A PUBLIC BANK FOR SAN FRANCISCO by Dr. Derek Kerr and Dr. Maria Rivero

(Westsideobserver.com May 2017)

During the early 1900s, North Dakota’s economy was based on agriculture, specifically wheat. Frequent drought and harsh winters didn’t make it easy to earn a living. The arduous growing season was further complicated by grain dealers outside the state who suppressed grain prices, farm suppliers who increased their prices, and banks in Minneapolis and Chicago which raised the interest rates on farm loans, sometimes up to 12%.

North Dakotans were frustrated and attempts to legislate fairer business practices failed. A.C. Townley, a politician who was fired from the Socialist Party, organized the Non-Partisan League with the intent of creating a farm organization that protected the social and economic position of the farmer.

The Non-Partisan League gained control of the Governor’s office, majority control of the House of Representatives and one-third of the seats in the Senate in 1918. Their platform included state ownership and control of marketing and credit agencies. In 1919, the state legislature established Bank of North Dakota (BND) and the North Dakota Mill and Elevator Association. BND opened July 28, 1919 with $2 million of capital.

Where does money come from? It’s created from nothing – by banks. Because of fractional reserve banking, banks can lend $10 for every dollar they hold. By charging interest on this fabricated money, banks extract much more than they lend. Since loans are marked as deposits, they can also be sold for cash. Meanwhile, governments collect taxes and deposit them in big banks. By serving as intermediaries, banks profit from investing this money or lending it. Instead of fostering community development, most bank loans benefit other financial institutions, insurance and real estate companies, hedge funds and corporate raiders. Cuts in federal housing and urban development grants have locked cities into the private banking system. Averse to raising taxes or cutting budgets, cities obtain private credit via municipal bonds or public-private deals that reward investors and can double the costs of public projects. Private banks monopolize a wealth-transfer mechanism that enriches their executives and shareholders at taxpayer expense.

The deregulation-enabled and fraud-driven banking crash of 2008, the $700 billion public bail-out, and Federal Reserve’s multi-trillion dollar rescue measures converted public dollars into private profits. Then emerged a sordid history of predatory loans, falsified mortgages, improper foreclosures, concealed liabilities and phony AAA securities that banks pitched, then covertly bet against. After profiteering from deception, big banks have grown larger, less accountable and at greater risk of collapse due to massive speculative trading. Trillions of dollars in risky but lucrative derivative deals circulate in proprietary Dark Pools. Although the 2010 Dodd-Frank bill prohibited bail-outs for bad derivative trades, insolvency can now trigger “bail-ins” whereby banks confiscate depositor assets. Meanwhile, an uninterrupted stream of public looting scandals has come to light, notably, rigging the London Interbank Offered Rate (LIBOR), the world’s benchmark interest rate, as well as currency exchange rates and municipal debt servicing auctions. These and a host of other violations yielded billions in pilfered profits despite billions in fines and settlements.

Supervisor Sandra Lee Fewer directed the Budget Analyst to re-assess the feasibility of a city-owned bank. Treasurer Cisneros will also have an opportunity to re-assess his stance. With the ongoing risks and predations of private banks, threats of federal cuts to sanctuary cities, and revenue losses from denying bank services to the cannabis industry, a public banking option is needed.”

One antidote for these abuses is to establish public banks. Their purpose is public interest – not private profits. Run as public utilities under public oversight, they take tax receipts deposited by governments. They provide credit for public projects and local businesses and return profits to General Funds. Run by salaried civil servants, there are no commissions for boosting loans or pursuing speculation. This alternate paradigm works for the Bank of North Dakota (BND), the nation’s only public bank. Founded in 1919 to support farmers who couldn’t get loans from commercial banks, it now finances infrastructure projects, and provides low-interest loans for students, farmers and public services. BND partners with local banks that lend to homeowners and small businesses. Over the past decade, it pumped some $300 million back into State coffers – one reason North Dakota was uniquely solvent during the financial crisis. In 2015, the BND’s Infrastructure Loan Fund offered 30-year loans – at 2% interest. Globally, 40% of banks are publicly-owned. Among US cities considering public banks are Oakland, Santa Fe, Philadelphia and Seattle.

