An Idea Virginians May wish to Ponder and Discuss   Why can't we follow the example of N. Dakota and Florida in the pursuit of a solution to the credit crunch? Talk about raising taxes and further cuts in programs are traditional inside-the-box, catch-22 approaches to a shortfall in revenue. These are temporary palliatives, which create more problems than they resolve.   What is needed is an outside-of-the-box solution with the exception that it is not new and has been successful in only one state. Today, N. Dakota has a budget surplus of more than $1.3 billion for a population of approximately 700,000.   Economist Farid Khavari, a Democratic candidate for governor of Florida in 2010, is proposing a Bank of the State of Florida (BSF) that would take full advantage of the potential of a bank charter. It would not only act as a depository for the state’s funds but would actually make loans to Floridians at much lower interest rates than they are getting now. It would do what the State Bank of North Dakota does now.   Among other benefits, a state bank could open up frozen credit markets, save homeowners many thousands of dollars in payments, produce major revenues for the state, and allow the state’s own debts to be refinanced at much lower rates. All those benefits are possible, says Khavari, because of the “fractional reserve” banking system used by all banks when they make loans.   As he explained in a July 29 article in Reuters: “Using the fractional reserve regulations that govern all banks, we can earn billions per year for Florida’s treasury, while saving thousands of dollars per year for Florida homeowners…For $100 in deposits, a bank can create $900 in new money by making loans. So, a state bank can pay 6% for CDs, and make mortgage loans at 2 percent.  For $6 per year in interest paid out, the state bank can earn $18 by lending $900 at 2 percent for mortgages.    “A state bank can be started at no cost to taxpayers, and will be a permanent engine driving the state’s economy.  We can refinance state and local projects at 3 percent, saving taxpayers billions and balancing state and local budgets without higher taxes.”   The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700; the homeowner would save $88,000 in interest and pay for the home 15 years sooner. “A state bank will save people about seven years of their pay over the course of 30 years, just on interest costs,” Khavari said. “We should work to support ourselves and our families, not the banks…What we have now…makes everyone work for a few greedy fat cats.”     Earlier Models   This sort of healthy public competition for the private banking monopoly has earlier precedents, going back to the colony of Pennsylvania in Benjamin Franklin’s day. Before Pennsylvania founded its own bank, the province was having difficulty attracting settlers, because there was a shortage of money with which to conduct trade. The settlers could get credit only by borrowing from British bankers at a hefty 8% interest, and even those loans were hard to come by.   The provincial government then got the bright idea of printing its own paper money and lending it to the farmers at 5% interest. When credit became cheaper and more freely available, the local economy flourished.   North Dakota is also one of only two states (along with Montana) on track to meet their budgets by 2010. It currently has the lowest unemployment rate in the country and the largest budget surplus it has ever had, tallying in at $1.3 billion.   Why this cold and isolated farming state should be doing so well when other states are teetering on bankruptcy has been the subject of several TV commentaries, including a spoof by Conan O’Brien on NBC’s Tonight Show, which attributed it to theft from tourists by local farmers. But North Dakota’s real secret seems to be that it has escaped the Wall Street credit debacle. The state has generated its own credit through its own publicly-owned bank for nearly a century.   The BND’s website (http://www.banknd.nd.gov/about.jsp) states that the bank was originally formed to create additional competition in the credit industry, while providing a local source of capital for state investment and development. The BND avoids opposition from other banks by partnering with them in loan projects.   According to the bank’s website: “The primary deposit base of the BND is the State of North Dakota. All state funds and funds of state institutions are deposited with the bank as required by law…Use of the banks’ earnings are at the discretion of the state legislature. As an agent of the state it can make subsidized loans to spur development…[It] underwrites municipal bonds for all of the political units in the state, and has been one of the leading banks in the nation in the number of student loans issued. The bank also serves as the state’s ‘Mini Fed’…As a result of the banks’ services, it enjoys widespread support among the public and the independent banking community.”   Bringing the Model Current   The private banking system is in systemic failure, and the public is waking up to the fact. We have been fleeced by Wall Street; banks are not providing loans; and our savings are no longer secure. The publicly owned Bank of North Dakota has provided an alternative model that has worked remarkably well for nearly a century. The BND has been around for so long, however, that skeptics can write off the state’s remarkable success to other factors. A modern-day public bank that quickly turned its flagging local economy around could set a precedent that was irrefutable. If Virginia were to establish a successful public banking model, it could blaze a trail out of the economic wilderness for local governments everywhere.   If you would like to learn more about this alternative please visit the State Bank of North Dakota web site above, read Dr. Brown’s seminal work, The Web of Debt, or visit her web site www.webofdebt.com.   You may also leave comments at http://ideas.virginia.gov/node/add/idea.