What If Banks Were Publicly Owned? In LA, This May Soon Be a Reality | Hacker News Reader

What If Banks Were Publicly Owned? In LA, This May Soon Be a Reality

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38 pointsevo_936 comments

Because a public bank is not a for-profit business, it can offer lower interest rates than private options, saving billions of dollars over time. And because the city owns the bank, any interest income would flow back into its coffers. That reduces financing costs and facilitates more lending. Plus, the money stays at home, circulating in the local economy rather than traveling into an investor’s pockets or a risky trading scheme.

I don't think this is well thought out.

They are ignoring opportunity cost. If the city lets a bank hold $1B, they get X amount in interest. If they pull that money out and lend it at a lower rate, they will get a smaller return. That's not "saving billions" at all.

I get the sense the people who thought this up have little to no understand of how finance works.

My interpretation is that, because the public bank is doing the lending, the city collects on any interest payments made on loans they provide. Because all money on loan from the bank is generating income for the city, the net income is greater than if they simply collected interest from their stash of money in another, public bank.

I get your line of thinking, but in the part I quoted they talked about offering loans "with lower interest rates".

I agree with you. The compliance costs alone with starting a bank, plus how do you earn interest back on investing in transportation infrastructure? If the bank makes a loan to the city for a new train line, does the city pay itself back...with its own money?

I get the overall activist position against modern finance in the aftermath of the financial crisis, but letting politicians run a bank is not a great idea.

Your argument sounds a lot like, "if they buy apples at $1 and sell them at $0.95, they'll loose money"

It is in fact possible to loan out money at a lower interest rate than a private bank while simultaneously collecting a higher rate than the bank pays on deposits because the bank doesn't lend at the same rate it pays out. The larger that spread, the more sense this idea makes. Seems like an elementary mistake for someone leveling the accusation that the scheme isn't well thought out. Surely there's more to your critique than this.

Explain this particular sentence...Because a public bank is not a for-profit business, it can offer lower interest rates than private options, saving billions of dollars over time..

Where are the "savings"? This money was originally earning interest, not costing money.

And of course they need to incorporate the default rate on their loans, which would lower the overall return.

Overall, a very hand wavy plan.

And looking at the Bank of North Dakota, it indeed looks like they don't save any money at all.

The vast majority of funding for the Bank of North Dakota comes from deposits resulting from tax and fee collections. The bank essentially offers below market rate loans by paying lower deposit rates back to the State, ultimately costing the taxpayer.[1]

[1]https://www.denverpost.com/2015/03/04/colorado-would-be-wise...

There are benefits besides absolute returns you're not considering (you're not beholden to a commercial entity, off the top of my head).

I look at it this way: Scenario A: city deposits their funds in a private bank where the funds earn a 1% interest rate. The private bank lends funds at 5% interest. The bank keeps the 4% difference. Scenario B: city keeps their funds in a public bank. The public bank pays out interest at 2% and lends at 4%. Now the city is keeping the 2% difference with the added benefit of total control over its funds.

> The private bank lends funds at 5% interest

Hang on.. is that the rate the bank is lending at, or their yield, including any losses from things like defaults and costs?

> the added benefit of total control over its funds.

Actually, not quite, because one no longer has control of any funds that were lent out.

If a disproportionate number of borrowers all miss a payment during a particular month (even if the don't outright default and catch up next month), the city/bank will have to borrow those funds from the Fed. This can also happen if the city isn't the only depositor and there's a "run" on the bank. That borrowing, short-term though it may be, adds cost, and the rate is (occasionally) variable, unlike, say, many mortgages.

The point is, understanding interest rate spread is simple enough, but the reality (especially with fractional-reserve banking, which is another can of worms) is far more complicated. What seems obvious when explained with the simple model isn't actually so.

As the grandparent poster just said, it’s the spread that means this might work.

Say a current bank gives you 0.1% interest on your deposit and loans that money out at 4.5%. A new bank could pay 2% interest to the depositor and loan the money out at 3.5%. Thus the depositor gets 20x more interest, and the lender pays less.

The public bank would lend the money at a lower rate than a private bank would, but that lower rate could still be higher than the interest rate for the city's deposits at a private bank. The devil is in the details, but I don't think you can dismiss it out of hand.

So it's kind of like a muni bond, but opposite?

Whenever I see articles like this the questions that occurs to me is: Why limit this to banks? Why not have a publicly owned restaurant? Convenience store?

Banks are literally the cornerstone of the economy. I'm not aware of any restaurants of convenience stores that are even close to being as critical or 'too big to fail.'

Banks aren't too big to fail just because they are banks. If they weren't allowed to get so big or merge together, they they wouldn't be too big to fail.

I never said that, but I'll clarify: They are too big to fail because we have allowed them to become too big to fail.

They're too big to fail because politicians decided they were. Of course, they aren't actually too big to fail. In the financial crisis, if they hadn't bailed out the banks, they'd either be acquired by competitors, or go out of business and people would have actually learned their lessons to not take on excessively risky assets. Instead, the government bailed out the banks, essentially telling them that they should take on whatever risk they want, because they'll just be bailed out whenever they fail.

https://www.archives.gov/publications/prologue/1997/spring/m...

The functionality of a bank is extremely standardized versus a restaurant or convenience store.

Right. One way to look at it might be "the less judgment you need to run a service, the more viable it will be as a non-profit". Hence the success of credit unions and the office coffee pool.

