California Free Press

The Venezuela Myth Keeping Us From Transforming Our Economy

by Ellen Brown, from truthdig, February 7, 2019

Alex Lanz / CC BY-NC-ND 2.0

Modern Monetary Theory (MMT) is getting significant media attention these days, after Rep. Alexandria Ocasio-Cortez said in an interviewthat it should “be a larger part of our conversation” when it comes to funding the “Green New Deal.” According to MMT, the government can spend what it needs without worrying about deficits. MMT expert and Bernie Sanders adviser professor Stephanie Kelton says the government actually creates money when it spends. The real limit on spending is not an artificially imposed debt ceiling but a lack of labor and materials to do the work, leading to generalized price inflation. Only when that real ceiling is hit does the money need to be taxed back, but even then it’s not to fund government spending. Instead, it’s needed to shrink the money supply in an economy that has run out of resources to put the extra money to work.

Predictably, critics have been quick to rebut, calling the trend to endorse MMT “disturbing” and “a joke that’s not funny.” In a Feb. 1 post on the Daily Reckoning, Brian Maher darkly envisioned Bernie Sanders getting elected in 2020 and implementing “Quantitative Easing for the People” based on MMT theories. To debunk the notion that governments can just “print the money” to solve their economic problems, he raised the specter of Venezuela, where “money” is everywhere but bare essentials are out of reach for many, the storefronts are empty, unemployment is at 33 percent and inflation is predicted to hit 1 million percent by the end of the year.

Blogger Arnold Kling also pointed to the Venezuelan hyperinflation. He described MMT as “the doctrine that because the government prints money, it can spend whatever it wants . . . until it can’t.” He said:

To me, the hyperinflation in Venezuela exemplifies what happens when a country reaches the “it can’t” point. The country is not at full employment. But the government can’t seem to spend its way out of difficulty. Somebody should ask these MMT rock stars about the Venezuela example.

I’m not an MMT rock star and won’t try to expound on its subtleties. (I would submit that under existing regulations, the government cannot actually create money when it spends, but that it should be able to. In fact, MMTers have acknowledged that problem; but it’s a subject for another article.) What I want to address here is the hyperinflation issue, and why Venezuelan hyperinflation and “QE for the People” are completely different animals.

What Is Different About Venezuela

Venezuela’s problems are not the result of the government issuing money and using it to hire people to build infrastructure, provide essential services and expand economic development. If it were, unemployment would not be at 33 percent and climbing. Venezuela has a problem the U.S. does not, and will never have: It owes massive debts in a currency it cannot print itself, namely, U.S. dollars. When oil (its principal resource) was booming, Venezuela was able to meet its repayment schedule. But when the price of oil plummeted, the government was reduced to printing Venezuelan bolivars and selling them for U.S. dollars on international currency exchanges. As speculators drove up the price of dollars, more and more printing was required by the government, massively deflating the national currency.

It was the same problem suffered by Weimar Germany and Zimbabwe, the two classic examples of hyperinflation typically raised to silence proponents of government expansion of the money supply before Venezuela suffered the same fate. Professor Michael Hudson, an actual economic rock star who supports MMT principles, has studied the hyperinflation question extensively. He confirms that those disasters were not due to governments issuing money to stimulate the economy. Rather, he writes, “Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.”

Venezuela and other countries that are carrying massive debts in currencies that are not their own are not sovereign. Governments that are sovereign can and have engaged in issuing their own currencies for infrastructure and development quite successfully. I have discussed a number of contemporary and historical examples in my earlier articles, including in Japan, China, Australia and Canada.

Although Venezuela is not technically at war, it is suffering from foreign currency strains triggered by aggressive attacks by a foreign power. U.S. economic sanctions have been going on for years, causing the country at least $20 billion in losses. About $7 billion of its assets are now being held hostage by the U.S., which has waged an undeclared war against Venezuela ever since George W. Bush’s failed military coup against President Hugo Chávez in 2002. Chávez boldly announced the “Bolivarian Revolution,” a series of economic and social reforms that dramatically reduced poverty and illiteracy as well as improved health and living conditions for millions of Venezuelans. The reforms, which included nationalizing key components of the nation’s economy, made Chávez a hero to millions of people and the enemy of Venezuela’s oligarchs.

