by Ellen Brown
05 March 2011
Ellen Brown wrote this
article for YES! Magazine, a national, nonprofit media organization
that fuses powerful ideas with practical actions. Ellen is an
attorney and the author of eleven books, including Web of Debt: The
Shocking Truth About Our Money System and How We Can Break Free.
Her websites are webofdebt.com
Public sector worker sitting in a
bar: “They’re trying to take away our pensions.”
Private sector worker: “What’s a pension?”
- Cartoon in the Houston
As states struggle to meet their budgets, public
pensions are on the chopping block, but they needn’t be.
States can keep their pension funds intact while
leveraging them into many times their worth in loans, just as Wall Street
banks do. They can do this by forming their own public banks, following
lead of North Dakota - a state that currently has a budget surplus.
Wisconsin Governor Scott Walker, whose recently proposed bill to gut
benefits, wages, and bargaining rights for unionized public workers
weeks of protests in Madison, has justified the move as necessary for
balancing the state's budget.
But is it?
Protesters dance and
celebrate being allowed
to stay another night in the
rotunda at the State Capitol building,
in Madison, Wisconsin, on
February 27, 2011.
(Photo: Nicole Bengiveno /
The New York Times)
After three weeks of
demonstrations in Wisconsin, protesters report no plans
to back down.
Fourteen Wisconsin Democratic lawmakers - who
left the state so that a quorum to vote on the bill could not be reached -
said Friday that they are not deterred by threats of possible arrest and of
1,500 layoffs if they don't return to work.
Obama has charged Wisconsin’s Governor
Scott Walker with attempting to bust the unions.
But Walker’s defense is:
“We're broke. Like nearly every state across
the country, we don't have any more money."
Broke Unless You Count
the $67 Billion Pension Fund...
That’s what he says, but according to Wisconsin’s 2010 CAFR (Comprehensive
Annual Financial Report), the state has $67 billion in pension and
other employee benefit trust funds, invested mainly in stocks and debt
securities drawing a modest return.
recent study by the Pew Center for the States showed that Wisconsin’s
pension fund is almost fully funded, meaning it can meet its commitments for
years to come without drawing on outside sources. It requires a contribution
of only $645 million annually to meet pension payouts.
writing in the Huffington
Post, notes that the pension program could save another $195 million
annually just by cutting out its Wall Street investment managers and
managing the funds in-house.
The governor is evidently eying the state’s pension fund, not because the
state cannot afford the pension program, but because he sees it as a
potential source of revenue for programs that are not fully funded.
This tactic, however, is not going down well
with state employees.
North Dakota - Banking
on the Locals
David Brancaccio visits a...
Bank that is Invested in its
Fortunately, there is another alternative.
Wisconsin could draw down the fund by the small
amount needed to meet pension obligations, and put the bulk of the remaining
money to work creating jobs, helping local businesses, and increasing tax
revenues for the state.
It could do this by forming its own bank,
following the lead of North Dakota, the only state to have its own bank -
and the only state to escape the credit crisis.
This could be done without spending the pension fund money or lending it.
The funds would just be shifted from one form of investment to another
(equity in a bank). When a bank makes a loan, neither the bank’s own capital
nor its customers’ demand deposits are actually lent to borrowers.
As observed on the
Dallas Federal Reserve’s
“Banks actually create money when they lend it.”
They simply extend
accounting-entry bank credit, which is extinguished when the loan is repaid.
Creating this sort of credit-money is a
privilege available only to banks - but states can tap into that privilege
by owning a bank.
How North Dakota
Escaped the Credit Crunch
The state-owned Bank of North Dakota (BND) has allowed North Dakota to
maintain its economic sovereignty, a conservative states-rights ideal.
The BND was established in 1919 in response to a
wave of farm foreclosures by out-of-state Wall Street banks. Today, the
state not only has no debt, but it recently boasted its largest-ever budget
surplus. The BND helps to fund not only local government but local
businesses and local banks, by partnering with the banks to provide the
funds to support small business lending.
The BND is also a boon to the state treasury. It has a
return on equity of
25-26% and has contributed over $300 million to the state (its only
shareholder) in the past decade, a notable achievement for a state with a
population less than one-tenth the size of Los Angeles County.
In comparison, California’s public pension funds
are down more than
$100 billion - that’s billion with a “b” - or close to
half the funds’ holdings, following the Wall Street debacle of 2008.
