AOC and Rashida Tlaib’s Public Banking Act, explained

A public option, but for banking. That’s what Reps. Rashida Tlaib and Alexandria Ocasio-Cortez are proposing in a new bill unveiled on Friday.

The Public Banking Act, first shared with Vox, wouldn’t create those options by itself, but would foster the creation of public banks across the country by providing them a pathway to getting started, establishing an infrastructure for liquidity and credit facilities for them via the Federal Reserve, and setting up federal guidelines for them to be regulated. Essentially, it would make it easier for public banks to exist, and it would give some of them grant money to get started.

While it sounds a little wonky, the basic idea is to make it possible for state and local governments, local businesses, and people to do business with public banks, which theoretically would be more motivated to do public good and invest in their communities than private institutions, which are out for profit. One public bank exists in North Dakota, and there is a growing movement to create more of them across the country. California recently passed a law allowing cities and counties to create and sponsor public banks.

“Economic stability is really, truly tied in with access to this type of banking,” Tlaib said in an interview with Vox. “It’s to try to create stable neighborhoods and communities.”

The proposal lands in the midst of the Covid-19 pandemic, which has shed light on many inefficiencies in the American system, including banking. Take the Paycheck Protection Program, for example: It used the regular banking system as an intermediary, which ultimately meant that bigger businesses and those with preexisting relationships with those banks were prioritized over others. Some smaller businesses missed out, with many owners saying they were denied loans for even a few thousand dollars. The discrepancy hit Black-owned businesses particularly hard.

The intent of the proposal is to try to guarantee a more equitable recovery by providing an alternative to Wall Street banks for state and local governments, businesses, and ordinary people, and by ensuring such banks provide services to historically excluded and marginalized groups. The public banking bill also does double duty as a climate bill: It would prohibit public banks from investing in or doing business with the fossil fuel industry.

“Public banks are uniquely able to address the economic inequality and structural racism exacerbated by the banking industry’s discriminatory policies and predatory practices,” Ocasio-Cortez said in a statement. She said that she also believes public banks could facilitate the use of public resources to construct “a myriad of public goods,” including affordable housing and local renewable energy projects. “Public banks empower states and municipalities to establish new channels of public investment to help solve systemic crises.”

Other countries have various forms of public banking in operation and have different regulatory schemes set up for them than commercial banks do, said Rohan Grey, a law professor at Willamette University. But, he said, this proposal is particularly comprehensive and supportive.

Getting the bill passed, the regulatory scheme and grant program set up, and public banks chartered and operational in time to actually shape America’s recovery from the pandemic may not be possible on a broad scale, timing-wise. But the bill is a signal of what’s possibly to come.

If Democrats keep control of the House come 2021 and manage to flip the Senate and win the White House, they’ll be able to take some big legislative swings, including and perhaps especially on issues related to the economy. It is worth noting that both Tlaib and Ocasio-Cortez sit on the powerful House Financial Services Committee, which is chaired by Rep. Maxine Waters (D-CA).

“I look at economic justice and the issues around economy right now, that many of our working families, from farmers to the middle class to front-line essential workers, all of them know that, with the corporate bailouts, at some point it’s just hitting a wall where it doesn’t carry them along and they’re looking for options,” said Tlaib, who represents Michigan’s 13th Congressional District, the third-poorest congressional district in the country. “So I’m putting this on the table as an option.”

The Public Banking Act, briefly explained

To be clear, the Public Banking Act isn’t creating a federal public bank.

Instead, what it does is encourage and enable the creation of public banks across the US. It provides legitimacy to those who are pushing for more public banking, and it also includes regulators as key stakeholders who can support and provide guidance for how those banks should operate.

“It’s not that tomorrow you’re going to see 1,000 of these across the country; it’s still going to be a hill-by-hill, city-by-city battle,” Grey said.

