A Public Option for Banks? Seems to Work Pretty Well Where They Have It (Joe Rothstein's Commentary)

October 5, 2009

By Joe Rothstein
Editor, EINNEWS.COM

My last column about how North Dakota uses "public options" to serve its citizens and strengthen its economic base drew a flurry of reader reaction. In particular, readers asked for more information about the Bank of North Dakota, an entity established by the state legislature in 1919 and an important driver in the state's economic development machinery.

A few months ago Mother Jones magazine interviewed the bank's president, Eric Hardmeyer, who said that over the past decade the bank has turned back about a third of a billion dollars in profits to the state's general fund. North Dakota is very deeply into the for-profit banking business---the only state that is--- and relies heavily on bank profits to pay for public services and to hold down taxes.

But the greatest value North Dakotans reap from their public option bank is a source of financing for private enterprises that add business and jobs to the state. Hardmeyer told Mother Jones "We have specifically designed programs to spur certain elements of the economy. Whether it's agriculture or economic development programs that are deemed necessary in the state. And education—-we do a lot of student loan financing. So that's our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history."

That mission is to serve the public interest. Needless to say, the Bank of North Dakota didn't leverage itself into oblivion over the past few go-go years like so many other banks. Its officers and staff weren't propelled in their decision-making by visions of million dollar bonuses. While others were buying and selling financial paper that few understood, the Bank of North Dakota was investing in students, local businesses and developments related to North Dakota's key industries: agriculture and energy.

Hardmeyer says the Bank's return on equity is a steady 25% or so each year.

Just across the border, the province of Alberta also owns and operates a public bank. It's known simply as ATB, for Alberta Treasury Branches. Like the bank in North Dakota, it is very solid, very profitable, and has played a big role in the province's development.

Alberta's entry into public banking came much as North Dakota's did----because private banking was fleecing the locals. In 1938 the provincial government made just one investment to start up its new public bank---$200,000. After that the bank took off on its own. Now the bank's worth is in the billions and it annually remits big bucks to help underwrite the province's budget.

Let's move a bit further afield, to India. The current banking crisis has played havoc with India's private banks. Fortunately for India, the private sector banks only amount to 20% of the nation's banking industry. The 80% owned and operated by the Indian government resisted the temptation to foolishly participate in the paper profit world that led to the financial collapse.

While the U.S. and most western economies have been slowed to a walk, India is still doing well, and now it's using its stability to take advantage of the rest of the world's misfortune.

Doing even better is China. China could have been devastated by the loss of U.S. and western markets, but instead, to compensate, China launched the largest per capita stimulus effort of any developed or developing nation. It can afford to take up the slack in domestic investment for a number of reasons, not the least of which being that China's banking system is mostly government owned and managed and remained strong while competitors around the world took huge hits.

The argument here isn't that all publicly owned banks are good for the public interest and all private ones aren't. Good and honest management has everything to do with the success of a bank, or any enterprise, whether public or private. About 10,000 private banks open for business every day in the U.S. Only a hundred or so have failed this year.

But most of the banks that remain solid are those that haven't strayed much from their primary business of banking. Traditionally banks invest depositors' funds in activities that have good collateral and good prospects---whether commercial ventures or private activities such as housing. The banks the taxpayers bailed out, and many of those that collapsed, were ones that chased brass rings---looking for outsized returns investing in products of that represented little more than paper promises.

Why did they do that? Mostly for two reasons. First, because those who ran operations such as Merrill Lynch and Wachovia were under extreme pressure to show ever-greater quarterly profits to shareholders. And a not-too-distant second reason was that the chiefs and traders at those banks stood to personally make bonuses counted in the millions by racking up those sales and profits.

I wonder how things might have been different if there had been a Bank of North Dakota type of depository operating in every state during the past 10 years----investing in local economic development exclusively, prohibited by law from following the crowd into the funny money abyss and with an incentive compensation system designed to reward managers for prudent, profitable decision-making. In other words, what if there had been a public option bank for every state?

And what if there had been a Bank of the United States, just as there was earlier in the nation's history? Charging and collecting reasonable interest on depositors' funds, providing an insider's expert evaluation of the risk of exotic investments, on a mission to perform as well as possible for the public, not private shareholders?

Judging by the results in North Dakota (and Alberta, and India and China and a lot of other places around the world) a lot of pain and torture inflicted on innocent businesses, communities, home owners and workers might have been avoided or minimized.

Health care isn't the only area of human activity where the reins need to be tighter to protect people from unbridled profit-making.

(Joe Rothstein can be contacted at joe@einnews.com)