Thursday, January 28, 2010

Economist's Notebook: Bradbury's Bank of Oregon Proposal

Gubernatorial candidate Bill Bradbury has come out with a proposal to create a "Bank of Oregon" where all state agencies would be required to deposit their funds. Then the bank would be required to invest only in in-state projects. It is an interesting idea, modeled on a similar bank in North Dakota that has been aroundn for 90 years.

The populism of the idea is clear, 'boo, big multinational corporate banks!,' but is it a good idea?

Well, it is hard to say. It seems to rest on the premise that worthy in-state ventures cannot get access to capital. This is not hard to believe is true to some extent at the moment, but putting aside a once-in-a-lifetime credit market collapse, is this an accurate premise in general? I am not convinced.

Which then would imply that the bank would end up being a lender that would undercut competitors essentially subsidizing Oregon businesses or lend to more risky ventures that might have a hard time accessing capital due to the risk factor (essentially a subsidy as well). Generally, this is where venture capital comes in for new or young ventures, so in some part, I suppose this bank would be filling in for a lack of or an unwillingness of venture capital to fund these projects. If this is the case, I am not sure it is the role of a quasi-governmental agency to play this role. It is easy to see how incentives can become distorted and bad risks are taken or underperforming loans are propped up by even more capital.

On the other side, the state may deposit money in out-of-state banks but the returns on those deposits come right back to the state. And if the state bank is going to underperform - which is almost certainly is be definition, undercutting or taking on more risk - then this will lower the returns on those deposits and essentially this becomes a taxpayer subsidy for business. And we could do that much more effectively through more direct measures.

So what this does, potentially, is create essentially a less efficient bank that will pay lower interest on the deposits of state agencies in order to either, one, offer lower-interests loans to Oregon projects that could get credit elsewhere, or two, fund more risky and/or less worthy projects and this would all lead to higher costs for Oregon taxpayers.

Now, it is possible that I don't understand how much of a disadvantage are in-state projects and how they cannot access funds from regular in-state and out-of-state commercial banks. Anyone want to educate me?

Because at first blush, I just don't see it.

PS, the North Dakota idea is 90 years old, from a time when credit for rural North Dakotan farmers was hard to access. The world has changed a lot since then.

5 comments:

MPPBrian said...

I don't get Bradbury's proposal at all. What problem is it solving? Oregon has many local, community banks with which the State of Oregon could place some deposits. And the idea that the state should put all of its money in any one bank seems irresponsible. Banks do fail sometimes, and having all the eggs in one basket makes no sense. This state is very generous with targetted economic development incentives; I would argue too generous in some cases (see: Business Energy Tax Credit). I'd rather see our gubernatorial candidates make serious proposals about how we are going to support our schools and reform our tax system.

Chuck said...

I agree with MPPBrian that local community banks are perhaps the solution. My sister is a big-bank commercial banker here in Oregon and she has explained to me the problem with their ability to relate to small business. It is all about personal relationships which small community banks are open to. Bill will have to explain more on his proposal.

Dann Cutter said...

I have mentioned this essential issue to him several times. He fundamentally refuses to address the performance and revenue issues at all. If you read his literature, he flat out misrepresents current banking by larger out of state banks... which it seems is in vogue at the time. So, as much as I'd like to consider this a serious proposal - it is pandering in the worst sense.

Fred Thompson said...

The Treasury already Manages a state and local government cash pool. The difference between what Bradbury proposes and status quo is the existing facility is restricted to investing in short-term, highly liquid securities.

sechrest said...

Access to Capital is a problem in Oregon. It has come up in several venues. It has come up often enough that there is a working group with the Oregon Business Council working on the issue.

There are many businesses , especially startup businesses, which have a hard time getting access to capital. Or have a hard time working thru the tough spots in a business because of their banking relationships.

While I think that having more access to capital and stronger local banking relationships is an important step, it is not sufficient.

If I am successful in using my access to capital to grow a company to a good exit, then the tax structure makes it worth my while to move out of state.

If we are going to amplify our businesses in the state, we need to address several parts of the system.