BY DANNY DE GRACIA II – Last Session, the House Finance Committee passed without hearing any testimony House Concurrent Resolution 200 under cover of a “unanimous consent” blanket vote to send to the Floor a measure calling for the establishment of a state owned bank.

The idea which has gained considerable favoritism among Majority caucus members is that by duplicating North Dakota’s style of a state owned bank, Hawaii can, through issuance of credit, develop unlimited revenues to plug any future foreseeable budget gaps.

While the Senate did not grant HCR 200 a hearing last year, the idea has returned in the form of House Bill 853 HD1 which is presently headed to Third Reading, and if adopted, soon to cross over to the Senate. If enacted, HB 853 will prove to be the most dangerous and potentially destructive mandate issued from the Hawaii State Legislature.

How Banking Works

During last year’s vigorous Floor debate over HCR 200, several representatives argued that a government owned bank would essentially be the best friend of the people since it could allow Hawaii to recognize an independent, “sustainable” economy. Those who opposed the idea of a bank opposed it on the premise that it would allow political favoritism and threaten other local banks. Both interpretations show extremely superficial understandings of markets and finance. The truth of the matter is that since December 23, 1913 there has never truly been such a thing as a “government owned bank” anywhere because no government owns a bank, it is always banks that own the government through de facto control of credit.

The very idea of a Hawaii state bank presupposes that in order to acquire cash reserves to lend at competitive interest rates to generate “state revenues” the bank must resort to securitization – that is, the bank must promise investors that in exchange for their present cash, the state will give investors future tax collections from you and me. Under that concept, the Hawaii State Legislature’s constitutional authority to represent the people is co-opted by the need to constantly raise taxes on behalf of the state bank, meaning the Legislature no longer represents the people (“no taxation without representation” is lost) but in fact, represents the interests of the bank.

Credit expansion carries with it moral hazards which are very different than capital acquisition through savings. “Cheap credit” triggers malinvestment in which financial decisions are made hastily and with reduced fear of loss, leading to a temporary “boom” in which everyone spends more but ultimately market forces expose discoordinations between time and profit and a recession results.

The very reason America is in a financial crisis is not because “banks aren’t lending” but rather because the ultimate government bank – that is, the Federal Reserve – lent too much money, leading to the insane gambles we saw in mortgage backed securities, credit default swaps, derivates and so forth. It’s been said by those who support a Hawaii bank that North Dakota is the envy of Wall Street. Duh! Of course Wall Street loves cheap credit, they make money through speculation and securitization while Main Street – the real heart of America – earns money through production and innovation.

I need not re-hash how the State of Hawaii has already shown outright foolishness in its handling of auction rate securities prior to 2008 or how the State nearly lost its non-profit status when private funds were commingled with a public account – if you think that’s bad, just allow HB 853 to pass and Hawaii will really be in a world of hurt.

I urge everyone who reads this article to send an e-mail to all their elected officials by addressing it to Reps@capitol.hawaii.gov and Sens@capitol.hawaii.gov as well as calling directly their offices and demanding a “NO!” vote on HB 853. A complete phonedirectory is available by visiting the State Capitol website. And if you’re interested in knowing more about how banking works, there are two great books that you can read free online:

The Mystery of Banking, by Murray Rothbard and Human Action, by Ludwig von Mises

The attempt to play with banking is nothing less than handling Pandora’s Box. The choice is ours.

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