Los Angeles Moves Forward with Public Bank Proposal

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The city of Los Angeles seems determined to open a government-owned and -operated bank. The City Council recently voted – 12-0 – to pay $460,000 for a feasibility study.

There are nearly 400 bank branches in the city of Los Angeles, according to one source. Another says there are about 325 branches and 63 banks.

Whatever the true number is, it doesn’t seem the city is underserved, especially in an era in which banks don’t even have to have roofs or walls. There are dozens of online banks, one of which (SoFi) has its name attached to the Los Angeles Rams’ new stadium in Inglewood.

Despite the options, the city of Los Angeles seems determined to open a government-owned and -operated bank. The City Council recently voted – 12-0 – to pay $460,000 for a feasibility study. This happened, the Los Angeles Times reported, “after advocates argued it would do better than private banks to serve black and Latino communities, small businesses, green energy initiatives and affordable housing projects.”

Public Bank LA, a volunteer organization “committed to serving the needs of all Los Angeles communities, particularly underserved members, by ensuring their meaningful participation in the financial system,” insists that “public banking serves as a powerful tool for keeping taxpayer dollars within local communities.” It promises “The People’s Bank” will be “chartered with socially and environmentally responsible mandates and will strive to serve the needs of underserved members of the community.”

“The People’s Bank”? Will the chairman be … Mao?

Well, no. But public banks are still party machinery, their ​lending decisions “driven by politics rather than economics,” the Cato Institute says.

That there is only a single public bank in the U.S. – the Bank of North Dakota, which tends “to subsidize the powerful and connected” even though it operates in a “relatively clean, honest” political culture – should be a clear message that banking should be limited to the private sector. Advocates don’t see it this way, though. They believe that public banks are virtuous. Which is nonsense, because neither governments nor politics are virtuous.

If we’ve learned nothing else from economist Milton Friedman, it should be that elected officials and bureaucrats have the same human frailties that the rest of us do. The difference is government operates in an environment dominated by special interests, often providing “substantial benefits to a few while imposing small costs on many.”

Those same public bank advocates also like to point to the recent failures of private institutions. Yet there’s nothing inherent about public banks that would prevent them from failing, as well. Sure, they could more easily be bailed out by policymakers, since they would have a strong incentive to save the monster they built, but that’s not a selling point.

As a Los Angeles Times editorial helpfully pointed out a few years ago, “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.” And when “around the country, they’ve been tried … in almost every case, they’ve failed or shut down.”

After the Legislature passed a public bank legislation in 2019, the California Association of County Treasurers and Tax Collectors asked Gov. Gavin Newsom to veto the bill. (He did not, and it became law.) “A local public bank, holding the localities’ public funds, cannot work,” the group explained.

The association also noted that “proponents of public banking have not reconciled themselves to the fact that the only known model of a state public bank took approximately 30 years to reach solvency.”

“In no event could a California county treasurer put county poll dollars on deposit with an entity – public or private – that presented any risk to those funds.”

At the federal level, there are ​​Fannie Mae and Freddie Mac, “quasi‐​public banks,” Mark A. Calabria, a former senior aide to the Senate Committee on Banking, Housing and Urban Development, calls them. They have a special brand of “mismanagement and corruption” that is “alive and well at the intersection of the public and private.”

Is there any reason to believe that the Los Angeles-commissioned feasibility study will find that a public bank is viable? There shouldn’t be. But it could happen. Sound public finances are not a distinguishing feature of those who dominate the halls of government in California, so don’t be shocked when they go out of their way to employ researchers happy to produce a predetermined conclusion.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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