Episode 93 – The Public Banking Act with Rohan Grey

“It’s long past time to open doors for people who have been systematically shut out and provide a better option for those grappling with the costs of simply trying to participate in an economy they have every right to—but has been rigged against them,” Tlaib said in a statement. “The COVID-19 pandemic has also plunged city and state governments into a financial crisis unlike any other they’ve ever experienced—and public banks could offer a much more tenable option for dealing with their debts at a time when they need it most.” — Newsweek 

Macro N Cheese – Episode 93
The Public Banking Act with Rohan Grey
November 7, 2020

[00:00:03.500] – Rohan Grey [intro/music]
What this bill is really trying to do is to provide a public option and a new public alternative, not just an option in the same market, but an entirely different approach for public banking vis a vis existing private commercial banks. The goal here is to say these are public banks; they serve a public purpose and to the extent that people should be well-remunerated for that, we think that the salary that the highest public servant in the country gets paid is a sufficient cap to that.

[00:01:26.700] – Geoff Ginter [intro/music]
Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:34.620] – Steve Grumbine
All right, folks, this is Steve with Macro N Cheese. I have Rohan Grey joining me now. Rohan’s been on this program many times and really probably doesn’t require a huge bio. But I do want to congratulate him. He is an assistant professor of law at Willamette University, and that’s a big deal. So with that Rohan, thank you so much for joining me tonight.

[00:01:56.010] – Rohan Grey
Thanks for having me, Steve.

[00:01:57.540] – Grumbine
You’ve done some really cool stuff here recently. This Public Banking Act that you just announced the other day, I think there was a nice article in Vox about it. It seems like Rashida Tlaib and AOC were involved. Talk to me a little bit about the genesis of this bill and what’s in it, what’s it all about.

[00:02:16.000] – Grey
Yeah, I mean, it’s been a kind of privilege to be working with AOC’s office and Rashida Tlaib’s office and their great staff on this bill, as well as colleagues of mine like Raúl Carrillo and various public bank advocates in California, New York, and elsewhere. We came to this bill in part because I had been working on other legislation with Congresswoman Tlaib, particularly the ABC Act that we had talked about earlier.

But public banking has long been on the agenda of, I think, a number of members of the squad and sort of one of the obvious interventions to make as part of building a more democratic and publicly oriented financial and monetary system. So when we got the opportunity to work on this, it’s not the thing that I sort of would consider the highest priority or the first thing that I would want to change, but it’s a very important part of any larger program of change and it’s one that’s time has come at the moment, particularly in light of the state and local government budget crisis that’s been precipitated by the COVID pandemic.

So working out how this could fit in with a larger agenda for financial reform – the larger agenda is sort of the progressive Green New Deal agenda – and then help deal with some of the immediate pain being felt at the state and local level as kind of the motivation here.

[00:03:25.330] – Grumbine
So, there are several flavors of public banking. We have the Ellen Brown school and then we have what it looks like you guys are working through. I know that Robert Hockett has come out with some different things. And so I’m just curious, what is the distinction for how you’re approaching it? Was this following anyone’s school of thought or are there differentiators here? What is the basis of this bill?

[00:03:48.250] – Grey
Yes, sure. This bill, I think, there are a couple of things that make it a distinct bill in terms of the way the public banking has been talked about in the last few years. The first is that this is explicitly a federal bill. So there have been a number of state and local initiatives, some ballot initiatives, some legislative initiatives to allow or to mandate the creation of a state or local bank around the country.

There is, of course, the historical model of the Bank of North Dakota, which a number of people point to as something worth emulating. I have problems with that particular model. And more broadly, I think that the way to approach this is letting a thousand flowers bloom. So even though I have problems with the Bank of North Dakota, I’m not out there trying to get it shut down or anything. And if there are other places that think that’s the best model for them, then they’re welcome to experiment.

But the way that this bill was set up was that it was a federal bill, but it was designed to be basically enabling and supporting legislation for state and local public banking initiatives. So it’s not a national investment authority. It’s not a sort of “democratizing the Fed,” or creating some sort of new sovereign wealth fund, or anything like that at the federal level. It’s about using federal legislation and federal legal and financial support to make it easier for state and local governments or state and local entities to create public banks, and for them to succeed and offer the kinds of services that would be most suited to the needs of those communities.

We designed it explicitly to be complementary with other current reform proposals, so any sort of fiscal monetary public investment reform at the federal level is entirely consistent with this. Having payment system reform, including things like Fed accounts, e-cash, or a postal banking system, are entirely consistent – there’s language in the bill to allow these public banks to provide those services or integrate with the Postal Service – and the bill is entirely consistent with more direct forms of fiscal relief to state and local governments and direct monetary and credit relief to state and local governments.

So this isn’t necessarily intended to be a replacement for any other policy or any other kind of reform that would be more directly relevant to particular problems around that, but it is an important part of a larger kind of infrastructure, a larger vision of what public finance should look like, and has a number of immediate, tangible benefits for the communities that might want to create their own public banks and then be supported by this legislation at the federal level.

[00:06:10.270] – Grumbine
So it was interesting. I was reading the Twitter thread that you had put out describing this, and one of the things that really jumped out at me was this is not actually chartering new banks. This is providing a structure, a funding vehicle, a means of providing a framework for allowing states to do this. Can you break that down? Because I think that that might be an area that the average listener probably wouldn’t have any understanding of.

[00:06:37.840] – Grey
Yeah, sure. So the overriding kind of principle or approach is a “if you build it, they will come” kind of thing. So the goal here is to create a whole framework at the federal level where any state or local government that manages to get support at their level of the demos, would find the federal government waiting, ready to support, shepherd, facilitate, subsidize them through the process to get to having a successful functioning public bank.

But it recognizes that because this bill is about supporting state and local initiatives, and to the extent that there should be federal reforms, they would be under separate bills that you can’t sort of mandate at the federal level, that, for example, the city of Chicago has to now commit to running a public bank for itself. But what you can do is say if the city of Chicago wants to create a public bank, then we’ll make it very easy and we’ll make sure there’s dedicated facilities that serve exactly their needs as they’re distinct from commercial private banks or whatever else.

