Arguably, one of the worst bills to be introduced and passed through the 2012 legislative process so far is a proposal to create a State of Hawaii Bank.

It would be owned by taxpayers and operated by the state bureaucracy and governed by elected officials. Its primary purpose, as outlined in House Bill 2103, HD2, would be to purchase toxic mortgages and foreclosures on properties in the state of Hawaii.

What is driving this legislation is the alleged success of the State Bank of North Dakota, which was created in 1919 and today puts about $30 million per year into the state’s treasury in a state with the nation’s lowest unemployment rate. Originally the bank was created to make loans to farmers, but today it primarily buys loans from the many small banks in the rural areas of North Dakota and does not specialize in foreclosures or loan modifications.

What has been missing in the discussion at the Legislature are the findings of an investigative study conducted by the Federal Reserve Bank of Boston’s in May of 2011 (bostonfed.org/neppc). The study was conducted at the request of the state of Massachusetts to see if the success of the Bank of North Dakota could be replicated in Massachusetts. Some of the major findings of the study are instructive to Hawaii’s taxpayers:

» State banks are not insured by the FDIC and all risk is on taxpayers.

» State banks have largely been creations of the Third World where governments have a very strong hand on the economy. (When this bill was argued on the House floor, the Central Bank of China was used as a profitable example for us to favorably consider creating a state-owned bank in Hawaii.)

» The Bank of North Dakota was started with $2 million in 1919; today’s equivalent start up for such a bank in Massachusetts was estimated to be about $3.6 billion. Does Hawaii have even a down payment for such a start-up cost?

» The governor and the attorney general of North Dakota are two of the three commissioners who oversee the bank, and the North Dakota state legislature controls its yearly budget. If this model is adopted, our bank would have Gov. Neil Abercrombie, Director of Finance Kalbert Young, and Attorney General David Louie at the helm with 76 politicians voting for its budget.

» Last, the study indicates that the good economy of North Dakota, where unemployment is lowest in nation at 3.3 percent, was most likely attributable to oil and natural gas extraction and not something the state bank could have done.

Needless to say, after this study was published, the state of Massachusetts dropped the idea of creating a state-owned bank.

The Hawaii Bankers Association has warned that a state-owned bank with tax-free status and not having to deal with costly and burdensome federal regulations could create unfair competition.

The bottom line is: Do we really want to risk taxpayers money in a bad economy to create a state-owned bank to buy bad mortgages?