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Ellen Brown begins: "Cut spending, raise taxes, sell off public assets - these are the unsatisfactory solutions being debated across the nation; but the budget crises now being suffered by nearly all the states did not arise from too much spending or too little taxation. They arose from a credit freeze on Wall Street."

American International Group (AIG) offices New York City, 02/24/09. (photo: Mario Tama/Getty Images)
American International Group (AIG) offices New York City, 02/24/09. (photo: Mario Tama/Getty Images)



Local Economies: An Alternative Solution to the Budget Crisis

By Ellen Brown, Reader Supported News

27 March 11

 

Keeping the State's Money in the State: An Alternative Solution to the Budget Crisis

ut spending, raise taxes, sell off public assets - these are the unsatisfactory solutions being debated across the nation; but the budget crises now being suffered by nearly all the states did not arise from too much spending or too little taxation. They arose from a credit freeze on Wall Street. In the wake of the 2009 financial market collapse, banks curtailed their lending more sharply than in any year since 1942, driving massive unemployment and causing local tax revenues to plummet.

The logical solution, then, is to restore credit to the local economy. But how? The Federal Reserve could provide the capital and liquidity necessary to create bank credit, in the same way that it provided $12.3 trillion in liquidity and short-term loans to the large money center banks. But Fed Chairman Ben Bernanke declared in January 2011 that the Fed had no intention of doing that - not because it would be too costly (the total deficit of all the states comes to less than 2 percent of the credit advanced for the bank bailout) but because it is not part of the Fed's mandate. If Congress wants the Fed to advance credit to local governments, he said, it will have to change the law.

The states are on their own. Policymakers are therefore considering a variety of reforms designed to increase bank lending, particularly to small businesses, the hardest hit by tightening credit standards. One measure that is drawing increasing interest is the creation of a bank modeled on the Bank of North Dakota (BND), currently the only state-owned bank in the country. The BND has a 92-year history of safe, secure and highly profitable banking. North Dakota has the lowest unemployment rate in the country; and in 2009, when other states were floundering, it had the largest budget surplus it had ever had.

Eight states now have bills pending either to form state-owned banks or to do feasibility studies to determine their potential. This year, bills were introduced in the Oregon State legislature on January 11; in Washington State on January 13; in Massachusetts on January 20 (following a 2010 bill that lapsed); and in the Maryland legislature on February 4. They join Illinois, Virginia, Hawaii and Louisiana, which introduced similar bills in 2010. The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses for Washington and Oregon. Their conclusion was that state-owned banks in those states would have a substantial positive impact on employment, new lending, and state and local government revenue.

State-owned banks could be a win-win for everyone interested in a thriving local economy. Objections are usually based on misconceptions or a lack of information. Proponents stress that:

  1. 1. A state-owned bank on the BND model would not compete with community banks. Rather, it would partner with them and support them in making loans. The BND serves the role of a mini-Fed for the state. It provides correspondent banking services to virtually every financial institution in North Dakota and offers a Federal Funds program with daily volume of $330 million. It also provides check clearing, cash management services, and automated clearing house services. It leverages state funds into credit for local purposes, funds that would otherwise leave the state and be leveraged for investing abroad, drawing away jobs that could go to locals.


  2. 2. The BND not only does not compete for loans, but also does not compete for commercial deposits. Less than 2 percent of its deposits come from consumers. Municipal government deposits are also reserved for local community banks, which are able to use these funds for loans specifically because the BND provides letters of credit guaranteeing them. Virtually all of the BND's deposits come from the state itself. All state revenues are deposited in the BND by law.


  3. 3. Although the BND is a member of the Federal Reserve system, it is insured by the state rather than by the FDIC. This does not, however, put deposits at risk. Rather, it helps avoid risk and unnecessary expense, since the BND's chief depositor is the state, and the state has far more to deposit than $250,000, the maximum covered by FDIC insurance. FDIC insurance is not only very expense, but subjects members to FDIC regulation, making the state subservient to a semi-private national banking association. (The FDIC calls itself an independent agency of the federal government, but it receives no Congressional appropriations. Rather, it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in US Treasury securities.) North Dakota prefers to maintain its financial independence.


  4. 4. BND officials stress that the bank is run by bankers, not politicians bent on funding their favorite development projects or bestowing political favors. The bank is run very conservatively, doing only creditworthy deals and avoiding speculation in derivatives and risky subprime loans. By partnering with local banks, the BND actually shields itself from risk, since the local bank takes the initial loss if the borrower fails to pay.


  5. 5. The BND does not imperil state funds or tax money but is self-funding and self-sustaining. It manages VA, FHA and other forms of loans that are federally guaranteed and would otherwise go to large out-of-state banks. Profits on these federally-guaranteed loans are then used to build a capital surplus from which riskier loans can be made to local businesses and development projects. The BND has a return on equity of 25-26 percent and has contributed over $300 million to the state (its only shareholder) in the past decade - a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. Compare California's public pension funds, which entrust their money to Wall Street and are down more than $100 billion, or close to half the funds' holdings, following the banking debacle of 2008.


  6. 6. Partnering with the BND allows community banks to fund local projects in which Wall Street is not interested, leveraging municipal government funds that would otherwise not be available for loans. Further, infrastructure projects can be funded through the state bank at substantially less cost, since the state owns the bank and gets the interest back. Studies have shown that interest composes 30-50 percent of public projects.


  7. 7. The North Dakota Bankers' Association does not oppose the BND but rather endorses it. North Dakota has the most local banks per capita and the lowest default rate of any state.

Other states could realize similar benefits, if they were to form banks on the BND model. Paying interest to coupon clippers on state and municipal bonds means sending money out of the state on a one-way trip to Wall Street. Having a state-owned bank allows the state to keep its money local, flowing into the state treasury and the local economy.