So in some respects, it’s kind of building the infrastructure so that the first person to walk through the door can sort of hit the ground running. The other thing is that because of the dual nature of the American banking system, states and federal government share the legal power to charter banks. And so existing public banking initiatives, including the Bank of North Dakota, as well as current initiatives to create new public banks across the country, are mostly at this
point relying on state authority.

But what our bill does, in addition to making it easier for state-chartered banks to get federal support, is to create for the first time new categories of federal public bank charters, a payments bank and a lending bank charter, as well as a new public investment entity license from the Securities and Exchange Commission to do sort of secondary market securities-related activity.

And so in that respect, this is adding a new piece to the public bank infrastructure in terms of chartering, where you can now get a federal charter even if, for example, a city might not have legislation at the state level authorizing it to create a state bank, it could go directly and create a federal bank that would be owned by the city.

[00:08:51.230] – Grumbine
So one of the things you also stated, and I found this to be very interesting because I know that a lot of people won’t think about this either, is the distinction between the federal government and the fact that the federal government has the right to mint currency, to create new money, so to speak, and states are revenue constrained and don’t have that. They would be in a borrowing arrangement or some sort of other arrangement to provide funding sources.

It is interesting to note that this bill doesn’t change that. It’s not like suddenly there’s a panacea, as you state as well, that public banking suddenly gives us a Green New Deal or anything to that effect. Can you just quickly touch on the difference between the power of the Federal Reserve and the federal government through Congress, as well as what the differentiator is between a public bank at the state and local level?

[00:09:46.400] – Grey
Yeah, sure, thanks. The first thing is, I think what this bill is really trying to do is to provide a public option and a new public alternative, not just an option in the same market, but an entirely different approach for public banking vis a vis existing private commercial banking. So it isn’t designed to be a substitute for fiscal policy, and it isn’t designed to be a substitute for things like fiscal sharing at the federal level, where there’s some sort of agreement that the federal government would provide fiscal relief to each state on a state-by-state basis or whatever else.

And it isn’t designed to be an alternative to straight-up public investment programs. So if you think about the state governments, on one hand, they don’t issue the US dollar, they’re users of the currency. This is a sort of standard MMT insight. But they still have unique taxing powers and they still have unique properties with respect to their debt.

And as we’ve seen with activist efforts to expand the municipal lending facility, as well as recent proposals by myself and Nathan Tankus and others for states and local governments to issue complementary currencies, similar with the Money on the Left MMN proposal for Unis, where universities as a sort of state entity would issue their own currencies that would be receivable in payment of university tuition and other things.

The ability to issue debt that has special properties when treated by the Fed and the ability to issue tax credits and things like that that have a “moneyness” even if you don’t issue the US dollar itself, means that there’s a range of tools that state and local governments can use to both finance programs and to provide a public financial system distinct from the one that we currently have.

At the federal level as well, in addition to being able to sort of “print money” or create money, the federal government is also responsible for the federal payment system and that means that there are things that banks can do at the state and local level that may not be necessary if we had a robust federal infrastructure. So in that respect, I very much support, for example, postal banking and Fed accounts. And if and when we have those reforms, it may be that certain services that might otherwise in the interim be provided by public banks would be less necessary.

But I don’t see them as in competition with each other or in a zero sum game. I think that the political energy around both of these proposals is mutually reinforcing and that having a kind of bottom-up, state by state, city by city strategy, as well as a top-down coordinated universal infrastructure strategy is the right way to go about things. And so with this bill, the federal government, to the extent it wants to spend money or to the extent it wants to do credit-related activities, it’s got fiscal and monetary policy levers.

It might not actually need a public bank to do those things, whereas state and local governments might find a public bank can expand their options and give them, for example, a place to store their funds and to provide basic consumer retail services away from the private commercial banks that are in their area. Or to start expanding universal access before we get to a full Fed accounts or e-cash or whatever else, digital currency, new world. So in that respect, I think it’s entirely complementary and it serves a different purpose to the kinds of reforms you might be looking at at the federal level.

[00:13:02.810] – Grumbine
OK, that’s really interesting because I know that you worked very closely with Rashida Tlaib on the ABC Act as well. And I am kind of curious here. It seems like these things are all tributaries to a larger mechanism here in a complete reform of the banking system. Can you talk a little bit about how the ABC Act might contribute here or be complementary here? Or maybe there’s no relationship at all?

[00:13:29.360] – Grey
One thing is that this bill, as part of providing sort of, as I said, new infrastructure and facilities exclusively dedicated to the needs of public banks, one of the things that we set up was a fiscal agent account where any sort of public entity could deposit funds at a public bank, and those funds would be basically invested at the Fed in a special account that would earn either the current overnight rate plus two percent or the 30-year bond rate, whatever’s higher, which would basically turn that into a very safe, reasonably high-yielding account for governments, which would reduce the pressure for them to invest in other kinds of private investments or hedge funds, things like that, and provide, basically, an interest rate that could be potentially altered in the future to provide direct support to state and local governments.

The ABC Act was really directed at individuals, so it was providing two thousand dollars of cash to every person. And so in that respect, having relief targeted to the government layer as well as the individual layer is, again, complementary. But the other thing is we spent a lot of time in the ABC Act thinking about the delivery mechanism. How can we actually get these emergency relief funds to individuals, particularly those who may be unbanked or underbanked, or who may be undocumented, or who may have concerns about coming forth with their identity into some sort of centralized database?

And one of the things that we looked at was an emergency responder call, which polled very, very well, where people went out and performed wellness checks and as part of that wellness check handed over the funds. Another was to provide sort of stations at postal services and other government agencies where people could come in and pick up their cards and would sign an affidavit like you would with voting, rather than having to sign into an electronic database. And so you could imagine a network of public banks providing some of those points of contact in the future, certainly, and becoming part of a distribution infrastructure for future cash services.

And you could imagine the public banks having concerns about consumer privacy and about access for marginalized or at risk populations who may not trust commercial banks, that being actually a priority for them, because that’s part of their mandate. And so things that would not be profitable or even maybe politically attractive for private banks to push for, like, for example, distributing these relief funds through anonymous or semi-anonymous debit cards rather than direct transfers, or allowing people to pick them up with an affidavit rather than having to go through standard “know your customer” rules to set up an account or something like that. You could imagine a public bank being willing to fight for those a little bit more than their private counterparts would.

