Archive for July 28th, 2011

Bank of North Dakota – Case Study of the only state owned bank in US

July 28, 2011

Wow! I did not know about this at all.  Bank of North Dakota in the state of North Dakota is the only state-owned bank in US. It was opened in 1919 as North Dakota farmers  were having difficulty securing adequate credit at a  reasonable cost.

Unlike India where we have banks owned by Central government and are called state-owned/public sector banks, here state-owned bank means owned by state. US Federal govt is not in any business of owning banks. BND is the only state govt owned bank in US.

It has come across as a nice professionally run bank with low NPAs and high profitability and returns. It also just has one branch in Bismarck and has not really expanded throughout the state. Its deposits are not insured by FDIC but are guaranteed by the full faith and credit of the State of North Dakota.

The deposit base of BND is unique. Its primary deposit base is the State of North Dakota. All state funds and funds of state institutions are deposited with Bank of North Dakota, as required by law. Other deposits are accepted from any source, private citizens to the U.S. government.

There were talks post crisis that State governments in US should also have their own government-owned banks. They thought this might have helped them ward off crisis. Their own bank could have infused more liquidity/credit and also provided some dividend to help in fiscal crisis.

Boston Fed did a superb study looking at whether State of Massachusetts should have a bank modelled like Bank of Dakota. Their analysis shows the experience have been mixed. Overall research shows Bank of North Dakota has played some role in development of North Dakota State but not really an exclusive role.

There are 4 reasons for setting a state-owned bank:


Great divide between academic, business and government economists

July 28, 2011

Mark Thoma has this another superb article on state of economics. He looks at examples from medical industry where academicians work closely with practitioners. In economics we have very little association between the two.

So medical academics apart from looking at how human body works also works on potential threats/new diseases etc. In economics it is mostly about how economics works and very little to do with treating health of economy and firms.

He starts interestingly:


Why Indian public is not angry against persistently high inflation?

July 28, 2011

This has been a question asked by a few.

Arvind Subramanian of PIIE adds more thoughts on the matter. He says it is a mystery how public has been so far silent on this high inflaition. Barring some cries against few food items (like onions in 2010), the public has been more or less silent. What are the reasons. He points to six possible reasons:

  • (i) Protection of rural India — Rural India incomes protected via NREGA which now has wages indexed to inflation..
  • (ii) Declining importance of food — NSS surveys show share of food in consumption declined from 41% to 29%, hence less impact of rise in food inflation
  • (iii) Decline in fixed-income earners — more wages seem to be indexed to inflation so people are not really concerned
  • iv) Rise of debt-financed consumerism — This is a good point. He says people are increasingly financing consumption via debt:

according to RBI data, personal consumer loans increased roughly threefold during the 2000s from 3 percent of GDP to about 10 percent. Higher inflation lowers the real cost of borrowing and effectively subsidizes consumption. However, this argument is valid only if borrowing is at fixed rather than floating interest rates, and consumer loans in India tend to be of the latter type.

  • (v) The absence of large price changes — may be price changes are more incremental and not onetime big changes for people to note
  • (vi) Growth matters more: people seem to be more concerned over growth..


In the end he says:

In any event, since higher inflation tolerance is still just a possibility, its causes unclear, and its reversal not improbable (as in 2008), RBI should not relax its guard. And the government should help with some serious fiscal consolidation on its part. The Sita of macroeconomic stability should not be sacrificed by diluting the Lakshman rekha of 5 percent inflation.

Another point he makes towards beginning is how RBI is one of the few better run institutions in the country:

Keeping inflation low and stable has been one of India’s major policy successes. On the strength of this achievement, the Reserve Bank of India (RBI) could pride itself as one of the better-run public institutions in the country. But conducting monetary policy was among the easier jobs in India. In some ways, RBI had little choice but to deliver macroeconomic stability because of the propitious political economy of inflation. The politically assertive middle class has had low inflation tolerance, with 5 percent considered the threshold —or Lakshman rekha —beyond which the clamor for action, never constrained by apathy or acquiescence, becomes difficult to ignore. RBI’s policy merely reflected an unavoidable respect for the inflation preference of key voters.


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