Op-Ed: Public Banking Can Recharge South Bay’s Economy

Everyday Americans, small businesses, and local governments face an unprecedented health and economic crisis. Many face unemployment and are unable to pay rent or even afford food. Yet the response from Washington has been to bail out Wall Street and multinational corporations. A lesson we failed to learn from 2008.

Last week, a series of class action lawsuits were filed against Bank of America, Wells Fargo, U.S. Bank and JP Morgan Chase for attempting to maximize the fees they collected from distributing loans as part of the Payroll Protection Program, which was meant to keep small businesses open and people in our communities employed.

It’s time we act to protect San Jose families from this greed and learn from the cycles of economic recession and recovery. We know that during economic recessions spending halts without aggressive government intervention and that poor communities and communities of color do not recover like the rich.

Twelve years after the 2008 financial crash and before COVID-19, many San Jose and District 6 residents never recovered with almost 25 percent of families in our district rent burdened. Now, with no real relief in sight, bankruptcy and eviction are all too close of a reality for many. Federally, over $6 trillion in stimulus money has been allocated and San Jose is expecting just 0.003 percent of that money, $178 million, despite being home to 0.3 percent of the population of the U.S.

Most frustrating of all is the stock market and billionaire assets are still hitting record highs, further exacerbating the already pervasive and egregious economic inequality right here in San Jose. To incentivize banks to lend, the Federal Reserve has dropped interest rates to near zero, eliminated reserve requirements, and relaxed capital requirements.

Essentially, banks can now effectively borrow for free, without restrictions. They can and will make funds available to their investment branches and private equity firms to buy up our communities’ distressed assets as they declare bankruptcy for pennies on the dollar—all of which further consolidates wealth in their own hands.

As San Jose City Council members Sylvia Arenas and Maya Esparza wrote in a recent memo on the matter: “A recovery that leaves out our vulnerable families and marginalized communities is not a recovery at all.”

We must re-evaluate what a thriving and resilient local economy looks like for our city. San Jose must find a way to adopt a counter-cyclical financial approach that is essential for a just and sustainable recovery. Despite the $178 million in federal assistance, the immense impact of the COVID-19 crisis has led San Jose to project $110 million in budget shortfalls over the next two years due to losses in sales tax revenue, construction and development fees and airport funds.

Because cities cannot run deficits, we are forced to respond with cuts to critical city services, implement layoffs and other cost cutting measures that only worsen the local economy’s ability to recover. With Santa Clara County and the city of San Jose being the first and fourth largest employers in the South Bay, respectively, their responses are critical in either exacerbating the downward spiral or jumpstarting the economy.

Luckily, AB 857 passed last year, a bill that provides a framework for cities and counties to create public banks. Such a bank would allow our city to take advantage of the Fed’s lending incentives to quickly disperse loans to our communities’ most immediate needs without a middle man maximizing their cut.

A public bank could recharge our local economy by lending at reduced rates to our small businesses, municipal agencies and even school districts. With over $15 billion in assets held by the county and city combined, and access to the financial tools being handed to Wall Street to protect their profits through federal action like the CARES Act, a public bank would be able to provide vital support right now.

This means small business loans hyper-focused on small and medium local business instead of corporate franchises, rental assistance to families and investments in public infrastructure to get city employees and local contractors back to work quickly.

We can start reclaiming public funds for our local economy instead of speculative investment instead of spending close to $200 million per year in interest and fees that could be used to better serve our community.

As we engage in much needed community discussions on what a post-COVID world looks like, there is a silver lining we cannot lose sight of. More than ever we recognize and thank the workers that were always essential, it's now time we also listen to them. For decades these workers have been asking for living wages, equitable opportunity for themselves and their children, an affordable roof over their head, food for their families, and a safety net for emergencies.

The way to show our thanks is by building a better world for everyone, by transitioning to an economic system that values people first, a system that is democratically controlled, not Wall-Street owned. A public bank would be a smart step for our community.

Jake Tonkel is a candidate for San Jose’s District 6 council seat, the former chair of the South Bay Progressive Alliance Public Banking Action Team and one of the founding members of the California Public Banking Alliance. Email him at [email protected] 

Nick Cortez chairs the California Progressive Alliance, co-coordinates the South Bay Progressive Alliance, heads the SBPA Public Banking Action Team and is a founding member of California Public Banking Alliance. Contact: [email protected]

Opinions are the authors’ own and do not necessarily reflect those of San Jose Inside. Send op-ed pitches to [email protected].

8 Comments

  1. To Jack and Nick: “Ladron que roba a ladron, tiene cien años de perdón!” Cuba has a public banking system. The solution is not to take money from a group of thieves to give it to the less experience thieves. The solution is to never bail them and make them all accountable for their acts!