[00:16:15.860] – Grumbine
Sure, so I know that Warren Mosler had some pushback on some of this, and I’m just curious, as we go into the bill itself, the very first thing we talk about is chartering and licensing. You had a great tweet thread that I’m going to try and follow somewhat because I think it was put together very nicely. But the idea of chartering banks, licensing banks in general, is a standard thing that the federal government has always done. And all these banks that are out there are, as Warren would say, in essence, public banks to begin with, by charter because they were given a charter by the federal government.

However, quite clear that these for-profit banks do not do what we’re looking to do as progressives and others to facilitate the public purpose. They have a very different mode of driving their work. What can you tell me is the difference there in terms of the chartering and licensing of a typical commercial bank as the standard banking charters go today versus what would be the banking charter, if you will, of a public bank?

[00:17:20.300] – Grey
Yeah, and I think this is one of those situations where that old maxim of trying to make things as simple as possible but no simpler is important, because I think at a certain point, when you start trying to reduce the complexity of the world or the nuance of something so much, you end up just reducing yourself. And in this situation, I think there’s a lot of history and a lot of layers of what being a public bank means, distinct from being a regulated commercial bank.

The first is the historical point, and it is an undisputed point that early bank charters were issued explicitly as a sort of public-private hybrid, as a developmental finance strategy. They’re explicitly a chartering of public authority and a grant of a sort of public license in exchange for a commitment that you’re serving this dual public purpose. And so in that respect, all banks exist because they originally were designed to sort of serve social purposes in the same way, interestingly enough, as copyright law.

Some people like to think of copyright as property rights that individuals have as a sort of natural right, the same way as they have a right to their labor or something else or to their plot of land. But in fact, the Constitution, at least in the United States, is quite clear that copyright is a temporary monopoly designed to promote the progress of useful arts and sciences. That is to say, people have a right in their copyright only to the extent that it helps society more broadly. At least that’s the theory. So you could make that claim about commercial banks.

But as a historical point, even at the point those first bank charter licenses were being issued, they were being issued in an incredibly corrupt political environment. They were being issued often by congresses to members of that legislature who then ran the bank while being on the Supreme Court of that state or in the legislature or the Speaker of the House or whatever else. And were often used as a sort of personal piggy bank. And so almost like the East India Company, you could say, well, on one hand it was serving the British Empire, on the other hand, it was clearly a tool of a certain set of private actors who ran the East India Company. Right?

And so you can say on one hand, well, they were being corrupt, well, that’s not fair, that’s violating the spirit of the banks. Or you could be a bit more realist about it and say, you know, from day one, even as a public-private partnership, it was one done with the intent explicitly of those who are pushing it to further private grift on public behalf. So if you fast-forward to today, you have a situation where there are a lot of regulated commercial banks and there are things like the Community Reinvestment Act and other statutory requirements that are supposed to force those banks to serve underserved populations and promote access to services and basic products and things like that.

And you can lament that that’s not working as advertised. And if we just regulated them better, then maybe they would work better. But at least in my opinion, first of all, that’s a historically ignorant argument because they were never designed to actually serve those masses. It was a convenient cover for the private grift of the elites who happened to own those legislatures. And, two, I think it confuses a sort of fictionally efficient marketplace with a public banking system.

And I think the real critique or the real kind of nuanced take that should have been responded to rather than to say, well, all we need to do is regulate private banks better and they can achieve these things, is to say, well, even if private banks were operating the way that they’re supposed to – the way that in the story it says that they exist to do – is that actually the same as a public banking system? And in my view, it isn’t. Because first of all, there’s a set of private shareholders who are by definition legitimately allowed and expected to extract profits from that system.

Secondly, there’s an expectation that that bank will serve the interests of those shareholders to some degree so that activities that may be unprofitable will be seen to be contrary to the goals of the organization. Even if they have to comply with them for statutory reasons, they will be seen as a cost, not a purpose, of doing business. And then third, what you are establishing is a system where the expectation is that these entities should be competing in a marketplace to prove their worth and that their worth will, in part, be a function of how well they compete in that marketplace.

That is to say, how successful they are in generating profits on returns, such that a bank that decides to have lower profits in exchange for a higher social outcome would basically be at cross purposes with the interests of their shareholders. There’s no point at which JP Morgan or something is going to say, yes, we decided to forego 10 billion dollars of profit this year because out of the goodness of our heart, we thought that was in the best interest of the consumer. They don’t do that.

So in my opinion, I don’t think this is a problem simply of private actors not working the way they’re supposed to and if we just sort of laid the hammer down on them and regulated them more strongly, it would be fine. They’d still be for-profit actors and they’d still be private companies with an explicit mandate to act in the interests of private stakeholders distinct from the broader community.

And so public banking, to say that they’re the same as a category, they’re serving fundamentally different purposes, and the only way you can kind of credibly claim that they would be functionally the same is if you define the goal so differently than I do to be self-serving. Well, I define the goal as this: “they both achieve that goal, therefore, they’re the same.” Yeah, well, other people define the goal differently.

[00:22:49.830] – Grumbine
Right. One of the things that you also brought up was the ownership of these public banks. You mentioned several things in particular, like tribal government. You even mentioned non-profits and associations, et cetera. But then you take it a step further and I want you to expand on this.
But you said no agent or employee of a public bank may be compensated at a rate higher than the compensation paid to the president of the United States for the equivalent period. Very interesting. Talk to me about both the ownership and the cap on pay. Very interesting.

[00:23:25.460] – Grey
Yeah, I mean, the ownership side of things we’ve tried to make quite clear that the goal here was to require these banks to legitimately be public banks so you can’t be owned as a non-profit subsidiary of a for-profit. It can’t be a non-profit that runs a for-profit as a subsidiary. It can’t be some sort of third party non-profit that simply decided to create their own public bank and thinks that because they’re a non-profit and therefore serve a charitable purpose, that they’re entitled to create a public bank.

These had to be either things that were explicitly created by the legislature or a government agency or an association of agencies. And in the event that there was an area, say, a township that hadn’t incorporated into a municipality, they could collectively, under an appropriate process, determine that some entity was acting as their representative. And that happens today for things sort of on the edge of municipal governance. So the idea here would be we accommodate a wide range of structures. You could imagine a state or a city government just chartering a bank that would just be a city-owned entity.

