Guest commentary: Banking change can help locally and beyond

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By David Bolduc

Naples

The bankruptcy of Detroit may be the canary in the coal mine to future US bankruptcies of cities, counties and states which finance their government infrastructure with municipal bonds rather than municipal banks.

To be more specific, when a municipality like Detroit needs new money to build a bridge, road, sewer or school, Wall Street will create interest-bearing municipal bonds out of thin air where future interest payments will forever leave Detroit’s economy. However, although this extractive model of privately controlled debt to finance public projects is prevalent today, it is not the only way to design a public project finance system. Interest on public loans or bonds could be returned to the economy and the people, feeding and self-sustaining the economy, rather than feeding off it, with the establishment of a city, county or state public bank.

The advantages to a public bank to finance public infrastructure projects are not rocket science. A government that owns its own bank can keep the interest and reinvest it locally, resulting in potential savings of 40 percent because interest charges comprise this amount of a total infrastructure project.

Perhaps the greatest example of public loans working for the good of the people, rather than predatory Wall Street, was in 1932 when the U.S. created the Reconstruction Finance Corporation (RFC): a little-known public financial institution that reversed the Great Depression and funded World War II.

The unique funding feature of the RFC was that its portfolio consisted of infrastructure loans that were largely “self-liquidating.” They paid for themselves by securing the future income streams of the assets created by the loans. For bridge and tunnel projects, tolls were sufficient to repay the loans. For aqueducts or power plants, a small fee would be added per gallon of water or kilowatt of power to repay the cost of construction which could be phased out once the loan was paid in full.

Originally authorized by Congress to provide employment, the public loans provided by the RFC not only succeeded in funding much need infrastructure and war production, it did so without tapping into the federal budget or raising taxes.

While the federal budget in 1932 was $4.6 billion, by the time Congress shut down the RFC in 1953, it had financed over $50 billion of new roads, bridges, dams, universities and power plants without taking money from the federal budget and returning all interest payments to the government. Public credit was simply extended through a publicly-owned bank for productive projects that ultimately paid for themselves, extinguishing the debt.

Somehow we have come to accept that it is less silly for private banks to create loans or bonds out of thin air and lend it to governments at market interest rates, than for a government to simply form its own bank and lend money to itself, debt and interest-free. We have forgotten our historical roots. We have lost not only the power to create our own money and credit, but even the memory that we once had it.

Fortunately, there still exists today one example of a government funding their roads, bridges, sewers and schools with publicly created credit rather than predatory Wall Street, and that is the publicly-owned Bank of North Dakota (BND). Established in 1919, the BND has funded the state’s infrastructure projects with incredible success. Today, North Dakota has the lowest unemployment rate in the country, lowest foreclosure rate and lowest credit card default rate. It has very little debt, and has had no bank failures in the last decade.

While some public bank detractors attribute the state’s thriving economy to an oil boom, similar states with more energy production do not have the same economic track record. Alaska and Montana’s unemployment rate is 7.7 percent, where North Dakota’s is 3.3 percent, and North Dakota is the only state to be in a continuous budget surplus since the economic crisis of 2008. In fact, the state’s balance sheet is so strong that in 2009 it was in the unique position of lowering individual income taxes and property taxes by a combined $400 million. In 2011, they were reduced by another $500 million. Not bad for a state with a population roughly twice that of Collier County.

Collier County can create our own credit system to fund future county projects with the establishment of a Collier County Bank. With a publicly-owned bank, our $700 million in debt can be reduced, taxes can be cut or services increased; we just need the political will.

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