State Banking Gathering Momentum

There is a steady move by theStates to the establishment of their own State bank following the North Dakota model. I suspect that as more and more legislators wise up to the naturalbenefits and also the natural checks and balances of the system, we will seealmost all States take the plunge.  A fewmay set up consortiums with other States to provide larger initial size.

In the end, the Fed abandoned itpotential role in supporting finance and indirectly municipal finance becauseof the deep damage generated by the collapse of the interbank market.  Thus its role is presently moot and it hasleft a vacuum into which the States can step.

In the long term this is verygood news for the US economy because it will wrest control of the moneycreation power away from the central government which has proven itselfincapable due to the monumental size of it all. Control was long overdue to devolve downward.  The same applies in Canada and elsewhere such as China and India but will be a long timecoming.

Feds To States: "Drop Dead." State Bank Movement Picks UpSteam

By Ellen Brown (about the author)      

opednews.com

http://www.opednews.com/articles/Feds-To-States--Drop-Dead-by-Ellen-Brown-110518-79.html

"Ford to New York: Drop Dead," said a famous headline in1975.   President Ford had declaredflatly that he would veto any bill calling for "a federal bail-out of New York City."   What he proposed instead was legislationthat would make it easier for the city to go bankrupt.  

Now the Federal Treasury and Federal Reserve seem to be saying this tothe states, which are slated to be the first ritual victims in the battle overthe budget ceiling.   On May 2, TreasurySecretary Timothy Geithner said that the Treasury would stop issuing specialsecurities that help state and local governments pay for their debt.   This was to be the first in a series of"extraordinary measures" taken by the Treasury to avoid default inthe event that Congress failed to raise the debt ceiling on May 16.   On May 13, the Secretary said theseextraordinary measures had been set in motion.

The Federal Reserve, too, has declared that it cannot help the stateswith their budget problems --   althoughthose problems were created by the profligate banks under the Fed'spurview.   The Fed advanced $12.3trillion in liquidity and short-term loans to bail out the financial sectorfrom the 2008 banking collapse, 64 times the $191 billion required to balancethe budgets of all 50 states.   But FedChairman Ben Bernanke declared in January that the Fed could not make the samecheap credit lines available to state and local governments -- not because theFed couldn't find the money, but because it was not in the Fed's legislativemandate.  

The federal government can fix its own budget problems by raising itsdebt ceiling, and the too-big-to-fail banks have the federal government andFederal Reserve to fall back on.   Butthese options are not available to state governments.   Like New York City in 1975, many states are teetering onbankruptcy.  

A Beacon in the Storm

Many states are in trouble, but not all.   North Dakota has consistently boasted large surpluses,aided by a state-owned bank that is showing landmark profits.   On April 20, the Bank of North Dakota (BND) reported profits   for 2010 of $62 million, setting a recordfor the seventh straight year.   TheBND's profits belong to the citizens and are produced without taxation.  

Inspired by North Dakota'sexample, twelve states have now introduced bills to form state-owned banks orto study their feasibility.   Eight ofthese bills have been introduced just since January, including in Oregon, Washington State, Massachusetts, Arizona, Maryland, New Mexico, Maine and California.   Illinois, Virginia, Hawaiiand Louisianaintroduced similar bills in 2010.   Forlinks, dates and text, see here.

The Center for State Innovation, based in Madison,Wisconsin, was commissioned to do detailedanalyses for Washington and Oregon . Their conclusion was that astate-owned bank on the model of the Bank of North Dakota would have a substantialpositive impact on employment, new lending, and government revenue in thosestates.

The BND partners with local banks in providing much-needed credit forlocal businesses and homeowners.   Italso helps with local government funding needs.   When North Dakota went over-budget a fewyears ago, according to the bank's president Eric Hardmeyer, the BND acted as arainy day fund for the state; and when a North Dakota town suffered a massiveflood, the BND provided emergency credit lines to the city.   Having a cheap and readily available creditline with the state's own bank reduces the need for massive rainy-day fundsthat are a waste of capital and are largely invested in out-of-state banks atvery modest interest.

What States Can Do with Their Own Banks

North Dakota has a population that is less than 1/10ththe size of Los Angeles.   The BND produced $62 million in revenue lastyear and $2.2 billion in loans.   Largerstates could generate much more.      

Banks create "bank credit" from capital and deposits, asexplained here.   The Bank of North Dakota has $2.7billion in deposits, or $4000 per capita.  The majority of these deposits are drawn from the state's ownrevenues.   The bank has nearly the samesum ($2.6 billion) in outstanding loans.  

You can get a rough idea of what a state bank could do for your state,then, by multiplying the population by $4,000.  California, for example, has 37 million people.   If it had a state-owned bank that performedlike the BND, it might amass $148 billion in deposits.   This $148 billion could then generate $142billion in credit for the state, assuming the bank could come up with $12billion in capital to satisfy the 8% capital requirement imposed on banks.  

Note that this capital would not be an expenditure.   It would just be an investment; and like anycapital investment, it would actually make money for the state.   The Bank of North Dakota has had a return on equity inrecent years of 25-26%, and a major portion of this has been returned to thestate treasury.   All states have massiverainy day funds of various sorts.   Someof this money could simply be shifted into equity in the state's own bank.  

There are many options for using the state's credit power, but here isone easy alternative that illustrates the cost-effectiveness of theapproach.   Assume California's state-owned bank invested $142billion in municipal bonds at 5% interest.  This would give the state $7 billion annually in interest income.   Californiahas outstanding general obligation bonds and revenue bonds of $158 billion, and$70 billion goes for interest.   If California had beenfunding its debt through its own bank for the last decade or two, it would havesaved $70 billion on its bonded debt and would be that much richer today.

In a futile attempt to "balance the budget" in a shrinkingeconomy, we have been pressured into a self-destructive economic model in whichthe only alternatives are said to be to slash services, raise taxes, and selloff public assets.   These are not ouronly alternatives.   What destroyed ourlocal economies was not excess government spending but was a credit crisis onWall Street.   We can restore theprosperity we lost by restoring credit in the state; and we can do that bytaking our deposits out of Wall Street banks and putting them in our ownstate-owned bank, to be leveraged into credit for local purposes.

Ellen Brown is an attorney and author of 11 books, including "Webof Debt: The Shocking Truth About Our Money System," http://webofdebt.com.She is president of the Public Banking Institute, http://PublicBankingInstitute.org.