Should New Jersey start a bank to pay off debt?

Brian Greenberg wasn't quite able to ride Gov.-elect Chris Christie's coattails: The Marlton-based accountant lost his bid this month to join the New Jersey General Assembly as a Republican from a Democratic district.

But that hasn't stopped Greenberg from dabbling in public policy: He wants New Jersey to start a bank. From the latest issue of his newsletter, the 5% Solution:

"The State could save billions of dollars in debt service for years to come" if it formed "its own bank, whose purpose would be to pay off the $40 billion plus in debt (New Jersey) has accumulated.

"Instead of interest payments going to private investors, the payments will effectively go to the residents of the State. The State would save over $6 billion a year in debt service.

"Pouring money into the private banking system has fixed the economy only for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans find themselves in...

"North Dakota is a sparsely populated state... Yet... this year it has a budget surplus of $1.3 billion, the largest it has ever had." Plus low unemployment. "Why is North Dakota doing so well?"

I'd say, high world grain prices, plus strong export demand and a weak dollar. But Greenberg says it's all due to North Dakota's state-owned "credit machine... Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of 'fractional reserve' lending...

"New Jersey pays $6 billion annually in debt service. If it had its own bank, the bank could refinance its debt and return that $6 billion to the state's coffers; and it would make substantially more on money lent out." As in North Dakota, a New Jersey state-owned bank would "provide a secondary market for real estate loans, which it buys from local banks." It could guarantee "entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions and a well-funded disaster loan program...

"The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates."

Greenberg anticipates the obvious problem with his scheme: "New Jersey wasn't named "The Soprano State" for nothing. Explicitly stated in its by-laws and lending practices must be strict conservative guidelines that the borrower must have adequate assets and security exist to repay in the event of a default. Otherwise the politicians will, like Tony Soprano, be whacking up loans to their friends and contributors." Well, yeah...

It's a provocative idea. Then again, most states - including Delaware up til relatively recently - used to own their own banks, and politicians couldn't keep their hands off them. Are we ready to experiment again?