State Banks, or, If You Can’t Regulate TBTF Banks, Why Not Compete Instead?

Once in a while, you’ll see stories pop up about state governments looking into setting up a state bank, Washington being the latest sighting, along the lines of the only state bank in the US, the Bank of North Dakota. And there’s good reason. The Bank of North Dakota has an enviable track record, having remained profitable during the credit crisis. Moreover, in the ten years prior, the bank returned roughly half its profits, or roughly a third of a billion dollars, to the state government. That is a substantial amount in a state with only 600,000 people. The bank was also able to pay a special dividend to the state the last time it was on the verge of having a budget deficit, during the dot-bomb era, thus keeping state finances in the black.

But the good financial performance is simply an important side benefit. The bank’s real raison d’etre is to assist the local economy. And it has done so for a very long time. It was established in 1919 as part of a multi-pronged effort by farmers to wield more power against entrenched interests in the East.

And the most important potential use of this type of bank in our era could again be to level the playing field with powerful interests, in this case, the TBTF banks.

On the funding side, the Bank of North Dakota is the depositary for state taxes and fees. Its president described its role to MotherJones last year:

The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It’s originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers’ bank or a wholesale bank. So we provide services to banks, whether it’s check clearing, liquidity, or bond accounting safekeeping. There’s probably 20 other bankers’ banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it’s beyond their legal lending limit or they just want to share risk, we’ll do that. We’re a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy….

We’re a fairly conservative lot up here in the upper Midwest and we didn’t do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don’t understand it, we’re not going to jump into it. And so we’ve avoided all those pitfalls. That’s not to say that we’re completely immune to everything, certainly we’ve bought some mortgage-backed securities and we’re working through some of those issues, but nothing that would cause us to be concerned.

Now why would this model make sense? As we’ve stressed here, community knowledge has tremendous value in banking, and even though we can’t prove it, we suspect this is the biggest single reason that large banks are less profitable (yes, you read that right) in terms of assets than smaller banks. Reliance on scoring systems is no substitute for having local intelligence and, for larger loans, in person assessment. And a state bank is under none of the growth pressures that private banks face, which lead them to overextend in supposed good time and leave themselves and those around them with major hangovers.

Moreover, the state bank also serves as a mini central bank, providing overnight funding. It may also thus help to lower smaller banks’ funding costs and make them more competitive.

Now admittedly, the Bank of North Dakota’s success depends on being stodgy. One can easily imagine a state bank being pressured to become more “profitable” to help out the state budget, with it winding up taking riskier bets and suffering the same eventual bad outcomes as private sector banks.

But consider another very useful a state bank could play (although existing in state banks would fight it tooth and nail). The Bank of North Dakota is a wholesale bank, so the lack of the costly retail branch infrastructure is one of the reasons its results are as good as they are.

But another role a state bank could play would be to apply pressure to banks in that state. For instance, one of the most important planks lost in the Consumer Financial Protection Bureau was the requirement that banks offer “plain vanilla” products, such as a simple mortgage and a low fee, low interest credit card.

In states where the TBTF banks are not very well liked and not as influential (which generally means states west of the Mississippi which lack major bank headquarters or regional operations, like Citibank’s credit card processing center in South Dakota), a state bank could serve as a wholesaler of plain vanilla products to smaller banks (or alternatively help fund a common platform to scale up existing plain vanilla products offered by credit unions so as to make them more economically attractive to other banks in state). There is no question the consumer demand exists; the trick is how to make the product for smaller banks, who would not doubt separately find it a good hook for attracting deposits from bigger banks.

I find the state bank concept intriguing, because it has the potential to operate in bank-as-utility mode, which is really all banks ought to be. And in that mode, they could apply a lot of useful pressure on nominally private banks which pay their staff and top brass handsome pay at taxpayer expense.

Before readers argue that this is tantamount to socialism, that would be better than what we have now. As we noted in an earlier post “Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?“:

Big finance has an unlimited credit line with governments around the globe. “Most subsidized industry in the world” is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.

But the subsidies go beyond that. To list only a few examples: we have near zero interest rates, which allow bank to earn risk free profits simply by borrowing short and buying longer-dated Treasuries. We have the IRS refusing to look into violations of REMIC rules, which govern mortgage securitizations. We have massive intervention to prop up real estate prices, with the main objective to shore up banks; any impact on consumers is an afterthought.

