The recent economic downturn has inspired a lot of anger at banks, especially around the problem of credit (loans) given by banks for the purchase of homes. There has been enough anger out there to fuel calls for a “state bank” in order to offer a local, publicly motivated financial institution to avert such a crisis in the future. Unfortunately the current proposal, HB 1320, doesn’t offer much in the way of how such an institution would function in the face of Washington State’s constitutional prohibition on the lending of public credit. The discussions of HB 1320 do have implications for Transit Oriented Development.
The mortgages at the heart of the crisis were often given to people with no money down, insufficient income to make payments, and then repackaged and sold off as securities for a profit by banks. When people started losing their jobs, those loans went bad, creating a crisis for financial institutions that had purchased large numbers of these mortgages. The decision was to “bail out” those banks.
It’s easy to to forget how banks work. Banks take deposits from people with cash and then loan out that money. Banks serve the critical function of aggregating capital, lending it out with some risk, and then paying depositors some interest. There is a great video by Sal Kahn on how fractional reserve banking works, a good refresher on the banking system.
So why not open a “state bank,” run by the state government for the benefit of the people of Washington? It’s a great idea, but it’s not clear it could really work or solve the problems the Occupiers have with banks. There are two gigantic problems, one is surmountable and the other is not.
First, Washington State has some pretty strict limits on lending of public credit. Article VIII, Section 7 of the State Constitution lays it out pretty clearly:
No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation.
But what about the State’s credit? Article VIII, Section 5 prohibits that.
The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation.
Are there any ways around these prohibitions? The advocates have made a rather strained argument that essentially says, “North Dakota does it, they have a similar prohibition (Article X, section 8), that means we can too!” and “if people deposit money in a state bank, that’s depositor money and it can be lent without lending the credit of the state itself.”
That brings me to the thing about a “state bank” that is insurmountable. Banks are banks, and whether the state, a non-profit entity, or mom and pop run them, they are always governed by the fractional reserve principle: banks make money by lending out money. And when anybody makes a loan, they are taking a risk that the person loaned money can’t or won’t pay it back.
It’s true that the profit motive can taint the lender’s actuarial sensibilities, skewing them toward riskier loans or toward tightening the terms of their loans. But even a non-profit lender has to make some money to run the bank itself. And what happens when the State Bank of Washington makes lots of student loans, the economy tanks, and those students can’t pay it back. We’re right back where we started, having to decide whether we tax payers or depositors want to “bail out” those students.
What does this have to do with Transit Oriented Development (TOD)? We advocates of TOD should be supporting hearings for HB 1320 even though it really doesn’t do anything other than study the idea of a “trust” into which state dollars would be poured. The legislation doesn’t outline clearly how the bank would operate or how it would overcome the prohibitions in the Constitution.
The reason for supporting it in principle has to do with much needed Constitutional reforms that would open up Article VIII to allow for more lending of public credit by state and local government to support public and private Transit Oriented Development. Along with Tax Increment Financing (TIF) and other tools I’ve described before, big changes in our Constitution in Washington could lead to more public and private development around light rail stations in the region. The lending of the states credit, for example, along with condemnation powers for land acquisition around stations could make land banking affordable and prevent hassles like the Roosevelt rezone battle.
Not surprisingly, the proponents of HB 1320 would be roundly opposed to such a use of public credit. But the debate and discussion about public finance is a welcome one, as long as we all remember that financing anything involves risk, and without risk there is no progress. Banking without risk is simply impossible even if it is a state bank loaning money to students or making loans to reduce the cost of building more privately constructed housing around transit.
With regard to the affect the massive downturn in the economy had on mortgagees it was not simply those with marginal credit worthiness that were foreclosed on. Many many people with heretofore excellent credit scores and substantial (potential) equity trapped in their homes, unable to sell them or keep up the mortgage payments after they lost their long standing jobs and had depleted their liquid assets trying to stay afloat were foreclosed on because the system of selling and repackaging loans via derivatives demands the underlying asset in any default. Banks in most cases were not able to “work” with borrowers to adjust terms because of the constraints of the secondary markets.
If a state bank is authorized, it needs to STAY OUT of the derivatives business. Derivatives are the one thing that has consistently destroyed wealth (or transferred it from the many to the few) in about every market it touches. Further, it would be best if the funds made available by such an state bank are invested independently of traditional Wall Street institutions and instead in things that bring primary economic stimulus to the local economy. That may sound rather radical but these are unusual times. If we’re going to put the credit of the citizens of Washington State at risk, it needs to be away from the hands of “vulture capitalists” and kept in more sane hands.
Thanks for dealing with this subject, Roger. However we do it, this country needs a new banking system. One approach with a lot of possibilities involves credit unions- basically cooperative banks owned by their members.
Underneath the current collapse, though, there’s another principle that’s less amenable to legislation: a huge amount of the trouble was simply a matter of an entire industry, as businesses and as individuals, willfully refusing to do their own job right.
Simply doing decently, not to say well, your own job: that’s the real gold standard.
Mark Dublin
I’m inclined to think that banking should be a function of private enterprise, but regulation of the banking industry is a right of government. From my viewpoint, the economic failure of the last few years was caused by the failure of government to properly regulate the financial industry and protect the citizens from the greed and shortsightedness of the bankers.
What an ironic picture.
The problem with banks is not that they make loans to students, those loans WILL be paid back even if means taking their SS checks. There is no way to discharge that debt short of death.
The reason to support a state bank is to get out of the Municipal bond racket. Borrow the money from a state bank to build LINK, not issue bonds. The bank can borrow from the Fed, at near zero interest rate, loan the money to ST at say .01% and now we have much more money to build LINK, SOUNDER etc. Yes you can’t start building until the first 10% is collected via taxes, but that gives you time to finish the plans, put out the contracts etc. Then the interest and principle goes back to WA.
