How Wisconsin Can Turn Austerity into Prosperity: Own a Bank

Public sector man sitting in a bar: “They’re trying to take away our pensions.”

Private sector man: “What’s a pension?

— Cartoon in the Houston Chronicle

As states struggle to meet their budgets, public pensions are on the chopping block, but they needn’t be. States can keep their pension funds intact while leveraging them into many times their worth in loans, just as Wall Street banks do. They can do this by forming their own public banks, following the lead of North Dakota — a state that currently has a budget surplus.

Wisconsin Governor Scott Walker, whose recently proposed bill to gut benefits, wages, and bargaining rights for unionized public workers inspired weeks of protests in Madison, has justified the move as necessary for balancing the state’s budget. But is it?

After three weeks of demonstrations in Wisconsin, protesters report no plans to back down. Fourteen Wisconsin Democratic lawmakers — who left the state so that a quorum to vote on the bill could not be reached — said Friday that they are not deterred by threats of possible arrest and of 1,500 layoffs if they don’t return to work. President Obama has charged Wisconsin’s Governor Scott Walker with attempting to bust the unions. But Walker’s defense is:

“We’re broke. Like nearly every state across the country, we don’t have any more money.”

Among other concessions, Governor Walker wants to require public employees to pay a portion of the cost of their own pensions. Bemoaning a budget deficit of $3.6 billion, he says the state is too broke to afford all these benefits.

Broke Unless You Count the $67 Billion Pension Fund…

That’s what he says, but according to Wisconsin’s 2010 CAFR (Comprehensive Annual Financial Report), the state has $67 billion in pension and other employee benefit trust funds, invested mainly in stocks and debt securities drawing a modest return.

A recent study by the PEW Center for the States showed that Wisconsin’s pension fund is almost fully funded, meaning it can meet its commitments for years to come without drawing on outside sources. It requires a contribution of only $645 million annually to meet pension payouts. Zach Carter, writing in the Huffington Post, notes that the pension program could save another $195 million annually just by cutting out its Wall Street investment managers and managing the funds in-house.

The governor is evidently eying the state’s lucrative pension fund, not because the state cannot afford the pension program, but as a source of revenue for programs that are not fully funded. This tactic, however, is not going down well with state employees.

Fortunately, there is another alternative. Wisconsin could draw down the fund by the small amount needed to meet pension obligations, and put the bulk of the money to work creating jobs, helping local businesses, and increasing tax revenues for the state. It could do this by forming its own bank, following the lead of North Dakota, the only state to have its own bank — and the only state to escape the credit crisis.

This could be done without spending the pension fund money or lending it. The funds would just be shifted from one form of investment to another (equity in a bank). When a bank makes a loan, neither the bank’s own capital nor its customers’ demand deposits are actually lent to borrowers. As observed on the Dallas Federal Reserve’s website, “Banks actually create money when they lend it.” They simply extend accounting-entry bank credit, which is extinguished when the loan is repaid. Creating this sort of credit-money is a privilege available only to banks, but states can tap into that privilege by owning a bank.

How North Dakota Escaped the Credit Crunch

Ironically, the only state to have one of these socialist-sounding credit machines is a conservative Republican state. The state-owned Bank of North Dakota (BND) has allowed North Dakota to maintain its economic sovereignty, a conservative states-rights sort of ideal. The BND was established in 1919 in response to a wave of farm foreclosures at the hands of out-of-state Wall Street banks. Today the state not only has no debt, but it recently boasted its largest-ever budget surplus. The BND helps to fund not only local government but local businesses and local banks, by partnering with the banks to provide the funds to support small business lending.

The BND is also a boon to the state treasury. It has a return on equity of 25-26%, and it has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. In comparison, California’s public pension funds are down more than $100 billion — that’s billion with a “b”— or close to half the funds’ holdings, following the Wall Street debacle of 2008. It was, in fact, the 2008 bank collapse rather than overpaid public employees that caused the crisis that shrank state revenues and prompted the budget cuts in the first place.

