What this item by Ellen Brown makes clear is that state based banking has been field tested for seventy years in the US and abroad and been very successful. It was created out of necessity during the great depression when commercial bank failures created a lending vacuum in their respective markets. We had a sniff of that recently when a few months back California was rebuffed by their lenders in New York. That is what necessity looks like.
There is something particularly attractive about empowering a state bank. It binds the citizens closely to their community in a way that a mere branch of an out of state bank cannot. Even better, having the state’s own cash flow passing through the state bank stiffens the political class to behave well. After all, they are suddenly partially responsible fro their elector’s savings and they all can imagine the shame of been caught out wasting those resources. It may not be quite true but it certainly will seem that way.
It has been a principal failing of the US federal system that they have not understood the virtue of transferring responsibility for administrating domestic policy to the state level just quickly as possible. This has worked extremely well in Canada. There the federal government will typically establish national guidelines and a financial program of shared responsibility then leave administration to the provinces. This obviously introduces competition that initiates a drive for efficiency, while it puts the feds in the position of judge and arbitrar.
The result is that the provinces catch all the political heat while the feds get to play the great benefactor. Obviously a system of state banks would insulate the US government from the fallout of a local credit bust while giving them the chance to play rescuer.
This vision does not exist in the US were the states are noticeably weak. In fact we seem to have a system in which the higher levels are far too quick to assert control over any new area of jurisdiction. The result has been unsatisfactory for a long time.
In fact the fundamental flaw in the US banking system is dangerous centralization. The prospect of just that again has stalled a proper medical insurance scheme in the US. So the proper response to both is to empower the States to solve the problem.
One other comment needs to be made. The housing crisis is better resolved by a state based banking system than simply going with the current regime who is still trying to see if they will live. A couple of states will not thank us for this but the solutions do lie at home. Most certainly, such action would restore confidence in most of the states almost immediately.
And again as I have already posted, hard hit California is a natural candidate for this treatment. They have plenty of bad mortgages and a major need to put state finances on an internal basis. With a state bank it is possible for them to sort it all out.
Cut Wall Street Out! Own Your Own Bank
How States Can Finance Their Own Recovery
By Ellen Brown
Global Research, November 3, 2009
Web of Debt - 2009-11-01
Pouring money into the private banking system has only fixed the economy for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans find themselves in.
President Obama's $787 billion stimulus plan has so far failed to halt the growth of unemployment: 2.7 million jobs have been lost since the stimulus plan began.
In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction:
Why is
The Advantages of Owning Your Own 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 web site:
"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 eight to ten. In a speech on April 14, he said:
"Although 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 recently, because 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.
The Bank of North Dakota (BND) is set up as a dba: "the State of
To get a bank charter, specific investments would probably need to be earmarked by the state as startup capital; but the startup capital required for a typical California bank 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 - and a lucrative investment at that. In the case of the BND, the bank's return on equity is about 25 percent. 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.
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.
Public Banking on the Central Bank Model
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 routinely bought 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 derivatives called "credit default swaps" supposedly protecting their CDOs were a highly unreliable form of insurance. In
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 the city of
The Commercial Banking Model: The Commonwealth Bank of
The BND studiously avoids competition with private banks, but a publicly-owned bank could profitably engage in commercial lending. A successful model for that 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 public competition that "kept the banks honest" and kept interest rates low. 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 seems to have been 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 it's proponents consider it's loss as a social and economic institution to be incalculable.
A State Bank of
Could the sort of commercial model tested by Commonwealth Bank work today in the
"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.
The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates. According to a German study, interest composes 30 percent to 50 percent 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.
Written for Truthout.
Ellen Brown developed her research skills as an attorney practicing civil litigation in
