Alf Young: Cashing in on state-owned banking

North Dakota's farming-based economy is doing rather well
North Dakota's farming-based economy is doing rather well
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AS THE debate over reform continues, one answer is to keep financial institutions in the public sector, writes Alf Young

Disturbing splits are emerging at the top of the Bank of England over how to reform our battered, post-crash banking system to ensure it doesn’t blow up again. In testimony this week to the parliamentary commission on banking standards, the Bank’s departing governor, Sir Mervyn King, called yet again for a more radical division of retail and investment banking actitivies than that envisaged by the Vickers Commission.

King, who leaves his post next summer, wants the Vickers ring-fencing proposals implemented now. But he also wants them reviewed in the light of experience, to determine “whether we need to go further”. But while King worries banks might run rings round regulators and burrow under any ring-fence, his deputy and the frontrunner to succeed him, Paul Tucker, is not convinced that full separation of retail and investment banking can ever be made to work.

The idea that, if retail banking could be made safe, the whole financial system would be insulated from the kind of shocks we saw in 2008, he told the commission is, in his view, “nonsense”. The whole economy could still be “blown up” by vast wholesale dealers and non-banks getting into trouble of their own. Tucker also disagreed with the Bank’s head of financial stability, Andy Haldane, that all loans and mortgages to individuals and all small business lending should be inside any ring-fence. He wants non-ring-fenced banks to still be able to lend to small businesses.

While MPs and peers on the commission were hearing such divergent views from the top people at the UK’s central bank on the scope for reforming our existing banking system, I was talking, in Edinburgh, to an American advocate of much more radical reform of our western banking landscape. Ellen Brown wants more governments to consider replacing large tracts of their private banking activity altogether – with new publicly-owned banks.

A Los Angeles-based attorney, Ms Brown is the author of Web of Debt and president of the Public Banking Institute (PBI). Banking, she argues, is not a market good or service. It’s a vital part of societal infrastructure which properly belongs in the public sector. And by taking it back where it belongs, states could regain control of that very large slice (up to 40 per cent) of every public budget that currently goes on interest charged to finance investment programmes through the private sector. Deficit reduction could get an enormous boost, by cutting out the profit-driven middle man.

Currently, only one American state owns its own depository bank. It’s been in existence since 1919 and was created by Norwegian and other immigrants, determined, through their Non-Partisan Alliance, to stop rapacious Wall Street money men foreclosing on their farms. Earlier this month, North Dakota voted three-to-two for Republican Mitt Romney, rather than Barack Obama. But, by law, in this sparsely-populated mid-western member of the union, all state revenues have to be deposited with the publicly-owned Bank of North Dakota (BND).

There are no bonuses, fees or commissions paid at BND. No advertising. No branches beyond the main office in Bismarck. The bank offers cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. This public bank underwrites municipal bonds, funds disaster relief and supports student loans. It partners with local commercial banks to increase lending across the state and pays competitive interest rates on state deposits. For the past ten years, it has been paying a dividend to this state, with a population of some 680,000, of some $30m (£18.7m) a year.

Intriguingly, North Dakota has not suffered the way much of the rest of the US – indeed much of the western industrialised world – has, from the banking crash and credit crunch of 2008; the subsequent economic slump; and the sovereign debt crisis that has afflicted so many. With an economy based on farming and oil, it has one of the lowest unemployment rates in the US, a rising population and a state budget surplus that is expected to hit $1.6bn by next July. By then North Dakota’s legacy fund is forecast to have swollen to around $1.2bn.

With that kind of resilience, it’s little wonder that twenty American states, some of them close to bankruptcy, are at various stages of legislating to form their own state-owned banks on the North Dakota model. There’s a long-standing tradition of such institutions elsewhere too. Australia had a publicly-owned bank offering credit for infrastructure as early as 1912. New Zealand had one operating in the housing field in the 1930s. Up until 1974, the federal government in Canada borrowed from the Bank of Canada, effectively interest-free.

Then there are the German Landesbanks, until some of them, led by WestLB, got caught up in an insatiable appetite for get-rich-quick financial exotica, and paid a heavy price. From our western perspective, we tend to forget that, globally, around 40 per cent of banks are already publicly owned, many of them concentrated in the BRIC economies, Brazil, Russia, India and China.

Ellen Brown cites academic studies showing that countries with high degrees of government ownership of banking were growing faster, up until the crash, than countries where banking is historically concentrated in the private sector. “So why aren’t states everywhere doing it?” asked one member of the audience on Thursday evening when the PBI president addressed an RSA-sponsored seminar on the theme “A Public Bank for Scotland?”

We may not have had any tradition of publicly-owned banking here in Scotland. But a Dumfriesshire minister did create the trustee savings bank movement in the 19th century, sadly launched on to the stock market in the 1990s when privatisation was all the rage. And our life assurance and building society sectors also first thrived on mutual principles. Now, thanks to force majeure, what’s left of Scotland’s two oldest commercial banks is now, predominately, owned by UK taxpayers.

Given the massive price we have all paid for our debt-fuelled crash, surely there is scope for a more fundamental re-think about what we really want from our banks and what structures of ownership are best suited to deliver on those aspirations? It’s a debate we’ve not yet had. The presumption remains that markets still know best. That central bankers and politicians squabbling over how best to ring-fence the animal instincts of commercial bankers is as good a guarantee as we’ll ever get that there won’t be another banking crisis a few years hence.

As we left Thursday’s seminar, I asked another member of the audience, someone with more than thirty years’ experience as a corporate financier, whether the concept of a publicly-owned bank has any chance of getting off the ground here. “I’ve no doubt it will happen,” came the surprise response. “When I look at the way our collective addiction to debt has ballooned in my lifetime, I’d even say it’s inevitable”.