Friday, March 16, 2012

A Letter Regarding the Proposed State Bank

Committee on Finance Chair Marcus Oshiro would like to share the following letter, which offers clarification on concerns that have been voiced regarding the proposed state bank. The author of the letter is Mike Krauss, Former officer, Pennsylvania county and state government, international transportation and logistics executive, Director of the Public Banking Institute and Chair, the Pennsylvania Project.

March 16, 2012

Dear Legislator:

With legislation now before you and your colleagues, the Legislature of the State of Hawaii has taken a leadership role in a rapidly expanding national effort to realize for the people of the states the demonstrated benefits of public banking – a locally generated and locally directed approach to stronger banking and credit markets, economic development and jobs creation. 

There are legitimate concerns about how a public bank of Hawaii might be established and to what purposes. We identify these concerns as: mission, capitalization (which must be in part a function of the agreed mission), governance, management, accountability, transparency and risk management.
These matters require a full and careful public discussion.

But we respectfully suggest that in a recent oped, Rep. Gene Ward did more to inflame than to inform the discussion that must take place. 

The legislator builds most of his case against a public Bank of Hawaii on a study prepared by the Federal Reserve Bank of Boston to examine a proposed public bank of Massachusetts.  This was unfortunate.
We can’t imagine a more discredited source than the Federal Reserve, who are chiefly responsible for failing to maintain a healthy U.S. banking industry, and instead have saddled taxpayers with the almost unimaginable cost and damage of arguably the greatest banking failure of all time.

There is a complete and comprehensive refutation of the “findings” of the Fed study available from the well respected Center for State Innovation and the DEMOS Project, which takes the Fed study apart, point by point. 

It is attached and we commend it to you.

But we must cite some erroneous “findings.”  First, the claim that it would cost the taxpayers of Hawaii $3.2 billion to start a public bank. The claim is ludicrous.

Perhaps, if what was proposed is a retail bank - with branches, real estate, buildings, ATMs, large staff, marketing, advertising expenses, etc – this kind of cost might be expected. But that is not what is proposed.
What is proposed is a wholesale operation, in one location, with a limited mission and without a need to build a retail operation.

Moreover, as was correctly observed but implied to be a gigantic risk, the bank staff would in fact be public employees. They were referred to by the presumably hated word, “bureaucrats.” 

But consider. Unlike the private banking sector that self-destructed in a headlong rush for obscene bonuses, recurring commissions, fantastic salaries and contrived quarterly profits for stockholders, what is proposed is management by salaried civil servants, who have no incentive to take dangerous risks, and work for only one shareholder – the people of Hawaii. 

Additionally, in an attempt to denigrate the concept of public banking generally, the representative referred to the “alleged” success of the Bank of  North Dakota.

The success is no allegation. For 93 years the bank has been a major contributor to that state’s robust economy. It boasts a current loan portfolio of more than $2.8 billion invested in the state’s economy – mostly in commercial loans to businesses – but also about $400 million in mortgages. And, as was correctly observed, the BND returns about $30 million a year to the state general fund in non-tax revenue.
This is an alleged success we believe Hawaiians could live with.

The legislator also refers to public banks as a mostly “third world” phenomena. But Japan, Germany, Australia and Canada have long and successful public banking traditions. 

These are hardly third world nations.

And in the so-called third world, the emerging markets of the BRIC nations have about 40 percent of the banking market in public banks – and are all prospering far ahead of the collapsing economies of the “developed” nations that rely solely on private banking dominated by privately controlled central banks, such as the Federal Reserve.

The legislator also dismisses the role of the BND in that state’s very healthy economy, and attributes the general prosperity to the state’s energy industry.

There is no doubt energy has made a substantial contribution to North Dakota’s revenues. But that is a recent phenomenon. Further, over the last decade, the bank has returned nearly as much revenue as has taxes on the energy industry. And more, the energy industry, like many others, has received substantial support from the bank, which has increased its contribution to the state.

Since 2010, seventeen states are now considering some form of public banking initiative, as are a growing number of municipalities. In almost all these places, the chief opposition comes from the large and often out-of-state banks that now hold many states’ considerable deposits and fear both loss of those deposits and lost market share - to the community banks they pushed out of the market when the Congress allowed creation of the too-big-to-fail banks.

But when the public’s taxes are deposited out of state, what does that do for the local economy? And can we any longer risk having our economic future in the hands of the too-big-to-fail banks - that failed?

One final observation for your consideration. In the legislation, the mission of the bank includes acquiring foreclosed and vacant properties. The alternative, proposed by the administration in Washington, is to sell many of these properties, acquired by the government at above market prices, to “qualified” investors, in bulk.

So, having been dispossessed of their homes, Hawaiians can have their paychecks eaten up in rents paid to the 1 percent, who will then wait on these assets to appreciate in value, and then sell them at a profit taxed at 15 percent as capital gains, to grow fatter still.

We believe holding these properties in a public trust, from which the public receives the rents while looking for ways to put people back in these homes, is both innovative and just. Interestingly, a Republican state legislator in Arizona has offered similar legislation.

We encourage legislators and the people of Hawaii to take a hard look at the alternatives for the future of banking in the state. We believe that if they do, they will conclude that it is prudent and greatly beneficial to have public banking in the mix.


Mike Krauss

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