Is the Los Angeles Municipal Bank’s proposal a good idea? – Daily news
Last week, the Los Angeles City Council’s Economic Development and Employment Committee approved a motion in support of the Los Angeles City Bank. It’s a bad idea.
Supporters confuse loans and expenses. The bank is backed by various special interest groups – but there is no transparency. No information on funding from Public Bank LA – the organization that promotes the idea – is available.
Job approvals for the Los Angeles Public Bank are a red flag. According to Public Bank LA, union support includes: Los Angeles County Federation of Labor, United Food and Commercial Workers Local 770 (TUAC) (which represents grocery and retail workers retail) and Local 11 UNITE HERE (which represents workers in hotels, restaurants and airports).
One can only conclude that unions foresee influence over final funding guidelines – perhaps borrowers will have to pay union wages. This will prevent funds from going to small downtown businesses which many bank supporters believe will help and would effectively drive low-skilled workers out of jobs.
In February, Public Bank LA organized 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 the bank’s money being used for “housing 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 bank loans to ease the pain and tragedy associated with bank foreclosure and the “never-ending cycle of payday lenders.” Susie Shannon, policy director at Housing is a Human Right, said community investments from the public bank would serve homeless people.
These are expenses, not loans. A bank can only survive if it grants repaid loans. It cannot be used as a jar of money to be used to help those in difficulty. If enthusiasm for projects related to community improvement results in an inappropriate assessment of risk, public bank loans 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 their loans. Loan officers at the nonprofit bank had no incentive to constantly monitor loans. Not only was the bank encouraged to favor politically linked borrowers, but the bank was actively encouraged to finance ill-conceived and high-risk projects.
The Valley Economic Development Center (VEDC), a community development finance institution (CDFI) located in Los Angeles, has promoted its efforts with annual events to mark its successes. Yet he was forced to file for bankruptcy in July 2019. According to Council member Rodriguez, VEDC “fled with millions of resources that should have been reinvested in small businesses.”
As mayor of LA Public Bank, Rodriguez said the public bank would direct the money to “investments in people, infrastructure, which will create local jobs.” Yet studies of similar efforts in California’s corporate zones found that the program had failed to create jobs.
The expectations of Public Bank LA supporters are unrealistic and ill-informed. What is most disturbing is that city council members are supporting the effort. This may be because they will be removed from their posts when the loans come due.
Shirley Svorny is Emeritus Professor of Economics at California State University, Northridge, and Adjunct Research Fellow 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.