From Wall Street to Main Street, Legislators Propose Public Bank Illustration: Hanji Chang



Since 2010, legislators in 20 states have introduced bills to create public banks. Under such a proposal, the $443 million in state funds currently held in private financial institutions would be deposited in a public bank to leverage low-interest loans to small businesses, support partnership loans with community banks, and fund public infrastructure projects. Using the only state-run bank in the country, the Bank of North Dakota (B.N.D.), as an example, advocates believe that North Dakota's lowest-in-the-nation unemployment rate, foreclosure rate, and default rate on loans is in part due to its use of public banking. However, critics, particularly private financial institutions, argue that the B.N.D. is the product of a bygone era and North Dakota's oil reserves are the main reason for the state's success, not the bank.



In 2011, a state bank bill was defeated unanimously in the Maine Legislature.



"Sometimes a bill has to die before it gets a life and this was a real clear example of that," said Rep. Diane Russell (D-Portland), sponsor of legislation she calls the "Maine Street Development Bank" bill. "It comes down to, do you want your money on Wall Street or do you want your money on main street?"



In this coming legislative session, Rep. Russell, Sen. Chris Johnson (D-Lincoln County) and Rep. Bobbi Beavers (D-South Berwick) are all returning with legislation that they hope will revive the debate.



What is the Bank of North Dakota?



Founded in 1919, the Bank of North Dakota was an idea conceived by a movement of farmers called the Nonpartisan League as a reaction to the farm foreclosures, market manipulation, and denial of credit by bankers in Minneapolis and New York. After winning power in the Legislature, the N.P.L. set up the state bank, as well as a publicly owned mill and elevator for the farmers to market and sell grain. By law, all state revenues are required to be deposited in the state bank. When the bank opened, it had $2 million in capital, which today has grown to more than $270 million. According to the B.N.D.'s website, in 1945 the state began rolling the bank's profits into the general fund. Since then, the B.N.D. has returned more than $555 million to the state's coffers and it has been profitable since 1971.



Following North Dakota's 2008 oil boom, the B.N.D. has paid an average dividend back to the state of $30 million a year, with a return on equity of 19 to 26 percent. There are no branch offices of the B.N.D. and it handles few individual deposits. It has an account with the Federal Reserve but is not insured by the Federal Deposit Insurance Corporation (F.D.I.C.). Instead, it is backed by the general fund, the taxpayers and the state of North Dakota. The B.N.D. is run by professional bankers, but it is overseen by a three-member commission, including the governor, attorney general, and Agriculture commissioner. Unlike other banks, it doesn't pay bonus fees or commissions.



Although supporting local agriculture has remained a strong focus of the B.N.D. since its inception, it also provides loans for students, affordable housing, the energy sector, and other economic development projects. The B.N.D. functions as a "banker's bank," partnering with over 100 other financial institutions in the state to help provide support for consumer loans. It also offers cheap credit lines to state and local government agencies.



State bank advocates point out that the B.N.D. played an instrumental role in providing immediate disaster relief after the 1997 floods of Grand Forks by opening up nearly $70 million in credit lines for affected homes and businesses. On the other side of the state border, help did not come so soon. As Jim Morrow and Ira Dember of the Public Banking Institute write in the Sky Valley Chronicle, "between the 1997 floods and 2000, Grand Forks lost 3% of its population. Sister city East Grand Forks, right across the river in Minnesota, lost 17% of its population in the same period."



Unlike the many large private financial institutions that got involved in risky speculation, the B.N.D. was able to avoid the brunt of the financial crisis, Eric Hardmeyer, current president and CEO of the B.N.D., told Mother Jones Magazine in a March 2009 interview. "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."



Advocates



On a Sunday evening in December, a passionate crowd packed into the Mayo Street Arts Center in Portland for a presentation by Ellen Brown, chair of the Public Banking Institute. The author of several books on finance, including Web of Debt and the soon-to-be released The Buck Starts Here, Brown travels around the world speaking in support of public banking.