It doesn’t change the state’s debt limit. It doesn’t loan money to people who aren’t going to pay it back. It’s no more risk than the current municipal bonds we issue AND it costs the taxpayers much less, so we get more rail for our dollars. (or whatever we build)
Actually built into Obamacare is a provision saying that student loans expire after x years (I can’t remember exactly what x is).
Stephen: It wasn’t part of Obamacare, it was a presidential decree. The “x” in the expiration is 20 years OF PAYMENTS. Which means the principle would be paid off.
Re: Mortgages: I agree with Gary that student loans are not a serious default risk considering all of the rules surrounding them.
Let’s try to remember, despite what just happened, how difficult it is to lose money in the traditional mortgage business.
You are asking for 10% to 20% of Y down and then are getting payments on an asset that is presumably worth Y. So if someone makes payments for 2 years and defaults… you get their 10% to 20% AND you get the asset. Additional note: As a bank, you don’t even have to have Y in deposits in order to lend Y. You just need 1/10 of Y.
The only way to lose money in the above set up is to do a bunch of crazy stuff because you are greedy. A state bank would not be incentivized to do that kind of crazy/greedy stuff.
Oh kk you naive liberal, don’t you know everything Obama does is part of Obamacare?
If the State could borrow at .01% from the fed they wouldn’t be issuing bonds to rebuild 520.
That’s an unlikely prospect. They might be able to borrow more cheaply than retail markets under such an arrangement. But, such a bank, particularly if it has any contact with the public may be subject to federal regulations for capital reserves and liquidity etc…
The reserve capital requirement is currently 7% assets to loans. So for a project like LINK, you collect the first 7% of the cost via taxes, pledge the rest and are good to go. For a 30 year loan that would be like 2 years worth of taxes. Heck it takes that long to get the local governments to agree on the number of stations, the roadway they are going on etc.
Folks it isn’t rocket science, just look at who is running the banks now.
They can’t get that loan because what bank would loan them money at that rate? Only one not interested in making a profit from it. Hence a state bank fits that role.
It allows the state to take control of the amount of money in circulation in the state and not leave it entirely in private hands.
If we use just a simple Mortgage calculator:
http://mortgagemavin.com/calc/mortgage-calculator.aspx?goal=1&mort=fixed-rate
and estimate the need to borrow 2 Billion dollars for 30 years.
We end up with at a 3% loan paying $1,035,549,041 (or 1 Billion dollars) which is roughly 1/2 more than what we need to build anything.
If we go with our state bank rate of .01% you’ll only pay $300,980 in interest, or nearly nothing in comparison.
Roger, a state bank would serve a far more significant role than merely “loaning money to students or making loans to reduce the cost of building more privately constructed housing around transit.” A state bank could make rail affordable to the public around here in a way it is not now.
Sound Transit’s interest costs on its bonds are not a big issue. The HUGE problem with ST’s financing model is it is a local government issuer that must secure its bonds by pledging to collect VAST amounts of regressive tax, for decades. The tax costs to the public of financing capital projects the way Sound Transit does it could be $100 billion, assuming the costs of building out the system are in the (expected) $13 billion range.
A state bank would obviate the need for those massive (and frankly, brutal) tax collection security pledges that are a key feature of the bond sales contracts Sound Transit uses.
“The tax costs to the public of financing capital projects the way Sound Transit does it could be $100 billion”
A false assertion you keep making, yet have never produced a shred of evidence to support.
I’ve posted this before, maybe you just missed it:
http://crosscut.com/static/static_file/2010/04/20/soundtransit1.pdf
That’s a Sound Transit document from 2010. It shows that through 2040 the tax collections necessitated by the bond security pledges will be over $44 billion. That document was prepared before the tax revenue forecasts were revised downward. That means the bonds will be issued later than what was anticipated for that document. It also means the amount of debt outstanding in 2040 will be greater than what the footnote shows (“$4.9 billion; Interest Balance = $2.1 billion”). The lower tax revenue forecasts also mean there won’t be the reserves shown on that exhibit as of 2040, which could have been used to pay off debt at that point. Looking at the annual tax collection level in 2040 we see Sound Transit will be taking in $2.3 billion of tax revenue that year. If you continue that level of taxing out for another 15 years (which likely would be required in light of how the outstanding principal and interest balance will exceed the $7 billion shown on this exhibit), you arrive at double the $44 billion that already would have been taken in as of 2040.
Look, Zed – I believe my estimate is roughly accurate, based on that Sound Transit document. Do us a favor though if you think my estimate is too high. Make yourself useful. Post a link to a Sound Transit document produced since this one from 2010 that purports to show the tax costs associated with the ST2 bond sales.
Why do you keep including capital and operational expenses in your calculation of financing costs?
Stop playing stupid, Zed.
The figure of around $100 billion is the estimate of the tax costs to the public of the bond sales. That figure is completely independent of both the capital and the operations expenses Sound Transit would incur — those expenses are not “included in” that estimate of the tax costs to the public.
I’ll ask you again . . . go ahead and provide a link to any Sound Transit document produced since 2010 that purports to show the tax costs that would flow from the terms of the bond sales. Those are the costs the public would be forced to shoulder. I “get it” you don’t like references to that massive public cost, but if you believe my estimate is off then provide better evidence than I have.
You haven’t provided any evidence, just an excerpt from the financial plan that you obviously don’t understand how to read.
ST pays cash up front for 50% and finances the other half with 30 years bonds. At the interest rates they have been able to secure the total repayment is about 1/3 principle and 2/3 interest. So the total cost to the tax payer for $13B in spending is $26B. But that’s in future money. In terms of real spending power it’s going to be much less due to inflation. If someone bought a “median” home in King County in 1980 and paid an average of 7.5% interest the total of all payments would be $498,400. That median home is now worth $375,000 so the real cost of borrowing is 123,400. That’s far less than the original value. It’s less than half what would have been spent on rent. Sometimes it makes sense to “rent” money.
