Khavari’s Idea Gains Momentum; Candidates from Maine to California Push State-Owned Banks in Mid-Term Elections

In announcing his candidacy last June, Iranian-born economist Farid A. Khavari, a Democratic candidate for governor of Florida, became the first candidate for public office to seriously promote the idea of a state-owned bank since the Great Depression when Minnesota’s radical Farmer-Labor Party — a party that held the governorship for eight consecutive years during the 1930’s— included such a plank in its platform.

Modeled after the powerful Non-Partisan League’s state-owned bank in North Dakota, the brainchild of failed farmer and ex-Socialist Party organizer Arthur C. Townley — a salty character who chewed on cellophane-wrapped cigars and is widely-credited with making his bank a reality in 1919 — the Farmer-Labor Party was never able to enact a similar state bank in neighboring Minnesota, even at the crest of its power.

While there have been sporadic attempts to popularize the concept of a state-owned bank in the years since the depression — Lane County Commissioner Jerry Rust briefly tried to make it a major issue during his 1982 campaign for governor of Oregon and the Peace & Freedom Party’s Maureen Smith of Aptos garnered an eye-popping 240,451 votes, or nearly 4 percent of the statewide total, on a public banking platform in her bid for California State Treasurer four years later — the idea has pretty much laid dormant as a political issue for the past seven or eight decades.

The 67-year-old Khavari, who holds a Ph.D. in economics from the University of Bremen, first seized on the idea of a state-owned bank in the spring of 2008 while writing Towards a Zero-Cost Economy — his ninth book. Anticipating the devastating financial meltdown that brought the country to its knees later that year — a crisis that he frankly didn’t think would happen for another twenty-four to thirty-six months — the economist-turned-politician began formulating his idea for a publicly-owned state bank.

Given his encyclopedic grasp of economics and the nation’s banking system, Khavari’s proposed state-owned bank is modeled after the nation’s commercial banks and — relying on the commonly accepted practice of “fractional reserve banking” — could provide fixed-rate mortgages at two percent and credit cards at six percent. The Bank of the State of Florida, he says, would also provide attractive rates on car loans and other consumer borrowing while offering CD’s yielding a 6 percent return.

The bank’s profits would help fund the state government, says Khavari, in much the same way that the Bank of North Dakota regularly contributes to that state’s budget. In the past decade, the nation’s only state-owned bank plowed nearly $300 million into North Dakota’s treasury.

Consequently, it’s one of the few states that doesn’t find itself in a fiscal crisis.

In 2009, North Dakota enjoyed a record $1.3 billion surplus, enabling the state legislature to shift more of the burden for funding education to the state while requiring local governments to cut property taxes by $295 million. In addition, individual taxpayers and businesses received about $100 million in income-tax reductions.

According to the Wall Street Journal, state lawmakers anticipate a $700 million budget surplus in June 2011, the end of its next budget cycle. With a jobless rate of only 4.4 percent, the state also boasts the lowest unemployment rate in the nation.

A similar state-owned bank, declares Khavari, could become the catalyst for an “economic miracle” in recession-ravaged Florida, a state that experienced 544,000 foreclosure filings in 2009. The bank, he insists, could be instrumental in providing the necessary capital to create jobs for more than a million out-of-work Floridians.

Khavari scoffs at his critics who believe his idea would put private banks out of business. “The era of commercial banking is over,” he told the Naples News. “If there were no bailouts, they would be out of business already.”

In the midst of the seemingly never-ending Great Recession, Khavari‘s bold idea is slowly gaining momentum. Moreover, his quest is no longer as lonely as it once was. It’s an idea that’s beginning to resonate, not only on the campaign trail but also in a handful of state legislatures across the country.

The idea might not be as radical as some people think. 

In fact, two of the candidates espousing the idea have been Republicans, both of whom are self-described fiscal conservatives. The first was James Stivers in traditionally-conservative Idaho, who garnered 15.9 percent of the vote in a three-way race for a state Senate seat in his state‘s May 25 primary.

 The other Republican is Gene Taliercio, a Rochester Hills businessman who is running for the State Senate in Michigan’s 12th district.

Patterned after Townley‘s longstanding bank in the Great Northern Plains, Taliercio envisions the Bank of Michigan as an economic development bank that would work closely with the state’s other financial institutions while providing residential loans for single family home purchases and new venture capital for businesses looking to expand.

According to Taliercio‘s website, nearly half of the bank’s profits would be designated to reducing the state’s debt burden while an equal amount would be placed in a trust fund modeled after Alaska’s oil fund established in 1976, shortly after oil from Alaska’s North Slope began flowing through the Trans-Alaska pipeline.