  2. So, SJI now runs campaign literature for city council candidates. Do you provide equal time for the other candidates?
    A major part of the problem in the South Bay is that the county is the first and the city of San Jose is the fourth largest employer in the county, if the authors’ assertion is true. That is WAY too much government getting in the way of things. And with all those employees, our streets are third world, the jail is a mess, getting building permits takes forever, and the list of inefficiencies goes on and on and on.
    Back in the 1950s my father, a staunch Democrat and union member, used to quip that if he were in charge he would line up every government employee, fire every other one, and tell the remaining half that he expected four hours of real work out of each and every one of them, or they would be fired, too. Government employees at all levels have grown like a cancer since then.
    And you can bet that COVID is going to be used as an excuse by governments at all levels in California to raise taxes. The first target will be Proposition 13.

  3. This is, objectively, a terrible idea. We looked at this idea carefully, and the proponents’ ideas were half-baked, at best. We do not need the City to be in the banking business. There is a reason that only a couple examples of a successful public bank exist – if it were easy to run banks without losing money, more people would be doing it. There are significant risks and regulatory hurdles in setting up banks – which which the City is unfamiliar – and you can be sure that the effort would be hijacked to promote other terrible ideas pushed by the Law Foundation of Silicon Valley and other radical organizations who oppose private enterprise. It would behoove us to focus on solving some of the basic challenges we face as a City before taking on hairbrained socialistic schemes that place the City at a significant financial risk – especially when we are facing a $72 million budget shortfall for the 2020-2021 Fiscal Year. Candidate Tonkel is ill-equipped to make good decisions on behalf of our community if these are the types of schemes he will propose. We don’t need to return to the days when we saddled ourselves with money-losing ventures like public golf courses and a certain hotel/conference center.

    • There might only a few examples of successful public banks in the US perhaps because there are strong banking lobbyists that opposed such competition. Are there successful examples overseas, such as in New Zealand?

      Also, you say that “if it were easy to run banks without losing money, more people would be doing it.” It seems to me that banking is a super profitable endeavor, but one that is also ripe for corruption; see Wells Fargo as the prime example, a criminal organization which somehow still is able to churn out billions in profit every quarter.

      Perhaps at the city or county level, this isn’t workable, but what about at the state or regional level?

      BTW, Shane Patrick, it would have been great if you identified yourself in your post as Chief of Staff of District 10 Councilmember Khamis. Had to do a search on your name since you mentioned that “we” looked at this idea, and it wasn’t clear who “we” are.

      • > It seems to me that banking is a super profitable endeavor,

        Well, if you believe this, why don’t you just encourage all of your progressive friends to establish banks, generate super profits, and end world poverty?

  4. The authors’ childish, naive confidence in the government to solve the very problems it created is mindboggling.
    That being said, I guess I was young and dumb too at one time. Fortunately for the world though, unlike these two, I wasn’t so arrogant as to think I should run for political office.

  5. If history, and the current health and economic cataclysm, teach us anything, it is that relying on the private sector to decide what should be produced, how and how much should be produced and how the product should be distributed is a formula for disaster.

    Take the for-profit health care system which could not anticipate and would never, ever have prepared for a costly pandemic response capacity. In the last three months, the Army Corps of Engineers had to be mobilized to build massive hospital capacity in key cities around the country that the for-profit private hospital corporations had spent decades downsizing to fit their elective surgery-driven business models. U.S. Navy medical ships–floating hospitals–were deployed to New York and to the West coast as back up capacity. Even Trump (of all politicians) found it necessary to invoke the Defense Production Act of 1950 as leverage to compel private sector actors to produce socially necessary goods and services that the private sector had not found profitable to produce. In response to the COVID-19 pandemic, a number of governments (e.g. Spain, Ireland) quickly nationalized private hospitals and other health care facilities to ensure sufficiently robust responses to the crisis.

    Economists deferentially refer to such situations as “market failures”; in fact, they are economic and social disasters generated by the inherent weaknesses of the private sector. When “the economy” breaks down due to “market failures” like the Great Depression (1930-1940), the Great Recession (2008-2011) and the corona virus pandemic (2020- ), plunging tens and hundreds of million of Americans into the direst of straits, you can be sure the source of the disaster is the nature and structure of private business and the myopic, dogmatic insistence that people are incapable of deciding what and how to produce for themselves, their families and communities without absentee owners and bankers getting their cut of the action.

    The hard historical facts are that the human species survived for tens of thousands of years without private property and a profit motive–in fact, that is precisely why the species survived: cooperation, not competition, provided the margin of survival of human communities against the forces of nature. Capitalist competition based on private property, on the other hand, and the “taming” of the natural world, are the formula for wide disparities in income and wealth, social conflict, economic cycles and instability and, as we are witnessing on a regular basis, deeper and more serious economic and health crises.

