Friday, July 1, 2011

Publicly Owned Banks Offer State Deficit Solution

As the Federal government continues to fumble its own foundering fiscal recovery, the bitter truth is that the majority of fifty States, suffering severe budget deficits brought on by an incompetent Congress and a rapacious financial services industry, are out on a limb by themselves.  

Scrambling to protect their own State assets, the budget crisis has provided the  Republican party with the political cover to target public employee pensions and unions as they attack the foundations of civil government.  Faced with extreme budget cuts that threaten essential People Programs and jeopardize fiscal stability, States desperate enough to look ‘outside the box’ will find that a credible solution to their fiscal problems lie within the borders of the little-appreciated State of North Dakota.   .      

It is worth repeating that the 2008 Federal deficit of $410 Billion grew to its current $14 trillion level because of the on-going recession and a massive drop in revenues and that the States, which rely on Federal dollars to support social programs and infrastructure costs, are not the cause of the current  Federal deficit.  The never-ending foreclosure crisis, another double-dip drop in housing value and the Treasury Department’s freeze on securities that directly benefit local and State governments all continue to drag on the State’s ability to pay on their $175 billion budget gap and exacerbate their ability to reinvest in essential services and long term infrastructure projects.   As a consequence of the States’ precarious fiscal situation, a municipal bond crisis is quietly simmering on the backburner.   

In today’s vituperous budget-cutting climate, it is rarely mentioned that a $5 billion interest payment, added to the $14 Trillion deficit each day, is threatening to further erode the country’s economy.  The non-partisan number crunchers at the Congressional Budget Office estimate that the U.S. debt will reach $20 trillion by 2015 with an unsustainable interest payment of $600 billion annually.  Even adopting the entire list of onerous recommendations from Obama’s Deficit Commission, it would appear that the mathematical odds of paying off the Federal principal are extremely remote, if not downright impossible.  The reality that an hopelessly ineffectual Congress and Federal government will budget-cut their way out of this self-created mess is a gross fiction and they know it.

In December, opponents of President Obama’s continuation of Bush tax cuts for the wealthiest 2% of Americans at a cost of $900 billion (the same amount of U.S. debt held by China), predicted dire consequences and those chickens have now come home to roost.  The American public continues to be led to believe that a few billion cut here and a few billion cut there will sufficiently save the country from the clutches of the International Monetary Fund or the World Bank or whoever it is who has us by the throat.  

As the same politicians whose negligence assisted the 2008 economic meltdown continue to wring their hands over the coming austerity; the President’s proposed cuts to the country’s social safety net and the Deficit Commission’s pontifications all avoid the reality that no proposal comes close to paying the interest on the debt, much less putting a significant dent in the $14 T deficit.     

Average Americans who struggle with their own credit card debt understand the frustration of never getting ahead of usury interest payments but for all of President Obama’s carefully scripted town meetings and orational skills, conducting an honest hard-reality, sit-down Oval Office conversation with the American people regarding the truth of deficit reduction is not one of his talents.  Just as Obama’s Wall Street campaign contributions, past, present and future, are no doubt a factor, the Bank of America with total assets of $2.3 trillion, paid no federal taxes in 2009.  

From the outset, the American economy has had a turbulent history suffering a long series of bank failures, bankruptcies, inflations, foreclosures, burst bubbles, recessions, depressions and Panics while, at the same time, the Federal government experienced a majority of budget surpluses from 1791 until the start of WWII.   
While most beltway politicians profess to hold our Founding Fathers in high esteem, they may be unaware that the fledgling United States government began in debt.  After the War of Independence, the country’s influential financiers understood that consolidation of the national war debt of $75 million would be fiscally advantageous.  Modeled after the rapacious Bank of England and despite considerable opposition to a  centralized private bank, the First National Bank of the United States of 1790 provided the government with enough money to pay its debt and all the government needed to do was repay the bonds - with interest.  With the need to establish credit for the new nation, Thomas Jefferson preferred that the government pay the debt directly through U.S. Treasury notes; thereby avoid costly interest payments to a private bank.       

Originally only States had the sovereign power to charter a bank and issue its own currency.  At the time, the highly successful Bank of Philadelphia used paper money to introduce certificates of indebtedness that could be cashed at any time in exchange for goods or services. Backed by actual funds to meet its capital requirements, the Philadelphia Bank did not sit on its resources and freely circulated money throughout the economy.  

In 1788 with ratification of the Constitution, Congress gave itself the power to ”coin and regulate the value of money” only to formally surrendered that authority upon establishment of the Federal Reserve Bank in 1913.    
An opponent of a centralized private bank, President Andrew Jackson issued an Executive Order transferring Federal government funds to State banks and became the only President to ever totally pay off the national debt.

Even after adopting the country’s first income tax in 1861 to finance the Civil War, the U.S. Treasury was near empty as the Lincoln Administration was faced with borrowing at exorbitant interest rates to fund the war effort.  The Congress of 1862 agreed to issue $150 million of debt-free green Treasury notes as legal tender that became known as Greenbacks.  With tax receipts insufficient to finance the war, the Greenbacks were a temporary war measure premised on a debt-free paper money system.  The bankers unsuccessfully lobbied to be designated as depositories of public funds in anticipation of high interest payments at  government expense.  The first real paper money issued by the U.S. government, Greenbacks proved surprisingly stable with $450 million in circulation immediately after the war. Soon after bankers pressured Congress to withdraw the currency from circulation, the Panic of 1873 occurred.     