Using figures from German researcher and author of Occupy Money, Professor Margrit Kennedy, Brown says that 35 to 40 percent of everything consumers buy goes to pay interest to financiers, bankers and bond holders, due to all of the credit needed by tradesmen, suppliers, wholesalers and retailers all along the chain of production. Brown calls that cost of doing business a regressive tax on consumers. She says that has helped cause the exponential growth of the financial industry in recent years, resulting in 1 percent of the population ending up with 42 percent of the financial wealth. In response to the financial crisis on Wall Street that ushered in the so-called Great Recession, interest in state-run banks, championed by reformers a century ago, is resurfacing.Since 2010, legislators in 20 states have introduced bills to create public banks. Under such a proposal, the $443 million in state funds currently held in private financial institutions would be deposited in a public bank to leverage low-interest loans to small businesses, support partnership loans with community banks, and fund public infrastructure projects. Using the only state-run bank in the country, the Bank of North Dakota (B.N.D.), as an example, advocates believe that North Dakota's lowest-in-the-nation unemployment rate, foreclosure rate, and default rate on loans is in part due to its use of public banking. However, critics, particularly private financial institutions, argue that the B.N.D. is the product of a bygone era and North Dakota's oil reserves are the main reason for the state's success, not the bank.In 2011, a state bank bill was defeated unanimously in the Maine Legislature."Sometimes a bill has to die before it gets a life and this was a real clear example of that," said Rep. Diane Russell (D-Portland), sponsor of legislation she calls the "Maine Street Development Bank" bill. "It comes down to, do you want your money on Wall Street or do you want your money on main street?"In this coming legislative session, Rep. Russell, Sen. Chris Johnson (D-Lincoln County) and Rep. Bobbi Beavers (D-South Berwick) are all returning with legislation that they hope will revive the debate.Founded in 1919, the Bank of North Dakota was an idea conceived by a movement of farmers called the Nonpartisan League as a reaction to the farm foreclosures, market manipulation, and denial of credit by bankers in Minneapolis and New York. After winning power in the Legislature, the N.P.L. set up the state bank, as well as a publicly owned mill and elevator for the farmers to market and sell grain. By law, all state revenues are required to be deposited in the state bank. When the bank opened, it had $2 million in capital, which today has grown to more than $270 million. According to the B.N.D.'s website, in 1945 the state began rolling the bank's profits into the general fund. Since then, the B.N.D. has returned more than $555 million to the state's coffers and it has been profitable since 1971.Following North Dakota's 2008 oil boom, the B.N.D. has paid an average dividend back to the state of $30 million a year, with a return on equity of 19 to 26 percent. There are no branch offices of the B.N.D. and it handles few individual deposits. It has an account with the Federal Reserve but is not insured by the Federal Deposit Insurance Corporation (F.D.I.C.). Instead, it is backed by the general fund, the taxpayers and the state of North Dakota. The B.N.D. is run by professional bankers, but it is overseen by a three-member commission, including the governor, attorney general, and Agriculture commissioner. Unlike other banks, it doesn't pay bonus fees or commissions.Although supporting local agriculture has remained a strong focus of the B.N.D. since its inception, it also provides loans for students, affordable housing, the energy sector, and other economic development projects. The B.N.D. functions as a "banker's bank," partnering with over 100 other financial institutions in the state to help provide support for consumer loans. It also offers cheap credit lines to state and local government agencies.State bank advocates point out that the B.N.D. played an instrumental role in providing immediate disaster relief after the 1997 floods of Grand Forks by opening up nearly $70 million in credit lines for affected homes and businesses. On the other side of the state border, help did not come so soon. As Jim Morrow and Ira Dember of the Public Banking Institute write in the Sky Valley Chronicle, "between the 1997 floods and 2000, Grand Forks lost 3% of its population. Sister city East Grand Forks, right across the river in Minnesota, lost 17% of its population in the same period."Unlike the many large private financial institutions that got involved in risky speculation, the B.N.D. was able to avoid the brunt of the financial crisis, Eric Hardmeyer, current president and CEO of the B.N.D., told Mother Jones Magazine in a March 2009 interview. "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."On a Sunday evening in December, a passionate crowd packed into the Mayo Street Arts Center in Portland for a presentation by Ellen Brown, chair of the Public Banking Institute. The author of several books on finance, including Web of Debt and the soon-to-be released The Buck Starts Here, Brown travels around the world speaking in support of public banking.Using figures from German researcher and author of Occupy Money, Professor Margrit Kennedy, Brown says that 35 to 40 percent of everything consumers buy goes to pay interest to financiers, bankers and bond holders, due to all of the credit needed by tradesmen, suppliers, wholesalers and retailers all along the chain of production. Brown calls that cost of doing business a regressive tax on consumers. She says that has helped cause the exponential growth of the financial industry in recent years, resulting in 1 percent of the population ending up with 42 percent of the financial wealth. "This is mostly Wall Street money," says Brown. "It's a parasite on the side of the economy that keeps growing, sucking money out without returning it."