Nicolás Maduro was elected president following Chávez’s death in 2013 and vowed to continue the Bolivarian Revolution. Recently, as Saddam Hussein and Moammar Gadhafi had done before him, he defiantly announced that Venezuela would not be trading oil in U.S.dollars following sanctions imposed by President Trump.

The notorious Elliott Abrams has now been appointed as special envoyto Venezuela. Considered a war criminal by many for covering up massacres committed by U.S.-backed death squads in Central America, Abrams was among the prominent neocons closely linked to Bush’s failed Venezuelan coup in 2002. National security adviser John Bolton is another key neocon architect advocating regime change in Venezuela. At press conference on Jan. 28, he held a yellow legal pad prominently displaying the words “5,000 troops to Colombia,” a country that shares a border with Venezuela. Clearly, the neocon contingent feels it has unfinished business there.

Bolton does not even pretend that it’s all about restoring “democracy.” He blatantly said on Fox News, “It will make a big difference to the United States economically if we could have American oil companies invest in and produce the oil capabilities in Venezuela.” As President Nixon said of U.S. tactics against Salvador Allende’s government in Chile, the point of sanctions and military threats is to squeeze the country economically.

Killing the Public Banking Revolution in Venezuela

It may be about more than oil, which recently hit record lows in the market. The U.S. hardly needs to invade a country to replenish its supplies. As with Libya and Iraq, another motive may be to suppress the banking revolution initiated by Venezuela’s upstart leaders.

The banking crisis of 2009–10 exposed the corruption and systemic weakness of Venezuelan banks. Some banks were engaged in questionable business practices. Others were seriously undercapitalized. Others still were apparently lending top executives large sums of money. At least one financier could not prove where he got the money to buy the banks he owned.

Rather than bailing out the culprits, as was done in the U.S., in 2009 the government nationalized seven Venezuelan banks, accounting for around 12 percent of the nation’s bank deposits. In 2010, more were taken over. Chávez’s government arrested at least 16 bankers and issued more than 40 corruption-related arrest warrants for others who had fled the country. By the end of March 2011, only 37 banks were left, down from 59 at the end of November 2009. State-owned institutions took a larger role, holding 35 percent of assets as of March 2011, while foreign institutions held just 13.2 percent of assets.

Over the howls of the media, in 2010 Chávez took the bold step of passing legislation defining the banking industry as one of “public service.” The legislation specified that 5 percent of the banks’ net profits must go toward funding community council projects, designed and implemented by communities for the benefit of communities. The Venezuelan government directed the allocation of bank credit to preferred sectors of the economy, and it increasingly became involved in private financial institutions’ operations. By law, nearly half the lending portfolios of Venezuelan banks had to be directed to particular mandated sectors of the economy, including small business and agriculture.

In a 2012 article titled “Venezuela Increases Banks’ Obligatory Social Contributions, U.S. and Europe Do Not,” Rachael Boothroyd said that the Venezuelan government was requiring the banks to give back. Housing was declared a constitutional right, and Venezuelan banks were obliged to contribute 15 percent of their yearly earnings to securing it. The government’s Great Housing Mission aimed to build 2.7 million free houses for low-income families before 2019. The goal was to create a social banking system that contributed to the development of society rather than simply siphoning off its wealth. Boothroyd wrote:

… Venezuelans are in the fortunate position of having a national government which prioritizes their life quality, wellbeing and development over the health of bankers’ and lobbyists’ pay checks. If the 2009 financial crisis demonstrated anything, it was that capitalism is quite simply incapable of regulating itself, and that is precisely where progressive governments and progressive government legislation needs to step in.

That is also where, in the U.S., the progressive wing of the Democratic Party is stepping in—and why Ocasio-Cortez’s proposals evoke howls in the media of the sort seen in Venezuela.

