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Public-Sector Banks: From Black Sheep to Global Leaders

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Posted on Mar 8, 2012
Gamma Man (CC-BY)

Detail of Alexander Hamilton’s face on a $10 bill. Hamilton was a strong proponent of public banking, championing the establishment of the first U.S. national bank in 1791.

By Ellen Brown, Truthout

(Page 2)

But that is not what the data of these researchers showed:

[W]e have found that ... countries with government-owned banks have, on average, grown faster than countries with no or little government ownership of banks…. This is, of course, a surprising result, especially in light of the widespread belief—typically supported by anecdotal evidence—that ” ... bureaucrats are generally bad bankers.”

What accounts for their surprising findings? The authors provide a novel explanation:

We suggest that politicians may actually prefer banks not to be in the public sector…. Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians—at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies.  Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders such as complex derivatives trading.

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Government owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed, if at all, for the misdemeanours of private banks. It is the shareholders who are expected to prevent these but lack of transparency and weak governance stops them from doing so in practice. On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth.

The BRICs as a Global Power

Focusing on the financing of real businesses and economic growth seems to be the secret of the BRICs, which are leading the world in economic development today.  But the BRIC phenomenon is more than just a growth trend identified by an economist. It is now an international organization, an alliance of countries representing the common interests and goals of its members. The first BRIC meeting, held in 2008, was called a triumph for then-Russian President Vladimir Putin’s policy of promoting multilateral arrangements that would challenge the United States’ concept of a unipolar world.

The BRIC countries had their first official summit and became a formal organization in Yekaterinburg, Russia, in 2009. They met in Brazil in 2010 and in China in 2011, and they will meet in India in 2012. In 2010, at China’s invitation, South Africa joined the group, making it “BRICS” and adding a strategic presence on the African continent.

The BRICS seek more voice in the International Monetary Fund (IMF), the World Bank and the United Nations. They are even discussing their own multicultural bank to fund projects within their own nations, in direct competition with the IMF.  They oppose the dollar as global reserve currency. After the Yekaterinburg summit, they called for a new global reserve currency, one that was diversified, stable and predictable—and they have the clout to get it. According to Liam Halligan, writing in The UK Telegraph: “The BRICs account for ... around three-quarters of total currency reserves. They have few serious fiscal issues and all are net external creditors.”

Western financial interests have long fought to maintain the dollar as global reserve currency, but they are losing that battle despite economic and military coercion. Russia, China and India are now nuclear powers. The BRICS will have to be negotiated with, and the first step to forming a working relationship is to understand how their economies work. We need to lift the curtain on how the other half of the world does it. Rather than declaring war on their more successful practices, we may decide to assimilate some of them into our own.

As Gandhi said, “First they ignore you, then they laugh at you, then they fight you, then you win.”

Written for the Public Banking in America Conference to be held April 27-28 in Philadelphia.

This article is not covered by Creative Commons policy and may not be republished without permission.


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By diamond, May 11, 2012 at 3:30 pm Link to this comment

Iceland had a model and prosperous economy, low unemployment and a high standard of living, but in 2001 they de-regulated their banks. Eventually the bankers destroyed Iceland’s economy and then fled to London with their ill-gotten gains. In spite of an Interpol warrant out for their arrest they are protected by the British government. The people of Iceland threw out their government, refused the IMF bailout after holding a referendum in which 93% of voters voted not to accept the bailout and set about fixing the mess. Presumably they have now nationalized the banks again and are putting the broken furniture out for rubbish collection and getting their house in order without any ‘help’ from the IMF.

Egypt’s empire lasted 3,000 years - they had no banks and no credit.

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moonraven's avatar

By moonraven, March 11, 2012 at 1:16 pm Link to this comment

I suggest you wait sitting down.

I also suggest that it could be worth your while to put one or more of my other suggestions to the test. 

Nothing you or anyone else on this site has suggested has accomplished jack shit.

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By frecklefever, March 11, 2012 at 1:03 pm Link to this comment

MOONER…LIFE IS SHIT…OVERTHROW THE FEDERAL GOVERNMENT…BY
FLOODING WASHINGTON WITH A MILLION CARS…TAKE A SECOND
CONSIDERATION OF LENIN…THESE ARE A FEW OF YOUR SPOT ONS…
A GIANT TRAFFIC JAM IN WASHINGTON WOULD HAVE RESULTED IN THE
DRIVERS TRYING TO KILL EACH OTHER OVER WATER FOOD AND BREEDING
RIGHTS…YOU EVEN CHIDED THE OTHER POSTERS FOR NOT BEING SMART
ENOUGH TO COME WITH THAT BRILIANT IDEA..AND COUNTRIES THAT LIVED
UNDER LENINS DREAM…AT THE FIRST OPPORTUNITY ABANDONED IT…BUT
YOU ARE CORRECT…YOUR POSTS AWAYS DO HAVE SPOTS ON THEM…I WILL
AWAIT YOUR OLD STANDBY…INSULT…

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By moonraven, March 11, 2012 at 11:15 am Link to this comment

My postings are ALWAYS spot on, freckle.

