Frank Murkowski rejects creating a new loan authority as part of the Alaska Permanent Fund using simplistic political cronyism and duplicated bureaucracy arguments. Even though I agree with some of what he says in this article, my question to him is why has Alaska failed to invest in our great projects if our state does not require additional or reformed credit mechanisms?
The Alaska Permanent Fund dividend cannot be protected if our economy fails.
Let me set the story straight through introducing some basic principles of money and banking and argue that creating a public bank is a better solution than creating a new loan authority within the Alaska Permanent Fund for five main reasons.
The first question is whether the money from the new Alaska Permanent Fund loan authority will come from existing savings or increases in the money supply. In banks and some non-banks, loans create deposits though double entry bookkeeping. In other types of funds, money that already exists is used for new loans.
There has been much confusion about this issue over the years and false theories continue to intentionally plague our understandings of money and banking. The false “financial intermediation” theory says that new loans in banks are simply transfers from other people’s deposits. The false “fractional reserve” theory says that new loans in banks originate from reserves that are controlled by a central bank.
What is actually occurring in banks is called “credit creation” where the mechanism of double entry bookkeeping originates new loans that create the new deposits. The money that is loaned by a bank is actually an increase in the money supply and does not exist before the origination process.
Financial intermediation does occur in most nonbank lending, loan authorities and other types of funds but the most efficient method of lending is to increase the money supply. The question is what type of loan mechanism is being proposed in this Alaska Permanent Fund loan authority?
Creating a loan authority within the Alaska Permanent Fund for lending public savings that does not increase the money supply is not the best solution because it exposes the fund to unnecessary loss and does not use the efficiency of the credit creation method.
The second issue is the possibility that Alaska Permanent Fund lending will create destructive inflationary asset bubbles in Alaska. New lending that is not directed toward productivity growth can drive up the prices of land and other assets that can lower living conditions for many Alaskans.
The Glass-Steagall Act and Commodity Exchange Act standards should guide all loan decisions for Alaskan investments. Even a simple Gross Domestic Product standard would be better than no standard or only relying on the prudent investor standard that has proven to be inadequate for protecting against asset bubbles.
The third issue is the size of the proposed loan authority within the Alaska Permanent Fund. At the proposed 200 million dollars, most large-scale Alaska projects for energy and transportation will not substantially benefit. The Alaska Industrial Development and Export Authority (AIDEA) is also too small to handle the large projects necessary for Alaska’s current and future development requirements.
As long as there is not a credit mechanism large enough to handle large infrastructure in Alaska there is the possibility that some of our proposed infrastructure projects such as a new gas line will overly attract foreign investments so large they will end up acting as a debt-pyramiding operation on the Alaska economy and expose our economy to massive loans in foreign currencies—and thus expose our future political choices to foreign dictates.
The fourth issue is on the subject of federal monetary cooperation. Not having the proposed loan authority within the Alaska Permanent Fund legally created as a real bank negates the possibility of accessing many existing and future federal monetary subsidies—some of which can increase substantially during financial crises.
Another problem with the Alaska Industrial Development and Export Authority (AIDEA) is that it is not a bank designed to receive the benefits of federal monetary policy.
The fifth issue concerns the inherent political nature of the grant process. Having the power to increase the money supply allows for creating grants as a percentage of originated loan packages. These grants and congressional appropriations of grants transferred into our financial credit mechanisms must have a fair and politically directed method of distribution.
Allowing an unelected AIDEA bureaucracy or an unelected loan authority within the Alaska Permanent Fund to determine grant allocations would be antithetical to our democratic public process that is based on checks and balances. There must be election consequences to decisions made in grant allocations. Alaska as a state within the United States must comply with democratic republican principles.
The best solution is to set up a public bank that is separate from the Alaska Permanent Fund that uses credit creation for economic development and has a legislative and executive branch directed credit guidance policy and grant process that directs new increases in the money supply toward the types of science, technology, education and infrastructure that makes our economy more productive in the future.
Most important, our new public bank must be designed from the beginning to receive multibillion dollar subsidies from federal fiscal and federal monetary policy to invest in large infrastructure projects in Alaska; and protect Alaska from international financial calamites and the natural high failure rates of medium and small enterprises.
The goal is to have Alaska’s new public bank use the existing bureaucracy of AIDEA and other development organizations and combine this potential with the legal requirements of a bank that can increase the money supply using Glass-Steagall Act and Commodity Exchange Act standards—while being protected and subsidized by our federal government.
If Alaska is to protect the Alaska Permanent Fund and its dividend program while investing in great infrastructure projects there must be a general understanding of the basic principles and problems in money and banking that are ignored by Frank Murkowski in his recent article.
Only a successful Alaska economy can protect the Permanent Fund dividend and one of the keys for achieving that goal is to create the Alaska State bank.
