Commentary: Legislation to create a public bank is likely to be introduced during the 2021 legislative session. The idea is to create a bank that receives deposits from local governments and lends to New Mexico businesses to promote economic development. The bank would be capitalized by a $50 million contribution from the State Treasurer, thereby creating a not-for-profit owned by the state of New Mexico.
The effort to create a public bank in our state is part of a larger national movement, with about half the states actively considering establishing such a bank. That said, as of right now, there is only one state has a public bank in the nation, which is the Bank of North Dakota. Here in New Mexico, the effort to establish a public bank is being led by the Alliance for Economic Prosperity.
There are valid reasons for creating a public bank. First is to provide funding for profitable businesses that otherwise would go unfunded. This is not currently a problem. The Federal Reserve has inundated the economy with liquidity to offset the effects of the Pandemic.
In fact, the problem is not a lack of funding, but a lack of profitable projects to fund. Bank reserves—which are funds available to lend—currently are greater than $3 trillion. This is idle funds that banks would lend if only they had profitable customers willing to borrow. To further make clear the point, note that interest rates are at or near all-time lows.
To the extent that a public bank makes loans to business that would otherwise qualify for a loan for a traditional private bank, the public bank is not adding to total investment in the state. Rather, it is simply replacing a private lender with a public lender. Given my libertarian-style leanings, I do not think this a positive.
Another valid reason for a public bank is to channel funds to socially desirable projects that are not profitable in the conventional sense. For example, the savings & loan industry was established in the 1930s precisely to fund 30-year fixed rate mortgages, which had been rare previous to the savings and loans. Because of special tax incentives, savings & loans were incentivized to make mortgage loans, thereby, helping to achieve the socially desirable goal of widespread home ownership.
And if in fact the lawmakers want to establish a public bank to subsidize certain favored projects viewed as socially beneficial, I’m OK with that, if done with open eyes. A public bank that funds socially-desirable-but-unprofitable projects will operate at loss and will need taxpayer-funded subsidies. Those subsidies may be explicit in the form of bailouts or they may be implicit in the form of lower returns than could be earned on deposits in private banks.
While there are valid reasons for establishing a public bank, those are not reasons emphasized by the proponents. Proponents don’t argue that profitable enterprises are short of funding, nor do they argue for subsiding socially desirable projects. Rather, the argument is about Wall Street. Proponents want to stop sending profits to out of state big banks. This is left wing twaddle.
Proponents argue that the public bank will operate more efficiently and at lower costs than for-profit banks. Thus, a public bank will both pay a higher return to the state and offer low interest loans.
This argument misunderstands capitalism and the working of markets. Private businesses, including banks, make a profit by providing high quality services at low cost. Too often, government-sponsored agencies like a public bank are not disciplined by the profit motive and do not operate more efficiently than private businesses.
One doesn’t want to paint with too broad a brush, as many government agencies are efficiently run by professional staff who seek to achieve the public interest. But one needs only to think of Spaceport America or of Visit Las Cruces to realize that an efficiently run public bank is far from certain.
Christopher A. Erickson is the Carruthers chair for economics development at NMSU. He is co-author of a study sponsored by the City of Santa Fe on formation of a public bank. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.