Friday, May 20, 2011

Cut out the banksters and see the economy boom

What a public bank could mean for California

The theory is that a state/county/large city creates its own bank using its own property/assets as its capital base. State/county revenues are deposited in the bank and and payroll also goes thro' it, creating more deposits - all guaranteed by the state. Enough credit is created to meet short-term budget needs, to buy back the state's compounding debt and to stimulate the local economy (e.g. loans for income-generating infrastructure and housing - repaid from the resulting profits or refinanced), thereby augmenting the tax base. It can partner with other local banks and backstop them ( a local central bank, as in North Dakota). The new credit is non-inflationary since it finances real projects. This theory is in the process of being put into practice in 12 US states.

Posted by icarus @ 03:29 PM (1786 views)
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19 thoughts on “Cut out the banksters and see the economy boom

  • If California needs $7 billion a year to meet interest payments on its debt, why couldn’t this proposed state bank just draw up a cheque to pay the entire debt? Then Californians would owe themselves the money? There must be some downside to this….is it that withdrawing assets to capitalize the state bank would cause other banks to fail?

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  • ‘Cut out the banksters and see the economy boom.’

    A restoration of the Constitutional Republic would have sorted those buggers out and there exotic plants of unknown origin.

    I wonder why it’s now in tatters Bush? Yeah right, ‘pull’ the other one buddy!!

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  • the number cruncher says:

    More on the the Bank of North Dakota

    http://motherjones.com/mojo/2009/03/how-nation%E2%80%99s-only-state-owned-bank-became-envy-wall-street

    direct issuance of money by government and LVT – the solution to 80% of the world’s problems. Trouble is there is now profit in it for the super wealthy

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  • Isn’t this just a trick so the states can carry on borrowing way past sensible limits?

    Or you could extend the metaphor. Tesco is evil, they make far too much profit. Let’s set up a state-run supermarket. All government employees are required to shop there and all office supplies must be ordered from there. What could possibly go wrong….

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  • Take a look at the URL the number cruncher identified.

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  • The banks should have been left to go bust – only way to resolve the debt.

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  • Dominique Strauss-Kahn has just had a “bail-out” from prison.

    Angela Merkel, suggested that Ms Lagarde would be an acceptable choice, telling a Berlin news conference: “Among the names mentioned for the IMF succession is French Minister Christine Lagarde, whom I rate highly.”

    The Californians will have a different method of selection – and Arnie is free, so maybe he can “terminate” all the problems 🙂

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  • tnc,

    From your link:
    “To be sure, it owes some of its unusual success to North Dakota’s well-insulated economy, which is heavy on agricultural staples and light on housing speculation.”

    That’s one hell of an understatement. As the interviewee goes on to say, “we are completely countercyclical“. If this was the State Bank of Nevada or Florida, we’d be reading a completely different interview. We’d be reading about how local politicians put pressure on the bank to lend more to the construction & housing sectors, and how the few dissenting voices inside the bank were marginalised. Having a captive deposit base is great for starting up operations; but nothing prevents the bank from making bad loans or foolish politically-motivated gestures (“it’s my re-election next month, I order you to cut everyone’s mortgage by 0.5%”).

    Sorry, but I see a government-run bank as about as sensible as a government-run airline or coal mine.

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  • drewster – does that apply to government-guaranteed banks (guarantees via liquidity and capital injections, debt guarantees, deposit insurance, asset purchases etc.)? And what of the pressure such banks (with the money and power those guarantees give them) put on politicians?

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  • the number cruncher says:

    Drewster

    I agree that state run enterprises are inefficient. But some enterprises, because of their propensity for monopoly, and ability to extract economic rent, can be only run by the state.The problems of private monopoly being worse than state monopoly.

    I believe that banks that issue money(as opposed to take deposits and issue loans on those deposits) have to be state run, even though they are open to misuses by the methods you describe.

    Its a question of money supply and public debt, which are two of the fundamental problems of our society. Also is the issue of private monopolies that effectively hold the rest of society to ransom. Private monopolies of banks, land and natural resources act as a ‘private’ tax collector extracting economic rent out of our economy, impoverishing the hard working and entrepreneurial, making our society uncompetitive on the world stage, causing poverty, high unemployment and underemployment.

    When you add up the economic rent from private monopolies, all the bad taxes like income tax, NIC & vat it is the most colossal drag on the operations of the free market. The economic rent directly charged and the portion of economic rent taken through taxation are the greatest problem facing our economy. State banks are one method for decreasing economic rent through the elimination of interest paid on state debt.

