Escape from Pottersville: Strengthening Banking in the Public Interest

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Escape from Pottersville: Strengthening Banking in the Public Interest
Sunday 03 January 2010

by: Ellen Hodgson Brown J.D., t r u t h o u t | Op-Ed


Returning our business to community banks is a great start. However, community banks are not suffering from a lack of customers so much as from a lack of the capital they need to make new loans, and investment capital today is scarce. There is a way out of this dilemma, demonstrated for over 90 years by the innovative state of North Dakota - a partnership in which community banks are backed by the deep pockets of a state-owned bank.


Arianna Huffington just posted an article that has sparked a remarkable wave of interest, evoking over 4,500 comments in a mere three days. Called "Move Your Money," the article maintains that we can get credit flowing again on Main Street by moving our money out of the Wall Street behemoths and into our local community banks. This solution has been suggested before, but Arianna added the very appealing draw of a video clip featuring Jimmy Stewart in It's a Wonderful Life. In the holiday season, we are all hungry for a glimpse of that wonderful movie that used to be a mainstay of Christmas, showing daily throughout the holidays. The copyright holders have suddenly gotten very Scrooge-like and are allowing it to be shown only once a year on NBC. Whatever their motives, Wall Street no doubt approves of this restriction, since the movie continually reminds viewers of the potentially villainous nature of big banking.

Pulling our money out of Wall Street and putting it into our local community banks is an idea with definite popular appeal. Unfortunately, however, this move alone won't be sufficient to strengthen the small banks. Community banks lack capital - money that belongs to the bank - and the deposits of customers don't count as capital. Rather, they represent liabilities of the bank, since the money has to be available for the depositors on demand. Bank capital consists of the funds of investors, the bank's loan portfolio (money that will be paid back with interest) and retained earnings (the difference between assets and liabilities). Lending ability is limited by a bank's assets, not its deposits, and today, investors willing to build up the asset base of small community banks are scarce, due to the banks' increasing propensity to go bankrupt.

It's a Wonderful Life actually illustrates the weakness of local community banking without major capital backup. George Bailey's bank was a savings and loan, which lent out the deposits of its customers. It "borrowed short and lent long," meaning it took in short-term deposits and made long-term mortgage loans with them. When the customers panicked and all came for their deposits at once, the money was not to be had. George's neighbors and family saved the day by raiding their cookie jars, but that miracle cannot be counted on outside Hollywood. ...........(more)

The complete piece is at: http://www.truthout.org/01031003

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