Public Banking (from 2014)

I've been trying to encourage the politically interested to get behind public banking (e.g. a California State Bank), but haven't found a comprehensive account of the kind of experience one can expect from one...until I started reading Ellen Brown's The Public Bank Solution. I've taken the liberty of quoting her chapter about North Dakota's state bank at length (thank you scanners and optical character recognition!) so you can see just how good this can be as a solution to a myriad of problem.

...and for those of you who believe "It'll cause [gasp!] inflation"... I highly recommend Phillip Pilkington's article that debunks that.

Sadly, although the legislature passed a bill funding a study of a State Bank for California, the "liberal" Jerry Brown vetoed that line item.

From Ellen Brown's Public Bank Solution: From Austerity to Prosperity

  Chapter 31

  "The State of North Dakota does not have any funding issues  at all. We in fact are dealing with the largest surplus we’ve  ever had .... [R]eally where we take the most satisfaction is  making sure we meet the needs of the state and finance those  things that make our state go forward."
 -- Eric Hardemeyen president of the Bank of North Dakota (March 2OO9)

   States deposit their revenues in Wall Street banks at minimal interest, then borrow money at much higher rates; yet they have massive capital and deposit bases themselves. If they had their own banks, they could leverage this money into low-cost credit  for local purposes. Most states are throwing this enormous credit  power away. The exception is North Dakota, which has led the way with its landmark state-owned Bank of North Dakota.
 
 
 Unlike the federal government, state and local governments cannot print their own money or borrow interest-free from their own central banks; and unlike private banks, they do not have nearly-free credit lines with each other. Like the Eurozone countries, they are subject to the whims and vagaries of the private credit market. State governments that have never defaulted on their debts wind up paying far higher interest rates than the too-big-to-fail banks, which would  have defaulted on hundreds of billions of dollars in debt if they had  not been bailed out by the states and their citizens. 

 California’s economy is the largest of any U.S. state and the eighth largest economy in the world. Yet in 2009, its credit rating was cut by  Standard & Poor’s to just above Greece’s--the lowest of any state's--causing the interest rate on California's bonds to shoot up to 7.26 percent on 30-year taxable securities.

Local governments have been forced to hoard funds in very inefficient ways, building excessive reserves and "rainy day" funds while slashing services, because they do not have the cheap and ready credit lines available to the private banking system. lncurring new debt requires voter approval, a process that is cumbersome, time-consuming and uncertain. Banks, on the other hand, need to keep only the slimmest of reserves, because they are backstopped by a central bank with the power to create reserves at will, along with Congress and the taxpayers themselves; and they can borrow from each other at the extremely low Federal funds rate of 0.25 percent. 

State and local governments can, however, share in the perks enjoyed by Wall Street. They can do it by setting up their own banks. North Dakota, the only state that actually does this, is also  the only state to be in continuous budget surplus every year since the banking crisis of 2008. The Bank of North Dakota (BND) was formed to free farmers and small businessmen from the clutches  of out-of-state bankers and railroad men. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. Today it is a major source of profit for the state, generating a whopping 25 percent return on equity even in  2008, when revenues in other states were plummeting. North  Dakota has the lowest foreclosure rate in the country, the lowest credit card default rate, and the lowest unemployment rate. It has no debt at all, and it has had no bank failures at least in the last decade.

Not just About Oil

The state’s thriving economy and low unemployment rate have been attributed to an oil boom; but while oil is a factor, something else has put North Dakota over the top. Profiting from an oil boom requires more than just finding oil in the ground. Infrastructure is needed get it to market. Oil companies do not build houses, hotels, or roads; and private banks in boom towns are reluctant to fund those projects because the boom could be gone before the loans get repaid.

Alaska has roughly the same population as North Dakota and produces nearly twice as much oil. Yet unemployment in Alaska in 2011 was running at 77 percent, compared to a low 3.3 percent in North Dakota. Montana, South Dakota, and Wyoming have all benefited from a boom in energy prices, with Montana and Wyoming extracting much more oil than North Dakota has. The Bakken oil field stretches across not just North Dakota but Montana, where the greatest Bakken oil production comes from Elm Coulee Oil Field. Yet Montana's unemployment rate, like Alaska’s, was 77 percent percent in 2011. Montana and Alaska had 3 to 4 times the home foreclosure rates of North Dakota, along with other financial problems. Other mineral-rich states that were not initially affected by the economic downturn lost revenues with the later decline in oil prices, but not North Dakota. Its balance sheet remained so strong that in 2009, it was in the unique position  of reducing individual income taxes and property taxes by a combined $400 million. In 2011, they were reduced by $500 million.‘

The enabling factor that has fostered both a boom in oil and record profits from agriculture in North Dakota is ready access to credit; and that access has been facilitated by what is truly unique to the state, its state-owned bank.

