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OpEdNews Op Eds    H3'ed 10/24/13

Public banking advocate takes on Vermont State Treasurer

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Beth Pierce
Beth Pierce
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Beth Pierce by Vermont Digger

There are several things wrong with this article, investigating the rationale for a state public bank, "State treasurer prefers local investments to public banking" in VT Digger, starting from the most basic question "Where is the money going to come from to start a state bank?"

A couple of days ago, Jim Rushford of Arizona's chapter of the Public Banking Institute, asked me to opine on the condition of the CAFRs for that state.  This comes upon the heels of my recent presentation to the Pennsylvania State chapter of the Public Banking Institute in Philadelphia (soon to be released on video), on that city's CAFR and how it could be used to fund a CITY Public Bank.  In Philadelphia, I discovered $12.4B in non-capital liquid and potentially reinvestable assets.  If even 10% of those assets were invested in a Public Bank, that would be a $1.2B bank, favorably comparable to the $6.5B State Bank of North Dakota, which was funded with bond issues.

For Arizona, I wrote the following:

Thank you Jim,

Just from taking a quick look at the net assets, excluding capital assets, on page 38 of the 2012 CAFR for Arizona, I come up with a figure for non-component government accounts totaling $13,035,490,000.  Add another $2,170,996,000 for non-capital component government accounts, so a total of $15,206,486,000 (all figures on page 38 are in thousands, so I just tacked on three zeros here).

In addition, there is $34,520,858,000 in Pension Trust funds on pages 208-211, though obviously not all of these investments, or even most, would necessarily make sense to transfer into a public bank, for various reasons.  Still, if you add that to the previous $15,206,486,000 you get $49,727,344,000.  Since we are now over a year from the June 30, 2012 close of FY 2012, let's assume the CAFR for 2013, which is overdue, will show a figure north of $50B (it was a good year for even the most mediocre of investment advisers).

The population of Arizona is 6,553,255 (2012), or, roughly, 10X the population of North Dakota.  North Dakota's State Bank has ~$6.5B in assets, but they, by law, deposit all their tax money first into the state bank (though not all of this is available for loans).  Even if Arizona devoted just 5% of that $50B to a State Bank, that would be $2.5B, or roughly 2/5 of the assets of the Bank of North Dakota, 10% would be $5B, or about 4/5 of the BND assets (to be fair, North Dakota floated a bond issue to initially set up the BND in 1919, and then added more money in the 1970s). 

Of course, I am getting ahead of things here, but just considering some possibilities. 

Please see the attached presentation I made to the Pennsylvania chapter of the Public Banking Institute for an idea of what I could put together, or help you to put together, for a presentation on funding an Arizona Public Bank.

Please let me know if I can be of further assistance.

All the best,

Scott Baker, NY Coordinator for the Public Banking Institute

I haven't looked at Vermont's CAFR to the same degree, but since the population is about the same as North Dakota's, it's not unreasonable to estimate their available CAFR non-capital assets are the same as well.  It would not be hard to work out funding for a half billion, or even 1 billion dollar public bank out of that.  More capital could be added, or grown organically out of successful loans, over time.

This is only the first problem with the article.

The second omission is almost as inexplicable. 
The reporter, Hilary Niles, seems to have no idea of what fractional reserve banking is, nor do the Treasurer or other officials seem inclined to tell her.  Under fractional reserve banking, practiced by every bank, loan amounts are created when the loans are made and are NOT taken from deposits.  It is true that a conservative, responsible bank, like the Bank of North Dakota (BND), but UNLIKE the money center banks like the 19 TBTF banks which leverage their non-loan investments with derivatives etc., will keep their loans to within a fraction of their deposit base - as former Senior VP of the BND answered during the first PBI conference "You had better be careful with loaning the state's money, since there is no way to get it back if you get it wrong."  However, that doesn't really change the fact that money is created when a bank makes a loan, as a debt to the borrower, but an asset to the bank.  That is why depositors do not have to fear the vault will be empty when they come to retrieve their deposits (if a bank has made enough bad loans, that is something else, since then those loans will have to be written off and the assets will become liabilities, or losses.  If that happens enough, there will be a liquidity issue and depositors won't be able to get back their deposits). 

Third, the Treasurer seems committed to "a solution (that) needs to be additive."  While it would be nice, for her office, to be able to allocate more funds, and maybe not as nice, from her point of view, to lose access to funds her office now controls, but which could be used to fund a public bank, that does not address what would be in the best interest (using the term in both senses) for the people of Vermont.  In addition to the relatively small savings in "money now spent on fees and services" cited by the reporter, there is the much bigger consideration of a dividend returned TO the state, instead of interest payments taken FROM the state.  The BND has returned $30m/year for over 10 years - not bad for a state with less than 700,000 people over that period (though growing).  Of course, a state like Vermont could expect similar returns if the bank was scaled up to North Dakota's size, but even a smaller bank would return something.  Then too, the smaller civil service salaries paid to the officers of a public bank would leave more for the bank to loan as well.  (Somewhere along our political history, people seem to have forgotten it is the public sector, not the private one, that is cheaper to run).

The Vermont Housing Finance Agency (VHFA) complains that they "require.. long-term loans to fund construction and upgrades to multi-family homes around the state" and for similar needs, but then goes on to say they are negotiating how to arrange that with the Treasurer.  These are 10-year, or longer, loans, not unlike what a public bank might finance.  So, it seems, pending successful "negotiations," that the Treasurer already has enough long-term liquidity to support such loans.  Why not do so through a properly regulated public bank, which would make such loans routinely, and not under "negotiated" special circumstances?  The source of the money would be the same, only the people controlling it would differ.
Finally, the "short term credit facilities" written of in the article may provide some small amount of money for things that banks were not going to fund anyway, but "Agencies can and do still borrow private funds," according to the article, which means they are paying interest to private banks, ultimately.  These so-called private-public partnerships are usually a losing proposition for the taxpayer and a risk-free winning one for the private lenders behind it all.

In short, neither the public officials nor the reporter, have offered any substantive reasons why Vermont should not have its own public bank.
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Scott Baker is a Managing Editor & The Economics Editor at Opednews, and a former blogger for Huffington Post, Daily Kos, and Global Economic Intersection.

His anthology of updated Opednews articles "America is Not Broke" was published by Tayen Lane Publishing (March, 2015) and may be found here:

Scott is a former and current President of Common Ground-NY (, a Geoist/Georgist activist group. He has written dozens of (more...)

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