Job Losses? Not in North Dakota. A Stimulus Plan That Really Works

On October 21, 2009, Dave Camp, the GOP Ranking Member on the House Ways and Means Committee, issued a disturbing report on the status of new job creation since President Obama's $787 billion stimulus plan went into effect in February. According to the report, the nation has actually lost nearly as many jobs as the plan was projected to create. Instead of adding 3.5 million new jobs, 2.7 million jobs have been lost. California, which was supposed to gain 396,000 jobs, has lost 336,400 jobs. Arizona, which was supposed to gain 70,000, has lost 77,300. Michigan, which was supposed to gain 109,000, has lost 137,300. A total of 49 states and the District of Columbia have all reported net job losses.

In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) North Dakota is a sparsely populated state of less than 700,000 people, largely located in cold and isolated farming communities. Yet, since 2000, the state's GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.

Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.

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:

[A]lthough 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 North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. Projecting the possibilities of this arrangement to California, the State of California owns about $200 billion in real estate, has $62 billion in various investments and has $128 billion in projected 2009 revenues. Leveraged by a factor of eight, that capital base could support nearly $4 trillion in loans.

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. California could do substantially better than that. California pays $5 billion annually just in interest on its debt. If it had its own bank, the bank could refinance its debt and return that $5 billion to the state's coffers; and it would make substantially more on money lent out.

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 North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.

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 Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.

The Commercial Banking Model: The Commonwealth Bank of Australia

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 Florida?

Could the sort of commercial model tested by Commonwealth Bank work today in the United States? Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending. He explains:

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.

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

Comments

[bkay]

I have been a great fan of ellen brown's since reading her book Web of Debt. She has written many incredible articles. What is amazing to me, is that, like the 100th monkey, her idea of a state bank is now coming out of the mouths of many, including Michael Moore. I don't know how this works, a thought in the universe by a powerful brave woman has reached many. Truth finds a way, and I see hope for all of usl Bravo to this incredible woman, who tirelessly, and fearlessly, exposes what took her years of research to uncover and research. I only wish her work was collated and made mandatory reading for every student of economics. ! bkay

[The Meek]

North Dakota is really good at electing people to Congress that bring home the pork. The surviving farmers are also good at working the system to their benefit., but they ain't that smart. The two major cities are built on a flood plain. Their agricultural bounty is totally dependent on oil and chemicals. They are also overdue for drought of biblical proportions.

They are far more dependent on the US remaining a socially cohesive society than they want to admit.

[Kache]

Ellen

I've read many articles about the BND. But I have not read one that explains the functioning and role of the bank that compares to your article. Farid Khavari will need a Communications Director - apply for the job!

The idea, and it's application is revolutionary, to say the least. It's like going back 500 years to the foundation of banking and squaring the wealth creation effect. Banking 2.0 (Best idea since printed money).

[AnnT]

GREAT IDEA!!!

Ellen Brown is addressing one of the fundamental issues affecting us today, and historically, for that matter -- the issue of money creation.

The authority to create money belongs to the people. The US Constitution places this authority in Congress. 

However, in our current sytem, private banks have usurped the authority to create money, effectively syphoning $1+ trillion per year from the people, local, state, and federal governments, by collecting undeserved interest on money created out of thin air. Only the government should be creating money out of thin air and only the people should be benefiting from any interest or feeds on its creation. The public also should not be paying excessive interest rates that double or triple actual costs to the individual, local, state and federal governments.

What to do? Understand what is really going on!

(1) Read "Web of Debt," by Ellen Hodgson Brown (www.webofdebt.com), "The Lost Science of Money," by 
Stephen Zarlenga (monetary.org), and "Fixing the System: A History of Populism, Ancient and Modern," by Adrian Kuzminski.

(2) Repeal the Federal Reserve Act of 1913. Take back the authority to create money by passing the American Monetary Act 
(http://www.monetary.org/amacolorpamphlet.pdf ) or a similar bill that prohibits private banks from creating money out of thin air.

In the meantime, folks are proposing the idea of public state and local 
banks, modeled after existing public banks, e.g., the Bank of North 
Dakota, to benefit the people!

[ThomH]

Another home run from Ellen Brown.

