We all know the banking system is broken. It's easy to become pessimistic in the face of corporate and political corruption, but the system can be changed. We've done it before, and we can do it again.
One pathway to genuine reform is "public banking": the establishment of banks which are owned at operated by the government, and which serve people and small businesses directly. Here's why public banking should be included in the agenda for deep and genuine financial reform.
There's a working model for state banking
Reform groups like the Public Banking Institute often cite the state-owned Bank of North Dakota as a model worth emulating. The Bank was created in 1919 to "promote agriculture, commerce, and industry" and to be "be helpful to and assist in the development of... financial institutions... within the State."
The Bank of North Dakota operates a little bit like the Federal Reserve. It's primarily a "bank for bankers," rather than an institution that serves customers. It does provides student loans, and individuals can deposit money, but it doesn't have ATMs or other customer service amenities. (Individual deposits make up less than 2 percent of its assets.)
The Bank of North Dakota has established relationships with all 94 of the state's community banks and has helped increase their lending ability in a targeted way that supports economic growth.
Local banking is desirable for many reasons, including the lenders' familiarity with their community. (For an idealized version, think of Jimmy Stewart in It's a Wonderful Life.) The presence of thriving local banks also helps fight the over-centralization of the banking system.
Public banking works
In North Dakota, community banking has also meant community lending. A meaningful economic recovery can't take place until banks stop exploiting low-interest Federal Reserve loans and start lending responsibly, with well-underwritten loans to both consumers and the small-to-medium sized businesses that are the engines of economic growth.
A 2011 report from the Institute for Local Self-Reliance shows how well North Dakota's banks did in the aftermath of the financial crisis, when compared to those of neighboring states and the nation as a whole:
A joint paper from the SEIU and the Center for State Innovation called "Building State Development Banks" summarizes the argument for exporting North Dakota's model to other states.
There are many kinds of public banks
State banks aren't the only public banking model worth exploring. The Public Banking Institute is also promoting the concept of county banks.
Proposals for a "National Infrastructure Reinvestment Bank" have been put forward in Washington DC, from President Obama and others, since 2007. These proposals have merit, but have tended to follow the FDIC model for housing loans.