This article first appeared on The Daily Yonder and is republished here under a Creative Commons license.
A public bank is a financial institution that is managed by the government in the public interest, which is unlike many of the big banks in the United States that are owned by private investors. Just one public bank exists in the entire country – the Bank of North Dakota – but efforts in other states are growing to pass legislation that would establish public banks to keep state and municipal revenues close to home and reinvested in local communities.
Angela Merkert is the executive director of the New Mexico-based organization Alliance for Local Economic Prosperity, which is studying the benefits of, and advocating for, the establishment of a public bank in New Mexico. I spoke with Merkert about this advocacy work and why small businesses can benefit from public banking, which is designed to provide more equitable access to capital for people seeking loans to start small businesses or support existing businesses. According to Merkert, one industry that can particularly benefit from these loans (and is predominantly rural) is agriculture, because farmers and ranchers often rely on small loans to get them through the year.
Read our full conversation about public banks and the role they can play in strengthening communities, below.
Claire Carlson, The Daily Yonder: What need for a public bank did you and other organizers recognize in New Mexico, and what work have you done in the state so far?
AFLEP executive director Angela Merkert
This all was coming off of the Great Recession, and that was another reason for the interest in looking at money because of the pain of coming through the recession. So that’s when not just in New Mexico but around the country there began to be more interest in looking at a public bank, especially seeing the influence of the public Bank of North Dakota. North Dakota had the lowest unemployment rate throughout the recession of any other state. Some of that was due to the oil boom there at that time, but it wasn’t the only factor. There were other reasons behind that, and they had to do with the kind of lending programs from the public bank that went into effect fairly rapidly once the recession started.
DY: What’s going on right now with the bill AFLEP is looking to introduce? Are there other groups you’re working with on this?
AM: Right now, we’re gearing up for the 60-day legislative session that opens mid-January to mid-March of 2023, where we will introduce the updated Public Bank Act. As a statewide group, we have developed significant allies and we’re a member of a number of groups, including the New Mexico Food and Agriculture Policy Council. We’ve been a member of that group for more than two years now.
We have found that [the New Mexico Food and Agriculture Policy Council] is one of the groups that has been most interested in learning about how lending programs could be developed and how small business support can be made. So we have been focused primarily on what a public bank can do to influence more equitable access to capital for small business owners or small business wannabes and also for people in agriculture and the food system. We feel like there are gaps in both processing and in distribution in this state to support food items. For New Mexico, about 95% of our agricultural products go outside the state for processing and then we bring back 94 to 95% of those processed foods into the state. A number of people involved in agriculture would like to see those percentages decreased for going out of state and for processing.
The whole foundation of this is that we want to keep New Mexico revenue safe, local, and working for New Mexicans. We want to invest our revenues, our state’s income in the people of New Mexico and one way to help control that is to develop our own depository, which would be a state public bank to hold those revenues and develop lending programs that focus especially on partnership lending, community banks, credit unions and CDFIs that would work more closely with small business development.
DY: You’ve alluded to it a bit, but I’m wondering if you can directly speak to how a public bank can help uplift economic justice in local communities and at the state level and how it could do that in New Mexico.
AM: What we see in small business development and where we see economic justice at play is that having equitable access to capital, especially in contrast to having to use credit cards, payday loans, and FinTech, which has higher interest rates to help them start their businesses, is really important, and it means lending in ways that are not necessarily defined or accepted in the structure of current lending programs from community banks or Wall Street banks.
There are some banks that won’t lend for anything less than $250,000. They think that they can recover their costs or make money better by making a larger loan rather than making a number of smaller ones. Or there’s those short term loans that farmers can apply for because you know, they’re planting their crops in the spring, they’ll pay off the loan in the fall or early winter when the crops are in. But not as many community banks support those as they used to.
Then there is another area of atypical loans like loans that are set up for outside the three-year range, that are more like four to five to six years that the borrower is asking for. And that can happen with some of the loans for farmers moving into more organic farming, or a number of our farmers now are looking at how to make adaptations that address climate change and the effects of climate disruption here. So that’s where we see a public bank and loan officers developing programs that could address some of those atypical loan needs – it doesn’t mean they’re higher risk, they’re just different from the designs of the loans that are currently established in the community banks. Often, the inaccessible loan structure at community banks is caused by changes in regulations, but that doesn’t mean that they can’t make some adjustments themselves to make access to capital more equitable.
New Mexico community banks, for instance, according to the Federal Reserve and FDIC have among the highest of liquidity to lending rates. What that means is they’re holding on to their money or they’re investing in other financial products, but they’re not lending that money. We want the bank to be up to 70 to 75% liquidity to lending. That’s not the percentage that a number of our community banks are running at. They’re running an average of around 56-57% overall. That’s really low we think, and it means that the money isn’t circulating.
DY: Does it seem like most people support the idea of a public bank or has there been pushback?
AM: Some of the pushback is people saying “we don’t need more government. We need less government.” So there are some folks who are resistant or who say the state shouldn’t be in the banking business, even though banks are the only way we can create more money. Part of what’s getting their attention is that we have what I call a fire hose of money that has come into the state and is still coming in due to oil and gas revenues and the income from that, plus what we were receiving through the pandemic recovery funds.
All of that is well and good, but when we project out several years to when the recovery funds run out and there’s pressure building on fossil fuels, we need to be looking at alternative funding options. We’ve been holding out the bank as a means of helping to stabilize the state’s finance system as we go through the transition away from fossil fuels. There are a number of legislators and business people who are saying, well, that’s not going to happen for a long time. But we think that there are definitely building social pressures that are going to move that forward sooner rather than later here.
DY: What can the public do to encourage lawmakers to pass these bills and start incorporating public banks within their state?
AM: The public needs to ask for more information about where our money goes, who’s holding our money, and what they are doing with that money. If JP Morgan Chase is holding your primary deposit, that’s your state’s revenue. Ask what they’re doing with that money. What’s the return that the state is getting on that? What are they allowed to do? And how much of that money may be being used for making money for themselves in the secondary banking market, which is pretty much unregulated? They’re always going to be making some money, but is it an outrageous amount or is it reasonable? Is it a reasonable cost of doing business, and how safe is it?
We found out that the liquidity of the big banks wasn’t healthy during the recession, and there’s been some concern about their degree of liquidity during parts of the pandemic. Just ask the questions and also understand that a bank is the only institution that can create money. So if your state and state legislators are saying that they don’t have the funding to do XYZ, then ask the question: if we added a bank to the state’s finance system, what would we be able to do with those resources that we can’t do now?
This interview first appeared in Path Finders, a weekly email newsletter from the Daily Yonder. Each Monday, Path Finders features a Q&A with a rural thinker, creator, or doer. Join the mailing list to have these illuminating conversations delivered straight to your inbox.
