Banking for the People

When you read the Financial Crisis Inquiry Commission report released last week, it's hard to believe that not so long ago banks were downright boring. Citigroups, JP Morgans, Bank of Americas, and Morgan Stanleys weren't peddling worthless mortgage-backed securities so that Masters of the Universe could collect obscene bonuses. Instead--in response to the Great Depression and some common sense regulations--banks were mostly local, single outlets that collected deposits and made sensible loans.

But beginning in the 1970s, bipartisan public policy ushered in a new era of deregulation and consolidation. The argument was that behemoth banks would be safer, more sophisticated and efficient, save consumers money and support economic growth.

For the most damning evidence of just how wrong that argument is check out the lost wealth and wrecked lives of this Great Recession. The statistics on the size and wealth of today's banks are also very revealing: in 1995, small and mid-sized banks with assets up to $10 billion held 61 percent of all US deposits, today they hold only one-third. The Giant Banks--with over $100B in assets--had just 7 percent of US deposits in 1995, but today hold 44 percent. And despite the fact that small and mid-sized banks possess just 22 percent of all bank assets today, they nevertheless make a dramatic 54 percent of all small business loans. (In contrast, the largest 20 banks average $380 billion in assets and yet do just 28 percent of small business lending.)

This concentration of financial power is not only dangerous, it also fails to serve the needs of the real economy. Stacy Mitchell, senior researcher with the New Rules Project, says that examining the balance sheets of local and Giant banks reveals "two entirely different types of businesses." Local banks are still largely engaged in taking deposits and moving money into the community through the likes of mortgages and small business loans, while Giant banks take deposits and engage in speculative trading that privatizes profits, socializes costs, and exacerbates economic inequality.

"We're fortunate that the small banks are still out there, because if it weren't for them, a lot of the basic economic activity in our communities--the real source of jobs in our communities--would not have the financing that it needs," says Mitchell.

Indeed there are still about 8,000 credit unions and more than 7,600 community banks in the nation. The pressing question is: how do we support and grow these institutions, and return to a people-centered banking system that makes credit readily available and invests in our communities?

One possible answer is the State Bank movement.

The Bank of North Dakota was established in 1919. All state revenues are required by law to be deposited in the bank, and technically all assets of the state are also assets of the bank.

"That means it's got a huge deposit base and a huge capital base," says Ellen Brown, author of Web of Debt.

According to Brown, North Dakota has a huge surplus, the lowest default and unemployment rates in the country, and the most local banks per capita.

"The North Dakota State Bank has actually helped the local banks because they partner with them and provide capital," says Brown. "Local banks elsewhere in the country got sucked into the mortgage-backed securities situation where they would sell off their loans in order to have the capital to make more loans. That doesn't happen in North Dakota because the state bank stepped in and helped with capital needs."

State banks might also be helpful in confronting the budget crises faced by state and local governments. According to Brown, when President Obama proposed that the Fed help states just as it helped Wall Street when it made $12 trillion available through short-term loans and the purchase of toxic assets, the Fed said it wouldn't happen because that kind of activity is not part of the Federal Reserve Act.

But a state with its own bank could easily undertake such action, refinancing the deficit at zero percent interest (just as banks are loaning to one another for virtually nothing, while states are currently borrowing at an average rate of 4.7 percent!)

There are currently three states with bills pending to create state banks--Washington State, Illinois, and Oregon. Legislation to begin state bank feasibility studies is being considered in Hawaii, Virginia, and Massachusetts.

There's transpartisan support for the state bank movement. Barbara Dudley, Co-Chair of Oregon Working Families Party, says that allies on the Oregon state bank bill include small business associations, farmers, and Republicans. (In fact, a strong state bank bill is being introduced by a Republican from Eastern Oregon.)

"We need to get out of our stuck places in terms of thinking who it is that might be willing to think about these ideas and put them forward," says Dudley.

Jared Gardner, co-chair of Oregonians for a State Bank, also spends a good deal of his time listening to bankers and small business advocates, hardly your usual suspects in progressive fights. He says there is broad agreement on the need to reinvest in communities through these kinds of efforts.

"We have an economic leakage happening in our communities. Working people work really hard, and then we pay all of this interest out of our state," says Gardner. "If we can support a vibrant community banking system, then we will have more small business jobs, more jobs, and a healthier economy that responds to local needs."

Of course, achieving this will require constraining the size and limiting the power of big financial institutions. The Nation's national affairs correspondent William Greider notes that small banks typically don't want to disturb their relationships with the big banks "because in a pinch they can go to them for help through a tough moment...that's their life blood." On the other hand, Greider says this issue "goes to all of those institutions in the economy that either didn't know, and now know, or have been sulking for years about the advantages that the government hands out to certain institutions and not to others, and they are now on the table and visible. This politics is going to get stronger, I predict."

Indeed, this will be a tough and long fight to say the least. But the more people see the relationships between the US banking system and their concerns about jobs and the economy, their children's futures, and the state budget crises--the more people may be willing to organize and fight for this kind of systemic change.