describes Public Banking as “the type of big thinking we need to get back on track.” He wants to do even more with a NJ state bank than the successful model of the Bank of North Dakota. “This is money that belongs to the taxpayers of New Jersey, so it should be invested in them.”

PBI’s Chair Emeritus Walt McRee says,

“Phil Murphy has distinguished himself not only in the race for New Jersey governor, but nationally as well with a policy innovation actually capable of turning the state’s economy around.”

Murphy’s win, as John Nichols says, could lead to a different way of talking about economic renewal nationally. PBI believes public banking is a non-partisan issue — conservatives and liberals alike embrace it as a solution for many of the problems facing our country. We are encouraged that so many candidates for office are putting Public Banking on their platform.

The Public Bank Option – Safer, Local and Half the Cost

Phil Murphy, a former banker with a double-digit lead in New Jersey’s race for governor, has made a state-owned bank a centerpiece of his platform. If he wins on November 7, the nation’s second state-owned bank in a century could follow.   

A UK study published on October 27, 2017 reported that the majority of politicians do not know where money comes from. According to City A.M. (London) :

More than three-quarters of the MPs surveyed incorrectly believed that only the government has the ability to create new money. . . .

The Bank of England has previously intervened to point out that most money in the UK begins as a bank loan. In a 2014 article the Bank pointed out that “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

The Bank of England researchers said that 97% of the UK money supply is created in this way. In the US, the figure is about 95%. City A.M. quoted Fran Boait, executive director of the advocacy group Positive Money, who observed:

“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are shockingly ignorant of where money actually comes from.

“There is in fact a ‘magic money tree’, but it’s in the hands of commercial banks, such as Barclays, HSBC and RBS, who create money whenever they make loans.”

For those few politicians who are aware of the banks’ magic money tree, the axiom that the people should own the banks – or at least some of them – is a no-brainer. One of these rare politicians is Phil Murphy, who has a double-digit lead in New Jersey’s race for governor. Formerly a Wall Street banker himself, Murphy knows how banking works. That helps explain why he has boldly made a state-owned bank a centerpiece of his platform. He maintains that New Jersey’s billions in tax dollars should be kept in the state’s own bank, where it can leverage its capital to fund local infrastructure, small businesses, affordable housing, student loans, and other state needs. New Jersey voters go to the polls on November 7.

That means New Jersey could soon have the second publicly-owned depository bank in the country, following the very successful century-old Bank of North Dakota (BND). Other likely contenders among about twenty public banking initiatives now underway include Washington State, which has approved a feasibility study for a state bank; and the cities of Santa Fe in New Mexico and Los Angeles and Oakland in California, which are exploring the feasibility of their own city-owned banks.

A Bank Is Not Simply an Intermediary

An article in City Watch LA critical of the idea of a city-owned bank observed that Los Angeles formerly had a bank that failed, closing its doors in 2003 due to insolvency. The argument illustrates the confusion over what a bank is and what it can do for the local government and local communities. The Los Angeles Community Development Bank was not a bank. It was a loan fund, and it was designed to fail. It was not chartered to take deposits or to create deposits as loans, and it was only allowed to lend to businesses that had been turned down by other banks; in other words, they were bad credit risks.

With a loan fund, a dollar invested is a dollar lent, which must return to the bank before it can be lent again. By contrast, as the Bank of England acknowledged in its 2014 paper, “banks do not act simply as intermediaries, lending out deposits that savers place with them.” A chartered depository bank can turn one dollar of capital into ten dollars in bank credit, something it does simply by creating a deposit in the account of the borrower. If the bank’s books don’t balance at the end of the day, it borrows very cheaply from other banks, the Federal Home Loan Banks, or the repo market. It borrows at bankers’ rates rather than retail rates, and that is one of the many perks that a publicly-owned bank can recapture for local governments. Borrowing from banks rather than the bond market actually expands the circulating money supply, stimulating the local economy.

Compelling Precedents

Public sector banks, while rare in the US, are common in other countries; and recent studies have shown that they are actually more profitable, safer, less corrupt, and more accountable overall than private banks.

This is particularly true of the Bank of North Dakota, currently the only publicly-owned depository bank in the US. According to the Wall Street Journal, it is more profitable than Goldman Sachs or JPMorgan Chase. The BND is risk-averse, lends conservatively, does not gamble in derivatives or put deposits at risk. It is able to lend at lower than market rates because its costs are very low.

The BND holds all of its home state’s revenues as deposits by law, acting as a sort of “mini-Fed” for North Dakota. It has seen record profits for almost 15 years. It continued to report record profits after two years of oil bust in the state, showing that it is highly profitable on its own merits because of its business model. It does not pay bonuses, fees, or commissions; has no high paid executives; does not have multiple branches; does not need to advertise; and does not have private shareholders seeking short-term profits. The profits return to the bank, which either distributes them as dividends to the state or uses them to build up its capital base in order to expand its loan portfolio.

