Don’t Bank on This Dreadful Idea

If the city of Los Angeles goes through with a proposal to create a public bank, it will be a demonstration of both chutzpah and contempt. Voters already have told the city of Los Angeles to stay out of the banking business, and by a not-so-close 56 to 44 percent vote. That wasn’t some ancient issue; it occurred less than a year ago when the city proposed creating a public bank. So, if the city council goes forward and creates a bank, it would be going against the clearly expressed will of the voters. That’s chutzpah. What’s more, consider that the lending business is difficult, highly regulated and typically done by experienced professionals with layers of oversight. For a city council to cavalierly presume bureaucrats could do a better job, that’s just contempt for the private sector. Although the vote to allow Los Angeles to create a public bank failed last year, the state legislature recently passed a bill to allow some public sector banks to be formed. City Council President Herb Wesson has said he intends to propose Los Angeles create one, bypassing the need for another public vote. That’s why the issue has resurfaced. Public bank proponents like the idea of making loans not to regular businesses so much as to projects with some social-justice aim, such as affordable housing. And they just don’t like the idea having the public sector use banks, thereby “enriching” the private sector. But honestly, where does the city get the notion that it can successfully manage such a difficult business? Was it the city’s stewardship of its pension funds, its trash collection system or its sidewalks that gives the city council such confidence? Another example of financial fecklessness: Just last week, City Controller Ron Galperin released a report on the results to date of Proposition HHH. Remember the $1.2 billion bond program to subsidize construction of up to 10,000 living units to alleviate homelessness? Voters approved it three years ago, and to date, only 19 projects are in construction and zero HHH-funded units are open, Galperin said. Hey, at least it’s a slightly better record of accomplishment than the high-speed rail line. Oh, and you saw this coming: The average cost per unit is way above the $350,000 to $414,00 original estimate. Galperin said one project may top $700,000 a unit – or “more than the median sale price of a market-rate condo in the city.” This is what “affordable” looks like when the city gets control. In short, the city of Los Angeles has done to sound financial stewardship what the Chinese government has done to the tourism industry in Hong Kong. And these are the people who want to get into the banking business? A tough business where a 1 percent return on assets is considered very good? Since the public bank proposal is only that – a proposal – there’s still hope the city won’t pursue this bad idea. But that’s a faint hope. Another hope is a legal challenge. As longtime political pundit Joel Fox has pointed out, the Los Angeles City Charter prohibits the city from engaging in “any purely commercial or industrial enterprise” unless there is voter approval. So, creation of a public bank without another vote may be contested in court. Finally, there’s this: The public banks would have to be insured – and regulated – by the Federal Deposit Insurance Corp. As long as the FDIC applies the same strict standards to any public banks as it does to commercial banks, the public bankers’ ambitions may quickly get squelched. In other words, they’ll find out how tough business banking really is.