According to the proposal prepared by consultants, the bank would focus “its initial lending activities on affordable housing development and affordable homeownership, local enterprises (small businesses), and green investments and environmental justice.” The “fundamental need for a city-owned bank,” it says, “stems from the historic inability of traditional financial institutions to equitably serve the needs of low-income communities and communities of color and to deliver financial services that are not extractive or damaging to those same communities.”
While the “proposed governance” of the bank “seeks to make the entity independent from political influence while enabling it to fulfill its public mandate,” making that work in the real world is impossible.
“When the government owns the banks, lending decisions become increasingly driven by politics rather than economics,” says Cato Institute scholar Mark A. Calabria.
“While we must search for a sustainable solution to the flaws in our financial system, government banks would be a cure worse than the disease.”
Calabria runs through a long list of failed public banks. It starts with “first such known institution,” which “was established in Genoa, Italy,” in 1408, and failed “in part because of losses on loans to its sponsoring government,” and goes on to cite a number of failed public banks in the U.S.
Even the editorial board of the Los Angeles Times has noticed the “countless” number of public bank proposals that “have been abandoned over the years because banking is a really expensive, complicated and risky business.”
The editors also noted that “feasibility studies have repeatedly found that a public bank would be too expensive for government agencies and too risky for taxpayers, while also delivering questionable value to the community. Around the country, they’ve been tried – and in almost every case, they’ve failed or shut down.”
One public bank still exists, however – the state-owned, state-operated Bank of North Dakota. But don’t mistake it as an exemplar of its type. Like other government‐owned banks, Calabria says it tends “to subsidize the powerful and connected.” It also exists in a “relatively clean, honest” political culture, which is rare, and means that there aren’t many places where a public bank won’t be corrupted by politics. No slight is meant toward San Francisco. North Dakota just happens to be an outlier in regard to political corruption.
The San Francisco public bank proposal, at least the second for the city in the last three years, has the feel, as do many California public policy ideas, of a progressive solution searching wildly for a problem. Is City Hall unaware that there are nearly 200 local and national banks operating more than 6,500 branches in California, and the option of online banking has created even more choice? If San Francisco policymakers would back away from their government-can-solve-everything mindset for just a moment, they might notice they are yet again overreaching while real problems they could solve continue to grow.
Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.