Brown says that in order to avoid the inevitable crashes that occur when debt reaches unsustainable levels, public banks may be the key. It's a model that has been followed by 40 percent of the world's banks, particularly in Brazil, Russia, India and China, all countries that largely avoided the global financial crisis.



"The first response is that this is socialism," says Brown. "Not really. Even in a capitalist society, in any form of economy, some things belong in the private sector and some things belong in a public sector. What belongs in the public sector is infrastructure. All of those things we share like roads, power, electricity and credit. You can tell it's infrastructure because we bailed out the Wall Street banks. Why didn't we just let them go bankrupt like any other business?"



The Center for State Innovation, a Wisconsin-based progressive policy research institution, estimates that a state bank could create or retain about 3,500 small business jobs in Maine due to increased loan activity through $220 million in new small business participation loans. The CSI also predicts that by year three, if the state bank is capitalized at $100 million, it could "pay total accumulated dividends to the state's General Fund or Rainy Day Fund of $39 million after 10 years."



Critics



In many ways, the debate over the Maine Street Bank bill has come down to age-old ideological questions about the role of the private and public sectors.



"As I understand it, the state bank would become a competitor to financial institutions and they would be making loans that financial institutions choose not to make or are not bankable," says Chris Pinkham of the Maine Bankers Association, which represents Maine's community banks as well as larger financial interests like Bank of America. "The question is, is it the tax-payer's money at risk?"



Acording to State Treasurer Neria Douglass, the state's revenues are currently deposited in several different banks, with the most in TD Bank and US Bank, followed by Camden National Bank and Bangor Savings Bank. There are much smaller reserves deposited in various local community banks and a few big Wall Street lenders.



As far as being a competitor goes, state bank advocates respond that the B.N.D. actually partners with and supports community banks, acting similarly to a central bank for the state. According to Pinkham, under the current system, the state has financial institutions competitively bid on bringing in the highest return on investment. If for whatever reason the state was unable to pay a competitive rate, state investments could be put in danger. However, as B.N.D.'s CEO Hardmeyer told Mother Jones, the B.N.D. does pay a competitive rate to the state treasurer. But he recognized that argument as a major reason for strong opposition to a state bank.



"I would bet that that would be one of the most difficult things to wrestle away from the private sector - those opportunities to bid on public funds," he said.



Pinkham of the Maine Bankers Assoc. also says that getting access to credit for small businesses is not a big problem in Maine.



"Banks are swimming in deposits," he says. "A lot of people say, 'You're not making loans to people.' Well, we're making loans to anyone we can find who is creditworthy."



There is also a big question as to what extent the B.N.D. has contributed to the state's financial success.



"With the possible exception of the Great Depression, B.N.D.'s contributions to stabilizing the state economy and finances appear to have been relatively minor," according to the Boston Federal Reserve Bank in an extensive 2011 report on public banking. The report attributed much of North Dakota's good fortune to its wealth in natural resources, comparing it to South Dakota, which has similar financial conditions and no state bank. Finally, the report questioned whether a state would even be able to effectively capitalize such a venture. Rep. Russell has discussed possibly funding it through a corporate bond.



Last year, Coastal Enterprises Inc., a Wiscasset-based, non-profit community development financial institution, recommended a study of the idea to weigh its merits.



Senator Chris Johnson's legislation would form a task force of bankers, credit unions, community economic development lending institutions, the state treasurer, and small businesses to come up with legislation to set up what he would like to call the Maine Partnership Bank.



"I'm not jumping in and saying I know how to make everybody happy," said Johnson. "I'm just saying that I'm confident that there's a way to do this to make everybody happy and be a good thing for the state of Maine."



