Overcome the banking deserts with a public option?

The fact that nearly 8 million homes went into foreclosure in the Great Recession did not only significantly reduce the homeownership rate in the US, it also redirected billions of dollars from local communities in the hands of corporations which vacuumed the cheaply available real estate up and directed teir value and the cash generated from rents or resales into their pockets. Many of these LLCs still operate nationally or regionally, continuing the money drain away from the local economy and contributing to the lopsided wealth distribution that has become the new normal. No wonder, then, that some look at ways how to keep the money in the community.

West Baltimore banking and funding desert:
Can local banks change this?

It is all about the money. Even an architect and urban designer who usually wants to shape physical things has to submit to that. Without it nothing happens. The uneven distribution of money, be it as accumulated wealth, or as investment and spending is a big burden on Baltimore. Many efforts are underway to even out investment through private and public reinvestment funds, social impact funds, funds from community benefits agreements or community development financial institutions. (CDFIs). It is in this context, then, that the Baltimore based Abell foundation has devoted a recent report to heart of finance, banking. Ever since the financial crisis the usual assumption that public problems can best be solved through private enterprise has taken a hit. Once highly regarded financial institutions such as Goldman Sachs or Deutsche Bank have taken a big hit and rank in their reputation closed to the proverbial used car salesmen.

Banking is a privilege, a public trust. Advocates of public banking argue that it should be in public hands. (The Municipal Banking Movement: An Opportunity for Baltimore Abell Report #32)

It isn't that the financial crisis has changed anything other than public opinion about banks.  As if it were the goal of the American financial world to keep the general public fiscally and financially illiterate, the industry itself has remained an unjustifiably bloated part of the economy and bank consolidations ("too big too fail") continue unabated as much as the greediness of the sector. It has become an infamous fact that the income of the top 25 hedge fund managers exceeds the income of all US kindergarten teachers combined. It also remains true that many parts of Baltimore remain banking deserts, devoid of brick and mortar banking facilities and devoid of meaningful loans made in the community.

In the long wake of the 2008 financial crisis, communities continue to watch scandal-ridden Wall Street banks gamble in opaque financial markets, while promising local projects go unrealized for lack of funding.(Abell Report)

All the [investment] banking has not made the broader population or for the country itself any wiser in matters of money. No comparable country has lower savings rates, more debt on credit cards, more student debt, or a higher rate on foreclosures on private homes, not to mention the  ballooning federal deficit which, in spite of its record size, can barely elicit a yawn among citizens. So used are we to debt as the path to the good life. Debt, though pushes many over the edge when it can't be served. Maryland sits on rank #3 in the US when it comes to foreclosures. At the same time banks continue to "redline" dis-invested areas by simply not maintaining any branches there. The fact that brick and mortar bank branches are disappearing at record rates has further exacerbated the lack of access. The Community Reinvestment Act of  1977, focused mostly on lending, has done little to change that.

Baltimore, like many American cities, has not been well-served by the recent transformation of commercial banking markets. In the years leading up to the 2008 financial crisis, large national lenders contributed to a real estate boom that swelled with the national market and crashed locally with devastating force. Wells Fargo in particular steered many minority Baltimoreans toward predatory mortgages that were more expensive than the borrowers’ credit warranted. As these mortgages predictably defaulted, foreclosed homes blighted many
of the city’s predominantly African American neighborhoods. (Abell report)

The idea of buying on debt is such a popular American method of doing things that a lack of access to loans, credit or banking is a huge disadvantage. The matter is by no way partisan. In recent memory,  supposedly fiscally conservative Republican presidents regularly bloated the federal deficit.  Maryland's Governor Hogan who talks a lot about prudent expenditure of State money, still sells the notion of buying beltway widenings or the DC area Purple Line via a giant credit card called "P3" as in private-public-partnership. In this model the famed private sector funds, builds and manages the projects and the taxpayer will pay in the end far more than the actual construction cost due to interest and profit going to the private partner. But back to banking and the idea that public local banking could bring more investment into under-served communities.

