Take Action! Call for State Banks!

The following piece was drafted by John David as a suggestion for correspondence to state and local government officials. Feel free to cut, paste, and edit as desired! Take action and contact your government representatives NOW!

More suggestions for taking action are here.

Bail Out Main Street:  Create Public-Benefit Banks

THE NEED

It has become quite clear where the single-minded pursuit of profit for the few gets us… deep in the hole. The deregulation of finance kicked that door wide open. Many of our states and cities are on the edge of bankruptcy, and many more are not far behind. The supremacy of finance’s phantom economy at the expense of the real economy played a central role in the credit crisis ravaging Main Street. Wall Street bankers went wild and got bailed out for their gambling and recklessness by the taxpayers. That was supposed to get the bankers to lend again, but instead they have been buying out smaller banks, putting money away, and paying lavish bonuses to top executives. Failure pays apparently. And they’ve gone back to their gambling fully recharged. Another crash is sure to follow unless we change course.

The cause of the crisis also goes deeper than that, and is a product of the global trade principle of specializing markets, and relying mostly on imports and exports to drive the economy. That makes each region vulnerable to collapse when their particular specialty is replaced or loses value. We need a way to rapidly build local economies that are more self-reliant, by fostering a more diversified economic field. A key component for achieving that is creating publicly owned banks that work for the benefit of the people.

This is not a Republican/Democrat or Left/Right issue ― it is about making our society work more effectively, putting money where it is needed to do the most good for the most people. How can we thaw the credit freeze, and get the economy moving again? We need to create publicly owned credit systems with a longer term perspective, focusing on the needs of the public, not on the greed of a few.

State legislatures think they have to keep going to Wall Street, hat in hand, for another loan. But those loans include high interest payments, which put the state deeper in debt. Interest payments consume an ever-increasing percentage of our taxes at all levels of government. Those payments are stifling investment in much needed infrastructure, and eating the savings of citizens.

WHY A STATE-OWNED BANK?

We cannot continue to privatize profit and socialize private bank debt. It’s time to bailout our communities ourselves, as the Federal government appears content to only bailout the “too-big-to-fail” few. It’s time to take back the credit commons as a public service, and to create the jobs we need to thrive as a society. Let’s bailout the public directly by creating public benefit banks for this purpose, at no cost to the taxpayer. Establishing a state-owned bank would relieve the state from some, and eventually all, of its interest obligations, payments that it must now make from tax revenues. Any interest payments charged by a state bank would simply be plowed back into the state as loans to fund economic development, rather than going to private bankers. The people’s money would be re-circulated within the state. That creates a dynamic that resolves the fiscal crisis, and allows for taxes to be reduced at the same time that infrastructure spending is increased. The citizens would save money, and the state would make more money to provide better services and to grow local economies that are more resilient.

Unlike socialism, where the people work for the state, this is the state working for benefit of the people. It is about building local, county and state economies into a mutually reinforcing network of partners, all committed to compounding the wealth of our communities, instead of compounding their debt to the private sector banks as we do now.

Creating a state-owned bank would get the state’s frozen credit moving again because it has:

1. Huge assets and a vast potential deposit base;
2. No greedy CEOs, or shareholders demanding quarterly profits, etc.;
3. A clean set of books, that will be a matter of public record;
4. A mission statement requiring investment in developing local communities; and
5. As already noted, it would return interest on government loans to the public purse, reducing taxes.

Since creating local economic resilience is the motivator, not just creating profit, in addition to short-term lending, a state bank can make long-term loans to finance socially beneficial projects that are not profitable in the short-term. A well run state bank helps transform a state’s economy from a money-feeder tube to Wall Street into a self-regenerating powerhouse. And it can aid state and local governments in getting through the current cash crunch without massive layoffs, privatizing public assets, or cutting back public services.

A WORKING MODEL

Fortunately, this is not an idealist fantasy. A working model has been in operation for nearly a century ― the state-owned Bank of North Dakota (BND). While 48 states are unable to meet budgets, cutting public services (with Arizona even trying to sell public buildings), North Dakota has a $1 billion surplus, is adding jobs, and has the lowest unemployment rate in the nation (just over 4%). (Montana is also solvent through 2010, thanks to mineral resources, but had to cut its budget to avoid a $62 million deficit.) It’s true that some of North Dakota’s good fortune is due to oil profits, however many other states also have oil resources, and this has not kept them solvent. It seems likely that North Dakota’s state bank has also been a major factor in the state’s remarkable performance, since there does not appear to be any other reasonable explanation.

North Dakota funds much of its economic development through its own bank, with the interest payments getting invested back into the state, along with an annual dividend the bank pays to the state. About half of BND’s profits go into the state’s general fund. Every state could turn their budget deficits into a surplus by creating their own state bank, and they could tailor it to suit their specific needs.

This is about more than just lowering taxes, and building infrastructure. State banks should have a focused mission to serve in-state citizens and businesses. Let’s look at how the Bank of North Dakota operates. All the state’s taxes and fees are deposited in the BND. Its mission is “to encourage and promote agriculture, commerce and industry” in-state. Quoting the bank’s website, the BND “acts as a funding resource in partnership with other financial institutions, economic development groups and guaranty agencies.”

The BND was established by the state legislature in 1919 to free farmers and small businessmen from the predatory lending of out-of-state bankers. Its populist organizers originally conceived of the bank as a credit-union-like institution that would provide an alternative, but these commercial lending functions were later suppressed by the private banking industry. The BND now chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve.