The BND does not compete but partners with local banks, which act as the front office dealing with customers. It does make loans that community banks are unable to service, but this is not because the borrowers are bad credit risks. It is because either the loans are too big for the smaller banks to handle by themselves or the smaller banks cannot afford the regulatory burden of lending in rural communities where they get only a few loans a year.

Among other cost savings, the BND is able to make 2% loans to North Dakota communities for local infrastructure — half or less the rate paid by local governments in other states. The BND also lends to state agencies. For example, in 2016 it extended a $200,000 letter of credit to the State Water Commission at 1.75% and a $56,000 loan to the Water Commission to pay off its bond issues. Since 50% of the cost of infrastructure is financing, the state can cut infrastructure costs nearly in half by financing through its own bank, which can return the interest to the state.

If Phil Murphy wins the New Jersey governorship and succeeds in establishing a New Jersey state-owned bank, expect a wave of public banks to follow, as more and more elected officials come to understand how banking works and to see the obvious benefits of establishing their own.

 

 

Phil Murphy opens on Broadway

“People focus on the big companies a lot, but small businesses are the big employers in the state, and if you look at where we’re going to get employment going forward, it’s going to be small business more than anything else,” said Democratic gubernatorial hopeful Phil Murphy standing in the 18th Street Farm Fresh Market on Broadway.

“Look down Broadway. You don’t see Apple, you don’t see General Motors. These are small businesses, and they need leadership from the state.” – Phil Murphy

Murphy, the former ambassador to Germany under President Barack Obama, is coming off a commanding victory in the primary election in June. He doubled the number of votes of the next strongest performers, Assemblyman John Wisniewski and Jim Johnson, combined. He’s in full campaign mode, with the November elections coming up fast, where he will face Republican Kim Guadagno, who served as Lieutenant Governor under Gov. Christopher Christie.

Bayonne is a city of small businesses, unlike Hoboken, which is home to major corporations like Jet and Pearson, or Jersey City, with offices that house Advance Digital, Forbes, Mack Cali, and Murphy’s former employer, Goldman Sachs.

Murphy, who visited Bayonne on Friday, July 21, said, “Look down Broadway. You don’t see Apple, you don’t see General Motors. These are small businesses, and they need leadership from the state.”

Instead of Microsoft or Exxon Mobil, Broadway houses small businesses like Herbert’s Army and Navy store, Hendrickson’s Corner, and Garden State News. “You don’t see places like this anymore,” Murphy said at Garden State News, which provides perhaps the widest selection of print news and magazines in town. “I love it.”

Half-banked

Murphy is not known as a progressive thought leader, but rather, by many, as another financier running for office. However, he brings both progressivism and finance to the table with an old idea from a populist uprising in North Dakota a century ago and adapted for modern capitalism –a public bank.

“You ask a small business person the reason you didn’t get bigger, what’s the reason your business failed, why you couldn’t get started to begin with; it’s invariably [lack of] capital,” Murphy said. “So one of our ideas is to start a public bank that the citizens would own. And one of the main lines of business would be lending money to small businesses through community banks. So we’d work with community banks, not compete with them. We want to get more capital to them and through them.”

A public bank would, in theory, funnel tax revenue through local community banks, such as Bayonne Community Bank, to provide loans and credit to small businesses and help fund small-scale infrastructure projects, while returning the profits from interest back into state coffers. It could be a more efficient way to lend than the current system, which relies heavily on a few multinational financial conglomerates and a shrinking number of community banks.

Skepticism about the idea abounds in the finance hub of New Jersey, which ranks dead last in fiscal health in an annual George Mason University Mercatus Center study. Meanwhile, North Dakota, which created its public bank in 1919, and remains the only state to ever have done so, ranks second.

Garnering support

Murphy is shoring up early support in Hudson County, a vital political battleground for any gubernatorial candidate. His tour through Bayonne was facilitated by Assemblyman Nicholas Chiaravalloti, Mayor James Davis, Bayonne Business Administrator Joe DeMarco, and members of the Bayonne City Council, who were on hand for the event.

“I think it’s great that he came out. Hopefully he can make an impact,” said City Council President Sharon Ashe-Nadrowski. “It’s not every day you get an opportunity like this.”

Mayor James Davis, who first met Phil Murphy before he ran for mayor, strongly supports his candidacy. Davis said the most vital policy decision Murphy can make as governor would be to create an equitable and stable school funding policy.

“The thing is, you have to turn around and make it fair for everybody,” Davis said. “I really believe that is going to be one of the staples of his administration. I think school funding is going to become fair for everybody in the state.” He’s confident that Murphy’s experience in finance will be an advantage. “I really believe that his fiscal prowess is going to be something that he is going to show in the first two years of his administration.”

Murphy has heavily criticized Christie’s school funding policies in the past, and said on Friday that more resources need to be dedicated to infrastructure improvements and public education to achieve fiscal health for communities across the state.

“The fact of the matter is, we haven’t had investment in public infrastructure,” Murphy said. “We’ve taken money from infrastructure, from public education. We haven’t really done much for small businesses over the past seven and half years.”

