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On State-Owned Banks

North Dakota is unique in that it’s the only state in the nation with a state-run bank. And that bank isn’t just profitable – it’s helped prop up the entire economy in North Dakota, because in the wake of the 2008 financial collapse, it didn’t experience the credit freeze experienced by the rest of the country.

I vividly remember politicians at the time talking about the harrowing effect that credit freeze was having on the economy. Their solution? To incentivize lending by private banks, by infusing them with liquidity, buying securitized assets, and buying toxic assets. Even at the time, I remember feeling confused. If the economy depends on credit which isn’t being supplied by the free market, why couldn’t/shouldn’t the federal government do so itself? It could certainly do so at lower cost (no need to build in profit for private banks), possibly quicker, and (in hindsight) certainly more effectively (private banks remained gunshy for a long time; they weren’t compelled to extend private credit, and so they didn’t at the levels desired).

Essentially, the economy remained stagnant for much longer than necessary, and millions of people suffered, and the federal government wasted billions of dollars enriching the very people who caused the crisis, because the idea of a governmental bank was politically unpalatable.

Yet it makes so much sense. This article examines the difference that a state-owned bank would make for the state of California. An excerpt:

One option would be to fund critical infrastructure needs. Today California and other states deposit their revenues in Wall Street banks at minimal interest, then finance infrastructure construction and repair by borrowing from the Wall Street bond market at much higher interest. A general rule for government bonds is that they double the cost of projects, once interest is paid. California and other states could save these costs simply by being their own bankers and borrowing from themselves; and with their own chartered banks, they could do it while getting the same safeguards they are getting today with their Wall Street deposits and investments. The money might actually be safer in their own banks, which would not be subject to the bail-in provisions now imposed by the G-20’s Financial Stability Board on giant “systemically risky” banking institutions.

To envision the possibilities, let’s say California decided to fund its new bullet train through its state-owned bank. In 2008, Californians approved a bond issue of $10 billion as the initial outlay for this train, which was to run from Los Angeles to San Francisco. At then-existing interest rates, estimates were that by the time the bonds were paid off, California taxpayers would have paid an additional $9.5 billion in interest.

So let’s assume the $10 billion in available assets from the state-owned bank were used to repurchase these bonds. The state would have saved $9.5 billion, less the cost of funds.

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