Ron: In the attached article Ellen Brown proposes that the US state of California set up state owned bank similar to the Bank of North Dakota (BND) as a solution to the state's debt and money shortage problems. Although the suggestion has merit in the current diabolical monetary situation in the US there are several problems with it.
First, the California state bank would still use the US dollar and continue to be part of the Federal Reserve System (The Fed) thus suffering the problems associated with the gross devaluation of the dollar due to extremely excessive money supply creation associated with the Fed’s bailout activities. So although a state bank might limit problems associated with the current bankers’ strike which denies adequate loans (money creation) for ordinary individuals and for small enterprises and local (ie state and municipal) needs, it could not insulate state (or US) citizens from the coming hyper inflation caused by the Fed’s enormously excessive money creation for bank bailouts and such.
Second, the proposal assumes that a host of private banks will still exist and still operate on a usury (interest taking) basis AND that those private banks will continue to fraudulently create money out of thin air (1) which ensures that there is never enough money in the system. Why? Because no money is ever “created” by banks to cover the interest (usury) required by the bank each time a loan is made. This ensures that the system is unstable and creates SCARCITY CONSCIOUSNESS throughout the community. Why? Because there is NEVER enough money to go around (ie to cover interest payments as well as repayment of principle) so that individuals and businesses consistently go bankrupt and the banks foreclose and end up owning the community’s assets. That arrangement is NOT a recipe for prosperity and abundance. It is a recipe for poverty stricken community slavery. In those circumstances it is small comfort that the state bank profits from the practices that are impoverishing its citizens.
Third, the proposal assumes that, like the BND, any new Californian state bank will continue the fractional reserve banking system currently operating under the Fed. That system is not only fraudulent but it also ensures that people must seek to have the banks increase the money supply by increasing their borrowing to cover exponentially increasing interest payments. Why? Because the so-called leverage effect of issuing loans for nine times (or more) of the amount of money held by the private banks grossly increases the INTEREST PAYMENTS payable to the banks when they issue loans using the borrower’s credit. Borrowers are like dogs forever chasing their tails but never catching it. Indeed, “the tail” constantly and inevitably recedes further and further away the harder borrowers seek to make their repayment because that process inevitably results in taking out new loans and hence increasing outstanding debt and the interest due thereon.
END NOTE (1)
Although governments have inherent authority to create their own money, they borrow it from central banks, with interest. A central bank fabricates paper money and credit by “lending” them into existence, in return for treasury bonds of the host government ~ taxpayer IOUs. This “money” has no pre-existing value in reality and is conjured up through accounting entries. It is literally created out of nothing. (Counterfeiting) The central bank first “lends” these taxpayer IOUs to its own investment banks and then to down-line commercial banks, with interest. The commercial banks then lend nine times the face value of taxpayer IOUs held “in reserve.” This nine-fold multiplication of borrowed accounting entries, described as “fractional reserve banking,” creates massive inflation of the money supply which devalues the currency and reduces purchasing power. Borrowers further expand the money supply when they promise to “pay back” these accounting credits with compound interest that multiplies exponentially. More money must be fabricated to pay this interest. Thus, all “money” that enters circulation is actually debt contrived by conjured up accounting entries. Every fiat dollar is an IOU from a borrower to a lender. Credit card debt is generated by the same fraud. A debt-based monetary system can never achieve equilibrium because compound interest that multiplies exponentially always exceeds the money in circulation and eventually reaches staggering proportions, causing systemic collapse.'
Source: Nikki Alexander ‘Restoring Our Financial Sovereignty: A New Monetary System’ See: http://nikkialexander.wordpress.com/...netary-system/
Nikki Alexander’s article ‘The Metaphysics of Money’ spells out the real solution. See: http://nikkialexander.wordpress.com/...oney/#comments
WHAT A PUBLIC BANK COULD MEAN FOR CALIFORNIA
May 16th, 2011
California is the eighth largest economy in the world, and it has a debt burden to match. It has outstanding general obligation bonds and revenue bonds of $158 billion, largely incurred for infrastructure. Of this tab, $70 billion is just for interest. Over $7 billion of California’s annual budget goes to pay interest on the state’s debt.
As large as California’s liabilities are, they are exceeded by its assets, which are sufficient to capitalize a bank rivaling any in the world. That’s the idea behind Assembly Bill 750, introduced by Assemblyman Ben Hueso of San Diego, which would establish a blue ribbon task force to consider the viability of creating the California Investment Trust, a state bank receiving deposits of state funds. Instead of relying on Wall Street banks for credit – or allowing a Wall Street bank to enjoy the benefits of lending its capital – California may decide to create its own, publicly-owned bank.