Taliercio isn’t the only candidate in Michigan clamoring for a bank owned by the taxpayers.

Lansing Mayor Virg Bernero, one of two candidates seeking the Democratic nomination to succeed term-limited Gov. Jennifer Granholm, proposed that Michigan — a state saddled with an unemployment rate of fourteen percent — should also follow North Dakota’s lead and create a state-owned bank that would operate like a traditional bank, making low-interest loans to businesses and college students.

A former state representative and state senator who’s positioned himself as a populist fighting for the little guy against House Speaker Andy Dillon in the state‘s August 3 primary, Bernero said that his proposed state bank could also alleviate Michigan’s foreclosure crisis by purchasing mortgage portfolios held by some of the state’s smaller banks.

Contending that commercial banks were hindering Michigan’s long-suffering economy because businesses and entrepreneurs couldn’t get adequate financing, Bernero unveiled his bold proposal in a press release this past March. “We can break the credit crunch and beat Wall Street at their own game by keeping our money right here in Michigan and investing it to retool our economy and create jobs,” he told the Detroit News.

Earlier this year, former Secretary of State Bill Bradbury also came out in favor of a state-owned bank during his unsuccessful bid for the Democratic nomination for governor of Oregon.

Angered that bailout-bloated bankers had hunkered down following the financial collapse, refusing to provide the capital desperately needed by small and medium-sized businesses to maintain operations or expand during this lengthy economic downturn, the 60-year-old Bradbury decided to make a relatively modest state-owned bank — one that would get money flowing through community banks — the centerpiece of his gubernatorial campaign.

He promised that it would be his highest priority, a solution that he could begin “implementing on my first day in office.”

Endorsed by former Vice President Al Gore, Bradbury polled more than 29 percent of the vote in Oregon‘s May 18 primary against immensely popular former Gov. John Kitzhaber.

Despite Bradbury’s loss in the primary, Oregonians may yet have an opportunity to support the idea of a state-owned bank in November if the 3,000-member Working Families Party has anything to say about it. 

 The Portland-based party, which plans to cross-nominate candidates this fall under the state’s new fusion law, favors capitalizing a publicly-owned bank that would partner with local banks and credit unions to help meet the financial needs of Oregon’s economy.

In Illinois, the Green Party’s Rich Whitney is also championing the idea of a state-owned bank. Whitney, who startled political observers four years ago by polling an eye-opening 361,336 votes, or 10.4 percent, against now-disgraced Gov. Rod Blagojevich and Republican state treasurer Judy Topinka, is one of at least three Green Party gubernatorial candidates calling for the creation of a state bank.

In an article in The Nation this past March, the Carbondale civil rights attorney said that “a state-owned bank could earn additional revenue for the state while at the same time help spur economic development in Illinois.”

Green Party candidates Howie Hawkins in New York and former financial analyst Laura Wells in California — a state hampered by a jobless rate of 12.6 percent and facing a staggering $19 billion budget shortfall — have also endorsed the idea of a state-owned bank in their respective campaigns.

A number of other candidates have also been sounding the trumpet, including businesswoman Rosa Scarcelli, one of four candidates seeking her party’s gubernatorial nomination in Maine. She polled 22 percent of the vote in Tuesday’s Democratic primary, about 16,000 votes behind state Senator Libby Mitchell, a 69-year-old Vassalboro lawyer and the only woman in Maine to ever serve as both Speaker of the House and president of the Senate.

Gaelen Brown, who is running for the state Senate as an independent in nearby Vermont, is also supporting the idea of a state bank.

State legislatures are also beginning to take a serious look at the possibility of creating state banks.

In March, Senate Democrats in Michigan proposed the creation of a Michigan Development Bank — similar to the one proposed by Mayor Bernero — to be financed by an economic development bond approved by the voters. If enacted, the bank would provide small business loans, low-interest credit cards for consumers, financial assistance to students and agricultural loans for struggling farmers in an effort to create jobs and stimulate the state’s sluggish economy.

Seattle Democrat Bob Hasegawa, a former Teamster official and longtime labor and social justice activist, introduced a similar bill in the Washington legislature in his role as vice chairman of the House finance committee.

With an eye toward boosting job creation in recession-battered Massachusetts, Therese Murray, a longtime lawmaker who presides over the state Senate, introduced legislation earlier this year to study the formation of a taxpayer-owned bank to free up credit and force banks and mortgage companies to do a better job in allowing homeowners to renegotiate their mortgages — a proposal that was immediately attacked by State Treasurer Timothy J. Cahill.

Cahill, who is currently running for governor as an independent, said it was a bad idea. 

