Banking on Michigan

by Neil Munro
February 1, 2010

Michigan residents are used to sudden and dizzying collapses in the car and truck industry and also are used to seeing it recover, stronger than ever. But we’re beginning to realize, with a sinking feeling, that this time it’s different — and we fear there’s no way to regain our prosperity.

An idea is surfacing, however, that there just might be a change we could make, and without federal permission, that would reinvigorate our state’s economy.

Nothing is stopping our legislature from creating a state-owned bank that would lend “Michigan money” to meet Michigan needs.

We already have such a bank in these United States: The Bank of North Dakota. Though virtually unknown outside that state a year ago, there now is talk in the Florida race for governor of starting one there.

And Conan O’Brien tried to make fun of the bank on the “Tonight Show.”

But it produced smiles, not laughs.

Despite this seeming recession-without-end, North Dakota is prosperous. It had a budget surplus of more than a billion dollars last year and was the only state to gain jobs. That it is largely rural and has only about 700,000 residents might lead one to expect privation rather than prosperity.

While the advantage of having your own bank is many-faceted, the chief attraction probably is the ability to invest the residents’ tax dollars within their state for their benefit, exclusively.

A state government’s cash on hand earns interest now, of course, when it is deposited in normal banks. The banks generate those interest payments by loaning the government’s cash temporarily to customers who need to borrow.

Imagine, though, that if “we the people” of the state of Michigan owned a bank directly, the interest earnings would be ours!

But that’s not the best part. Banks have, since they began, loaned eight to 10 times as much as they’ve accepted as deposits. It’s not only legal, but is essential.

President Barack Obama alluded to that phenomenon when he explained why federal assistance money was being deposited in banks — to vastly increase the amount of it ultimately available to boost the economy. Of course, that was before he realized those private banks were so frail they were going to sit on the dollars for their own survival, rather than multiply the money by lending.

The New York Times recently cited an example here in Michigan. Independent Bank of Troy received $72 million of the $700 billion-plus in bank bailout funds. But it needed it to prop itself up, rather than to make loans.

In any event, when banks can and do lend, they create most of that money with the proverbial stroke of a pen.

It is by charging interest on those loans that they can pay interest to the depositors whose money it is. Since the depositors don’t all want to get all their money back at the same time, the total amount loaned can vastly exceed the amount deposited. That’s where most money comes from.

Sometimes people have a hard time getting their minds around this normal banking relationship between deposits and loans, but they can learn. The folks in North Dakota obviously are way ahead of us on that score.

North Dakota’s normal tax and fee revenues are deposited in its own bank that must pay interest to the state, as would other banks competing for the deposit business. (But the state-owned bank there is careful to cooperate, not compete, with the private banks in the state; no interest-rate wars, for example.)

That state’s bank, in turn, loans the money only to citizens and businesses within North Dakota. Incidentally, in doing so it also became the first to make student loans. It obviously and inevitably is close to the needs of its owner-customers.

Large multi-state banks, on the other hand, can and do invest money in one state that has been earned by depositors in another and less economically attractive state. Imagine what’s happening to many Michigan business and family bank deposits that are multiplied eight or 10 times and pumped via loans into the Texas economy, perhaps, where Detroit’s former Comerica bank finally moved its headquarters.

By contrast, the North Dakota bank’s assets promote business only there and also can act as a “rainy day” fund for that state and no other by passing along a substantial dividend to its government, when needed.

Is there opposition and resentment from private banks? In general, the North Dakota public bank’s president says, it is a partner with them, rather than a competitor.

But he suggests another state now most likely would sell bonds to raise the money to get its own bank started, rather than dip directly into state coffers as North Dakota did almost a century ago.

What are we waiting for?

Neil Munro is the retired editor of the Oakland Press in Pontiac.