California just legalized public banking  – setting the stage for more affordable housing

Allowing for infrastructure funding and low-rate loans to public agencies
Editor

An article by Mario Koran published in The Guardian on 3rd October 2019 [1] reported the signing of the Public Banking Act, or AB 857, of the U.S. state of California by the state’s current Governor Gavin Newsom.

This Act allows city and county governments within California to create, or to sponsor, public banks. And it makes California one of two U.S. states to legalize financial institutions of this kind. Those banks will in turn provide public agencies access to loans at interest rates much lower than they could find at private banks. And the change also sets the stage for funding infrastructure demands or providing loans to developers to help meet affordable housing needs.

And California legislator David Chiu, who co-authored the Act with legislator Miguel Santiago, stated that the bill’s “signing sends a strong message that California is putting people before Wall Street profits”. The Democrat congress- woman Alexandria Ocasio-Cortez has indicated her support for the legislation, writing that: “Public banking is the next level!”

Background

Koran has provided some of the back- ground to this important development: “ Public banks have existed for 100 years, originating in the state of North Dakota where low population density made it both difficult for financial institutions to grow and loans tough to come by. In 1919, the Bank of North Dakota was born, which today is the nation’s only public bank.

“Supporters say public banks benefit local communities because they aren’t driven to seek ever-higher profits, allowing government agencies access to low-interest loans for projects that benefit the public. As they do in North Dakota, public banks in California would also partner with private banks to offer loans to businesses and students. “

The recent history of California records that calls for public banks intensified following the global financial crisis and the financial collapse of 2008.

According to Koran: “ This crisis increased the demands for divestment in banks such as Wells Fargo and major financial institutions tied to the Dakota Access pipeline and other controversial projects, said Sushil Jacob, who is a senior attorney with the Lawyers’ Committee for Civil Rights of the San Francisco Bay area.

“Jacob’s organization is a founding member of the California Public Bank- ing Alliance, a grassroots network of groups in cities that campaigned for the bill including San Francisco, Oakland and San Diego. Jacob points to North Dakota as evidence of the effectiveness of public banks.

“ Jacob also said that the state of North Dakota has six times as many financial institutions per capita as the rest of the country and it’s because they have the Bank of North Dakota. When the great recession hit, the Bank of North Dakota stepped in and provided loans and allowed local banks to thrive”.

Criticisms

A number of critics of public banking have said that this Act sets the stage for public corruption and self-dealing. And in particular, the California Bankers Association said in a statement: “We are disappointed that the governor signed AB 857 into law today. Despite the rhetoric from public bank advocates, Californians are not clamouring for a public bank option”. [We] hope that community leaders and elected officials will take note of the risks associated with establishing a municipal bank, before opting to explore this unnecess- ary and unwanted public option. “

Stuart Waldman, president of the Valley Industry & Commerce Association, a business advocacy group in the San Fernando Valley that opposed the bill, told the Los Angeles Times “we don’t think the government should be in the business of banking”, pointing to the department of motor vehicles as an example of the government’s supposed inefficiency.

Operation

In regard to the operation of the new scheme, Koran also made the following points: “Jacob said that the new public banks in California would be operated by professional bankers and run by an independent board of directors to insulate and protect against self- dealing. The bank’s sponsor would have to propose a viable business plan which would need to be approved by the state department of business over- sight and would also need approval to obtain direct deposit insurance from the Federal Deposit Insurance Corporation. The plan would have to go before the public before it moved forward …. ‘That injects an element of sunshine and public debate’ said Jacobs, who added that because the banks would be public entities, they would be subject to laws that require them to provide the public access to records and meetings. ‘There are a lot of protections, far more than the current structure (of private banks)’.

“The current law allows California to license no more than two public banks per calendar year and caps the total number at 10. Nearly two dozen other states – including four this year – have also tried to establish public banks, according to Vox. None of the other bills have passed. “

Mario Koran is an investigative reporter and staff writer for The Guardian

1. Source: Article by Mario Koran

https://www.theguardian.com/us-news/2019/oct/03/california-governor-public-banking-law-ab857