"Ford to New York: Drop Dead," said
a famous headline in 1975. President Gerald Ford
had declared flatly that he would veto any bill
calling for "a federal bail-out of New York City".
What he proposed instead was legislation that
would make it easier for the city to go bankrupt.
Now the Federal Treasury and Federal
Reserve seem to be saying this to the states,
which are slated to be the first ritual victims in
the battle over the government's budget ceiling.
On May 2, Treasury Secretary Timothy Geithner said
the Treasury would stop issuing special securities
that help state and local governments pay for
their debt. This was to be the first in a series
of "extraordinary measures" taken by the Treasury
to avoid default
in the event that congress
failed to raise the debt ceiling on May 16. On May
13, the secretary said these extraordinary
measures had been set in motion.
The
Federal Reserve, too, has declared that it cannot
help the states with their budget problems -
although those problems were created by the
profligate banks under the Fed's purview. The Fed
advanced US$12.3 trillion in liquidity and
short-term loans to bail out the financial sector
from the 2008 banking collapse, 64 times the $191
billion required to balance the budgets of all 50
states. But Fed chairman Ben Bernanke declared in
January that the Fed could not make the same cheap
credit lines available to state and local
governments - not because the Fed couldn't find
the money, but because it was not in the Fed's
legislative mandate.
The federal
government can fix its own budget problems by
raising its debt ceiling, and the too-big-to-fail
banks have the federal government and Federal
Reserve to fall back on. But these options are not
available to state governments. Like New York City
in 1975, many states are teetering on bankruptcy.
A beacon in the storm Many
states are in trouble, but not all. North Dakota
has consistently boasted large surpluses, aided by
a state-owned bank that is showing landmark
profits. On April 20, the Bank of North Dakota
(BND) reported profits for 2010 of $62 million,
setting a record for the seventh straight year.
The BND's profits belong to the citizens and are
produced without taxation.
Inspired by
North Dakota's example, 12 states have now
introduced bills to form state-owned banks or to
study their feasibility. Eight of these bills have
been introduced just since January, including in
Oregon, Washington State, Massachusetts, Arizona,
Maryland, New Mexico, Maine and California.
Illinois, Virginia, Hawaii and Louisiana
introduced similar bills in 2010. (For links,
dates and text, see here.)
The Center for State Innovation, based in
Madison, Wisconsin, was commissioned to do
detailed analyses for Washington and Oregon. Their
conclusion was that a state-owned bank on the
model of the Bank of North Dakota would have a
substantial positive impact on employment, new
lending, and government revenue in those states.
The BND partners with local banks in
providing much-needed credit for local businesses
and homeowners. It also helps with local
government funding needs. When North Dakota went
over-budget a few years ago, according to the
bank's president Eric Hardmeyer, the BND acted as
a rainy day fund for the state; and when a North
Dakota town suffered a massive flood, the BND
provided emergency credit lines to the city.
Having a cheap and readily available credit line
with the state's own bank reduces the need for
massive rainy-day funds that are a waste of
capital and are largely invested in out-of-state
banks at very modest interest.
What
states can do with their own banks North
Dakota has a population that is less than 1/10th
the size of Los Angeles. The BND produced $62
million in revenue last year and $2.2 billion in
loans. Larger states could generate much more.
Banks create "bank credit" from capital and
deposits (as explained here).
The Bank of North Dakota has $2.7 billion in
deposits, or $4,000 per capita. The majority of
these deposits are drawn from the state's own
revenues. The bank has nearly the same sum ($2.6
billion) in outstanding loans.
You can get
a rough idea of what a state bank could do for
your state, then, by multiplying the population by
$4,000. California, for example, has 37 million
people. If it had a state-owned bank that
performed like the BND, it might amass $148
billion in deposits. This $148 billion could then
generate $142 billion in credit for the state,
assuming the bank could come up with $12 billion
in capital to satisfy the 8% capital requirement
imposed on banks.
Note that this capital
would not be an expenditure. It would just be an
investment; and like any capital investment, it
would actually make money for the state. The Bank
of North Dakota has had a return on equity in
recent years of 25-26%, and a major portion of
this has been returned to the state treasury. All
states have massive rainy day funds of various
sorts. Some of this money could simply be shifted
into equity in the state's own bank.
There
are many options for using the state's credit
power, but here is one easy alternative that
illustrates the cost-effectiveness of the
approach. Assume California's state-owned bank
invested $142 billion in municipal bonds at 5%
interest. This would give the state $7 billion
annually in interest income. California has
outstanding general obligation bonds and revenue
bonds of $158 billion, and $70 billion goes for
interest. If California had been funding its debt
through its own bank for the last decade or two,
it would have saved $70 billion on its bonded debt
and would be that much richer today.
In a
futile attempt to "balance the budget" in a
shrinking economy, we have been pressured into a
self-destructive economic model in which the only
alternatives are said to be to slash services,
raise taxes, and sell off public assets. These are
not our only alternatives.
What destroyed
our local economies was not excess government
spending but a credit crisis on Wall Street. We
can restore the prosperity we lost by restoring
credit in the state; and we can do that by taking
our deposits out of Wall Street banks and putting
them in our own state-owned bank, to be leveraged
into credit for local purposes. For more
information, see here.
Ellen Brown is an attorney and
president of the Public
Banking Institute. In Web of
Debt, her latest of 11 books, she shows how a
private cartel has usurped the power to create
money from the people themselves, and how we the
people can get it back. Her websites arewebofdebt.com and
ellenbrown.com.
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