It would have its independent board governance structure, but essentially it would be a publicly chartered entity. You could imagine something where, for example, ten states’ Departments of Health sign a collective agreement and they come up with an interstate public bank that is designed to promote health-related lending or payment services or whatever else across a number of states. So that’s the sense in which we wanted to be a bit more flexible.

We don’t want to have everybody immediately think that the only model could be that the state legislature charter something in one way. There’s a wide range of ways you can do it as long as you make sure that all of them are appropriately serving public interest. On the second question about remuneration, one of the kind of long-standing problems with non-profit law is just that, first of all, enforcement is very weak. Usually, for example, states that have a Secretary of State department that does regulatory enforcement, or looks into the health of non-profits, is very understaffed relative to the regular corporate regulatory side of things.

And the second thing is that often you have actors that through creative corporate structures, use the veneer of a non-profit entity to basically conduct activities more broadly consistent with a for-profit entity. And so as a result, you have large hospital administrators and such getting paid two million dollars a year, even though the hospital is a non-profit, or you have some sort of non-profit entity where there’s a CEO that’s getting paid a million dollars a year, that’s actually also the vice president of a for-profit company that contributes all the donations to that non-profit.

The president’s salary, I believe, is roughly around 400 thousand dollars a year. The goal here is to say this is not going to be a place where we replicate the pay scales of the private sector banking industry. We’re not going to have CEOs getting paid seven million dollars a year under the rationale, which you sometimes hear, that if you don’t pay public sector bureaucrats that amount of money, you won’t get any quality hires. And I frankly don’t believe that.

I’ve worked in enough areas where there are people who are incredibly skilled and talented, who do the work for reasonable levels of pay because they care about the work, and they’ve got a sense of civic duty and others. And more broadly, there’s a kind of person you attract when you start treating the industry like that. You attract the kind of people that care more about getting seven million dollars a year than they do about being a public servant.

And so the goal here is to say these are public banks to serve a public purpose. And to the extent that people should be well remunerated for that, we think that the salary that the highest public servant in the country gets paid is a sufficient cap for that. Right now, I believe a number of Fed presidents, it may be the board of governors members as well, but I think definitely Fed presidents get paid more than the president of the United States.

And I find that to be a pretty ridiculous concept, in my opinion. And this bill sets, I think, a pretty clear marker about limiting the possible exploitation of these entities by actors from within.

[00:27:15.500] – Grumbine
That’s a very good statement, sir. I appreciate you because that’s one of the big things you hear from people is skepticism based on the extreme exploitation and just that siphoning sound of “money for nothing” and yet they’re profiting off of it. So one of the next things that you bring up – and I want to frame this a little differently – we always hear banks are too big to fail and always getting bailed out.

These are the headlines anyway. And you’re talking about backstopping these public banks with FDIC-like arrangements. And I guess the question is: when you take away the profit motive and you take away the risk, if you will, these banks are able to fulfill a public purpose agenda. How does that differ – the way that you all are backstopping these, at least conceptually – from the commercial banks and their typical failsafes when they have problems?

[00:28:12.850] – Grey
Yeah, I mean, I think the first thing is that this is trying to get away from the historical model of privatized gain, socialized loss. This is trying to get away from the idea that these actors, which claimed to be the private market actors operating independent of public influence or public goals when it suits them, then require a bailout when there’s a crisis that hits.

And there’s always a kind of invisible subsidy going along the way anyway, with respect to the various facilities and services they have access to that others don’t, including just their charter and the limited liability that comes with that charter. But basically, the idea with a public banking system is to recognize from the outset that these are not private actors, that the quote/unquote “gains” they should be extracting in the first place should be reasonably limited by public considerations.

And so partially, that means things like capping the salaries of executives, but partially it also means not extracting profit for shareholders in the first place. One of the things that this bill does, again, recognizing the dual nature of the American banking system, is it isn’t actually trying to stop state and local banks from creating banks that go beyond the scope of this bill. Right? What it’s doing is saying if you want access to all the benefits that come from federal recognition, then these are the requirements that come with it.

So you can have a situation where a state bank wants to do things that the state has authorized but the federal government doesn’t necessarily approve of, and that would just be disqualifying for the kinds of benefits that this bill provides. So this is a carrot-led approach to harmonizing standards across state and local governments to say, look, if you adhere to these federal standards, then you’ll be part of the system, you’ll get all these benefits, and we’re still keeping it public purpose oriented, but recognizing that you can’t force that, given the sort of dual constitutional right to charter banks at the state and federal level.

When it comes to how you have quality regulation, one of the things that the bill establishes is what’s called federally recognized loans and federally recognized securities. And effectively what that means is the state would identify criteria for a public vanilla product – a 30-year mortgage, or basic banking account or something, basic credit card or something – and any bank that offered it in accordance with those conditions would basically be eligible to pledge that loan at the central bank and get liquidity against it.

And what that does is say that the Fed has to take responsibility from the outset to identify the kinds of assets and the kinds of evaluation processes that it’s willing to accept. So we’ve had a situation where the federal government said it wanted to have more 30-year mortgages, but it created this bizarre hybrid system with private banks and then the what they call government sponsored enterprises – Fannie Mae, Freddie Mac, that kind of stuff.

And it sort of hid behind all of those actors and second layers of securitization and mortgage-backed securities and things to avoid just acknowledging the basic point that if you want to give out public credit to individuals or entities, according to some criteria at the federal level that you think is a good thing, then you need to take ownership for that if the system goes under. It’s already something that deserves public bailout because it was a public gain in the first place. Right?

It’s not that “privatized gains, socialized loss,” it’s public gain and public loss. And so one thing is asset-based regulation, which is something that is getting increasing attention now in light of the various Fed facilities that were enacted after COVID, where they explicitly started buying up certain kinds of assets, breaking that famous taboo that they said we don’t pick winners and losers because it used to only invest in government assets.

Now we’re investing in all these risky private sector assets, we have to take responsibility for which ones we’re investing in and which ones we’re not. And it’s also kind of getting more attention now due to the push around the Green New Deal, because people are saying that the central bank needs to be responsible for its decisions regarding the environmental impact of the loans it’s buying. So maybe it should not be buying fossil fuel backed loans. Maybe it should be buying more green loans at favorable rates.

