Friday, November 15, 2013

Private vs Public: Banks

I am again thinking of my friends who insist that government is incompetent and that private enterprise can run circles around the government, no matter what the government does. Reminds me of that song that goes, "Anything you can do, I can do better". In many cases I would agree that private enterprise is better suited for the job.

But there is one industry that private enterprise has had trouble with lately: banking. I'm sure most of you remember the bank bailouts of 2008 and 2009. We remember how the government helped the banks to the tune of almost $2 trillion. In a thank you note, the banks let us know that they refused service to most of America while giving huge bonuses to their executives. I guess those executives did a really fine job to earn those bonuses.

So while all those big banks had stock that was basically worthless as of September 30, 2008, there was at least one bank that did quite well, even leading up to that time. Seems that while big banks were tanking everywhere we looked on CNBC, the Bank of North Dakota was sitting pretty. It wasn't engaged in housing speculation as a primary business model. The BND was making consumer, farm and student loans, like a boring, ordinary bank should do.

But there is one feature of the BND that distinguishes it from the rest of the banks. It is state owned. Using the same fractional reserve system as other banks, the BND continued to make loans even during the credit freeze that everyone else experienced. Not only that, while every other state in the union suffered a spike in unemployment, the unemployment rate in North Dakota remained low and steady. What does the bank use for reserves? Money the state takes in to fund the budget. Over the last decade, the bank returned $300 million in revenue to the state, which is about $1200 per household there.

The BND is the only state owned bank in the country. We could have more, but there is a gigantic force working against the notion of any more public banks popping up: private banks. Here is a map showing activity by state where interest in public banking is picking up. Apparently, some 20 states are willing to at least investigate the idea of creating a public bank if private banks aren't willing to service in the public interest.
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