Politics & Media
Nov 21, 2017, 10:36AM

One Bank to Beat them All

Imagining a better world.

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Today we’ll talk about how regional governments can increase fiscal autonomy by banking with their own banks. I’m referring to any regional government that has the same relationship with the country’s national or federal government as it is in the USA. Namely, that the regional (local) governments cannot levy taxes in any other currency, except for the national currency.

With that premise in mind, let’s talk about money.

Money is credit. Money is debt. All financial assets are always without exception backed by debt. The government’s net financial position equals the non-government sector’s net financial position.

(G-T)= -(I-S) -(X-M)

(I-S)+(G-T)+(X-M)= 0

This is not opinion or ideology; it’s an accounting fact. All government debt in the world represents worldwide private sector savings. Government debt takes three forms: cash and coins, reserve (checking) accounts at the central bank, securities (saving) accounts at the central bank. The root demand for government currency is government taxation. All other demand stems from that.

We must differentiate between money (IOUs) and money things (the medium in which those IOUs are recorded in). Examples: clay tablets, wood, bone, metals, plastic, paper, electronic entries. IOUs have extrinsic value, while commodities have intrinsic value. There’s a hierarchy of money in every society, and the government’s money usually sits atop that hierarchy, being the universally accepted unit of account in that jurisdiction. It sits atop that hierarchy if the government in question spends and taxes in its own free floating fiat currency. We call this monetary sovereignty. If the government chooses a foreign currency as legal tender or chooses to operate under a metal standard or fixed exchange rate, that government dramatically reduces its space for fiscal and monetary policy.

Let’s talk about banking.

Loans create deposits. Loans are a bank’s assets. Deposits are a bank’s liabilities. What about reserves (checking accounts at the central bank)? Reserves are used for accounting and settlement purposes. The banks require reserves to settle payments between themselves, and between themselves and the Consolidated Government sector (the Treasury and the central bank). Banks also use reserves to purchase cash from the central bank, and in turn, the central bank obtains the cash notes from the Bureau of Engraving. Contrary to popular belief, banks don’t loan out reserves to their customers. Banks are not reserve constrained when issuing loans. They are constrained, however, by their capital and the actual demand for loans. If a bank is below its reserve minimum, it can borrow them from the inter-bank market or from the central bank’s so-called discount window.

When a contract is reached, an exchange of obligations occurs. The bank has to make sure that the payment to your vendor gets made. And you, the debtor, are obligated to honor your scheduled debt payments. If your vendor banks with a different bank, then reserves will migrate from your bank to your vendor’s bank. If your vendor banks with the same bank, what the bank does is change numbers up and down on its own ledger. The bank’s cash or reserves do not migrate.

Now, what are the advantages of banking with your own bank?

You control the bank’s areas of activity. You control the conditions in which the bank extends loans and what it does with those assets. You control the fee structure. You decide what to do with the profits it makes. Sounds good? It is. So let’s focus now on good banking practices that will benefit the regional economy as a whole, including the regional government.

Warren Mosler goes thoroughly into it here. I’ll just sum it up. The regional public bank wouldn’t have subsidiaries of any kind, since keeping assets off balance sheet doesn’t serve the public purpose. It wouldn’t be allowed to accept financial assets as collateral for loans, as financial leverage serves no public purpose. It wouldn’t be allowed to lend off-shore (for foreign purposes). It wouldn’t be allowed to engage in proprietary trading or any profit making venture beyond basic lending. It would issue loans based on credit analysis, not market valuation. It wouldn’t be allowed to buy or sell credit default insurance. It wouldn’t be allowed to contract in an interest rate set in a foreign country. It would only be allowed to lend directly to customers, service and keep those loans on its own balance sheet. No public purpose is served by selling assets to third parties.

So what’s the complete scheme for all this?

Every citizen within the regional government’s jurisdiction would receive a free checking account at the regional public bank. The bank’s fee structure would be formulated with low mark-ups in mind, in contrast to the competition. This will incentivize firms and households to bank with the regional bank, thus increasing its market share. Also, the regional government can give its public bank the competitive edge by issuing loan guarantees. In essence, the bank uses the regional government’s IOUs as capital. This, in conjunction with regional fiscal policy based off Georgist principles would work wonders. Taxing the value of natural monopolies (the land-value tax), and not taxing labor, consumption, and man-made things (goods and improvements to the land). It’s not a panacea. It would still be an imperfect world, but a far better one than we have today. The regional government taxing the value of land (capturing economic rent) would leave the economy free of the rentier excess charge. The cost of production would go down. Housing costs would be dramatically lower and stable. More spending/investment, higher sales, new jobs, more income.

The regional government could pursue more investment in public infrastructure and services, even uncommon ones like a local Jobs Guarantee or basic income. As another competitive edge, the regional government could offer its citizens a basic income via its public bank only. There would be no need to deliver cash payments or cashable checks, just numbers in the person’s account at the bank.

By reducing or eliminating taxation on productive things and shifting the fiscal burden on undesirable activities (rent-seeking etc.), a better society would be attained.

In conclusion, an important observation has to be made. The regional government, before engaging in these ways to gain the competitive edge in the banking sector, should hire competent lawyers and make a tight case in defense of its actions, should private agents sue the public bank and the government for “unlawful competition.” They need to employ all the arguments they can, from constitutional law, business law, to pragmatism, and morality. In the end, what matters is for households, for the government, and for firms (non-financial firms especially) to get the best services for the best price.


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