By a more than three-to-one margin on Tuesday, communities voting on whether to support the creation of a public bank in Vermont approved the idea, calling for the state legislature to establish such a bank and urging passage of legislation designed to begin its implementation.
In a show of direct democracy that also exposed the citizenry’s desire for a more localized and responsible banking system, fifteen of nineteen towns passed the resolution during ‘Town Meeting Day’— an annual event in which voters choose local officials, approve municipal budgets, and make their voices heard on a number of measures put before local residents for approval.
The specific proposal under consideration, Senate Bill 204, would turn an existing agency, the Vermont Economic Development Authority, into a public bank that would accept deposits and issue loans for in-state projects. Currently, the only state in the U.S. to maintain a public state bank is North Dakota. However, since the financial downturn of 2008, other states have looked into replicating the North Dakota model as a way to buck Wall Street while taking more control of state and local finances.
Voicing his support of the measure ahead of Tuesday’s vote, Gary Murphy, a resident of South Ryegate, one of the towns that subsequently approved the measure, explained the thinking behind the plan this way in a letter to the local Times-Argus:
Senate bill 204 would expand the Vermont Economic Development Authority to become a state bank and would start out by depositing 10 percent of Vermont’s unrestricted money into the state bank. The bank would be able to leverage this money by means available only to banks to bolster the economy of the state and cut down on the interest payments and fees that are presently paid to out-of-state financial institutions and other entities. The bank would not engage in retail banking and would not compete with community banks; it would work with community banks to maintain their viability and expand their ability to help create better economic outcomes for Vermonters by partnering with them in projects they would not be able to engage in on their own.
Presently, large public projects are, to a large extent, funded by bonding and other private investment which requires the state to pay interest and fees that often do not get recycled into the local economy. Bond sales are managed by Wall Street firms, which seem to rig everything they can to further enrich themselves. In addition to the fees that they charge for this service, it is possible that they are rigging the process to divert funds that would otherwise be available to the state into their own pockets. While the cost of bonding is relatively cheap now, it will likely increase in the next few years if not sooner and the bond market could dry up. Creating a state bank now and growing it could put us in a position where we can substantially lessen the need to float bonds to fund large public projects.
According to Vermont Public Radio, unofficial results on Wednesday showed the following towns had approved the resolution: Bakersfield, Craftsbury, Enosburg, Marshfield, Montgomery, Montpelier Plainfield, Putney, Randolph, Rochester, Royalton, Ryegate, Tunbridge, Warren, and Waitsfield. The four towns that voted down the measure were: Marlboro, Barnet and Fayston and Greensboro.
North Dakota has had a state bank since 1919. Eric Hardmeyer, chief executive officer of the Bank of North Dakota, said he’s heard from 30 to 40 states asking the same thing: How does the only state-owned bank in the U.S. work? The financial institution, which opened in 1919 to help North Dakota farmers, has $5 billion in assets and contributed about $340 million in earnings to state coffers in the 12 years through mid-2009.
Lawmakers in other states are modeling proposals on the Bismarck bank as activists protest bailouts for JPMorgan Chase & Co. (JPM) and other financial giants while their customers struggle with foreclosures and unemployment. Supporters say state-run banks, whose deposit base would include tax revenue and other government funds, would have greater control to develop socially minded lending programs favoring average Americans.
“Because of the Occupy Wall Street movement, there is much more of an interest to put in place state-owned banks to serve the public interest,” Marc Armstrong, the executive director of the Sonoma, California-based Public Banking Institute, said in a telephone interview.
“The benefit to commercial businesses is they receive affordable low-cost loans, including some as low as 1 percent per year,” Armstrong said. “The benefit to the state’s public is a more affordable and competitive rate for student loans and home mortgages.”
The Bank of North Dakota offers below-market lending rates as part of a program for beginning farmers. The DEAL loan, which supports students in college, is one of the most competitive alternative loans in the nation. North Dakota students or those who attend school in ND pay zero fees, have the option of a fixed interest rate of 5.72% APR or a variable interest rate of 1.74% APR effective January 1, 2014 and can count on quality local customer service. Variable rates can change quarterly and may increase. Rate will never exceed 10%.