Not unlike the Robber Baron breed of conscience-free business practices, today’s more emboldened banksters play the White House and Congress like a fiddle.  With a presumption of privilege and entitlement, voracious moneylenders have provided no material benefit to the lives of average Americans.  The Wall Street banks and financial industry are the major instigators for the economic turmoil that brought the country to bankruptcy that continues to plague the national economy including devastating losses to public pensions in many States.          

While huge, insurmountable systemic problems exist, there is light on the horizon.  In its early days as a Territory, North Dakota’s corrupt political system was dominated by out-of-state cartels with the railroads owning State land and paying no taxes for the privilege. With its farmers in revolt during the Progressive Era, the Non-Partisan League formed to take back control of the State’s economy from an entrenched corporate opponent with creation of the State Bank of North Dakota in 1919.

As a publicly-owned entity, the BND’s mission was to “encourage and promote agriculture, commerce and industry” and insure a dependable supply of affordable credit for its citizens.  Currently the only publicly-owned State Bank in the country, the BND has experienced its share of political challenges with smear campaigns, recall elections, being temporarily derailed from its mission and fiscal ups and downs. Ninety two years later, the BND remains a solvent, reliable institution with a current $700 million surplus.

While the sole purpose of privately-owned Wall Street banks is to lend money at interest rates that will rake in the greatest profits in the shortest amount of time, the BND is responsible to one shareholder - the People of North Dakota.  Its profits are deposited into the State’s general fund and, unlike most other States, are available to reinvest in essential services and long term infrastructure improvements as they maintain the State’s fiscal health and save millions of taxpayer dollars.  Capitalized by State assets including municipal investments which have remained solvent during the current national crisis, the State of North Dakota has had no need for tax increases or cuts to vital public services during the country’s enduring economic downturn. .  

Since 1945, more than $555 billion has been transferred to the State’s treasury with $350 million returned to State coffers in the last fifteen years.  In 2010, as the Nation remained in the grip of a foreclosure and unemployment emergency, the State Bank of North Dakota recorded a $62 million profit.   Having resisted the lure of unrealistic sub prime mortgages or an exotic derivative market, North Dakota currently has the lowest foreclosure and unemployment (3.9% in 2010) rates in the country.

Here’s where the merit of a publicly owned bank can have a direct influence on any State’s current fiscal woes.  As most States currently invest millions of tax revenue dollars with out-of-state conglomerate international Wall Street banks, the BND keeps their revenues in-house as pure profit, depositing those funds directly into the State’s General Fund.  In addition, when States borrow from those same Wall Street banks, there is no quid pro quo as the States pay considerable interest for the privilege of doing business.  As a publicly-owned bank that works in collaboration with local commercial banks, North Dakota recycles those funds back into State community projects, economic development and start-up loans for small business. With a population of 647,000 and $2.7 billion in deposits which translates into $4,000 per resident, North Dakota’s economy remains a model of fiscal responsibility with no crippling budget deficit as home values have increased 14% since 2005.  

Consider the implications of applying that $4,000 per capita deposit into a hypothetical State Bank of California with a population of 37 million that is currently paying $7 billion in annual interest payments on a $28 billion deficit.  That State Bank of California could have up to $50 billion (based on the North Dakota model) to clean up their State deficit with enough leftover to contribute to public education, public employee pensions, a fast-track train or health care for its uninsured citizens.   

Benefits of a fiscally healthy State able to meet more of its own needs would be an enormous relief to the Federal government, freeing billions of dollars dedicated to improving the American quality of life. 

The Public Banking Institute reports that the States of California, New Mexico, Maine, Oregon, Arizona, Louisiana and Washington have joined Maryland, Illinois, Virginia, Hawaii and Massachusetts with legislative initiatives to explore the feasibility of establishing their own publicly-owned banks.   .  

True fiscal conservatives concerned about a ‘bloated’ Federal government should find the State’s rights element irresistible.  The success of any future public State bank depends on adopting North Dakota’s conservative ‘stodgy bank’ model while maintaining a strict local focus and a commitment to accountability that shines its light on all public transactions.  The “buy local’ movement has a powerful ally in the Bank of North Dakota as it has shown that public banks prosper as they better understand community needs and are closer to the people.   

With the breakdown of an economic structure that has consumed the American experiment in democracy and never served the public interest, State-owned banks represent the best, most equitable solution to improve any State’s financial health, assuring its ultimate economic survival and, in turn, positively influencing the national economy.   While establishing a State-owned bank is sure to attract a vociferous response from the same financial wizards who have proven they cannot be trusted amid the usual dire warnings of imminent doom that the market will crash, that the debt will increase, that China will call-in its loans – if we are wise enough to read between the lines, it will be apparent that what is good for the American people is not the same as what’s good for the multinational conglomerate banks.   Conversion to a populist debt-free economy is an essential step towards creating a 21st century America as a new breed of visionary elected officials, dedicated to middle class values and economic justice, emerge in 2012 and beyond with State-owned public banks a central campaign theme.    

Publicly-owned banks are a win – win for everyone - except Wall Street.

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