Michigan Does Not Need a 'State Bank'

By Michigan Sen. Tom George, R-Kalamazoo

On March 16, 2010, on the floor of the Michigan Senate, Sen. Hansen Clarke, D-Detroit, and Sen. Tom George, R-Kalamazoo, debated whether the state of Michigan should run its own bank. This idea has recently been proposed by Lansing Mayor Virg Bernero, a leading candidate on the Democrat side for governor of Michigan.

Sen. Clarke's remarks are here.

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Senator George's statement is as follows:

Mr. President, I rise in response to statements made last week by some members of this chamber and the mayor of Lansing regarding their proposal to create a state of Michigan bank. In their remarks, the proponents argue that creation of a Bank of Michigan to be modeled after a Bank of North Dakota by borrowing $150 million and issuing bonds and then making a billion dollars in low-interest loans to students, small businesses, and credit card users would generate $500 million in profits for Michigan's General Fund. Mr. President, I think that their math is wrong.

It is true that North Dakota has the country's highest per-capita GDP and the lowest unemployment. It is true that North Dakota enjoys a billion-dollar budget surplus, but this is not because it has a state-chartered bank. This is because it has a strong economy based on agriculture, not manufacturing. It is because of this economy that the Bank of North Dakota is profitable, not the other way around.

Moreover, the Bank of North Dakota does not use the FDIC to insure its deposits. Instead, they are insured by the taxpayers of North Dakota who assume the bank's risk. Right now North Dakota's budget surplus is held by the bank and provides a strong capital reserve.

Because Michigan is broke, a Bank of Michigan would have to be capitalized by taking out a loan in the form of selling bonds on the open market. In effect, Wall Street investors would have to loan us the money, and the people of Michigan would be on the hook twice: first for paying off the initial bonds and second for the low-interest, higher-risk loans the bank would be created to make. Our state's financial situation would only be made more precarious by taking out loans to start a bank in order to make even riskier loans that existing banks and credit unions find too unsound to make.

Our current economic crisis was precipitated in part by such behavior. The federal government created lending institutions such as Fannie Mae and Freddie Mac in order to make housing loans traditional banks would not make. And look where it got us. We, our children, and grandchildren are now saddled with billions of dollars of debt left from bailing out these institutions when the mortgages they sold could not be paid for.

The math is wrong because borrowing from one party, Wall Street, at the market rate and then loaning to another party at a discount does not generate a profit. It creates a loss. At best, even if the loans are fully repaid, the people of Michigan will end up subsidizing the difference. Claims that Michigan can make $500 million in easy money, through this type of scheme are simply irresponsible. Unfortunately, they are typical of the budgeting fantasies that have led the federal government and our state to the brink of insolvency.

The problem in Michigan is not that we do not have a state bank. The problem is that our manufacturing-centered economy has collapsed, taking our tax base with it. In order to turn Michigan around, fiscal stability and a sound currency are needed. We need to control runaway health care spending, invest in education, and fix our infrastructure. We cannot afford to throw money away on the latest boondoggle, investment scheme, or get-rich-quick plan.

Do the math again; a state bank does not add up.