 ln a June 2011 paper called "The Public Option: The Case for Parallel Public Banking Institutions," Professor Timothy Canova observed that California, like North Dakota, has copious resources, including agriculture and oil. But it has been unable to mobilize those effectively to create local infrastructure and investment because unlike North Dakota, it lacks its own bank;

    ...California is the largest state economy in the nation, yet without a state-owned bank, is unable to steer hundreds of billions of dollars in state revenues into productive investment within the state. Instead, California deposits its many billions in tax revenues in large private banks  which often lend the funds out-of-state, invest them in speculative trading strategies (including derivative bets against the state's own bonds), and do not remit any of their earnings back to the state treasury.
    Meanwhile, California suffers from constrained private credit conditions, high unemployment levels well above the national average, and the stagnation of state and local tax receipts. The state’s only response has been to stumble from one budget crisis to another for the past three years, with each round of spending cuts further weakening its credit rating.
   
Not so in North Dakota: 
    The state deposits its tax revenues in the Bank [of North Dakota] which in turn ensures that a high portion of state funds are invested in the state economy. In addition, the Bank is able to remit a portion of its earnings back to the  the state treasury....

Having its own bank allows North Dakota to fund projects without either raising taxes or incurring debt. Professor  Canova  comments:
    The dilemma facing governments today is how to pay for stimulus and jobs programs without  incurring new debt. Public banking institutions should point the way, in part for their ability to expand lending on a revolving basis without raising taxes or even borrowing from bond markets.
   
The BND Model. ,

The Bank of North Dakota has a massive, captive deposit base, since all of the state’s revenues are deposited in the  bank by law. Most state agencies also must deposit with it. The BND does not compete with local banks for commercial deposits or loans. It takes some token individual deposits, but the vast majority of its deposits come from the state itself. Municipal government deposits are generally reserved for local community banks, which are able to  use those funds to back loans because the BND provides letters of credit guaranteeing them.

The BND also has a massive capital base. The bank was originally set up as "North Dakota doing business as the Bank of North Dakota." That means that technically, all of the assets of the state are assets of the bank. Beyond that technical pillar, the BND has built up a sizable capital fund. By the end of 2010, it had capital of $327 million. lt had $4 bilion in  assets, of which $2.8 billion were loans; and it had deposits of $3 billion.

Like private banks, a publicly-owned bank has the ability to create money in the form of bank credit on its books, and it has access to very low interest rates. It differs from private banks in that their business requires them to take advantage of the low rates to extract  as much debt service from their customers as the market will bear. Private banks are legally bound to think first of the quarterly profits of their shareholders. The BND, by contrast, is obligated by its mission statement to serve the community. A public bank can pass low interest rates on to public agencies, local businesses, and residents.

The BND has a loan program called Flex PACE, which allows local communities to provide assistance to borrowers in areas of jobs  technology creation, retail, small business, and essential community services.

For the state, infrastructure projects are effectively interest-free, since the bank returns interest to the state in the form of an annual dividend. The result is to reduce project costs by an average of 40 percent over the life of the loan. ....

The BND's revenues have been a major boost to the state budget. In the first decade of this century, it contributed over $300 million to state coffers, a substantial sum for a state with a population that is one-fifteenth the size of Los Angeles County. ln April 2011, the BND reported annual profits of $62 million, setting a record for the seventh straight year. These profits belong to the citizens, and they are generated  without taxation.  According to a study by the Center for State Innovation, the BND added nearly as much money to the state's general fund from 2007 to 2009 as oil and gas tax revenues did.

Unlike  the Federal Reserve, which is not authorized to lend directly to state and  local governments except in very limited circumstances, the BND can  help directly with local government funding. When North Dakota went over-budget one year, the BND acted as a rainy day fund for the state; and when a local town suffered a massive flood, it provided emergency credit lines. Having a cheap and ready credit line with the state’s own bank reduces the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks.

While Wall Street banks were being bailed out by the taxpayers and were drastically cutting back on local lending, the BND was increasing local lending--and showing record profits. The Bank’s loan portfolio has shown a steady, uninterrupted increase in North Dakota  lending programs ever since 2006. In 2011, according to its annual report:

    BND continues to be financially strong, recording its eighth  consecutive year of record profits; this year's profits were over $70 million. Standard & Poors (S&P) raised BND's credit rating in December. Its long·term issuer credit rating was raised to AAf- from A+ and its short-term issuer credit rating to A-1+  from A-1. This is significant when viewed in context of the  ratings downgrades received by many financial institutions across the country.

Every year from the 2008 banking crisis up through 2012, the BND  has reported a return on investment of between 17 percent and  26 percent. Compare that to California's pension funds--CalPERS andCalSTRS--the largest pension funds in the world. From a peak of $ 260 billion in 2007 CalPERS fell to $160 billion in March 2009, a 38 percent decline. CalSTRS peaked at $180 billion in October 2007 and dropped to $112 billion in the same period, a 34 percent decline.  They  did better in 2011 and 2012, but they are still well below where they  before the crisis. For their questionable performance in the CalPERS portfolio, Wall Street firms reported earning $1.1  billion in 2010.