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  • Deckchairs and Titanic come to mind..

    .it is misleading to refer to California’s economy as though it were a sovereign state – it is a state within a state, and has to bear it’s share of the federal debt as well as its own.

    The motivation behind this plan seems to be more driven by a desire to find someone to blame for their finanial woes, rather than face up to the fact that the California electorate have for years voted in the governor who promised to spend the most and tax the least.

    Time for a little cold turkey perhaps…

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  • the number cruncher says:

    UT – Its not misleading at all – it is just a way of expressing the size of its economy in terms easily understood, no one in the article tried to say it was a independent economy in anyway.

    The compound interest on the public debt is far from re-arranging deck chairs, do some numbers and you will see it is a massive problem. But as a policy I think governments should be debt free and live within their means, the best method is the direct issuence of money.

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  • tnc,

    Yes, California has a massive debt problem, but creating a new bank will have a neglible impact on the problem – hence the deckchair analogy..

    Should a government’s budget be constrained by their tax revenues? Yes, I totally agree. The runaway budget deficits of the world’s developed nations is without historical precedent, and will, I think, end in tears..

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  • the number cruncher says:

    UT – On that we are in firm agreement

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  • North Dakota runs no deficit. As for California, about 20% of its deficit is debt service charges – bonds that a state bank would buy back under the proposed schemes. And are we to dismiss, without reading it, the feasibility studies by the Center for State Innovation mentioned in the article.

    A state bank is not a monolith. It is different in that it’s capitalised by state money, takes state deposits (the state’s cash), and may return a proportion of Its profits to the state. It operates with a limited portfolio and in many ways it operates like other banks and partners with them – participates in loans originated by other banks in the state (augmenting them, buying down the interest rate, guaranteeing them). It also has bankers’ bank functions (some central bank functions) and guarantees deposits (a function otherwise performed by the FDIC.

    The important thing is that the Bank of North Dakota has provided liquidity and stability to the state’s banks and those banks, along with BND, have consistently provided more credit (pre- and post-crunch) to enterprises in the state, at competitive interest rates, and have contributed significantly to employment and economic activity in the state. The BND also has healthy financials like return on assets.

    These benefits (with stats and counterfactuals), and the feasibility of transferring them to another state, are outlined at
    http://stateinnovation.org/Home/CSI-Washington-State-Bank-Analysis-020411.aspx

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  • Icarus,

    I’ve been to ND many times, and know many Californians (endure might be a better word..!)

    ND has vast amounts of fertile land, but a brutal winter and occasional immense floods..

    ..the people there have learned to work together, and to save when the going is good. They have the most prudent state finances in the union, and the lowest unemployment. They dislike external interference in their affairs with a passion.

    The Californians only look out for number one, and if someone has bright ideas for a new bank, you can be pretty certain that they are hoping to get rich out of it. No-one bats for the community or the common good in Ca..

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  • uncle tom – they don’t bat for the common good in the City or on Wall Street either, which is why it’s good to reduce dependence on them.

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  • icarus – I don’t disagree…

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  • Yup, agree with Uncle Tom and Icarus. What works for a countercyclical close-knit rural community like North Dakota doesn’t necessarily work for California.

    icarus @ 9,
    Right now there’s no evidence of politicians leaning on RBS or Lloyds, but frankly I think it’s only a matter of time. The reverse pressure is limited by competition – if HSBC threatens to cut lending if their demands aren’t met, then other banks will step into the breach and shareholders will demand to know why HSBC is losing market share. It’s not as if HSBC can take its business abroad – if a bank has deposits in Pounds Sterling, they can only be lent out in Pounds Sterling.

    tnc @ 10,
    There are lots of private companies in monopoly positions. All the utilities – telecoms, water/sewage, gas, electricity – are monopolies (water especially so). Yet we tolerate them, with heavy regulation. It’s possible that they would function just as well if they were state-run – Scottish Water is still owned by the government – but in general the evidence isn’t good. If banks are making too much profit from their monopoly (or oligopoly) positions then they should be better regulated, not nationalised.

    Having said that I’m all in favour of some state-run competition. The BBC provides excellent competition to ITV/Sky/etc. NHS hospitals do an excellent job at great prices, even compared to private hospitals. Having one state-run bank in the UK wouldn’t be a bad thing. Having every bank state-run would be bad.

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