And so we can think of that at the sort of systemic level: more green loans, less fossil fuel loans, more loans to consumers, less loans to large financial and speculative actors. And we can think of it down at the individual level: a standard credit card product, a standard mortgage product. And the other side of it is the banks themselves have to be either getting a federal charter or get a certificate of federal recognition. And both of those come with ongoing supervision and oversight.

The last little thing to just mention is the bill also includes access to these sort of fiscal agent accounts and payments accounts at the Fed that function much more like a narrow bank. So even if you don’t want to get public deposit insurance and offer standard deposit accounts, you can offer these sort of narrow bank-like money transmitter services, kind of like a public Venmo, as Bob Hockett would say, or as an intermediate step towards a Fed account system or something like that.

And those actors might have lower capital and regulatory requirements than an actor that engages in lending, because they’re basically providing sort of straight payment services. And so between those various things, asset-side, institution-side, and function-side kind of restrictions, the bill keeps a quality control on the overall activities of public banks without falling into that old story of privatized gain, socialized loss.

[00:34:05.640] – Intermission
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[00:34:54.680] – Grumbine
Can you just take a second and explain what a narrow bank is, what that even means?

[00:35:00.110] – Grey
Yes, a narrow bank is just something that doesn’t really provide credit products. You have accounts. You can do payments. Imagine your debit card without a credit card attached.

[00:35:09.380] – Grumbine
Very good. OK, so the pre-Glass-Steagall?

[00:35:13.160] – Grey
Yes and no. I mean, Glass-Steagall was really about separating commercial banking from investment banking, but commercial banking still involved making loans. It just involved making more direct loans rather than secondary loans. This is sort of like the Chicago plan, except the Chicago plan was more aggressive in trying to curb lending.

This is really more about separating out lending and payment services, not to curb lending, but to acknowledge that the two do not have to be as linked as they used to be, in part due to advances in the way that payments technology is progressing so that you could have, for example, a digital currency at the central bank, or a publicly issued digital currency.

And banks could be authorized to make loans in that currency where every time they make the loan, they simply take the loan that they get from the customer, the asset for them, and they just pledge it directly at the central bank, and the central bank gives them the digital currency and then they give it on to the consumer. So in that situation, there’s no “loans create deposits” in the standard banking story, there’s “loans create central bank overdrafts” that then go out into the payment system.

And so you still have the banks being franchisees there, you still have them sort of acting as intermediaries for public credit allocation, but they’re allocating public credit directly as government digital currency rather than issuing their own deposits and then managing one to one par convertibility and clearing things on the back, which is how we currently do it.

[00:36:38.860] – Grumbine
So when we talked about the Unis with Scott Ferguson and Ben Wilson, the discussion was to be able to leverage these municipal programs the Fed is doing. And then I see here that the Fed can authorize various liquidity and credit through favorable terms in a wide range of, basically like that municipal thing is what I’m hearing here. Can you describe a little bit about what the relationship between the Fed and the public bank might be as it pertains to that?

[00:37:10.360] – Grey
Yes, I think the first thing is that this bill also provides grants to start up, to complete the application process, to initially capitalize, to address unexpected losses – say, for example, in the middle of a pandemic – and to provide technological assistance to entities seeking to establish or maintain a public bank. So there’s a direct grant program included.

There’s also a program that says that any integration with postal banking would be funded by the Fed and that the Fed would take responsibility for any infrastructure costs associated with any Fed account services, any digital dollar services like e-cash, as well as the fiscal agent accounts storing money for the government actors, and the payments accounts, which would be the narrow bank accounts for you and me. So all of those related costs would be potentially covered by the Fed.

And then on top of that, there are sort of traditional monetary macroeconomic stability levers. And there are three of those. One is the primary liquidity facility, and that is basically any loan or security that has been approved by the federal government, the kinds that we were just talking about, your vanilla product or say you have something that says that anybody who has these profile characteristics and this credit score would be eligible for this product at this rate.

Those kinds of things that get pre-approved by the federal government would get the most favorable terms, you could pledge them pretty much without penalty at any time and get a very low interest rate on that. The second facility, the secondary liquidity facility, would be any other asset that’s not recognized by the federal government. It’s not one of the ones that’s been preapproved. Right? But it hasn’t been prohibited. So it’s not the ones that we love, but it’s also not the things that we hate.

And so anything in that category could also be pledged or used as collateral, but would have slightly less favorable terms or at least give the Fed more discretion about how favorable those terms would be. And then there’s a third facility, which is the credit facility, and the credit facility is effectively an unsecured credit facility. And it gives the Fed very broad discretion to use it to support public banks in any way that would be most helpful.

And so, effectively, that facility is a way for the Fed to just provide direct credit support. Could be indefinitely, could be at zero interest, could be a loan that’s later written off. And that would basically mean that if there was a crisis like this, the Fed wouldn’t be able to say we lack the tools. It would be very clear that the Fed has the authority to do whatever is necessary. The only question would be whether it chose to do it or not.

So there would be no complicated metrics or collateral schedules or bond ratings or anything like that that would get in the way that if they wanted to, they could just extend credit directly. And then, of course, the question becomes how much political pressure can you put on the relevant actors to make that happen? So on one hand, you’ve got direct grants and on the other hand, you’ve got ongoing lending and liquidity facilities.

And perhaps most importantly from an MMT point of view, the way that we set this up was so that any expenses related to all these would be reported at the Fed in a set of special accounts where any expenses would be recorded as a deferred asset. And MMTers have talked about the way that the Fed uses this deferred asset accounting convention before. And it’s a gimmick, right? We’re pretty open that this is an accounting rule.

It doesn’t change anything substantively, but it’s important because what it does mean is that the Fed books that loss as a potential future profit. So it’s not that it’s actually a loss, it’s that it is profit we haven’t received yet. And that allows it to basically say that it’s not running a loss, even if it is and so it doesn’t affect the amount of remittances that would otherwise go back from the Fed to the Treasury.

Now, we all know in MMT world that the Treasury/Fed accounting is all kind of internal to the government. From a net perspective it doesn’t matter; from a policy and political perspective, it does matter. And what this bill does is allows us to say credibly that this bill does not reduce overall profits at the Fed, therefore, it doesn’t reduce remittances to the Treasury, which means it doesn’t have any effect on the budget deficit.

