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.

The New Face of Poverty in Oregon

It won't surprise anyone that the demand for state services associated with poverty has increased dramatically in the current economic downturn.  But the dramatic increase in households needing assistance is unprecedented, for example there was a 58 percent increase in participating households from 2005 to 2009.

This comes from a new study of SNAP, the state food stamp program, reveals how dramatically the population needing assistance has changed.  Suzanne Porter a student in the OSU Master of Public Policy program, and Mark Edwards, a sociology professor at OSU, in a new report show that many of the new recipients of SNAP have no recent history of SNAP receipt, that many of the new SNAP recipients come from manufacturing and construction and are therefore disproportionately male, and that many households have a full-time worker.

Here is the report:

Newly Poor in the Great Recession

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.