Learning from North Dakota

Imagine the state of Washington controlling its own revenue and keeping the profits from the revenue local instead of exporting them as commercial bank profits. If a bill introduced by Rep. Bob Hasegawa makes it through the 2011 state legislative session, that dream could become reality. Hasegawa originally introduced HB 3162--a bill to create the State Bank of Washington (SBW)--in the 2010 session.

“As we weather the Great Recession, the lack of accessible capital for small businesses increases the economic hardships that hundreds of working families are going through,” said Hasegawa. “Small businesses are the economic drivers that help Washington’s commerce run smoothly, but when they cannot access the capital they need, the consequences result in chain reactions that invariably end up hurting most, if not all, working families, small businesses and family farms in our state.”

HB 3162 is modeled after the Bank of North Dakota (BND), the only state-owned bank in the nation. North Dakota has operated a successful financial institution since 1919, and is one of only two states that have avoided budget deficits in the past three years. Many experts cite BND as a large part of the reason.

Currently, the state Treasurer invests Washington’s operating cash in short-term, interest-bearing accounts in banks and thrifts that are approved to hold state and local government deposits. If SBW were to exist, the Treasurer would deposit state revenue into it, and the bank could lend money, assume debt and invest in private companies just like a private bank. We could achieve greater returns on state funds, and also provide access to capital for businesses that need it to thrive.

At least eight U.S. states are considering proposals to start state-run banks. The Service Employees International Union Urging is advocating for this legislation as it wages a national campaign to stop investing in unaccountable banks. “It’s time for Wall Street banks to stop focusing on their profits and start doing their part to help our cities and families recover,” says SEIU Secretary-Treasurer Anna Burger.

In the last three-plus years, the Bush and Obama administrations have pumped trillions of dollars into private banks through the federal bank bail-outs, with the hope that they would begin lending again. The prospect of what could have been done with all that money has some key thinkers and doers talking of taking the North Dakota model national.

A year ago, economist Joseph Stieglitz suggested, “If we had used the $700 billion to create a new financial institution, allowed it to lever 10-to-1, which is very modest compared to the 30-to-1 that we were doing, 10-to-1 would have generated $7 trillion of new lending capacity, far in excess of what our country needs. So the issue here is not about lending. It’s really about saving the bankers. And what we confused was saving the banks versus saving the bankers and their shareholders.”

What Stieglitz was referring to was a little-known practice called fractional reserve lending. Put simply, most private banks around the world lend money that they do not have, but that they literally create as an entry in their accounting books at the moment the loan is made. In the U.S., banks are allowed to lend up to 10 times the amount of money they have on deposit with the Federal Reserve. By starting a bank, states can multiply the power of the money they have from tax revenues.

State bank legislation faces monumental challenges including the start-up cost and political opposition Daunting, but nor insurmountable, given the state of the world these days. It is time for some fresh thinking.

By Steve Dzielak, PSARA member