By John Leonard
We think banks are the same as credit unions but they are not. They operate under different rules. We are given the impression (or are under the illusion) that banks lend out its members’ savings, allowing them to generate interest for our savings and checking accounts. Nothing is further from the truth. It is the credit unions that lend money this way. Banks lend money by establishing a “bank reserve” that allows them to lend out ten times the reserve amount. By now, you are probably scratching your head, asking, “ Where does the money come from?” Banks operate under a fiat money system that allows them to create money out of thin air. They are governed by international laws (the Basel Accord) to establish “safe banking practice.”
To create a bank you need to establish a purpose. Why do you want a bank and what are you going to do with it? Next comes the most important document, “The Charter,” the rules and regulations of operation. This will be a tome about four-foot wide. All state and federal guidelines are incorporated in the charter. This is why you need a professional banker to run the bank, since the guidelines go way beyond what credit unions do. When the state banking board does audits, if corruption is apparent, then the state makes an example of the bank president. When a charter is reviewed by the state and/or federal banking regulators and approved, you are on your way to owning a bank.
The construction union bank I am proposing will need few people on the governance board because it will be, at first, a single purpose bank. The governance board should represent the rank and file of the membership and change every few years with no permanent positions.
Let’s do some quick math, now that you have the basic concept of how a bank works by lending out ten times its reserve. If the construction unions were creating the bank, they would need to raise $100,000,000 for the reserve. This will create a bank valued at 10 times that, $1 billion dollars. Now you have the hair on the back of your heads bristling, worried about the safety of that much of an investment. Here is the good news; your money is to establish a “bank reserve.” It is not established to gamble on Wall Street; it just sits there making money. The money, which is now lent out by this union owned bank, could refinance student loans at 4%, the lowest rate in the nation. It would give a return of ten times the interest rate, because you are able to lend out at ten times the reserve. Banking amortization tables show about a 39.5% return.
Many student loans are now being charged 11%. With a $100,000 loan @ 11% for 25 years, the student now pays $960 per month. Refinancing the student loans at 4% brings the payment down to under $550 per month, a $400 per month savings. For the parents who are required to assume one half of the loan because the student has no credit rating, paying 8% on their half of the loan, their rate will drop proportionately.
Wow, a 39.5 % return; now what can we do. The bank needs to be autonomous but owned and run by the construction trades. In about 3 years the $100 million will be returned to the lenders with interest. At this point the union bank costs the trades absolutely nothing. Its purpose is not only to provide low student refinancing but also to provide funding in the future for massive projects that the trades will own. By letting the bank grow and reinvesting the profits back into the reserve, in six to seven years the trade unions will reap close to $295 million every year in profits. These profits can be used to create not only jobs, but the ownership of all they create; Factories will never be outsourced again. Factory jobs will be union. The factories will be very competitive, because when you own it you have no investors to pay. So your goal is full employment, not high profits.
To operate this kind of bank you only need a professional banker, computer equipment, a check scanner and union office staff. The bank can be in a large office space. There is no money kept in the office because everything is done by internet banking or personal checks made out to the bank.
John Leonard is a retired electrician, and a member of IBEW Local 172, trying to bring jobs back to western PA by reducing student loan rates.