Michigan, which has an unemployment rate of 14 percent, has been particularly hard hit by the economic downturn. Virg Bernero, mayor of Lansing, the state’s capital, and a leading Democratic candidate for
governor, proposes to relieve the state’s economic ills by opening a
state-owned bank. He says the bank could protect consumers by making
low-interest loans to those most in need, including students and small
businesses; it could also help community banks by buying mortgages off
their books and working with them to fund development projects.

Bernero joins a growing list of candidates proposing this sensible solution to their states’ fiscal ills. Local economies have collapsed because of the Wall Street credit freeze. To reinvigorate local
business, Main Street needs a heavy infusion of credit, and
publicly-owned banks could fill that need.

In a recent article for YES! Magazine, I tracked candidates in five states running on a state bank platform and one state (Massachusetts) with a bill pending. Just one month
later, there are now three more bills on the rolls—in Washington State,
Illinois and Michigan—and two more candidates joining the list of
proponents (joining Bernero is Gaelan Brown of Vermont). That brings
the total to seven candidates in as many states (Florida, Oregon,
Illinois, California, Washington State, Vermont, and Idaho) campaigning
for state-owned banks, including three Democrats, two Greens, one
Republican, and one Independent.

The Independent, Vermont’s Gaelan Brown, says on his website, “Washington, D.C. has lost all moral authority over Vermont.” He adds, "Vermont should explore creating a State-owned bank that would work
with private VT-based banks, to insulate VT from Wall Street
corruption, and to increase investment capital for VT businesses,
modeled after the very successful state-owned Bank of North Dakota."

The Bank of North Dakota, currently the nation’s only state-owned bank, is the model (with variations) for all the other proposals on the table. The Bank of North Dakota acts as a “bankers’ bank,” partnering
with other banks in “participation loans," which allow them to compete
with larger banks. In a participation loan, the community bank
originates the loan and takes responsibility for it, while the
participating bank contributes funds and shares in the risk and
profits. The Bank of North Dakota also makes low-interest loans to
students, farmers and businesses; underwrites municipal bonds; and
provides liquidity for more than 100 banks around the state.

Three New Bills Pending for Publicly Owned Banks

Proposals for publicly owned banks in other states have now progressed beyond the campaign talk of political hopefuls to be drafted into several bills.

The Michigan Development Bank

The Michigan bill has gotten the most press. Introduced into the legislature earlier this month, it mirrors Bernero’s state bank idea. According to a press release
issued by Michigan Senate Democrats on March 9, the bill’s aim is to
“keep Michigan’s money in Michigan” by putting tax dollars into a
proposed “Michigan Development Bank." The bank would function like a
traditional bank, but would focus on economic development rather than
profit. The press release quoted Senator Gretchen Whitmer (D-East
Lansing):

Investing in the state’s economy is the greatest way to create jobs, and this proposal will provide small businesses and entrepreneurs the funding they need to invest and grow. Our economy has stagnated due in
part to stale thinking in Lansing, and this is just the type of
innovative idea we need to create real economic change, using our own
money to rebuild the state.

Senate Democratic Leader Mike Prusi (D-Ishpeming) stated:

Michigan’s economy has been suffering, and working families in the state have had difficulty keeping up with credit card bills, college tuition prices and mortgage payments. Establishing the Michigan
Development Bank will keep our hard-earned dollars right here in the
state to invest in small business, create good-paying jobs to get
people back to work, and help protect the middle class.

Also quoted was Senator Hansen Clarke (D-Detroit):

With the current state of our economy, every dollar counts, yet we’re depositing our money in other people’s pockets by investing in big corporate banks without seeing much lending in return. It’s time
for the Mitten State to lend itself a helping hand and establish a bank
that is willing to invest in our small businesses and offer the
financial support necessary to see job growth.

For start-up capital, the Senate Democrats suggested that Michigan could sell voter-approved bonds. With an initial capitalization of $150 million, they estimated the bank could lend up to $1 billion to small
businesses, students and farmers, and offer low-interest credit cards
to consumers. For deposits, the bank could follow the model of the Bank
of North Dakota and use state revenues. So says Gene Taliercio, a
Republican candidate for the state Senate, who has also put his weight
behind the Michigan Development Bank. In a video clip on the website of the local Oakland Press,
he says, “We’re talking about restructuring the whole tax system, in
the sense that the way it's set up is that all taxes are going to go
into this central bank ... Every dollar that the state of Michigan
makes goes into this bank.”

The State Bank of Washington

A similar bill, HB 3162, was introduced to the Washington State Legislature on February 1. The bill has generated so much interest that Steve Kirby, chair of
the Financial Institutions and Insurance Committee, has scheduled a
special work session on it. According to John Nichols in The Nation,
the State Bank of Washington was formally proposed by House finance
committee vice chair Bob Hasegawa, a Seattle Democrat. Nichols quotes
Hasegawa:

Imagine financing student aid, infrastructure, industry and community development. Imagine providing access to capital for small businesses, or otherwise leveraging our resources instead of having to
do it with tax incentives. Imagine keeping our resources local instead
of exporting them as profits, never to be seen again—that’s what this
bank could do.

