How States Can Escape the Credit
Crisis: Own A Bank
by Ellen Hodgson Brown
www.webofdebt.com, December 2,
Since President Obama's stimulus plan
went into effect in February, according to a report from the House
Ways and Means Committee, the nation has actually lost nearly
as many jobs as the plan was projected to create. Instead of adding
3.5 million new jobs, 2.7 million jobs have been lost. California,
which was supposed to gain 396,000 jobs, has lost 336,400 jobs.
Arizona, which was supposed to gain 70,000, has lost 77,300. Michigan,
which was supposed to gain 109,000, has lost 137,300. A total
of 49 states and the District of Columbia have all reported net
In this dark firmament, however, one bright
star still 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%, personal income has grown 43%, and wages have grown
34%. 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
Why is North Dakota doing so well, when
other states are suffering the ravages of a deepening credit crisis?
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 Dakota.
The Advantages of Owning a Bank
So how does owning a bank solve the state's
funding problems? Isn't the state still limited to the money it
has? The answer is no. 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
"Banks actually create money when
they lend it. Here's how it works: Most of a bank's loans are
made to its own customers and are deposited in their checking
accounts. Because the loan becomes a new deposit, just like a
paycheck does, the bank . . . holds a small percentage of that
new amount in reserve and again lends the remainder to someone
else, repeating the money-creation process many times."
How many times? President Obama puts this
"multiplier effect" at 8 to 10. In a speech on April
14, he said:
"[A]lthough there are a lot of Americans
who understandably think that government money would be better
spent going directly to families and businesses instead of banks
- 'where's our bailout?,' they ask - the truth is that a dollar
of capital in a bank can actually result in eight or ten dollars
of loans to families and businesses, a multiplier effect that
can ultimately lead to a faster pace of economic growth."
It can but it hasn't, because private
banks are limited by bank capital requirements and by their private
for-profit business models. That is where a state-owned bank has
an enormous advantage: states own huge amounts of capital, and
they can think farther ahead that their quarterly profit statements,
allowing them to take long-term risks. Their asset bases are not
marred by oversized salaries and bonuses, they have no shareholders
expecting a sizeable cut, and they have not marred their books
with bad derivatives bets, unmarketable collateralized debt obligations,
and mark to market accounting problems.
The Bank of North Dakota is set up as
a dba: "the State of North Dakota doing business as the Bank
of North Dakota." 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 8, that capital base could support nearly
$4 trillion in loans.
To get a bank charter, specific investments
would probably need to be earmarked by the state as startup capital;
but for a typical California bank that requirement is only about
$20 million. This is small potatoes for the world's eighth largest
economy, and the money would not actually be "spent."
It would just become bank equity, transmuting from one form of
investment into another. In the case of the BND, the bank's return
on equity is about 25%, and 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 this debt and return this $5 billion to the state's
own coffers; and it would make substantially more on money lent
Besides capital, a bank needs "reserves",
which it gets from deposits. For the BND, this too is no problem,
since it has a captive deposit base. By law, the state and all
its agencies must deposit their funds in the bank, which pays
a competitive interest rate to the state treasurer. The bank also
accepts deposits from other entities. These copious deposits can
then be plowed back into the state in the form of loans.
The Central-Bank Model of Public Banking
The BND's populist organizers originally
conceived of the bank as a credit union-like institution that
would free farmers from predatory lenders, but conservative interests
later took control and suppressed these commercial lending functions.
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.
One of the BND's functions is to provide
a secondary market for real estate loans, which it buys from local
banks. Its residential loan portfolio is now $500 billion to $600
billion. This function has helped the state to avoid the credit
crisis that afflicted Wall Street when the secondary market for
loans collapsed in late 2007. Before that, investors snatched
up 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 credit default swaps supposedly
protecting their CDOs were a highly unreliable form of insurance.
In North Dakota, this secondary real estate market has been provided
by the BND, keeping the credit market stable.
Other services the BND provides include
guarantees for entrepreneurial startups and student loans, the
purchase of municipal bonds from public institutions, and a well-funded
disaster loan program. When Fargo was struck by a massive flood
recently, the disaster fund helped the city to 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 bankruptcy.
The Commercial Banking Model: The Commonwealth
Bank of Australia
The BND studiously avoids competition
with private banks, but a publicly-owned bank could profitably
engage in commercial lending. One very successful precedent for
this 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
competition that kept interest rates low and the private banks
honest. 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 century.
Indeed, it was apparently too profitable,
making it a takeover target. It was simply "too good not
to be privatized." The Bank was sold in the 1990s for a good
deal of money, but according to proponents, its loss as a social
and economic institution was incalculable.
A State Bank of Florida?
Could the sort of commercial model tested
by Commonwealth Bank work today in the United States? 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.
"For $100 in deposits, a bank can
create $900 in new money by making loans. So, the BSF can pay
6% for CDs, and make mortgage loans at 2%. For $6 per year in
interest paid out, the BSF can earn $18 by lending $900 at 2%
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.
"Our bank will save people about seven years of their pay
over the course of 30 years, just on interest costs," says
Dr. Khavari. He also proposes 6% credit cards and 6% Certificates
Besides earning billions of dollars per
year for the state on these loans while saving hefty sums for
consumers, the state could refinance its own debts at very low
interest rates, along with those of its agencies and municipal
governments. According to a German study, interest composes 30%
to 50% 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.
Ellen Brown is an attorney in Los Angeles
and the author of 11 books. In Web of Debt: The Shocking Truth
About Our Money System and How We Can Break Free, she shows how
a private banking cartel has usurped the power to create money
from the people themselves, and how we the people can get it back.
Her website is www.webofdebt.com.