Reviving the Local Economy With Publicly-Owned Banks

The credit crunch is getting worse on Main Street, despite a Wall Street bailout that now measures in the trillions of dollars. The Federal Reserve's charts show that "base money" is rapidly expanding -- meaning coins, paper money and commercial banks' reserves with the central bank. But the money isn't making it to where it needs to go to stimulate economic growth: into the bank accounts of American businesses and consumers. The Fed has been pumping out money to the banks, and their reserves have been growing at unprecedented rates; but the money supply in the real economy has been declining.

According to Ambrose Evans-Pritchard, writing last month in the UK Telegraph, U.S. bank credit and M3 (the broadest measure of the money supply) contracted over the summer at rates comparable to the onset of the Great Depression. In the summer quarter, U.S. bank loans fell at an annual pace of almost 14 percent. "There has been nothing like this in the USA since the 1930s," said Professor Tim Congdon of International Monetary Research. "The rapid destruction of money balances is madness."

Chartered banks are allowed to create credit on their books equal to many times their deposit base, but lately they haven't been doing it. In more normal times, one dollar in base money has been fanned by the banks into $8.50 in loans. Today, one dollar in base money is producing only one dollar in loans. Although the Fed has been frantically pushing cash into the banks, it can't make them lend to consumers.

This is not because the banks are trying to be difficult. If they had prudent loans on which to turn a profit and the capital base to do it, they no doubt would. But their books have been choked with toxic assets, destroying their capital positions; and the "shadow lenders" who once took subprime loans off their books have gotten wise to the scam and gone away. Bankers who know the endangered state of their own books don't trust each other, so money is tight all around. And the Fed has already dropped interest rates as low as they can go, so it has no more leverage with which to entice borrowers.

Local Government to the Rescue?

The Fed may have played all its cards, but state and local governments still hold a few aces. Some local politicians are looking into the feasibility of opening their own publicly-owned banks, providing them with their own credit machines. A new public bank would have a clean set of books, untainted by the Wall Street addiction to gambling in complex derivatives; and its profits would go back to the local government and community, rather than being siphoned off in exorbitant salaries, bonuses and dividends. A publicly-owned bank could funnel credit where it is needed most, directly into the local economy.

One legislator who is considering a publicly-owned bank is Bruno Barreiro, County Commissioner for Miami-Dade County in Florida. In a September 23 article titled "Capital Sources: Recession Steers Banks Away from Business as Usual", The Daily Business Review reported that Miami-Dade is planning to conduct a feasibility study proposing alternatives for becoming its own depository. Said the journal:

Barreiro notes that throughout the year, a portion of the county's $7.5 billion operating budget is deposited with outside financial institutions in return for an interest rate. However, he feels that given the instability of many banks, the county might be better off going into such a business on its own.

Brian Bandell, writing in The South Florida Business Journal on September 11, reported that Barreiro's concern is that bank accounts are insured by the FDIC for only up to $250,000. Some businesses have lost millions of dollars in uninsured deposits when banks failed. The county often has over $50 million in a single account. If the county were to open its own depository institution, it could safeguard against these losses.

However, said Bandell, Barreiro is not proposing to allow the institution to make loans. Rather, the state's money would be invested conservatively in Treasury bonds. The problem with that approach, said Miami banking analyst Kenneth Thomas, is that it would be a challenge to get good interest rates for the county's deposits without making loans. "There's a reason most other municipalities aren't doing it," he said.

In stopping short of making loans, the county could be missing a major business opportunity. The average interest rate on U.S. government bonds is currently 3.35%. If the funds in Miami-Dade's operating budget were deposited in the county's own bank, the money could serve as the reserves to support at least nine times that sum in loans. Assuming an average interest rate of 5% on these loans, the county could increase its revenues by over 1,000% (45% vs. 3.35%). [A fuller explanation and references are here.]

Maximizing the Potential of a Publicly-owned Bank

Economist Farid Khavari is a Democratic candidate for the governor of Florida in 2010. He proposes a Bank of the State of Florida (BSF) that would take full advantage of the potential of a bank charter. It would not only act as a depository for the state's funds but would actually make loans to Floridians at much lower interest rates than they are getting now. Among other benefits, the BSF could open up frozen credit markets, save homeowners many thousands of dollars in payments, produce major revenues for the state, and allow the state's own debts to be refinanced at much lower rates. All those benefits are possible, says Khavari, because of the "fractional reserve" banking system used by all banks when they make loans. As he explained in a July 29 article in Reuters:

Using the fractional reserve regulations that govern all banks, we can earn billions per year for Florida's treasury, while saving thousands of dollars per year for Florida homeowners . . . For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6% for CDs, and make mortgage loans at 2%. For $6 per year in interest paid out, the BSF can earn $18 by lending $900 at 2% for mortgages. The BSF can be started at no cost to taxpayers, and will be a permanent engine driving Florida's economy. We can refinance state and local projects at 3%, saving taxpayers billions and balancing state and local budgets without higher taxes.

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," Khavari said. "We should work to support ourselves and our families, not the banks . . . What we have now . . . makes everyone work for a few greedy fat cats."

Earlier Models

This sort of healthy public competition for the private banking monopoly has earlier precedents, going back to the colony of Pennsylvania in Benjamin Franklin's day. Before Pennsylvania founded its own bank, the province was having difficulty attracting settlers, because there was a shortage of money with which to conduct trade. The settlers could get credit only by borrowing from the British bankers at a hefty 8% interest, and even those loans were hard to come by. The provincial government then got the bright idea of printing its own paper money and lending it to the farmers at 5% interest. When credit became cheaper and more freely available, the local economy flourished.

The only state that owns its own bank today is North Dakota. North Dakota is also one of only two states (along with Montana) that are on track to meet their budgets by 2010; it has the lowest unemployment rate in the country; and it has the largest budget surplus it has ever had, tallying in at $1.3 billion. Why this cold and isolated farming state should be doing so well when other states are teetering on bankruptcy has been the subject of several TV commentaries, including a spoof by Conan O'Brien on NBC's Tonight Show, which attributed it to theft from tourists by local farmers. But North Dakota's real secret seems to be that it has escaped the Wall Street credit debacle. The state has generated its own credit through its own publicly-owned bank for nearly a century.

The Bank of North Dakota (BND) was founded in 1919, when a political party called the Non Partisan League succeeded in uniting farmers suffering from an earlier credit crisis. The BND's website states that the bank was originally formed to create additional competition in the credit industry, while providing a local source of capital for state investment and development. The BND avoids opposition from other banks by partnering with them in loan projects. According to the bank's website:

"The primary deposit base of the BND is the State of North Dakota. All state funds and funds of state institutions are deposited with the bank as required by law . . . Use of the banks' earnings are at the discretion of the state legislature. As an agent of the state it can make subsidized loans to spur development . . . [It] underwrites municipal bonds for all of the political units in the state, and has been one of the leading banks in the nation in the number of student loans issued. The bank also serves as the state's 'Mini Fed' . . . As a result of the banks' services, it enjoys widespread support among the public and the independent banking community."

Bringing the Model Current

The private banking system is in systemic failure, and the public is waking up to the fact. We have been fleeced by Wall Street, the banks are not providing loans and our savings are no longer secure. The publicly-owned Bank of North Dakota has provided an alternative model that has worked remarkably well for nearly a century.

The BND has been around for so long, however, that skeptics can write off the state's remarkable success to other factors. A modern-day public bank that quickly turned its flagging local economy around could set a precedent that was irrefutable. If Florida were to establish a successful public banking model, it could blaze a trail out of the economic wilderness for local governments everywhere.

 

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

Comments

[kankankan]

The public option for banking..s­ounds great....i­f banks can use leverage to make money, and we have to back all their risks, why not do it ourselves and back the risk and make the profit for the common good. How awesome would it be if we took all the interest our governemnt entities pay to private banks and used that to lower state income and sales tax!!!!