A Bank Even a Socialist Could Love

“Money is a utility that belongs to all of us,” says Walt McRee. McRee is a velvety-voiced former broadcaster now plotting an audacious challenge to the financial system. He’s leading a monthly conference call as chair of the Public Banking Institute (PBI), an educational and advocacy force formed seven years ago to break Wall Street’s stranglehold on state and municipal finance.

“This is one of the biggest eye-openers of my life,” says Rebecca Burke, a New Jersey activist on the call. “Once you see it, you can’t look back.”

This ragtag group—former teachers, small business owners, social workers— wants to charter state and local banks across the country. These banks would leverage tax revenue to make low-interest loans for local public works projects, small businesses, affordable housing and student loans, spurring economic growth while saving people—and the government—money.

At the heart of the public banking concept is a theory about the best way to put America’s abundance of wealth to use. Cities and states typically keep their cash reserves either in Wall Street banks or in low-risk investments. This money tends not to go very far. In California, for example, the Pooled Money Investment Account, an agglomeration of $69.5 billion in state and local revenues, has a modest monthly yield of around three-quarters of a percent.

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.

Wall Street banks have used shady financial instruments to extract billions from unsuspecting localities, helping devastate places like Jefferson County, Ala. Making the wrong bet with debt, like the Kentucky county that built a jail but couldn’t fill it with prisoners, can cripple communities.

Even under the best conditions, municipal bonds—an enormous, $3.8 trillion market—can cost taxpayers. According to Ellen Brown, the intellectual godmother of the public banking movement, debt-based financing often accounts for around half the total cost of an infrastructure project. For example, the eastern span of the San Francisco-Oakland Bay Bridge cost $6.3 billion to build, but paying off the bonds will bring the price tag closer to $13 billion, according to a 2014 report from the California legislature.

Public banks reduce costs in two ways. First, they can offer lower interest rates and fees because they’re not for-profit businesses trying to maximize returns. Second, because the banks are 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.

“It enables local resources to be applied locally, instead of exporting them to Wall Street,” says Mike Krauss, a PBI member in Philadelphia. “It democratizes our money.”

Legislators, Brown says, commonly object that governments “don’t have the money to lend.” But this misunderstands how banks operate. “We’re not lending the revenues, just putting them in a bank.” That is, the deposits themselves—in this case tax revenues—are not what banks loan out. Instead, banks create new money by extending credit. Deposits simply balance a bank’s books. Public banks, then, expand the local money supply available for economic development. And while PBI has yet to successfully charter a bank, there’s an existing model in the unlikeliest of places: North Dakota.

During the Progressive Era, a political organization of prairie populists known as the Nonpartisan League took control of the state government. In 1919, they established the Bank of North Dakota. It has no branches, no ATMs, and one main depositor: the state, its sole owner. From that deposit base, BND makes loans for economic development, including a student loan program.

BND also partners with local private banks across the state on loans that would normally be too big for them to handle. These loans support infrastructure, agriculture and small businesses. Community banks have thrived in North Dakota as a result; there are more per capita than in any other state, and with higher lending totals. During the financial crisis, not a single North Dakota bank failed.

BND loans are far more affordable than those from private investors. BND’s Infrastructure Loan Fund, for example, finances projects at just two percent interest; municipal bonds can have rates roughly four times as high. And according to its 2015 annual report, the most recent available, BND had earned record profits for 12 straight years (reaching $130 million in 2015), during both the Great Recession and the state’s more recent downturn from the collapse in oil prices. A 2014 Wall Street Journal story described BND as more profitable than Goldman Sachs. Over the last decade, hundreds of millions of dollars in BND earnings have been transferred to the state (although the overall social impact is somewhat complicated by the bank’s role in sustaining the Bakken oil boom).

The long march through the legislatures

Brown founded the Public Banking Institute in 2010, after years of evangelizing in articles and books such as The Web of Debt: The Shocking Truth About Our Monetary System and How We Can Break Free. Since then, by Walt McRee’s estimate, around 50 affiliated groups have sprouted up in states, counties and cities from Arizona to New Jersey.

“I’ve been working against the system all my life,” says Susan Harman of Friends of the Public Bank of Oakland. “I think public banking is the most radical thing I’ve ever heard.” Harman, a former teacher and a onetime aide to New York City Mayor John Lindsay, helped get the Oakland City Council to pass a resolution last November directing the city to determine the scope and cost of a feasibility study for a public bank—a tiny yet promising first step.

A feasibility study completed by Santa Fe, N.M., in January 2016 found that a public bank could have a $24 million economic impact on the city in its first seven years. A resolution introduced last October would create a task force to help the city prepare to petition the state for a charter. “It’s the smallest municipality investigating public banking,” says Elaine Sullivan of Banking on New Mexico, who hopes the task force could complete its business plan by the end of the year. “We’re interrupting the status quo.”

