[The governor of California has signed into law legislation to authorize local governments to own banks. The President & CEO of the American Bankers Association makes a strong case against publicly owned banks, a view I very much share for a lot of good reasons. Nationalized banks in other countries – Israel and Mexico come immediately to mind – have never worked. Politicians use them as their playthings to finance whatever the cause du jour may be, leaving it to taxpayers to clean up the resulting mess. The FDIC and various state governments spent a lot of time and money cleaning up the substantial losses and hardships during the 1980s created by the failure of state-backed deposit insurance funds in Ohio, Maryland and Massachusetts. The California idea will likely go nowhere unless the FDIC grants deposit insurance to the publicly owned banks, which we all should pray never happens.]
To its credit, California has always been a place of big dreams and experimentation. The Golden State has given us Hollywood, Silicon Valley, McDonald’s hamburgers and even blue jeans. Now some in California think they have discovered the next great innovation when it comes to financial services.
Taxpayers should be wary.
Gov. Gavin Newsom recently signed AB857, which will allow California’s local governments to charter their own banks, and there are already efforts under way. Supporters say the legislation will enable cities and counties to stop relying on regular commercial banks to help manage their own finances, while competing with those banks to provide financial services to the public. They point to other public banks in the U.S. as proof that this big idea can succeed. They should brush up on their history.
The reality is America’s experience with dozens of public banks over the years is littered with painful and costly failure. Nearly all have been closed down — many failing because of political interference that resulted in making risky loans and operating with too little capital (or both), then collapsing when the boom times ended. In fact, Abraham Lincoln’s earliest recorded speech as an Illinois legislator in 1837 criticized just this kind of political interference.