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Presented

By:

Enrique Suarez

 

Why Public Banks Outperform Private Banks: Unfair Competition or a Better Mousetrap?

Public banks in North Dakota, Germany and Switzerland have been shown to outperform their private counterparts. International private competitors have responded by pushing for regulations limiting the advantages of the public banking model, but public banking advocates are pushing back.

In November 2014, the Wall Street Journal reported that the Bank of North Dakota (BND), the nation’s only state-owned bank, “is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.” The article credited the shale oil boom; but as discussed earlier, North Dakota was already reporting record profits in the spring of 2009, when every other state was in the red and the oil boom had not yet hit. The later increase in state deposits cannot explain the bank’s stellar record either.

Then what does explain it? The BND turns a tidy profit year after year because it has substantially lower costs and risks then private commercial banks. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; has no private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesome wholesale bank that partners with local banks that have located borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives.

Lest there be any doubt about the greater profitability of the public banking model, however, this conclusion was confirmed in January 2015 in a report by the Savings Banks Foundation for International Cooperation (SBFIC) (the Sparkassenstiftung für internationale Kooperation), a non-profit organization founded by the the Sparkassen Finance Group (Sparkassen-Finanzgruppe) in Germany. The SBFIC was formed in 1992 to make the experience of the German Sparkassen – municipally-owned savings banks – accessible in other countries.

The Sparkassen were instituted in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money, and to support business start-ups. Today, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) Local public banks are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. The savings banks operate a network of over 15,600 branches and offices and employ over 250,000 people, and they have a strong record of investing wisely in local businesses.

In January 2015, the SPFIC published a report drawn from Bundesbank data, showing that the Sparkassen not only have a return on capital that is several times greater than for the German private banking sector, but that they pay substantially more to local and federal governments in taxes. That makes them triply profitable: as revenue-generating assets for their government owners, as lucrative sources of taxes, and as a stable funding mechanism for small and medium-sized businesses (a funding mechanism sorely lacking in the US today). Three charts from the SBFIC report are reproduced in English below. (Sparkassen results are in orange. Private commercial banks are in light blue.)

Swiss Publicly-Owned Banks and the Swiss National Bank: Marching to a Different Drummer

The Swiss have a network of cantonal (provincially-owned) banks that are so similar to the Sparkassen banks that they were invited to join the SBFIC. The Swiss public banks, too, have been shown to be more profitable than their private counterparts. The Swiss public banking system helps explain the strength of the Swiss economy, the soundness of its banks, and their attractiveness as a safe haven for foreign investors.

The unique structure of the Swiss banking system also helps explain the surprise move by the SNB on January 15, 2015, when it lifted the cap on the Swiss franc as against the euro, anticipating the European Central Bank’s move to embark on a massive program of quantitative easing the following week. Switzerland is not a member of the EU or the Eurozone, and the Swiss National Bank (SNB) is not like other central banks. It is 55% owned by the country’s 26 cantons or provinces. The remaining investors are private. Each canton has its own publicly-owned cantonal bank, which provides credit to local small and medium-sized businesses.

In 2011, the SNB pegged the Swiss franc to the euro at 1 to 1.20; but the value of the euro steadily dropped after that, and the SNB could maintain the peg only by printing Swiss francs, diluting their value to keep up with the euro. The fear was that once the ECB started its new money printing program, the Swiss franc would have to be diluted into hyperinflation to keep up.

The SNB’s unanticipated action imposed heavy losses on speculators who were long the euro (betting it would rise), and the move evoked criticism from the European central banking community for not tipping them off beforehand. But the loyalty of the Swiss National Bank is to its cantons, cantonal banks, and individual investors, not to the big private international banks that drive central bank policies in other countries. The cantons had been complaining that they were no longer receiving the hefty 6% dividend they had been able to count on for the previous century. The SNB promised to restore the dividend in 2015, and lifting the cap was evidently felt necessary to do it.

Publicly-owned Banks and the Trans-Pacific Partnership

The SBFIC is working particularly hard these days to make information and technical help available to other countries interested in pursuing their beneficial public model, because that model has come under attack. Private international competitors are pushing for regulations that would limit the advantages of publicly-owned banks, through Basel III, the European Banking Union, and the Transatlantic Trade and Investment Partnership (TTIP).

In the US, the current threat is from the TransPacific Partnership (TPP) and its European counterpart the TTIP. President Obama, the Chamber of Commerce, and other corporate groups are pushing hard for fast track authority to pass these secret trade agreements while effectively bypassing oversight from Congress.

