As of recently, the federal government—whether it is extending FDIC insurance, facilitating the sale of troubled banks, or making sure funds are available through the Federal Reserve’s new Bank Term Funding Program—has become quite comfortable interfering in the private banking sector. The only problem is that it is not necessarily to the benefit of average Americans.

With no buyer on the horizon weeks after First Republic’s collapse, the FDIC facilitated JP Morgan’s purchase of the bank’s assets. The conditions of the deal were to the benefit of the “too big to fail” megabank. To secure the purchase, the FDIC agreed to lock in a loss-sharing agreement regarding First Republic’s residential mortgages and commercial loans. If that was not enough, the FDIC also agreed to provide $50 billion in financing to JP Morgan at an undisclosed fixed interest rate. That means that while taxpayers are on the hook for some of First Republic’s losses, all the potential profits of the assets go to JP Morgan.

The federal government justified the deal as necessary to save the banking sector from total collapse. The argument is not without its truth. In the first two years of the Trump administration, when Republicans controlled all three branches of government, Congress deregulated regional and mid-sized banks. The argument was that such regulations, including stress tests to ensure that these smaller banks could survive dramatic swings in the market, were cumbersome and unnecessary. According to deregulation advocates, these regional and mid-sized banks had no incentive to take risky lending practices, and their overall influence on the economy was marginal. Just a few years later, the advocates of deregulation could not be more wrong.

No one could have predicted the economic chaos caused by the COVID-19 pandemic, nor the Federal Reserve’s sudden and dramatic rate hikes to deal with inflation, but that is the point of having regular stress tests: to prepare for the unexpected. Now, with rolling collapses of regional banks, the light touch approach that deregulation advocates celebrated is completely obsolete. Governments need to intervene to prevent a larger crisis from occurring.

Nevertheless, the question is: does the government always need to intervene on the side of the wealthy?

Previously, President Biden attempted to split the difference on bank rescues. After the collapse of Silicon Valley Bank in March, the Biden Administration, jointly with the Federal Reserve and the FDIC, agreed to wipe out Silicon Valley Bank’s shareholders, but it offered an unprecedented extension of FDIC insurance to all depositors, even those who had deposits over $250,000. When First Republic failed weeks later, the policy was extended to their collapse. The moral hazard of this new policy is obvious. Rather than encouraging banks to diversify their clients and depositors to diversify their banks—thus strengthening the overall banking system by compelling the sharing of risks—both banks and depositors are encouraged to put all their eggs in one basket.

The problem with this banking homogenization is if a bank fails, then they are more likely to pull an entire company down with them and vice versa. Additionally, paying for this new system is not cheap. FDIC insurance is paid for by commercial banks, but banks get their revenue from fees and interest rates on their clients. Eventually, covering all these risky deposits will mean that the average bank user is going to pay more for opening a checking account, overdraft fees, and taking out a car loan.

The FDIC’s new deal with JP Morgan only adds to the problem. Why would any bank purchase the assets of a failed bank if they knew that within a few weeks the FDIC will offer them a sweet deal that shovels much of the risk onto the taxpayer? When a banking crisis occurs, rapid response is critical to prevent contagion. Now, the megabanks—which are some of the few institutions that have enough capital to deal with a failed mid-sized bank—have every incentive to sit on their hands in the hopes that FDIC will come groveling with a one-sided bargain.

In fairness to the federal government, it remains unclear how much its recent actions will be understood as precedential. The Biden administration and various federal agencies have given mixed messages on the matter, and it is likely that no one knows the full extent of the current banking crisis. Regardless, if the government is going to interfere in the banking sector, it should do so on behalf of average Americans—everyday taxpayers and depositors—or, better yet, let average Americans own and operate the banks through a system of public banking.

Rather than focusing on maximizing profits for its shareholders, public banks operate to serve the public interest on a nonprofit basis. North Dakota remains the first and only state in the country with a publicly owned and operated bank. Since its establishment in 1919, the Bank of North Dakota has provided North Dakotans with equitable loans for their homes, cars, small businesses, and higher education. It has also shielded it from the rest of the country’s economic turmoil. In 2008, during the Great Recession, North Dakota’s economy grew 7.3%, nearly twice as much as almost any other state, and a virtual miracle when compared to the free-falling economies of states with huge housing bubbles.   

Over the last decade-and-a-half, interest in public banking has exploded. According to the Public Banking Institute, thirty-two states have campaigns to establish public banks on either the state or municipal level. Here in Washington, during the most recent legislative session, State Senator Patty Kuderer (D-Bellevue) introduced legislation to create a public infrastructure bank for the state’s municipal, local, and tribal governments. Unfortunately for Washingtonians, the legislation was killed in committee.

Still, as the tumult of our current banking crisis has shown, the need for public banking is pressing. Despite the bromides from free market ideologues, the storms created by America’s private banking system will not weather themselves. To prevent another collapse, governments are going to need to intervene in the banking sector. They should do so on the side of the public; and there is no better way to make sure the public’s interests are served by the banks than by making the public the owners and operates of those banks.