An American Banking Revolution Awaits

These tough economic times require creative alternatives to Wall Street, including more state banks.

Vermonters aren’t like the rest of us: They live in a small state with a flinty history and a legendary suspicion of outsiders.

That independent streak gained luster when 15 Vermont towns voted earlier this year to reinforce this independent tradition by approving a proposal to create a state bank.

The Vermont Economic Development Authority would get a license to do what private banks normally do — only with a mandate to serve the public interest no matter what.

This isn’t unprecedented. North Dakota has enjoyed a flourishing state banking system for nearly a century.

Costa Rica set another good precedent. Its public banking dates back to 1949. As of a decade ago, its four state banks held 75 percent or more of all individual deposits.

All this is quite vexing to the World Bank and the International Monetary Fund. As elsewhere, they have muscled Costa Rica to privatize its government-owned businesses. Costa Rica has largely done this, but it won’t let go of its state-owned banks. For some reason, Costa Ricans don’t trust the commercial ones.

No, Americans don’t trust our banks either. But only North Dakota’s state bank remains under public control.

Everywhere else, banking laws have made it very profitable for old-fashioned mutual (non-profit) savings banks, once popular, to sell out their depositors and turn commercial. The executives who accomplish this switch all do very nicely for themselves.

Luckily, credit unions carry on from bygone times as a thorn in the side of the industry, but Wall Street is working hard to extinguish them too. Credit unions depend heavily on their non-profit status to protect them against taxes, so conservative outfits like the Tax Foundation are trying mightily to squash that exemption.

Theoretically, the government is our protector from the avaricious cartel of private banks. Both state and federal laws ostensibly provide us with banking watchdogs which safeguard the honesty and fairness of our saving and borrowing.

That’s really just in theory. Unfortunately, a cynical revolving door regularly sends regulators wheeling into bank jobs and bankers hot-footing it over to regulation. At the same time, lobbyists sap the rectitude of those lawmakers and oversight agencies who you might have thought had our best interests at heart.

Hence, banks feel unrestricted to manipulate credit cards, student loans, mortgages, securitizations, hedge funds, credit default swaps, currency exchanges, and all manner of rigged financial transactions. Our regulators rein them in sometimes, but in many cases not until after the damage is done.

As a result, when mortgages default, neighborhoods collapse, families are ruined, and the economy tanks, the banks go right on — perhaps with their wrists slapped.

One other savings alternative does exist: the Post Office. In years gone by, the U.S. Postal Service doubled as a bank that had lots of branches and no securitized mortgages.

But given the general lack of trust most people have with banks, some lawmakers are looking to bring the Post Office back into banking. That would be a new American Revolution.