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

Consider Fannie and Freddie pre-conservatorship. They were at least branded more accurately as “government sponsored enterprises” and “agencies” making their public/private role explicit. Yet they were over time allowed more and more latitude to act as private enterprises, particularly as far as employee pay was concerned. We know how that movie ended…

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

Right now, we have much of the banking sector operating so as to privatize gains and socialize losses. We might as well socialize the gains, as North Dakota does. Even if this idea took hold in only a handful of states, the trend could lead to a change in the perception that big financial interests always and ever have the upper hand and thus lead to a change in the negotiating dynamics in policy and regulatory circles.

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  1. tawal

    This is precisely what the States that Newt is trying to force into Bankruptcy should do; along with issuing their own currency. They can also collect rent from .mil; that ought to balance some budgets. Nice to see you take up the Ellen Brown mantle, Yves.

  2. attempter

    The establishment of more state banks on the North Dakota model would be a significant step in the right direction.

    It would be a step away from corporate welfare “socialism”, as it would help actual businesses (which are always fairly small; once anything reaches a certain size it transforms itself into a welfare-mooching racket) while striking a blow against the big bank corporate state.

    Of course such a state bank would only be worthwhile insofar as it was strictly dedicated to keeping wealth in the state. Any kind of significant interaction with Wall Street or any big corporation would run counter to that goal.

    A basic rule of thumb – no bank or other outside corporation would ever come to your state/locality and “invest” in it unless it expected to take out far more than it was putting in.

    The only business entities which are truly beneficial are home-grown ones. A state bank could help maximize these.

  3. gh

    Ahem. This is exactly the model the now infamous Landesbanken in Germany are running which are not necessarily a beacon of financial stability… I am not saying it can’t work (the example given is encouraging) but one would need to think hard about the incentives.

    1. Mondo

      gh – I agree with your comment, the history of the Landesbanken absolutely should be examined closely to apply the right lessons. You probably are aware that the Landesbanken actually functioned pretty well until the early 2000’s, if we leave their occasional use as a slush fund for politician’s pet projects aside.

      Their slide into the abyss started with their EU mandated conversion to a business banking model when the states were forced to end the guarantees they had provided the Landesbanken. Their executives at the Landesbanken, whose stodginess had served them well up until then, had absolutely no idea what they were getting themselves into when they saw all the shiny new products that they were offered by GS and the like. They also thought that it might be nice to set up branches in tax havens such as Ireland which greatly helped obscure what the banks really did. Then there was the famous story of WestLB’s lending to Boxclever in the UK, just an illustration of what a state bank should never be allowed to do. Having their boards stuffed with politicians didn’t help because they were equally unable to understand what was happening.

      I guess the lesson to be learned is that you need to be very strict in limiting what a state bank should and should not do. That may be one case where our beloved business banks would be all in favor of strong regulation, and rightly so.

    2. IF

      I was also immediately thinking of the Landesbanken. Their existence did not stop Deutsche Bank to grow slightly too big. And of course, they famously blew up because they were stuffed with political cronies. I don’t mind the idea, but it seems one needs mechanisms to keep abuse in check.

    3. bmeisen

      jawohl the Landesbanken are hard to figure out. Mondo has a point – I believe they contributed substantially during the post-reconstruction boom, for example via their role as participatory lenders who cooperate rather than compete with private banks. But I also think something human, all too human happened. Until recently they were also considerable employers, providing heaps of well-paid, do-almost-nothing jobs. Those days are gone apparently, at least for low- and mid-level workers. Upper management has shown little sign of sobering up. They’re still demanding more perks – they have to compete for talent. And the parties have abused their influence, filling oversight boards with righteous dopes. The oversight dopes in the US are greedy not righteous.

      1. Yves Smith Post author

        I’m told the Landesbanken staffers continued to be not well paid, and they certainly did not exhibit having any “talent” associated with them.

        1. bmeisen

          Ich gebe zu – “well-paid” was the wrong word. In German terms the jobs are “secure”. It’s hard for me to imagine Landesbanken using temps but who knows thesedays. And while take-home may not be much, even the low-level secure jobs include benefits that Americans at similar levels could envy: 5-6 weeks of vacation, health care with medical and dental and some therapies, effective “Unkundbarkeit” meaning you can almost never be fired.