It was, in fact, the 2008 bank collapse rather
than overpaid public employees that caused the crisis that shrank state
revenues and prompted the budget cuts in the first place.
Seven States Are Now
Considering Setting Up Public Banks
Faced with federal inaction and growing local budget crises,
number of states are exploring the possibility of setting up their own
state-owned banks, following the North Dakota model.
on January 11, 2011, a bill to establish a
state-owned bank was introduced in the
Oregon State legislature
13, a similar bill was introduced in
on January 20, a bill
for a state bank was filed in
Massachusetts (following a 2010 bill that had
on February 4, a bill was introduced in the
legislature for a feasibility study looking into the possibilities
introduced similar bills in 2010, bringing the total number of states with
such bills to seven.
Why All Americans
Should Care About Wisconsin
If Governor Walker wanted to explore this possibility for his state, he
could drop in on the Center for State Innovation (CSI), which is located
down the street in his capital city of Madison, Wisconsin.
The CSI has done detailed cost/benefit analyses
of the Oregon and Washington state bank initiatives, which show substantial
projected benefits based on the BND precedent.
For Washington State, with an economy not much larger than Wisconsin’s, the
CSI report estimates that after an initial start-up period, establishing a
state-owned bank would create new or retained jobs of between 7,400 and
10,700 a year at small businesses alone, while at the same time returning a
profit to the state.
A Bank of Wisconsin
...Could Generate “Bank Credit” Many Times the Size of
the Budget Deficit
Economists looking at the CSI reports have called their conclusions
The CSI made its projections without relying on
state pension funds for bank capital, although it acknowledged that this
could be a potential source of capitalization.
If the Bank of Wisconsin were to use state pension funds, it could have a
capitalization of more than $57 billion - nearly as large as that of Goldman
Sachs. At an 8 percent capital requirement, $8 in capital can support $100
in loans, or a potential lending capacity of over $500 billion. The bank
would need deposits to clear the checks, but the credit-generating potential
could still be huge.
Banks can create all the bank credit they want,
limited only by,
the availability of creditworthy
the lending limits imposed by bank
the availability of “liquidity” to clear
Liquidity can be acquired either from the
deposits of the bank’s own customers or by borrowing from other banks or the
If borrowed, the cost of funds is a factor; but
at today’s very low Fed funds rate of 0.2 percent, that cost is minimal.
Again, however, only banks can tap into these very low rates. States are
reduced to borrowing at about 5 percent - unless they own their own banks,
or, better yet, unless they are banks.
The BND is set up as “North Dakota doing
business as the Bank of North Dakota.”
That means that technically, all of North Dakota’s assets are the assets of
the bank. The BND also has its deposit needs covered. It has a massive
deposit base, since all of the state’s revenues are deposited in the bank by
The bank also takes other deposits, but the bulk
of its deposits are government funds. The BND is careful not to compete with
local banks for consumer deposits, which account for less than 2 percent of
the total. The BND reports that it has deposits of $2.7 billion and
outstanding loans of $2.6 billion. With a population of 647,000, that works
out to about $4,000 per capita in deposits, backing roughly the same amount
Wisconsin has a population that is nine times the size of North Dakota’s.
Other factors being equal, Wisconsin might be
able to amass over $24 billion in deposits and generate an equivalent sum in
loans - over six times the deficit complained of by the state’s governor.
That lending capacity could be used for many purposes, depending on the will
of the legislature and state law.
partnering with local banks, as in the
North Dakota model, strengthening their capital bases to allow
credit to flow to small businesses and homeowners, where it is
sorely needed today
funding infrastructure virtually
interest-free (since the state would own the bank and would get back
any interest paid out)
refinancing state deficits nearly
Why Give Wisconsin’s
Enormous Credit-generating Power Away?
The budget woes of Wisconsin and other states were caused not by
overspending on employee benefits, but by a
credit crisis on Wall Street.
The “cure” is to get credit flowing again in the
local economy, and this can be done by using state assets to capitalize
Against the modest cost of establishing a publicly owned bank, state
legislators need to weigh the much greater costs of the alternatives -
slashing essential public services, laying off workers, raising taxes on
constituents who are already over-taxed, and selling off public assets.
Given the cost of continuing business as usual, states can hardly afford not
to consider the public bank option.
When state and local governments invest their
capital in out-of-state money center banks and deposit their revenues there,
they are giving their enormous credit-generating power away to Wall Street.