Restoring Economic Sovereignty:
The Push for State-Owned Banks
by Ellen Hodgson Brown
While
Wall Street is reporting record profits, local banks are floundering, credit
for small businesses and consumers remains tight, and local governments are
teetering on bankruptcy.
There is even talk
of allowing state governments to file for bankruptcy, something current legislation
forbids. The federal government and
Federal Reserve have managed to find trillions of dollars to prop up the Wall
Street banks that precipitated the credit crisis, but they have not extended
this largesse to the taxpayers and local governments that have been forced to
pick up the tab.
In
January, Federal Reserve
Chairman Ben Bernanke
announced
that the Fed had ruled out a central bank bailout for state and local
governments. The collective state budget
deficit for 2011 is projected at $140 billion, a mere 1% of the
$12.3
trillion the Fed managed to come up with in liquidity, short-term loans,
and other financial arrangements to bail out Wall Street.
But
Chairman Bernanke said the Fed is limited by statute to buying municipal
government debt with maturities of six months or less that is directly backed
by tax or other assured revenue, a form of debt that makes up less than 2% of
the overall muni market. State
and municipal governments, it seems, are
on their own.
"It is time to declare economic sovereignty
from the multinational banks that are responsible for much of our current
economic crisis. Every year we ship over a billion dollars in Oregon
taxpayer dollars to out-of-state and multinational banks in the form of
deposits, only to see that money invested elsewhere. It's time to put our money
to work for Oregonians."
- Bill Bradbury, former Oregon Senate President
Responding
to an unfilled need for credit for local government, local businesses and
consumers, three states in the last month have introduced bills for state-owned
banks -- Oregon, Washington and Maryland – joining Illinois, Virginia,
Massachusetts and Hawaii to bring the total number to seven.
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 model of North Dakota, the only state that seems to have escaped the
credit crisis unscathed. The 92-year-old Bank of North Dakota (BND), currently the
only state-owned U.S. bank, has helped North Dakota avoid the looming budgetary
disasters of other states. In 2009,
North Dakota sported the largest budget surplus it had ever had. The BND helps fund not only local government
but local banks and businesses, by providing matching funds for loans to
commercial banks to support small business lending.
In
the last month, three states have introduced bills for state-owned banks, following
the North Dakota model. On January 11, 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 (discussed in an earlier article
here); and on
February 4, a bill was introduced in the
Maryland legislature
for a feasibility study looking into the possibilities. They join
Illinois,
Virginia,
Hawaii,
and
Massachusetts,
which introduced similar bills in 2010.
Broad-based
Support
The bills are widely
supported by small business owners. The
Seattle Times reported
on February 3 that 79% of 107 business owners surveyed by the Main Street Alliance
of Washington supported the Washington bill.
More than half said they had experienced a tightening of business
credit, and three-fourths of those said they could create additional jobs if
their credit needs were met.
A survey by the Main
Street Alliance of Oregon produced similar
results. Their survey, which covered
115 businesses in 28 communities, found that two-thirds of small-business owners
had delayed or canceled expansions because of credit problems; 41 percent had
been turned down for credit; and 42 percent had seen their credit terms
deteriorate. Three-quarters of the
business owners surveyed supported the Oregon bill.
Also supporting
the idea of a state-owned bank is Oregon state treasurer Ted Wheeler, with
this twist: he thinks Oregon can unlock additional lending capacity in
partnership with existing institutions by creating a “virtual” bank. The state would not need to build new brick
and mortar banks requiring hundreds of new employees to service them. The new tools afforded the state by being a
“bank” could be arranged quickly and cheaply through a framework he calls a
“virtual economic development bank.” In
an OpEd
posted on Oregonlive.com on February
9, he wrote:
This new model
would consolidate Oregon’s various economic development loan programs in one
place, and allow state government to step in as a new lending participant,
which will help qualified Oregonians to secure additional financing. We also
have strategic investment tools such as the Oregon Growth Account that could be
better utilized as part of this framework.
Banks
“create” money by leveraging
their capital into loans. At an 8%
capital requirement, they can leverage capital by a factor of twelve, so long
as they can attract sufficient deposits (collected or borrowed) to clear the
outgoing checks. States give this
leveraging power away when they put their deposits in Wall Street banks and
invest their capital there.
State
and municipal governments have assets tucked all over the state in separate
rainy day funds, which are largely invested in Wall Street banks for a very
modest return. At the same time, states
are borrowing from Wall Street at much higher interest rates and have to worry
about such things as credit ratings, late fees, and interest rate swaps, which
have proven to be very good investments for Wall Street and very bad
investments for local governments.
By
consolidating their assets into their own state-owned banks, state and local
governments can leverage their own funds to finance their own operations; and
they can do this essentially interest-free, since they will own the bank and will
get the interest back. The BND contributed over $300
million to state coffers in the past decade, a notable achievement for a state
with a population that is less than one-tenth the size of Los Angeles County.
The growing movement to establish local economic sovereignty
through state-owned banks has been a grassroots effort that has grown
spontaneously in response to unmet needs for local credit. In Oregon, the push
has come from an active volunteer group called Oregonians
for a State Bank working with the Working Families Party. In Washington, a major role has been played by the Main Street Alliance, a project of the Alliance for a Just Society
(formerly NWFCO). The chief legislative
champion in Washington State is Rep. Bob Hasegawa. In Maryland, the campaign was initiated by
the Wisconsin-based Center for State
Innovation (CSI), working with the Service
Employees International Union (SEIU) and the Progressive States
Network. Progressive
Maryland is a prominent NGO
supporter. Detailed analyses of
the Washington and Oregon initiatives and their projected benefits have been
done by CSI. For grassroots efforts in other states and
for petitions that can be signed, see http://publicbankinginstitute.org/state-info.htm.
_______________
Ellen Brown is an attorney and
president of the Public Banking
Institute. She has written eleven books, including Web of Debt: The Shocking Truth About Our Money
System and How We Can Break Free (2010).