  4. Lyle

    Or simply open up Credit Unions so that anyone can Join. Since they are mutual organizations, as part of the deal forbid de-mutualization of the Credit Unions. Ensure that they remain narrowly focused as well acting as they traditionally did as narrow banks.

  5. Max424

    The United States has one bank working on its behalf: the Bank of North Dakota! (assets: $340 million; no fiat currency)

    versus…China, owner of 4 humongous state banks and hundreds of other subservient…er…subsidiary banks: (assets: well over $100 trillion; unlimited fiat currency)

    So get ’em, B of ND! America needs you! No excuses now. Remember, you have the whole might and money of the people of North Dakota behind you.

  6. readerOfTeaLeaves

    Now admittedly, the Bank of North Dakota’s success depends on being stodgy.

    I’m thinking that ‘stodgy’ is the Next Big Thing.

  7. Tim

    Another example I can think of closer to home is ATB Financial(ATB stands for Alberta Treasury Branches). ATB is a cross between the populist Bank of North Dakota model and the corporatist Landesbanken model. To be fair also Alberta is a lot more populated and industrialized than North Dakota. Two examples I can think of where ATB is more like a Landesbanken is that it has a fairly decent sized energy derivatives unit by Canadian standards and has been involved in some political pork barrel financing such as the building of the West Edmonton Mall.

  8. Dave of Maryland

    I’m increasingly skeptical of the North Dakota miracle. According to Wiki, population in ND peaked at 680,000 in 1930. It has slowly declined ever since. It is now estimated to be 673,000, having increased from 642,000 ten years ago due to new oil production.

    Despite the Bank of ND, Wiki has this to say about emigration:

    From 1923 through the beginning of the 21st century, North Dakota experienced a virtually constant decline in population, particularly among younger people with university degrees.[31] One of the major causes of emigration in North Dakota results from a lack of skilled jobs for graduates. Some propose the expansion of economic development programs to create skilled and high-tech jobs, but the effectiveness of such programs has been open to debate.[32] During the first decade of the 21st century, the population increased, in large part because of jobs in the oil industry. (Found here: )

    The US population in 1930 was 123,000,000. The US has nearly three times that now. By contrast, from 1930 to 2010, South Dakota has added 200,000 people. The population of Montana has nearly doubled. These are still well-below national averages, but much better than ND.

    Here you will find some other interesting North Dakota demographics:

    By comparison to the rest of the country, North Dakota has slightly fewer children & slightly more old folks. It has a significantly higher percentage of people in the work force, but they earn a lot less than the rest of us.

    A fair analysis of the Bank of ND would start with an explanation of the collapse of North Dakota. For that state has, in fact, collapsed. Was the bank of no practical help, or was the bank counterproductive? Aside from making money, what role has the bank played? What real use has it been?

    1. Joel3000

      Blaming the Bank of ND for the fate of the state is silly.

      How do we know that the state bank didn’t make things better than they could have been without it?

      Keeping money in the state has to be a net positive under any condition.

    2. emca

      North Dakota also has the highest number of Churchs per capita. Could this be the problem?

      Your implying North Dakota’s state bank is somehow the reason for the state’s demographic woes, but like the absurd statement I made above, you have not supported your contention.

      (Actually if you want to do statistics, North Dakota’s metropolitan regions have shown the highest growth in the last 10 years, top only by South Dakota and Nabraska (barely), of the 12 state midwest region (Liesl Eathington, Department of Economics, Iowa State University, April 2010). Unfortunately, N.D. doesn’t have much urban area to grow by and its rural population dynamics, as many in the Midwest, is abysmal.)

      As to oil, this quote form your Wikipedia article:

      “Western North Dakota is currently in an oil boom: the Williston, Tioga, Stanley and Minot-Burlington communities are experiencing rapid growth”

      Again, how is the state bank impeding this trend?

      North Dakota’s fate is the same as many in the mid-west, none of which have a state bank. That the state bank is somehow culprit in North Dakota’s population decline, directly or indirectly, is far-fetched.

    3. David Sheegog

      Dave, your comment shows you fully subscribe to the notion that economic growth somehow is ‘good’ and further that without population growth economic growth is not possible. What ND has is something closer to a sustainable economy/society than anywhere else in the country – not a bad model for our future if we are to meet the challenges of declining fossil fuel production, global climate change and overpopulation. Assuming that population decline equates to something wrong with their system is your saying that your definition of an acceptable culture is superior to theirs. That’s not necessarily so. Rural is different – wherever it is. I left farming, but I still yearn for the community surrounding it.

