How States can Fight the Power of the Federal Reserve and Federal Government

I attended a CPA meeting a few weeks back and the speaker was George Burns (no not that "George Burns"). This George Burns is the head of the Nevada Financial Institution Divisions and among other things he mentioned how the Federal government was making a power play against state chartered banks. Before I discuss this power play, first let me explain the duality of our banking system.

Our banking system is comprised of nationally chartered banks and state chartered banks. Nationally chartered banks naturally are supervised by the Federal Government through the "Office of the Comptroller of the Currency" and the Federal Reserve (if the banks are members); state chartered banks are overseen by the state they are chartered in, however, they can also be overseen by the FDIC if they utilize FDIC insurance for their customers and the Federal Reserve (if they become a member). So now that you are familiar with the system, let's talk about the Federal Government power play on state chartered banks.

According to Mr. Burns, none of the bailout money that was handed out went to banks with state charters; it was all given to Nationally chartered banks. Also, that bailout money isn't getting to state chartered banks; thus state chartered banks have less of a safety net right now. The saving grace for many state chartered banks has been that they dealt mostly with retail and commercial loans and so they had higher equity loans than those banks lending to homeowners. At any rate, as the margins of state chartered banks are now being squeezed, and people are fleeing to banks with bailout funds, the state chartered banks are becoming vulnerable. Thus the power play.

After listening to Mr. Burns speak, I wondered why controlling state chartered banks is important to Uncle Sam and the Fed. In my pondering, I came across an article about how California can solve its liquidity problem by following what the state of North Dakota has done. The following is an excerpt from the article:

"North Dakota has beaten the Wall Street credit freeze by generating its own credit. By law, ever since 1919 the State's revenues have been deposited in its own bank, the Bank of North Dakota (BND). Using the 'fractional reserve' lending scheme open to all banks, these deposits are then available to be used as the 'reserves' for creating many times their face value in loans. Other banks in the State do not see the BND as a threat, because it partners with them and backstops them, serving as a sort of central bank for North Dakota. BND's loans are not insured by the Federal Deposit Insurance Corporation (FDIC) but are guaranteed by the State.

"If California followed suit, it would not need to meet the FDIC's capital requirements but could designate state-owned property (parks, buildings and so forth) as its capital base. Applying the 'multiplier effect' by which capital is lent and relent many times over, this base could then generate hundreds of billions of dollars in 'credit.' The State could deposit its revenues in the State bank and pay its payroll through it, generating an even larger deposit base for making new loans. Enough credit could be generated to allow the State not only to meet its short-term budget needs but to buy back its outstanding bonds (or debt). Bond interest and redemption costs on California's General Fund for the current year are estimated at nearly $5 billion -- about 20% of the budget shortfall. All of that money could be saved in interest, since the State would be paying interest to itself.

"The State could do more than just chase the wolf from its door. It could generate enough credit to engage in the sort of economic 'stimulus' being undertaken by the federal government. It could create jobs for the 11.5% of the State's population that are currently unemployed, augmenting the tax base and supplying the incomes necessary to prop up the languishing housing market. Loans for income-producing projects (transportation, energy, housing) could be repaid with the profits generated by the funded projects. And if some of the newly-issued loans were not paid back, they could simply be refinanced. The federal government has been rolling over its loans ever since 1835, the last time the federal debt was actually paid off (under Andrew Jackson)." (Here's a link to the full article and another similar article.)

That article helped me understand how unique state chartered banks could be and how states who created their own bank would be able to take back economic decision making from the Federal Reserve and the Federal Government. States can be in charge of their own destiny by utilizing fractional reserve lending. Wouldn't it be wonderful if a state could kick the habit of dependence on Federal money that comes with strings attached by merely making its own bank? The less dependence a state has on Federal money, the more freedom it has to make decisions that benefit the people who call it home, and the less power Uncle Sam and the Federal Reserve has to manipulate us.

I also ran across some legislation that is making its way through several states. The legislation is a part of a state sovereignty movement. Basically states are trying to remind the Federal Government that it exists for certain purposes spelled out in the constitution and that all other government authority is held by the individual states (here is a link to one article on the movement.) My opinion is that the Federal Government has grown much too big and is involved in matters that should be left to state and local governments. This legislation is a good start, but states should also do what they can to be self-reliant (such as setting up their own North Dakota style bank) and not look for Uncle Sam to give them a handout - trust me those handouts always come with strings.