“Cahill is probably beholden to the commercial banking system or simply doesn’t understand economics,” Khavari told Uncovered Politics. “He obviously fails to understand that a state-owned bank has the potential to stimulate the demand side of the economy — an area in which the private banks have failed miserably.”

In the past, Cahill has been rapped by the Boston Globe and others in Massachusetts for failing to adequately identify the employers or occupations of nearly 4,000 donors in campaign filings with the state. He has also been heavily criticized for accepting large contributions from pension fund managers who get business from the Treasurer’s office.

According to attorney Ellen Brown, author of the widely-acclaimed Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, similar bills have also been proposed in Illinois and Virginia and at least four other states — Hawaii, Missouri, New Mexico and Vermont — are entertaining proposals for state-owned banks.

Khavari, who remains a dark-horse contender in Florida’s Democratic primary against the party’s anointed candidate Alex Sink — the state’s chief financial officer and a former president of Bank of America’s Florida operations — is pleased that so many other candidates across the country have embraced the idea of state-owned banks. He’s also happy that several state legislatures are beginning to take the idea seriously.

“Its time has come,” he says.

14 Comments

  1. Pingback: Green Party Watch » Blog Archive » Green governor candidates push state banks in CA, NY, IL - America’s #1 Source for Green Party News & Views

  2. The idea of a State Bank is an idea whose time has come. Banking services are essential infrastructure to enable commerce and investment. The private banks have failed to provide a stable infrastructure. The State has two choices. The first is to try to regulate the private banks so they do not fail – that has proved to be a futile. The other approach is to show – by example – how to fix the problem. State Banks can provide alternative ways to reduce the risk of loans that the private banks appear to have abandoned in their quest for more and greater profits.

  3. Pingback: Khavari’s Idea Gains Momentum; Candidates from Maine to California Push State-Owned Banks in Mid-Term Elections « Public Banking

  4. Why not also consider eliminating usury as well.

  5. In, Canada, the Province of Alberta started a bank – called the Alberta Treasury Branch – in the 1930’s and is is still going strong. http://www.atb.com

  6. The Slow Death Of Zionist America;

    THE KEY TO NATIONAL POWER & INDEPENDENCE is manufacturing. America’s needs, whether it be food, clothing, habitation, or defense, was once bound up and provided for through its domestic manufacturing base.

    As the US Recession deepens and job losses set records, (530,000 jobs were lost in November 2008), the blame must be pointed at the Zionist bankers of the privately-owned Federal Reserve Bank who gouge our money supply with unconstitutional interest rates.

    These interest rates, which create continual inflation, prompt manufacturers to outsource & relocate their industries. By 2015, Forrester Research forecasts that as many as 3.3 million more US jobs will be moved to India & China.
    http://www.realzionistnews.com/?p=345

  7. Dave Mowers says:

    Why don’t we just seize the federal reserve, make it an actual federal bank? You know every time they print a bill the American taxpayer is on the hook for the face value of the bill/debt and remarkably the bills only cost a few cents to manufacture. That’s .97 of every dollar owed to what are thought to be twelve families (private shareholders) and U.S. banks (preferred shares). In essence 90+ percent of all U.S. debt is fraud upon the American taxpayer. You know, Americans have already paid to create, manage and build the federal reserve system. It would save money to expropriate the existing infrastructure and then use the difference between the cost (manufacturing cost) of making the money and the face value to control inflation instead of handing all the productive power and wealth of the entire planet to one group of privileged persons.

  8. Yes! Yes! Yes! A very good idea, it is definitely time to stop the financial insanity where it originates!

  9. Jct: Yes, taking over the credit-creation process from the banks, and the profits as well, is a great idea. But I’d bet every bank-financed politician is going to be against it.

  10. I applaud Dr. Khavari. I would vote for him but I burned my Dem voting card (hint…hint..please run as an Independent)

    What has happened to our economy is the result of the mathematical certainty of compound interest. There will always come a time when the interest due exceeds the ability to pay it. This is called the debt saturation point- where all your excess money goes to paying your bills. You can’t dig your way out of a hole. Soon the government will not be able to pay the interest on the national debt. They will say we are broke and we need to raise taxes and cut services. To this I say, BULL! We can fix this problem with very little pain (that is unless you’re one of those whose job depends on being a parasite on the backs of workers).

    “Dr. Strangemoney or How I learned to stop worrying about the National Debt and hate the FED”.

  11. Capitalism has brainwash us from day one,”make a profit”. A electrical transformer get a 97% output return, on 100% input,3% is lost. That`s the most efficient machine man makes,capitalism say man can get more than his 100%.Nature says no,who is right? Our dying world is a good answer to that question.