In February 2016, the Philadelphia City Council unanimously voted to hold hearings discussing a public bank. Advocates are now working with the city treasurer to find funds to capitalize the bank.

PBI has faced a rougher path in state legislatures. In Washington, state Sen. Bob Hasegawa (D) has introduced a public banking bill for eight straight years. Despite numerous co-sponsors, the bill can’t get out of committee. Efforts in Arizona and Illinois have also gone nowhere. California Gov. Jerry Brown (D) vetoed a feasibility study bill in 2011, arguing the state banking committees could conduct the study; they never did.

One overwhelming force opposes public banking: Wall Street, which warns that public banks put taxpayer dollars at risk. “The bankers have the public so frightened that [public banking] will destroy the economy,” says David Spring of the Washington Public Bank Coalition. “When I talk to legislators, some are opposed to it because ‘it’s for communists and socialists.’ Like there are a lot of socialists in North Dakota!”

In Vermont the financial industry fought a proposed study of public banking, says Gwen Hallsmith, an activist and former city employee of Montpelier. “We don’t have branches of Bank of America or Wells Fargo in Vermont, but they have lobbyists here.” So Hallsmith got the study done herself, through the Gund Institute at the University of Vermont. It found that a state bank would boost gross domestic product 0.64 percent and create 2,500 jobs.

The state eventually passed a “10 percent” program, using 10 percent of its cash reserves to fund local loans, mostly for energy investments like weatherizing homes. Meanwhile, Hallsmith helped push individual towns to pass resolutions in favor of a state bank— around 20 have now done so. Hallsmith says her advocacy came at the expense of her job; the mayor of Montpelier, in whose office she worked, is a bank lobbyist. Hallsmith now coordinates a citizen’s commission for a Bank of Vermont.

Because of state resistance, PBI has encouraged its supporters to go local. And several issues have emerged to assist. For instance, environmental and indigenous activists have demanded that cities move money from the 17 banks that finance the Dakota Access Pipeline. But therein lies another dilemma: Who else can take the money? Community banks and credit unions lack the capacity to manage a city’s entire funds, and larger banks are better equipped to deal with the legal hurdles involved in handling public money. So divesting from one Wall Street bank could just lead to investing in another.

A public bank could solve this problem, either by accepting cities’ deposits or by extending letters of credit to community banks to bolster their ability to take funds. Lawmakers in Seattle have floated a city- or state-owned bank as the best alternative for reinvestment, and Oakland council member Rebecca Kaplan has connected divestment and public banking as well.

Another opportunity arises with marijuana legalization initiatives. Because cannabis remains illegal at the federal level, most private banks are wary of working with licensed pot shops, fearing legal repercussions. This means many of these shops subsist as all-cash businesses. “It’s seriously dangerous; people arrive in armored cars to City Hall to pay taxes with huge bags of money,” says Susan Harman. In Oakland and Santa Rosa, Calif., public banking advocates are partnering with cannabis sellers to offer public banks as an alternative, which would make the businesses safer while giving the banks another source of capital.

While Donald Trump hasn’t formally introduced a long-discussed infrastructure bill, his emphasis on fixing the nation’s crippling public works has also bolstered the case for public banking. Ellen Brown maintains the country could save a trillion dollars on infrastructure costs through public-bank financing. That’s preferable to Trump’s idea of giving tax breaks to public-private partnerships that want big returns.

From the Great Plains to Trenton

“All it’ll take is the first domino to fall,” says Shelley Browning, an activist from Santa Rosa. “Towns and cities will turn in this direction because there’s no other way to turn.” And PBI members think they’ve found an avatar in Phil Murphy, a Democrat and former Goldman Sachs executive leading the polls in New Jersey’s gubernatorial primary this year.

Murphy has made public banking a key part of his platform. “This money belongs to the people of New Jersey,” he said in an economic address last September. “It’s time to bring that money home, so it can build our future, not somebody else’s.”

Derek Roseman, a spokesman for Murphy, tells In These Times that Bank of America holds more than $1 billion in New Jersey deposits, but only made three small business loans in the entire state in 2015. Troubled state pensions could help capitalize a state-owned bank, and would earn more while paying lower fees.

Murphy’s primary opponent, John Wisniewski, chaired the Bernie Sanders campaign in the state, while Murphy raised money for Hillary Clinton. Some believe Murphy is simply using public banking to cover his Wall Street background—and on many issues, Wisniewski’s policy slate is more progressive. But Brown thinks Murphy’s past primed him to recognize public banking’s power: “It’s always the bankers who get it.”

The first new state-owned bank in a century, chartered in the shadow of Wall Street, could shift the landscape. What’s more, blue-state New Jersey and red-state North Dakota agreeing on the same solution would highlight public banking’s biggest asset: transpartisan populist support. “We have Tea Partiers and Occupiers in the same room liking public banking. What does that tell you?” asks PBI’s Mike Krauss.

“Regardless of declared conservative or progressive affiliations,” says state Sen. Hasegawa, “regular folk … almost unanimously grasp the concept.” He is working with Washington’s Tea Partybacked treasurer, Duane Davidson, to advance public banking. “I go to eastern Washington, … they get the whole issue about independence from Wall Street and corporate control.”

