Straight Talk: State-owned banks pure folly

Lawmakers from around the country are floating the idea of starting a government-owned bank for their state. Apparently, as many as 17 state legislatures are looking into creating state-owned banks along the lines of the Bank of North Dakota..The idea of creating more state-owned banks is terrible; no lawmaker should waste any time on this. If lawmakers want to do something meaningful to give their state an economic boost, they should be looking at ways to help existing banks be more effective. It is amazing to me that at a time when so many states are struggling to balance their own books they think they can run a bank..I understand the initial appeal. Revenue-hungry lawmakers in other states drool over the Bank of North Dakota's annual profits. They figure a state-owned bank might be a good place for their municipalities to put their money, and a state-owned bank surely would make all those loans that regular banks refuse to make. But it would be a huge mistake to go down this path..Local banks already provide a place for municipalities to put their money. Lenders make careful decisions about how to lend that money, usually to enterprises close to home so those very same municipalities benefit. I hate to think of the kind of loans a government-run bank might make. The potential for conflict of interest is huge. We absolutely do not need the government picking winners and losers, any more than it already is..Advocates for state-owned banks like to claim that the existing banking system isn't doing the job. If those lawmakers want to help spur economic development they should help existing bankers rather than attempt to create an alternative banking system. One way to help bankers make more loans is to exempt the income they make from certain kinds of loans – perhaps small farm loans or rural non-conforming mortgages – from income tax. That would allow them to offer such loans at a little lower rate and compete with tax-exempt lenders such as the Farm Credit System or credit unions..State-owned bank advocates might object to the cost of offering such a tax benefit but I can guarantee that in the long run the cost of setting up, running and ultimately closing down a state-owned bank would be far greater. A state-owned bank does not have deposit insurance; the potential liability to taxpayers is huge..The idea of creating more state-owned banks is pure folly and legislators everywhere should look for other solutions to their local challenges.