Can State-Owned Development Banks Save America?

How about New Mexico?

When Wall Street banks started messing with North Dakota by foreclosing on farm properties nearly a century ago, the "Peace Garden State" gave big banking the finger and established its own financial institution. The farms were saved, and the Bank of North Dakota—government interference in the free market in a big way—blossomed into a fiercely protected fixture in the conservative state.

Because all state funds in North Dakota pass through BND, including regulatory and licensing fees, the institution is extremely well-capitalized. Because BND sticks to investing conservatively on behalf of the people and businesses of North Dakota, and ignores hinky transactions such as credit-default swaps, it has weathered the depressions and recessions of the 20th and 21st centuries with little turbulence.

In the midst of the current economy, with every other state in the country wrestling with crippling debt, North Dakota has none. It has billions in surplus. In addition to paying state government a competitive interest rate, BND issues dividends to the state. According to a March 7 article by Ellen Brown for, in 2008, the bank provided the state a 26 percent return in dividends alone.

For the last two years, state Rep. Brian Egolf, D–Santa Fe, has introduced bills in the New Mexico Legislature aimed at creating a "state development bank" in New Mexico, using a $100 million allocation from the Severance Tax Permanent Fund (STPF). Egolf's position is that such a bank would be in a position to work with small, community banks around the state to ramp up small business loans and increase entrepreneurial activity, thereby bolstering the economy and increasing the tax base. But for two years running, he's been shut down.

In the 2011 legislative session, according to Egolf, his bill (HB 290) was stalled by aggressive lobbying from Bank of America and Wells Fargo.

"I met amazing and unprecedented opposition," Egolf says. "The state development bank was tabled by the business and industry committee early in the session, and only got heard again on March 10. No time was left to carry through the process."

Stacy Mitchell, a community banking specialist for the Institute for Local Self-Reliance and its New Rules Project (see "Local Goes National"), believes that state bank proposals meet resistance from legislators because the concept is not well understood.

"It's sensible for people to have a knee-jerk reaction to the idea of the government running a bank," Mitchell says. "In the current climate, there's a lot of misinformation and scare tactics about socialism."

But, Mitchell says, a state development bank is not a reckless, charitable lending institution; it's a business, operated by professional bankers who have a duty to the citizens of the state rather than to personal profit. Seeing as 35 percent of all the personal profit reported in the US last year was made by banking industry professionals, the notion that the rest of the populace could stand to gain from viewing some banking as more of a public utility than a private enterprise is sound.

In a 2009 interview with Mother Jones magazine, Eric Hardmeyer, president of BND, warned that North Dakota's model was unlikely to be a "panacea" for all the troubles that other states face. He acknowledged that BND had been an effective tool to "spur economic growth for our state" and "to provide niches where others aren't comfortable, whether it's in-state financing of residential loans or making student loans." But he cautioned that it would be key to be perceived as a partner to the banking industry rather than a competitor.

Mitchell believes that's a case that can be made.

"It's a wholesale sort of a bank, so it doesn't compete with retail banks," she says. "It greatly expands the lending capacity of community banks and small and mid-sized banks. Those banks typically have the fewest assets, but make the lion's share of small business loans."

In New Mexico, state-backed programs for small business loans, student loans and farm loans are so splintered into various fiefdoms that the real barrier to passing Egolf's bill may not be big banking lobbyists—it's probably just a good old-fashioned political turf war.

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