A Partner, Not a Competitor, with Local Banks

The BND is a boon not only to the government and local  economy but to the local banking community. It acts as a mini-Fed for  providing correspondent banking services to virtually every institution in North Dakota. It offers a federal funds program that in 2011 provided secured and unsecured federal fund lines to 113 financial institutions, with combined lines of almost  $400 million.  Federal fund sales averaged over $10 million per day peaking at $41 million one day in July. The BND also provides check-clearing, management and automated clearing house services.

Local banks are willing to take on more risk when the BND participates in their loans. Because it assists them with mortgages and guarantees their loans, local North Dakota banks have been able keep mortgages on their books rather than selling them off to investors to meet capital requirements. As a result, they managed to avoid the subprime and securitization debacles.  By partnering with the BND,  local banks can also take on local projects in which Wall Street has no  interest, projects that might otherwise go unfunded.

Due to this amicable relationship, the North Dakota Banker, the North Dakota Bankers'  Association endorses the BND as a partner rather than a competitor of the state’s private banks. The BND may actually be helping  to save local banks from extinction. A November 2012 report in Fortune predicated that the number of U.S. banks would shrink over the next  decade from 7,000 to only a few hundred, with small banks taking the hit. A major reason they are selling out to their larger competitors  is that they cannot satisfy heightened regulatory requirements,  something the BND helps local banks meet. That could explain why North Dakota now has more banks per capita than any other state.·
 
  Stepping Up to the Plate in Disasters: The Grand Forks Story
 
Another role the BND is in a unique position to play is in providing disaster relief. It has a mandate to serve the public interest and no shareholders other than the state itself, giving it wide-ranging flexibility in emergencies and allowing it to act quickly to coordinate resources and catalyze recovery. While disaster victims in other states wait for federal relief that is often too little too late or rely on insurance policies with obscure clauses that exclude coverage when most needed, North Dakota's state-owned bank is on the spot ready to serve.
 
The BND's emergency capabilities were demonstrated in 1997 when record flooding and fires devastated Grand Forks, North Dakota. The town and its sister city, East Grand Forks on the Minnesota side of the river, lay in ruins. Floodwaters covered virtually the entire city and took weeks to fully recede. Property losses topped $3.5 billion.

The response of the state-owned bank was immediate and  comprehensive, demonstrating a financial flexibility and public  generosity that no privately-owned bank could match. Soon after  the floodwaters swept through Grand Forks, the BND was helping families and businesses recover. Led by then-president and CEO ]ohn Hoeven (future North Dakota governor and U.S. senator), the Bank quickly established nearly $70 million in credit lines -- to the city, the state National Guard, the state Division of Emergency Management,  the University of North Dakota in Grand Forks, and to individuals,  businesses and farms. It also launched a Grand Forks disaster relief loan program and allocated $5 million to help other areas affected by the spring floods. Local financial institutions matched these funds, making a total of more than $70 million available.

Besides property damage, flooding swept away many  jobs, leaving families without livelihoods. The BND coordinated with the U.S. Department of Education to ensure forbearance on student loans; worked closely with the Federal Housing Administration and Veterans Administration to gain forbearance on federally backed home loans; established a center where people could apply for federal/state housing assistance; and worked with the North Dakota Community Foundation to coordinate a disaster relief fund. The Bank served as the deposit base for this fund. It also reduced interest rates on existing Family Farm and Farm Operating programs. Families then used these low-interest loans to restructure debt and cover operating losses caused by wet conditions in their fields.

To help finance the disaster recovery, the BND obtained funds at reduced rates from the Federal Home Loan Bank. These were then passed on to flood-affected borrowers in the form of lower interest rates. 

The city was quickly rebuilt and restored. As a result, Grand Forks lost only 3 percent of its population between the 1997 floods 2000, while East Grand Forks, right across the river in Minnesota lost 17 percent of its population.

When serious floods struck again in North Dakota  in 2011, the BND again came to the rescue. According to its 2011 annual report:

    Floodwater and the havoc it created was headline news. It hampered the ability of farmers to plant their fields; nearly 30 percent of the land was not farmed. Residents of nine counties fled homes because of spring and summer flooding.
       
    BND employees were excused from work to help North Dakota communities in their fight against the floods. Lending programs were designed to assist with recovery efforts: Rebuilder's Loan Program for homeowners, Business Disaster Relief Loan Program, and the Farm Disaster Relief Loan Program.

lt was the sort of community effort that rarely makes headlines, and the BND has generally chosen to keep out of the headlines in any case. But when North Dakota and its state-owned bank pulled through the banking crisis with flying colors, legislators from other beleaguered states started to take notice ....