By Tyler Suksawat & Scott Ferguson
In a recent essay, we advanced a proposal for sub-federal governments to sell municipal bonds to their own public banks. We took the city as our primary point of departure, but the same lessons are applicable to U.S. counties and states. Establishing a public bank that regularly purchases municipal debt, we argued, would not only significantly expand a city’s fiscal capacity to support its communities and environs, but also reclaim regional public finance from a parasitical and punishing bond market.
Since the publication of our essay, some commentators have criticized the proposal for involving city finance in so-called shadow banking, precisely because it places public credit creation outside traditional private capital markets. Such concerns are rooted in a legitimate wariness toward the unregulated and often fragile credit structures that trigger financial crises. However, this criticism fails to distinguish between speculative private ventures and institutionalized provisioning by the municipal public purse. Indeed, such a critique mistakes the absence of private middlemen for a lack of financial oversight and security. Our plan, by contrast, replaces the opaque and volatile shadows of private intermediation with a transparent, public-facing mechanism anchored in the enduring fiscal authority of the city government.
Today, municipal finance remains trapped in an exploitative and convoluted cycle. When a city issues debt, it is immediately subjected to a gauntlet of private intermediaries: banks underwrite the bonds, rating agencies perform a gatekeeping function via risk assessment, and institutional investors claim interest as a form of social rent. Crucially, these investors are often not traditional depository banks, but rather volatile non-bank entities such as money market mutual funds and hedge funds, which treat municipal bonds as liquid shadow money to be leveraged for short-term gain. As it stands, then, the public purse is already precariously entangled in shadow banking, with municipal debt serving as a primary asset for the volatile and uninsured money markets that dominate the status quo. Every stage of this process, meanwhile, is governed by a “fiscal discipline” that prioritizes private profit over public need. Thus, far from a stable, above-board process, the current municipal model represents an architecture of austerity that embeds the public interest within the murky, predatory, and destabilizing mechanisms of market-based finance.
Our proposal replaces the fragility of the shadow market with an architecture of public provisioning. Before we turn to the specific mechanisms of financial stability, we must first establish the basic institutional design. We propose a publicly owned institution with chartered banking powers–including direct access to the Federal Reserve’s discount window–that allows the city to bypass the private gauntlet and recapture its own credit. Under this arrangement, the interest generated by municipal debt is no longer captured as social rent; instead, it is credited back to the issuer’s general fund. While both the private market and our public model acknowledge that credit is fundamentally elastic, the divergence lies in who controls and benefits from that elasticity. By internalizing debt service and neutralizing the power of rating agencies, our proposal transforms the financial model from an extractive regime into a regenerative one.
This formalization—grounding municipal debt finance in a chartered public bank, regulated oversight, and direct access to central bank liquidity—moves our model firmly into the light of the regulated banking system. If critics wish to argue about the risks of aggressive credit expansion or the blurring of fiscal and monetary lines, those are legitimate debates over localized monetary and credit governance. But to label a chartered, transparently regulated public utility as “shadow banking” is a category error. Our plan does not evade regulation; it institutionalizes public purpose through it.
Regarding the safety of deposits, public ownership is no barrier to FDIC insurance. A state-chartered public bank meeting standard capital and supervisory requirements can qualify for federal backing. However, even in the absence of the FDIC, the Bank of North Dakota provides a proven roadmap: deposits can be backed by the full faith and credit of the municipal government itself. In this architecture, deposit safety is a design constraint managed through robust capital buffers and strict regulatory adherence, rather than an impossibility.
In this context, the risk of default on deposits is a feature of any bank lacking sufficient capital or insurance. Critics often raise the specter of “portfolio concentration,” but a public bank purchasing its own city’s bonds is simply internalizing fiscal risk. This shifts the concern from “depositor loss” to the broader question of municipal insolvency–a condition that, in our schema, is mitigated by the bank’s ability to coordinate with the city’s broader fiscal agenda. We address concentration not through the fickle discipline of the bond market, but through diversified asset management and the elimination of capitalist underwriting.
The most powerful engine of this model is its mandated retention and concerted utilization of public deposits, serving as a foundation for proactive public provisioning. By directing city payrolls, vendor payments, contractor accounts, and the collection of taxes, fines, fees, and even utility payments (as seen in Seattle) through the public bank, we create a massive, stable foundation of liquidity to be deployed for the common good. This capacity becomes particularly transformative when paired with a local Job Guarantee program. The bank provides the strong accounting infrastructure for such a program, ensuring that municipal payrolls for public works are settled within the public’s own credit circuit to build and sustain community wealth. Consequently, the interest payments that currently “leave” the city as social rent are instead retained, further expanding the city’s financial system and its capacity to support collective wellbeing with every cycle.
Finally, we must correct a persistent metallic-standard myth: the idea that a bank’s ability to purchase bonds is constrained 1:1 by its existing deposits. As any modern banker knows, loans create deposits. Banks expand their balance sheets first and manage reserves afterward. The true constraints on our model, then, are not “available deposits,” but rather regulatory capital ratios and liquidity coverage rules. We acknowledge these constraints and embrace them. Our goal is not to evade regulation, but to use the inherent elasticity of credit to activate municipal democracy and provision the public good.
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