48th District State Senator Patty Kuderer wants a state bank. She said that she has lots of data to prove it is a great idea. Well, turns out, there is only one state-ran and state-owned bank in this country – the Bank of North Dakota. However, in the 1800s, there were a number of state-owned banks in US. They all failed miserably, and at great expense to the taxpayer.
Although the Bank of North Dakota is generally a well-run institution now, even its President and CEO, Eric Hardmeyer, advised against starting a state-owned bank in his article on New York Times. In Mr. Hardmeyer’s own words “Today, the bank receives many calls from people interested in starting a state-owned bank, and our response is consistent. We do not advocate the use of this model elsewhere.”
Mr. Hardmeyer said in his article “the Bank of North Dakota is successful because we are partners with North Dakota’s financial institutions, not competitors. However, according to the bill report of SB 5464, “The state bank would compete with private banks on a wide array of services that are offered and available by private banks, without having to pay taxes.” In other words, Senator Kuderer’s state bank would do exactly the opposite of what Bank of North Dakota has done!
Furthermore, when the government owns the banks, lending decisions become increasingly driven by politics, rather than economics. A 2002 paper from a Northwestern University economist found that areas with stronger political parties get lower interest rates from public banks.
The state is on the hook to guarantee all deposits in the state bank. When the first American public bank, the Vermont State Bank, failed after only six year’s operation in 1812, it costed the citizens of Vermont the equivalent of almost $3 billion in today’s dollars. Are Washingtonians ready for this kind of risk?
Update: A recent Bloomberg Businessweek article pointed out that startup costs of a public bank could be in billions. The Businessweek article said “The anticipated startup costs have derailed past attempts to found public banks. Massachusetts abandoned a proposal for one in 2011 after an analysis pegged the required capital at $3.6 billion. The chief legislative analyst for the L.A. City Council issued a report in February saying the costs there could be “exorbitant.” ” . On Nov. 6, voters in Los Angeles will be voting on a public bank. We will update readers on the result when it comes out.
Update: L.A. voters rejected measure to create public bank with 57.81% votes.