In fact, Krauss is himself a Republican. “The biggest thing going on in America, people decided we don’t have any control anymore,” he says. “Whether it’s Bernie’s people or Trump’s people, they’re articulating the same thing but differently. … They want control of their money—and it is their money.”

 

What a State-Owned Bank Can Do for New Jersey

Phil Murphy, the leading Democratic candidate for governor of New Jersey, has made a state-owned bank a centerpiece of his campaign. He says the New Jersey bank would “take money out of Wall Street and put it to work for New Jersey – creating jobs and growing the economy [by] using state deposits to finance local investments … and … support billions of dollars of critical investments in infrastructure, small businesses, and student loans – saving our residents money and returning all profits to the taxpayers.”

A former Wall Street banker himself, Murphy knows how banking works. But in an April 7 op-ed in The New Jersey Spotlight, former New Jersey state treasurer Andrew Sidamon-Eristoff questioned the need for a state-owned bank and raised the issue of risk. This post is in response to those arguments, including a short refresher on the stellar model of the Bank of North Dakota (BND), currently the nation’s only state-owned depository bank.

Which Is Safer, a Public Bank or a Private Bank?

Sidamon-Eristoff warns, “[W]e need to remember that a public bank would be lending the state’s operating cash balances – we’re not talking about an enormous pool of unused, unencumbered cash – and that any repayment shortfalls or liquidity restrictions could potentially impact the availability of funds for employee salaries and other regular operating expenses.”

As the Bank of England recently confirmed, however, banks do not actually lend their deposits. The deposits at all times remain in the bank, available for withdrawal. They are no less available to the state when deposited in its own bank than in Bank of America. In fact, they are more at risk in Bank of America and other Wall Street banks, which with the repeal of Glass-Steagall are allowed to commingle their funds. That means they can gamble with their deposits in derivatives and other risky ventures, something a transparent and accountable state-owned bank would not be allowed to do.

Today, government deposits are at risk in private banks for another reason. Banks across the country are telling governments of all sizes that they can no longer provide the collateral required to fully protect these deposits while paying a competitive interest rate on them, due to heightened regulatory requirements. FDIC insurance covers only the first $250,000 of these deposits, a sum government revenues far exceed. The bulk of these deposits are thus left insufficiently protected against a banking collapse like that seen in 2008-09—something that is widely predicted to happen again.

In North Dakota, by contrast, state revenues are deposited by law in the state-owned Bank of North Dakota and are guaranteed by the state. The BND pays a competitive interest rate on these deposits that is generally at about the midpoint of rates paid by other banks in the state. The BND, in turn, guarantees municipal government deposits, which are generally reserved for local banks. Unlike in other states, where local banks must back public deposits with collateral to an extent that makes the funds largely unavailable for lending, North Dakota’s community banks are able to use their municipal government deposits to back loans because the BND provides letters of credit guaranteeing them.

The concern that a New Jersey state-owned bank might make risky loans can be obviated by limiting lending, at least initially, to the same sorts of loans the state makes now, using the same underwriting standards. Sidamon-Eristoff observes that “the state already maintains a comprehensive range of economic development, infrastructure finance, housing finance, and student assistance programs.” What financing through the state’s own bank would add is leverage. State and local governments routinely make loans through revolving funds, in which the money has to be there before it can be lent out and must come back before it is lent again. Chartered depository banks are allowed to leverage their capital into 10 times that sum (or more) in loans, acquiring the liquidity for withdrawals as needed from the wholesale markets (Fed funds, the repo market or the Federal Home Loan Banks). A bank with adequate capital will lend to any creditworthy borrower, without first checking its deposits or its reserves.  If the bank has insufficient reserves, it can borrow from a variety of cheap sources that are normally the exclusive province of the banking club, but that local governments and communities can tap into by owning their own banks.

That is one of the major benefits to the state of having its own bank: it can borrow very cheaply in the money markets. It can get the sort of Wall Street perks not otherwise available to governments, businesses, or individuals; and it is backstopped by the Federal Reserve system if it runs short of funds.  This is the magic that allows banks to be so profitable, and it is what makes a publicly-owned bank exceptionally useful at state and local levels of government.

Cutting the Cost of Infrastructure in Half

Consider the possibilities, for example, for funding infrastructure. Like most states today, New Jersey suffers from serious budget problems, limiting its ability to make needed improvements. By funding infrastructure through its own bank, the state can cut infrastructure costs roughly in half, since 50 percent of the cost of infrastructure, on average, is financing. Again, a state-owned bank can do this by leveraging its capital, with any shortfall covered very cheaply in the wholesale markets. In effect, the state can borrow at bankers’ rates of 1 percent or less, rather than at market rates of 4 to 6 percent for taxable infrastructure bonds (not to mention the roughly 12 percent return expected by private equity investors).  The state can borrow at 1 percent and turn a profit even if it lends for local development at only 2 percent—one-half to two-thirds below bond market rates.

