If State Banks, Why Not County Banks?

A Bank Formed During the Great Depression Could Be the Key to Credit Access

The majority of state and county officials in the United States are staring at serious budget problems from which there is really no escape without significant action. Rising health care costs, employee pension fund losses, and revenue shortfalls are affecting budgets at every level of government. Notably, all of these problems were caused, both directly and indirectly, by speculation in the financial and banking sectors on Wall Street. Cutting pensions, eliminating health benefits, and slashing budgets are a diversion from the source of the troubles.

Tightening our belts and straightforward budget cutting are helpful in the short term but ineffective as long-term solutions. Real solutions to our financial dilemma require us to redirect the public’s investments away from speculative Wall Street banks and their too-big-to-fail counterparts.

To begin, state and municipalities should enjoy lower interest rates on their bonds through effective use of their own reserve funds. State banks and county banking institutions can manage their own revenues and savings in order to create wealth and localized public benefits.

During the Great Depression, the U.S. government sponsored the Reconstruction Finance Corporation (RFC). The RFC demonstrated that rescue, recovery, and economic development banking can be done profitably and to great effect.

The state bank solution is a proven concept; The Bank of North Dakota demonstrates that state banking works.Though it is decentralized in comparison to the RFC, it still is big enough to have a significant effect but with less concentration of financial power. County banks could be an innovative way to capture the same benefits of state banking while further decentralizing power and decision making.

The benefits of the county investing its own money are balanced by the risk involved in the enterprise. For that reason it should only operate on conservative banking models and proven precedents of state-sponsored banks. Generally a county bank’s activity would be limited to participation loans with other banks and private investors. A county bank does not provide 100 percent of a loan on any project and it would always take the first position in case of losses. The guidelines and principles of successfully running this type of financial institution exist but are not well known.

There is a credit crunch in the United States and private banks are not lending sufficiently. Expansion of credit through wise investment is the prerequisite for economic recovery. By counties and states creating their own banks, they would have the power to do what the large private banks should have been doing for the country all along. The benefits and program possibilities for a county-owned bank are:

• Financing county development projects with low-interest loans which can save millions in interest charges. A county bank can help buy up and sell its own development bonds.

• Improved ability to stretch county development dollars by seeking participation loans with the state, and with private investors, as well as federal loans, grants, and matching funds.

• Low interest disaster relief loans to cities, residents, and businesses in the county that are affected by fire, flood, tornado, etc. The purpose of these loans is to stabilize the economy and protect revenues in a crisis without spending or raising taxes.

• “Self-Liquidating” infrastructure investments for water, power, and transportation projects. These loans create assets and reliable revenue streams that can be dedicated to loan repayment. Thus the loans are structured and secured to pay for themselves. These kinds of projects create jobs, new wealth, local demand for supplies, and more consumer spending in the local economy. Additionally, such projects could be used to lower the costs of water, power, and transportation in the region which is helpful in attracting and retaining businesses. All of these things indirectly increase revenues without the county making any changes to spending or taxation rates.

• Investing in a new profitable approach to underfunded county systems of health care. Many counties could benefit from a new way to deal with the state and federal health-care mandates which are contributing to deficits and increased health care costs at the county level. A solution to this problem can positively impact residents, businesses, and the county in many ways.

• Financing and refinancing for loans owed by the various county departments. Lowering the interest rates of loans can save millions of dollars in interest payments each year.

• Economic recovery loans at low interest rates that are intended to reward existing and successful local businesses. Specific goals for these loans would be for a business to remain in the county, expand, or initiate new hires.

• Participation loans for purchase of energy efficient appliances, solar panels, clean energy vehicles.

• Some or all of the profits from a county bank are returned to the county’s treasury each year. Both the Bank of North Dakota and the RFC regularly returned profits to their respective treasuries.

• Low-interest loan programs for cities to reduce some of their interest payments

Residents and businesses should receive a long-term benefit from the proposed bank. Therefore to make it a success, county officials should insist on these programs being carried out in a businesslike and nonpolitical manner. To provide the lowest possible interest rates, the bank must minimize losses and still have some profit margin in order to pay for its operational costs. Therefore, these loan programs should be low risk. With that caution in mind, a county bank is feasible and could be a great asset to any county.

Jeff Orr, an engineer with a deep interest in financial reform who blogs at

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