Two mayoral candidates have floated the idea of a municipal bank. Sounds good, but it’s more complicated than you’d think
by Jeremy Nowak
Two mayoral candidates, first Tony Williams and then Nelson Diaz, floated the idea of the city going into the banking business. What problem would a public bank solve and is this the best way to solve it?
One quick but too dismissive of a response is that a city that has trouble collecting taxes, inspecting buildings for public safety, funding schools, and keeping up with pension payments should probably stay out of the banking business and straighten out those issues first.
But candidates Williams and Diaz are pointing to an issue that deserves attention: Access to credit that can fuel economic growth. That’s an issue to take seriously.
But the discussion so far in this campaign has centered more on whose idea it was first—Williams has accused Diaz of stealing his municipal bank proposal—than on the idea itself. A “public bank” sounds good, but when you delve into the history of public banking in the United States, a whole host of questions come to the fore.
No doubt, the idea of a public bank has some popular appeal. After the banking crisis of 2007 and 2008, anti-banker populism hit fever pitch. The public investments in the large banks (some necessary, most not) and the public assumption of the Fannie Mae and Freddie Mac mortgage portfolios created a new reality. The federal government—like it or not—is the largest mortgage banker in the nation.
There is a tradition in American politics that views the expansion of credit as a central issue. Much of 19th and early 20th century American populism had the democratization of credit to struggling farmers as an important sub-theme.
This is the background to the fact that the only publicly owned bank in America is The Bank of North Dakota, a state-owned bank that grew out of rural populism. It was created in 1919 and is still an effective institution today; small by modern banking standards but effective. Its early history was portrayed in a remarkable film titled Northern Lights.
Today the North Dakota bank is an integral part of state government. It manages state deposits and works with other banks around economic development ventures. While it has its own specialty loan programs, it does not exist to compete with other banks, but to originate participation loans with private lenders.
The other example of a public banking system in the United States was the postal system, which for fifty years took deposits and offered a fixed rate of interest to American households. It provided a savings function, not a lending role.
The postal savings system began in 1911 and shut down in 1965. It is an idea that has been revived recently both as a way to potentially redefine the functions of the postal system and to meet the needs of unbanked Americans.
Postal banking is popular in many nations. The Japan Postal Savings Bank is the largest savings bank in the world. The idea was popular in the U.S. in the early twentieth century for two reasons: it was an era of large immigration (like today) by millions of people who used postal systems in other nations for savings, and in a pre-FDIC insurance period, the postal system had a security advantage.
Public sector banks exist throughout the world with mixed success. In some nations public sector banks have very large portfolios of non-performing loans. There are several banks in China in this position; in part because there were no incentives to stop financing state owned enterprises that were failing. Continue reading