Ellen Brown is an attorney and chairman of the Public Banking Institute. She has written eleven books, including "Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free" (2007, 2010).

 

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+1 # Karl Smiley 2011-03-27 11:17
I like the idea of state owned banks, but I don't believe that lack of credit is causing "massive unemployment". That is caused mostly by outsourcing and lack of demand (caused by low income, loss of wealth and outsourcing) Believe me, if there is a demand for a product, money can be found to produce it!
 
 
+1 # jon 2011-03-27 16:16
Quoting Karl Smiley:
I like the idea of state owned banks, but I don't believe that lack of credit is causing "massive unemployment". That is caused mostly by outsourcing and lack of demand (caused by low income, loss of wealth and outsourcing) Believe me, if there is a demand for a product, money can be found to produce it!


And let us never forget, it was Ronald Reagan - a Republican, if I recall correctly ;-) - who gave a tax-break to corporations for the money they spent on outsourcing jobs. How is that for an "in your face", common man!
 
 
0 # KittatinyHawk 2011-03-27 18:16
Don't you just love the Gipper Now?
 
 
-8 # Thomas Jefferson 2011-03-27 19:21
I vote we sell ellen brown and then outlaw Flies(flies cause trash)then send the staff of RSS to Libya so they can see where the money really goes.
 
 
+1 # Bruce Gruber 2011-03-28 05:00
Quoting Thomas Jefferson:
I vote we sell ellen brown and then outlaw Flies(flies cause trash)then send the staff of RSS to Libya so they can see where the money really goes.


Spoken with the same assurance that tea creates when fermented in angry, empty space that might otherwise have held grey matter. Who is the "WE" who should/could 'sell' Ellen Brown-same crowd who would 'sell' Crispus Attucks? Flies don't cause trash any more than buzzards cause road kill. And while we are at the business of enlightenment for the deranged, the money being expended in Libya was (as much as anything) taxes paid by unionized public employees in Wisconsin so General Dynamics can have a good fiscal year replenishing 15-30 year old Tomahawks with newer and double-priced 'cherry bombs'.
Your namesake's obviously unsuccessful admonition is fulfilled by your fantasy - "If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be."
 
 
-2 # rf 2011-03-28 04:27
THe problem seems to me to be that the levels of credit before the meltdown were unrealistic and now we are paying the piper. To restore those levels of credit would be to restore the bubble. Raises of real estate values to 5 times in less than ten years was unsustainable. Now Bernanke figures he can make all of our savings worthless and inflate the rest of the economy up to the value of property. Being one of the rare savers...this really pisses me off. Take it out of my lower middle class hide in order to give the same privileged class who created this morass a tax break. This articles ideas only work in an academic vacuum.
 
 
+1 # Bruce Gruber 2011-03-28 06:23
The 'levels of credit before the meltdown' were DELIBERATE, as has been the Fed's economic creationism in maintaining the APPEARANCE of an economy by charging virtually NO interest for big borrowers who have, therefore, accumulated the mortgages on our homes, credit and futures. Just as Wall Street created their get rich scenario for leveraged stock trading that led to the Great Depression, the same greed philosophers have peddled to us dupes the same 'get rich quick' scheme for real estate and stock (and credit card) 'investment' in the good life that has led to our present economic near-collapse.

Our 'controlled' public education system is not allowed to teach us to beware these schemes, but rather to worship at the altar of capitalistic opportunism .. forgetting (or not knowing) that NOBODY beats the house when you gamble - unless they want you to so you can convince others to bet. The vertical monopoly works if you own the raw materials, the means of production, the labor which accomplishes that production AND the political/legal system that changes the rules , as needed, to insure that no one can get free and everything is controlled by the plutocracy. Good luck, America. Stick to "stupid"! They'll give us somebody to blame and make lots more money off the war we get suckered into fighting.
 
 
+3 # Merschrod 2011-03-28 05:15
Great idea on Ellen's part - read her earlier versons. This would be part of the "Challenge" for a state alternative party platform. A real solution to a serious "system" problem.

The problem of capital (savings, profits, etc) being drained off has been a problem all over in the developing workd and also in this country since the Robber Barron days. No matter where you go from Afghanistan to Zambia- Alabama to Wyoming - it is the same problem - local control and interest is lost - sort of like the loss of community radio!
73,
 
 
+2 # Merschrod 2011-03-28 05:22
Ditto in the health coverage area - In Ithaca we had an alliamce of self help, but the State insurance pawns moved in and closed us down b/c they judged that we were operating as an unregulated Ïnsurance Company. No way were we able to qualify as an insurance company - too costly. In the end the Free clinic was funded with the reserves and now Ithaca has a Free clinic baseed on good citizens donating time and cash. There are alternative practices offered too. The "system" made the community come up with an even better alternative, but not "the solution."

Solamente el pueblo salva el pueblo!
 
 
+1 # dkonstruction 2011-03-29 12:46
dear thomas jefferson,

if you are going to take a real historical figure as your name de phlegm, you might want to see what that person actually believed in....

Jefferson was very hostile to the whole idea of a privately owned central bank and raised the question as to why a publicly controlled bank could not be formed.

here in NY the state pension fund is worth more than $140 billion and the NY city funds more than $114 billion...imagi ne what we could do with a publicly owned/controlle d $250 billion dollar investment fund (that could then leverage more like $750 billion) that instead of investing with the scum on wall street (and paying them huge fees to boot) could be used to invest in true community and economic development projects from infrastructure to permanently affordable "green" housing to the development of high tech living wage "green" manufacturing (and for all you sports fans out their we could probably even buy the teams and make them truly publicly owned entities as they should be).
 

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