      1. DianeK

        Thanks, that was the point I was going to make. I just finished some Montana histories and the enhanced Homestead Acts of the early 20th century did Montana no good. These states up here shouldn’t be more populated. The railroads that brought the homesteaders here are mostly gone. There is no transportation infrastructure. So more people does not make for a more sustainable economy.

        The Bank of North Dakota is patterned after some of the successful colonial banks like Pennsylvania except they don’t issue their own currency. If they did that, then they would be even niftier. The colonial banks were so successful that the British bankers got Parliament to pass a law prohibiting them. After that, the colonists became debt slaves which, in part, led to the Revolution. (Read Stephen Zarlenga’s “The Lost Science of Money” and Ellen Brown’s “Web of Debt”.

        I hope this gets talked up.

    4. scraping_by

      Actually, the decline in ND’s population has more to do with the USDA’s policy of creating larger farms in the last thirty year. They started by declaring any farmer who worked outside the farm more than 40% of the time was a ‘part time farmer’ and therefore ineligible for the kind of technical and financial support available up until then.

      Fewer farms, fewer farm families, smaller population.

      Collectivization didn’t work real well for Soviet Union. Capitalist collectivization looks like it’s not working real well, either.

    5. Matt

      The demographic story of North Dakota is no different than the demographic story of the rest of the northern High Plains (eastern MT, eastern WY, SD, ND, NE). Population trends in that region simply reflect the natural conditions: very cold and windy winters, occasional brutal summer heat, farm-busting drought, few natural resources (recent oil boom not withstanding), scenery not much to write about unless you really appreciate subtlety…

      1. skippy


        A Greenland like growing seasons, 100+ years of mining legacy see: Jared D. Bitterroot Vally explanation.

        Skippy…economy’s that overwhelm their environment have two choices collapse or equilibrium…eh

        1. Dave of Maryland

          All I’m saying is Let’s follow the money. If in fact the Bank of ND is a cow that lays golden eggs, then why isn’t North Dakota a rich, populous state? Sure it’s cold, but Nevada is a desert. Everybody has problems. A wealthy state overcomes them. Money buys solutions. A poor state watches while its children leave & never come back. This is before we consider rural depopulation, the folks who left ND farms in favor of ND cities. Which is a world-wide problem, not just here in the states. Which means the situation in rural North Dakota is even worse than we think.

          North Dakota is a wretchedly poor state. What role did the bank play, really?

          I ask this because if other states copy North Dakota’s example, then exactly what will they be copying? A superficial analysis says the Bank of ND is not socialist.

  9. Joe Costello

    This deserves a lot of thought. For many public goods, though they’re trying to destroy the notion that there is even such a thing, the money question could be handled through state or even local government financing, that is without the banks.

    For example, the city of Berkeley, developed a plan for solar panels, where the city financed and then embed the cost with the house itself, collecting taxes to pay for it over years, that’s a bank. It could be done for many things.

    The great resolution that came out of the late 19th century money debate was to basically give the banks monopoly control of money creation, and money creation is the key power component in the money game. If people understand, and its not really understood well, forget the quasi-government feel, the Fed is the banks, the picture is complete.

    And at this time, it should be clear to us all, you can’t have democracy when a society’s monopoly money sector has gone completely parasitical, and looks to suck dry the rest of society. We need a massive breaking up the concentration of power in this society — one thing to keep in mind, that’s a founding tradition of American culture.

    1. Sufferin' Succotash

      Well, that’s one founding tradition of American culture. But there’s also the founding tradition represented by A. Hamilton’s Bank of the United States, which basically argues that what’s good for concentrated financial power is good for everyone else.

      1. Joe Costello

        Thus lies one of the fundamental lines of battle in American politics for over two centuries, and while Hamilton was definitely a centralist, he had sense of commonweal completly missing from today’s banking and corporate criminal oligarchy, and therein is all the difference.

  10. F. Beard

    I seriously doubt state run fractional reserve banking is the solution either. Isn’t that what the Soviet Union used?

    Rather, allow the states (cities too?) to issue their own debt and thus interest free fiat that is only legal tender for debts to the corresponding state or city.

    The true “asset” of a government is its taxing authority. Then let government issue (spend) liabilities against that asset.

    As for gold and silver, it would be fascism to grant them legal tender status but currently that is all the States are allowed to do under the Constitution.

