Ensuring Scotish Sovereignty: Exploring the Public Bank Option
The Royal Bank of Scotland (RBS) and
the Bank of Scotland have been pillars of Scotland's economy and culture for over three centuries. So when the RBS
was nationalized by the London-based UK government following the 2008 banking
crisis, and the Bank of Scotland was acquired by the London-based Lloyds Bank,
it came as a shock to the Scots. They no longer owned their oldest and
most venerable banks.Another surprise turn of events was the triumph of the
Scottish National Party (SNP) in the 2011 Scottish parliamentary
election. Scotland is still part of the United Kingdom, but it has had its
own parliament since 1999, similar to U.S. states. The SNP has
rallied around the call for independence from the UK since its founding in
1934, but it was a minority party until the 2011 victory, which gave it an
overall majority in the Scottish Parliament. Scottish independence is now on
the table. A bill has been introduced to the Scottish Parliament with the
intention of holding a referendum on the issue in 2014.Arguments in favor of
independence include that it will allow the Scottish people to make decisions
for Scotland themselves, on such contentious issues as having nuclear weapons
in their seas and being part of NATO. They can also directly access the
profits from the North Sea oil off Scotland's coast.Arguments against independence include that Scotland's levels of public spending (which are higher than in the rest of the UK) would be difficult
to sustain without raising taxes. North Sea oil revenues will eventually
decline.One way budgetary problems might be relieved would be for Scotland to have its own publicly-owned bank, one that served the interests of
the Scottish people. True economic sovereignty means having control over
the national currency, credit and debt.It was in that context that I was asked
to give a presentation on public banking at RSA Scotland (the Royal Society of
Arts) in Edinburgh on Nov. 22. Among other attendees were a special
adviser and a civil servant from the Scottish government. The
presentation was followed by one by public sector consultant Ralph Leishman,
director of 4-consulting, who made the public bank option concrete with
specific proposals fitting the Scottish context. He suggested that the
Scottish Investment Bank (SIB) be licensed as a depository bank, on the model
of the state-owned Bank of North Dakota. Lively debate
followed. The SIB is a division of Scottish Enterprise (SE), a government
economic development body. SE encourages economic development, enterprise,
innovation and investment in business, which is achieved by the SIB through the
Scottish Loan Fund. As noted in a September 2011 government report titled
"Government Economic Strategy": Securing affordable finance remains a considerable challenge...
Evidence shows that while many large companies have significant cash holdings
or can access capital markets directly, for most Small and Medium-sized
companies bank lending remains the key source of finance. Unblocking this is
key to helping the recovery gain traction." The limitation of a public
loan fund is that the money can be lent only to one borrower at a time.
Invested as capital in a bank, on the other hand, public funds can be leveraged
into nearly ten times that sum in loans. Liquidity to cover the loans is
provided by deposits, which remain in the bank available to the
depositors. Any shortage in liquidity can be covered by borrowing at low
interest from other banks or the money market. As observed by Kurt von
Mettenheim, et al., in a 2008 report titled "Government Banking: New
Perspectives on Sustainable Development and Social Inclusion from Europe and
South America" (at page 196): "In terms of public policy, government
banks can do more for less: Almost ten times more if one compares cash used as
capital reserves by banks to other policies that require budgetary
outflows."Leishman stated that the SIB now has investment funds of 23.2
million pounds from the Scottish government. Rounding this to 25 million
pounds, a public depository bank could have sufficient capital to back 250
million pounds in loans. For deposits to cover the loans, the Scottish
Government has 125 million pounds on deposit with private banks, currently earning
little or no interest. Adding just 14 percent of the General Fund cash and
cash equivalent reserves held by Scotland's local governments would provide
another 125 million pounds, reaching the needed 250 million pounds, with six
times that sum in local government revenues to spare.My assignment was to show
what the government could do with its own bank, following the model of the Bank
of North Dakota (BND). n the Saturday following the RSA event, The Scotsman
published and article Alf Young that summarized the issues and possibilities so
well that I'm taking the liberty of abstracting from it here.North Dakota is
currently the only U.S. state to own its own depository bank. The BND was
founded in 1919 by Norwegian and other immigrants, determined, through their
Non-Partisan League, to stop rapacious Wall Street money men foreclosing on
their farms.All state revenues must be deposited with the BND by law. The
bank pays no bonuses, fees or commissions; does no advertising; and maintains
no branches beyond the main office in Bismarck. The bank offers
cheap credit lines to state and local government agencies. There are
low-interest loans for designated project finance. The BND underwrites
municipal bonds, funds disaster relief and supports student loans. It partners
with local commercial banks to increase lending across the state and pays
competitive interest rates on state deposits. For the past ten years, it has
been paying a dividend to the state, with a quite small population of about
680,000, of some $30 million (18.7 million pounds) a year.Young
writes:"Intriguingly, North Dakota has not suffered the way much of the
rest of the U.S. -indeed much of the western industrialized world -- has, from
the banking crash and credit crunch of 2008; the subsequent economic slump; and
the sovereign debt crisis that has afflicted so many. With an economy based on
farming and oil, it has one of the lowest unemployment rates in the U.S., a rising population
and a state budget surplus that is expected to hit $1.6 billion by next July.
