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Job Losses? Not in North Dakota - A Stimulus Plan That Really Works

On October 21, 2009, Dave Camp, the GOP Ranking Member on the House Ways and Means Committee, issued a disturbing report on the status of new job creation since President Obama’s $787 billion stimulus plan went into effect in February. According to the report, the nation has actually lost nearly as many jobs as the plan was projected to create. Instead of adding 3.5 million new jobs, 2.7 million jobs have been lost. California, which was supposed to gain 396,000 jobs, has lost 336,400 jobs. Arizona, which was supposed to gain 70,000, has lost 77,300. Michigan, which was supposed to gain 109,000, has lost 137,300. A total of 49 states and the District of Columbia have all reported net job losses.

In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank.

THE ADVANTAGES OF OWNING YOUR OWN BANK

So how does owning a bank solve the state’s funding problems? Isn’t the state still limited to the money it has? The answer is no. Chartered banks are allowed to do something nobody else can do: they can create credit on their books simply with accounting entries, using the magic of “fractional reserve” lending.

They can, but credit has been frozen of late because private banks are limited by bank capital requirements and by their for-profit business models. And that is where a state-owned bank has enormous advantages: states own huge amounts of capital, and they can think farther ahead that their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders expecting a sizeable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations, and mark to market accounting problems.

The Bank of North Dakota is set up as a DBA: “the State of North Dakota doing business as the Bank of North Dakota.” Technically, that makes the capital of the state the capital of the bank. Projecting the possibilities of this arrangement to California, the State of California owns about $200 billion in real estate, has $62 billion in various investments, and has $128 billion in projected 2009 revenues. Leveraged by a factor of 8, that capital base could support nearly $4 trillion in loans.

To get a bank charter, specific investments would probably need to be earmarked by the state as startup capital; but the startup capital needed for a typical California bank is only about $20 million. This is small potatoes for the world’s eighth largest economy, and the money would not actually be “spent.” It would just become bank equity, transmuting from one form of investment into another - and a good investment at that. In the case of the BND, the bank’s return on equity is about 25%. It pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a billion dollars to the state’s general fund, offsetting taxes. California could do substantially better than that. California pays $5 billion annually just in interest on its debt. If it had its own bank, the bank could refinance its debt and return that $5 billion to the state’s coffers; and it would make substantially more on money lent out.

Besides capital, a bank needs “reserves”, which it gets from deposits. For the BND, this too is no problem, since it has a captive deposit base. By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts deposits from other entities. These copious deposits can then be plowed back into the state in the form of loans.

PUBLIC BANKING ON THE CENTRAL BANK MODEL

The BND’s populist organizers originally conceived of the bank as a credit union-like institution that would free farmers from predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND is now chiefly a “bankers’ bank.” It acts like a central bank, with functions similar to those of a branch of the Federal Reserve. It avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, and buy down the interest rate.

One of the BND’s functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state to avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007. Before that, investors routinely bought securitized loans (CDOs) from the banks, making room on the banks’ books for more loans. But these “shadow lenders” disappeared when they realized that the derivatives called “credit default swaps” supposedly protecting their CDOs were a highly unreliable form of insurance. In North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.

Other services the BND provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program. When Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.

THE COMMERCIAL BANKING MODEL: THE COMMONWEALTH BANK OF AUSTRALIA

The BND studiously avoids competition with private banks, but a publicly-owned bank could profitably engage in commercial lending. A successful model for that approach was the Commonwealth Bank of Australia, which served both central bank and commercial bank functions. For nearly a century, the publicly-owned Commonwealth Bank provided financing for housing, small business and other enterprise, affording effective public competition that “kept the banks honest” and kept interest rates low. Commonwealth Bank put the needs of borrowers ahead of profits, ensuring that sound investment flows were maintained to farming and other essential areas; yet the Bank was always profitable, from 1911 until nearly the end of the century.

Indeed, it seems to have been too profitable, making it a takeover target. It was simply “too good not to be privatized.” The Bank was sold in the 1990s for a good deal of money, but its proponents consider its loss as a social and economic institution to be incalculable.

A STATE BANK OF FLORIDA?

Could the sort of commercial model tested by Commonwealth Bank work today in the United States? Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending. He explains:

“For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6% for CDs, and make mortgage loans at 2%. For $6 per year in interest paid out, the BSF can earn $18 by lending $900 at 2% for mortgages.”