Restaurants and stores need a lot of judgment by comparison.

We kind of do. Food Stamps / EBT cards are sort of like a public grocery service. And Exchange Stores are quite literally public-owned retail stores for Military members - https://www.shopmyexchange.com/ is basically a government-owned government-run WalMart/Amazon. And there's a public-owned restaurants (cafeteria) inside various government buildings, like the Longworth House Cafeteria.

Except they’re the opposite. They’re simple redistribution between private entities. EBT doesn’t mean a public employees’ union now runs yojr grocery store.

So it seems like the core issue they're trying to solve is Los Angeles's portfolio is too large to manage at a community bank[1], because it's too risky. And the solution is to create a single customer bank?

It would seem to me that the way to manage this is to either use the large size of the portfolio to demand concessions from commercial banks, or split up the banking needs over several banks -- although it's probably difficult to split over enough to be able to use the services of even the largest community banks. The article reports $101 Million on deposit with Wells Fargo at some point, that's just a huge amount; more than 1% of total assets for most credit unions (all except the top 7 [2])

[1] I'm going to use bank, when it could also be a credit union, since for most purposes they're interchangeable.

[2] https://www.mx.com/moneysummit/biggest-us-credit-unions-by-a...

Dexia and Belfius are state owned in Belgium since the state bailed them out in 2008. Same for Ethias, an insurance company.

All they have to do is study how the Indians did it - under Mrs. Indira Gandhi's leadership, at one go, all private banks were nationalised in India and the ownership transfered to the government who ran it; 30+ years down the lane, India now also allows private and foreign owned banks with strict regulations.

What if currency were privately printed?

If by currency you mean paper and not coins, this is already the case. The Fed is a private institution with a government mandate to print paper money. The plates are owned by the U.S. Treasury, but the printing is performed exclusively by the Fed authorized by the Federal Reserve Act.

Because the U.S. Constitution authorizes coining but not paper currency, and the Federal Reserve Act authorizes the Fed to print paper, it's something of an open question to what degree the printing of paper currency is an exclusively federal power. But in practice anyone trying to print a competing paper currency domestically gets stomped on. As far as I'm aware though, it's untested if a state could print its own paper money - but to what end? I think it's a hypothetical really only of interest to monetary economists and perhaps some fringe politicals, which is where it would need to be explored substantially before it could ever emerge practically.

There are historic cases of private banks issuing paper money in the U.S., but it usually degraded into distrusting the currency, one exception being the Suffolk Bank system, but even that eventually came to pass. You could argue that your VISA, MasterCard, or Amex card is a private "currency" with a fixed exchange rate 1:1 with the card's issuance currency. By offering you a line of credit on the card, they've "printed" their own private currency, with an externally facing dollar (or whatever the currency happens to be in the card's issuing location). But as it's not in physical paper form, it's sorta shrugged off as a convenient derivative rather than a competitor.

And so back to the public bank question, most countries do have them. Their central bank is publicly owned. Bank of Germany, the Bank of Canada, the Bank of Mexico, etc.

> You could argue that your VISA, MasterCard, or Amex card is a private "currency" with a fixed exchange rate 1:1 with the card's issuance currency. By offering you a line of credit on the card, they've "printed" their own private currency

I don't think this really flies, the credit is paid, denominated, and collected in USD it's not separate in any useful or meaningful sense. They can't pay out more to merchants than they have in their accounts/credit lines.

>...There are historic cases of private banks issuing paper money in the U.S., but it usually degraded into distrusting the currency, ...

I don't think that was the general case at least with the bank notes issued by the national banks after the civil war:

>...From 1863 to 1935, National Bank Notes were issued by banks throughout the country and in US territories. Banks with a federal charter would deposit bonds in the US Treasury. The banks then could issue banknotes worth up to 90 percent of the value of the bonds. The federal government would back the value of the notes—the issuance of which created a demand for the government bonds needed to back them.

>The program was a form of monetization of the Federal debt. Bonds eligible as collateral for posting to the Treasury were said to have the "circulation privilege" and the interest they bore provided seigniorage to the National Banks.

https://en.wikipedia.org/wiki/National_Bank_Note

The program was run for over 70 years, it was only with the Great Depression and the desire to have the Fed have greater control over the money supply that the program ended.

One of the largest benefits of national currencies is when they're healthy everyone uses it and knows the value making commerce 10000x easier. Look at the EU one of their major projects was creating a single currency to make things much simpler to facilitate trade between their members. Now imagine the US 'private currency' situation, it's like the European market pre-Euro but instead of the boundaries of the currencies happening at national borders it's just an undifferentiated mass.

The US had a mix of currencies at one point as local and state banks issued their own bills and it was a mess.

If you mean private as in state, it's illegal via the Contract clause in the Constitution. Having 13 states making up monetary policy became enough of a clusterfuck during the revolutionary war that Congress had to explicitly forbid the issuing of any type of currency, so chances are good it would result in an even bigger clusterfuck if it was tried today.

I thought the parent meant something like US state banks 1837-1862

Cryptocurrency is. IOUs are essentially private currency as well.

That's called a Credit Union. Not a new idea....

A credit union is a non-profit. A non-profit can be owned by a government or an individual, similar to how a for-profit can be owned by a government or individual. In other words, the two descriptions are completely orthogonal.

Most credit unions (really, the vast majority) are privately owned, typically by the account holders themselves.

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