    1. Joe Costello

      Very true, part of the government’s “asset” is taxing authority, but there’s important and more difficult to define cultural, political, and social aspects, that are part of any government’s “assets.”

      The greatest power in money politics is in how it’s created. The reason many people love gold is it puts an automatic choke on money creation, and if you have the gold, you control money creation. Gold is an undemocratic money system.

      A century ago, we gave the money creation monopoly to the banks and the Fed. The Fed is the banks. In a fractional reserve system, the only thing that truly limits money creation is the reserves. That is holding the actual currency. It provides stability, seemingly fairly well at say 10-1 reserve. We know the banking system was leveraged 40-1, maybe more depending on how you account, into the most recent panic.

      Bill Black’s post below this is an excellent read, because he shows letting the bank’s used capital requirements, allows them to turn a fiat reserve system into Ponzi finance. It’s really an excellent piece.

      As far as the Soviet Union, I just finished and amazing work of history called “Wages of Destruction.” It’s an excellent history on the Nazi economy. In 44, as Germany is just falling apart, they try to keep what’s left together, and keep printing more money. This guy Kerhl, was one of the main heads of the economy at this point and he writes about the printing, even the ‘totally planned economy of Soviet Russia’ had learned the importance of retaining a stable monetary standard as a foundation for accounting and statistical measurements.”

      When the Bolsheviks came in, they thought money was a “bourgeois value”, it was never constraining, and accordingly they ran into a series of money crises, and they figured out how to create “a stable monetary standard”, that was totally centralized. The Soviet Union was no democracy.

      So, what we find out from the Soviet Union and the rest of history how money is created is a big political question. If you want to have some sort of democracy, you also need some sort of democratic money creation process. So, I think some interesting questions would be 1)How do you do that? 2) How do you do that and make it stable?

      1. F. Beard

        If you want to have some sort of democracy, you also need some sort of democratic money creation process. So, I think some interesting questions would be 1)How do you do that? 2) How do you do that and make it stable? Joe Costello

        Government will tax, there is no escaping that. However, there is no need for government to distort the private sector via money creation.

        So I propose the following but actually the inspiration is 2000 years old*, separate government and private money supplies:

        1. Government money shall be pure (cheap) fiat that is only legal tender for government debts (taxes and fees), not private ones. No other money shall be accepted by government BUT ITS OWN.

        2. All conceivable private money forms shall be allowed to compete equally wrt government. This means in practice that there shall be no government privilege for ANY private money or private money form such as FRNs or PMs.

        3. Free market exchange rates shall prevail at all times between private monies and government fiat.

        4. The government shall never borrow money.

        5. The government shall never lend money.

        6. The government shall never sell its money in exchange for another money.

        7. The income tax shall be repealed.

        8. The capital gains tax shall be repealed.

        9. All legal tender laws for private debts shall be repealed.

        With the above, the private sector can escape the stealth inflation tax and market distortion via government monetary policy.

        The basic idea is that counterfeiting either of government money or private monies shall be disallowed.

        *Matthew 22:16-22

  11. John Merryman

    Some aspects of society and the economy function better as private concerns and some as public. Originally politics was a private function, but monarchy outlived its effectiveness.
    A market needs a medium of exchange in order to function effectively, but if a private party is providing that medium, then the rest of the economy is at the mercy of that party. It used to be that private banks issued and were responsible for maintaining the value of their own currency. With central banking, this is made a public responsibility, while private banks profit from its management. Either we go back to a time of private currencies, or move forward to a fully public banking system.

    Just like government, this could function on various interlocking levels.

    The big problem is that capital is subject to the laws of supply and demand. Without viable borrowers, surplus wealth becomes inflationary. Much of the rapacious nature of capitalism has been a continuing effort to suck dry different groups of borrowers, before moving on to fresh grounds. Now even the worlds largest governments are being sucked dry to maintain the value of this bubble of notational wealth.

    The fact is that we need to completely re-evaluate the nature of currency. It is a contract, with everyone, by everyone and if everyone is trying to cheat everyone else, especially those in charge of the system, it will not last. So it is not just banking which is a form of utility, but money itself. If people understood that, they would be more careful what value is drained from personal relations and resources to convert into money. This would encourage stronger communities, healthier environments and a stable monetary system.

