State-Owned Banks

North Dakota has an unemployment of 3.3% and is the only state with a budget surplus. The Bank of North Dakota is state-owned, and profits go into the budget. It isn't backed up by the Federal Reserve, but by the state's taxes, and it isn't preoccupied with record profits or million dollar bonuses for it's executives. This allows the bank to loan money to promising small businesses and entrepreneurs without the predatory lending and Wall Street millionaires. North Dakota was protected from the financial crisis by a state-owned bank that kept interest rates low and stimulated the economy. Other states are thinking about doing the same thing.


http://www.webofdebt.com/articles/growing_movement.php

The major problem with the idea of a state-owned bank is it runs the risk of becoming like Fannie Mae and Freddie Mac. Legislators could push the bank to make risky investments for the sake of economic growth, and the credit crisis happens all over again. The Bank of North Dakota is a success story, but North Dakota is a much different state that California or Michigan. In a largely populated state, a state-owned bank might be pressed to get into more and more mortgage lending, which could cause problems when a real estate bubble occurs.


A benefit of having a state-owned bank would be that regulations are much easier to enforce, although in being state-owned, the bank is subject to political changes and new legislation. If a newly elected legislature goes on a de-regulation spree and appoints a free-wheeling bank president, you have a real financial crisis on your hands, and there's no Federal Reserve to bail you out; the taxpayers are footing the bill. Although, as we saw with the "Great Recession," the taxpayers eventually foot the bill anyway. 


This is something that is and should be discussed in legislatures around the country. The Bank of North Dakota acts as a miniature Federal Reserve, partnering with local banks and supporting them by making loans. It does not compete for commercial deposits since virtually all of the bank's deposits come from the state itself. In partnering with community banks, the Bank of North Dakota helps secure funding for local projects that wouldn't get support from the big Wall Street banks, and also funds infrastructure projects as substantially less cost since the state owns the bank and gets the interest back. North Dakota has more banks per capita and the lowest default rate in the nation. A state-owned bank is a good idea, but safe-guards are needed against ever-changing politics, much like the Federal Reserve is an independent organization free from partisan influence. Hopefully another state legislature will model the Bank of North Dakota so we can all see what happens.