At the interest rates they have been able to secure the total repayment is about 1/3 principle and 2/3 interest. So the total cost to the tax payer for $13B in spending is $26B.
No, Bernie, that’s an estimate of the financing cost to SOUND TRANSIT. What Zed and I are talking about is the cost to taxpayers. Those are two very different types of costs.
The cost to taxpayers is the amount of tax Sound Transit must confiscate pursuant to the bond sales contracts. Those tax collection pledges, which will extend until the mid 2050’s unless this madness stops, would impose tax costs on the public of about $100 billion. That cost — again, to taxpayers — is completely independent of how much interest Sound Transit pays to bondholders.
What is it you don’t understand about this, Bernie?
It’s hard to understand something that is completely nonsensical.
Not to mention the term “confiscate” is so loaded with Libertarianism…
So, it would be nice to pay cash for everything we Citizens voted to have built. Now, how do YOU propose we come up with that cash? Should today’s Citizens pay for everything up front or should we let the citizens yet unborn in the next 50 years also have a chance of contributing to these things?
Not to mention the term “confiscate” is so loaded with Libertarianism…
I just used that term because it is accurate; the root “fisc” refers to a government’s treasury, and speaking of taxes being confiscated is a neutral way to describe what’s going on. I don’t think it’s a loaded term, but others may disagree.
Now, how do YOU propose we come up with that cash? Should today’s Citizens pay for everything up front or should we let the citizens yet unborn in the next 50 years also have a chance of contributing to these things?
That’s a perfectly good question, and I don’t mind addressing it at all. Light rail should be paid for here the way it is paid for in the peer regions. Phoenix, the Twin Cities, and Portland are three examples of metro areas where the government heads do it right.
There are many examples of smarter, more frugal, and less abusive peers paying for buses and trains. The Twin Cities and Portland are two models Sound Transit could have emulated. Those metro areas’ leaders do a great job of providing transit – especially light rail – to people and businesses at NO regressive tax cost targeting people.
In the Twin Cities they built out a new light rail system from downtown to the airport (with a tunnel) in just a couple of years in the mid-2000’s. There was NO new local taxing for that. About the same population is served as in Sound Transit’s area (2.8 million) but just check out how no long-term bonding and no new taxing was used there for light rail:
http://www.metrotransit.org/facts-about-trains-and-construction.aspx
TriMet serves three counties around Portland. It only needs about $230 million in local taxing each year to provide expanding bus and rail systems and services to roughly the same population as the Sound Transit taxing area. The TriMet financing plan imposes taxes on businesses directly. The average family there pays $0 in direct taxes for transit each year. The way it was designed here though is nasty: Sound Transit and Metro taxes cost the average family of four here $500 every year, and that amount is set to increase for decades.
Let’s take a look at how this unaccountable taxing district run by hack political appointees compares to one of its peers – the one in Phoenix. We can look at the lines currently in operation. The light rail service provider in Phoenix got its modest local tax authority 3.5 years AFTER Sound Transit did.
Miles of Track and Numbers of Stations:
P — 20 miles of track, 28 stations.
ST – 14.5 miles of track, 13 stations.
Construction Periods:
P – 2004 – 2008
ST – 2003 – 2009
Capital Costs:
P – $1.4 billion
ST – $2.8 billion
Financing Plans:
P — Fifty percent of the funding came from the federal government and fifty percent from Phoenix-area taxpayers. No local long-term bonding.
ST — $500M came from the federal government and $2.3 billion from local taxpayers. The ADDITIONAL costs to service the Sound Transit long-term bonding will include many billions of dollars of regressive tax collections JUST as security for the bondholders (that taxing district does not disclose the anticipated tax costs of its long-term bonding).
Operations Costs:
P — $32M last year
ST — $50M last year
Weekday Daily Boardings in 2011:
P – Averaged 40,712
ST – Averaged about 22,000
All three of those regions built out light rail at very little or no new public tax cost, and they leveraged appropriate amounts of federal grants. THAT’s how light rail should be financed.
Googling the term Confiscate yields:
Take or seize (someone’s property) with authority.
Take (a possession, esp. land) as a penalty and give it to the public treasury.
Googling the term Tax yields a response such as: A contribution for the support of a government required of persons, groups, or businesses within the domain of that government.
There is NO stealing here. Sound Transit did not steal YOUR money because it is no longer YOUR money. It is what you owe to live in this society and take advantage of ALL that this society offers you including shiny new trains and millions of miles of un-tolled roads, clean water, electricity, work place safety, building standards, police protection and business services to name just a few things that we take for granted and some balk at paying for.
Now, I ask you in the case of the Twin Cities, did they have to pay anything (other than nominal parcels) to acquire a right of way for their system? If not, would that have contributed significantly to being able to build their system quickly and cheaply? FYI, I’ve ridden the Hiawatha from in front of Minneapolis city hall all the way to Mall of America. It’s pretty much all in a pre-existing rail corridor, until you get to the airport and beyond. Sound Transit doesn’t have that luxury for this system.
Part of what makes those security pledges massive is that the interest rate on those bonds isn’t near zero. Which is what the Fed rate is on loans to banks.
Last I looked 30year municipal bond rates were paying investors near 3%. When you are talking about the Billions needed to build a Light Rail system you are starting to talk about real money.
Also the loan can be “simple interest” instead of “compound interest”, as we pay it back the principle payments get bigger and bigger, further cutting the interest costs.
but 3% is at historic lows. It is highly unusual in the history of the Federal Reserve to have Fed Funds rates at Zero percent. And it is able to do this only because the US Dollar is the de facto world reserve currency. We may not have that luxury in too many more years…
But it is the norm that interbank lending from the Fed, is lower than the rates for borrowing in the municipal bond market. That’s how banks stay in business. They borrow at rates we can’t get. That’s why you have a state bank, so that state can have access to those lower rates.