Leveraging, rather than taxing, is how private banks have been creating “credit” for centuries. States could do the same thing, cutting the middlemen out of the equation, saving significant sums in
interest and fees and generating revenue for the state.

A nonpartisan analysis of the Washington bill prepared for the state legislature noted that the bank would be the depository for all state funds and the funds of
state institutions, and that these deposits would be guaranteed by the
state. The bank would be run by a board of 11 members and would be
chaired by the State Treasurer. It would have the same rules and
privileges as a private bank chartered in the state. Since current law
prohibits the state from lending credit and investing in private firms,
voters would have to approve the state Constitution to get the bank off
the ground.

The Community Bank of Illinois

A third bill, introduced by Illinois Representative Mary Flowers, is on its way through the legislative process in Illinois. According to the Illinois General Assembly website,
the Community Bank of Illinois Act would establish a state bank with
the express purpose of boosting agriculture, commerce, and industry.
State funds and money held by penal, educational, and industrial
institutions owned by the state would be deposited in the bank and
would serve as reserves for making loans. The bank could also serve as
a clearinghouse for other banks, including handling domestic and
foreign exchange; and it could buy property under eminent domain. All
deposits would be guaranteed with the assets of the state. The Bank
would be managed and controlled by the Department of Financial and
Professional Regulation, with input from an advisory board representing
private banking and public interests.

An amendment to the initial bill would enable the Community Bank of Illinois to make loans directly to the state’s General Revenue Fund, helping the state cope with its current budget challenges.

A Massachusetts-owned Bank

On March 12, the Associated Press reported that a jobs bill sponsored by Massachusetts Senate President Therese Murray also includes a call to study a Massachusetts-owned bank. She
told a business group that a state-owned bank has worked in North
Dakota, helping to insulate that state from the worst of the recession
while also keeping its foreclosure rate down; similarly, a state-owned
bank could spur job creation and free up lending to Massachusetts
businesses.

Grandfather of the Concept: The Bank of North Dakota

All of these proposals take their inspiration from the Bank of North Dakota, which was founded in 1919 to resolve a credit crisis like that facing other states today. Last year, North Dakota had the largest budget
surplus it had ever had. It was the only state that was actually adding
jobs when others were losing them. In March 2009, when 46 of 50 states
were in fiscal crisis, the Council of State Governments noted that North Dakota was in the enviable position of discussing tax cuts and looking for ways to spend its surplus.

With the deepening crisis, according to National Public Radio, by January 2010 only two states could still meet their budgets—North Dakota and Montana. On February 8, however, the Montana paper the Missoulian reported
that the Montana State Legislature’s chief revenue forecaster foresees
a budget deficit by mid-2011, leaving North Dakota the only state still
boasting a surplus.

North Dakota’s riches have been attributed to oil, but many states with oil are floundering. The sole truly distinguishing feature of North Dakota seems to be that it has managed to avoid the Wall Street
credit freeze by owning and operating its own bank. According to the
North Dakota Department of Commerce,
the BND turned a profit in 2009 of $58.1 million; this money goes into
the state’s General Fund. North Dakota’s economy is ten times smaller
than Michigan’s, suggesting that Michigan could generate $500 million
per year in this way; Washington State and Illinois present similarly
inviting possibilities.

That defuses the objection raised in a March 15 editorial in The Detroit News, arguing that Michigan can ill afford the $150 million capital investment to start a bank. If operated like the BND, the Michigan
Development Bank could soon be a net generator of state revenues. There
are other possibilities, besides a bond issue, for providing the
capital to start a bank, but that subject will be reserved for another
article.

The BND’s 90-year track record of prudent and profitable lending defuses another objection to state-owned banks: that a public agency cannot be trusted to act responsibly in managing public funds. The Detroit News'
editorial concluded that Michigan should “leave banking to the
bankers,” but it is precisely because the bankers have destroyed the
economy with their reckless lending practices that the public needs to
step in. We need a “public option” in banking to set standards and keep
private banks honest.

The True Potential of Publicly-owned Banks

North Dakota broke new ground nearly a century ago, but the true potential of publicly owned banks remains to be explored. Nearly all of our money today is created by banks when they extend loans. (See the Chicago Federal Reserve’s “Modern Money Mechanics,"
which begins, “The actual process of money creation takes place
primarily in banks.”) We the people have given away our sovereign
money-creating power to private, for-profit lending institutions, which
have used it to siphon wealth from the productive economy. If we were
to take that power back, we could generate the credit we need to
underwrite a whole cornucopia of projects that we don’t even consider
because we think we lack the “money.” We have the labor and we have the
materials; we just lack the “liquidity” necessary to put them together
to create products and services.

Money today is just a ticket, a receipt for work performed and goods delivered. We can fund the work we need done by creating our own credit. The real promise of publicly-owned banks is not that they can
bail out subprime borrowers but that they can jumpstart the economy by creating real wealth.
They can provide the liquidity to put labor and materials together,
allowing the economy to build and grow. Our private, profit-driven
banking sector has been bleeding wealth from the rest of the economy.
Public-interest banks can transfuse the economy with the credit it
needs to flourish and be productive once again.