Is a State Bank a Worthy Idea?

During this legislative session, senate bill 6310 was introduced to create a state investment trust, or bank. The intent of the bill starts off with the following language:

 SB 6310: INTENT: “The legislature finds that there are significant public infrastructure and higher education needs of the state that are unmet, and that the level of unmet need has been exacerbated by the economic downturn.”

A bill like this must be understood in the context of our current economic and political climate. Some speaking in favor of this bill cite historic examples of economic development in early 1800’s America and the role that public investment trusts played. But that is not the proper context to look at these institutions. Banking and economic activity are different some 200 years later, so recent behaviors of government backed financial institutions will more likely give a better indication of their likely performance. The 2008 Credit Crisis can serve as a guide. The credit and economic meltdown is widely attributed to relaxed oversight of Wall Street and government meddling in the housing market. Fannie Mae encapsulates both problems and is identified across the political spectrum as the organization at the heart of the crisis. Operating with oversight too often beholden to political influence over sound lending practices, these institutions proved unable to manage problems that are insured with taxpayer guarantees. Footage of politicians can be viewed where they actually scolded the regulators at congressional hearings, thus attempting to erode the oversight of these institutions. It is still common to hear politicians decrying the lack over oversight on Wall Street, but it is easy to demonstrate that oversight of Fannie was the pillar of the crisis, and that responsibility falls at the feet of Congress.

If we know that elected officials pursue votes, like the private sector pursues profits, then we have a good starting place to understand this bill and the significant governance challenges with a state investment trust. It is difficult to read the stated intent of the bill to be anything other than the legislature creating an entity that they can influence to get around its budget woes. But while small business has difficulty borrowing, municipalities and school districts are not finding it difficult to obtain financing for capital improvements from the private sector bond markets. Cities and school districts currently borrow at historically low interest rates in the municipal bond markets. Those rates indicate that the market views these bonds as favorable investments. For municipalities, there is no shortage of money to borrow, provided taxpayers approve.

Proponents also suggest a state bank would lower borrowing costs and provide profits for the state that could be reinvested here. Very recent history shows that below market borrowing costs overheated the U.S. housing market and it is difficult to see how things would be any different in the case of a state bank. The bill identifies at least part of the oversight of the state trust institution would come from leaders in the State Legislature and that there will be measures in place to prevent the peddling of political influence. This plan is simply not credible, if oversight of an entity like this comes in such a form.

In a state that is wrestling with its bureaucratic structure, a state bank is a bad idea. Politicians seldom show restraint in influence peddling and this entity would only provide one more temptation. Washington does not need a state bank to deal with its capital project and budget woes. A well-thought and bi-partisan plan should be created to improve the economy in the state of Washington.