By then North Dakota's legacy fund is forecast to have swollen to around $1.2 billion. With
that kind of resilience, it's little wonder that twenty American states, some
of them close to bankruptcy, are at various stages of legislating to form their
own state-owned banks on the North Dakota model. There's a long-standing tradition of such institutions elsewhere
too. Australia had a publicly-owned bank offering credit for infrastructure as early
as 1912. New Zealand had one operating in the housing field in the 1930s. Up until 1974, the
federal government in Canada borrowed from the Bank of Canada, effectively
interest-free.From our western perspective, we tend to forget that, globally,
around 40 per cent of banks are already publicly owned, many of them
concentrated in the BRIC economies, Brazil, Russia, India and China. "Banking
is not just a market good or service. It is a vital part of societal
infrastructure, which properly belongs in the public sector. By taking
banking back, local governments could regain control of that very large slice
(up to 40 percent) of every public budget that currently goes to interest
charged to finance investment programs through the private sector. Recent
academic studies by von Mettenheim et al., and Andrianova et al show that
countries with high degrees of government ownership of banking have grown much
faster in the last decade than countries where banking is historically
concentrated in the private sector. Government banks are also less
corrupt and, surprisingly, have been more
profitable in recent years than private banks.Young concluded his article: "As
we left Thursday's seminar, I asked another member of the audience, someone
with more than thirty years' experience as a corporate financier, whether the concept
of a publicly-owned bank has any chance of getting off the ground here.'I've no
doubt it will happen,' came the surprise response. 'When I look at the way our
collective addiction to debt has ballooned in my lifetime, I'd even say it's
inevitable.'"The Scots are full of surprises, and independence is in their
blood. Recall the heroic battles of William Wallace and Robert the Bruce
memorialized by Hollywood in the Academy Award-winning movie Braveheart. Perhaps the Scots will blaze a trail for economic
sovereignty in the EU, just as the North Dakotans did in the U.S. A
publicly-owned bank could help Scotland take control of its own economic destiny, by avoiding unnecessary debt
to a private banking system that has become a burden to the economy rather than
a pillar in its support.
American economy and the Rationalization of Inequality
Republicans love touting the
benefits of trickle-down economics and are still doing it in the big debate over
tax cuts for the wealthy. The idea is simple: The more money the people on top
make, the more the people below will benefit from the dripping down
of that prosperity. The hidden agenda here, of course, is the rationalization
of inequality. By linking the welfare of working-class Americans directly to
the prosperity of the rich, the Republicans can protect the insulated interests
of corporations and the wealthy without the fear of backlash. In reality,
however, the only thing that trickles down in the Republican universe is
you-know-what. Our economy is actually a trickle "up" economy
instead, based on a lopsided pyramid scheme that ensures the rising up of
prosperity rather than the dripping down. Consider the example of investment
banking, a white-collar profession that raises money for companies and provides
advice for mergers, divestitures, and other strategic alternatives. I chose
this example because the pyramid structure illustrated by it is magnified a
thousand times in blue-collar environments, the retail industry, and other
sectors where wage inequality between rank-and-file workers and senior
management is even higher, and so it is telling that even in a relatively
upscale business like investment banking, the contrasts are so extreme. The
investment banking hierarchy is essentially a large bureaucracy. At the bottom
(ignoring maintenance staff like janitors and security guards) are the
administrative assistants, who support several bankers at one time and make
about $35,000 a year. Above them are the analysts, a cadre of college graduates
whose life consists of 120-hour work weeks and an endless stream of menial
tasks for $65,000 to $90,000 a year. Next up, and supported by the analysts,
are the associates freshly minted MBAs with more than a $100,000 in school
loans hanging over them who can look forward to taking home between $100,000
and $175,000 a year. If these young men and women, who work 90-hour weeks while
trying to juggle a family, survive long enough to become vice presidents, their
compensation can rise to $200,000-$300,000 per year. So far so good, but here
is where the gravy train takes a sharp turn towards the absurd. Above the vice
presidents are the directors, which is a training zone for the next pay grade
(or a graveyard for those who don't have what it takes). Directors rely on the
workers below them to do all the grunt work, including research, financial
analysis, and client presentations, while they mainly babysit clients and
occasionally come up with ideas to pitch to them. Their pay for these
relatively cushy tasks ranges from $350,000 to $500,000 per year; but even this
is meager compared to what their superiors make. Managing directors, who work
even less and spend more time golfing instead, can make anywhere from a million
to several million dollars a year. Finally you have the really big fish the
CEOs, presidents, executive vice presidents, and others who manage the entire
circus, think deep thoughts, and schmooze with politicians to get regulations
loosened. What makes these gigs so coveted is not just the fact that few ever
manage to leapfrog into that echelon but that the pay scale can jump to tens of millions of dollars (and for
celebrity executives, even hundreds) per year for work that is only
moderately more challenging than that of the managing directors. It may be
lonely at the top, but it's pretty lucrative too.It should be clear from the
above that the wealth generated in these organizations gathers mainly at the
top of the pyramid, while the people at the bottom, who do a lot of the heavy
lifting and are instrumental in building that wealth, receive only a fraction
of those riches. Sure, the pay scales in investment banking are pretty good by
the standards of other industries, but it is the proportional difference between the compensation at the top and the bottom that
makes a difference. This large income gap leads to an exponentially faster
accumulation of wealth in a few hands, which in turn widens the prosperity gap
even more. In other words, prosperity is not really trickling down but
trickling up.The problem with this is obvious. The more wealth trickles up in
our system, the more it frustrates those at the bottom without whose efforts
that wealth could not be created in the first place. Moreover, since money is a
finite resource, disproportionately large compensation for senior executives is
ultimately paid for not just by other employees, but by customers (whose
pockets that money comes from) and shareholders (who receive less benefit from
their investment) as well. In a true trickle-down economy, the benefits of
productivity and innovation would be shared fairly by all stakeholders, not
just the select few with authority to dictate compensation and how the profits
of a company are distributed. So while the idea of such a system might be
appealing conceptually, it is not the way our economy really works, and if the
Republicans really believe in trickle down, they should stop trying to
whitewash the exploitative pyramid schemes of their wealthy donors and come up
with a real model for equality instead.
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