Public banking gets a toehold in New Jersey

At the 2016 Princeton Community Democratic Organization annual picnic, a pair of activists approached Phil Murphy with an unconventional idea: A public bank for New Jersey.

Murphy, a longtime banker with Goldman Sachs, heard the activists out. Then, when he announced his platform for his gubernatorial run later that year, it included a plank for a public bank, a commercial bank owned by the state that would take deposits from the state and from municipalities, and lend in-state.

For years, public banking activists have mobilized dissatisfaction with Wall Street to push for public banking at all levels, including for cities, states, and even at the federal level. Longtime consumer advocate and Green Party candidate Ralph Nader has endorsed the idea of federal public banking, and Sen. Elizabeth Warren, D-Mass., has suggested that the Post Office could offer basic banking services to supplant payday lenders.

With Murphy now installed as New Jersey’s governor, the grassroots push for public banking now enjoys an official pull, said Walt McRee, director of Banking on New Jersey, a group that has advocated a public bank in the state since 2012. McRee and director Joan Bartl were the ones to bring the idea to Murphy.

“The simplicity of the public banking message, mantra, is: Let’s keep the money at home,” McRee said.

The basic concept is that the state would set up the bank, which would take deposits from public entities that take taxpayer funds and need banking services. The public bank would supplant the private banks, including foreign-owned banks, that currently provide the services.

Then, the bank would lend within New Jersey. The public bank would facilitate cheaper financing for local businesses and public projects. That is the crux of the pitch for the bank. Murphy has noted that banks don’t necessarily invest in their states — and, in the case of foreign banks, may invest outside the country.

The public bank would take the power granted to private banks, the power to create money, and direct it to the public’s benefit, including by maintaining access to credit throughout the business cycle, McRee argued.

The idea isn’t pie-in-the-sky. North Dakota has had a public bank, the Bank of North Dakota, for nearly 100 years. The bank takes deposits from state entities and makes business and consumer loans. The profits it earns are returned to the state.

The Bank of North Dakota is proof-of-concept for public banking supporters. Supporters are working on extending the concept in jurisdictions around the country, with legislation introduced in roughly a dozen state houses, according to advocates, as well as several cities. Democratic state senators Nia Gill and Richard Codey have introduced legislation to follow up on Murphy’s promise and create the bank in New Jersey.

Although the idea of a public bank is billed as a partner with, not a rival to, private banks, the legislation is sure to run into opposition from the banking industry.

Michael Affuso, the director of government relations for the New Jersey Bankers Association, acknowledged Murphy’s complaint that public funds are being invested by private banks out of the state or overseas, but he said the solution of a public bank “is a little larger than the problem.”

Instead, he said, the state could simply contract with New Jersey banks, which generally lend in-state.

A public bank would hurt private banks by taking business from them, Affuso said. For a quarter of the banks his group represents, municipal deposits make up about a fifth of their deposits. Losing that funding would be a blow.

But the biggest concern, both critics and proponents of public banking agree, would be the possibility for the bank to become politicized, lending to favored groups or businesses and cutting off ones without political connections.

Research on public-owned banks across the world suggests that’s the case. A 2002 paper from a Northwestern University economist found that areas with stronger political parties get lower interest rates from public banks. Political interference is likely the reason that public banks have been found to underperform compared to private banks in underdeveloped countries, according to a 2012 paper written by Taiwanese researchers.

The public bank in North Dakota is a different proposition from one in New Jersey, with its reputation for corruption. McRee suggested that the key would be in writing the legislation, ensuring that the bank is operated “at least two arms’ lengths” away from politicians, by having it run by bankers hired by a board of directors appointed by a government commission.

Another obstacle to the public bank will be fiscal conservatives. Regina Egea, president of the Garden State Initiative, a free-market think tank, noted that the bank would not have its deposits insured by the Federal Deposit Insurance Corporation. Instead, like the Bank of North Dakota, they would be backed by the state.

“New Jersey residents are already among the highest-taxed people in the country,” Egea said. “A public bank uninsured by the FDIC would put our taxpayers at risk of having to bail out the state bank if it failed.”

Even if Murphy’s project gets held up by opposition in the Garden State, public banking advocates believe that they have reason for optimism in places around the country, and eventually at the federal level.

In California, for instance, state officials are exploring the idea of a public bank to provide services for the marijuana industry, which faces restrictions at banks with federal charters. Several cities in California and the Pacific Northwest have examined the possibility of public banks as a way to divest from banks with interests in fossil fuel industries.

“There is a national movement afoot,” McRee said.

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