Friday, April 30, 2010

The North Dakota Bank model

A friend forwarded this to me recently inquiring about the viability of such a model. Yes, socializing banks sounds beneficial in some respects.

However, there are major (in my opinion insurmountable) problems.

1. The inevitability of politicization of the bank capital, disintermediation, and loan approval. We see ample evidence of this in China, and while this system may be working in a state with less than 650,000 residents and relative homogeneity. (it must be mentioned that culturally and demographically, North Dakota is Scandinavian, with obvious affinity to socialist policies and imbued with a special cultural affinity towards egalitarian society. A notable 30% percent of the population is of Norwegian descent.) Transplanting this system into the larger economy would be would take a nanosecond before it became completely compromised by local, state, and Federal politicians.

2. The Bank itself benefits from higher commodity prices. To say it is flourishing because it is socialist ignores this. It is flourishing because it is heavily exposed to a certain market segment and asset classes that have done very well in recent years. To its credit, it refrained from the siren call of "diversify your real estate holdings by purchasing MBS in other states" that it must have heard multiple times from multiple investment banks. But this is not to say the socialist model in it of itself is the cause of the balance sheet success of the Bank.

3. It is not scalable. From the 2009 financial report, the Bank has about 4 Billion in assets. Putting those assets to work is relatively easy. If you hold 500 Billion in assets, you must venture outside of your comfort zone in order to avoid distorting multiple markets.

4. It benefits from flows of Federal Subsidies. Agricultural prices are still subject to Federal Subsidies and North Dakota receives over $400 million dollars per year. There is a recursive element to this socialist perfection.

To conclude: unique cultural factors, a small balance sheet, government assistance, and high commodity prices have combined to make this a success story...but certainly not "because" it is a state-owned bank.

As Washington tries to regulate Wall Street's newfangled derivatives, government officials in at least a dozen states are mulling a more old-school response to the financial crisis: 100 percent state-run banks. Since 1919, North Dakota has operated the nation's only depository of this kind, a genuinely socialist enterprise that spins tax revenues into loans for in-state farmers, students, and small-business owners. Unlike other banks, the Bank of North Dakota (BND) plows about half its profits into the state budget and takes cues from the governor, who acts as chairman, and a seven-member advisory board that the governor appoints.
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In normal times, such a bank might not be politically palatable. Now, however, it's emerging as an attractive model for lawmakers—in large part because North -Dakota flourished during the recession, with the nation's lowest unemployment rate (about 4 percent) and one of the largest budget surpluses (more than$1 billion). Some of the state's well-being is attributable to its agriculture- and energy-based economy. But the BND has helped greatly, propping up more than 100 privately held community banks and keeping credit flowing to small, local businesses even as it remains tighter nationally. The bank could be attractive for more populist reasons, too: it helps keep taxes low—BND has offset $350 million in public projects since 1997—and Main Street's money out of Wall Street's coffers.

Last month Washington state formally proposed its own version, while Hawaii recently commissioned a report. And representatives from other regions are calling Eric Hardmeyer, the CEO of the BND, for advice. His response? Despite the advantages, don't count on getting your own -socialist bank. "The idea of state ownership," he says, "doesn't resonate across the country real well."

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