That is the rate at which North Dakota lends for infrastructure. In 2015, the state legislature established a BND Infrastructure Loan Fund program that made $150 million available to local communities for a wide variety of infrastructure needs. These loans have a 2 percent fixed interest rate and a term of up to 30 years; and the 2 percent goes back to the State of North Dakota, so it’s a win-win-win for local residents.

The BND is able to make these cheap loans while still turning a tidy profit because its costs are very low: no exorbitantly-paid executives; no bonuses, fees, or commissions; very low borrowing costs; no need for multiple branch offices; no FDIC insurance premiums; no private shareholders. Profits are recycled back into the bank, the state and the community.

In November 2014, The Wall Street Journal reported that the BND was actually more profitable than the largest Wall Street banks, with a return on equity that was 70 percent greater than for JPMorgan Chase and Goldman Sachs. This remarkable performance was attributed to the state’s oil boom; but the boom has now become an oil bust, yet the BND’s profits continue to climb. In its latest annual report, published in April 2016, the bank boasted its most profitable year ever. The BND has had record profits for the last 12 years, each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on equity of a whopping 18.1 percent.

The BND Partners, Not Competes, with Local Banks

Sidamon-Eristoff argues that “a new public bank would inevitably compete against New Jersey’s private banks for routine business.” But the BND does not compete with private banks either for municipal deposits or for loans. Rather, it partners with local banks, participating in their loans. The local bank acts as the front office dealing directly with customers. The BND acts more like a “bankers’ bank,” helping with liquidity and capital requirements. By partnering with the BND, local banks can take on projects in which Wall Street has no interest, projects that might otherwise go unfunded, including loans for local infrastructure.

The BND helps local private banks in other ways. It acts as a mini-Fed for the state, providing correspondent banking services to virtually every financial institution in North Dakota. It offers secured and unsecured federal funds lines to over 100 financial institutions, along with check-clearing, cash management and automated clearing house services.  Because it assists local banks with mortgages and guarantees their loans, local banks have been able to keep loans on their books rather than selling them to investors to meet capital requirements, allowing them to avoid the subprime and securitization debacles.

Due to this amicable relationship, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks.  Indeed, it may be the BND that ultimately saves local North Dakota banks from extinction as the number of banks in the US steadily shrinks. North Dakota has more banks per capita than any other state.

Bolstering the State’s Budget

The BND also helps directly with state government funding as needed. Between 2009 and 2016, the BND retained its profits because the state did not need them and the bank needed the additional capital for its rapidly expanding loan portfolio. But in December 2016, Governor Jack Dalrymple proposed returning $200 million from the bank’s profits to the state’s general fund, to help make up for a budget shortfall caused by collapsing oil and soybean proceeds. Dalrymple commented, “Our economic advisers have told us there is no similar state in the nation that could have weathered such a collapse in commodity prices without serious impacts on their financial condition.”

The BND also served as a rainy day fund when the state went over-budget in 2001-02 due to the dot-com bust. The bank simply declared an extra dividend for the state, and the next year the budget was back on track: no massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no capital appreciation bonds at 300% interest.

Having a cheap and ready credit line with the state’s own bank can have similar benefits for New Jersey and other states. It can reduce the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks; allow the state to leverage its funds, expanding its current credit facilities without adding to the state’s debt burden; cut infrastructure costs nearly in half; and jumpstart the economy with new development,  new employment, and an expanded tax base.

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Ellen Brown is an attorney, founder of the Public Banking Institute, a Senior Fellow of the Democracy Collaborative., and author of twelve books including Web of Debt and The Public Bank Solution. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

 

Public banks help communities thrive. Why aren’t there more?

Since the 2008 financial crisis, the idea of creating a public bank has been proposed in dozens of states across the country. Cities including Santa Fe, Philadelphia, San Francisco, and Seattle are also exploring the option.

Progress has been slow and the only state so far to take concrete action is Vermont, which allows up to 10 percent of its cash balance to be used for lending and investments. But momentum has picked up with a proposal by Phil Murphy, a leading New Jersey gubernatorial candidate, for a public bank as a centerpiece of his economic platform. This proposal was received favorably by the state’s largest newspaper, The Star-Ledger.

New Jersey has approximately $12 billion of public funds invested in large banks such as Wells Fargo, Capital One and Bank of America. In 2015, Bank of America made only three small business loans in the state. Characterizing New Jersey as “the most under managed asset I’ve ever seen,” Murphy wants public deposits reinvested in the state. This plan is one component of Murphy’s broader objective to stabilize state finances and revive New Jersey’s reputation as an investment hub for technology and innovation.

Under this proposal, the state and potentially municipalities would deposit their revenues with the public bank. That capital would be leveraged into credit to support economic development and public investments. The bank would support community banks by acting as a secondary lender to help them compete with big banks. This, in turn, helps small businesses and local economies as community banks account for most small business loans.

