Now, on the surface, Brown’s assertion that the difference between North Dakota’s solvency and the 47 states that are insolvent in this economic crisis is the state-owned bank, seems legitimate. However, upon closer inspection this is proven inaccurate. First of all, North Dakota is the third least populous state in the union, with fewer than a million residents. There is little crime, hardly any costs associated with illegal immigration, and much less of a need for social programs. It is, after all, a conservative Midwestern farming state.
Indeed, it is probably because of the state’s two biggest industries, agriculture and petroleum, that North Dakota is doing so well. These industries have done very well in recent years and would account for the huge growth in the state’s GNP and personal income. Incidentally, the exclusion of food and energy costs from the consumer price index has contributed to moderating the national inflation rate at a time when both commodities’ costs have been relatively high. As far as the solvency of the state is concerned, North Dakota is not a low tax state and given the prosperity of the two aforementioned industries it’s no wonder the state’s coffers are overflowing.
Secondly, what Brown suggests is responsible for North Dakota’s prosperity is really just fractional reserve banking, albeit through a state-run bank instead of the private system. Fractional-reserve banking is nothing new, and in fact is what the Federal Reserve System is based on (hence the quote from the Dallas Fed). It is a monetary scheme whereby banks keep only a portion of all their deposits (currently approximately 10 percent) in reserve and loan out the remainder, while at the same time maintaining their obligation to pay on demand all deposits to savers. There are two problems with fractional reserve banking: Loss of liquidity and inflation. The Fed maintains what is called a discount window for banks to use to borrow short term from the Fed when their liquidity is insufficient. Fed chairman Ben Bernanke has been asked several times by Congress to divulge the names of banks that utilize the discount window. He refuses on the grounds that the information would unnecessarily cause a lack of confidence in those banks and put them at risk of real insolvency. However, it is more likely that the number of banks utilizing the discount window is immense, primarily because of fractional reserve banking, and to make that information public would destroy all Americans' confidence in the banking system. Think about it, when a bank writes down a bad loan it is also writing down a deposit on which it must eventually make good. How many banks have written down bad loans in the current crisis?
Article comments
1 - Dave Nalle
Kenn, you're confusing me. I thought you opposed fed-style banking?
Dave
2 - Clavos
Dave,
Are you being ironic?
3 - Dave Nalle
Possibly.
Dave
4 - El Senor
I don't know about that. But one thing that might save California.
5 - Kenn Jacobine
Dave,
I do - where is the confusion?
Kenn
6 - Bliffle
A shallow analysis of inflation. It ignores the justifiable source of inflationary pressure caused by increasing population and productivity, which means that policy revolves around who benefits from inflation.
Anyway, CA doesn't have very high welfare and tax sources are throttled by the old prop 13 law which flagrantly misallocates tax sources and the ability of the a small minority to hold up any budget.
Also, prison costs are high because of the prosecution of marijuana users and handlers.
7 - Bliffle
"As was mentioned in this column last week, given the defeat of tax hike propositions in California..."
There is considerable opinion around here (admittedly, the liberal SF area) that rejection was not over the (tepid) tax proposals but rather the cowardice and laziness of the legislature and governor in pushing this problem onto the voters instead of solving this themselves and thus earning their pay.
Who needs a government body like that?
8 - Kenn Jacobine
Bliffle,
How does increasing population and productivity cause inflation? Increased productivity and a stable money supply would actually cause deflation. Population growth has nothing to do with inflation. Inflation is caused by too many dollars chasing too few goods. Under our current fiat money system any inflation is always the fault of the Federal Reserve which prints the money. They either miscalculate the need for new dollars or don't care (like is currently happening).