Look, even if the municipal bond rates became less than the interbank lending rate, there isn’t anything to say, ST has to have a state bank loan. It’s just an option. One that will be nearly impossible to beat in the private sector though.
Here’s the history of the Federal reserve rates:
http://www.the-privateer.com/rates.html
And, once ST or whoever finishes paying the money off, we’d have the interest paid as part of the money we use to loan more money out. It’s a virtuous circle.
Eventually the state could have ALL of it’s loans from the cash in that bank. Might take a few decades to build up the necessary reserves to get away from the Fed rates, but it would happen eventually.
That’s not at all how banks work. Nobody borrows long term money at the Fed Funds rate. It’s the rate that banks charge each other on overnight loans. The cost of long term money to the US Government is the 30 year T-bill rate. The cost to city and state government is whatever they can sell bonds at (often discounted because of tax except status). There’s no free lunch from the Fed.
I beg to disagree, since the banks went bust in 2007 with the collapse of the CDC’s and MBS’s the big ones are rolling their loans over nightly to stay afloat. That way every day their assets exceed their liabilities because they don’t count the nightly float loans.
Since then it’s become an easy way to make money, just loan it out at anything above that rate, like on credit cards, student loans, and wa la instant profits.
There is no reason that a state bank has to do anything like this anyway. All they have to do is cover their costs. With fractional lending they are allowed to only have 7% asset to loan ratio. With a billion dollar loan they could easily loan it out at less than 3% and still cover their costs. They don’t need a fancy marble building, safe deposit boxes, or even a safe. They don’t deal in cash, they deal in electronic fund transfers. You submit your bill, the “money” gets transferred to the account you owe it to.
With our debt based currency banks create money out of thin air. ie it didn’t exist before it was loaned out.
The State doesn’t have any 3% money. The State sells bonds to finance things like SR-520. The interest rate on those bonds is the cost of money to the State. They can’t lend out money at a lower rate than they are borrowing it! And if you think the money people are going to invest in a State bank is going to provide capital then that bank has to provide a return on equity to those depositors at least greater than what they can get buying State back bonds. There’s no free lunch and no, banks don’t make money by rolling over short term debt. Again, the fed funds rate is what banks charge each other. The Fed is just the clearing house, it doesn’t loan money.
Yes, Bernie, that is true, Fed Funds Rates are overnight short term rates and long term rates are typically guided by rates on T-Bills. But what I gather some people are envisioning is that we can magically make money appear simply by putting the faith and credit of the State of Washington on the line with the Federal Reserve. That may not be the case in reality but there are opportunities to save the taxpayers significant money and for the effect of that money to be contained locally rather than siphoned off to Wall Street.
Bernie you are totally confused about how money is created with a Fractional reserve system.
When you go to a bank and borrow the money to buy a house, you put in 10% of the cost. You pledge to pay it back at some interest rate like 4%. The bank then pays the builder the full amount. The bank doesn’t have to sell bonds to raise that money. It comes into existence the moment they make the loan. The bank doesn’t have to have the full amount in reserves.
When the bank needs cash for daily transactions they get it from the Federal Reserve. The interest on that Fed loan is the daily rate, and the cost of doing business.
The bank says your loan + interest is an asset. It is that piece of paper which represents the future value of the loan.
A lot of banks did bundle up those mortgages and sell bonds, MBS’s (Mortgage backed securities) the bank made money doing that, that’s why they did it. But there is no requirement to do it. It’s not necessary for the bank to do this to raise the cash to pay the builder.
Charles and Bernie, Here is a link to a good documentary on money.
http://www.youtube.com/watch?v=swkq2E8mswI
It’s not what you think it is.
Yes and no. The Fed Funds rate is a target rate for the overnight interbank loan market, adjusted via the Open Market Operations desk at the New York Fed. The Fed does in fact lend money in order to adjust the market rate toward the target. And over the last few years the Fed has pumped trillions out through the discount window.
But all this talk of the Fed isn’t really relevant. What is relevant is the borrowing costs of the federal government. All the histrionics over the debt ceiling notwithstanding, the bond markets love the security of Treasuries. In 2007 the long-term real rate for federal debt was about 2.5 percent. But right now it’s about 0.5 percent. A National Infrastructure Bank backed by the full faith and credit of the US Government could underwrite loans to local authorities and drastically reduce their borrowing costs relative to private bond markets.
Who do you think underwrites the State bond offerings? We just got out of the retail liquor business. Let’s not go into banking. ST is doing just dandy selling bonds. Same for cities that manage their finances properly. A State bank would only encourage lacks fiscal policy and drive up the cost for everyone. Now, Federally there is a good case for an infrastructure bank. That’s a whole different story.
@Gary. It’s true that loans are an asset on a bank’s balance sheet. Deposits are a liability. The money they bank pays the builder with comes from those deposits. The fractional reserve is there to cover the depositors coming in and making a withdrawal. When I tell BECU I want a $1,000 I mean I want greenbacks; not a share of my neighbors house. That’s why banks are required to keep a fraction in reserve. If everyone withdrew their money tomorrow the system would collapse. That panic is what happened at the great depression. It didn’t happen at the start of the “great recession”. It’s a painful correction but it had to happen.
Infrastructure is not liquor. Liquor is an unnecessary commodity that the government shouldn’t be selling or restricting private sellers. Infrastructure is critical to the state’s economy and well-being. Generating private bonds to enrich bondholders is not a state responsibility, and it’s counter to the taxpayers’ interests. So there’s no downside to a state bank. If the Legislature is worried about the bank getting overenthusiastic, it can limit the amount of loans the bank can make, the kinds of things it can lend for, or it can require the bank to come back every 5 or 10 years for authority to make more loans.
Bernie you are missing the whole, “how a state bank works” problem. With a state bank tax revenues from ALL sources are deposited there until they are needed.
The Fed loans banks money to cover that daily outflow of cash until the assets are fully funded.
