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the people is co-opted by the need to constantly raise taxes on behalf of the state bank, meaning the Legislature no longer represents the people (“no taxation without representation” is lost) but in fact, represents the interests of the bank.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.

Comments

comments

4 COMMENTS

  1. This article surprised me with the level of hyperbole and unsubstantiated claims. Here are just a few:

    “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.” Ownership has to do with equity, not an abstract concept like “control of credit.” The Bank of North Dakota has been owned by the State of North Dakota since 1918. KiwiBank has been owned by the government of New Zealand for nearly 10 years. Equity ownership percentage is the commonly used metric that determines ownership. To imply that a commonly used credit issuing framework, the fractional reserve system, is the basis for ownership is completely false.

    The author goes on to say that “…the bank must promise investors that in exchange for their present cash, the state will give investors future tax collections from you and me.” The investor is the State of Hawaii. To suggest otherwise is simply untrue.

    The statement ““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.” is clearly not factual. It is slipshod origination controls and lack of creditworthiness of borrowers that undermines the unregulated expansion of credit. There are plenty of examples of this in the years from 2003 to 2008.

    Finally, the author says “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…” Really? Then the author must welcome the virtual collapse of the number of SBA loans issued in the last 2 years by wall street banks and must believe that this surely is the path towards a stronger economy.

    We need factual and clearly stated arguments (both pro and con) for a state bank in Hawaii. This Oped simply creates unwarranted confusion and ungrounded fear.

  2. It’s always interesting to see what kind of disinformation is posted by private bankers and their minions. They are rightfully scared that there is a growing movement among the states and municipalities to start their own publicly owned banks. What are they scared about?

    One need only look at the only public bank in the U.S., the Bank of North Dakota (BND), which has been around since 1919 to see what a difference keeping local tax revenues within the state can do for economic health. North Dakota has the lowest unemployment rate and the most local banks per capita in the U.S., and it is the only state running a large surplus.

    That’s because the BND, which is set up as the state doing business as (DBA) a bank, lets the local banks decide what is worthwhile and then participates in those loans. The local banks love this because the BND does not steal their customers, which the “too big to fail” (TBTF) banks do when they participate. So, it’s a win-win. In addition, the BND buys long-term loans (mortgages, etc.) from the local banks, freeing up the local banks to lend for economic development.

    Why should the billions of dollars that each state has in rainy day funds (reported in the Comprehensive Annual Financial Reports [CAFRs]) be deposited in Wall Street Banks, where they are used to speculate in derivatives (gambling on sub-prime mortgages, commodities, etc.) for low returns to the state, when the state could leverage these monies to build back their local economies?

    The reason that the TBTF banks aren’t lending is because they can make more money on these securities than they can helping local economies. Their lackeys, who fill the U.S. government, have no interest in creating programs that will help local economies.

    It’s time for the people to take matters into their own hands by taking their own money out of Wall Street and putting it to work on Main Street.

  3. The claim of this article, “If enacted, HB 853 will prove to be the most dangerous and potentially destructive mandate issued from the Hawaii State Legislature” is not supported by any evidence. All objections to a state bank modeled on the Bank of North Dakota can be met by simply pointing to the fact that North Dakota has experienced no such problems. Not only has North Dakota not experienced anything “dangerous and potentially destructive”, but it is doing better than any other state financially. it is the only state with a healthy budget surplus — 1.3 billion in 2010. It has the lowest foreclosure rate in the country, the lowest unemployment rate, the healthiest local banks and most per capita, etc.

    “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.”
    Not true. According to the BND’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.”

    “The attempt to play with banking is nothing less than handling Pandora’s Box.” This statement implies that all is well with the banking system the way it is. Nothing could be farther from the truth. The TBTF banks have caused our economic problems, were bailed out, and now are not providing the credit that small businesses need to expand and add workers. A state bank will do that and much more. Just look at North Dakota.

    Here’s a great little video that explains how state banks make sense:

  4. A state-owned bank in Hawaii! Most Dangerous Bill (for a state-owned bank!) at the Hawaii Legislature? Most dangerous to whom? The TBTF Wall St banks and their bankster lackeys!

    Fortunately, we have a model for a state-owned bank — the Bank of North Dakota (the Bank of North Dakota), in existence since 1919, at the time, led by the Non-Partisan League, in response to North Dakota’s economy being controlled by out-of-state cartel of Minnesota grain brokers, bankers, and railroads. According to the BND website )http://www.banknd.nd.gov/about_BND/prairie_public_history_of_BND/economic_exploitation.html), “North Dakotans raised an outcry against the unfair practices that left the state’s future in the hands of eastern bankers and financiers.”

    A state-owned bank would allow Hawaii to withdraw its funds from Wall St banks and into Hawaii’s state-owned bank, allowing Hawaii’s assets to work for the people of the state, local businesses and local banks, rather than out-of-state Wall St TBTF banks.

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