The bank’s profits are returned to the state through dividends. The state could borrow at reduced or zero interest for projects such as infrastructure improvements. Interest payments and fees to private banks potentially double the cost of such government projects, according to Ellen Brown, founder of the Public Banking Institute.

Public banking is nothing new. It accounts for 40 percent of banking worldwide. Infrastructure investment funds are already used in more than 30 states nationally. But currently the only public bank in the U.S. is the Bank of North Dakota (BND), which has operated for almost 100 years. Following the 2008 crisis, North Dakota had the lowest national default and unemployment rates and was the only state reporting major surpluses. The bank’s success has inspired public bank proponents.

BND’s success model includes prudent management, insulation from political influence, and a supporting role on behalf of local financial institutions. It wisely avoided subprime lending. The bank’s state-appointed advisory board consists of finance experts, its executives are experienced bankers, and routine lending decisions are made by professionals.

Most BND loans originate from community banks and credit unions. Over the last decade the bank has reported record earnings, with more than $130 million in earnings and an impressive 18 percent return on investment in 2015. According to a 2011 study, two-thirds of the bank’s profits were returned to the state over a 35-year period and it responds more quickly during natural disasters then the federal government.

BND primarily services government agencies and local financial institutions. It deals directly with customers in only limited circumstances, such as student loans (the bank issued the nation’s first federally-insured student loan in 1967. Accordingly, the bank functions as a partner, not competitor, with community banks. For example, in addition to providing liquidity and secondary lending, BND provides letters of credit that allow local banks to accept deposits and manage funds for municipalities and counties.

Consequently, public banking can act as a counterweight against too-big-to-fail consolidation. Ever since the Riegle-Neal Act of 1994 allowing interstate banking, consolidation has increased dramatically. This trend only accelerated following the 2008 financial crisis. Since 1996, the number of banks nationally has declined from 11,454 to 5,170. More troubling, the seven biggest banks control 56 percent of all industry assets. This consolidation reduces competition and potentially increases systemic risk. It also explains why the bank lobby opposes public banks, employing “free market” rhetoric while benefiting from government largess.

The potential for public banks to counter big bank consolidation is multifaceted. In addition to providing an alternative depository for public funds and source of credit for public entities, support for community banking allows local financial institutions to compete with big banks. Competition and decentralization are worthy policy goals that contribute to stability. Indeed, North Dakota has the highest number of community banks per capita in the nation and weathered the 2008 crisis better than most.

The next governor of New Jersey will confront major economic challenges: slow growth, poor business climate, aging infrastructure, an underfunded pension system, and the reality of being the third-most indebted state in the nation. Under Gov. Chris Christie, the state’s credit rating has been downgraded a staggering 10 times.

In conjunction with other measures, a public bank could be part of the solution. The 2017 gubernatorial election may very well give Phil Murphy the opportunity to demonstrate that public banking works beyond North Dakota.

Douglas Singleterry is counsel at Vasios, Kelly & Strollo, where is specializes in civil litigation. He is co-author of the New Jersey Uniform Commercial Code and has served on the North Plainfield Borough Council since 2005. Zenon Christodoulou is a management consultant and adjunct professor at William Paterson Universitys Cotsakos School of Business.

PHIL MURPHY MAKES STATE BANK CENTERPIECE OF GUBERNATORIAL CAMPAIGN

Former Goldman Sachs executive also called for a higher minimum wage, tax breaks for those with lower incomes, and efforts to encourage high-tech.

Democratic gubernatorial candidate Phil Murphy delivering a major policy speech on the campus of the New Jersey Institute of Technology in Newark.
Democratic gubernatorial candidate Phil Murphy delivering a major policy speech on the campus of the New Jersey Institute of Technology in Newark.

Democratic gubernatorial hopeful Phil Murphy called for a sweeping revision of state economic policies during a major speech in Newark yesterday, saying New Jersey’s economy is now saddled with inequality after more than six years under Republican Gov. Chris Christie’s direction.

To help restore fairness for everyone, Murphy said the state minimum wage must go up, student-loan programs revamped, and tax breaks for the working poor expanded. But his most noteworthy proposal was a call for the creation of a state-owned public bank that would allow college students and small businesses to access loans at more equitable rates than those charged by profit-driven commercial institutions. Only one other state currently operates such a bank in the United States.

Murphy, a former Wall Street executive and ambassador to Germany under President Obama, also criticized tax breaks for major corporations that have become a hallmark of Christie’s tenure, saying the governor’s approach represents “outdated” economic thinking. If he becomes governor, Murphy said the state would invest more in cities, infrastructure, and higher education, even if it means hiking taxes on the wealthy and forcing big corporations to pay more by closing loopholes to bring in new revenue.

“We can no longer tolerate a zero-sum economy where some are able to succeed only because others have been left by the wayside,” Murphy said. “There is too much inequality (and) our economy is in a place you don’t want to be, profoundly unfair and flat as a pancake.”

