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Ireland's political and cultural magazine
November 2014 33
T
HREE Irish political parties support publicly-
owned banks but the mainstream has yet to be
convinced. Ellen Brown who spoke at Kilkenomics
in October is on a mission to change that.
Brown claims that a state bank can nearly double its
spending power if it puts state money in its own bank as
capital and deposits.
I ask what she thought of Deirdre McClusky, Professor
of Economics at the University of Illinois, describing that
at Kilkenomics as “magical thinking”.
She’s unfazed: “Banking is magical. It’s the source
of about 95% of our money supply. Except for paper
money and coins, all of our money is created by banks
when they make loans. Contrary to popular belief, banks
do not lend their deposits. They create deposits when
they make loans”. Of course, they need their deposits
to clear their cheques. But where do the deposits come
from? Unlike with a revolving fund, which can only lend
its money out and then wait for it to come back before
lending it again, a bank can generate loans backed by its
deposits while the deposits remain in the bank, avail-
able to depositors. The money
is effectively double counted.
If the depositor and the bor-
rower come for their money
at the same time, the bank can
borrow very cheaply from other
banks or the money market to
cover the shortfall. And that is
the magic of banking”.
She is equivocal about the
proposed Strategic Banking
Corporation of Ireland which
is about to launch with €500m
in credit for SMEs. “It is not actually a bank. Its money
comes largely from KfW, a German publicly-quoted
development bank, to help capitalise the Irish banks. The
interest on that capital will go back to Germany, and the
banks that will be lending the money to small and medi-
um-size businesses are the same three big Irish banks
that have not shown themselves to be good stewards in
the local lending market”.
In Germany, KfW provides liquidity for a network of
skilled, locally responsive 200-year-old publicly-owned
banks called Sparkassen. She says “they service about
70% of the domestic SME market and are largely respon-
sible for its viability even in the face of a global credit
crisis”.
The Sparkassen group is quite interested in helping
Ireland set up a similar network of publicly-owned banks,
not because they want to expand into Ireland, which they
are not allowed to do, but, according to Brown, because
they want to establish the viability of the model, which
is under threat in the Eurozone. They describe them-
selves as the last man standing, fighting for banking in
the public interest. She approves.
Another option she moots for Ireland is of a state-
owned bank similar to the Bank of North Dakota, the
only depository bank in the US that is publicly owned.
North Dakota is also the only state that escaped the
credit crisis, boasting a substantial surplus every year
since 2008. It has the lowest unemployment rate and
one of the lowest foreclosure rates in the US. All state
revenues are deposited in the Bank of North Dakota by
law. The bank then leverages its revenues into credit for
the state.
Brown believes that “One of the advantages of public
bank ownership is that it can cut the cost to the public
of infrastructure in half. On average, 50% of the cost
of infrastructure goes to interest. It’s just like with a
mortgage”.
Owning the bank also allows the state to direct credit
where it needs to go in the community. Publicly owned
banks lend counter-cyclically,
meaning that when other
banks are afraid to lend, the
public banks expand their
lending.
Public banks also have much
lower costs. The Bank of North
Dakota doesn’t have to adver-
tise for customers or deposits.
It has a captive depositor in the
state itself, and it gets its cus-
tomers by partnering with the
local banks, which serve as the
front office. The Bank of North Dakota then comes in and
backs the loan, helping with capital and liquidity require-
ments and sharing in the profit. It does not pay bonuses,
fees, or commissions, and it has no high-paid executives.
As a result, it is highly profitable, for the state.
As to the fact that Ireland already owns over 95% of
AIB and 14 to 15% of the Bank of Ireland, she points out
that “the public has borne the losses for those banks, but
it has not reaped the profits, and until their toxic balance
sheets are cleaned up, there won’t be many profits”. The
government has not taken over their direction in the pub-
lic interest. She considers it would be a smart move for
Ireland to set up its own freshly capitalised ‘good’ public
bank if only to have a ‘Plan B’ if, or some say when, the
current system takes another big hit. •
Emer O’Siochru is a member of the Public Banking Forum,
Ireland.
Emer O’Siochrú interviews Ellen Brown, the founder
of the Public Banking Institute in the US and author of
‘The Public Bank Solution’
Magical public banking
Public bank ownership
can cut the cost to the
public of infrastructure
in half. and allows the
state to direct credit
where it needs to go
in the community, and
counter-cyclically
“
Ellen Brown
Public Banking
Advocate
POLITICS
INTERVIEW