Sorry if it makes you pimps for patriotism mad.

I couldn’t possibly care less.

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By moonraven, March 11, 2012 at 11:15 am Link to this comment

My postings are ALWAYS spot on, freckle.

Sorry if it makes you primps for patriotism mad.

I couldn’t possibly care less.

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By Fat Freddy, March 11, 2012 at 8:52 am Link to this comment

Ellen Brown? She’s a neo-Greenbacker.

http://www.garynorth.com/public/department141.cfm

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By Laurence Tribe, March 10, 2012 at 4:42 pm Link to this comment
(Unregistered commenter)

Congress shall have the Power: To coin Money, Regulate the value Thereof and of Foreign Coin and fix the Standard of Weights and Measures. Article I,Section 8, Clause 5, Constitution of the United States.The Federal Reserve Act of 1913 was not a Constitutional Amendment, but it granted to a private corporation the power and authority to control the value of every dollar in your wallet/purse.At least some are aware that the Fed’s quantitative easements (QE’s) I and II inflated (les-sened) the value of every dollar in circulation, which means higher prices, a huge rise in the cost of living to the poor. A N.Y. judge sued for a pay increase based on the devaluation of her paycheck:the dollar was worth 1/265th of an ounce of gold at hire but now worth 1/1,300th ounce of gold, a big loss in pay - and won. Bastiat:It is impossible to introduce into society a greater change and greater evil than this: the conver-sion of the law into and instrument of plunder.

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By Fullblad, March 9, 2012 at 4:59 pm Link to this comment

With proper oversight I don’y see why publicly owned banks would not be an asset to any governing body.Interest rates would nominally be low and any profits would accrue to the government and taxpayer. This has obviously worked to some degree for N.D. over the years. Private banks have proved economically unstable with booms and very intensive busts adding social irresponsibility to their failings. An idea who’s time has come and probably should have arrived a lot earlier as a counter to the private banks and their societal destructiveness.

And yes the Federal Reserve needs to be legislated from existence and it’s responsibilities encorporated under public scrutiny with the treasury board. Time for our Federal Government to retake the power to create money and control credit for the good of the people and the economy as a whole.

“Until the control of the issue of money and credit
is restored to government and recognized as it’s
most conspicuous and sacred responsibility,
all talk os sovereignity of Parliament and
democracy is idle and futile…Once a nation parts
with control of it’s credit, it matters not who
makes the laws..Usury once in control will wreck
any nation.”  MacKenzie King-Canadian Prime Minister
                        WWII era

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By frecklefever, March 9, 2012 at 1:35 pm Link to this comment

MOONRAVING…READ ELLEN BROWNS…THE WEB OF DEBT..THEN YOUR
SPOUTING WILL EVEN SEEM RIDICULOUS TO YOUR ON PUFFED UP
INTELLIGENCE…FOR SOMEONE CLAIMING TO HAVE A PHD…YOUR POSTINGS
ARE CHILDISHLY INSULTING…

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By Dr. Roger Kotila, March 9, 2012 at 1:20 pm Link to this comment
(Unregistered commenter)

Ellen Brown’s leadership toward publicly owned banking is helping to open doors which have been slowly closing due to privateering—privatization of publicly owned assets and services which should really remain public utilties. Ellen has yet to discuss the need for regulation and control of international finance and banking: That is where the Earth Federation Movement under the Earth Constitution becomes critically important to replace the obsolete UN global political system which is unable to cope with either Big Money, or multinational corporations.

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By moonraven, March 9, 2012 at 11:49 am Link to this comment

freckle:  Which nuthouse are you posting from?

As if the world wasn’t insane enough, you have to kick up the amps of silliness here.

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By proletariatprincess, March 9, 2012 at 7:36 am Link to this comment

I believe it will be impossible for the USA to overcome the yoke of corporate capitalism until it overcomes the irrational fear of all social justice issues it labels socialism.  The Cold War and the Red Scares that followed WW2 insured that at least 2 generations of USAmericans were innundated with misinformation and propaganda.  The truth, we have seen, does not always set us free but has a liberal bias…..

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By frecklefever, March 9, 2012 at 6:30 am Link to this comment

THE FEDERAL RESERVE BANK IS PRIVATELY OWNED BY MAJOR U.S. AND
EUROPEAN BANKS…THE USE OF THE WORD FEDERAL…IS TO GIVE THE
IMPRESSION ITS A BRANCH OF THE GOVERNMENT…THATS WHY IT MUST BE
NATIONALIZED…

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By Marian Griffith, March 9, 2012 at 1:22 am Link to this comment
(Unregistered commenter)

I do agree with the general principles outlined in this article.
However, there is one logic fallacy that needs to be adressed. There is no, or at least not necessarily a, causal relation between the huge growth of the BRICs countries and the fact they have a national bank.
Their growth may well be because they reached a point in their economic development where such growth became possible, same as happened to Europe and (slightly later) the USA at the mid 1800s when they transited from a primarily agrarian to an industrial economy. Because of the nature of industrial manufacture the productivity increases very rapidly indeed, allowing for a huge increase in income. The BRICS countries did not have to go through a century of robber barons and world wars to give their populace a part of that increasing wealth, thus allowing for a much greater economic base.
Having national banks however is helpful in that there is less skimming off the top by banks seeking to earn trillions.

