Be careful what you wish for from banks

contributing writerJanuary 22, 2012 

Proponents of a state bank or investment trust might not phrase it quite this way, but one of the arguments driving their proposals for a government-owned-and-operated financial institution appears to be, “Why not? We can’t do any worse than the commercial banks.”

That’s a pretty low standard to set for an entity that will be handling the public’s money, given the banking industry’s recent history – even if it were true.

And it isn’t. Government can be just as adept at making bad credit decisions as the private sector – and if given the opportunity could well prove to be much worse.

The government-sponsored and backed entities in the mortgage business – Fannie and Freddie – were right in the thick of inflating a housing bubble that, when it popped, managed to blow up much of the economy along with it.

Government’s attempts to jump-start the alternative-energy sector have on occasion come to woe, Solyndra being the most prominent example. Headline from the Oregonian last week: “Oregon taxpayers must bail out state fund that made bad loans for renewable- energy projects.”

Washington has some recent history of its own with bum lending. Peninsula Plywood in Port Angeles is out of business despite a $500,000 grant from the state’s Community Development Block Grant program and a $1 million loan from the forestry products loan fund.

A Department of Commerce spokeswoman says PenPly’s creditors, including the state, “have agreed to move forward with liquidation of equipment at the site. Commerce intends to recover any receipts available from the sale of equipment and is collaborating with the other creditors to secure any funds that will be available pertaining to the loan upon the sale of the equipment.”

The proposal in the current session of the Legislature to establish a state bank, and the philosophy behind it, isn’t new even for Washington. There have been pushes in the past to direct state retirement money to in-state companies.

The likelihood of success for a Washington bank is limited by three factors.

First is the problem of mission creep. While the current legislative proposal calls for a bank to fund student loans, public works and the like, does anyone really believe the temptation can be resisted to expand the bank’s lending authority into, well, almost anything, including sectors about which it knows little (see: alternative energy) and which are too risky even for private capital?

Next problem: The motivation behind the state bank’s loans. That PenPly failed less than two years after its restart (which was an attempt to revive a mill that had gone out of business in 2007) is as unsurprising, given the nature of the forest products industry, as the sentiment that drove the decision to lend money to a risky proposition.

As laudatory as the idea of creating employment might be, it’s a terrible criterion for evaluating whether to make a loan, at least one which the lender hopes will be repaid. Yet that will be a prime consideration for a state bank to make loans.

Along with one other consideration, which represents problem No. 3. All lenders are subject to bad credit analysis, lax standards and economic swings that lead to bad loans. A state bank is also subject to political pressure: “Hey, why aren’t you lending more in my district? Or to this campaign contributor/buddy of mine?”

A government-run bank won’t offer much improvement in loan underwriting, and it certainly won’t have any better economic climate to operate in. So what will it offer? Easy credit – which may be attractive to borrowers but is also how we got into our present predicament. And a ready source of capital with which to make loans and to absorb the inevitable losses: You.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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