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Bank of North Dakota: A Compelling Case for Nationalization?


Kicking the tires of America's only state-owned financial institution.

There's been a bit of ballyhoo lately about the Bank of North Dakota, the only state-owned bank in the United States.

It was created about 90 years ago as part of the populist resistance in the Upper Midwest to New York bankers making decisions on who got farm loans.

But the Bank of North Dakota isn't a model for the creation of government-run banks to save us from the horror of Citigroup (C), Bank of America (BAC) or JPMorgan Chase's (JPM) takeover of Washington Mutual.

Here's why:

North Dakota's population is about 640,000 and it's hard to see how a successful bank largely built on agriculture translates into major states with diverse economies and large populations such as California, Florida, Texas, Illinois, North Carolina and New York.

The Bank of North Dakota serves as the depository for state taxes and fees. It's impossible to imagine the legislatures of major states creating a similar captive base of depositors for government-run banks while the private sector nods in agreement.

North Dakota's agricultural-based economy is shielded from much of the gyrations of the nation's broad economy. Better yet, there isn't rampant housing speculation in North Dakota and the bank wasn't forced to take on billions in subprime loans, thanks to the beneficent souls at Fannie Mae (FNM) and Freddie Mac (FRE).

"We're a fairly conservative lot up here in the upper Midwest and we didn't do any subprime lending," Eric Hardmeyer, president of the Bank of North Dakota, told Mother Jones magazine. "…If we don't understand it, we're not going to jump into it."

The Bank of North Dakota has about $4 billion under management and is solidly profitable. It has a portfolio of $500 million to $600 million in residential loans. The bank also provides liquidity, check clearing services and bond accounting to about 100 private banks in the state.

"For all states to look at North Dakota's model and say this would be the panacea for all those (problems), I don't see that happening," Hardmeyer said. "…We were designed and set up to partner with (private banks) and not compete with them."

But that won't stop some earnest state legislator somewhere from proposing a state-owned bank at home to take business away from banks in the private sector. Never mind that politics infused Fannie and Freddie and turned banks into instruments of social policy, playing a major part in creating the current mess.

It's hard to imagine that state legislators wouldn't do worse in the future. The heavy hand of government can screw up just about any industry. Keep in mind that government mandates, especially on gas mileage, forced Detroit to build cars buyers didn't want. And don't forget the government-mandated ethanol boondoggle.

But that won't stop the usual flock of true believers from putting theology ahead of sound economic practices.

"My advice is everybody take a deep breath," Hardmeyer told Mother Jones. "We're going to get through this and we're going to exit this as a stronger industry than when we went into it, with controls in place that are absolutely necessary, with banks understanding the risks they are taking."

Golly, a state employee touting the strength of the free market - that's news.
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