Newly elected State Treasurer Neria Douglass has met with Ellen Brown and the Public Banking Institute and says she is interested in learning more about the idea. Given Governor LePage's oft-expressed distrust of the public sector, it's unlikely he will be interested in a public bank proposal, but Rep. Russell says there's also a conservative argument for public banking to be made. Although public banks have been most often touted by progressive reformers, in Montana and Arizona conservative lawmakers have championed the idea under the banner of local economic sovereignty. "This is mostly Wall Street money," says Brown. "It's a parasite on the side of the economy that keeps growing, sucking money out without returning it."Brown says that in order to avoid the inevitable crashes that occur when debt reaches unsustainable levels, public banks may be the key. It's a model that has been followed by 40 percent of the world's banks, particularly in Brazil, Russia, India and China, all countries that largely avoided the global financial crisis."The first response is that this is socialism," says Brown. "Not really. Even in a capitalist society, in any form of economy, some things belong in the private sector and some things belong in a public sector. What belongs in the public sector is infrastructure. All of those things we share like roads, power, electricity and credit. You can tell it's infrastructure because we bailed out the Wall Street banks. Why didn't we just let them go bankrupt like any other business?"The Center for State Innovation, a Wisconsin-based progressive policy research institution, estimates that a state bank could create or retain about 3,500 small business jobs in Maine due to increased loan activity through $220 million in new small business participation loans. The CSI also predicts that by year three, if the state bank is capitalized at $100 million, it could "pay total accumulated dividends to the state's General Fund or Rainy Day Fund of $39 million after 10 years."In many ways, the debate over the Maine Street Bank bill has come down to age-old ideological questions about the role of the private and public sectors."As I understand it, the state bank would become a competitor to financial institutions and they would be making loans that financial institutions choose not to make or are not bankable," says Chris Pinkham of the Maine Bankers Association, which represents Maine's community banks as well as larger financial interests like Bank of America. "The question is, is it the tax-payer's money at risk?"Acording to State Treasurer Neria Douglass, the state's revenues are currently deposited in several different banks, with the most in TD Bank and US Bank, followed by Camden National Bank and Bangor Savings Bank. There are much smaller reserves deposited in various local community banks and a few big Wall Street lenders.As far as being a competitor goes, state bank advocates respond that the B.N.D. actually partners with and supports community banks, acting similarly to a central bank for the state. According to Pinkham, under the current system, the state has financial institutions competitively bid on bringing in the highest return on investment. If for whatever reason the state was unable to pay a competitive rate, state investments could be put in danger. However, as B.N.D.'s CEO Hardmeyer told Mother Jones, the B.N.D. does pay a competitive rate to the state treasurer. But he recognized that argument as a major reason for strong opposition to a state bank."I would bet that that would be one of the most difficult things to wrestle away from the private sector - those opportunities to bid on public funds," he said.Pinkham of the Maine Bankers Assoc. also says that getting access to credit for small businesses is not a big problem in Maine."Banks are swimming in deposits," he says. "A lot of people say, 'You're not making loans to people.' Well, we're making loans to anyone we can find who is creditworthy."There is also a big question as to what extent the B.N.D. has contributed to the state's financial success."With the possible exception of the Great Depression, B.N.D.'s contributions to stabilizing the state economy and finances appear to have been relatively minor," according to the Boston Federal Reserve Bank in an extensive 2011 report on public banking. The report attributed much of North Dakota's good fortune to its wealth in natural resources, comparing it to South Dakota, which has similar financial conditions and no state bank. Finally, the report questioned whether a state would even be able to effectively capitalize such a venture. Rep. Russell has discussed possibly funding it through a corporate bond.Last year, Coastal Enterprises Inc., a Wiscasset-based, non-profit community development financial institution, recommended a study of the idea to weigh its merits.Senator Chris Johnson's legislation would form a task force of bankers, credit unions, community economic development lending institutions, the state treasurer, and small businesses to come up with legislation to set up what he would like to call the Maine Partnership Bank."I'm not jumping in and saying I know how to make everybody happy," said Johnson. "I'm just saying that I'm confident that there's a way to do this to make everybody happy and be a good thing for the state of Maine."Newly elected State Treasurer Neria Douglass has met with Ellen Brown and the Public Banking Institute and says she is interested in learning more about the idea. Given Governor LePage's oft-expressed distrust of the public sector, it's unlikely he will be interested in a public bank proposal, but Rep. Russell says there's also a conservative argument for public banking to be made. Although public banks have been most often touted by progressive reformers, in Montana and Arizona conservative lawmakers have championed the idea under the banner of local economic sovereignty. X