Are state-owned banks an answer to economic woes?

Eric Hardmeyer, president of the Bank of North Dakota, poses outside the bank's steamboat-shaped headquarters near the Missouri River. (AP Photo/Dale Wetzel)

The state of North Dakota has the lowest unemployment rate in the nation at 4.1% and is one of only two states expected to meet their budgets in 2010.  It also has the nation's only state-owned bank. Several economists and officials from state governments across the nation are beginning to think that there is a correlation.

"There's a lot of hurt out there, a lot of states that are in trouble, and they're tying the Bank of North Dakota together with this economic success that we're having right now," said the bank's president, Eric Hardmeyer.

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 in 2009 it had a budget surplus of $1.3 billion, the largest it has ever had.

According to attorney, economist and author Ellen Hodgson Brown writing for truthout.org, North Dakota's recipe for success may be that "it has its own credit machine. North Dakota is the only state in the Union to own its own bank." Brown's latest of 11 books, "Web of Debt,"  is an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back.

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.

According to the AP, the bank had almost $4 billion in assets and a $2.67 billion loan portfolio at the end of last year, according to its most recent quarterly financial report. It made $58.1 million in profits in 2009, setting a record for the sixth straight year. During the last decade, the bank funneled almost $300 million in profits to North Dakota's treasury.

All chartered banks have the ability to create credit on their books simply with accounting entries, using the magic of "fractional reserve" lending. The Federal Reserve Bank of Dallas explains on their web site that:

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 once again 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.

In a speech last April, President Obama stated that such a money-creating process can be repeated eight to ten times when he said, "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."
 

According to Brown, however, state-owned banks have distinct advantages over their privately-owned competitors, both for the state and consumers, and for the bank:

...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. Their asset bases are not marred by oversized salaries and bonuses; they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.

Furthermore, because the BND is set up as a dba, that is the state of North Dakota doing business as the BND, that makes the capital of the state the capital of the bank. 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 low-interest loans to farmers, students and small businesses. The bank pays no federal or state taxes, but instead pays a dividend to the state in that all profits are returned to the treasury, thereby offsetting taxes.

In the current economic crisis, officials from states with huge budget deficits are taking a serious look at North Dakota's model. Gubernatorial candidates in Florida and Oregon and a Washington state legislator are advocating the creation of state-owned banks in those states. A report prepared for a Vermont House committee last month said the idea had "considerable merit.''

Dr. Farid Khavari, a candidate for Governor of Florida with a PhD in economics, proposes to create a State Bank of Florida (SBF) if elected. He explains:

For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6 percent for CDs, and make mortgage loans at 2 percent. For $6 per year in interest paid out, the BSF can earn $18 by lending $900 at 2 percent for mortgages.

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 percent credit cards and 6 percent certificates of deposit.

On his web site, Dr. Khavari lists eight advantages that a state-owned bank in Florida would provide:

1. Lack the shortcomings of the commercial banking system by employing transparent oversight by the public.
2. Become the engine to drive an economic miracle in the State of Florida, bringing general prosperity and economic security for all Floridians.
3. Create jobs in giant numbers that are simply impossible under the present commercial banking system.
4. Cut costs in half or more by providing low interest financing to Floridian homeowners and businesses.
5. Use profits to benefit students seeking higher educations.
6. Secure attractive salaries for teachers and educators.
7. Take care of veterans and elderly by making health care affordable.
8. Reduce property taxes, eventually eliminating them altogether.

In other words, if this is true, Florida could earn billions yearly on these loans, while saving hefty sums for consumers and taxpayers. The state could also refinance its own debts and those of its municipal governments at very low interest rates.

What has happened over the years in North Dakota with the BND suggests that very well may be true. At the very least, repackaging and rebranding the economic approaches that have led to failure in the past are likely to have the same results. Perhaps it is time for states like Florida to try something new.