So it only borrows enough to cover the daily difference between the payments to the ST subcontractors, the welfare checks etc and the sales tax revenues, property tax revenue, + repayments from the Fed for their part of the Medicaid funds etc.
A bank, once it makes a loan has “created” money. They don’t need to sell bonds to get it.
It’s not like they have to have cash on hand to cover all the outstanding costs of the loan.
I know this is a tough thing to grok, because it isn’t like normal goods. But once you get a handle on it, you can see how controlling the amount of money in circulation is a powerful tool. And the state should have some control of it vs just the municipal bond market.
If you’re worried about the state-owned bank running amok, you could probably restrict it legally to making loans to the state government and municipal governments, taking deposits from anyone, and providing retail sales of financial products offered by the state government and municipal governments.
Of course, since the state government would *own all the stock*, it would really be a matter of who the state government appointed to the board of directors of the state-owned bank.
In interesting thoughts. I like this idea of a State bank or trust better than the proliferation of so many special districts that we typically use to fill in financing gaps.
Interesting thoughts. I like this idea of a State bank or trust better than the proliferation of so many special districts that we typically use to fill in financing gaps.
You still need special districts. Those are used for the tax collection part of any project. A state bank doesn’t change any of that, just the cost of borrowing the money.
I idea of a State Bank, especially when tied to a Rainy Day Fund, intrigues me. I don’t think it will be easy to set up such an institution, but few things worth doing are. Even if it takes 20 years and starts with baby steps, like using a WA State Credit Union like BECU to transition away from the for-profit banks that got us into this mess, those steps are themselves good moves and should be supported. I’d like to see a 5, 10, 20 year plan for not just setting up something similar to what ND has, but to what they originally tried to build.
Sidenote, but hopefully by the time we sell our house here in Fayetteville this summer (Chase ended up with the Mortgage) the Johnson family will be completely parasite bank free. Checking, saving, credit cards, IRAs, investments, everything. Only BECU and USAA. It’s my NY Resolution.
That’s really the answer. I just don’t understand why people choose to do business with institutions like BOA and Chase (although you don’t typically have any choice over who ends up with a mortgage). Even some municipalities are getting on board and switching to smaller local or regional banks. You tend to get better service and are charged lower fees.
You realize of course that the State uses BofA to hold its money? And I think JP Morgan to handle it’s debit cards for welfare?
That’s one of the other things a state bank could do. That way we can remove the “profit” that’s extracted from these transactions and thus lower the cost of money for WA tax payers.
That’s easy to fix by switching to Columbia Bank . It makes more sense (and cents) to do that than require all of are ferries be built in Washington. I wonder if the State ended up with BOA because the SeaFirst debacle and with Chase because of WaMu turning into WaOink.
Small businesses use commercial banks because BECU at least doesn’t offer business accounts; I don’t know if any other credit union does. Large businesses use large banks because supposedly small banks can’t scale to their needs. I’m not a finance expert so I can’t say what size bank the state needs. I took my money to a credit union twenty years ago, as soon as I was eligible. I don’t know why other people leave their money in the big 5 banks. Some of them have said privately they wouldn’t mind if some of the small fry accounts closed because the don’t make much money from them; their focus is on big business customers.
The argument against a state bank, is the same as the argument against a single payer medical insurance, like canada’s.
In canada, medical cost on the whole economy (eg. percent of GDP) is 50% that of the usa. And yet, the canucks outlive americans by 4 years.
How do the detractors explain that away?
Why a state bank? simple; the “commercial” scum banks that are co-owned with the federal reserve by the bank of england, need LOCAL government competition.
No matter what the detractors of a state bank(lovers of the big banks) argue, I wont do any business with BoA, Chase or Wells Fargo. they are all immoral, unconstitutional criminals. the “commercial banks and the federal reserve have gotten us into every war since WW1. and they still cant get enough of bankrupting us, while they get fat, and killing off the flower of people (our young).
I’ll go farther, round up the scum, give them a nice trial, and take every bit of wealth they have, and pay down the deficit, or mortgages of not-rich persons.
Your analysis has one major problem: it doesn’t comport with reality.
“No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation.”
Wait wait wait.
Read literally, this prohibits counties, cities, towns, etc. from having bank accounts. Bank accounts are loans made to the bank, which is a company or corporation.
Does Seattle really issue no checks? Does it hand every city employee a cash pay packet with cash taken from a large vault? If not, then it’s clear this clause is unenforced.
Obviously this clause is a dead letter. It’s no bar to anything.
“The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation.”
This means the state isn’t allowed to guarantee private bonds, nothing more.
The state is clearly allowed to loan money (money is not “the credit of the state”) — which means it’s allowed to have bank accounts — and is allowed to own stock in corporations — which means the state can establish a Bank of Washington State, with the stock owned by the state, and the state can then deposit all the state’s money in the bank, and the state can let other people deposit money in the bank, and the bank can loan money to the state.
Like the Bank of North Dakota.
In other words, the advocates of a state bank appear to be on firm legal ground and you appear to not understand the law.
Gary is absolutely correct: the purpose of a state bank is to get out of the municipal bond racket. A federally chartered state-owned bank can borrow at 0% from the Federal Reserve (yes, really) and lend at a reasonable rate to the state government.
It can’t borrow infinite amounts from the Fed, because the Fed has deposit volume and capitalization requirements — but Fed borrowing covers all *short term* needs.
For long term needs, the state bank can easily attract deposits — even while offering very low interest rates, like 1% — and can then lend to the state at a profitable rate — say, 2% — while undercutting the municipal bond rates massively.
The profit spread? Part goes to run the bank — the rest gets paid to the stockholders. Which is the state government.
If the state-owned bank is having trouble attracting deposits, the state can go back to issuing municipal bonds. It’s *still* ahead of the game, though, because it can sell those municipal bonds through the state-owned bank, who will charge much lower “underwriting” fees than JP Morgan et al, and who will make the bonds available to small individual buyers, ensuring a larger market.