Because otherwise you can say, oh, yes, any of these costs have to be borne by the Fed. And what the Fed will turn around and say is, yes, we can do this, but if we do this, it will reduce the amount that we send back to the Treasury, which will increase the budget deficit, which means functionally this is the same as the Treasury spending it. So why doesn’t the Treasury just spend it directly anyway? Because we’re not going to reduce the effect on the budget deficit either way.

And this bill is a way around that; it says, no, we’re going to put the costs on the Fed’s balance sheet and then just ring-fence them on the Fed’s balance sheet and leave them there. So it’s just a pure accounting fiction, but it’s a way to get us past silly CBO estimates that come up with ridiculous, scary numbers and all that kind of stuff.

[00:42:05.830] – Grumbine
That’s a great point, obviously, with Stefanie’s new book – well, not so new, but really wonderful book, “Deficit Myth,” it’s opened up a lot of people’s eyes to the possibilities of what we can and can’t do. And it seems like there is an opportunity here to blow that myth wide open by expanding our fiscal space, et cetera.

With the public banking option, it allows us to get past what seems like the inertia of a Congress that is locked in partisan battles and doesn’t seem really apt to make a lot of bold moves. I am curious, though, given Powell’s sometimes seemingly coherent statements, what do you think the Fed’s position would be on this bill? Has anyone talked to the Fed? What might some of the criticisms be?

[00:42:56.830] – Grey
Yeah, I mean, the first thing is that this is a bill, right, so it does have to be passed by Congress, and once it is passed by Congress, it would change the statutory mandate that the Federal Reserve has. The Federal Reserve loves to talk about itself as being politically independent, but it’s also a creature of Congress, and its independence only exists within the corners of its actual statutory mandate.

And so this would change fundamentally that statutory mandate and whatever happened would be a question for the Fed to then interpret how they’re supposed to enact the statutory mandates that have now been issued by Congress. Agencies can and do comment on proposed reforms to their mandates and to their statutory authority, right? They often have opinions about what’s going to change.

The Department of Education will have thoughts about a bill that will change the Department of Education’s role in public education, you know? So there are situations where the Fed would likely weigh in with its thoughts, but its thoughts would be the thoughts of bureaucrats advising legislators. They are not thoughts that would be superior to the position of the legislature’s, and they’re certainly not positions that would have greater democratic legitimacy than those of the legislators themselves.

I’m talking about within the actual drafting or passage process itself. So, if Chairman Powell and others at the Fed said, you know, is the opinion of this Federal Reserve that this bill would give us powers we don’t want or would require us to do things we think we shouldn’t, then, you know, that can be taken under advisement and it can also be ignored after being taken under advisement. And in that situation, I would say to the extent that people like Congresswomen Ocasio-Cortez and Tlaib and Chairman Powell have different politics and different visions of the future of this country and the economy, then I’m not surprised if some of them might disagree with this bill.

But I don’t think that really matters to whether it’s a good idea or not. My understanding is Jay Powell has been a Republican his entire life. I think he probably made a series of bad judgments about where the political future of this country should be, and I’m quite happy to say that. So he actually said in a hearing with Representative Tlaib, where Representative Tlaib said, “You know, you have the authority to directly buy up state and local debt.”

And he said, “I don’t think we have that authority and even if we did, we wouldn’t want it.” And in my opinion, that’s a gross overstep by him. It’s not his role to say we don’t want the authority… First of all, he was wrong, as a fact of the matter. They do have that authority. But secondly, it’s not right of him to say, “Well, we don’t want that authority and therefore we’re not going to use it.” Congress told them to have that authority for a reason, and he should respect those wishes as an institution they wish to keep independent.

To get to your substantive question, I think they would say this is giving us a lot of authority to charter and to approve banks, whereas historically at the federal level, it was the Office of Comptroller of Currency at Treasury, the OCC, that charters banks. To which I would say, functionally speaking, the Fed has been the lead regulator of the whole financial system, and it makes sense to consolidate this authority rather than hand it back over to the OCC, which has historically not done a very good job, in my opinion.

And so you might as well, rather than go all around the garden path only to come home again, you might as well just sort of start where the buck is going to stop and focus on building that capacity. Secondly, I think they would say that this bill requires them to make judgments about the quality of loans that they don’t want to make, and to which I would say that that’s true of the status quo right now. And they are very unhappy that they’ve been pushed into the position of making judgment calls about the kinds of loans that they want to support or not.

And they’ve done everything they can to give the impression that the decisions they’ve made have been apolitical or reaffirming markets rather than just a straight up picking winners and losers, but I think that’s all a fiction. It’s all a smokescreen. The reality is that the Federal Reserve has always chosen who the winners and the losers are – everything from international swap lines through to the choice of collateral they’ll accept at the discount window, through to the choice of the interest rate they chose to set on the municipal lending facility relative to the rate on, for example, the primary corporate credit facility.

So I think the Fed has always been engaged in that behavior. It likes to pretend it doesn’t, and this bill would make that explicit in a way that they would probably wish to avoid if possible. And lastly, I think the Fed is very jealous of its budgetary independence, it likes the idea that it has a pretty much blank check to fund whatever kinds of research it wants, to engage in whatever kinds of accounting practices it wants.

And it might be worried that putting all of these expenses on its budget and then locking that part of the budget away might raise some eyebrows and draw some attention to just how much discretion its budgetary accounting practice has. And again, it might not appreciate the spotlight being shone there, but in my opinion, it’s quite comfortable using that power for a whole range of things today. And this is a legitimate thing to use it for and if they don’t like the kind of public scrutiny that comes with more people looking at what they’re doing, well, sorry to them.

My colleague Nathan Tankus just had a great post up on his Substack looking at the way that the Swedish Central Bank Awards the Nobel Prize – what is called the Nobel Prize in Economics is the Swedish Central Banking Prize in Economics. And the first year that they did that, it was sort of hundreds of thousands of dollars as a prize and they did it by just creating the money. And there was actually a sort of legal fight at the time where the authority to issue money for purposes unrelated to macroeconomic policy was not necessarily inherent in the central bank’s mandate.