The agreements are being sold as promoting trade and increasing jobs, but the effect of international trade agreements on jobs was evident with NAFTA, which hurt US employment more through the competition of cheap imports than helped it with increased exports. Moreover, only five of the TPP’s twenty-nine chapters are about trade. The remaining chapters are basically about getting government off the backs of the big international corporations and protecting their profits from competition. Corporations would be authorized to sue governments that passed laws protecting their people from corporate damage, on the ground that the laws impair corporate profits. The trade agreements put corporations before governments and the people they represent.

Particularly targeted are government-owned industries, which can undercut big corporate prices; and that includes publicly-owned banks. Public banks are true non-profits that recycle earnings back into the community rather than siphoning them into offshore tax havens. Not only are the costs of public banks quite low, but they are safer for depositors; they allow public infrastructure costs to be cut in half (since the government-owned bank can keep the interest that composes 50% of infrastructure costs); and they provide a non-criminal alternative to an international banking cartel caught in a laundry list of frauds.

Despite these notable benefits, under the TPP and TTIP, publicly-owned banks might wind up getting sued for unfair competition because they have advantages not available to private banks, including the backing of their local governments. They have the backing of the government because they are the government. The government would be getting sued for operating efficiently in the best interests of its constituents.

To truly eliminate unfair competition, the giant monopolistic multinational corporations should be broken up, since they have an obvious unfair trade advantage over small farmers and small businesses. But that outcome is liable to be long in coming. In the meantime, fast track for the secretive trade agreements needs to be vigorously opposed. To find out how you can help, go to www.StopFastTrack.com or www.FlushtheTPP.org.

Source: Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.

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  • Dear William:  The emergency legislation  that was passed within days of President Franklin Roosevelt taking office in March 1933 was just the start of the process to restore confidence in the banking system. Congress saw the need for substantial reform of the banking system, which eventually came in the Banking Act of 1933, or the Glass-Steagall Act. The bill was designed “to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.”

    In other words, the above legislation prevented the merging of investment banks (speculation) with commercial banks whose main role was to lend money for productive purposes as oppose to speculative purposes, however due to the immense pressure from Wall Street this important legislation was repealed thanks to Bill Clinton with the results we all know. Another fascinating fact is that most of the money circulating in the economy up until 2007 was for commercial-productive purposes ad now 99% of the money circulating in the economy is for speculative purposes. 

  • My concern is does our Federal Reserve System possess unknown risk because the member banks have ownership in the Fed, but also because of our fiat currency, and because of member bank leverage and the size of the derivative markets. While I believe there is a place for both public and private banks, I believe that due to a "grey" area as to when commercial banking ends and investment banking begins, the unknown risk should be our greatest concern.

  • Excellent comment about the reality of public versus private banks in India. However, this reality in India about public banks does not negate the fact that public banks (central banks) can better serve society (stakeholders) than private banks that have as its main charter to serve the stockholders and having the nanny state come to their rescue when they fail.

  • Well in India it is the other way round, the private sector banks and particularly the new generation private sector banks setup after 1993 are doing well on all counts that include customer experience, sharreholder profitability, employee compensation, regulatory compliance and governance, productivity and cost management. The public sector banks although have the depth of knowledge and experience are limited by the empowerment to take decisions and government interference in terms of senior management appointments. The public sector banks are victim of government shareholding that has led them to lend on socialist and populist agenda of the ruling government and has the burden of carrying on with non-productive staff. The changes are envisaged with the markets punishing them for accumulated bad loans and cost ratios, but a long way to go in terms of public sector banks in India getting the freedom to compete with the private sector banks.
  • The problem that private banks in America have is leverage on derivatives and feeling the need to be the fiat currency for the globe. It is, in my opinion, the reason the Am

  • Interesting! It seems my own experience as a Canadian trying to do work in the US is similar to the Mexicans.

  • I agree with Ellen Brown almost one hundred percent about why public banks are a much better option than private banks because the key problem in the American business world today is that we've lost sight of what  business is all about. We think it's about accumulating financial wealth and shareholder  value, but the fundamental purpose of business, going back thousands of years in human  experience, is to meet human economic needs by cultivating creative human talent."

     With regard to Chomsky's comments about NAFTA I back him one hundred percent with the fact that corporations are "tyrannies" that need to be held accountable to people (stakeholders) as oppose to private tyrannies (stockholders). For example, one important aspect about NAFTA is the treatment of foreign companies. NAFTA has a special treatment for American companies in Mexico where American want to be treated as "Mexicans". On the other hand, if Mexicans travel to the USA and demand to be treated as "Americans" they (the Mexicans) will be very lucky to if they are still alive. if you want to learn about my position on business issues, human nature, competitiveness, industrial policy, education, global power dynamics, etc. please read my other articles on this forum.

  • I apologize for attributing the quote to you, Mr. Suarez.

