Solvency: how state-owned banks end interest costs on state debt ($5 billion/year for CA)

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Only two states are currently solvent; North Dakota is one. What makes them different is that they have a state-owned bank. The advantage of a state-owned bank is to return profits to the public and/or minimize borrowing costs for the state and whatever portion of the public the state chooses as borrowers (North Dakota provides credit at the lowest costs for student loans and to farmers, for example).

Banks legally create credit out of nothing as a fraction of their assets (to simplify). Any state could record state assets (state receipts, buildings, land, etc.) on their accounting books and create credit from their value. Although different from most peoples’ misunderstanding, banks do not lend what depositors have put in the bank. Therefore, states are not “risking” assets through loans; they are legally entitled to create credit out of thin air. This is verified by the Federal Reserve’s Publication, “Modern Money Mechanics” and explained in its crucial details in my brief. Excerpts:

“The purpose of this booklet is to describe the basic process of money creation in a ‘fractional reserve’ banking system…The actual process of money creation takes place primarily in banks.”

“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrower’ transaction accounts. Loans (assets) and deposits (liabilities) both rise by [the amount of the "loan"]."

What does this mean? It means that intelligent state legislators can immediately authorize their own bank, issue credit to themselves at 0% interest to purchase their outstanding debt, and immediately save themselves borrowing costs.

Whoa. That’s important.

For California, that means saving $5 billion every year. Reality check: ~20,000 teachers were laid-off this year in California (I am one, creatively trying to earn income as a writer). All could be re-hired at $70,000 per year and the state would still have $3.4 billion left over in savings!

Hey, how much is your state paying on interest for state debt? If you’re willing to contact a state legislator, I’ll help you with the information. Contact me at my bio info above.

Ellen Brown, Michael Sauvante (a soon-to-be Examiner Economics writer – remember his name) a constituent, and I met with a California legislator on the state banking committee. The legislator immediately recognized the national implications of this idea (“Why don’t we do this on a Federal level? Boy, Wall Street would hate that!”), was astounded California could save $5 billion so easily (“Why didn’t I know this?”), and appropriately infuriated that no bankster hawking to provide California credit at higher-profit levels after downgrading the state to BBB risk ever informed state legislators or Treasurer of the option that the state could legally create its own bank (“The state of California is far more appropriate to create credit than Goldman Sachs!!”). We will have a follow-up meeting with the legislator this month to create a plan of legislative action. Details to follow…

Now this is important: governments creating credit (debt) is only a temporary solution to our predicament. I think I humorously portrayed our situation by relating it to a Pingu cartoon here. The real answer is government creating money for the direct payment of public goods and services. This has to happen at the national level. The benefits are conservatively a trillion dollars every year: please see my paper here. I invite professional economists to work with me on this cost-benefit analysis; I fear I am not taking into consideration all of the measurable benefits.

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Two one-minute visuals to imagine a trillion dollars, because almost all of us do not work with numbers of this magnitude: