AB 750 - Open Letter To Gov. Brown - PBI News Alert

With the state’s unemployment now at 12.1%, California is in a state of crisis.  Anemic and tardy efforts in D.C. and indifference on Wall Street have left the U.S. public depending on their respective state legislators and governors for the necessary leadership. 

AB 750, the bill that forms a temporary commission to study the merits of California having its own bank, can be an important first step towards creating hundreds of thousands of manufacturing and small business jobs—exactly what the California economy needs.  Why? 

·       It addresses the cause of the problem.  Small businesses cannot obtain the affordable loans that will fund new jobs.  The basis for our bank lending system (Yes, the system that froze up on Wall Street in 2008 has yet to come unstuck on Main Street) is credit.  A credit pool needs to be established in order to create those small business loans.  Where can we get that credit?  Presently, the State of California gives nearly $20 billion, our average daily balance of liquid deposits, of our credit to Wall Street banks, a giveaway reinforced daily with every deposit made by the State Treasurer’s office.  This credit – the public’s credit – is then used by private banks for their own private gain.  Instead, we could place this $20B in liquid deposits in our own depository/wholesale bank and effectively create another $20 billion in credit through the magical everyday banking practice of leveraging capital.
·       It uses the public’s credit without mixing politicians and lending.  Loan origination can be risky business, especially considering the news of the federal government’s Solyndra fiasco this month.  Why not do what North Dakota does, taking its tax revenues deposited by law into the Bank of North Dakota (BND) and packaging this credit into lending programs?  The BND then partners with the private banking community, which finds the qualified high-tech manufacturers, small businesses looking to expand, and entrepreneurs who could most benefit from these loan programs.  These banks do what regional and community banks do best – make loans.  They also take on some of the risk, a prudent approach for all parties.
·       It creates jobs.  Consider North Dakota, with an unemployment rate so low it’s approaching 3%.  BND’s most successful commercial loan program requires that a job is created for every $100,000 of the loan balance (and some of these loans are at 1% or 2% per annum, but that’s another matter).  BND has $1B in commercial loans.  With a population 50x larger than North Dakota (pop. 670,000), were California to have an equivalent commercial loan program of $50B, 500,000 jobs would be created.  If we changed the requirement to one job for every $150,000 of the loan, a figure more appropriate for California, then 350,000 jobs would be created.  Assuming our commercial loan program is limited to the size of our existing liquid deposits of $20B, we create 140,000 jobs.  Any way you look at it, this is still a big number.

The conservative state of North Dakota is simply using the power of credit, created in its own depository bank, to develop key sectors of its economy through its loan programs (commercial–$1,022M, residential real estate–$471M, agriculture–$271M).  Private bankers placing money, in the form of loans, into the hands of the right people creates a counter-cyclical remedy for credit contractions.  True, North Dakota has oil and gas, but so do other states that have not translated this into economic success. That oil and gas can hardly pump itself out of the ground.  In North Dakota, loans are being made to the oil and gas businesses, so that they can buy equipment and hire the workers to develop their resources.  The difference between other economically floundering states with oil and North Dakota is that North Dakota owns a bank and sports a huge budget surplus.

We could be a similarly innovative model here in California, where there are so many more opportunities for development, from renewable energy to high tech manufacturing.  The urgency is so great that it would be best to skip the study and issue an emergency directive to create a state-owned partnership bank now.  A study is simply a means to build further consensus, and we can hardly afford to wait!  This is banking, pure and simple, not rocket science.  The state could create its own state-chartered wholesale bank and within 3 to 4 months be in business.  Mike Rossi, with his experience and capabilities, could likely make it happen much sooner than that.  Starting a bank could be as simple as buying a state-chartered bank that is currently in bankruptcy.

Many Californians are ready to help you form a state-owned partnership bank, and urge you take this course.  We’re ready to use the public’s credit – credit that comes from our tax payments – to invest in California and create jobs. 

If you choose not to create a state-owned partnership bank at this time, we urge you to sign AB 750, a bill with broad support amongst Californians, as a first step towards creating jobs by using the public credit – the same tool they use so successfully in North Dakota. 

Regards,

Marc Armstrong
Executive Director
Public Banking Institute