After many months of preparation and peer review, we have finally completed the study of the economic impacts of a public bank in Vermont. Highlights include:
over 2,500 new jobs created
over $190M in new economic value added
over $340M in additional gross state product
the existing institutions already have the capital to establish a bank, no new appropriation or bonding needed.
recommendation that VEDA's authority be expanded to include banking, which is what S. 204 proposes this year.
These are not insignificant impacts. If you add the lower level of risk associated with independence from the large, out of state, (too big to fail) banks, and the funds that the dividends from a State Bank could provide for public priorities like renewable energy, health care, improved public infrastructure, and economic development, the benefits more than outweigh the risks.
What are the risks? Several hypothetical straw men are being advanced by people who oppose the idea of a public bank. Here are a few of them, and some of our answers.
What if the Bank fails or its loans fail? Will the taxpayers have to Bail it out?
The riskiest part of a state bank certainly lies in the fact that the taxpayer dollars that are deposited in it are loaned out to businesses, homeowners, students, state agencies, and even municipalities for their financing needs. This is how any bank pays interest on their deposits.
We are already doing this lending - through the Vermont Economic Development Authority (VEDA), the Vermont Housing Finance Agency (VHFA), the Vermont Student Assistance Corporation (VSAC), and our state and municipal bonding. We have been doing it for years, and the necessary checks, balances, loan loss reserves, and other measures to protect taxpayers from default are already in place, and - most importantly - they work. The state's "moral obligation," (or "moral ob" as the financial experts term it) is already engaged with the borrowing that we do to make these loans. We borrow money from Wall Street - VHFA borrows from Wells Fargo, VEDA sells commercial paper - to make loans we could make with our own money.
This argument about taxpayer bailouts is particularly amusing when it's made by the same banks who were bailed out by taxpayer dollars back in 2008.
A State Bank that makes long term loans will have problems meeting short term cash flow obligations
Banks face the same problem - the loans they make are typically 15 - 30 year mortgages, when they have demand deposits that can be withdrawn at any time. The State of Vermont, at least, understands its own pattern of cash flow, maybe better than the average small commercial bank. Banks have tools to address this problem that state agencies do not have - they have a window at the Federal Reserve, and the newer practice of interbank overnight repurchase agreements makes it even easier. If VEDA had a banking license, they would have access to these tools as well, for the benefit of the citizens of Vermont.
Capitalization and Collateralization are still problems with the establishment of a State Bank
The study shows clearly that the existing state lending agencies have the capital they need to be granted a banking license. Their balance sheets show adequate capital in unrestricted assets. No new appropriations or bonding are necessary. Full stop. It is a political decision more than it is a financial decision. "Capitalization" is not a legitimate obstacle.
"Collateralization" refers to the process by which the $350M average daily balance of state deposits in TD Bank are secured, since the $250,000 insurance limit that the FDIC provides depositors is orders of magnitude less than what would be needed if TD Bank failed. The deposits the State of Vermont makes to TD Bank are secured instead by a letter of credit with the U.S. Federal Home Loan Bank. That sounds nice and secure, doesn't it? After all, it has the word "Federal" in it, like "Federal Reserve" (a private bank), and "Federal Express," (a private package delivery service). The U.S. Federal Home Loan Bank is actually a cooperative - it's owned by its members. The members are the banks who make housing loans all over the country. If you want to know what the bank itself describes as its growing "problem," click here.
And what, exactly, for the uninitiated, is a "letter of credit?" (If you know something about constitutional law, states are prohibited from issuing "letters of credit," which is part of the reason that monetary policy tends to be limited to the federal level). The dictionary defines a letter of credit as "a letter issued by a bank to another bank to serve as a guarantee for payments made to a specified person under specified conditions." OK, you should feel better now. Our taxpayer deposits are secured by a promise from a cooperative (made up of banks) to TD Bank to pay any demands that come from the State of Vermont. Isn't that a tautology of sorts? Especially in an era of bank failures and massive government and depositor bank bailouts?
How would our deposits be secured if it weren't by banks making promises to other banks? This is where the "full faith and credit" and "moral obligation" of the state financial institutions comes in. They would be secured by Vermonters. So a lot of the arguments about whether or not you think that a State Bank is a good idea rests upon whether or not you think Vermont and Vermonters are good investments. Do our businesses have huge loan default rates? Do our homeowners have lots of foreclosures? The largest economic downturn since the Great Depression would seem to indicate that, on average, we do pretty well here in Vermont. We don't make lots of risky loans, and we honor our commitments. We don't gamble with the public trust.
If you have made it this far without nodding off, congratulations. You are now among the minority of people who are starting to understand the labyrinth of high finance. It's a house of cards, and it has fallen down repeatedly throughout history, making winners and losers of us all. Our efforts to educate people about it, and to argue in favor of a State Bank for Vermont, are merely one small effort to start to democratize what is a closed and increasingly inequitable process. We hope you will agree that we need to change this system, and that you will help us do it. Write to your legislator. Get an article on your Town Meeting warning.