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Self-financing Toronto

City could ease cash crisis if it put revenues in a bank of its own.

Dateline: Monday, May 14, 2012

by Paul Weinberg

Those who participated in Occupy Toronto last fall have fond memories of economist Jim Stanford at the protest mic in front of the bank towers on King. The high point of his speech was all about a public, democratic, accountable banking system that serves the economy, not private wealth accumulation.

Now, Councillor Kristyn Wong-Tam has a plan to get Toronto out of its financial logjam with just such an effort, inspired by the 93-year-old public-owned Bank of North Dakota.


If retailers like Walmart Canada are able to obtain a licence to create a bank and issue credit, why can't Toronto?

Wong-Tam returned recently from a conference in Philadelphia (by the way, she paid her own way) organized by the US-based Public Banking Institute. And though she knows the private banks will pounce, she's kick-starting a campaign to win backing for a people's bank.

Imagine, she says, if instead of depositing its revenues from taxes and fees in Bay Street banks, the city used the cash to develop its own financial institution. The profit maximization would then benefit all of us; we could use it to build infrastructure and fund services.

"We pay for our roads and infrastructure 20 times over the actual cost," she says, pointing out that private banks charge interest — as much as $250 million in 2011 — on the hundreds of millions of dollars in loans Toronto borrows for necessary services.

A Toronto city bank could generate its own credit and new capital, and set more reasonable terms for loans to itself, she says. If retailers like Walmart Canada are able to obtain a licence to create a bank and issue credit, why can't Toronto?

Wong-Tam says North Dakota's odd prescription — deficit-free fiscal conservatism and a state bank — is now being considered by 18 other states.

Following the 2008 financial meltdown and the rise of Occupy, alternative banking models are top of mind, says Marc Armstrong, exec director of the Public Banking Institute.

"We are saying, 'Look, let's use the bank for the people's benefit,'" he says, explaining that when money is put into private banks it's often invested elsewhere — manufacturing in China, bonds in Brazil or risky securities — rather than in local economic development.

Formed during a populist revolt in 1919 similar to Occupy, the Bank of North Dakota is now helping to fund the state's manufacturing and commercial base, says Armstrong. Currently, BND, which partners with private banks to access their expertise, has $5.4 billion in financial assets and has issued $3 billion in loans.

"It has much more oversight, transparency and accountability [than private institutions]," Armstrong says. And it doesn't pay out millions in executive compensation.

According to Ed Sather, former senior VP of treasury services for BND, top execs at BND earn no more than $250,000 annually. Moreover, meetings of the governing industrial commission, its board of directors composed of the state governor, attorney general, commissioner of agriculture and more, are open to the public and media. "It's not like the private sector, where you do what you do in the boardroom," he says.

But retired bank economist Doug Peters, an associate with the Canadian Centre for Policy Alternatives, remains unconvinced. "We have more banks in Toronto than any other city in the country. To say we need another bank is like saying Lake Ontario needs more water. "Everyone thinks they know how to run a bank, but it's not easy. There have been very serious bank failures in this country if you look at the 1970s and 80s."

His CCPA colleague Jim Stanford, meanwhile, thinks Wong-Tam's on the right path. "She correctly identifies that private banks will actively resist any intrusion into the terrain they currently dominate," he says, "and she is also right to identify public education as a crucial prerequisite to making progress on this issue."

Stanford suggested that the City could raise seed money for the initial capitalization of a public bank from its capital budget rather than its operating budget.

Moreover, differences in the timing of inflows and outflows of City tax revenues and spending at Toronto Public Bank would permit an additional "financial cushion for incremental lending by the bank."

"A public bank, like a private bank, has the ability to make loans as part of its business, so long as it has an adequate capital base and an adequate inflow of deposits. And that could include making loans to the city."

Public banks as investment vehicles with mandated policy goals already exist in Canada and one of the best examples is the Export Development Corporation which under the Conservatives had its mandate extended beyond short term credit financing for exporters "They gave it a mandate to actually lend to and take equity stakes in businesses including interestingly enough [the Canadian divisions] of General Motors and Chrysler."

Providing credit or creating money out of thin air, which is what licensed banks do, doesn't require "proprietary technology" that only private companies own, Stanford says. "It doesn't require magic. It just requires the institutional and legal power to do it."

[A slightly shorter version of this article previously appeared in NOW Weekly.]

Paul Weinberg lives in Toronto. He is a freelance writer and Canadian correspondent for Inter Press Services. He also writes for NOW Weekly.

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