… and stick it to Wall Street at the same time! Sounds like the best of both worlds to us!

In November 2009 Ellen Brown wrote at AlterNet that bailing out the banking system “…has only fixed the economy for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans find themselves in.”

Source: Catalyst QuickBooks Solutions

The Bank of North Dakota may seem like a sole-surviving relic of a bygone era.  As a “state-owned” bank, it offers discounted loans to farms and agriculture, students and education, and small companies.  It serves as an important  economic development agency and a “banker’s bank” that reduces the loan risks of private banks and assists the private banks to finance bigger business projects.

The Bank of North Dakota had over $5 billion in assets and a $4 billion loan portfolio at the end of 2009, and it made nearly $60 million in profits in that year, setting a record for the seventh straight year. This was at a time when the entire banking and financial sectors were reeling from the collapse.   Over the past 10 years, the bank channeled over $300 million in profits to North Dakota’s state treasury.

As a state-owned bank, The Bank of North Dakota has the advantage of being THE repository for virtually all state funds, which can than be used for loans, as well as occasional relief for private banks that need a jolt of cash during sluggish credit markets.

“We think of ourselves as kind of a little mini-Federal Reserve,” says bank president Eric Hardmeyer.  Hardmeyer said he was once doubtful others would take up North Dakota’s model, but now he’s not so sure.

The Bailout that Missed Main Street

The credit collapse of September 2008 was triggered by the speculative activities of giant Wall Street banks. These profligate banks, which would have gone bankrupt without federal support, have emerged from the crisis bigger and more powerful than before. The federal government has supported and subsidized bank consolidation, resulting in the elimination of more than a thousand community banks by takeover or failure.

The 5 biggest banks now own over 40 percent of all deposits and nearly 50%  of all US bank assets.  Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and PNC currently control more deposits than the next largest 45 banks combined.

They be large, they be powerful, and they have clearly lost interest in local business loans.  Over the last 36 months, the 4 biggest institutions have severed back on small business loans by a over 5o%. The two biggest banks that received TARP funds, Bank of America and Citigroup, have cut back their small business loans by 94 percent and 64 percent, respectively!

Why Banks Aren’t Lending Locally

Ellen Brown at her WebofDebt.com blog –

Another perk of the bailout that has put a tourniquet on local lending involve interest rates. The Federal Reserve dropped the Fed funds rate (the rate at which banks lend to each other) to an extremely low 0 to 0.25 percent. It was a very good deal for the big banks – too good to be wasted on local lending.

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

In 2010, the six largest bank holding companies made a combined $75 billion; and of this, $56 billion was in trading revenues-income from speculating in derivatives, futures, commodities, and currencies. If the too-big-to-fail banks win on these bets, they win big and can pocket the proceeds. If they lose, the federal government can be relied on to bail them out.  In those comfortable circumstances, why lend to risky local businesses that might go bankrupt, or to homeowners who might default?

State-owned Banks to the Rescue?

Some states are taking matters into their own hands and considering legislation that would put local credit back into the local economy. Fourteen states have now initiated legislation for state-owned banks based on the model of the Bank of North Dakota noting that North Dakota has not lost a single bank to insolvency over the last decade.

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.”

From How State-Owned Banks Can Help Americans (And Stick It to Wall Street, Too) by Ellen Brown –

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 Dakotadoing 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.

The above example of how dramatically a state-bank could help California’s woes could equally be applied to Florida, Michigan, and virtually every state.

From PublicBankingInstitute.org –

Cut spending, raise taxes, sell off public assets – these are the unsatisfactory solutions being debated; but the states’ budget crises did not arise from too much spending or too little taxation. It arose from a credit freeze on Wall Street.

The logical solution, then, is to restore credit to the local economy. But how? The Federal Reserve could provide the capital and liquidity necessary to create bank credit, in the same way that it provided $12.3 trillion in liquidity and short-term loans to the large money center banks. But Fed Chairman Ben Bernanke declared in January 2011 that the Fed has no intention of doing this — not because it would be too costly (the total deficit of all the states comes to less than 2% of the credit advanced for the bank bailout) but because it is not part of the Fed’s mandate. If Congress wants the Fed to advance credit to local governments, he said, it will have to change the law.

Fourteen states now have introduced bills either to form state-owned banks or to do feasibility studies to determine their potential. This year, bills were introduced in the Oregon State legislature on January 11; in Washington State on January 13; in Massachusetts on January 20 (following a 2010 bill that lapsed); in Arizona on January 24th; in the Maryland legislature on February 4; in New Mexico on February 16th; in California on February 17th (amended on March 31st); Montana on March 26th; New York on March 28th; and in Maine, on April 12th. They join Illinois, Virginia, Hawaii, and Louisiana, which introduced similar bills in 2010. The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses for Washington and Oregon. Their conclusion was that state-owned banks in those states would have a substantial positive impact on employment, new lending, and state and local government revenue.

This idea’s time has come.