THE PUBLIC OPTION IN BANKING: ANOTHER LOOK AT THE GERMAN MODEL

Publicly-owned banks were instrumental in funding Germany’s “economic miracle” after the devastation of World War II. Although the German public banks have been targeted in the last decade for takedown by their private competitors, the model remains a viable alternative to the private profiteering being protested on Wall Street today.

One of the demands voiced by protesters in the Occupy Wall Street movement is for a “public option” in banking. What that means was explained by Dr. Michael Hudson, Professor of Economics at the University of Missouri in Kansas City, in an interview by Paul Jay of the Real News Network on October 6:

[T]he demand isn’t simply to make a public bank but is to treat the banks generally as a public utility, just as you treat electric companies as a public utility. . . . Just as there was pressure for a public option in health care, there should be a public option in banking. There should be a government bank that offers credit card rates without punitive 30% interest rates, without penalties, without raising the rate if you don’t pay your electric bill. This is how America got strong in the 19^th and early 20^th century, by essentially having public infrastructure, just like you’d have roads and bridges. . . . The idea of public infrastructure was to lower the cost of living and to lower the cost of doing business.

We don’t hear much about a public banking option in the United States, but a number of countries already have a resilient public banking sector. A May 2010 article in The Economist noted that the strong and stable publicly-owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the world in the last few years.

In the U.S., North Dakota is the only state to own its own bank. It is also the only state that has sported a budget surplus every year since the 2008 credit crisis. It has the lowest unemployment rate in the country and the lowest default rate on loans. It also has oil, but so do other states that are not doing so well. Still, the media tend to attribute North Dakota’s success to its oil fields.

However, there are other Western public banking models that are successful without oil booms. Europe has a strong public banking sector; and leading it is Germany, with eleven regional public banks and thousands of municipally-owned savings banks. Germany emerged from World War II with a collapsed economy that had degenerated into barter. Today it is the largest and most robust economy in the Eurozone. Manufacturing in Germany contributes 25% of GDP, more than twice that in the UK. Despite the recession, Germany’s unemployment rate, at 6.8%, is the lowest in 20 years. Underlying the economy’s strength is its Mittelstand—small to medium sized enterprises—supported by a strong regional banking system that is willing to lend to fund research and development.

In 1999, public banks dominated German domestic lending, with private banks accounting for less than 20% of the market, compared to more than 40% in France, Spain, the Nordic countries, and Benelux. Since then, Germany’s public banks have come under fire; but local observers say it is due to rivalry from private competitors rather than a sign of real weakness in the sector.

As precedent for a public option in banking, then, the German model deserves a closer look.