Article I, Section 8, of the Constitution gives Congress the power to create the nation’s money supply. Congress needs to exercise that power. The key to restoring our economic sovereignty is to reclaim the power to issue money from a commercial banking system that acknowledges no public responsibility beyond maximizing profits for its shareholders. Bank-created money is backed by the full faith and credit of the United States, including federal deposit insurance, access to the Fed’s lending window, and government bailouts when things go wrong. If we the people are backing the currency, it should be issued by the people through their representative government.

Today’s government, however, does not adequately represent the people, which is why we first need to take our government back. Thankfully, that is exactly what Ocasio-Cortez and her congressional allies are attempting to do.

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Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution." A thirteenth book titled "The Coming Revolution in Banking" is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

 

The Financial Secret Behind Germany’s Green Energy Revolution

by Ellen Brown, from truthdig

JAN 24, 2019|TD ORIGINALS

Wind farmer Jan Marrink poses by his wind turbines in Nordhorn, Germany. (Martin Meissner / AP)

The “Green New Deal” endorsed by Rep. Alexandria Ocasio-Cortez, D.-N.Y., and more than 40 other House members has been criticized as imposing a too-heavy burden on the rich and upper-middle-class taxpayers who will have to pay for it. However, taxing the rich is not what the Green New Deal resolution proposes. It says funding would come primarily from certain public agencies, including the U.S. Federal Reserve and “a new public bank or system of regional and specialized public banks.”

Funding through the Federal Reserve may be controversial, but establishing a national public infrastructure and development bank should be a no-brainer. The real question is why we don’t already have one, as do China, Germany and other countries that are running circles around us in infrastructure development. Many European, Asian and Latin American countries have their own national development banks, as well as belong to bilateral or multinational development institutions that are jointly owned by multiple governments. Unlike the U.S. Federal Reserve, which considers itself “independent” of government, national development banks are wholly owned by their governments and carry out public development policies.

China not only has its own China Infrastructure Bank but has established the Asian Infrastructure Investment Bank, which counts many Asian and Middle Eastern countries in its membership, including Australia, New Zealand and Saudi Arabia. Both banks are helping to fund China’s trillion-dollar “One Belt One Road” infrastructure initiative. China is so far ahead of the United States in building infrastructure that Dan Slane, a former adviser on President Donald Trump’s transition team, has warned, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.”

The leader in renewable energy, however, is Germany, called “the world’s first major renewable energy economy.” Germany has a public sector development bank called KfW (Kreditanstalt für Wiederaufbauor “Reconstruction Credit Institute”), which is even larger than the World Bank. Along with Germany’s nonprofit Sparkassen banks, KfW has largely funded the country’s green energy revolution.

Unlike private commercial banks, KfW does not have to focus on maximizing short-term profits for its shareholders while turning a blind eye to external costs, including those imposed on the environment. The bank has been free to support the energy revolution by funding major investments in renewable energy and energy efficiency. Its fossil fuel investments are close to zero. One of the key features of KfW, as with other development banks, is that much of its lending is driven in a strategic direction determined by the national government. Its key role in the green energy revolution has been played within a public policy framework under Germany’s renewable energy legislation, including policy measures that have made investment in renewables commercially attractive.

KfW is one of the world’s largest development banks, with assetstotaling $566.5 billion as of December 2017. Ironically, the initial funding for its capitalization came from the United States, through the Marshall Plan in 1948. Why didn’t we fund a similar bank for ourselves? Simply because powerful Wall Street interests did not want the competition from a government-owned bank that could make below-market loans for infrastructure and development. Major U.S. investors today prefer funding infrastructure through public-private partnerships, in which private partners can reap the profits while losses are imposed on local governments.

KfW and Germany’s Energy Revolution

Renewable energy in Germany is mainly based on wind, solar and biomass. Renewables generated 41 percent of the country’s electricity in 2017, up from just 6 percent in 2000; and public banks provided over 72 percent of the financing for this transition. In 2007-09, KfW funded all of Germany’s investment in Solar Photovoltaic. After that, Solar PV was introduced nationwide on a major scale. This is the sort of catalytic role that development banks can play—kickstarting a major structural transformation by funding and showcasing new technologies and sectors.