BND by statute can do anything any other bank can do, unless restricted by statute. Mostly by practice BND does not make direct loans. However, legislative action has given express lending authority to BND for:
- The purchase or acquisition of bank stock or the formation of a bank holding company.
- The acquisition or refinancing of farm real estate by qualified individuals.
- Assistance with post-secondary educational costs (i.e., student loans).
- Originate home loans where loans are not readily available
All other lending by BND is through participation with a lead financial institution. This lead lender can be any qualified financial institution – most notably a bank, savings and loan, credit union or Farm Credit Services.
“We have a specific mission that we’re trying to achieve that’s not necessarily bottom-line driven,” Hardmeyer said. Another difference is that deposits in most conventional commercial banks are guaranteed by the Federal Deposit Insurance Corp., while the North Dakota bank’s deposits are backed by the state.
Lawmakers in 13 states, including Massachusetts and California, introduced legislation this year that would create a state-run bank or study the notion, according to the Public Banking Institute, a non-partisan group backing the idea.
“As the financial crisis deepened and there are liquidity issues around the country, our model was looked at a little bit deeper than it ever had been before,” said Hardmeyer, who may be the only bank president in the U.S. who’s also a state employee. “It has been overwhelming at times in terms of the response.”
The U.S. banking industry opposes the idea and is lobbying against it, saying a state-run bank would compete with commercial banks for business and politicize a state’s lending decisions. “A state-owned bank? Why don’t we just re-label the state capitols the Kremlin?” Camden Fine, president of the Independent Community Bankers of America, a Washington-based trade group that represents more than 5,000 community banks, said in a telephone interview. “It’s a socialistic idea,” Fine said. “If you get a state-owned bank that is allocating credit, it can slide very quickly into a situation where those in favor get credit and those not in favor don’t get credit.”
Arizona Representative John Fillmore, a Republican from Apache Junction who has introduced legislation to create the Bank of Arizona, said he views it as a way his state could increase jobs while bolstering its treasury.
“We would have a bank, just like a regular bank that you see out there, it would have savings accounts and checking accounts,” Fillmore said in a telephone interview. “But its main function would be to give support to the state and to other banks within the state.”
Efforts to pursue the idea have gotten off to a rocky start in Massachusetts and California. In the Bay State, where legislation was introduced to create a Bank of Massachusetts, a commission said the bank would cost $3.6 billion to start and may expose public funds to “unacceptably high risk.”
In California, lawmakers in September agreed to set up a task force to study the idea of a “California Investment Trust” to boost economic development by easing access to credit for California-based businesses, according to the legislative text. Governor Jerry Brown, a 73-year-old Democrat, vetoed the bill. Brown said he didn’t want to create another “blue ribbon” taskforce and suggested the Legislature’s banking committees look at the idea.
The California Bankers Association, a Sacramento-based trade group, lobbied against the proposal, saying a state-owned bank would crowd out commercial banks.
“A state bank has the ability to use the enormous resources of the state to nearly monopolize the market and as a result, create an unfair advantage over commercial banks,” Alex Alanis, the association’s vice president of state government relations, said in a May letter to Assembly member Ben Hueso, who offered the bill. Hueso, a Democrat from San Diego, said the proposal is aimed at creating a wholesale bank that would lend through commercial banks to businesses and consumers.
State-run banks are more likely to be more flexible in their lending relationships with consumers and less likely to engage in proprietary trading and other risky activities by large commercial banks.
North Dakota Economy was ranked No. #1 in economic development in 2010-2012. North Dakota has weathered the Great Recession with a boom in natural resources, particularly a boom in oil extraction from the Bakken formation, which lies beneath the western part of the state. The development has driven strong job and population growth, and low unemployment. It was largely supported by the state bank.
It is not surprising that commercial banking lobbyist would oppose the “state bank idea”. If you have watched how these commercial banks and lending institutions have dealt their hands in places like Detroit or Cleveland and watched as they have extracted huge amounts of public wealth out of the system, it is clear they have no interest in having State Banks pop up. Why it’s Un-American right?
Reality is it is about as Un-American as the Boston Tea Party, the real Boston Tea Party. If you live in a state seriously considering starting a state bank, get yourself educated to what that means. We think the more you understand the more you will understand the freedom from banksters it represents.