Prairie Home Companion this weekend was broadcast from Bismark, ND. There was much marveling and congratulations about the fact that unemployment in the area is the lowest reported anywhere in the U.S., just one measure of how good life there is. Comments were made about keeping it all secret so there would not be a sudden inrush of new residents.

So here comes Ellen, spilling the beans on ND, but showing us how we can do it in each of our states so you don't have to move there to get a better life. I have already sent her article to a friend, who fwded it in turn to a member of the Maine legislature who is on the banking committe in the State House and is intrigued. Hey, this may be something we can actually make happen!

[MilwaukeeDan]

Don't worry about that rush of Americans heading to Bismark there Thom. The Beach Boys never wrote a song North Dakota Girls and the Mamas and the Papas never sang North Dakota Dreaming. As for any men who might want to go there for work, all the hot women leave by the time they're 18. You mind as well go to Alaska, same weather, too.

[Kache]

"you don't have to move there to get a better life"

Whoa! ND is cold and nasty 6 months out of the year. You only get better banking in ND. Export the idea to CA or FL, now we're talking better living :-) (I'd include Texas but.....)

[Rousseaux]

Hi Ellen:
I've been protesting the loss of Ga's Homestead Exemption since I got the news of its confiscation in early August. I used yesterday some quotes from your excellent article on the wise people of North Dakota, having their own state bank since 1919. I'm sure all the 50 governors are aware of this and what they can do, along with the state legislators, but they are doing nothing to change the status quo. I just heard on Fox News that the reason all the lawyers/"Esquires" (titled under the Crown) are silent also is because of the huge financial gain they are and will be making out of this mess. Isn't it sad that the very people who swear to uphold the Declaration & Constitution & Bill of Rights are the first to forget that they even exist? They even have amnesia, forgetting that they swore to represent us, selling us out to the Khazar Zionist Banksters at every turn. Americans appear to be awakening, so I hope we soon move en masse to throw the secret cabals off our backs. Restoration of our Republic can't come too soon for we the people. Keep up the good work. Thanks for the suggestions for placards to be used in protest groups. Good health. Dr. Brooks, DC (ret.), Georgia, Amerika

[MilwaukeeDan]

Why is North Dakota doing so well? Just about everyone has gone somewhere else.

[ThePeacemakers]

It works in North Dakota because as you point out - they have a small population.

5 people in North Dakota and three of them are related. Easy to come to an agreement on things.

CA for instance - try it here and people would be worried about if "illegals" could make withdrawals and deposits...not a damn thing would get done. Big banks would jump on divide and conquer strategy.

[Ellen Brown - Huffpost Blogger]

Vermont and Wyoming have smaller populations than North Dakota, and they both have budget and unemployment problems.

[FoonTheElder]

There are more people still left in Detroit than there is in all of North Dakota.

North Dakota is largely dependent on agriculture, a highly government subsidized industry. The plains states most dependent on agriculture are the states with the lowest reported unemployment rates. Even when there is a low unemployment rate, you need to look at what types of jobs are available there.
The plains states with the lowest unemployment also have some of the lowest wages in the country.

The reason there is no housing bubble depression in North Dakota is because the prices of housing never went up much in the first place, just as in most of the rest of the plains states. Because it never went up much, it never came down much.

There are not as many good jobs available here as reported. Most Plains state manufacturing plants and ethanol producers are in just as much trouble as anywhere else in the country.

North Dakota is also protects some local businesses. Every pharmacy or liquor store is required to be majority owned by a North Dakota resident. This eliminates competition from national companies such as Walmart, Target, Walgreens, etc.

[The Meek]

When asked if I'm American, I often hesitate because I grew up in North Dakota so I'm not exactly an American. It is very hard to explain the difference between Americans and North Dakotans, so I just let it go and and say ja.

People I know still call me a Canadian. I take it as a compliment.

[FoonTheElder]

Some of the liberal policies from Saskatchewan over the years must have creeped over the border into North Dakota. You're lucky there are so few people in ND, because if Beck found out about it I'm sure he would be sending his stormtroopers to Fargo to prevent North Dakota from becoming a communist state.

[Kache]

You are familiar with the nationality known as NODAK, correct?????????

[sonomarc]

Brilliant idea! We need to do this in California!