    People are not fundamentally saints or devils. We tend to take advantage of our situation, but if we lived in a more economically interconnected situation, there would be more basic social pressure not to cheat one’s way to the top. Things like education, health care and care for the elderly are best done as local community functions. Public banking would be a way to provide funding for this and other public functions, rather than draining community wealth off for the benefit of a few.
    Politics is like the central nervous system of the community. Banking and money are like the circulatory system and blood. They exist somewhat separately from the nervous system, so maybe it would be possible to also have a public financial system that wasn’t entirely subservient to the political system.

  12. emca

    The key to N.D. state banking is ‘conservative’ or no risky ventures, particularly with out-of-state interests (stodgy). Curiously, when you talk political conservatism today, a cautious investment and money management psychology, taken privately, is not part of the rhetoric.

    From the Wilipedia article referenced above the impetus behind the state bank:

    “The corruption in the early territorial and state governments led to a wave of populism led by the Non Partisan League (usually referred to as the “NPL”), which brought social reforms in the early 20th century. The NPL which was later incorporated as part of the Democratic Party, fashioned a number of laws and social reforms, in an attempt to insulate North Dakota from the power of out-of-state banks and corporations.”

    and this:

    “Additionally, anti-corporate laws were passed, which virtually prohibited a corporation or bank from owning title to land zoned as farmland…Thus, virtually every farm in existence today in North Dakota is still a “family-owned” farm. As a result, CBS News has reported that the state with the highest per capita percentage of millionaires is North Dakota.”

    (anti-corporate laws being a serious deterrent to banks foreclosing on farms)

    North Dakota as a state looking after its own citizens interests rather than gaming Wall Street; a pattern which needs duplication in this country. Too bad everyone else are such slow learners.

  13. TC

    “A house is a home, and not an investment.”

    With this fact in mind, then, I disagree with the suggestion that, state banks could “offer ‘plain vanilla’ products, such as a simple mortgage and a low fee, low interest credit card” that is, were such offerings intended to contribute anything more than a minuscule addition to a state bank’s operating earnings. Thus, since it is unwise to allow such products to become anything but a small part of what a state bank provides, it is better that none of this at all is offered by such institutions.

    Rather, state banks are best suited for long-term, capital intensive investments in projects whose effect will create profound efficiencies within the economy in which businesses in the state operate, such that commercial revenues generated by businesses utilizing the enhanced economic platform the state bank’s investment has created effectively will secure the debt the state bank incurred to capitalize its investment.

    Such is the essence of a Hamiltonian credit system which, if enough state banks were to adopt, rapidly would move such an approach to the national level and wipe away the current, misguided, monetarist, hyperinflationary attempt to salvage the unsalvageable.

    (Those who would claim that, Alexander Hamilton was a “socialist” are not even worth a GFY.)

    1. F. Beard

      (Those who would claim that, Alexander Hamilton was a “socialist” are not even worth a GFY.) TC

      Correct. Fascist is more accurate since he was in favour of government borrowing its money supply.

  14. joebhed


    Great that you’re talking about monetary alternatives – something outside the normal financialist’s scope of discussion.

    The best thing that can come of a well-thought out state banking proposal is the education of the state populous regarding things monetary and how the monetary powers are set up, and the potential for state benefits.

    The worst thing about any move to direct state banking is IF it removes from the same state population the proper understanding of the need for and potential for federal banking and monetary reform.

    Dennis Kucinich’s Bill, H.R. 6550, the National Emergency Employment Defense (NEED) Act of 2010, provides the superior fix to that almost un-fixable of our national financial systems, the private, debt-based money system of money creation using bank-credits and consumer-debts, known as fractional reserve banking.

    The Kucinich Bill – available here –
    puts an end to the entire private fractional reserve
    banking system, replacing it with one of government-issue of the nation’s circulating media, without issuing any debt.

    When its complete, even the state banks will have to switch over to a full-reserve based lending system. But no problem there.

  15. nickj

    Krugman makes the point that although the banks are borrowing at 0% and getting 4%, the 4% treasuries are long term (10 years?) so the’re locked into this investment, unless they sell out at a capital loss.

    As I write, this is his latest post.

  16. steelhead23

    Yves, I could kiss you. For years I have been touting publicly-owned banks as one solution to the tendency for regulatory capture, excessive risk-taking, looting, and forced (?) government bailouts. The mechanism that seems simplest is to modify FDIC such that only deposits held in banks organized as publicly-owned, not-for-profit enterprises would be federally insured. In that way, most folks would move their primary banking business to public institutions yet investment banks could continue to operate, perhaps under less strict regulation as the risks to the public and the economy would be greatly reduced.