Murphy’s speech, delivered on the campus of the New Jersey Institute of Technology, drew praise from several fellow Democrats and proponents of public banking. They said his plan to create such a bank in New Jersey is worthy of national attention. But Murphy’s economic agenda was also loudly criticized by state Republicans, and they predicted his ideas would bring on higher unemployment and increased taxes.

Christie has held firm since taking office in early 2010 to an economic strategy that has emphasized streamlining regulations and reducing a tax burden that the state’s business community has long blamed for holding back growth and investment. His administration has enacted more than $2 billion inbusiness tax cuts while also authorizing more than $6 billion in corporate tax incentives through the state Economic Development Authority.

But New Jersey’s economy has remained stuck in a trend of largely slow growth since the end of the Great Recession, and the unemployment rate has trailed the national average in recent months as the state has struggled to string together consecutive months with net job creation. Some of the economic wounds have also been self-inflicted, as Christie and Democratic legislative leaders have been mired in an ongoing stalemate over renewing the state Transportation Trust Fund, leading to a lengthy shutdown of state-funded road, bridge, and rail projects.

Christie will reach the end of his second term in office in early 2018 and cannot run a third time. With the governor now struggling to overcome extremely low approval ratings, most Democrats believe New Jersey voters will be unlikely to give Republicans another try when they go to the polls next year.

Murphy right now is the only official candidate in New Jersey’s 2017 gubernatorial contest, though Senate President Stephen Sweeney (D-Gloucester), Sen. Ray Lesniak (D-Union), Assemblyman John Wisniewski (D-Middlesex), and Jersey City Mayor Steven Fulop are among the high-profile Democrats who are expected to eventually join the race for the Democratic nomination. The field on the Republican side could include Lt. Gov. Kim Guadagno, Senate Minority Leader Tom Kean Jr. (R-Union), Assembly Minority Leader Jon Bramnick (R-Union), and Assemblyman Jack Ciatterelli (R-Somerset).

Murphy, during the speech yesterday, suggested investing more in infrastructure and the state’s cities would provide far more incentive for companies to relocate to New Jersey than a tax credit. He also said state colleges and universities need better funding to prevent high-school seniors from being the state’s “leading export.”

The Middletown resident also called for the organizing of an “innovation cabinet” that would be focused on getting New Jersey back into the lead when it comes to fostering new technology, and he stressed the need for the state to improve technology within government itself to be more responsive to innovators and entrepreneurs. Murphy also called for an increased minimum wage, gender-pay equity, tax credits for childcare and family caregivers, and an expansion of the state’s Earned Income Tax Credit for low-wage workers.

But he pitched the creation of a public bank in New Jersey as the cornerstone of his economic vision, holding up North Dakota’s state-owned bank as a model. Established by the North Dakota Legislature in 1919 in response to the rising interest rates that commercial banks were charging for agricultural loans, the public bank was seeded with $2 million in capital. As of last year, the bank had over $270 million in capital and 168 employees and had returned hundreds of millions of dollars in profits to the state’s general fund.

Local governments could borrow money for infrastructure projects at cheaper rates than those offered by Wall Street if New Jersey created a similar state-owned bank, Murphy said. It would also allow college students and small businesses to access capital without having to pay the high fees that sustain shareholder profits and exorbitant bank-executive bonuses.

Right now, the state deposits more than $1 billion in commercial banks, some located overseas, he said.  “This money belongs to the people of New Jersey, it’s time to bring the money home,” he said.      Pressed by reporters after the speech about how he would keep the proposed public bank from being used for the wrong purposes in a state known for its political corruption, Murphy said that could be accomplished through the drafting of the bank’s charter and the selection of its board members.

Walt McRee, national chairman for the nonprofit Public Banking Institute, has previously pitched New Jersey as a prime candidate for the nation’s next state-owned public bank. He praised Murphy’s proposal yesterday, calling it “bold” and “timely.”       “Phil Murphy has distinguished himself not only in the race for New Jersey governor, but nationally as well, with a policy innovation actually capable of turning the state’s economy around,” McRee said.

But several of Murphy’s economic policies put him at odds with the state business lobbying groups like the New Jersey Business & Industry Association, including calling for a higher minimum wage, earned sick leave, and the adoption of combined-reporting corporate-accounting policies that would make it harder for multistate corporations to shift profits to states with lower tax rates.

Rick Rosenberg, a spokesman for the state Republican Party, also criticized Murphy’s economic agenda, comparing it to policies enacted by former Democratic Gov. Jon Corzine. Corzine served one term in office before being unseated by Christie in 2009 at the onset of the economic collapse. Corzine and Murphy are both former employees of Wall Street-powerhouse Goldman Sachs.

“Phil Murphy has made it abundantly clear that he is hell-bent on resurrecting the same kind of failed big-government policies of the Corzine era,” Rosenberg said. “His plans for bloated government and job-killing regulations would bring us back to the days when New Jersey had the highest unemployment in the region, a government teetering on bankruptcy, and families and seniors paying the highest tax burden in the nation.”