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By Jeff N., March 8, 2012 at 6:10 pm Link to this comment

Seems like a no-brainer to me.. can go ahead and add that to the list of things that will never happen in the U.S.

glenn, how about government as a public utility too!  Wouldn’t THAT be something.

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By moonraven, March 8, 2012 at 4:52 pm Link to this comment

Venezuela has nationalized several banks because they ripped off the banking clients and failed to maintain acceptable levels of capitalization.

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By moonraven, March 8, 2012 at 4:49 pm Link to this comment

frecklefever:  The Fed doesn’t need to be nationalized.  It is an autonomous unit within the US federal government.

It was created by the US Congress in 1913, and that same body has oversight responsibiity in its regard.

I cannot believe how little some of you folks know about your government.

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By glenn, March 8, 2012 at 3:52 pm Link to this comment
(Unregistered commenter)

As a business owner, I am a big fan of capitalism and free markets, generally.  But I see no reason why the currency, the lifeblood of capitalism, should have ever become an object of capitalism / profit.  It should just be a public utility, enabling the flow of goods and services.  It took me a while, but I can also see health care as a public utility.  Then, the real economy is basically everything else.  Thanks Ellen for all your work in this area.  Looking forward to attending your PBI conference next month in Philly!

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By PatrickHenry, March 8, 2012 at 2:58 pm Link to this comment

Public sector banks are a great idea.  Besides having the employees tied into a structured pay scale the thought of the bank officers giving each other huge bonuses with bail out funds while giving me .2% interest makes it sound even more worthwhile.

Banks should stick to banking and stop with the promos for air miles, free kitchen equipment, $100 sign up bonuses and return to providing interest on savings and loaning money on secured collateral.

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By Ernie Messerschmidt, March 8, 2012 at 1:57 pm Link to this comment

Yes, add the military to the list too, Felicity. There should be no private profit motive for mass murder and military aggression. That’s the third big monkey on our backs.

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By felicity, March 8, 2012 at 1:31 pm Link to this comment

I have long held that the health-care system should be
a public utility.  After reading this article, I’m
adding banks to the list.

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By Derryl Hermanutz, March 8, 2012 at 1:29 pm Link to this comment
(Unregistered commenter)

Great article, Ellen. Antipathy toward public banking is more of a vague ideological
prejudice than a rational objection to what is in fact a very sound approach to finance. It’s
kind of amazing that, after the virtually complete implosion of private banking in the US
and Europe, people still assume that private bankers are inherently ‘prudent’ and that our
nations’ finances should be left exclusively in their ‘capable’ hands. Certainly the bankers
have proven themselves “capable” of paying themselves enormous salaries and bonuses
while they were systematically bankrupting their banks, and so far they have “prudently”
collected trillions of government bailout money and avoided prison, but I don’t think
rewarding kleptocracy is really an optimal public policy approach to operating a national
banking system. 

The real world track record, not theory but actual history, is that public banking is a more
sound approach to finance than is private monopoly banking. At minimum public banking
should play a dominant role in public finance such as infrastructure development, using
the people’s own credit to develop their economies and preventing private bankers from
extracting fully one half of all ‘infrastructure’ spending as interest payments. 

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By Ernie Messerschmidt, March 8, 2012 at 1:10 pm Link to this comment

A very auspicious report—public banking appears to be the wave of future because it works! The BRIC countries that have embraced it are doing much better than we are in terms of economic growth. No wonder, with the monkey of parasitic private finance off their backs! China is predicting a very bad year for them,  with only 7.5% growth, after pretty consistent 10% growth since the early 80s. India about the same. Russia is doing fine, predicted to be the richest country in Europe by 2030 by GS economnist O’Neill.  Brazil is kicking A. This while the USA and the UK, staunchly committed to the virtues of capitalist banks reigning supreme, are imploding economically at equally phenomenal rates, despite media denial. While the quintessence of private Western banking is the derivative, which is nothing but irresponsible rip-off flam-flam according to derivatives expert Satyajit Das, the quintessence of public banking is the public service loan, responsibly improving social well-being and nurturing important industry without the necessity of making a quick buck.
This public banking option deserves further close study. We ignore these facts to our detriment. Many thanks to Ellen Brown for bringing them to our attention!

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By frecklefever, March 8, 2012 at 1:10 pm Link to this comment

THE FED NEEDS TO BE NATIONALIZED…THUS THE NATIONAL DEBT COULD
BE FORGIVEN WITH THE STROKE OF A PEN…AND A BALANCED BUDGET
WOULD BE INSTITUTED…WITHOUT POLITICAL GRANDSTANDING…

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