KfW is not only one of the biggest financial institutions but has been ranked one of the two safest banks in the world. (The other, Switzerland’s Zurich Cantonal Bank, is also publicly owned.) KfW sports triple-A ratings from all three major rating agencies—Fitch, Standard and Poor’s, and Moody’s. The bank benefits from these top ratings and the statutory guarantee of the German government, which allow it to issue bonds on very favorable terms and therefore to lend on favorable terms, backing its loans with the bonds.

KfW does not work through public-private partnerships, and it does not trade in derivatives and other complex financial products. It relies on traditional lending and grants. The borrower is responsible for loan repayment. Private investors can participate, but not as shareholders or public-private partners. Rather, they can invest in “Green Bonds,” which are as safe and liquid as other government bonds and are prized for their green earmarking. The first “Green Bond—Made by KfW” was issued in 2014 with a volume of $1.7 billion and a maturity of five years. It was the largest Green Bond ever at the time of issuance and generated so much interest that the order book rapidly grew to $3.02 billion, although the bonds paid an annual coupon of only 0.375 percent. By 2017, the issue volume of KfW Green Bonds reached $4.21 billion.

Investors benefit from the high credit and sustainability ratings of KfW, the liquidity of its bonds, and the opportunity to support climate and environmental protection. For large institutional investors with funds that exceed the government deposit insurance limit, Green Bonds are the equivalent of savings accounts—a safe place to park their money that provides a modest interest. Green Bonds also appeal to “socially responsible” investors, who have the assurance with these simple and transparent bonds that their money is going where they want it to. The bonds are financed by KfW from the proceeds of its loans, which are also in high demand due to their low interest rates, which the bank can offer because its high ratings allow it to cheaply mobilize funds from capital markets and its public policy-oriented loans qualify it for targeted subsidies.

Roosevelt’s Development Bank: The Reconstruction Finance Corporation

KfW’s role in implementing government policy parallels that of the Reconstruction Finance Corporation (RFC) in funding the New Deal in the 1930s. At that time, U.S. banks were bankrupt and incapable of financing the country’s recovery. President Franklin D. Roosevelt attempted to set up a system of 12 public “industrial banks” through the Federal Reserve, but the measure failed. Roosevelt then made an end run around his opponents by using the RFC that had been set up earlier by President Herbert Hoover, expanding it to address the nation’s financing needs.

The RFC Act of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. As with KfW’s loans, its funding source was the sale of bonds, mostly to the Treasury itself. Proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms and much more; it funded all of this while generating income for the government.

The RFC was so successful that it became America’s largest corporation and the world’s largest banking organization. Its success, however, may have been its nemesis. Without the emergencies of depression and war, it was a too-powerful competitor of the private banking establishment; and in 1957, it was disbanded under President Dwight D. Eisenhower. That’s how the  United States was left without a development bank at the same time Germany and other countries were hitting the ground running with theirs.

Today some U.S. states have infrastructure and development banks, including California, but their reach is very small. One way they could be expanded to meet state infrastructure needs would be to turn them into depositories for state and municipal revenue. Rather than lending their capital directly in a revolving fund, this would allow them to leverage their capital into 10 times that sum in loans, as all depository banks are able to do, as I’ve previously explained.

The most profitable and efficient way for national and local governments to finance public infrastructure and development is with their own banks, as the impressive track records of KfW and other national development banks have shown. The RFC showed what could be done even by a country that was technically bankrupt, simply by mobilizing its own resources through a publicly owned financial institution. We need to resurrect that public funding engine today, not only to address the national and global crises we are facing now but for the ongoing development the country needs in order to manifest its true potential.

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Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution." A thirteenth book titled "The Coming Revolution in Banking" is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Central Banks Have Gone Rogue, Putting Us All at Risk

From truthdig

by Ellen Brown

SEP 13, 2018TD ORIGINALS

COMMENTS

 

marcokalmann / Flickr

Excluding institutions such as Blackrock and Vanguard, which are composed of multiple investors, the largest single players in global equity markets are now thought to be central banks themselves. An estimated 30 to 40 central banks are invested in the stock market, either directly or through their investment vehicles (sovereign wealth funds). According to David Haggith at Zero Hedge:

Central banks buying stocks are effectively nationalizing U.S. corporations just to maintain the illusion that their “recovery” plan is working. … At first, their novel entry into the stock market was only intended to rescue imperiled corporations, such as General Motors during the first plunge into the Great Recession, but recently their efforts have shifted to propping up the entire stock market via major purchases of the most healthy companies on the market.