Seven States Are Now Considering Setting Up Public Banks

Faced with federal inaction and growing local budget crises, an increasing number of states are exploring the possibility of setting up their own state-owned banks, following the North Dakota model. On January 11, 2011, a bill to establish a state-owned bank was introduced in the Oregon State legislature; on January 13, a similar bill was introduced in Washington State; on January 20, a bill for a state bank was filed in Massachusetts (following a 2010 bill that had lapsed); and on February 4, a bill was introduced in the Maryland legislature for a feasibility study looking into the possibilities. They join Illinois, Virginia, and Hawaii, which introduced similar bills in 2010, bringing the total number of states with such bills to seven.

If Governor Walker wanted to explore this possibility for his state, he could drop in on the Center for State Innovation (CSI), which is located down the street in his capitol city of Madison, Wisconsin. The CSI has done detailed cost/benefit analyses of the Oregon and Washington state bank initiatives, which show substantial projected benefits based on the BND precedent. See reports here and here.

For Washington State, with an economy not much larger than Wisconsin’s, the CSI report estimates that after an initial start-up period, establishing a state-owned bank would create new or retained jobs of between 7,400 and 10,700 a year at small businesses alone, while at the same time returning a profit to the state.

A Bank of Wisconsin Could Generate “Bank Credit” Many Times the Size of the Budget Deficit

Economists looking at the CSI reports have called their conclusions conservative. The CSI made its projections without relying on state pension funds for bank capital, although it acknowledged that this could be a potential source of capitalization.

If the Bank of Wisconsin were to use state pension funds, it could have a capitalization of more than $57 billion – nearly as large as that of Goldman Sachs. At an 8% capital requirement, $8 in capital can support $100 in loans, or a potential lending capacity of over $500 billion. The bank would need deposits to clear the checks, but the credit-generating potential could still be huge.

Banks can create all the bank credit they want, limited only by (a) the availability of creditworthy borrowers, (b) the lending limits imposed by bank capital requirements, and (c) the availability of “liquidity” to clear outgoing checks. Liquidity can be acquired either from the deposits of the bank’s own customers or by borrowing from other banks or the money market. If borrowed, the cost of funds is a factor; but at today’s very low Fed funds rate of 0.2%, that cost is minimal. Again, however, only banks can tap into these very low rates. States are reduced to borrowing at about 5% — unless they own their own banks; or, better yet, unless they are banks. The BND is set up as “North Dakota doing business as the Bank of North Dakota.”

That means that technically all of North Dakota’s assets are the assets of the bank. The BND also has its deposit needs covered. It has a massive, captive deposit base, since all of the state’s revenues are deposited in the bank by law. The bank also takes other deposits, but the bulk of its deposits are government funds. The BND is careful not to compete with local banks for consumer deposits, which account for less than 2% of the total. The BND reports that it has deposits of $2.7 billion and outstanding loans of $2.6 billion. With a population of 647,000, that works out to about $4,000 per capita in deposits, backing roughly the same amount in loans.

Wisconsin has a population that is nine times the size of North Dakota’s. Other factors being equal, Wisconsin might be able to amass over $24 billion in deposits and generate an equivalent sum in loans – over six times the deficit complained of by the state’s governor.  That lending capacity could be used for many purposes, depending on the will of the legislature and state law. Possibilities include (a) partnering with local banks, on the North Dakota model, strengthening their capital bases to allow credit to flow to small businesses and homeowners, where it is sorely needed today; (b) funding infrastructure virtually interest-free (since the state would own the bank and would get back any interest paid out); and (c) refinancing state deficits nearly interest-free.

Why Give Wisconsin’s Enormous Credit-generating Power Away?

The budget woes of Wisconsin and other states were caused, not by overspending on employee benefits, but by a credit crisis on Wall Street. The “cure” is to get credit flowing again in the local economy, and this can be done by using state assets to capitalize state-owned banks.

Against the modest cost of establishing a publicly-owned bank, state legislators need to weigh the much greater costs of the alternatives – slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed, and selling off public assets. Given the cost of continuing business as usual, states can hardly afford not to consider the public bank option. When state and local governments invest their capital in out-of-state money center banks and deposit their revenues there, they are giving their enormous credit-generating power away to Wall Street.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 400+ blog articles are posted at Read other articles by Ellen.

3 comments on this article so far ...

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  1. klaatu said on March 8th, 2011 at 7:40pm #

    Ellen, this is such a great opportunity, why do not the politicians of all fifty states back this kind of movement? Or, have I answered my own question by referring to “politicians”? But at the state level there are surely still some civic minded folk. It seems obvious that the states need to start managing their own affairs (semi-) independent from the corruptions at the national level.

