Seven States Are Now Considering Setting Up Public Banks
Faced with federal inaction and growing local budget crises, an increasing number of states are exploring the possibility of setting up their own state-owned banks, following the North Dakota model. On January 11, 2011, a bill to establish a state-owned bank was introduced in the Oregon State legislature ; on January 13, a similar bill was introduced in Washington State ; on January 20, a bill for a state bank was filed in Massachusetts (following a 2010 bill that had lapsed); and on February 4, a bill was introduced in the Maryland legislature for a feasibility study looking into the possibilities. They join Illinois , Virginia , and Hawaii , which introduced similar bills in 2010, bringing the total number of states with such bills to seven.
If Governor Walker wanted to explore this possibility for his state, he could drop in on the Center for State Innovation (CSI), which is located down the street in his capitol city of Madison, Wisconsin. The CSI has done detailed cost/benefit analyses of the Oregon and Washington state bank initiatives, which show substantial projected benefits based on the BND precedent. See reports here and here .
For Washington State, with an economy not much larger than Wisconsin's, the CSI report estimates that after an initial startup period, establishing a state-owned bank would create new or retained jobs of between 7,400 and 10,700 a year at small businesses alone, while at the same time returning a profit to the state.
A Bank of Wisconsin Could Generate "Bank Credit"
Many Times the Size of the Budget Deficit
Economists looking at the CSI reports have called their conclusions conservative. The CSI made its projections without relying on state pension funds for bank capital, although it acknowledged that this could be a potential source of capitalization.
If the Bank of Wisconsin were to use state pension funds, it could have a capitalization of more than $57 billion -- nearly as large as that of Goldman Sachs. At an 8% capital requirement, $8 in capital can support $100 in loans, or a potential lending capacity of over $500 billion. The bank would need deposits to clear the checks, but the credit-generating potential could still be huge.
Banks can create all the bank credit they want, limited only by (a) the availability of creditworthy borrowers, (b) the lending limits imposed by bank capital requirements, and (c) the availability of "liquidity" to clear outgoing checks. Liquidity can be acquired either from the deposits of the bank's own customers or by borrowing from other banks or the money market. If borrowed, the cost of funds is a factor; but at today's very low Fed funds rate of 0.2%, that cost is minimal. Again, however, only banks can tap into these very low rates. States are reduced to borrowing at about 5% -- unless they own their own banks; or, better yet, unless they are banks. The BND is set up as "North Dakota doing business as the Bank of North Dakota."
That means that technically, all of North Dakota's assets are the assets of the bank. The BND also has its deposit needs covered. It has a massive, captive deposit base, since all of the state's revenues are deposited in the bank by law. The bank also takes other deposits, but the bulk of its deposits are government funds. The BND is careful not to compete with local banks for consumer deposits, which account for less than 2% of the total. The BND reports that it has deposits of $2.7 billion and outstanding loans of $2.6 billion. With a population of 647,000, that works out to about $4,000 per capita in deposits, backing roughly the same amount in loans.
Wisconsin has a population that is nine times the size of North Dakota's. Other factors being equal, Wisconsin might be able to amass over $24 billion in deposits and generate an equivalent sum in loans -- over six times the deficit complained of by the state's governor. That lending capacity could be used for many purposes, depending on the will of the legislature and state law. Possibilities include (a) partnering with local banks, on the North Dakota model, strengthening their capital bases to allow credit to flow to small businesses and homeowners, where it is sorely needed today; (b) funding infrastructure virtually interest-free (since the state would own the bank and would get back any interest paid out); and (c) refinancing state deficits nearly interest-free.
Why Give Wisconsin's Enormous Credit-generating Power Away?
The budget woes of Wisconsin and other states were caused, not by overspending on employee benefits, but by a credit crisis on Wall Street. The "cure" is to get credit flowing again in the local economy, and this can be done by using state assets to capitalize state-owned banks.
Against the modest cost of establishing a publicly-owned bank, state legislators need to weigh the much greater costs of the alternatives -- slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed, and selling off public assets. Given the cost of continuing business as usual, states can hardly afford not to consider the public bank option. When state and local governments invest their capital in out-of-state money center banks and deposit their revenues there, they are giving their enormous credit-generating power away to Wall Street.
First posted on Yes! Magazine.
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