    While it might have been more appropriate to provide a link to such a lengthy diatribe, i appreciate the sharing.

    I, personally, believe that NAFTA was a good thing for all North American countries, even with all its warts and woes. Even if you take the position, as Mr. Chomsky has, that only the few and the elite have benefited from it, I would argue that it increased visibility on a problem that is endemic to the US and, to a lesser degree, Canada. 

    There is already a huge disparity between the very rich and the very poor in the US. To blame NAFTA for revealing this problem - for those who think it's a problem - is a bit dubious. Some have actually blame the Internet for exacerbating the problem - read "The Second Machine Age" by McAfee and Brynjolfsson. With so many potential variables, I find it a bit difficult to think NAFTA was - and is - that evil.

    You've posted Mrs. Brown and Mr. Chomsky's thoughts. What are YOUR thoughts about NAFTA? 

  • Dear Stephane these are not my comments but the comments of Ellen Brown that I have posted in this forum for a debate. Regarding NAFTA, I want to quote below the most important intellectual alive whose name is Noam Chomsky talking about NAFTA:

    Free Trade
    Noam Chomsky
    Excerpted from Secrets, Lies, and Democracy, 1994
    My local newspaper, the Boulder [Colorado] Daily Camera, which is part of the Knight-Ridder chain, ran a series of questions and answers about GATT [the General Agreement on Tariffs and Trade]. They answered the question, Who would benefit from a GATT agreement? by writing, "Consumers would be the big winners." Does that track with your understanding?

    If they mean rich consumers-yes, they'll gain. But much of the population will see a decline in wages, both in rich countries and poor ones. Take a look at NAFTA [the North American Free Trade Agreement], where the analyses have already been done. The day after NAFTA passed, the New York Times had its first article on its expected impact in the New York region. (Its conclusions apply to GATT too.) It was a very upbeat article. They talked about how wonderful NAFTA was going to be. They said that finance and services will be particularly big winners. Banks, investment firms, PR firms, corporate law firms will do just great. Some manufacturers will also benefit-for example, publishing and the chemical industry, which is highly capital-intensive with not many workers to worry about

    Then they said, Well, there'll be some losers too: women, Hispanics, other minorities, and semi-skilled workers-in other words, about two-thirds of the work force. But everyone else will do fine. Just as anyone who was paying attention knew, the purpose of NAFTA was to create an even smaller sector of highly privileged people-investors, professionals, managerial classes. (Bear in mind that this is a rich country, so this privileged sector, although smaller, still isn't tiny.) It will work fine for them, and the general population will suffer.

    The prediction for Mexico is exactly the same. The leading financial journal in Mexico, which is very pro-NAFTA, estimated that Mexico would lose about 25% of its manufacturing capacity in the first few years and about 15% of its manufacturing labor force. In addition, cheap US agricultural exports are expected to drive several million people off the land. That's going to mean a substantial increase in the unemployed workforce in Mexico, which of course will drive down wages.

    On top of that, union organizing is essentially impossible. Corporations can operate internationally, but unions can't-so there's no way for the work force to fight back against the internationalization of production. The net effect is expected to be a decline in wealth and income for most people in Mexico and for most people in the US.

    The strongest NAFTA advocates point that out in the small print. My colleague at MIT, Paul Krugman, is a specialist in international trade and, interestingly, one of the economists who's done some of the theoretical work showing why free trade doesn't work. He was nevertheless an enthusiastic advocate of NAFTA-which is, I should stress, not a free trade agreement.

    He agreed with the Times that unskilled workers-about 70% of the work force-would lose. The Clinton administration has various fantasies about retraining workers, but that would probably have very little impact. In any case, they're doing nothing about it.

    The same thing is true of skilled white-collar workers. You can get software programmers in India who are very well trained at a fraction of the cost of Americans. Somebody involved in this business recently told me that Indian programmers are actually being brought to the US and put into what are kind of like slave labor camps and kept at Indian salaries-a fraction of American salaries- doing software development. So that kind of work can be farmed out just as easily.

    The search for profit, when it's unconstrained and free from public control, will naturally try to repress people's lives as much as possible. The executives wouldn't be doing their jobs otherwise.

    What accounted for all the opposition to NAFTA?

    The original expectation was that NAFTA would just sail through. Nobody would even know what it was. So it was signed in secret. It was put on a fast track in Congress, meaning essentially no discussion. There was virtually no media coverage. Who was going to know about a complex trade agreement?

    That didn't work, and there are a number of reasons why it didn't. For one thing, the labor movement got organized for once and made an issue of it. Then there was this sort of maverick third-party candidate, Ross Perot, who managed to make it a public issue. And it turned out that as soon as the public learned anything about NAFTA, they were pretty much opposed.