Before the 1980s, robust federal banking regulation ensured that a diverse archipelago of small and medium-sized banks provided community financial services within tightly bounded geographic markets. But in the years since, financial deregulation enabled a wave of bank consolidation, generating a
few, continent-spanning banking firms. (Abell report)

Abell's report about the possible advantages of public banking feels like a call in the desert in a time when everything trends towards privatization. Bob Embry,  still the President of the Abell Foundation, is no self described socialist like Bernie Sanders and neither is the author of the study, Sean Vanatta, an assistant professor  of the history of modern political economy in New York. Increasingly, though, privatization shows its ugly sides. Cool facts increasingly point to the advantages of public options, whether it is in municipal energy (example Hagerstown), transit, water service, parking garages, schools, universities, health care or banking.

The local Sparkasse (Savings Bank), often owned by the
municipality:  beloved but endangered in Europe

But

In the Baltimore Metropolitan Statistical Area (MSA) the Federal Deposit Insurance Corp. (FDIC) found that 6 percent of residents were “unbanked,” lacking any relationship with a federally insured financial institution. Another 21 percent were“underbanked,” maintaining some relationship with a federally insured bank, but also continuing to rely on fringe financial service providers, like check cashers and payday lenders, for their financial needs. In 2013, the last year for which data are available, 41 percent of African Americans in the MSA were underbanked, while 13 percent were fully unbanked.  (Abell report)

Public intervention where the private sector fails is no new idea. In health care it is Medicare and Medicaid which cut out the middleman, in banking it can be done through reinvestment funds, banking co-ops and municipal banks.  In Europe municipal savings banks used to be as popular as credit unions here until several of them tried to be like the big banks and experimented with subprime mortgages and derivatives, often losing spectacularly in the process, just like the evil big banks.

[The public banking proposal] in cities and states around the country, is a bold call to reinvigorate public purpose in banking. Having long been subject to the power and caprice of finance, local governments now wish to control it—to reclaim ownership of their community assets from distant financial firms.

Government-led public banking, promoted by organizations l[...] emphasizes using state or municipal funds to establish publicly owned banks that then provide local governments with low-cost financial services. Government-led public banks, in turn, enable local governments to end their reliance on what advocates characterize as unethical Wall Street banks, which charge local governments expensive fees to invest community resources in distant financial markets. (Abell report)

Abell refers to the Public Banking Institute, an organization formed to promote public banks.

“Public banks can help us create the communities we want. We want parks, good roads, safe bridges, clean energy, and housing we can afford. We want lower interest rates for local small-business loans, local control of our tax dollars, investment in our local communities, and ethical and transparent financial institutions managing our public funds. Public banks can be the financial engine that makes this happen for our communities.” (PBI)

Abell also refers to the example of German local banks that are frequently owned by municipalities (Sparkassen). Their function isn't a bit like US credit unions, local and oriented on a smaller pool of customers. Several of heir bigger siblings, the State Landesbanken, however, wanted to be like the big banks and dabbled with derivatives and bad loans so that several had to be bailed out as well and also lost their better reputation just as US local savings and loan banks had even before the last financial crisis. 

Reinvestment in West Baltimore:
Bakerview homes for first time homebuyers. Subsidized and hard to finance.

The Abell report discusses the many forms funds take to adress the lack of investment in disinvested areas but argues that funds are not banks and that the difference between them is "like addition and multiplication" pointing to the many more options a bank has to grow their assets and "create money". The report acknowledges that small public banks are seen as too difficult and that no one wants to be the first to try.  It muses that the lesson from history "may be that public banking's moment passed long ago". A very uncertain conclusion of the report, for sure. In the end the report suggests a more thorough feasibility analysis to "test the idea" (again).

The next real estate crisis may be right around the corner. Time to think about differently about a rescue: Instead of buying out the culprits give the money to local community banks.

Klaus Philipsen, FAIA


Abell summary
Abell Report