  12. Friend of State Owned Banks says:

    I am a huge fan of the state banking idea. However, I have seen NO evidence that the Khavari plan makes any sense at all. In fact, I bet it is against federal law. Seriously, how can a bank pay 5 or 6 percent on deposits and make loans at say 4 percent? This is the core of his economic package. It won’t ever work. I know he believes that he can loan MUCH MORE money than actually exists on deposit at his bank. For example, he believes that his state bank model will allow him to take in $10,000 in deposits and then his bank can lend $90,000. This is not true. This is NOT fractional reserve banking, as it is commonly understood and practiced around the world. This is a model unique and exclusive to Khavari’s “interpretation” of fractional reserve banking. All journalists who cover this subject need to sit down and do a little research on the subject before they laud this plan.

    A great starting source to learn the real facts about fractional reserve banking can be found here:

    http://en.wikipedia.org/wiki/Fractional-reserve_banking

    There is support of the above information on several Federal Reserve websites and in EVERY economic textbook ever written!

    If one studies the site, it is CLEAR that a bank can only lend a portion of what it has on deposit. Thus, a bank with a deposit of $10,000 dollars would only be allowed to lend $9,000 under fractional reserve theory, NOT $90,000. However, once that $9,000 is lent and finds its way into another bank as a NEW deposit, then and ONLY then may a portion of that money be lent, say $8,100 dollars under fractional reserve theory.

    The “FRACTION” component is the DEPOSIT minus the LOAN, which is LESS than the DEPOSIT. In Khavari’s formula he sees fraction as being the LOAN minus the DEPOSIT which is completely backwards regardless of how “encyclopedic” his knowledge of economics is!!!

    Clearly Khavari understands that the true process of fractional banking requires that banks as and entire system may create an additional $90,000 of new deposits. He formulated his theory of banking from that basis. However, from my example in the prior paragraph you can see that I have created $17,100 dollars of new deposits in a sequence or a chain of monetary relationships, not from a single financial entity, and I am WELL supported on this. Just search the web.

    As you can see I created new deposits from old deposits and I am only getting started. The eventual outcome is the same as Khavari’s I would add $90,000 to the money supply through commercial credit expansion. This is how it works! Khavari presumes to CUT OUT the banking system and take ALL the loans for his state bank, and call it fractional banking because the “end” result is the same, however the process is absolutely without question a different process.

    Now here is the danger of his system. It would create a 0% reserve system in which a state plus the commercial banking industry could create as much money as it wished without any regulation controlling the growth of the money supply. This temps MASSIVE inflation then MASSIVE deflation or a complete breakdown of the monetary system. It is bad enough that the Federal Reserve can barely control the banking system, now we want 50 state banks breaking the most important control devise on money supply expansion that our government possesses, which is a rational fractional reserve system, which can only expand when the FED injects new money into the system?

    If Khavari’s plan as well as all the others in the several states wishing to pursue a state model of banking want to proceed as such, then let us put down the pretense of it being a fractional reserve system. There is no need to hold back a reserve at all, since the system is mathematically functioning on a 0% reserve outcome. The pretense of a reserve is at best a charade, to inspire trust, allowing the “bridging” of the common system to a new system of monetary expansion. But this sounds like socialism doesn’t it? I personally don’t believe it is. However, to “sell” it to the American people who are paranoid about it, certainly it must be either packaged in such a way as to confuse them or not alarm them. Thus the Kavari plan must “fib” a little to make it palatable to the consumer.

    Does this mean I don’t believe in the state model? Not really. Why not just go all the way and let each state create its own currency with its own central bank. Essential that is what Khavari is promoting, unless his long-term plan is to close down commercial banking all together. I think if you read the above article carefully you will see that he believes commercial banking is over. Maybe so and maybe good riddance. But until such a day when the states reassert their rights over the federal government they are bound to federal law and its prudential regulation.

    Finally, it should be pointed out that the Bank of North Dakota in NO WAY operates on the Khavari premise. This is a boldface omission by the state banking movement. To compare the systems is to compare apples to oranges. The Bank of North Dakota like ALL banks follow the common system of fractional reserve banking as outlined in many many sources. Those in the monetary reform community would argue that banks already dodge the fraction reserve requirements and so, it they are doing that, well then anything goes. I have seen NO PROOF that banks have dodged reserve requirements and from my perspective this claim is nothing but unsubstantiated conjecture by an impassioned community of activists. Show me the PROOF!