BND’s participation loans with local lenders “encourage the creation of new wealth, expanded employment opportunity, farm-income diversification, and government-guaranty purchase-options.” They offer “below market rate of interest to start up, or to troubled borrowers within the state.” And also “provide a source of liquidity for financial institutions.”

To acquire a BND loan, you must have “an identified purpose and a specific source of cash flow which reasonably assures repayment of the loan.” This is sound lending. The BND loans directly to a borrower, or more often, through a local lender by reducing risk for the lender, with programs for loan guarantees.

Incentive financing is used “to encourage needed local development.” To assist farmers and ranchers the BND offers loans to begin or expand a business that may be short of funds. This may include refinancing of debt as well. Also available are loans for buying real estate or equipment, and for financing “operating funds to carry the cost of inventory and accounts receivable.” There is a loan program that “will provide an 85% guarantee to a financial institution willing to make a loan to assist in the start-up or expansion of a business enterprise.” Some of their business loans are “tied to new job creation as a requirement to get the loan.” The BND “made the first federally insured student loan in the nation” in 1967. And all its deposits are guaranteed by the state.

MOVING BEYOND THE BND MODEL

At minimum, a state bank can be a banker’s bank, and assist community banks and credit unions to lend more by guaranteeing portions of their loans. Beyond that, it’s up to each state’s wisdom and imagination.

Here are some possibilities:

1. Stimulate the economy by prioritizing the creation of essential jobs;
2. Freeze home foreclosures; refinance home mortgages at a lower interest rate;
3. Cut investment costs in half or more by providing low interest financing to homeowners and businesses;
4. Care for veterans and elderly by making health care affordable;
5. Issue import-replacement loans to develop in-state versions of products that are currently imported;
6. Pay out more interest for savings while offering lower-interest loans for local development;
7. Issue credit cards at affordable interest, at say 6%;
8. Reduce banking costs by doing all online banking, as ING Direct does;
9. Tie a portion of the increase in state revenues from the bank to tax reduction;
10. Offer zero-interest loans as community equity loans for public infrastructure;
11. As the Ithaca Hours Bank does, offer such loans to individuals for home improvement, etc.

There are several funding options for state banks: deposit all existing (no new taxes) into the state bank, state and municipal CAFR accounts (government savings funds), and state assets.

When banking is part of the community, self-interest becomes mutual. The “profit only” motive is replaced by “compound the wealth.”

To keep it public, the bank’s charter must and will prohibit the bank from ever being privatized. To prevent speculation, the only ways of investing in a state bank are to buy CDs, or to deposit in the bank. Bad-loan loading is also prohibited.

To prevent corruption, the board of the bank must be elected directly by the citizens for whom the public-benefit banks serve. That is, any bank board should be elected using a proportional representation system by the depositors, with one vote per depositor (person). {Comment for now: borrowers should be encouraged to also be depositors, and depositor voting rights motivates this.} [Comment 2. Why have only the depositors vote? Why not all of the citizens voting? Is the state bank only for those rich enough to deposit there?]

Public-benefit banks can also be set up at the county and city levels. By networking them, we could create a national community currency system. That would turn the race to the bottom into prosperity for all.

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12 Responses

  1. Ellen,you need Madison Ave. P.R. or Hollywood Stars getting the word out.Common sense(Thomas Paine 1776) We learn to vote,we can learn to invest.

  2. When the Government(federal) realizes STATES, as they are corporations, begins to make money in those so called bankes it will merely move on the Assets that the bank – using public land holds. Simpole No State may enter any treaty or law that impairs the obligation of contract(US Consitution) thus when they have “funds” or assets(Land) the Gov’t Fed will swoop in with their courts and take it since the states will not be able to meet obligations to the Fed(read Tax)
    Another ploy to steal the Land of thr people.

  3. By far the most concise and up to date information I found on this topic. Sure glad that I navigated to your page by accident. I’ll be subscribing to your feed so that I can get the latest updates. Appreciate all the information here

  4. Another possibility I don’t see listed may be for states to lend to the Federal Government. Even at the 1.6% interest rate for FY2008 the U.S. paid out 464 billion in interest. This was lower for 2009 due to lower interest rates due to the financial crisis.

    • The interest paid by the federal government is a problem, but the states are already broke. Another option would be to borrow directly from the Federal Reserve rather than putting the bonds up for auction to the public at interest. The Fed rebates the interest to the government after deducting its costs. Thanks for writing, Ellen

  5. Ms Brown, I’d like to thank you for offering a plausible alternative to Private banking. It’s idea’s like the one you’ve purposed here that will help this nation unsaddle ourselves from this enormous debt we’ve occured. My question to you is, Do you do book tours and if so have you ever thought of adding Mississippi to your list of stops?

    • Hi, I was invited to speak at a conference in Missouri recently, but Mississippi isn’t on my current itinerary I’m afraid! Thanks for asking though, Ellen

  6. Hi Ellen,thanks for all you do.Have you try to talk to Obama or his people about federal help State Banks?Do you see any help in Congress? Bernie Sanders?If you come to South Florida,please put out a press release. Thanks

    • Thanks. I think federal help is probably unlikely; that’s why we’re pushing the state bank idea. It’s a possible route to state sovereignty, independent of Wall Street, which has pretty much captured Congress.

  7. Ellen,the same people that control Congress,is the same that control most State Governments.If Obama can give $30 billion to community banks,he can use the same reasoning for State Banks.”Get The Money To The People”. Thanks Jessie

  8. Is there a fundamental difference the benefits realized from a “state owned bank” versus “credit unions”?

    Geo

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