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Cash-starved states need to play the banking game

On February 19 California narrowly escaped bankruptcy when Governor Arnold Schwarzenegger held the state senate in lockdown mode until they signed a very controversial budget.

If the vote had failed, the state was going to be reduced to paying its employees in IOUs.

California avoided bankruptcy for the time being, but 46 of 50 states are insolvent and could be filing Chapter 9 bankruptcy proceedings in the next two years.

One of the four states not insolvent is North Dakota. Since 2000, the state’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent and this year the state has a budget surplus of $1.2 billion.

What does the State of North Dakota have that other states don’t? The answer seems to be: its own bank.

In fact, North Dakota has the only state-owned bank in the nation.

If the State of California established its own bank, the state would actually own the bank so it would not have to worry about shareholders or profits.

It could lend to credit-worthy borrowers at very low interest – perhaps limited only to a service charge covering its costs – and could lend to itself or to its municipal governments at as low as zero-percent interest.

The more we understand about how the Federal Reserve and the other banks operate, the better a state-owned bank starts to sound.

Mike Welling


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