    I followed the media coverage on this, which was extremely interesting. Usually the media try to keep their class loyalties more or less in the background-they try to pretend they don't have them. But on this issue, the bars were down. They went berserk, and toward the end, when it looked like NAFTA might not pass, they just turned into raving maniacs.

    But despite this enormous media barrage and the government attack and huge amounts of corporate lobbying (which totally dwarfed all the other lobbying, of course), the level of opposition remained pretty stable. Roughly 60% or so of those who had an opinion remained opposed.

    The same sort of media barrage influenced the Gore-Perot television debate. I didn't watch it, but friends who did thought Perot just wiped Gore off the map. But the media proclaimed that Gore won a massive victory.

    In polls the next day, people were asked what they thought about the debate. The percentage who thought that Perot had been smashed was far higher than the percentage who'd seen the debate, which means that most people were being told what to think by the media, not coming to their own conclusions.

    Incidentally, what was planned for NAFTA worked for GATT-there was virtually no public opposition to it, or even awareness of it. It was rammed through in secret, as intended.

    What about the position people like us find our selves in of being "against," of being "anti-," reactive rather than pro-active?

    NAFTA's a good case, because very few NAFTA critics were opposed to any agreement. Virtually everyone-the labor movement, the Congressional Office of Technology Assessment (a major report that was suppressed) and other critics (including me)- was saying there'd be nothing wrong with a North American Free Trade Agreement, but not this one. It should be different, and here are the ways in which it should be different- in some detail. Even Perot had constructive proposals. But all that was suppressed.

    What's left is the picture that, say, Anthony Lewis portrayed in the Times: jingoist fanatics screaming about NAFTA. Incidentally, what's called the left played the same game. James Galbraith is an economist at the University of Texas. He had an article in a sort of left-liberal journal, World Policy Review, in which he discussed an article in which I said the opposite of what he attributed to me (of course-but that's typical).

    Galbraith said there's this jingoist left- nationalist fanatics-who don't want Mexican workers to improve their lives. Then he went on about how the Mexicans are in favor of NAFTA. (True, if by "Mexicans" you mean Mexican industrialists and executives and corporate lawyers, not Mexican workers and peasants.)

    All the way from people like James Galbraith and Anthony Lewis to way over to the right, you had this very useful fabrication-that critics of NAFTA were reactive and negative and jingoist and against progress and just wanted to go back to old-time protectionism. When you have essentially total control of the information system, it's rather easy to convey that image. But it simply isn't true.

    Anthony Lewis also wrote, "The engine for [the world's] growth has been...vastly increased...international trade." Do you agree?

    His use of the word "trade," while conventional, is misleading. The latest figures available (from about ten years ago-they're probably higher now) show that about 30% or 40% of what's called "world trade" is actually internal transfers within a corporation. I believe that about 70% of Japanese exports to the US are intrafirm transfers of this sort.

    So, for example, Ford Motor Company will have components manufactured here in the US and then ship them for assembly to a plant in Mexico where the workers get much lower wages and where Ford doesn't have to worry about pollution, unions and all that nonsense. Then they ship the assembled part back here.

    About half of what are called US exports to Mexico are intrafirm transfers of this sort. They don't enter the Mexican market, and there's no meaningful sense in which they're exports to Mexico. Still, that's called "trade."

    The corporations that do this are huge totalitarian institutions, and they aren't governed by market principles-in fact, they promote severe market distortions. For example, a US corporation that has an outlet in Puerto Rico may decide to take its profits in Puerto Rico, because of tax rebates. It shifts its prices around, using what's called "transfer pricing," so it doesn't seem to be making a profit here.

    There are estimates of the scale of governmental operations that interfere with trade, but I know of no estimates of internal corporate interferences with market processes. They're no doubt vast in scale, and are sure to be extended by the trade agreements.

    GATT and NAFTA ought to be called "investor rights agreements," not "free trade agreements." One of their main purposes is to extend the ability of corporations to carry out market-distorting operations internally.

    So when people like [Clinton's National Security Advisor] Anthony Lake talk about enlarging market democracy, he's enlarging something, but it's not markets and it's not democracy.

  • "NAFTA [...] hurt US employment more through the competition of cheap imports than helped it with increased exports" As a Canadian, I find the author's comments a bit self-serving. It is true that it is usually the countries with the smaller economies that gain the most from international trade agreements - Australia and New Zealand is a good example. The US has, on occasion, disregarded NAFTA and imposed tarriffs to block "cheap imports", such as the Canadian softwood lumber. If the US had not acted against the NAFTA grain so many times, Mr. Suarez' statement might have been a bit more veridical.

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