  2. Deadbeat said on March 8th, 2011 at 11:42pm #

    I’ve haven’t seen any real evidence that the state of North Dakota’s economy is a direct result of its state banking. Also there is no evidence to make the leap that if Wisconsin does the same that it could have a similar result as North Dakota.

    For example, the Wisconsin governor supported huge cuts to the estate tax. In other word, even if Wisconsin implement a state bank, the cut in taxes for the rich would diminish Wisconsin revenue leading to a deficit that would require cuts to the public sector in order to balance its budget. No where does Ms. Brown advocate raising taxes on the wealthy.

    What a state-owned bank would do is help reduce speculation that exacerbated the current crisis and prolong Capitalist contradictions in prime Keynesian fashion and structurally keep Capitalism in place.

    The problem is why have ANY credit at all. Credit is unnecessary if people can just merely obtain access to the resources they need and full access to the means of production. In other words MONEY is anachronistic and thoroughly obsolete especially in a 21st Century economy. It is an inefficient middle-man that ultimately leads to inequality.

    Getting rid of money, people having complete access to resources, and contemplating a new social arrangements should be the goal not keeping Capitalism and all of its inefficiencies and contradictions in place that maintains inequality and crises.

  3. PatrickSMcNally said on March 9th, 2011 at 3:43am #

    A state bank which prints money to compensate tax-cuts on the rich would more likely be a source of inflation. Creating new money can only be really justified when the process corresponds to an increase in the volume of goods and services which are in circulation. The classical pattern of the 19th century whereby banks were constantly crediting out thousands of times more money than they possessed in hard assets was possible then because the economy was constantly growing as the USA expanded across North America. That made it possible to absorb an ever-expanding money supply (though even in the 1800s capitalism routinely saw bank runs and deflationary crises).

    But since the world economy is so overgrown today, one has to pay more attention what really is the intended outcome of creating new money. Stagflation erupted in the 1970s because capitalist producers had grown accustomed to assuming that the government would always be injecting new money into the economy via Keynesian measures. When the economy was really growing through the years 1945-70 this expectation of a rising money supply was balanced by the expectation of an increasing volume of goods and services. When economic growth slowed down because of a decline in the rate of profit on further investments, this meant that businesses now expected inflation to arise from the Keynesian policy and so they initiated the inflation themselves while cutting back on employment. Hence stagflation occurred.

    If we’re not specifically talking here about expropriating the bourgeoisie but are rather seeking bourgeois reform measures, then a restoration of taxes is the first logical step. Before one starts adding money to the supply already in circulation, it makes more sense to start by taxing the surplus off of those who possess the gretaest volume of surplus. The only pitfall with that, is that in a capitalist economy everything depends upon the confidence of the bourgeoisie in the profitability of investments in order to provide jobs and evrything else. Tax cuts were initiated in the 1970s because it was realized that a fall in the rate of profit meant that the investors had no incentive to create jobs and so it was argued that cutting taxes and breaking unions was the only way to restore an investor’s confidence in profitability so that there would (allegedly) be new jobs.

    Well, we know how that went. The decline in the rate of profit was not compensated for by tax cuts to a sufficient degree to enable sustained reliable employment from private investment. To begin to approach that, one would need to socialize not only banks but also all large corporations beyond a certain minimal size. After this it would be necessary that some form of economic plan be worked out to determine where the assets of all these nationalized corporations can be best applied to the benefit of society. Simply nationalizing Chrysler and then cranking up automobile production wouldn’t accomplish much when the world has a burgeoning surplus of automobiles already. One would have to determine a more productive usage of the resources that are currently owned by Chrysler, and this determination should not be based upon any investor’s profits but on long-term social needs.

    While there’s nothing ipso facto wrong about discussing a national bank, this has been largely turned into a figleaf as a way of obscuring the crisis of capitalism. Any socialist program will have to involve a nationalization of banks, but ramblings about bank nationalizations apart from the crisis of capitalism are, in the very best of circumstances, mere bourgeois reformism. In the worst of circumstances such ramblings can take on demagogic forms, as in Hitler’s references to banks. Better as a summary of the issues would be something like this: