Friday, March 4, 2011

A Bank of Oregon?

Ben Jacklet has an outstanding article in Oregon Business magazine on the idea of creating a Bank of Oregon that would lend out public money directly to Oregon businesses.  Jacklet's article is an absolute must read for anyone trying to make sense of the idea.  I blogged about the idea of a bank of Oregon over a year ago when Bill Bradbury first proposed the idea as part of his campaign for governor.  I was skeptical then and I am skeptical now.

Many of the questions and concerns I had then are expressed almost verbatim by private bankers in Oregon:

Bill Humphreys, CEO of Corvallis-based Citizens Bank, says he has studied the North Dakota model and concluded that a state bank would be against the interests of the state and taxpayers. “I don’t see how a state-owned bank could enter the marketplace and all of a sudden start making loans that aren’t being made now,” he says. “Unless they decide they’re going to take on greater levels of risk.”

Humphreys and other bankers point out that one driving reason behind the financial meltdown was loose, easy credit without proper collateral. A state-run bank committed to lending to businesses would “share the consequences of higher risk with the taxpayers,” Humphreys says. “This is not a good time to do this. If you look at the state as a business, they are in such a deficit position that they have no business investing in anything.”

Which is precisely what I pointed out a year ago, if a Bank of ORegon is going to start making loans to businesses that can't get private capital, it means they are going to have to make riskier loans - is this really what we want to do?

Then there is the strange populist rhetoric that doesn't make any sense:

“One of the things about the state bank is that it is not not-for-profit, but that the profit belongs to the people,” said Barbara Dudley, co-chair of the Oregon Working Families Party. Dudley told the crowd that the bank could not only provide money to businesses that need capital, but could also become a viable revenue source for the state.

What is it that banks do? They consolidate lots of little pools of private savings and use it to direct larger loans to the investments with the highest return. This is a vital part of any well-functioning economy and provides a valuable service to both depositors and borrowers. For this service they get a normal return - profit - that provides the incentive to provide the service. Profit is not a measure of usury but of the value of the service to the community.

And how exactly does a non-profit provide a viable revenue source for the state? The state can invest its money in private capital markets and make a normal rate of return already, so the only way the bank can provide additional revenue is to do better than that but making riskier loans is not a good way to get a higher return. If they go after the less risky loans that are already being made by private banks they will just end up crowding out those banks and put them out of business.

Jacklet also does a wonderful job of profiling businesses that have had a hard time getting credit on private markets. The very resasons that they can't get private loans should give one pause when contemplating transferring public money to them.

Another supporter is Barbara McLean, who runs the One Stop Sustainability Shop in Northeast Portland with her daughter Jessica Ilalaole. They have struggled since launching in December 2009 with the goal of providing affordable everyday products to help people live more sustainable lives. Their shelves are stocked with dustpans made from recycled plastic, envelopes layered with old newspaper instead of bubble wrap and handmade soaps.

But it’s hard to pay the bills with idealism. After failing to get a loan through her credit union, McLean took out a home equity loan. She and her daughter moved from the pricey Pearl District to funky Alberta, where they’re hoping business will pick up as the weather warms. “We’d like to pay ourselves at some point,” says Ilalaole. Later in the interview, she mentions matter-of-factly that the shop’s unusual prices date back to the launching of the business, when “we didn’t know what we were doing.”

That offhand admission brings up an important point. Prior to opening his wine shop, Allegri worked for 25 years at a nonprofit. McLean’s previous work was doing fish surveys in the North Fork of the John Day River. Both followed their dreams to launch Main Street businesses, but their companies have not grown organically.

Yes, all struggling businesses would like infusions of cash, but the reason many are struggling has little to do with lack of access to loans and more to do with a bad economy, inexperience or unsustainable business models.

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