29 March 2011
By Ellen Brown
Cut spending, raise taxes, sell off public assets –
these are the unsatisfactory solutions being debated
across the nation; but the budget crises now being
suffered by nearly all the states did not arise from
too much spending or too little taxation. They arose
from a credit freeze on Wall Street. In the wake of
the 2009 financial market collapse, banks curtailed
their lending more sharply than in any year since
1942, driving massive unemployment and causing local
tax revenues to plummet.
The logical solution, then, is to restore credit to
the local economy. But how? The Federal Reserve
could provide the capital and liquidity necessary to
create bank credit, in the same way that it provided
$12.3 trillion in liquidity and short-term loans to
the large money center banks. But Fed Chairman Ben
Bernanke declared in January 2011 that the Fed had no
intention of doing that -- not because it would be too
costly (the total deficit of all the states comes to
less than 2% of the credit advanced for the bank
bailout) but because it is not part of the Fed's
mandate. If Congress wants the Fed to advance credit
to local governments, he said, it will have to change
the law.
The states are on their own. Policymakers are
therefore considering a variety of reforms designed to
increase bank lending, particularly to small
businesses, the hardest hit by tightening credit
standards. One measure that is drawing increasing
interest is the creation of a bank modeled on the Bank
of North Dakota (BND), currently the only state-owned
bank in the country. The
BND has a 92-year history of safe, secure and highly
profitable banking.
North Dakota has the lowest unemployment rate in the
country; and in 2009, when other states were
floundering, it had the largest budget surplus it had
ever had.
Eight states now have bills pending either to form
state-owned banks or to do feasibility studies to
determine their potential. This year, bills were
introduced in the Oregon State legislature on January
11; in Washington State on January 13; in
Massachusetts on January 20 (following a 2010 bill
that lapsed); and in the Maryland legislature on
February 4. They join Illinois, Virginia, Hawaii, and
Louisiana, which introduced similar bills in 2010.
The Center for State Innovation, based in Madison,
Wisconsin, was commissioned to do detailed analyses
for Washington and Oregon. Their conclusion was that
state-owned banks in those states would have a
substantial positive impact on employment, new
lending, and state and local government revenue.
State-owned banks could be a win-win for everyone
interested in a thriving local economy. Objections
are usually based on misconceptions or a lack of
information. Proponents stress that:
1. A state-owned bank on the BND model would not
compete with community banks. Rather, it would
partner with them and support them in making loans.
The BND serves the role of a mini-Fed for the state.
It provides correspondent banking services to
virtually every financial institution in North Dakota
and offers a Federal Funds program with daily volume
of $330 million. It also provides check clearing,
cash management services, and automated clearing house
services. It leverages state funds into credit for
local purposes, funds that would otherwise leave the
state and be leveraged for investing abroad, drawing
away jobs that could go to locals.
2. The BND not only does not compete for loans but
does not compete for commercial deposits. Less than
2% of its deposits come from consumers. Municipal
government deposits are also reserved for local
community banks, which are able to use these funds for
loans specifically because the BND provides letters of
credit guaranteeing them. Virtually all of the BND's
deposits come from the state itself. All state
revenues are deposited in the BND by law.
3. Although the BND is a member of the Federal
Reserve system, it is insured by the state rather than
by the FDIC. This does not, however, put deposits at
risk. Rather, it helps avoid risk and unnecessary
expense, since the BND's chief depositor is the state,
and the state has far more to deposit than $250,000,
the maximum covered by FDIC insurance. FDIC insurance
is not only very expense but subjects members to FDIC
regulation, making the state subservient to a
semi-private national banking association. (The FDIC
calls itself an
independent agency of the federal government, but it
receives no Congressional appropriations. Rather, it
is funded by premiums that banks and thrift
institutions pay for deposit insurance coverage and
from earnings on investments in U.S. Treasury
securities.) North Dakota prefers to maintain
its financial independence.
4. BND officials stress that the bank is run by
bankers, not politicians bent on funding their
favorite development projects or bestowing political
favors. The bank is run very conservatively, doing
only creditworthy deals and avoiding speculation in
derivatives and risky subprime loans. By partnering
with local banks, the BND actually shields itself from
risk, since the local bank takes the initial loss if
the borrower fails to pay.
5. The BND does not imperil state funds or tax money
but is self-funding and self-sustaining. It manages
VA, FHA and other forms of loans that are federally
guaranteed and would otherwise go to large
out-of-state banks. Profits on these
federally-guaranteed loans are then used to build a
capital surplus from which riskier loans can be made
to local businesses and development projects. The BND
has a return on equity of 25-26% and has contributed
over $300 million to the state (its only shareholder)
in the past decade -- a notable achievement for a
state with a population less than one-tenth the size
of Los Angeles County. Compare California's public
pension funds, which entrust their money to Wall
Street and are down more than $100 billion, or close
to half the funds' holdings, following the banking
debacle of 2008.
6. Partnering with the BND allows community banks to
fund local projects in which Wall Street is not
interested, leveraging municipal government funds that
would otherwise not be available for loans. Further,
infrastructure projects can be funded through the
state bank at substantially less cost, since the state
owns the bank and gets the interest back. Studies
have shown that interest composes 30-50% of public
projects.
8. The North Dakota Bankers' Association does not
oppose the BND but rather endorses it. North Dakota
has the most local banks per capita and the lowest
default rate of any state.
Other states could realize similar benefits, if they
were to form banks on the BND model. Paying interest
to coupon clippers on state and municipal bonds means
sending money out of the state on a one-way trip to
Wall Street. Having a state-owned bank allows the
state to keep its money local, flowing into the state
treasury and the local economy.
Originally posted by
Yes! Magazine.
Ellen Brown is an attorney and chairman of the
Public Banking Institute.
She
has written
eleven books,
including
Web of Debt: The Shocking Truth About Our Money System
and How We Can Break Free (2007, 2010). Comments 💬 التعليقات |