    Public banks are clearly part of the way forward. Eliminate capital allocation decisions based solely on private profit considerations in favor of community and societal priorities. Eliminate the middlemen which cost the public sector billions each year and don’t add any value. We need more affordable housing; the public bank will fund such projects. We need more and better public infrastructure: public banks will fund this. We need more public heath and hospitals: public banks can and will fund these too. The community can directly produce what it needs, when it needs it and can finance it without bankers and the wealthy weighing in and taking a cut. (Think fire departments.)

  6. Kudos to Jake Tonkel and Nick Cortez who are right on time, right on target and right on the money in calling for immediate action to establish a public bank–something the County of Santa Clara formally took up in April 2019 (https://sanjosespotlight.com/santa-clara-county-to-explore-forming-its-own-public-bank/; https://www.sanjoseinside.com/news/as-community-lenders-sell-out-or-go-under-can-publicly-owned-banks-restore-local-control/) and which the State of California formally enabled in law in October 2019 (https://www.latimes.com/business/story/2019-10-02/public-banks-can-be-formed-under-bill-signed-by-newsom). Indeed, if we had a public bank at this moment, the City and County would be in excellent positions to do what a Federal Reserve Bank (Fed) facility will do in the coming weeks and months. The Municipal Liquidity Facility (MLF) was established by the Fed last month to support state, county and local fiscal finances in the wake of the COVID-19 crisis.

    In early April 2020, the Fed announced it would for the first in history buy “junk bond” quality securities from large corporations in order to shore up confidence in the private financial markets during the COVID-19 crisis (https://www.barrons.com/articles/the-fed-for-the-first-time-can-buy-junk-bonds-that-should-help-fallen-angels-51586449148). Almost simultaneously, the Fed announced the establishment of the MLF that will directly buy the public debt obligations of states, counties and cities with the aim of stabilizing state and local budgets caused by the fallout from the present crisis (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a3.pdf). Local authorities will not have to go through commercial banks’ underwriting and “open market” sales processes which siphon billions in bank fees and commissions from public authorities each year. Their debt obligations, rather, will be purchased directly by the Fed.

    Ostensibly, states, counties with populations of 2 million or more (Santa Clara County has an estimated 2020 population of 1.9 million) and cities with populations of 1 million or more (San Jose has an estimated 2020 population of 1.03 million) will be able to issue debt obligations of up to 24 months in duration to tide them over during this unprecedented crisis. The U.S. Treasury–the official bank of the federal government–will provide a $35 billion in initial equity to the Fed facility which can serve as the basis for lending up to $500 billion (one-half trillion dollars), although the full extent of such lending is likely to grow as conditions develop and rules are finalized and executed (see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3574157). In effect, the Congress and the Fed have enabled what amounts to a federal “public bank” for the purposes of bridging the regular budget shortfalls now plaguing nearly every single city, county and state in the U.S.

    (By contrast, our representatives in Congress have provided $75 billion as investment equity to enable the Fed to buy up to $750 billion in corporate debt in support of largest corporations in the country during May-September 2020 alone (see https://www.newyorkfed.org/markets/primary-and-secondary-market-faq/corporate-credit-facility-faq). This augments other earlier provisions for Fed private sector lending of more than $3 trillion, combined with reduced reserve and regulatory requirements for commercial banks, themselves large private corporations (see https://www.americanactionforum.org/insight/timeline-the-federal-reserve-responds-to-the-threat-of-coronavirus/). The almost immediate federal response to distress signals coming from large private sector corporations–including Wall Street dealers and banks– and the belated and more muted response to such signals coming from public sector entities, are strong indicators of who owns our “representatives” in Congress.)

    In the case of the City of San Jose, the current estimated regular budget fiscal shortfall for 2020-2021 is $71.6 million (https://www.mercurynews.com/2020/05/13/worse-than-the-great-recession-san-jose-releases-new-budget-proposal-with-71-6-million-deficit/) with the federal government providing $178 million in grants to San Jose to help it cope with the extraordinary expenditures caused by the COVID-19 crisis (https://sanjosespotlight.com/san-jose-approves-a-new-coronavirus-relief-fund/). In the case of Santa Clara County, the estimated regular fiscal budget shortfall is presently $285-$300 million for 2020-2021 (https://www.bizjournals.com/sanjose/news/2020/05/13/santa-clara-county-mountain-view-budget-covid.html) with federal grants of $154.7 million in extraordinary, extra-budgetary COVID-19 related assistance (https://lao.ca.gov/Publications/Report/4217).

    The Fed’s MLF will give us a glimpse into the power a public bank can wield in a crisis situation and on a national scale. It will by-pass greedy operators on Wall Street while providing budgetary relief under the most trying of circumstances. But public banks’ real contribution is their ability to finance long-term infrastructural and community development in “normal” times, including public facilities and programs, by buying longer term debt instruments that, like those to be purchased by the Fed’s MLF, are financed by the tax dollars. I suggest O’Connor, Connelly and Galt pay close attention to the impact of this large “public banking experiment” in real time rather than spouting failed neo-liberal platitudes about the inability of the public sector or government to get anything done or to get anything right.

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