Banking on the Public Option: Will LA Lead the Way for People-Owned Banks?

by Public Bank LA
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By: Glenn Daigon, Who.What.Why. Glenn Daigon talks to Trinity Tran and Ellen Brown on Los Angeles establishing a public bank - an issue its residents will vote on in the fall.

If Los Angeles were to establish a public bank — an issue its residents will vote on in the fall — one of two things could happen.

In the opinion of plan proponents, a public bank would free the city from predatory Wall Street institutions and save taxpayers a lot of money. That money could then be used to fund needed projects, such as affordable housing, infrastructure, renewable energy, and small-business expansion.

Opponents of the proposal, on the other hand, predict that such a bank would be a disaster. Untethered from market forces, the “public” bank might make loans to the politically connected without regard to profitable returns. Critics argue it would be so inefficient and poorly managed that city taxpayers would eventually be forced to bail it out.

Granted, even public approval does not mean LA will get a public bank. Other local, state, and federal hurdles need to be cleared before such a bank could be up and running.

Nevertheless, the vote on the measure could have implications far beyond the city or even California. If the proposal passes this November, it could jumpstart other efforts by cities and states around the nation that are currently considering setting up their own public banks.

New Jersey’s new governor was elected on a platform that promised to establish a public state bank. San Francisco and Oakland have done feasibility studies, though no results have been announced. In all, there are an estimated 15 separate pieces of legislation at the city and statewide level around the country that aim to establish local public banks.

Even before the Los Angeles City Council decided in late June to put the measure before the voters, there was controversy about how feasible public banking in LA was.

A report by the Chief Legislative Analyst’s Office in February raised a lot of doubts, including the initially high startup costs for the bank and a list of local and state laws that would have to be changed before it could even get off the ground.

“As Los Angeles City Council President Herb Wesson pointed out, if this were easy, someone would have done it already,” Sharon Tso and John Wickham, from the Office of the Chief Legislative Analyst for Los Angeles, told WhoWhatWhy.

Bank advocates disputed the findings of the report.

To start up a bank, all you need is $20 million, according to Ellen Brown, founder and chair of the Public Banking Institute. This figure is drastically lower than the one referred to in the initial report.

Because public bank supporter Gavin Newsom is likely to be California’s next governor, some think the legal and regulatory hurdles also can be surmounted. “Where there is a will, there is a way,” Brown said.

One source of startup funding: moving the city’s billions of dollars that now sit in checking and short-term investment accounts at commercial banks to the new public institution. Then the bank’s equity or reserve could come from either a city appropriation, voter initiative, bonds, or excess pools of interest earned by existing city budget items.

In any case, the bank would not be a retail bank. It would not accept retail checking and savings accounts from the general public. It would be a “banker’s bank,” with the City of Los Angeles acting as the primary customer and chief lender.

From the Ashes of the 2008 Crash

Without hesitation, some of the strongest advocates of public banking insist that this measure would never have made it onto the Los Angeles ballot had it not been for the crash and bailout of 2008.

“The crash of 2008 exposed the destructive flaws in the banking system,” Trinity Tran, co-founder of Public Bank LA told WhoWhatWhy.

People did not really feel the pain until after the 2008 crisis, concurred Mehrsa Baradaran, University of Georgia law professor and banking policy specialist.

The first steps of Los Angeles banking activists centered on convincing the Los Angeles City Council to divest city funds from what they considered to be predatory local banks. One of those groups, Divest LA, successfully persuaded the council to divest its accounts from Wells Fargo. The challenge then became where the city could deposit these divested funds.

Establishing a public institution became the next logical step. “Local banks are not big enough and aren’t able to collateralize loans,” Ellen Brown told WhoWhatWhy.

This type of political movement is not unique. After the Great Depression in 1929, there were grassroots movements for greater government intervention in the economy, explained Diego Zuluaga, a policy analyst with the Cato Institute.

“In the 1920s and 1930s there was a promotion of farm lending and real estate lending to rural areas. In the 1990s it was all about home ownership,” Zuluaga told WhoWhatWhy.

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