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.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
3
2
2
