What Other Businesses Can the State Run?

State government is clearly in a pickle.  We don’t have enough money to continue doing the things that we’re currently committed to do.  But that isn’t stopping some from proposing that we add more to our plate.

As legislators and advocates begin forming up their proposals for next year, the idea of a State Bank of Washington has been floating around.  Rep. Bob Hasegawa introduced a bill in 2010 that would have authorized the formation of such a bank, but the proposal met with strong opposition from the banking community and, more importantly, the state Treasurer.

The idea is that we should use tax dollars as the deposits, and with the fractional reserve system we use in this country, make loans valued at 10 times what the bank holds in deposits.  Depending on who you talk to, those loans would be made to students, farmers, other banks, small business, or just about anyone in need.  After all, there are plenty of people out there who could really use some cash but just can’t meet underwriting standards at a private bank or credit union.  Why shouldn’t the state help them out?

Maybe Rep. Hasegawa hasn’t noticed that it isn’t easy to operate a bank.  We have the dubious honor of being the home state to the largest bank failure in history (WaMu), and the financial reform legislation just passed by Congress gives regulators the power to “wind down” even larger institutions in the future so that we never have to hear the words “too big to fail” again.

Banks’ real business is risk assessment.   They make money by pricing risk appropriately.  A state bank designed to loan money to people that private banks won’t loan to is like a state auto dealer designed to sell cars at a loss to people who can’t afford them at a retail lot.  We’ll lose money on every transaction, but we’ll make it up on volume!

Or, a state bank could price its products appropriately.  But then it would compete directly with private enterprise, without all the hassles of regulatory oversight or deposit insurance that we put in place after the Great Depression.  And depositors (tax payers) would be safe because, after all, government never gets into financial trouble, right?

We’re just now getting around to eliminating a line of business that the state got into after the Great Depression – liquor sales.  Let’s not start looking for another way for the state to compete with the private sector.  Especially not one as difficult as banking.  May I suggest a nice lemonade stand, or a paper route perhaps?