October 31, 2009
from TruthOut Website
Pouring money into the private banking system
has only fixed the economy for bankers and the wealthy; it has not done much
to address either the fundamental problem of unemployment or the debt trap
so many Americans find themselves in.
In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.)
North Dakota is a sparsely populated state of
less than 700,000 people, largely located in cold and isolated farming
communities. Yet, since 2000, the state's GNP has grown 56 percent, personal
income has grown 43 percent and wages have grown 34 percent. The state not
only has no funding problems, but this year it has a budget surplus of $1.3
billion, the largest it has ever had.
Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men.
The bank's stated mission is to deliver sound
financial services that promote agriculture, commerce and industry in North
Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of "fractional reserve" lending.
As the Federal Reserve Bank of Dallas explains on its web site:
How many times? President Obama puts this "multiplier effect" at eight to ten.
In a speech on April 14, he said:
It can, but it hasn't recently, because private banks are limited by bank capital requirements and by their for-profit business models.
And that is where a state-owned bank has enormous advantages: States own huge amounts of capital, and they can think farther ahead that their quarterly profit statements, allowing them to take long-term risks.
The Bank of North Dakota (BND) is set up as a dba:
Technically, that makes the capital of the state
the capital of the bank. Projecting the possibilities of this arrangement to
California, the State of California owns about $200 billion in real estate,
has $62 billion in various investments and has $128 billion in projected
2009 revenues. Leveraged by a factor of eight, that capital base could
support nearly $4 trillion in loans.
It would just become bank equity, transmuting from one form of investment into another - and a lucrative investment at that. In the case of the BND, the bank's return on equity is about 25 percent. It pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a billion dollars to the state's general fund, offsetting taxes. California could do substantially better than that.
California pays $5 billion annually just in
interest on its debt. If it had its own bank, the bank could refinance its
debt and return that $5 billion to the state's coffers; and it would make
substantially more on money lent out.
These copious deposits can then be plowed back
into the state in the form of loans.
The BND is now chiefly a "bankers' bank." It
acts like a central bank, with functions similar to those of a branch of
the Federal Reserve. It avoids rivalry with private banks by partnering
with them. Most lending is originated by a local bank. The BND then comes in
to participate in the loan, share risk and buy down the interest rate.
Before that, investors routinely bought
securitized loans (CDOs)
from the banks, making room on the banks' books for more loans. But these "shadow
lenders" disappeared when they realized that the derivatives
called "credit default swaps" supposedly protecting their CDOs were a highly
unreliable form of insurance. In North Dakota, this secondary real estate
market is provided by the BND, which has invested conservatively, avoiding
the speculative derivatives debacle.
When the city of Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC.
Rather, they are guaranteed by the State of
North Dakota itself - a prudent move today, when the FDIC is verging on
A successful model for that approach was the Commonwealth Bank of Australia, which served both central bank and commercial bank functions. For nearly a century, the publicly-owned Commonwealth Bank provided financing for housing, small business, and other enterprise, affording effective public competition that "kept the banks honest" and kept interest rates low.
Commonwealth Bank put the needs of borrowers
ahead of profits, ensuring that sound
investment flows were maintained to farming and other essential areas; yet,
the bank was always profitable, from 1911 until nearly the end of the
Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending.
The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700, while the homeowner would save $88,000 in interest and pay for the home 15 years sooner.
He also proposes 6 percent credit cards and 6
percent certificates of deposit.
According to a German study, interest composes 30 percent to 50 percent of everything we buy.
Slashing interest costs can make projects such
as low-cost housing, alternative energy development, and infrastructure
construction not only sustainable, but profitable for the state, while at
the same time creating much-needed jobs.