State banks would mean jobs, credit and investment: Why don’t we?

One of the many problems with the current banking system is that your tax money helps fuel speculation. Unless there is a public bank that your local government can place deposits into, revenues are the playthings of big banks.

Some of that money will go toward investment via loans — at a hefty profit to the bank, of course — but a significant portion will go toward risky, socially harmful speculation. What if these public funds were instead put in a professionally run public bank? There would be more funds available for investment, significant savings on interest costs and more jobs would be created. That is the conclusion of a series of studies examining the issue.

The latest of these studies advocates that a Vermont state-government agency be converted into a state bank, run along the lines of the Bank of North Dakota, the only state bank in the United States. This study, prepared by researchers at the universities of Vermont and Massachusetts for the coalition group Vermonters for a New Economy, concludes that a Vermont public state bank would lead to more than 2,000 new jobs, hundreds of millions of dollars in increased economic output and a significant increase in funds available for investment.

Vermont maple syrup (photo by Gerald Zojer)

Vermont maple syrup (photo by Gerald Zojer)

Earlier, separate studies concluded that state banks in Oregon and Washington state would lead to thousands of jobs and hundreds of millions of new revenue. Advocates of a state bank in California believe the creation of a public bank would lead to billions of dollars in benefits there. The Bank of North Dakota turns a profit on behalf of that state’s government while providing investments for local projects — an example that could be replicated elsewhere.

Vermont has a small population similar to North Dakota’s, and the researchers who prepared the Vermonters for a New Economy paper drew on North Dakota’s experience. The paper concludes that a Vermont state bank would result in:

  • 2,535 new jobs, including more than 1,000 in the first two years.
  • $192 million added to the state economy.
  • As much as $236 million in new money would be available for credit.
  • Savings of almost $100 million from reduced interest costs.

If it acts like a bank, why not make it a bank?

Such achievements would represent a considerable benefit for a small, rural state with 600,000 residents. The paper does not recommend that Vermont start a state bank from scratch, but rather convert an existing state agency, the Vermont Economic Development Authority, into one. The paper said the authority, in conjunction with two other state agencies that provide specialized loans, already carries out many of the functions of a bank. The authority is tasked with “providing loans and other financial support to eligible and qualified Vermont industrial, commercial and agricultural enterprises” by the state legislature, a mission similar to a state bank.

As of now, the Vermont state government deposits its revenues in two commercial banks, TD Bank (based in Toronto) and People’s United Bank (a regional bank based in Connecticut that swallowed a local bank previously used). Those two banks can, and do, use the money deposited by the Vermont government for any purpose its managers desire. Although the paper went out of its way to praise both for their willingness to lend locally, they have little obligation to do so. TD Bank, typical of large financial institutions, is heavily involved in speculation — it has a reported derivatives exposure of $3.8 trillion, a total more than four times more than its assets. There is risk here.

Were the state government to instead place its revenue in a state bank, all the funds (excepting those required to be held as reserves under applicable federal regulations) would be available for local investment, both as loans and for needed public infrastructure projects. Moreover, a state bank could borrow funds from the Federal Reserve at a much lower rate than by borrowing from a commercial bank and, by being able to use funds from its state bank, the government would float fewer bonds, saving on interest payments. The paper said:

“A public bank could direct as much credit as desired within fed reserve requirements, capital ratios, and prudent banking towards investment in-state lending agencies by partnering with them. A bank can also expand the amount of credit available through leveraging, which the [state] Treasurer and lending agencies cannot do.” [pages 10-11]

The paper calculates that, even with reserve requirements, there would be more than $200 million in new credit available, which could be directed toward useful investment rather than speculation. Because Vermont’s deposited revenue represents a minuscule percentage of TD and People’s United’s assets, and because a state bank would be much more focused on public needs, the proposed state bank’s credit would be in addition to, not a replacement for, commercial banking credit:

“[O]n the question of a public bank creating new credit or not, we find no evidence to support critics, and find that public bank lending will mostly add to existing credit within the state. Furthermore, even if public bank lending simply replaced existing lending by private banks, the results would still be highly beneficial.” [page 22]

What’s good for a small state is good for a bigger state

In addition to the other benefits, the profits from loans would be returned to the state. The Bank of North Dakota routinely produces profits for that state’s government while providing a reliable source of funding for local investment. There have been bills introduced into the Vermont Legislature to study the creation of a state bank, but so far have not advanced due to opposition by the Vermont Bankers Association.

