Friday 19 March 2010

by: Ellen Brown, t r u t h o u t | News Analysis

(Photo: Steve Rhodes / Flickr)

As the states' budget and credit crises deepen, four states have initiated bills for state-owned banks, and candidates in seven states have included that solution in their platforms.

"Hundreds of job-creating projects are still on hold because Michigan businesses and entrepreneurs cannot get bank financing. We can break the credit crunch and beat Wall Street at their own game
by keeping our money right here in Michigan and investing it to retool
our economy and create jobs."

- Lansing, Michigan Mayor Virg Bernero in the Detroit News, May 9, 2010

Michigan has an unemployment rate of 14 percent and has been particularly hard hit by the nation's economic downturn. Bernero, mayor of the state's capitol and a leading Democratic candidate
for governor, proposed that the state relieve its economic ills by
opening a state-owned bank. He said the bank could protect consumers by
making low-interest loans to those most in need, including students and
small businesses; and could 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.

A February posting tracked candidates in five states running on a state-bank platform and one state with a bill pending (Massachusetts). There are now three
more bills on the rolls - in Washington State, Illinois and Michigan -
and two more candidates on 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), including three Democrats, two Greens, one
Republican and one Independent.

The Independent, Vermont's Brown, said on his web site, "Washington DC has lost all moral authority over Vermont." He maintained:

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," including doing "participation loans" with other banks, allowing
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
serves as the state's "Mini Fed,"
providing liquidity and clearing checks 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 gone 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 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 Sen. 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 Sen. 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 startup capital, 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 said 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 web site of
the local Oakland
Press, he said:

We're talking about restructuring the whole tax system, in the sense that the way its 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. To get the bank off
the ground, voters would have to approve amendments to the state
Constitution, since current law prohibits the state from lending credit
and investing in private firms.

The Community Bank of Illinois

A third bill, introduced by Illinois Rep. Mary Flowers, is on its way through the legislative process in Illinois. According to the Illinois General Assembly web site, 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
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. 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 (BND), 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; and 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, North Dakota
was in the enviable position of discussing tax cuts and looking for ways
to spend its surplus.

By January 2010, according to a National Public Radio news clip, 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 foresaw 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; and
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; and 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 would 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.

For more updates on the movement for publicly owned banks, see http://www.public-banking.com

To sign a petition for a citizen-owned bank in California, go to http://www.change.org/actions/view/help_the_terminator_save_california