    Even if my suggestion is silly and unworkable, I really want to thank you for bringing “socialized banking” out of the “sphere of deviance.”

  17. marc sobel

    I think your hypothetical has the wrong conclusion. “Even if this idea took hold in only a handful of states,” GOPcongress would out law it, probably based on anti-Federalism grounds.

  18. Andrew Charles

    If we define the role of government as the pursuit of the common (as opposed to personal) good (the commonwealth), then a case for state and nationally-owned banks is easy to make. China’s growth as an international power can be linked to the use of state-owned banks to fund development in China—as opposed to Western financial institutions which are only concerned with return on investment. Consider the case of a Massachusetts solar panel manufacturer which is shifting production to China, not because of lower labor costs, but because of readily available low-cost funding. In contrast the business could not get funding for American manufacturing, even at 4 times the rate of interest. For any manufacturer seeking project funding, the first question private banks ask is “How can you pay us back when your competitors are manufacturing in China/India?” For a properly chartered public bank the questions
    are “How does your project benefit the state? How does our investment improve the common wealth?” So far private banks have failed to ask “How does financing shifting employment offshore effect our mortgage portfolio?” or “How will retail lenders pay us back if we shift their jobs out-of state?” This is as much the cause of the collapse in the housing market as irresponsible sub-prime lending, and can’t be corrected by simply following more conservative lending rules.

  19. john bougearel


    Great flipping idea, and way to frame the choice available to states and state regulators:”If you can’t regulate TBTF, why not compete with them.” As you point out, ND state bank is an awesome bank, not jeopardized by a state in recession. Washington state may not have the same pristine balance sheet as ND but that matters not.

    ND had the presence of mind to know that a true “state” bank is supposed to serve the interests of the local community, and if the state bank’s raison d’etre is solely support the local economy, basing banks on the “utility model” would seem far more judicious than the TBTF model which offers up the fictitious economies of scale offering bennies. As you have pointed out, the economy of scale fiction is merely a ruse simply to ensure higher bonuses for exec compensation based on market cap size.

  20. Bev

    Pardon my lateness in replying.

    Thank you so much for addressing this important topic that could save the day very quickly if we can do what we Americans have done six times in our past to recover–debt free money controlled by Congress, or by the states such as the North Dakota example.

    There is still much I need to learn about all of this. I just had read that Public Banks can also be applied on a city level (and that cities, states did not overspend themselves into bankruptcy, but that private banks speculated their money away) and even Public Banks on an international level. So there looks to be options at one level or another that could turn things around quickly.

    I need to learn more.

  21. Phil Sheridan

    Bank of North Dakota is the only state bank in the U. S. Its return of investment is over 20% per year. As a result North Dakota is the only U. S. state right now with a surplus [after the Great Crash of 2007-10.]

    North Dakota also had the 2d highest increase in median household income for 1999-2009 [+7.4%.]
    The U. S. state average was -7.1%. 45 states median income declined during this period only 5 states median income increased. The best was Wyoming 8.0% – the worst was Michigan -21.2%. [Source U. S. Census reported in the Economist Nov 20, 2010.]

    Landbanken it was said above has branches in Ireland. Bank of North Dakota has no branches outside North Dakota. It keeps its own money within the state. So Landsbanken is not really comparable to a state bank..

  22. drachenchen

    This is a fascinating article, and comments section. How would those of us who are a different flavor of geek than financial, go about getting enough knowledge and info to ACT on this? How do we start pressuring our own state governments? I live in Michigan, and I think a 21% drop in income in the last several years is probably a VERY conservative estimate. This state is a train wreck. The auto industry bailouts did NOT “trickle down” (big surprise!), and we have been doing a slow decline since the 70s, really. I have felt for some time that we need local solutions, and the car companies are no longer truly local. Help is not coming. -Nor “change”, unless we find a solution that is particular to this state.

    I am financially a moron. I can barely follow some of the references discussed here, and the acronyms snow me, but I’d like to learn more. Any suggestions on where to begin? -Or on how to start pushing for a state bank in public policy? It feels rational to have a “stodgy” state bank, based on personal observation, but feelings need to be backed up with facts. Thanks.

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