Note: I’m responding to my other blogpost ‘A Primer On Community Capital’.
A common and reasonable solution we can gravitate towards when considering how best to manage local (community) capital is to build up and manage it ourselves. Community Owned Banks are a step in this direction however, as I discussed in my post, they continue to be burdened by the same structures and policies that larger banks are governed by, not that they have capital reserve requirements and use the Fed’s window, but that they can hold on to excess capital without penalty – even when there are feasible investments out there – and that since 2003 they do not have to be in trouble to access this discounted credit (basically free liquidity since today’s discount rate is a mere .75% or 75 basis points – that’s the cost to banks, not to you) as they once did thereby allowing open management oversight of their portfolio’s to the detriment of society’s and the community’s needs. Plus, even though they are local and familiar, they work like privately owned businesses which do not have to fully disclose information to the public.
Yet the three things that community capital requires are coordination, networks, and trust (among others like the capital itself and the infrastructure to hold it – physically or electronically). So if your interests were piqued and you wanted to go the community capital route, how and where would you start if not with a community owned bank and the corporate structure within which it rests?
An even more progressive idea is allowing our already existing infrastructure to act as a public bank and on our behalf. Ellen Brown of the Public Banking Institute discusses this in her article and she wrote extensively on the subject in “Web of Debt.” This idea of a Post Office Bank or National Infrastructure Bank (NIB) is on par with what community capital attempts to accomplish, which is to keep capital flowing in the local economy and support locally owned enterprises. A public bank ultimately functions with the same intent in mind – not to satisfy the shareholder who may be in any foreign location with the motive of increasing profits, but to satisfy the public, i.e. us, in financing the needs within our localized jurisdiction or state or community. The advantages that Ms. Brown points to are in the banking of the unbanked and the underbanked since this was the genesis of using postal savings in the past (and here by President Taft too). I’m not entirely sure how these folks would become eligible to access the community’s resources, however, I could imagine that by merely having the process publicized eventually things would be altered to meet the needs of both the institution and the people.
Some of the other advantages of a public bank which utilizes the Postal system include:
- diversification of our public resources/assets – since right now all we are seeing are investment club type solutions, maybe a few DPO’s here and there, and volunteerism (which has its sustainability constraints).
- economies of scale in an instant – there would still need to be an organic outgrowth of the local capital itself in terms of where it would be invested, what types of projects, etc. however I would transfer my money in an instant to a local Post Bank that could be accessed anywhere (using online systems) and offer me the peace of mind that my money was being used for responsible local investments while waiting for me to withdraw it.
- longer time horizons on investments – there is just no way that the type of local investments needed can turn around profits in 12 months, let alone 3-6 months for most offerings. This is a similar debate to the project contract periods of 1 to 3 years; how can you affect change in such a short time? The post-bank model accounts for the human, social, environmental, community, and cultural aspects that require longer time horizons to see their outcomes.
- a de-concentration of wealth likely in a very short time period – typically banks have somewhere in the range of 60-80% of their total assets in deposits (barring the top 3 largest banks which have a less than 45% ratio – JPMorgan, Bank of America, and Citigroup) which for the top 50 US banks this is about $7 trillion. Imagine what this would look like – not just for these banks but for how resources could be used to fund projects in your local community! – if just a small percentage of private bank users moved their deposits to a Post Bank.
Can you imagine what would happen if you knew that the money you banked went to finance bonds that supported investments in education, healthcare, community centers, etc. right in your neighborhood?
These are serious threats to the current financial system (and our plutocracy) which seek ever higher returns from conventional investments. Also consider this: US community owned banks now only consist of a mere $100 billion in total assets; this pales in comparison to the $212+ trillion in financial stock, pensions, deposits, etc. of global financial system (see McKinsey 2011 Capital Markets Report).
Yet even with this approach I have some outstanding criticisms which have not fully been addressed. First, the idea of allowing citizens to make deposits to the NIB would still be equivalent to a national tax – whereby our funds/capital/deposits would help finance national projects and not necessarily local or state ones – unless the postal system was re-configured as a state by state outfit but still I’m curious how this would work. Second, an NIB would never be non-partisan if it is funded by Congress; there is always a way for Congress to hold one side or the other hostage to its demands (see today’s government shutdown). Third, right now the idea of our federal government managing public resources, in fact private citizen’s own personal financial resources, does not seem appealing considering how parts of the government can simply reallocate resources towards Wall Street or other ends – at the same time, the private sector has not demonstrated it can carry our social capital either; which the section of the article focusing on Japan’s Post Bank so intricately details. What are the checks and balance in place to ensure the management of public resources stays within a US Post Bank and is not diverted elsewhere?
“…Rather than using its deposits to back commercial loans as most banks do, Japan Post [Bank] invests them in government securities. That means the government is borrowing from its own bank and its own people rather than from foreign bondholders.”
The Public Banking Institute attempts to address some of the misperceptions of public banking, here. In summary they indicate that misperceptions include:
- Public banking is riskier than the current system – this simply is not the case; would you rather have your money used for public interest or for the benefit of the few?
- Public banks compete with private banks – not necessarily, for deposits, yes, but for how the banks invest those dollars, not these days; that is why we are having the discussion in our national politics about poor infrastructure; should private finance be funding our public commons? Utilities? Infrastructure?
- Private banks are already providing the services that public banks would replicate – I don’t think so; private banks are more interested in conservative investments that value their bottom line and payback whereas public banks would focus on alternative areas of return such as social, human, environmental, community, cultural, etc. Plus, the liquidity crisis (i.e. banks not lending) should tell you otherwise for small businesses in your community.
- Government being in the banking business is both inefficient and a potential source for mischief caused by politicians – should investments in the community be open to debate in the public forum?
- The return on a state’s investment with public banks would not be significantly better than the return on investment which the state is currently receiving with private banks – we are not comparing apples to apples here since many of the projects a public bank would invest in are larger in scale, scope, and time horizon therefore requiring an institution that realizes this is what is most important and then valuing all aspects of the project not solely the bottom line. Investments should benefit the public, not a few shareholders.
There is proposed legislation by Bernie Sanders and Peter DeFazio on Postal Service Modernization and another (Carper-Coburn) on dealing with the pension issues internally. These issues must be addressed if we are to add a bank as part of the service the Post Office offers, otherwise, it will be a much longer road to seeing a truly community capital oriented Post Bank emerge in the US.