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For A New Divestment Movement

ECON_public-banking_88Why public entities should not put money into private banks

Inspired by the anti-apartheid divestment movement of the 1980s, climate change activist groups spearheaded by 350.org are agitating for colleges, universities, and municipalities to refrain from investing in fossil fuel companies and develop new pension and other portfolios that keep public cash pools from financing environmental destruction. The environmental divestment movement seeks to hold institutions materially accountable, demanding that monetary decisions reflect environmental and economic justice.

The idea that public entities should use their budgets to promote the public good is worthy of emulation.  It’s time for state and local governments, public schools, and other public entities to divest from private banks, because, as the experiences of the last five years demonstrate, the practices of private banking are incompatible with the public good. Instead of feeding big, private banks, public entities need public banks: financial institutions owned by communities, serving the interests of those communities.

States and local governments currently use commercial banks to hold their operating capital. Governments spend hundreds of millions of dollars a year for these services—paying both fees and interest to feed the profits of private shareholders with no intrinsic stake in the local economies that fund their returns (or the salaries of bank CEOs). As Rich Moniak points out in his description of the Alaskan government’s banking contracts, “the state spends $1.7 million each year for these services. Of that, less than five percent stays in Alaska.” The budgetary policies of nearly every other state, and thousands of municipalities, tell the same story: Public entities finance big private banks with tax dollars and government trusts, thereby guaranteeing not only that private profit will govern the priorities of that money, but that the money will not return to the communities from which it came.

Of course, if the federal government hadn’t bailed out private banks in 2008, Alaska and nearly every other state in the union would have lost billions more, because the private banks “lost” it, causing massive long-term damage to our economy, and widespread misery to millions of people. That crisis didn’t need to happen. Globally, countries with strong public banking sectors generally have strong, stable economies. Publicly-owned banks in India, China and Brazil were integral in those countries’ weathering the banking crisis of 2008. Currently, public banks in Germany are funding that country’s investment in renewable energy.

Private banks’ primary mission is payoffs to their shareholders. Public banks’ primary mission is financing economic development in the localities whose citizens democratically own the banks. When private banks receive public money (tax revenues and rainy day funds), decision makers affiliated with those banks have incentives (in the form of bonuses) to divert those monies into speculative instruments and private foreign industries that compete with domestic industries. In contrast, decision makers at public banks, accountable to the people, leverage those same monies into local job creation. Large private banks have nearly ceased all lending to small businesses. Public banks lend to the local entities whose success is key to vibrant local economies.  A public bank returns more than income on investments to shareholders. The North Dakota experience suggests it can return massive funds–hundreds of millions over the course of a decade–into state general funds. It can stimulate local economies through its low-interest loans to small businesses, farms, and students.

Proposals for and interest in public banks is growing across the nation, as citizens from all political camps grow increasingly frustrated with private financial institutions’ tendency to tap and transfer the lifeblood of local communities. A new divestment campaign, one which calls for governments and their services to transfer their money to banks operated by and for the people, will compliment and hasten the transition to a new grass-roots economy.

The 2013 Public Banking Conference, taking place in Northern California this June, will bring together grassroots organizations and activists to get serious about directing our economies according to our values rather than the values of Wall Street and Congress. Now is the time to push a new divestment campaign and build new institutions to re-invest in communities and people.

The second annual Public Banking Conference will take place in San Rafael, California on June 2-4, 2013. 

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About Matt J. Stannard

Policy Director for Commonomics USA, longtime writer, speaker, and legal & policy consultant on economic justice and public deliberation.