Since I live in Mn, I have talked to many people in ND that had their student loans thru the ND State bank...sou­nds like a dream compared to the usury many students are trapped in due private student loan sharks and can't even bankrupt from when legitimately broke broke. ND banks treats the students reasonably, allows them space when un-employed etc...And yet the ND banks makes big money for the state.

Banks should be treated like utilities, either heavily regulated that they are hardly a private business, or just be a governemnt entity. Given the regulatory capture the banks have accomplised, I'm for all public banks.

Love this proposal, although it could lead to radical change, it is as simply appealing as having a public land grant along side private collegs, ND has one and they are not known as the pinko commie socialist types, the are white and rural and very independent types. Don't even have a Thai restaurant­...but they have a public bank! The also produced Dick Armey...so obviously its not a crazy liberal bastion.

[SinfullySublime]

Thank you, Ellen Brown. I have just written Peter DeFazio about implementing this in Oregon.

[SinfullySublime]

And, for the hell of it, I wrote Merkley and Wyden, too. Thankfully, my reps don't seem too "bought." Knock wood.

[WeCanDoMore]

This is the way of the future. There should be no private profit in industry that is essential to living. I have thought this for along time, but, like most people don't have the skills to articulate how it could be done. I'm very glad that someone who does has come forward with this proposal. These men who have made billions off of our failed econmy are not gods. They don't deserve this money, they have twisted and broken the rules to get it, they are taking 500 times in a year what the average employee makes. Clearly they may be real bright, but they are morally bankrupt. Guess you don't get everything.

Until we find a way to stop this immense gigantic rip off, we will continue to be crushed. We need to find a way to get this money back in to the economy where it can improve millions of lives. Local banks are a strong step in the right direction.

[AnnT]

Make that trillions. The private bankers have made trillions.­..

[racetoinfinity]

You and Farid Khavari are beacons of light to get us out of this depression. I want this article to be very widely read and discussed,and hope I Mr. Khavari gets to do what's good and smart and right - it would be a great start!

[dogster]

It is still early. The people still have blind faith in the government. It won't be until unemployment passes 25% or so that people will come out of their trances.

It is important that reformers like Ellen Brown hone their plans and get them ready. The momentum will shift quickly.

[tompoe]

If a handful of the world's biggest banks bring the global economy down to the point they won't do business, and it turns out that a handful of investment banks in America are the cause of this global crash, it only makes sense that these investment houses/banks must be shut down and replaced by government banks. When the economy regains some sense of legitimacy, the banks can be reprivatized. Not a difficult conceptual framework to understand. So, why are taxpayers paying these criminals tens of billions of dollars in bonuses?

[Ellen Brown - Huffpost Blogger]

I think more and more people do understand, but we're not in control. The pirates have stolen the ship. So how do we get it back? Just voting for our chosen leaders obviously hasn't worked. We need to take action ourselves, in our own communities and our own states. State and county legislators should be easier to bring around than federal ones. We have a dual banking system, state and federal. Every state should do what North Dakota did, set up its own mini-Fed, with public branches all over the state.

[SinfullySublime]

Yes, that is the question, how do we get our ship back? I'm increasingly concerned that Uncle Sam has ceded control utterly, and all that's left is a quickly-fading illusion.

Among other things, until Oregon creates it's own bank, I've joined my local credit union.

[AnnT]

To understand that something is very wrong with our current debt-based private monetary system, consider the following. Since money, in our current system, is created out of thin air, by bookkeeping entry, whenever anyone takes out a loan, there is always more debt than money! The public is in debt to approximately $50 trillion and there is only $13-15 trillion in the money supply!

What to do?!?! Understand what is really going on! The private banksters use bank double-speak to mislead the public into what really is going on. For example, the Federal Reserve is neither "Federal" nor has "reserves.­"

(1) Read "Web of Debt," by Ellen Hodgson Brown www.webofdebt.comm), "The Lost Science of Money," by Stephen Zarlenga monetary.orgg), and "Fixing the System: A History of Populism, Ancient and Modern," by Adrian Kuzminski. Here's a review of "Web of Debt": http://onlinejournal.com/artman/publish/article_4427.shtml .