San Francisco already has a template for public banking. In 2009, then-Supervisor John Avalos collaborated with Sociologist Karl Beitel, who went on to publish a monograph; “Municipal Banking: An Overview.” It showed how a public bank could recapture $68 million annually by purchasing the City’s short-term bonds. Pressed by soaring foreclosures and housing costs that displaced City residents, as well as the Occupy Wall Street and Move Your Money movements, in 2011 Avalos asked the City’s Budget and Legislative Analyst to research a City-owned bank. Harry Rose’s September 2011 report identified a major barrier: State law. Government Code section 27003 states: “a county shall not, in any manner, give or loan its credit to or in aid of any person or corporation.” However, a 6/21/13 City Attorney opinion concluded that as a charter city, San Francisco could establish its own bank. Ominously, State bills to create public banks (AB750 in 2011 and AB2500 in 2012) were vetoed or buried after opposition from the California Bankers Association, and the State Treasurer.

City Treasurer Jose Cisneros was guarded while testifying before the City Operations and Neighborhood Services Committee on 10/24/11. He admitted that the City deposited its funds with Bank of America, Wells Fargo, and Union Bank at a cost of $2.7 million/year. He emphasized his legal obligation to prioritize security, liquidity, and return, in that order, for City investments. There was no assessment of the security of City funds placed with Bank of America that co-mingles its $1 trillion in deposits with $70 trillion in derivatives. When such banks fail, the derivative claimants have “super-priority”, meaning that the City would get nothing. Cisneros vowed to adjust banking contracts to promote social responsibility.

In 2013, Cisneros asked UC Berkeley’s Goldman School of Public Policy to “recommend policy alternatives” to increase access to credit for home-buyers, small businesses, and non-profits. However, the 2014 analysis itself, titled Promoting Access to Credit, shows that he requested recommendations for “existing financial institutions in the City” – not a public bank. The analysis found that the City’s policy of “attracting firms, job creation and providing incentives for the tech sector…inevitably leads…” to rising commercial and housing costs.

Cisneros’ current Investment Policy keeps “social responsibility” subordinate to security, liquidity, and returns. However, his “social responsibility screen” steers City investments away from firearms producers, major polluters, and predatory lenders. A foe of predatory banking, Cisneros uses public bank-like tools to boost community financing. In 2008 he advanced the Bank On SF program that partners with credit unions and “responsible banks” to provide low-income residents with low-fee accounts. Last year he suspended Wells Fargo from the program for opening 2 million sham accounts nationwide. His Kindergarten to College program used City and philanthropic funds to open $100 savings accounts for over 18,000 kids. This March, he was pushed by the Board of Supervisors to divest from banks that sponsor the Dakota Access Pipeline. Why not open a public bank?

E-mails obtained from the City Treasurer’s Office since 2011 reveal wariness, skepticism, and defensiveness toward public banking – and its proponents. Inquiries from Avalos and associates were cautiously tracked by the Treasurer’s Legal Section. Correspondence between City and regional treasury officials expressed these concerns;

  1. Conflicts of Interest: Can bank governance be insulated from politics? Will politics influence what projects get loans, or how bad debts are collected?
  2. Complexity & Cost: Can the City provide the necessary expertise and start-up capital?
  3. Risk-Management: Would prioritizing economic development loosen loan standards and put public funds at risk?

The Public Banking Institute has answers to these questions. And on 4/11/17 Supervisor Sandra Lee Fewer directed the Budget Analyst to re-assess the feasibility of a city-owned bank. Treasurer Cisneros will also have an opportunity to re-assess his stance. With the ongoing risks and predations of private banks, threats of federal cuts to sanctuary cities, and revenue losses from denying bank services to the cannabis industry, a public banking option is needed.

Dr. Derek Kerr and Dr. Maria Rivero and were senior physicians at Laguna Honda Hospital where they repeatedly exposed wrongdoing by the Department of Public Health. Contact: watchdogs@westsideobserver.com

Share This Item
Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *