Canova on a Public Option in Banking
The dilemma facing governments today is how to pay for stimulus and jobs programs without incurring new debt. Public banking institutions should point the way, in part for their ability to expand lending on a revolving basis without raising taxes or even borrowing from bond markets. For instance, public infrastructure banks in continental Europe and East Asia have long recognized the role of public finance to fund long-term development projects – “projects that generate economic benefits to the wider economy in excess of their private returns.”
Various proposals for a national infrastructure bank by the Obama administration and members of Congress, while a step in the right direction, are far too modest in scale and scope. At the state level, North Dakota has enjoyed the benefits of a public bank since 1919. The Bank of North Dakota, the model of a state-owned bank, has operated continuously at a profit and according to conservative banking practices (including relatively modest compensation for the bank’s management). The state deposits its tax revenues in the Bank which in turn ensures that a high portion of state funds are invested in the state economy. In addition, the Bank is able to remit a portion of its earnings back to the state treasury – more than $300 million in the past decade.
Thanks in part to these institutional arrangements, North Dakota is the only state that has been in continuous budget surplus since before the financial crisis and it has the lowest unemployment rate in the country. In contrast, California is the largest state economy in the nation, yet without a state-owned bank, is unable to steer hundreds of billions of dollars in state revenues into productive investment within the state. Instead, California deposits its many billions in tax revenues in large private banks which often lend the funds out-of-state, invest them in speculative trading strategies (including derivative bets against the state’s own bonds), and do not remit any of their earnings back to the state treasury.
As private sector wealth concentrates into fewer hands, public options will become even more essential. As Louis Hyman quipped in a recent podcast, America’s private finance system is substituting loans for decent wages. It’s not sustainable.
Canova gave an inspiring talk at the Roosevelt Institute’s Future of the Fed event earlier this year. Canova has drawn on the history of the Fed, and particularly that of Utahan Marriner Eccles, Chairman of the Federal Reserve from 1934 to 1948. Eccles is an unsung hero of the New Deal era. I recently found this 1933 testimony from him, and it is a truly acute diagnosis not only of the economic situation of his time, but also that of our own. (His frustration with the deficit hawks of his day is particularly eloquent on p. 708.) Canova’s careful understanding of the past, and revival of the remarkable Eccles, is the solid foundation for a compelling proposal to develop a public option in banking.