But lawmakers were pushing forward anyway.
AB 2243 would have established a taxpayer-funded commission to study the feasibility of a public bank and how it could act “as an additional financial tool to lower borrowing costs, strengthen local lending partnerships and help finance urgent public needs like affordable housing, infrastructure, climate resilience and small business growth,” according to a press release from the bill’s author, Assemblyman Matt Haney, D-San Francisco.
The bill died (for now?) without a vote in the Assembly Appropriations Committee but had passed two prior committees. Why anyone voted for it is one of those mysteries of the Legislature. Technically, lawmakers were pushing to form a commission, not a public bank itself, but it’s not like they would have studied the issue to tell them it’s a bad idea.
There are some huge hurdles to forming a public bank, like meeting the capital requirements, or the rigorous federal regulatory burdens, or the need for FDIC insurance, which is required by state law. No modern public bank has completed the process to get FDIC insurance, and the Bank of North Dakota, the only public bank in the country, doesn’t have FDIC protection, and that exposes taxpayers to significant risk.
But there’s probably no bigger obstacle than the state itself – is there any evidence the state would make a good banker?
Washington state looked into a forming a public bank and found it “reckless,” too risky and lacking “enough proven benefit.” Massachusetts also considered it and found it to be too expensive to start, too risky and unnecessary with all the other funding options already available.
The Bank of North Dakota was formed over a hundred years ago, in a different time and era. Though the North Dakota bank is considered to be successful and well run, a study found that its success is at least partially due to income tax exemption and the significant risk shifted to North Dakotans. The study also found that the bank could take little credit for the state’s energy boom.
The push for a public bank is based on a flawed premise. Haney’s reasoning follows that because California has a large economy, it should have a public bank.
“California is the fourth-largest economy in the world, generating nearly $300 billion in annual revenue,” Haney notes in the Assembly bill analysis. “Yet despite this economic strength, the state continues to rely heavily on private financial institutions to finance public investments.”
Not only is that a false equivalency that should invalidate the idea on its face – California has a big economy, so it needs its own bank? – but it ignores the fact that California’s private banking system is one of the larger drivers of the economy.
Climate activists are backing the effort because they want the bank to fund a bunch of environmental priorities. But currently there is no shortage of investment in viable, profitable projects, so what happens when the state uses taxpayer funds to prop up risky and unprofitable programs?
Bad stuff. That’s what happens.
China’s public banking system is being crushed under the weight of bad loans driven by political decisions. In fact, the country’s public banks just posted their lowest returns on record due to failing investments in the property sector.
“California is the fourth largest economy in the world, but we still send billions of taxpayer dollars in interest out the door to Wall Street just to finance the things our state needs,” Haney said in the press release. “That is money that should be helping us build housing, upgrade infrastructure, support small businesses and invest in the future of this state.”
Haney thinks the money spent on debt service is wasted, but that’s just a business expense.
Money isn’t free. But is debt service the problem, or is it the decision making in Sacramento that borrows so much money in the first place? What about the inability of state bureaucrats to finish a project on time and on budget (or, in the case of high-speed rail, finish at all)?
What Haney seems to be missing is that a public bank will also have to charge interest in fees to stay solvent. Is he proposing that the bank lose money? A state bank can force interest rates down, but it can’t change the underlying risks that rates are priced to absorb. It simply transfers these risks to state taxpayers who will be on the hook.
Again, the bill has passed two committees, which is astounding. Forming a committee – for an estimated $4 million! – is a waste of money when there’s already plenty of credible analysis highlighting all the reasons a public bank in California is a bad idea.
Once the available information is considered, the idea of a California public bank makes no sense. There’s not a gap in the market that a public bank is necessary to fill, and it would saddle taxpayers with significant costs and risks.
Even if the idea is revived in the future, lawmakers should not waste any more time considering it.
Matt Fleming, MBA, is Pacific Research Institute’s communications director and policy fellow.