There is no downside of a state-owned bank and it’s clearly constitutional in Washington.
On the other hand, as I noted, it may be unconstitutional for cities in Washington to have bank accounts. Has anyone checked the court rulings? :-)
I can put the short point more clearly: the purpose of a state bank is to remove the powers which private banks have over the state, the ability to charge outrageous fees, cut off credit if they don’t like state government policy, create short-term funding crises, etc. etc. etc. etc.
It really has very little to do with state lending policy. If you want a state owned bank which does things like student loans, that would be a different thing. FDR set up *over a dozen* federally owned banks, each for a *specific* type of lending.
But because of the hostility of the Money Trust, he never managed to fully convert the Federal Reserve, the key money-printing bank, to federal ownership. It has federal control, but its seignorage (look it up) profits go to private money center banks.
…or, if the Bank of Washington State joins the Fed, some of the profits go to the Bank of Washington State. ;-)
Anyway, the Bank of North Dakota has both ND ownership and ND control.
The GET program is in essence a State operated bank for education. It’s a good program, one I wish I’d invested in :-( That’s very different than running a bank. We’re finally out of the booze business. Next step should be privatizing WSF. If the legislature wants to switch some of it’s business to WSECU I’m all for it!
Bernie, the ability to control the amount of money in circulation is a fundamental role of government. It’s not like running a retail booze selling outfit. It’s so important that it’s in the US Constitution. (Section 8.5: To coin Money, regulate the Value thereof, ..)
As I have explained with you have debt based currency and fractional lending laws, we’ve allowed private banks to control the quantity of money in circulation. A state bank is a local effort to gain back some control over this.
As Nathanael correctly points out, when you are beholden to a lender you have given them control over you. That’s the other big reason to have a state bank. We don’t have to kowtow to private bond sellers, Goldman Sach’s et.al. when we want to do something with OUR money.
Having a state bank doesn’t prevent us from using municipal bonds, it just gives us another option, one that is going to have significant cost advantages.
On the “banks having different agendas than the state:”
For instance, the banks have engaged in a huge fraud with foreclosures, filing notices of foreclosure without actually holding the title. Yet we’ve seen no state prosecutions of these banks. Why not? Could the fact the banks also control our access to credit influence state attorney generals? That they would threaten to either cut us off, or significantly raise our rates. I don’t know whether they have done this, but the amount of money on the line is huge, as are the potential jail sentences if any of them had to stand trial.
A state bank gets us out from under that threat. Then we can prosecute as necessary.
It’s a fundamental role of the Federal Government. And one that has perhaps been abused since we went off of the gold standard. Creating a State Bank doesn’t create money for the State. It does create a lot more State employees. Again, the State doesn’t have any money to loan out. Any fraction of zero is still zero. How do you get money into the bank? Offer a competitive rate of return. Right now anybody that wants to invest can buy State backed bonds. That’s the value the market has put on investing in Washington. To just break even you have to charge a higher percentage on your loans than you give back on deposits and you can only spend/loan a fraction of the deposits whereas 100% of the money raised through bonds goes to long term capital projects. So how is this going to be a win?
Because it’s a matter for the federal courts? The WaMu executives are being prosecuted. The robo signing has been addressed with fines and court ordered review and moratorium on foreclosers. There are other examples but I agree it hasn’t been enough. Too big to fail means too big to not be broken up under anit-trust legislation.
“the state doesn’t have any money to loan out”
That’s where you are 100% wrong. If ST can sell bonds backed by tax revenues, then they can get a loan from the state bank pledging those same tax revenues.
You still don’t understand how money is created. The loan itself creates the money.
To qualify for the loan, a certain percentage of the loan must be put up as collateral. For a Federally charted bank, that’s 7%. So ST collects the taxes on the project for 2 years, does the preliminary design work, holds the community meetings to decide where the stations are going. And deposits the tax revenue in the state bank. At the end of that time, they borrow the rest. Now they don’t need all of it right at once anyway. They need it as the work is done.
There is no way we should go back to the gold standard. Tying the amount of money in circulation to private enterprise wandering around digging up rocks? Seriously? That’s not a recipe for the people of this country controlling the value of our currency. If some other country dumped it’s gold holdings into the market, it would destroy the value of our currency. It would be as if they set up a counterfeiting operation and printed US dollars. Gold is only valuable because it’s scarce. And it’s scarce only because we’ve locked up most of what we’ve dug up.
“The loan itself creates the money.”
BTW, this concept hurts my head. And if I ruled the country, I would outlaw fractional lending. I’d institute one dollar of capital for one dollar of debt. But that’s not the world we live in. So I’d rather we took control of the cost of raising money than leave it to the private sector. We are under no obligation to enrich bond salesmen, or private bankers.
No, it doesn’t. The money is deposited in the bank first. Then a fraction of that money can be loaned out. The rest keep in reserve to pay off depositors that want to cash in their savings. You seem to think that for an investment of $7 you can “create” a $100. The State currently has about a Billion dollar hole in it’s budget. It can’t just close up shop for a year or two, build up reserves and then loan out a fraction of that money to it’s self and “create money”.
ST has been it’s own bank in the past. The East sub-area had excess money which was loaned to build Central Link. When ST has extra money (which they always do to keep a reserve) it’s invested in interest bearing accounts. If the State can come out $12 million dollars ahead not selling booze how is it you think the lumbering bureaucracy controlled by the State Workers Unions will be more efficient than a commercial bank?
Nope: it works the other way around.
I show up at the bank, with 10% of the cost of my house, the bank loans me the rest. The bank doesn’t have the other 90% on deposit. Fractional lending allows the bank to loan out the other 90%.
You clearly don’t understand debt based money. Go watch “The Secret of Oz” it has a very clear explanation of how money is created.
Instead of spending your time arguing, it’s time to go get an economics lesson. Trust me, I used to think of it like you did. But that is not how it actually works.
