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A Municipal Bank In San Francisco? City Explores Revolutionary New Model

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SAN FRANCISCO -- On a typically foggy San Francisco morning, a few hundred protesters stood on the sidewalk in front of the Federal Reserve Bank of California's Market Street location in an effort to bring the wheels of high-finance capitalism to a grinding halt.

At their front, liberal city supervisor and mayoral hopeful John Avalos stepped up to the makeshift podium, a beat-up red megaphone pressed to his salt-and-pepper beard, to give one of the trademark rabble-rousing stem-winders that have earned him his status as the de facto progressive candidate in this month's contest.

If Avalos knows one thing, it's how to work a sympathetic crowd. Ringing up one applause line after another, the candidate hammered easy targets like the Wall Street bailout and tax cuts for the wealthy.

But one line in particular stood out. "San Francisco needs to look into starting its own municipal bank," he said. "We need to stop doing banking with the very people who wrecked the economy."

The assembled crowd, a motley assortment of union workers, mask-wearing anarchists and everyday people feeling trapped by high unemployment and a dour economy, erupted in a rapturous roar of support.

For the creation of a local government commission.

To study an obscure form of banking.

That a politician could so easily get an angry mob to instantly rally around an idea so inherently complicated is indicative of either his oratorical skill or the timeliness of the idea, or both.

As a rallying cry, "off with their heads" it's not; but a municipal bank may be just the thing to kick-start San Francisco's economy out of the doldrums. Or it could become a black hole sucking millions of dollars from the budget at a time when the city can least afford it.

The idea of creating a local municipal bank has been around for a long time. It was a demand of the 1975 San Francisco Community Congress, and the San Francisco Board of Supervisors commissioned a Legislative Analyst Report at the bequest of supervisor Matt Gonzalez on the issue in 2001.

Only two totally government-owned banks exist in the United States, neither of which are under the jurisdiction of an individual city. Around the world, a handful of cities (Berlin and Jakarta, for example) have been running their own banks for years with some success.

San Francisco currently divides its nearly 200 bank accounts between three massive financial firms: Wells Fargo, Union Bank of California and Bank of America. Wells Fargo and Union Bank are based in the city, and Bank of America, founded by an Italian immigrant who set up a table on a San Francisco street corner after the 1906 earthquake and started making loans, is now based in North Carolina after a mid-1990s acquisition by Nations Bank.

A municipal bank would do away with those relationships in favor of something more closely resembling the model of the Bank of North Dakota.

The Bank of North Dakota was created in 1919 amid a populist uprising not unlike the current Occupy protests. "Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets...deciding who got credit and how to market their goods," said bank president Eric Hardmeyer in an interview with Mother Jones.

By law, North Dakota deposits all of its money into the bank, which then partners with local banks to make loans within the community. The loans are issued by the private banks and, as a result, those banks are on the hook for a portion of the loans in the case of a default. Requiring the private bankers to put some skin in the game incentivizes them to hopefully make prudent decisions instead of excessively leveraging themselves at the government's expense.

This partnership allows these local banks, most of which are a fraction of the size of the financial giants currently handling San Francisco's accounts, to increase the volume of loans they make within their respective communities. Even though the amount of capital held by major banks far outstrips the amount held by small banks, it's the little guys who do a majority of the nation's small business lending. North Dakota's municipal bank not only gives these small banks an extra push to expand their lending, it also allows the government to direct investment toward sectors like student loans, disaster relief and the development of alternative energy sources that it deems beneficial.

For Avalos, the ability to send loan money to where it's desperately needed, particularly in neighborhoods often ignored by traditional lenders, is especially attractive. "Out in [my home district of] the Excelsior, we're underserved by traditional banks," he explained to HuffPost. "We have a lot of the same kinds of businesses. Whenever we have a storefront open up, I always expect it's going to be filled by a 99 cent store -- and it too often is. There's a real need to have more diverse neighborhood-serving businesses. We don't have a print shop in my district; we don't have a book store."

The supervisor insists many of these potential borrowers are credit-worthy but, because of requirements on how much capital banks need to have on hand, they aren't able to get the loans they need.

Furthermore, last year's Dodd-Frank financial reform bill mandated a whole array of new compliance measures, such as the imposition of stress tests and an increase in capital requirements. One of the legislation's ultimate effects was a disproportionate pressure put on small banks, making it more difficult for them to issue loans -- particularly to the type of lower-rated borrowers who make up the majority of cases in places like Avalos' district.

The Bank of North Dakota has earned the state more than $300 billion in the past decade. This consistent inflow of capital, along with a recently discovered bonanza of shale oil, are reasons why North Dakota is one of the few states not facing a budget shortfall.

This isn't to imply that municipal banking is entirely risk-free. If the the loans tank, the losses would come directly out of the city's coffers, which aren't exactly overflowing.

Walter Mix, a former Union Bank of California executive who now heads the Financial Services Practice at the Berkeley Research Group, questioned if focusing on increasing business output is the right tactic at a time when a lot of people don't have much extra money to spend. "Aggregate demand for goods and services is low," he said, "meaning that loan demand is also not particularly strong."

For government banking advocates like Public Banking Institute executive director Marc Armstrong, the proof of municipal banking's feasibility can be found in Bank of North Dakota's success.

Since it's managing state funds, the bank has taken a conservative approach to investing, largely avoiding the derivatives market troubles that have ensnared so many other financial institutions.

"The hole in the balance sheets of these Wall Street banks is enormous -- in the trillions of dollars -- and they have the gall to say it's too risky for cities and states to pull out their money and invest it themselves," Armstrong said with a laugh. "There's always going to be risk, but the Bank of North Dakota has been able to prudently manage it. There are still credit-worthy applicants out there not getting the loans they need."

Last week, the Board of Supervisors held a hearing looking into the creation of a municipal bank, but implementation is a long way off.

California law prohibits cities and counties from making loans to private individuals or corporations, meaning legislative action would be required to make a municipal bank, strictly speaking, legal. Avalos said he's gotten positive feedback from some statewide lawmakers on the idea, but it could take years of political wrangling to make it a reality.

Nevertheless, if a city-run bank is going to happen anywhere, it seems likely to be in the legislative laboratory of San Francisco government at a time when much of the population seems willing to go along with anything that fundamentally challenges the current system.

This Saturday, for example, has been termed Bank Transfer Day, during which individuals around the country are urged to switch their personal accounts from major banks to smaller credit unions as a means of protest.

"With the start of the Occupy Wall Street movement, it's like a light has been turned on," Armstrong said. "Everything just changed overnight. People are actually taking about monetary policy in the streets."

Take a look at footage of Avalos addressing an Occupy Wall Street rally in San Francisco:

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