“I understand that these cuts are very painful and affect real life. This is a harsh reality and a reality that we face. Sacramento is not Washington – we cannot print our own money. We can only spend what we have.” – Governor Arnold Schwarzenegger quoted in Time, 22 May 2009
Christmas is coming early, Governor. You CAN print your own money. North Dakota’s fiscal solvent did. . . and so does California. Now!!!
In a May 22 article in Time titled “Billions in the Red: Fiscal Reckoning in CA,” Juliet Williams reports that since California voters have now vetoed higher taxes and further state government borrowing, Governor Arnold Schwarzenegger has indicated that he intends to to close the budget gap almost entirely through drastic spending cuts. The reductions could include laying off thousands of civil servants and teachers, ending the state’s main welfare program for the poor, eliminating health insurance for some 1.5 million poor children, ending cash grants for some 77,000 students, cutting money for state parks, and releasing thousands of dollars. prisoners before their sentences are completed. Schwarzenegger laments the fact that the state cannot print its own money but says it can only spend what it has.
But the state can create its own money. After all, banks do this every day. Certified cardholder bankers are allowed to do something no one else can: they can make “credits” with accounting entries on their books. As the Federal Reserve Bank of Dallas explains on its website:
“Banks actually create money when they lend it. Here’s how it works: Most bank loans are given to their own customers and deposited in their checking accounts. As loans become new deposits, as do salaries, banks … hold a small percentage of the new amount. it as a reserve and again lend the rest to someone else, repeating the money creation process over and over again.”
President Obama also acknowledged that banks create money, through what he calls the “multiplier effect”. In a speech at Georgetown University on April 14, he said:
“[A]While there are many Americans who understandably think that government money would be better off spending directly on families and businesses than banks – ‘where’s our bailout?,’ they ask – in fact a dollar of capital in a bank can actually result in eight or ten dollars in loans for families and businesses, a multiplier effect that could ultimately lead to a faster pace of economic growth.”
Money in state-owned banks can give us the best of both worlds. We can have all the credit-generating benefits of private banks, without the burdens that mess with the Wall Street giant’s books, including bad derivatives bets, unmarketable collateralized debt obligations, mark-to-market accounting problems, oversized CEO salaries and bonuses, and shareholders. expect a sizable profit cut. A country can keep its large revenues in its own state-owned banks and proceed to fan them to 8 to 10 times their face value in loans. Not only will it have its own credit machine, but it will control the terms of the loan.
States can lend at % interest to themselves and to municipalities, rolling out loans as needed until income has been generated to pay them off. According to Professor Margrit Kennedy in her 1995 book Interest and Inflation-free Money, interest on average makes up half the cost of every public project. A cost cut of up to 50% could make currently unsustainable projects such as low-cost housing, alternative energy development, and infrastructure development not only sustainable but actually profitable for the government.
If all this seems too radical and unprecedented, consider that one state has had its own bank for 90 years; and not only escaped the credit crunch but also did very well. . . .
NORTH DAKOTA INNOVATIVE BANK
Only three of the fifty states are now solvent, meaning they have the income to meet their state budgets; and one of them is North Dakota. This is an unlikely candidate for distinction. It is a sparsely populated state with fewer than 700,000 people, mostly located in remote farming communities that suffer from cold weather. But since 2000, the state’s GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. Not only does the state have no funding problems, but this year it actually has a budget surplus of $1.2 billion, the largest ever.
North Dakota boasts the only state-owned bank in the nation. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small entrepreneurs from the clutches of out-of-state bankers and railroad workers. The bank’s stated mission is to provide sound financial services that promote agriculture, commerce and industry in North Dakota. By law, the state must deposit all its funds in a bank, which pays a competitive interest rate to the state treasury.
The state, not the FDIC, guarantees bank deposits, which are hijacked back to the state in the form of loans. The bank’s return on equity is around 25%, and it pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the past decade, the BND has returned a third of a trillion dollars to the state’s general fund, offsetting taxes. The former president of the BND is now governor of the state.
BND avoids competition with private banks by partnering with them. Most of the loans come from local banks. The BND then enters to participate in the loan, share the risk, and buy down the interest rate. BND provides a secondary market for real estate loans, which are purchased from local banks. Its residential loan portfolio now stands at $500 billion to $600 billion. Guarantees are also provided for startups, and BND has plenty of money to lend to students (over 184,000 outstanding loans). It buys municipal bonds from public institutions, and supports loans made to new farmers at 1% interest. BND also has a well-funded disaster loan program, which helps explain how Fargo, when hit by the recent catastrophic floods, managed to avoid the devastation that New Orleans suffered under similar circumstances.
North Dakota has also managed to avoid a credit freeze, through a simple way to create its own credit. He has led the nation in upholding the country’s economic sovereignty. In California and other states, workers and factories are out of work because the private credit system has failed. A new injection of money from the publicly owned banking system on the Bank of North Dakota model could break the credit freeze and bring spring to market once again.