Absolutely totally wrong. The 10% (now more like 20%) has absolutely nothing to do with the fractional reserve. It is the banks assurance that you have some skin in the game and are less likely to default. It doesn’t even go to the bank, it goes to the seller. If you do default the bank effectively bought the house for 90% of it’s market value (if things worked like they are supposed to which obviously didn’t during the bubble). The bank can not give you the mortgage unless they have excess reserves on deposits. I put $100 in the bank. They loan you $90 dollars (or $93, whatever the reserve requirement is). That’s it. Freddie shows up tomorrow with $10 in hand and wants a $90 mortgage to build a house on Park Place; tough luck Mac. The bank is at it’s reserve limit and can’t just “create money”.
Here you go, since you don’t believe me:
from: http://en.wikipedia.org/wiki/Fractional_reserve_banking
“In practice, some central banks do not require reserves to be held, and in some countries that do, such as the USA and the EU they are not required to be held during the day when the banks are lending, and banks can borrow from other banks at near the central bank policy rate to ensure they have the necessary amount of required reserves by the close of business.”
The state bank would borrow the necessary reserves at the end of the day from the Fed, which is currently loaning money at near zero % interest rates. The Fed requires a 7% capitalization rate to be solvent, and thus that’s the first 2 years of taxes on a 30 year loan.
After that initial money is on deposit, the rest is available via a loan.
And yes if ST defaults on the loan then the Washington State Bank would own LINK and the rest of it. But that’s no different that what we would want any case.
First, the bank won’t loan money to just anybody. It loans money to things like ST which have taxing authority. The bank is limited in the amount of money it can loan by the state’s debt limit. As it’s the state that guarantees the bank.
And ST pledges the tax revenue as collateral on the loan. It’s no different than selling municipal bonds. Except the fees are way lower, as is the interest rates.
“how is it you think the lumbering bureaucracy controlled by the State Workers Unions will be more efficient than a commercial bank?”
Because a state bank is not a profit center. There is no way that we would be paying the head of that bank anywhere near what the CEO’s of BofA, Chase, JPMorgan are getting. Even with bloated state union wage jobs they wouldn’t come close to the level of graft that is in the private banking sector.
Bingo! It has to be on deposit before you can make a loan. Then you can loan out a fraction of that deposit. If Washington were rolling in cash from oh say, oil money like North Dakota instead of trying to close a billion dollar deficit between what legislators want to spend vs projected revenue for the next biennium then sure a State bank might be feasible. And btw, it’s not banks by and large that hold ST bonds it’s people who own funds in their retirement accounts. And it’s investment banks, not commercial banks that underwrite the bond sales. The interest doesn’t go to the bank, they’re just the auctioneer.
Nope: Again you don’t understand how modern banks are being run. The deposit is only necessary for the capitalization requirement, no the full amount of the loan.
I really wish you’d take the time to go read up on this.
You’re both right (or wrong :D). Bernie’s point is that the amount of money a bank can lend out is capped at the total amount of money that the bank has taken in. That’s true. But Gary’s point is that a bank is allowed to have sufficiently small reserves such that, if all of its depositors tried to get their money at once, only a small fraction would be available. That’s also true.
As far as the gold standard goes, a panel of respected economists unanimously thinks it’s a bad idea.
Aleks, exactly right and exactly what I’ve been saying:
I didn’t say we should go back to the gold standard:
Monetary policy has been much looser since that constraint was removed. There’s been a lot of throw it up against the wall and see what sticks. Taking tighter reins doesn’t mean we have to go back to a gold atandard. The Fed trying to drive interest rates below the rate of inflation for example has had the opposite effect of what was intended. Banks have tightened credit because they know they’ll likely loose their shirt giving out 30 year money at less than 4% interest.
“a bank can lend out is capped at the total amount of money that the bank has taken in”
Nope: That loan with it’s tax revenue pledged as collateral is considered an asset. Even though it’s yet to be paid. The bank can pay out against it using the Fed to cover the daily need for cash.
You guys need to read up on this. I’m not arguing that it’s right, just that it is. And since it is what it is, and it makes the cost of acquiring capital for infrastructure, vs the municipal bond market, we should take advantage of it.
Now I see why you’re mixed up. Yes, a loan is an asset on a banks ledger. No, it doesn’t count toward it’s reserve, only deposits which entail an obligation to repay do. Can the money supply be increased by fractional lending? Yes. I deposit $100 in bank A. You take out a $90 loan and deposit it in bank B. Bank B loans out $81 to Bill Gates. The money supply has increased from $100 to $271 but no wealth has been created. If you take out a loan to buy a car or a house you can’t deposit it. And few people borrow money at 12% to invest at 2%.
And I see what you are missing.
That first 10% down is part of the banks reserve. It’s the part that’s been prepaid.
Also a state bank would hold all the other tax revenue until it’s due to be paid to various recipients, that is also part of the banks reserve.
You can see this in that banks are not writing off second mortgages on loans where the first is in default. The second loan will never be repaid, but if the bank were to write these off then it’s asset/debt ratio changes and they would be in default.
That’s also why a state bank can’t let a city skate on it’s loans either.
No it’s not. When you put 10% down on a mortgage the money goes to the seller through escrow. The bank never touches it. Nothin, nada, zip to do with the loan other than nominally assuring that the asset backing up the loan will recover the value if there is a default. If you’re talking about unsecured loans you don’t give the back $10 to borrow $100. I’ve already explained this to you, it’s not that hard to grasp.
But when you take out a loan for say digging a tunnel, there is no escrow. The bank just holds the funds until the contractor submits the bill. In this case it’s counted as a reserve which allows the bank to borrow the difference between the rate of tax collection and the bills to the contractors on the overnight rate from the Fed. The bank doesn’t actually have to borrow 2Billion dollars in over night loans. That’s the total cost over the 2 years. It’s also the amount due to the bank as an asset.