So people were saying, well, you can’t do this. This is fiscal policy. You basically created a grant program and you’ve given the grant out. You need to go to the legislature for this. And eventually they kind of came to a compromise where the legislature passed a last minute law giving them this authority. But if the central bank can create money out of thin air to create a fake Nobel Prize, to legitimize a certain theory of economics, it can create money to fund a public banking infrastructure.

And if it can pick winners or losers in the COVID credit facility, it can pick winners or losers in this system. So I think that their objections are going to be real and they’re going to reflect the inherent conservatism of a bureaucracy combined with the reactionary politics of most central bankers.

[00:48:48.480] – Grumbine
Very well said, sir. Very well said. Let me ask you, from a Federal Reserve standpoint, I know that a lot of people, when they hear about public banking, the first thing they do is they think about the “private” Federal Reserve. They immediately jump to… and we’ve talked about this at length; one of our best podcasts ever was your description of the Federal Reserve, and I can’t thank you enough going through that. If you wouldn’t mind going backwards just a little bit with me here.

Obviously, one of the big things is “audit the Fed.” They want to end the Fed and they see public banking as a means of doing exactly that. That’s not what’s happening here at all. Will you fill us in on what auditing the Fed might do in this case and how that plays into a public banking regulatory framework. Obviously, people are afraid of the Fed. They don’t like the Fed. And there’s good reason to not like the Fed. Yet at the same time, others say that the Fed could simply be reduced to a spreadsheet. So what’s the real story there?

[00:49:47.560] – Grey
I don’t think the Fed can be reduced to a spreadsheet. I think it’s an independent agency. It’s an entity with its own governance structure and its own culture and its own ideology and its own interests. And I think a lot of them are bad. You know, I’m pretty on the record about that. I think there’s a lot of things that we could be getting the Treasury to do rather than the Fed, and I think that we could be getting more consolidation between the two of them.

I also don’t think a lot of the kind of “audit the Fed” approach is necessarily the way that I would do it, but I generally support more transparency and more accountability, and I think certainly a lot of the excuses that central bankers have for not providing more transparency are based in pretty anti-democratic principles like, “well, we couldn’t let people know what’s going on, otherwise there would be more churn and turmoil in the markets.” And I find that kind of stuff very unpersuasive, frankly.

But in this situation, I think, as I mentioned, we could very clearly politicize and highlight just how much control that the Fed has over the banking system. And remember when I said at the start, this is not a substitute for more fiscal support for state and local governments, and this is not a substitute for direct fiscal sharing of monetary powers. This is about saying: to the extent we have a banking system at all, it should be public.

And to the extent that a thing that functions with a budget constraint should exist, the actions that are most appropriate for that to happen are the state and local governments’, because the federal government has its own unique institution that can do potentially much better than the public bank would for the same purpose. So I don’t think this is really here nor there in terms of the Treasury/Fed/how you want to reform macro policy.

This is taking a lot of that stuff as a starting point because that’s just where things are at right now. The way the bill is written, it would be trivially easy to amend it if there was some sort of consolidation of the Treasury or the Fed or whatever else. But I think one thing that’s become very clear with this crisis is there’s a difference between having fiscal policy be in the lead, which I strongly support, and requiring every single proposal to be approved by the legislature on a kind of month by month basis.

So even the ABC Act was about a kind of automatic recurring payment that would continue until a condition was met. And even the Treasury Department has a lot of autonomy from Congress as an agency. So this isn’t really, in my opinion, a kind of “democratic Congress versus undemocratic Fed” kind of thing. It’s more of a Treasury versus Fed. And what would shaking up the institutional landscape due to existing entrenched interests? And would that be positive? Probably blah, blah, blah.

And in that respect, this bill would give the Fed a huge amount of powers it would hate to have. It would acknowledge and pull back the curtain on a lot of the things the Fed is doing right now that it likes to pretend it isn’t. And it would set a standard for what the Fed is expected to do to support purely public banking initiatives that would make it very hard for them to do nothing, which is the current default. So in those respects, I think it’s all positive, but it’s kind of a separate issue to the people who think that the Federal Reserve is private and all that kind of stuff.

If you have any exposure to any government agency, the problem is not that it’s called the Fed, and the problem is not the corporate structure of the regional Federal Reserve banks. The problem is the kinds of actors that naturally accumulate at the top of any government bureaucracy responsible for this. If they weren’t at the Fed, they’d be at the Treasury. And mixing it up may be a good strategy to relitigate that by, but a lot of these things are inherent to having independent administrative agencies in general, which in a country like the United States is unavoidable, in my opinion. So the choice is sort of “more Fed discretion/more Treasury discretion,” it’s not more direct congressional direction.

[00:53:24.590] – Grumbine
OK. With that in mind, one of the things that jumped out at me, and I think that this is an opportunity to show this bill’s potential in action. In Puerto Rico we see that they were decimated by natural disasters and then human vultures floating around looking to pick it apart.

We see that happen in Detroit, Michigan, where they were unable to really do anything and they were leveraged and private actors came in and picked apart museums and the art and all the natural resources of the area. We’ve seen many cities go bankrupt. I’m just curious how something like this public banking act might have helped a place like Puerto Rico or Detroit.

[00:54:05.780] – Grey
Yeah, that’s a great question and Congresswoman Tlaib is much better at this than I am. You know, whenever we chatted about these things, she always says, you know, I always want to talk about directly how it’s going to help people. You can wonk out on the design, but I’m sort of just thinking about bottom line, how does this make people’s lives better?

So the first thing is this allows public actors, governments and things to divest from banks that are charging them an arm and a leg and screwing them with fees and things, and to put their money in an entity they trust that serves their interests. So the huge amount of costs related to being a fiscal agent for a city government, things like that can be reduced. The second thing is that these banks can invest in state and local government bonds as one of the assets they might want to be investing in.

And so they could do that at a “more favorable interest rate” than quote/unquote, the market would get. Or they could become the interface between those state and local governments and the Fed, who could then maybe buy the bonds from the banks, even if the Fed wouldn’t buy the bond directly from the state or local government. So it can reduce borrowing costs in addition to reducing bank costs.