There is a spectrum of services public banks would offer; many would be a lot like what commercial banks do, though different public banks would likely have different areas of emphasis. At least at the outset, some banks could serve as depository institutions for state and local governments, meaning those governments would put their money in the local public bank, not JPMorgan. Or they might partner with community banks or other institutions to help boost lending capacity and offer lower debt costs to the businesses and cities they lend to. They could also facilitate easier access to funds for state and local governments from the federal government or Federal Reserve.

“It’s basically a way to finance state and local investment that doesn’t go through Wall Street and doesn’t leave the community and turn into a windfall for shareholders,” said Porter McConnell, the campaign director of advocacy group Take On Wall Street. “This is more about community development.”

They could engage in retail banking as well. The legislation creates a framework for public banks to interact with postal banking, where the Postal Service serves as a bank, or FedAccounts, where everyone gets an account with the Federal Reserve through which they could receive direct payments from the government, for example, during an economic crisis.

“This bill is saying whatever you come up with, there’s a place for that to be recognized and be plugged in at the federal level,” Frey said.

Tlaib recalled hearing from her constituents when the $1,200 coronavirus stimulus checks went out this spring — people waiting days and weeks for direct deposits, or getting a check in the mail only to lose a substantial portion of it cashing it at the store down the street. “I’d rather them have access to a bank that’s for them, that’s not focused on for-profit schemes,” she said.

The Public Banking Act allows the Federal Reserve to charter and grant membership to public banks and creates a grant program for the Treasury secretary to provide seed money for public banks to be formed, capitalized, and developed. It also instructs the Fed to establish an incubator program for those who want to create a public bank, and it instructs the Securities and Exchange Commission (SEC) and Federal Deposit Insurance Corporation (FDIC) to establish regulatory schemes around them.

One other important element, McConnell explained, is how the legislation would change the FDIC’s reticent approach to public banks. Public banks need the FDIC to provide assurances that it will recognize them in accordance with the bond rating of the city or state they represent. For example, Los Angeles is a large municipality and has typically maintained a strong bond rating. McConnell said the FDIC issuing guidance that it recognizes the city’s — and the state’s — public banks as an AAA rating would send a clear direction to the state financial regulators that the public bank is considered low risk.

“The FDIC needs to be convinced not to discriminate against public banks, and they need to be convinced legislatively that they should be given the same facilities, the same rights, as private banks,” she said.

The bill would also provide a road map for the FDIC, which insures bank deposits of up to $250,000, to insure deposits for public banks, so people feel assured they won’t lose all their money by choosing to open an account with their state bank instead of, say, Wells Fargo.

The legislation has multiple co-sponsors in the House, including Reps. Chuy Garcia (D-IL), Pramila Jayapal (D-WA), Ayanna Pressley (D-MA), Bennie Thompson (D-MS), and Ilhan Omar (D-MN).

This isn’t a panacea for fixing banking in America, and whether this is the right approach can be debated. The government isn’t always perfect at providing services (see: the unemployment system, or Flint, Michigan). Columbia University law professor Katharina Pistor noted for Worth in 2019 that “the global and historical experience with public banking suggests that, just as in the private sector some public banks will achieve most of their goals most of the time, while others will underperform or even fail.” She also points out that there is a question of whether in the long run, public banks will be able to stay on mission.

Aaron Klein, an economic fellow at the Brookings Institution and former Treasury Department aide in the Obama administration, noted in an email to Vox that the Office of the Comptroller of the Currency (OCC) has historically been charged with chartering national banks in the US, not the Fed, meaning this is a fairly novel idea. He also noted what he saw as a misguided part of the bill: It prohibits the Fed and Treasury from considering the financial health of an entity in grant-making decisions. “Banks that are failing should fail. Public or private,” he said.

Still, he commended the message at the heart of the proposal: “The problem that the bill responds to is sound — banking is too expensive for working people.”

When the public sector competes with the private sector, it’s a good thing

So here is the thing about private companies, including, yes, banks: The point of them is to make money, and that drives their decisions. It’s not necessarily evil (though sometimes it kind of is), but it’s just how they work. For example, many people in America don’t have access to affordable internet because it’s not lucrative for telecom companies to get it to them.