    Right now, the federal government is going in the exact opposite direction as Khavari and the state banking movement. It is RAISING capital reserve requirements and tightening liquidity requirements on all banks. Obviously our government believes that there are reserves held back and the Fed controls them. To say that the banks are going around said requirements, which justifies an irrational banking model, is just lazy journalism at best and rabble rousing at worse.

    A state bank in its most appropriate role would be as a fiduciary agent of the state which in time could make the state an income from interest on loans of state assets as so booked by its treasury arm. If a state sells some land, fine, now it can loan the funds out to students. Great! Let it compete with all the other banks. But don’t presume to offer something you can’t deliver….UNLESS YOU ARE READY TO GO ALL THE WAY.

    That means usurpation through revolution. Believe me, that is what it boils down to when you mess with the currency of a nation. It has happened many times in history and it is a devise of revolution. Don’t get it wrong.

    Well that is about all I have to say. I may check in on this site. However, if you want to contact me or want me to continue this argument, demand form the site moderators that they contact me and make me a permanent part of this discussion. Until then I will remain anonymous.

  13. Our Friend, described the fractional reserve system correctly, but missed several points of importance:
    1) If the deposits are all made to branches of the public bank then the net result is the same as what Khavari describes. If the public bank deals mainly with state funds through its branches then at least the portion of activity that is within that part of the system is appropriately described.
    2) The problem of a debt based currency has not been addressed. The issue is that no matter what the interest rate is if all funds are generated with debt there is no possible way for there to be enough funds to pay all interest obligations without continuous expansion of the money supply through continued borrowing.
    3) Since all of the available funds must eventually be paid back plus more money than was created all value in an economy will eventually come to be owned by the entity that has the right to create the currency. If this entity is an entity formed by the people then they still own what they gave up to form the entity. This is different from all value coming into the hands of a few private power brokers which is what we now have.
    4) Unless we address the issue of eventual transfer of all assets to some unforgiving entity, at some point all loans will be called and the system will ignite??? So the discussion of how to handle this eventual melt down is very important to have. It has been said that the Fed is forgiving interest on the Federal Debt, but that leaves all the other debt that ends up in foreclosure in a deflationary period when there are not enough funds in circulation.
    5) One way to put the additional money that is needed to pay interest on normal loans into circulation is to fund public purpose activity with zero interest loans. There has not been any discussion of this necessity in the public media.
    6) The last point is that taxation is also a means of controlling inflation, but those who hoard excess liquidity as a talisman of virtue defeat that purpose of taxation. The presence of large banks doing program trading with fractional reserve provided liquidity is something that needs more explanation or examination. If this is a serious issue then the returns generated from this kind of activity need to be subject to a very high taxation rate.

  14. Bob Waterstripe says:

    First of all, Friend and Alan make some interesting points–and unlike most people who check wikipedia to learn about fractional reserve banking, Friend has clearly read the whole wiki article. He realizes that $100 in deposits can grow to 900 in new money, just as the Fed itself says (cited near the end of the wikipedia article).
    So where is the mystery in the math? You pay $6 in interest for a $100 deposit, and you loan out $900 at 2% and get $18. Reserves–if the checking account money that does not get 6% interest is not enough, then loan only 800 at 2% and get $16. Never mind that 6% credit cards would earn so much money that you can have any amount of reserves you want.
    CAPITAL is another issue, separate from “reserves”. A state has virtually unlimited capital at its disposal. Current capital requirements limit loan activities to some 20 or 25 times capital. OK, let’s say Florida capitalizes its bank with $25 billion. From where? one way would be to pay 10% dividends to $25B (a small percentage) of the state retirement funds (better than negative 40% they got last year). Now you can generate up to $600 Billion in loans if you want to. (round numbers). The entire GDP of Florida is $750B in a good year. The state could come up with $25B in many ways, if that is the desired capital. It could start with much less.
    Khavari never claimed to want to emulate North Dakota’s state bank. So what if they have the lowest unemployment in America and a nice budget surplus? Wouldn’t the citizens of ND be even better off with 2% mortgages and 6% credit cards?
    You don’t need to have a revolution, or have every state issue its own currency, or anything radical like that. All you need is the state bank in the current system. And the state can just decide it wants to do it.
    Alan points out the limitations of debt-based money, and he is correct: you never create enough to pay the interest—UNLESS the economy and thus the money supply grow. Still, much lower interest rates are extremely beneficial in this regard (putting off collapse indefinitely if nothing else). Ellen Brown has a very viable solution to this issue in her book, Web of Debt.
    There are many ways a state bank could cooperate with commercial banks, especially locally owned ones. On the other hand, what has commercial banking done for us lately? Do I need to enumerate?

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