The third thing is that this would help average people by allowing city and local governments to offer a place to store your money that would have no fees, no costs, no minimum balances, none of those kinds of things, and would be explicitly designed to operate with universal access. So it doesn’t have to worry about whether opening a branch in this area would be profitable or not; it can say even if it isn’t that profitable, it’s what we exist to do.

So people could get access to cheaper banking services, both in terms of accounts and in terms of credit. It can also make it easier for those kinds of services to integrate with any future federal infrastructure. So if we do have Fed accounts and postal banking, then you could have your postal bank account, but then you could have your home loan with your local public bank and you could go access both of them at the Postal Service; or you could have your Fed account and you could have a local investment account and you could access both of them through the same interface.

So it makes it easier to have integration between new federal initiatives and banking products. The third thing is that it allows governments to directly invest in areas that support their local economy, whether that’s things like investing in sectoral or investing in environmental sustainability and energy, things like that, that they could do so on very favorable terms and they could do so in collaboration with other state and local governments in a way that would not be possible through a private commercial intermediary.

[00:56:27.970] – Grumbine
So one of the other questions I have is the Ellen Brown School of Public Banking and the people that support Ellen Brown’s public banking initiatives. When I hear them talk about national debt, I hear them talk about various things, it doesn’t sound MMT-friendly. It sounds like there’s a rather large delta in their understanding of what a dollar is, where it comes from and what generates it, what that is. How does this bill differ from what someone like Ellen Brown puts forward?

[00:57:00.940] – Grey
Yeah, I mean, I think the first thing I’ll say is that I believe that the Public Banking Institute has been supportive of this bill. And so to the extent that there are differences, they don’t seem to be so surmountable that it cost any support for this bill, and I applaud them in that respect. I do have genuine good-faith differences with their approach. I think one of the things that this bill doesn’t do, for example, is talk about public banks as a federal device.

This isn’t about creating a federal public bank and imagining what we could do if we had more federal banks that we can’t do with the federal government’s budget. So this is explicitly acknowledging that state and local governments are in a different position than the federal government and that what may be appropriate for state and local governments isn’t necessarily equally appropriate for the federal government.

The second thing is, I think this bill is a lot more broad in the possible kinds of public banking structures that it can accommodate so it can accommodate a Bank of North Dakota model, but it can also accommodate a very different kind of model. And to the extent that I think a lot of the initial push around the Bank of North Dakota was like, how can we get more federal recognition and integrate the Bank of North Dakota into the federal system more, but also not have any accountability at the federal level?

We want this to be something that states can charter pretty much on their own terms. And as I mentioned at the beginning, this bill is not designed in that way. This bill is designed to say if you want to have federal recognition – either by getting a direct federal charter or by getting a certificate of federal recognition for your state charter, right? – either way, if you’re going to get this federal recognition and all the goodies that come with it, including these special accounts at the Fed and these favorable interest rates, and these liquidity and credit facilities, and these grants and everything else, then you have to conform to some federal standards.

And it’s a quid pro quo kind of thing. If you’re going to be part of the federal system and get the benefits, you have to be accountable to the federal system. And so I think in that respect, this bill is an attempt to coordinate and harmonize bottom-up efforts with a top-down set of standards. And you can sort of see there’s maybe an analogy in the way that people talk about federal education: you want to have broad federal standards and then support for state and local discretion and autonomy; but that’s different from saying that the federal government is obligated to provide funding no matter what, and that state and local governments have no need to harmonize or anything else.

What often ends up happening is you have vastly disparate standards and you have a race to the bottom, et cetera, et cetera, and so in this situation, what we’re trying to ensure is that every public bank that meets the definition of “public” under this bill will have a basic standard that the federal government will support.

[00:59:39.130] – Grumbine
Right. So for this first segment, I guess the last question I have for you is, what would you say to people that are just reading this bill now? What is the big takeaway? What would you want somebody to really think about?

[00:59:52.400] – Grey
Yeah, I think the first thing is this isn’t something that has to be thought of in opposition to anything else. It’s a “yes and…” It’s part of a larger vision. It isn’t something where the first choice has to be, well, why can’t we do this other thing instead? And then the second point is what this is really about, as I kind of mentioned at the beginning, is trying to build a space for public banks to thrive, a kind of ecosystem in which they can thrive.

And so if you think about this as, “what’s it going to achieve tomorrow?” well, what it’s going to achieve is sort of like building the whole for the festival to turn up. You know? Before the festival turns up it’s just a field with a stage and some speakers. But when everybody fills in there, you go, “Wow. I’m so glad that they designed it with the right exits, and the acoustics, and the toilets, and all that kind of stuff.” So this bill is about getting everything ready at the federal level so that every time there’s a state or local, hill by hill, city by city battle that’s won for a more democratic financial system, the federal government is ready to support it.

[01:00:52.470] – Grumbine
Thank you very much, Rohan. And folks, this is the end of part one of this two-part series we’re going to do with Rohan. I really hope you enjoyed this. I’m Steve Grumbine with Rohan Grey, we’ll talk to you next week. Thank you so much. Have a great day, everybody. We’re out of here.

[01:01:11.680] – End credits
Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.

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Find Rohan on Twitter @rohangrey

Press releases

https://tlaib.house.gov/tlaib-aoc-public-banking-act

https://tlaib.house.gov/media/press-releases/reps-tlaib-neguse-introduce-bill-expanding-local-government-municipality-access

https://tlaib.house.gov/media/press-releases/tlaib-progressive-leaders-urge-federal-reserve-improve-lending

Link to bill

https://tlaib.house.gov/sites/tlaib.house.gov/files/TLAIB_118_xml.pdf

If the above link doesn’t work, the bill in its entirety can be found here:
https://rohangrey.net/files/PublicBankingAct-10-30-20.pdf

Coverage in the media:

https://www.washingtonpost.com/business/2020/04/10/cities-states-coronavirus-budgets/

https://www.vox.com/policy-and-politics/21541113/rashida-tlaib-aoc-public-banking-act

https://www.commondreams.org/news/2020/10/30/banking-people-tlaib-and-ocasio-cortez-unveil-bill-foster-creation-public-banks

https://thehill.com/policy/finance/523624-tlaib-ocasio-cortez-offer-bill-to-create-national-public-banking-system

https://www.newsweek.com/reps-tlaib-aoc-call-public-banks-avoid-fees-minimum-balance-requirements-1543719

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