(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.pdff ) or a similar bill that prohibits private banks from creating money.

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 (which has existed for ~80 years), to benefit the people!

[AnnT]

Most people don't realize that in our current monetary system, private banks, including the Federal Reserve, create money out of thin air, by bookkeeping entry, whenever anyone, including the government, takes out a loan. On the money the private banks create out of thin air, the private bankers collect interest, accumulating huge wealth for doing nothing to earn it. With this wealth, the private bankers have acquired huge power and control the media, Congress, influence the president, and influence US and world events, all for their own private benefit.

The authority to create money belongs to the people. The US Constitution places this authority in Congress. Money is the medium of exchange by which we exchange goods and services. The creation of money should be the prerogative of a sovereign government. The free market then exists within this environment of money created by the government (via public banks, for example).

By usurping the authority to create money, the private bankers effectively syphon $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 fees 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!

[Mikecola]

Why couldn't existing local credit unions fulfill this function? Mine provides loans
and all business services now.

[Ellen Brown - Huffpost Blogger]

Supporting your local credit union is certainly a better option than bowing to Wall Street, but local credit unions are suffering from the credit crunch like all the other private banks. Money is tight, the FDIC is imposing yet more assessments, etc. A state is a deep pocket with a huge capital base and a huge deposit base, assuming it deposits its own revenues in its own bank. It can refinance its own debt at much lower interest rates -- in fact at zero interest rates, since the interest goes back into its own coffers. It can fund statewide projects in desperate need of funding, putting people back to work. It can refinance home loans at half the cost to homeowners, while increasing its own revenues by a factor of 5 or so. It's just a good deal all around. Banking is a cash cow; we're supporting thieves on Wall Street when we could be capitalizing on all that potential ourselves. We don't have to be in Wall Street's chain gang. We've got an alternative.

[ClarcKing]

Thank you for the article, your proposal could work if the crisis were not deeper, on-going/c­atastrophi­c. Confronting the global monetary financier system that demands cancerous usury and speculation in every financial transaction is the imperative. The bailouts must stop as there is no protection given to the population which the government is sworn to protect. The Stimulus must be reconfigured since it is not stimulating. We have over one million homeless children as a result of foreclosures. Every state in the Union is bankrupt. Chronic unemployment may "stabilize" if only 500,000 jobs a month are lost. Our feeble administration is set to manage an economic and population contraction policy; not realizing that the crisis will deepen further. If the United States, does not implement economy formation measures now, the U.S. economy will stop functioning; with unimaginable consequences.
Put the Fed into bankruptcy protection, recover the bailout trillions, banks that qualify will join the U.S. National Bank. Credits and currency will be issued into the population's physical economy; with the executive of creating, improving and expanding the necessary facilities for human survival/ our standard of living.
Only the United States can confront the International Monetary Financier Power; can lead and cooperate with other nations in reorganizing the world economic/financial system.

[Ellen Brown - Huffpost Blogger]

I agree; the International Money Power is aiming to reduce the U.S. to third world debtor nation status, so it can impose a private global central bank and global currency on us all. It's up to us to break free; the world has always looked to the U.S. to lead.

[ClarcKing]

Thank you Ellen, for more info visit www.larouchepac.com; great article keep them coming.

[kankankan]

Did you see Michael Hudson on Mx Kesier...h­e described how Swedish and German banks did same thign to Latvia as the US banks did to US consumers and Hudson talks about he is telling Latvia to not committ to debt slavery via IMF. The Swedish banks apparently knew full well the loans they made to Latvia were unsustaina­ble...but they use them to create a bubble, knowing they would get bailed out by IMF and IMF would try to force Latvia to be bled to pay off loans for decades if not generations.