Similar bills have been introduced in other states, which have also faced considerable headwinds, despite (or because of) similar conclusions.

A study by the Center for State Innovation found that a state bank in Oregon could help create or retain 6,900 to 8,800 additional small-business jobs, make $1.3 billion available in new credit and earn profits for the state after only three years. Another study by the same organization focusing on Washington state predicted that a state bank there would created as many as 10,000 small-business jobs, make $2.6 billion available in new credit and also begin turning a profit after three years.

Advocates of a California state bank believe that it would generate $133 billion in credit becoming available for the largest U.S. state. A bill to study this issue was passed by the state legislature, but was vetoed by Governor Jerry Brown. The Bank of North Dakota reported net income of $82 million in 2012 — what would such a bank return in bigger states?

Ultimately, however, the stranglehold of financiers can not be reformed away. It can only be eliminated by converting all banking into a public utility for the broad benefit of society with speculation firmly prohibited.

Getting to there from here is a long road, but successful public state, provincial and regional banks replicated around the world would set a good example, and demonstrate that the staggering cost of a financial industry that continues to run amok is not a burden that we are forced to live with. If we have no control over the economy and our working lives, democracy is an illusion.

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11 comments on “State banks would mean jobs, credit and investment: Why don’t we?

  1. carolahand says:

    This is such a creative way for countering the power of the banking industry! Thank you for sharing the information and links!

  2. Jeff Nguyen says:

    I think your title pretty much answered your question.

  3. I guess we can thank the global meltdown for states seeing the light on this – and marijuana legalization. States and cities simply can’t afford prosecuting victimless marijuana possession any more – or handing over heaps of money to Wall Street bankers.

    • U.S. marijuana laws are a monument to the extreme slowness of the country’s institutions to respond to the popular will. How many people in the U.S. have used marijuana at some point in their lives? I’d guess it must be 70 or 80 percent. How can something that a large majority of people have at least tried be illegal? There’s money in keeping it illegal and votes to be had in the “war on drugs.” It is good that prohibition is finally being challenged, but that will be a long struggle yet, as will the taking back of privatized utilities.

  4. Steve says:

    Certain parties in the European Union are now seeing how centralized banking has undercut their autonomy. There are discussions underway by respected economists about the advantages of leaving the Euro. They are beginning to understand the effects of economic hegemony and not liking what they are seeing. Leaving aside the more absurd positions of the far right, there is a certain convergence of opinion about the viability of the Euro (and the attendant flaws) that is gaining traction across multi-party lines.

    And this is to be hoped for. When people begin to realize that the politicians no longer represent them or their local interests (which become national interests in the long run), they will react.

    And, as you said, if it doesn’t happen, …

  5. Steve says:

    Forgot to add this little tidbit from spectrezine.org:
    “The EU is a project to deepen, institutionalise and make permanent neoliberal capitalism and, in order to do so, undermine what realities there are to national democracies.. This is the whole of its meaning. Everything else is just there for obfuscation.”

    • Very well put. Or, as I have argued:

      “European capitalists desire the ability to challenge the United States for economic supremacy, but cannot do so without the combined clout of a united continent. This wish underlies the anti-democratic push to steadily tighten the E.U., including mandatory national budget benchmarks that require cutting social safety nets and policies that are designed to break down solidarity among wage earners across borders by imposing harsher competition through imposed austerity.”

  6. Steve says:

    As Romain Gary pointed out long ago, Europeans had a hard time outdoing the Americans in their quest for absolute dominance, and they decided to either give up (sell out) or go elsewhere to preserve what was left of their colonial past (look at what’s happening in Africa). Both of which Europe is now doing out of some irrational fear that the US will retaliate somehow. A fear engendered by the oligarchy to keep the peasants in line. It has become so apparent as to be laughable, but still dangerous.

  7. […] our socio-economic system brings us terminator seeds from Monsanto, predatory banking instead of public banking, the military industrial complex’s war for profit instead of national defense, viagra […]

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