The idea behind public banking isn’t that Goldman Sachs, Wells Fargo, and Morgan Stanley go away; it’s that they have to compete with a government-owned entity — and one that’s a little fairer and more ethical in how it does business.

“The potential around taking private ownership out of banking, even just a little bit, is huge considering that we are depositors and we deposit $15 trillion in the commercial banking industry, and we get what? Redlined? Ethical violations in Malaysia? Fraud? Coal? Fossil fuels? All of these things that are driving us toward catastrophe,” said Emma Guttman-Slater, director of policy advocacy and field building at the Beneficial State Foundation, a nonprofit focused on making the banking system more equitable.

Public banks, as imagined in the Tlaib/Ocasio-Cortez proposal, would provide loans to small businesses and governments with lower interest rates and lower fees. They would potentially be better at avoiding the short-term thinking private institutions tend toward and be more willing to lend to projects with a slightly longer time horizon.

“There’s a disinclination to believe you can make money without making money hand over fist,” McConnell said. “A lot of this gets at market failures.”

In the US, North Dakota is the only state to have a public bank, which it established more than a century ago. And it works pretty well, as Will Peischel explained for Vox in 2019. The bank — which isn’t FDIC-insured — initially was supposed to protect the state’s farmers, but now it’s good for a lot of people:

Student loans are facilitated directly with BND, but other loans, called participation loans, go through a local financial institution — often with BND support. For example, if someone wants to take out a business loan for $20,000 with a local bank, BND would lend half of the money, $10,000, and minimize the risk for that bank. The result: The individual and local bank or credit union are supported by BND through a single transaction.

According to a study on public banks, BND had some $2 billion in active participation loans in 2014. BND can grant larger loans at a lower risk, which fosters a healthy financial ecosystem populated by a cluster of small North Dakota banks. The benefits of these loans are kept local, and the banks are protected from risk with BND support.

If this bill were to become law, it would open up a lot of doorways in public banking. It would make life a lot easier for those working on forming public banks in California after the state gave the rubber stamp allowing it in late 2019. In New York City, advocates have long been pushing for a public bank that would make equitable investments, foster growth and prosperity in the local community, and be more transparent about where money is going.

If Democrats take power, there could be a lot more where this came from

Beyond the ins and outs of this specific piece of legislation, there is a broader message: Democrats have a lot of ideas, and if they take power come January 2021, there’s a lot they can do.

Tlaib, for example, is a proponent of universal basic income and has proposed multiple pieces of related legislation. In response to the pandemic, she and Rep. Pramila Jayapal (D-WA) proposed the Automatic BOOST to Communities (ABC Act), which would provide a $2,000 payment to every American during the Covid-19 crisis, plus $1,000 monthly payments for a year after the outbreak ends.

“I hope we have a serious conversation about the [ABC Act] … that’s important,” Tlaib said. “Right now, people need us to put them first and to have a people’s bailout, and so I hope that we’re looking at reoccurring payments at the beginning of next year. I think there’s going to be a door to having a conversation about it, because right now, there’s a wall around the White House.”

The Public Banking Act is meant to complement ideas such as the ABC Act and postal banking. And, of course, it’s linked to the Green New Deal, not only because it would bar public banks from financing things that hurt the environment, but also because the idea is that public banks would play a major role in financing Green New Deal and climate-friendly projects.

There’s no guarantee moderates will get on board, but there’s a plethora of ideas for making the American economy and people’s financial lives better. Klein pointed to proposed legislation from Sens. Chris Van Hollen (D-MD) and Elizabeth Warren (D-MA) and Reps. Pressley and Garcia proposed in 2019 that would authorize the Fed to build a real-time payments system to get people money safely and fast.

How likely some of these proposals are to make it into law is an open question — and much of it hinges on Tuesday’s election. If former Vice President Joe Biden wins the White House and Democrats control both the House and the Senate come 2021, the talk around these ideas becomes a lot more serious.

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