“Move Your Money” Hits Potholes
Switching to small banks could hurt states
By Max Schiller, CMC ’11
Largely fueled by the Huffington Post’s Arianna Huffington and Rob Johnson, the “Move Your Money” campaign has gained steam across the country as many Americans have lost faith in the ability of big national banks to protect their money and promote economic growth within their communities. The campaign, which asks individuals to move their funds out of large, national, bailed-out banks into smaller, more local banks and credit unions, has even attracted the attention of state legislators throughout the country.
Claremont McKenna economics professor Eric Helland sees a few potentially problematic issues states could face when moving state funds to community banks, particularly that community banks may not have the capacity to support state funds. According to Helland, California “started paying with IOUs several months ago,” with poor results. “Several large banks essentially floated the state, or rather state employees who banked with them, a loan by honoring the IOUs as cash,” he said. “Community banks lacked the resources to do this.” The implication, of course, is that states have a lot of capital – and business interests necessarily need large, national banks with significant funds and lines of interest to accomplish their objectives.
Yet for proponents of “Move Your Money,” frustration about the failures and subsequent bailouts of large banks may overshadow these concerns. Large government loans to big banks – like the government’s January 2009 bailout to Bank of America with $20 billion in aid and a $118 billion guarantee against bad assets – have angered citizens who felt their tax dollars were working not for them but rather for bank shareholders. Further exacerbating concerns, these banks subsequently cut lending to businesses by $100 billion, thus making national banks far less accessible to the average citizen.
Accordingly, the organizers of “Move Your Money” argue that Americans should not rely on Congress to fix the economic crisis and instead should invest in community banks that promote a stable and people-oriented approach. They promote a personal solution where people take their money from the biggest banks and invest it in local ones, thereby promoting the interests of their local communities. But even with a coordinated plan, will this model work for state governments?
Several states are considering the switch. Earlier in the year, Brian Egolf, a New Mexico state representative, introduced House Bill 66 to create a preference for holding state funds in community banks and credit unions, where $5 million would be moved immediately. The bill also introduces a temporary provisional study for determining the feasibility of dividing state funds between community banks and credit unions to ensure that state money benefits New Mexico residents. Though the bill passed the New Mexico House unanimously, it failed to reach a vote on the Senate floor in the last hours of the session. In his “Special Session Updates,” Egolf says that he was “deeply disappointed the bill did not pass but will certainly reintroduce it in future sessions if [he] is reelected to the house.” Without future time constraints on the session, the bill may have a good chance of passing.
The Maryland state legislature is considering a similar bill, which would give state banks and credit unions preference in their bids to serve state agencies. According to Representative William Frick’s office, this bill intends both to protect consumers from the abusive lending practices of federally-chartered banks and to create jobs for Maryland residents. According to Frick’s press statement, “When the state sends its deposits or business to local community banks, those dollars are reinvested in small business loans, which are essential to restarting the Maryland economy and putting our fellow citizens to work.” So far, the state’s Senate has taken no action on the bill.
Despite these attempts, Helland says he would be surprised “if most community banks could handle state banking needs because of some serious coordination costs for the state.” Instead of making things easier for the states, it may bog them down with severe bureaucratic costs and the logistical problems associated with moving large sums of money among smaller banks.
These potential problems may hamper states’ efforts to devise their own versions of the “Move Your Money” campaign. The Huffington Post’s individually-based model may prove a much more viable option for grassroots banking reform.