It’s that first 10% that’s considered “reserve.” It’s hard to believe that it’s done this way, and that it’s legal but it is. And it’s encouraged by the Fed which is trying to stimulate the economy by making more funds available via the overnight loans. (They also did it via QE 1 & 2, this is effectively a full time QE3)
ST sells 30 year bonds because of the interest rate, vs the tax collection rate it’s necessary to get more money up front via the bonds. Also they do it to lock in the project. Ever since the Supreme Ct of WA ruled that voters can’t overturn a contract, the bond sale becomes that contract to finish the project.
Also these are “secured” loans in the sense that the tax revenue is pledged to the bank.
In a construction loan you’re pre-approved for the total amount. You don’t borrow the money and pay interest until it’s time to pay the contractor. So yes, the money that hasn’t been loaned yet is still a valid part of the banks reserve. A bank isn’t double dipping by making loans on that amount as long as the reserves are there when you come around looking for your next installment. A loan against projected tax revenues is not a secured loan. If the tax revenues don’t materialize the loan can go into default and be written off. There’s no tangible security to recover the loan amount. The lender assumes the risk that the government entity will come up with some way to repay the loan to protect it’s credit. That may not be the case with say California and there have certainly been municipalies that have gone into default. The classic “whoops” was right here in Washington.
WPSS defaulted on Bonds! And the bond holders got a major haircut. With say the city of Seattle defaulting on a loan from the state bank, the state can impose a tax on the residents via the legislature and force collection via the state courts. No actual default possible.
Exactly how it’s supposed to work.
Well, if there are cost overruns on the DBT (which there almost certainly will be) I guess we’ll see how that plays out.
Loans create money. This is actually “money 101”, even if the concept hurts some people’s heads.
When you buy a T-Bill, you make a loan from you to the US treasury. The US treasury now has “more money”. *But the T-Bill is a liquid asset which can also be used as money*. Whoa, suddenly there’s more money, because the T-Bill IS money!
Think about it for a while and you’ll figure out that not only do loans create money, money is actually a type of loan.
No argument with the statement that fractional banking can be used in a way that increases the money supply. I gave an example of how that works (different thread). But, the important thing to note in that example (dep. allows loan A which is deposited to allow loan B which is deposited to allow loan C) is that the actual money in circulation at each step where the money supply increases actually is reduced by the reserve amount. The system is designed to keep the invested money “working”.
Here is an example of the banks trying to gain control of Cleveland’s power supply.
http://en.wikipedia.org/wiki/Dennis_Kucinich#Cleveland_mayoralty.2C_1977.E2.80.931979
“Specifically, it was the Cleveland Trust Company that suddenly required all of the city’s debts be paid in full, which forced the city into default, after news of Kucinich’s refusal to sell the city utility. For years, these debts were routinely rolled over, pending future payment, until Kucinich’s announcement was made public. In 1998 the Cleveland City Council honored him for having the “courage and foresight” to stand up to the banks and saving the city an estimated $195 million between 1985 and 1995.
If Cleveland had it’s debts held by a state bank, none of that would have happened.
When you owe someone money, they have the power over you to do what they want. That’s the other reason for a state bank. To gain independence from private banking interests which DO NOT have WA state tax payers interests at heart, except to extract cash from us.
The idea that a State bank would loan money “for a good cause” and not try to collect on bad debt is exactly why it’s such a bad idea. If you’re going to run a bank effectively you have to be heartless. Otherwise it’s called a charitable organization like a food bank. Which is where the tax payers would end up when we have no more bread.
Bernie, it’s only allowed to loan money to state sanctioned enterprises. That’s cities, and counties and the state itself. We are not talking about setting up another commercial bank to make loans to Microsoft or farmers. We are talking about making loans to WSDOT, and ST, and the city of Seattle instead of sending them off to the municipal bond market.
And if cities know that there is no consequence for not making payments on time because Uncle George will float them the money? WSDOT is already “swimming” in debt on two mega projects that are a billions of dollars “in the hole”. I don’t see the State getting into the Banking business resulting in improved fiscal responsibility even if there was a way to overcome the problem of the vault being empty. The State doesn’t have a revenue problem it has a spending problem. A new credit card won’t help.
Loans from a state bank would be at a lower interest rate. And the interest goes to the state of WA, not bond holders in NYC.
And yes a state bank can sell bonds. It is a commercial bank, not your neighborhood savings and loan.
Legislature shouldn’t use ‘jobs bond’ to sidestep debt. Yet another example of why the State shouldn’t have any more scams to dig it’s self deeper into debt. Especially something called a bank with the mantra, “The more you spend the more you save!”
Cities have the same incentive to pay back loans as they do municipal bonds. If you fail to pay, we seize your assets, since you pledged tax revenue, we still collect it, and your ability to raise money anywhere else drops because your bond rating goes down as well.
It’s a lose lose game for a deadbeat city.
What happenned to being compasionate? Besides, why be a hard ass when the money is just created when you write the loan. It’s not like the State Bank actually lost anything tangilbe. Just write another one to cover it.
A currency is worthless unless the power behind it has the authority and power to enforce collection of the tax behind it. That’s why the Euro is doomed to failure. The EU is not going to invade Greece, or Italy to force tax collections.
And in fact a state bank is in a better position to enforce collection than a municipal bond holder is. The state can call in armed troops, arrest people and enforce tax collection via the courts. A municipal bond holder who isn’t paid is off to bankruptcy court.
A hard money guy like yourself should appreciate this.
Bernie, Cleveland’s debts were in no way “bad debts” — Cleveland was clearly good for the money, with a tax base which was plenty big enough. There was a concerted effort by the financial scammers to accelerate the debt in order to force a default.
We would hope that a state-owned bank would be run by responsible long-term thinkers, rather than short-term scammers. (Of course, if an irresponsible swindler like Rick Scott is elected, that might not be true, but at least you have better odds of getting a long-term thinker than you do with a private bank these days.)