Thoughts on the merits of a “State” bank in New Jersey?
May 15th, 2017 | 
Author: I was asked to take a look at Phil Murphy’s “state bank” idea. So I did and here are my thoughts.
The general idea is that the State would create a bank that would service the State of NJ and then make loans to municipalities and possibly special classes of citizens, like students, at favorable terms.
I had three initial thoughts
- By charging lower rates than commercial banks for the same amount of risk, taxpayers will bear the cost
- What problem is this idea trying to solve?
- Why would NJ, in 2017, model anything after North Dakota, in 1919 (as apples and oranges a banking environment as you can possibly get)?
I read the Politico article about this which was fairly in depth and came away even more confused.
It seems that the Murphy campaign is struggling to figure out how it can protect a State Bank from political corruption. That’s good, because it would seem that a State controlled bank would be like a sandbox for malfeasance of one type or another. You can just hear the back room bargains now for funding of this or that local infrastructure project in return for some sort of favor.
Meanwhile, the question that is NOT adequately addressed is “what problem are we fixing?” The answer can NOT be that commercial banks are charging too much. If that were the case then there are plenty of other banks that would charge citizens less if it were possible. A State bank could only charge less if it were subsidized by taxpayers, which is exactly what will have to happen. The public can be easily duped on this note because not many people understand the relationship between risk and cost. Basically, a State bank could charge lower interest on loans if taxpayers guarantee the loans. If loans go bad, it’s not the bank who takes the loss, it’s the taxpayer.
Presumably, we DO have a problem with corruption in our use of banking services. Why wouldn’t we? NJ politicians have found ways to corrupt all types of government contracting. While a Public Bank could address this corruption, it seems like we would be simply shifting the corruption from one place to another.
We do a lot of dumb things in NJ. As an example Trenton used public money ($65M in state and local funds) to build a publicly owned hotel back in 2000. This happened because private money didn’t think there was a good business case for the hotel. And there wasn’t. So taxpayers were left holding the bag when the hotel went bankrupt. This is what happens when we let politicians with big chunks of public money make investment decisions. A New Jersey Public Bank would fund a field day for politically motivated bad investments.
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Those are fair and understandable concerns, but they’re predicated on incorrect assumptions. Let me offer some clarifications and rationale for why the people deserve to have their own bank.
The first reason is that banks actually create new money when they make loans. They can leverage their capital 10-fold, meaning that if we’d capitalize the state bank with $100MM, we could actually lend ourselves $1 Billion for infrastructure or schools or the long list of other things that we’d have to go to Wall Street for. Borrowing from the bond market typically DOUBLES the cost of public projects — why should we be forced into that exploitative relationship if we can create our own credit? Banks are not intermediaries that dole out amounts they have on hand — they actually create NEW money when they make loans. Right now we let private parties, from our loyal local community bankers and credit unions to the gamblers on Wall Street, have that powerful franchise to operate in their own profit-based interest. No problem that they are profit based — just that their motivation is profit, not the public interest. That’s a big problem as we see how criminally irresponsible the big banks have been consistently, all at the public’s expense. The 2008 collapse is merely the latest catastrophe that ruined our economy and millions of people lives by lost homes, jobs, etc. That will happen again, as it does like clockwork almost every 10 years. Count on it.
Second point is that the proposed state bank would not be run by political and special interests and would be run by banking professionals, not government employees; two arms length will be between these corrupting influences and any loans that are issued – politicians won’t be involved in the lending process. The bank operations will be transparent because they will be publicly accountable. You’ll never get that from Wall Street or any private bank — they’re under no obligation to tell you anything about what they’re doing with our money. Plus the Board of Directors and Advisors will represent a diversity of public interests to see that the bank stays on its predetermined mission course.
Three, risk involved in making loans is significantly lower if you’re lending money to yourself, as in infrastructure finance. Municipal and state debt make for a pretty secure portfolio, and while some loans go bad, they are in proportion to the banks line of lending and its capital limitations. VERY unlikely that the bank would ever head into the sort of outrageous debt exposure like we’ve seen with the Big Banks, in part because they won’t be making those sorts of risky calculations. No speculative derivatives or interest rate swaps, etc. etc. But a bank loss is a BANK loss, not a blank check for the state treasury to cover bad bets.
And then there is the obvious fact that right now we put all our tax dollars into the Big Banks who are having their way with it, making their bucks, paying us a pittance (well under 1% on our deposits) and then charging us many multiples of that when we need some money to fix or build some things. It makes no sense to give our money away when we can use it to invest in ourselves.
It’s interesting that Phil Murphy likes this idea since it is so counter to the Wall Street interests folks associate him with. But as a former banker, he knows what a shell game banking is by definition, and he rightly concludes that if the private banks can make a bundle for themselves by making loans to us, and saving a bundle by getting away from our dependency on Wall Street capital borrowing, so can we.
So we should.
Let’s assume for a second that one believes government should be limited and that corruption is a problem in New Jersey. Then no matter what words you use to assure us, we can’t knowingly allow the State of New Jersey to expand into an area where big money is involved.
Maybe if we thought our government was inherently “good”, this would be a reasonable idea. But that’s not the case AND there are commercial options for both citizens and government that, as you suggest, also have money multiplier effects.