The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700; while the homeowner would save $88,000 in interest and pay for the home 15 years sooner. “Our bank will save people about seven years of their pay over the course of 30 years, just on interest costs,” says Dr. Khavari. He also proposes 6% credit cards and 6% Certificates of Deposit.

The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates. According to a German study, interest composes 30% to 50% of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but profitable for the state, while at the same time creating much-needed jobs.

Source: UnUnited We Fall

Enrollment booming at UM-Helena

Sharon Heigh decided to go back to college after her position at the Montana Guaranteed Student Loan Program was eliminated in May of last year.

"I was surprised - you see that it might come, but it was tough," Heigh said. "As much as I didn't want to let them see my cry, they did."

Two months later, she gave herself a pep talk and decided to go back to school.

Heigh is taking advantage of a new program at the University of Montana-Helena that provides a 50 percent discount on tuition to dislocated workers.

The program is just one endeavor the college has pursued over the past four years in an attempt to meet the educational needs of Helena and the surrounding region, which has helped increased enrollment by 10 percent this year.

"We've increased accessibility through more class offerings and expanded programs, as well as evening and online classes," college CEO and Dean Daniel Bingham said. "Whether a student seeks to obtain the first two years of a bachelor's degree, technical training or a professional degree, the college has and will continue to rise to meet those needs."

Bingham says UM-Helena has developed into a more comprehensive college by responding to the needs of local businesses and industries, and focusing on individuals and families.

The school has 25 occupation degree programs, 12 associate degrees and many additional partnership programs such as the bachelor's of applied science in business through Montana Tech.

Classes began last week and final numbers are not officially reported for another week, but Mike Brown, assistant dean of student services, anticipates enrollment to be around 1,300 by the end of the semester.

That's a 45 percent increase from four years ago when enrollment was at 889.

Academic dean Brandi Foster said the class schedule is more accessible than ever before by offering more evening, weekend and online classes. Foster says the school is also focused on its general education courses, making certain it meets accreditation standards so students can be assured they transfer.

There's also been a big increase in support services to offer assistance to students in areas of academics, finance and access for students with disabilities, Brown said. Last year the student-to-faculty ratio was 14 to 1.

"Students are finding they have a lot more resources to be successful in the college environment," he said.

Although the school maintains its reputation of being a technical and trade school, the largest growth is in the general education area where students are looking for transferable courses, Brown said.

Helena native Zack Gambill, 25, is taking his general education requirements after serving in the military for five years.

"I was way too immature to go to school and the market requires it now," he said.

Gambill is among the 56 percent of students surveyed who say the economy did not affect their decision to go to school.

Jenna Rattler, 19, moved to Helena from Browning to attend UM-Helena and study nursing.

"I always knew I'd go to college and I love Helena," she said.

She said the environment is welcoming and the staff is helpful at addressing all her concerns.

UM-Helena provides opportunities for high school students too. Seven area high schools participate in the dual-credit program where high school students take courses on campus at a discounted price and earn not only high school credit, but college credit as well.

Foster said the classes are taught with college books and to university rigor, but provide an opportunity for students to gain credits before officially beginning their higher education.

The school also has an "on campus experience" program for when there are open seats for those 16 and older with waived tuition. Brown said it's particularly beneficial for home-schooled students, but anyone can utilize it.

Foster said two current trends at the school may have some correlation to the economic downturn.

There has been an increase in the number of credits students are taking, often because they may not be finding part-time jobs and thus choose to take more classes, she said.

There also is an increase in traditional students because of the value in education at UM-Helena, as parents are able to save a significant amount of money by keeping their children at home and paying lower tuition, room and board.

Foster notes, however, that an integral part of the mission is to be responsive to the community regardless of the economy.

The estimated annual cost last year based on full-time enrollment of 15 credits for a Montana resident was $3,041. Even so, administrators say the college is committed to helping students navigate economic barriers - 64 percent of its degree-seeking students receive financial aid and 45 percent receive Pell grants.

Heigh credits the school's accessibility and financial assistance for her ability to attend college right now.

"There is no way I could go back without their assistance without taking out massive student loans," she said.

Foster said as a college the school has matured.

"We've taken our mission to heart," she said. "We are making sure activities and resources meet the mission. We are more intentional in being responsive to community needs, encouraging lifelong learning and developing a work force for the community."

Reporter Alana Listoe: alana.listoe@helenair.com or 447-4081

Source: Enrollment booming at UM-Helena