Last week, the Los Angeles City Council’s Economic Development and Employment Committee approved a motion in favor of the Municipal Bank of Los Angeles. It’s a bad idea.
Proponents confuse lending with spending. The bank is backed by a variety of special interest groups – but there is no transparency. No information on funding from Public Bank LA – the organization promoting the idea – is available.
Job endorsements for the Public Bank of Los Angeles are a red flag. According to Public Bank LA, union support includes: the Los Angeles County Federation of Labor, United Food and Commercial Workers (UFCW) Local 770 (which represents grocery and commercial workers in retail) and Local 11 UNITE HERE (representing hotel, restaurant and airport workers).
One can only conclude that unions are anticipating influence on final funding guidelines – perhaps borrowers will be required to pay union salaries. This will prevent funds from going to small inner-city businesses that many bank supporters imagine will help and it would crowd out low-skilled workers.
In February, Public Bank LA held a virtual town hall to rally supporters. The town hall revealed that supporters have no idea what a public bank could or would do.
SEIU 721 President Bob Schoonover expects the bank to fund essential city services, including clean water, and improve health care and access to child care in the city . Beverly Roberts, ACCE Action and Home Defenders League, was eager to see money from the banks used for “rental assistance, affordable housing and housing services”. She noted that a public bank “will allow funds to be allocated to low and very low income communities.”
Roberts and board member Monica Rodriguez expect the bank loans to ease the pain and tragedy associated with bank foreclosures and the “endless cycle of payday lenders.” Susie Shannon, director of policy at Housing is a Human Right, said community investments from the public bank will serve the homeless.
These are expenses, not loans. A bank can only survive if it makes loans that are repaid. It cannot be used as a kitty to be used to help people in dire straits. If enthusiasm for community improvement projects results in improper risk assessment, public bank lending will lead to defaults and insolvency.
The last attempt at a community bank in Los Angeles – the Los Angeles Community Development Bank – failed in 2004 because borrowers failed to repay loans. The non-profit bank’s loan officers had no incentive to monitor loans on an ongoing basis. Not only was the bank encouraged to favor politically connected borrowers, but it was also actively encouraged to fund ill-conceived, high-risk projects.
The Valley Economic Development Center (VEDC), a community development financial institution (CDFI) located in Los Angeles, has promoted its efforts with annual events to highlight its successes. Yet, it was forced to file for bankruptcy in July 2019. According to board member Rodriguez, VEDC “got away with millions in resources that should have been reinvested in small businesses.”
At the LA Public Bank town hall, Rodriguez said the public bank would direct the money to “investments in people, infrastructure, that will create local jobs.” Yet studies of similar efforts in California‘s Enterprise Zones found the program failed to create jobs.
The expectations of Public Bank LA supporters are unrealistic and misinformed. What is most disturbing is that members of the city council support the effort. It may be because they will be away when the loans come due.
Shirley Svorny is Professor Emeritus of Economics at California State University, Northridge, and Adjunct Researcher at the Cato Institute. His article, co-authored by Robert Krol, “The Collapse of a Noble Idea,” explained the failure of the Los Angeles Community Development Bank. It was published in the journal Regulation in 2004-05.