On May 2, AB 750 moved out of the Banking and Finance Committee with only one nay vote and is now on its way to the Appropriations Committee. Three unions submitted their support for the bill – the California Nurses Association, the California Firefighters, and the California Labor Council. The state bank idea also got a nod from former Secretary of Labor Robert Reich in his speech at the California Democratic Convention in Sacramento the previous day.
Why a State Bank?
California joins eleven other states that have introduced bills to form state-owned banks or to study their feasibility. Eight of these bills were introduced just since January, including in Oregon, Washington State, Massachusetts, Arizona, Maryland, New Mexico, Maine and California. Illinois, Virginia, Hawaii and Louisiana introduced similar bills in 2010. For links, dates and text, see here.
All of these bills were inspired by the Bank of North Dakota (BND), currently the nation’s only state-owned bank. While other states are teetering on bankruptcy, the state of North Dakota continues to report surpluses. On April 20, the BND reported profits for 2010 of $62 million, setting a record for the seventh straight year. The BND’s profits belong to the citizens and are produced without taxation.
The BND partners with local banks in providing much-needed credit for local businesses and homeowners. It also helps with state and local government funding. When North Dakota went over-budget a few years ago, according to the bank’s president Eric Hardmeyer, the BND acted as a rainy day fund for the state. And when a North Dakota town suffered a massive flood, the BND provided emergency credit lines to the city. Having a cheap and readily available credit line with the state’s own bank reduces the need for massive rainy-day funds (which are largely invested in out-of-state banks at very modest interest).
The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses for the Washington and Oregon bills. Their conclusion was that a state-owned bank on the model of the Bank of North Dakota would have a substantial positive impact in those states, increasing employment, new lending, and government revenue.
What California Could Do with Its Own Bank
Banks create “bank credit” from capital and deposits, as explained here. Under existing capital requirements, $8 in capital can be leveraged into $100 in loans, drawing on the liquidity provided by the deposits to clear the outgoing checks. Assuming a 10% reserve requirement (the amount in deposits normally held in reserve), $8 in capital and $100 in deposits are sufficient to create $90 in loans ($100 less $10 held back for reserves).
In North Dakota (population 647,000), the Bank of North Dakota has $2.7 billion in deposits, or $4000 per capita. The majority of these deposits are drawn from the state’s own revenues. The bank has nearly the same sum ($2.6 billion) in outstanding loans.
California has 37 million people. If the California Investment Trust (CIT) performed like the BND, it might amass $148 billion in deposits. With $12 billion in capital, this $148 billion could generate $133 billion in credit for the state (subtracting 10%, or 14.8 billion, to satisfy reserve requirements).
There are various ways the state could come up with the capital, but one possibility that would not require new taxes or debt would be to simply draw on the treasurer’s existing pooled money investment account, which currently contains $65 billion in accumulated revenues dispersed to a variety of funds. This money is already invested; a portion could just be shifted to the CIT. Since it would be an investment in equity rather than an expenditure, it would not cost the state money. Rather, it would make money for the state. In recent years, the Bank of North Dakota has had a return on equity of 25-26%. Compare the 25-30% lost in the two years following the 2008 banking crisis by CalPERS, the California Public Employees’ Retirement System, which invested its money on Wall Street.
There are many inviting possibilities for applying the CIT’s $133 billion in credit power, but here is one easy alternative that illustrates the cost-effectiveness of the approach. Assume the bank invested $133 billion in municipal bonds at 5% interest. This would give the state close to $7 billion annually in interest income – nearly enough to pay the interest tab on the state’s debt.
What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies. North Dakota has a population that is less than 1/10th the size of Los Angeles; the BND produced $62 million in revenue last year and $2.2 billion in loans. Larger states could generate much more.
We have been trapped in an austere neo-liberal economic model in which the only alternatives are to slash services, raise taxes, and sell off public assets, all in a futile attempt to “balance the budget” in a shrinking economy. We need to start thinking outside the box. We can choose prosperity, and public banks are a key tool for achieving that end.
Ellen Brown wrote this article for YES! Magazine. Ellen is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of eleven books, she shows how people can reclaim the power to create money. Her websites are http://webofdebt.comhttp://ellenbrown.com.