Taking out US takes out an example of a country with a formerly strong working class...wh­ile much of US wealth may have come from other countries, wrongly, at least the booty was relativley equally split, unlike say Saudi Arabia. Now China and India and Brazil want to be US of 1950-1970.­..but if you take us out, then you can take out middle class aspirations worldwide

[ldsb]

Great idea- hope it gains some steam. I've got deposits that I would gladly move to a state bank.

[leevntheus]

Health care interests have crushed reform there...wh­at makes anyone think JPM,CITI,and GS will just LET states start their own banks?

And wasn't the very fact that tiny banks with their own money all over the US at the time failing and cheating customers the entire reason for setting up a large central bank in the first place?

The whole notion of money and the exploitation that goes with it needs to go. The aliens must think we're hardly a step beyond the neanderthals they left last time they were here.

[Ellen Brown - Huffpost Blogger]

That's why I think we have to act at the local level; Congress is owned by Wall Street, but the states still have some autonomy. Voters can bring initiatives to compel state legislatures to act; they can't bring federal initiatives.

[anfractuous]

You've discussed all the plusses, now explain the inevitably well financed resistance to such a rational plan and how it can be circumvented.

[Ellen Brown - Huffpost Blogger]

Okay, here are a few:
1. They'll say the state can't afford it. We'll say it won't cost anything. For reserves, we deposit the state's ample revenues, as was done in North Dakota. For capital, we'll just shift some of the state's investments over. The money won't be lost; it will just be transformed from a low-interest investment to a much more lucrative asset in the form of bank capital.
2. They'll say the bank will take years to set up. We'll say it can be fast-tracked in a matter of weeks. It could be an Internet bank; it's just a question of accounting.
3. They'll say the bank will compete with local banks. We'll say it will partner with them, as in North Dakota. It can be good for local business everywhere.
4. They'll say the bank will take revenues away from the big Wall Street banks where the state's money is deposited now. We'll say good; the Wall Street banks wouldn't even honor California's IOUs. Let's keep California's revenues in California.
5. They'll say you can't trust government. We'll say and you can trust Wall Street? A government bank will be transparent and accountable, the profits will go back to the state, and the employees will get modest Christmas bonuses like everybody else.

[ScottontheSpot]

Great progress on the state bank issue, Ellen.
Folks - Ellen's been working on this for some time. Incentivized by her terrific idea, and with her knowledge, I set up an e-petition on Change.Org to the Politicos in California to set up a state bank there. It has 429 signatures so far, but these are each multiplied by the number of recipients each signature is sent to (about a dozen). It is here:
http://www.change.org/actions/view/help_the_terminator_save_california
If we can get on-its-back California to do this, the rest of the country will quickly follow suit, yes, even Wall Street beholden New York. As Ellen points out, we can't wait for Washington to act; they are bought and paid for. The states, with grass-roots support, have to act.
Read Ellen's excellent articles or her book, Web of Debt, or even my articles here:
How the Terminator Can Save the World
http://www.opednews.com/articles/How-the-Terminator-Can-Sav-by-Scott-Baker-090702-598.html

[unitron]

6. They'll make it all about "that crazy Ellen Brown woman and her crazy ideas about alternative medicine" and anything else they can dig up about you. Do not expect them to "fight fair".

[ncmom54]

Thank you Ellen for offering solutions!

[William50]

Banks are made for profit of the investors not to help people or to make their lives better. They are set up to first make money and then to allow the people to think they are in place to help them.
That being said, public banks would be better then private ones simply because the record profits would be churned back into the state and not into the owners accounts.
Strangely enough an individual or group in each state if funded, to start with federal growth dollars, five to seven hundred million would open their doors with clean books. They then could lend to business new and working to open the economy. They could force value of real estate to real levels and loan money at a rate that was fair for that state thus forcing the commercial banks to have to reject the money price set daily on the east coast. They would in a small state, population speaking, have limited numbers of real sites and unlimited net sites to help the people of that state.
I agree, this type of bank would force the big lenders to fear for their economic life.
middleamerican2010
Casey

[AllenPapapetrou]

Spot on article as usual. This seems like a no brainer for state and local governments.

The commercial banks must despise the idea?