2020 Lane Reports

California has legalized public banks. Should Illinois follow its lead?

Wednesday, March 25, 2020 10:00 am
by Marc J. Lane

crains chicago

 

Let's consider democratizing capital in Illinois and putting the public in control of its own future.

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For just the second time in a century, a people-powered coalition successfully overcame the clout of big finance when California’s Gov. Gavin Newsom signed a bill late last year allowing the state's municipalities and counties to organize their own nonprofit lending institutions. Their mission: to hold public funds and deploy them – along with money they’ll be eligible to borrow at low rates from the Federal Reserve – for socially and environmentally impactful purposes. Before long, such banks in California and elsewhere will operate free of the pressure commercial megabanks face to fund outsized executive pay packages while delivering healthy investment returns to their shareholders.

Until now North Dakota has been the only state that operates a public bank wholly backed by the deposit of government funds. The bank was founded by community activists in 1919 to protect wheat farmers in the state, then a banking desert, from predatory out-of-state lenders as well as grain dealers who suppressed grain prices. Today the bank offers residents and businesses low-cost services including checking accounts and loans. More important, it funds economic development initiatives in partnership with other local banks.

North Dakota's bank turns a significant profit – more profit, in fact, than Goldman Sachs -- which is plowed back into the state's coffers and offsets the financial burden its taxpayers, without the bank, would bear. So everyone benefits from the government funds that would otherwise be deposited each year in distant commercial institutions.

California’s cities have deposited billions of taxpayer dollars in Wall Street's biggest banks every year which too often have been invested them in private prisons, Saudi Arabian oil, derivative securities and other assets deemed antithetical to the state’s values and policies. Worse yet, the nation’s largest commercial banks, as a group, have justifiably earned a reputation for exploiting unwary consumers. 

But now, thanks to the efforts of a diverse group of labor unions, climate justice groups and civil rights organizations, cities and counties there will be able to launch their own banks to leverage public funds for local impact. Although public banks will be barred from competing with commercial banks at the retail level, they are expected to make low-cost loans for renewable energy, affordable housing, small business expansion, transit and other public needs, cutting the financing costs of infrastructure projects in half.

Similarly, Chicago, Cook County, and other cities and counties throughout Illinois might benefit from state-sanctioned public banks which could invest in infrastructure, housing, schools and other worthy projects, including those that private banks decline to fund. Public banks could also unleash the state’s medical and recreational marijuana industry, denied access to private banks because the possession or sale of cannabis remains illegal under federal law.

Opponents of public banks have raised legitimate concerns about political influence which could lead to corruption, self-dealing and risky lending. But there's no reason community stakeholders can't actively participate in the governance of a public bank ensuring the accountability the public deserves.

Public banks inform a new and worthwhile discussion about sustainability and growth. Let's consider democratizing capital in Illinois and putting the public in control of its own future.


Marc J. Lane is a Chicago attorney and financial adviser and vice chair of the Cook County Commission on Social Innovation.

Reprinted from Marc Lane's March 5, 2020 editorial which appeared in Crain's Chicago Business. Crain Communication Inc.'s permission is gratefully acknowledged. Copyright © 2020 by Crain’s Communications Inc.


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