Public bank — BrandWiki

Public bank — BrandWiki

Theoretical perspectives on public banking

Interest

Interest, or payment from a borrower or deposit-taking institution to a lender or depositor, increases the overall costs of goods and services. Critics of high interest payments say that 35% to 40% of the money paid for goods and services actually goes to interest payments to finance the chains of supply, production, and distribution necessary for delivery of products.[74] Governments pay similarly high rates of interest for capital projects such as infrastructure and schools.[75] Thus, public banks, which do not need to charge high interest rates the way private banks must do in the service of shareholders, would arguably lower the cost of interest on public projects, and on those private endeavors a public bank was directed to support.[76]

Money creation

Banks are often held to be mere financial intermediaries, taking deposits and lending money from those deposits.[77] Others disagree with this view and point out that banks create money through lending, and that banks lend far more than their deposit base. For example, Robert C. Hockett of Cornell Law School argues that the belief that banks are mainly intermediaries between savers and borrowers is false. Rather, the capacity to lend at a rate not strictly tied to a bank's deposits is, for Hockett, a reason for the function of banking to be a public utility instead of a strictly private enterprise.[78]

Banks hold less in reserve than their deposit liabilities, but those deposit liabilities are also functionally money. Thus, the very practice of fractional reserve banking grows the money supply beyond banks' deposit bases. Nations' central banks attempt to regulate that growth through interest rates, reserve requirements, and capital adequacy requirements, although most advanced economies today have deprioritized reserve requirements.[79]

Acceptance of the view that banks create money is widespread. Authors writing on behalf of the Bank of England have explained that, rather than banks receiving and then loaning deposits specifically, banks loan money, creating matching deposits in borrowers' bank accounts, thus creating "new money."[79] Western Michigan University political scientist Susan Hoffmann, author of Politics and Banking, opens that book by declaring that Congress has historically struggled with the reality that banks create money and that money itself arises "in an institutionalized decision process."[80] This became apparent to the directors of the Bank of Amsterdam in the 17th century, when they realized that loaning out deposits created money for borrowers while the same amount still sat in the accounts of the original depositors.[32]

Professor Richard Werner of the University of Southampton has utilized empirical research to conclude in favor of the credit creation theory, and that "banks can individually create money out of nothing."[81] Two former members of the Federal Reserve Bank of Minneapolis, Chari and Phelan, refer to the process of fractional-reserve banking as "private money creation."[82]

Some scholars and authors disagree with the argument that banks create money by lending it. Austrian School economists, for example, emphasize that only one party at a time can have a legitimate claim on the same unit of deposit.[83] Those who deny that banks create money may argue that the process of lending gives the outsider the false appearance of money creation due to the recording of the same asset twice, once as a deposit entry and once as an asset account entry. Rather, the two figures are transactional representations of the same unit of money.[84]

Other scholars and authors qualify their belief that banks create money by following up with an account of what happens to that money when loans are repaid. Thus, Mcleay, et al. point out: "Just as taking out a new loan creates money, the repayment of bank loans destroys money."[79]

David Korten and others from the New Economy Working Group argue that the power to create and allocate money ought to be decentralized and democratized by making such power reside in community banks.[85]

Public banks and economic growth

Svetlana Andrianova, Pancios Demetriades, and Anja Shortland use data from several countries for 1995-2007 and conclude that a high degree of government ownership of banks facilitates faster growth than little government ownership.[86]

Mark A. Calabria of the Cato Institute cites the corruption of Fannie Mae and Freddie Mac as evidence of public sector finance's mismanagement. Calabria also argues that the Bank of North Dakota's success is exaggerated and that public-sector banking decreases economic growth. He concludes, "When the government owns the banks, lending decisions become increasingly driven by politics rather than economics."[87] The Public Banking Institute has argued that Calabria's conclusions are based on research that doesn't incorporate the Bank of North Dakota; that Calabria doesn't compare the performance and corruption histories of public banks to private banks, and that he uses an insufficient number of examples to reach his conclusions.[88]

Researchers at the John F. Kennedy School of Government Department of Economics at Harvard University, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer noted in a 2000 paper that government ownership of banks is pervasive around the world and in particular countries with low levels of per capital income and underdeveloped financial systems.