Cut spending, raise taxes, sell off public assets—these are the unsatisfactory solutions being debated across the nation, but the budget crises that nearly all the states are now suffering did not arise from too much spending or too little taxation. The crises arose from a credit freeze on Wall Street. In the wake of the 2009 financial market collapse, banks curtailed their lending more sharply than in any year since 1942, driving massive unemployment and causing local tax revenues to plummet.
The logical solution, then, is to restore credit to the local economy. But how? The states are on their own. Policymakers are therefore considering a variety of reforms designed to increase bank lending, particularly to small businesses, the hardest hit by tightening credit standards. One measure that is drawing increasing interest is the creation of a bank modeled on the Bank of North Dakota, currently the only state-owned bank in the country.
Eight states are now interested in having a state-owned bank.