The U.S. Federal Reserve, which bailed out General Motors in a rescue operation in 2009, was prohibited from lending to individual companies under the Dodd-Frank Act of 2010, and it is legally barred from owning equities. It parks its reserves instead in bonds and other government-backed securities. But other countries have different rules, and central banks are now buying individual stocks as investments, with a preference for big tech companies like Amazon, Apple, Facebook and Microsoft. Those are the stocks that dominate the market, and central banks are aggressively driving up their value. Markets, including the U.S. stock market, are thus literally being rigged by foreign central banks.

The result, as noted in a January 2017 article at Zero Hedge, is that central bankers, “who create fiat money out of thin air and for whom ‘acquisition cost’ is a meaningless term, are increasingly nationalizing the equity capital markets.” Or at least they would be nationalizing equities, if they were actually “national” central banks. But the Swiss National Bank, the biggest single player in this game, is 48 percent privately owned, and most central banks have declared their independence from their governments. They march to the drums not of government but of private industry.

Marking the 10th anniversary of the 2008 collapse, former Fed chairman Ben Bernanke and former Treasury secretaries Timothy Geithner and Henry Paulson wrote in a Sept. 7 New York Times op-edthat the Fed’s tools needed to be broadened to allow it to fight the next anticipated economic crisis, including allowing it to prop up the stock market by buying individual stocks. To investors, propping up the stock market may seem like a good thing, but what happens when the central banks decide to sell? The Fed’s massive $4-trillion economic support is now being taken away, and other central banks are expected to follow. Their U.S. and global holdings are so large that their withdrawal from the market could trigger another global recession. That means when and how the economy will collapse is now in the hands of central bankers.

Moving Goal Posts

The two most aggressive central bank players in the equity markets are the Swiss National Bank and the Bank of Japan.  The goal of the Bank of Japan, which now owns 75 percent of Japanese exchange-traded funds, is evidently to stimulate growth and defy longstanding expectations of deflation. But the Swiss National Bank is acting more like a hedge fund, snatching up individual stocks because “that is where the money is.”

About 20 percent of the SNB’s reserves are in equities, and more than half of that is in U.S. equities. The SNB’s goal is said to be to counteract the global demand for Swiss francs, which has been driving up the value of the national currency, making it hard for Swiss companies to compete in international trade. The SNB does this by buying up other currencies, and because it needs to put them somewhere, it’s putting that money in stocks.

That is a reasonable explanation for the SNB’s actions, but some critics suspect it has ulterior motives. Switzerland is home to the Bank for International Settlements, the “central bankers’ bank” in Basel, where central bankers meet regularly behind closed doors. Dr. Carroll Quigley, a Georgetown history professor who claimed to be the historian of the international bankers, wrote of this institution in” Tragedy and Hope” in 1966:

[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.  This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central bank,s which were themselves private corporations.

The key to their success, said Quigley, was that they would control and manipulate the money system of a nation while letting it appear to be controlled by the government. The economic and political systems of nations would be controlled not by citizens but by bankers, for the benefit of bankers. The goal was to establish an independent (privately owned or controlled) central bank in every country. Today, that goal has largely been achieved.

In a paper presented at the 14th Rhodes Forum in Greece in October 2016, Dr. Richard Werner, director of international development at the University of Southampton in the United Kingdom, argued that central banks have managed to achieve total independence from government and total lack of accountability to the people, and that they are now in the process of consolidating their powers. They control markets by creating bubbles, busts and economic chaos. He pointed to the European Central Bank, which was modeled on the disastrous earlier German central bank, the Reichsbank. The Reichsbank created deflation, hyperinflation and the chaos that helped bring Adolf Hitler to power.

The problem with the Reichsbank, said Werner, was its excessive independence and its lack of accountability to German institutions and Parliament. The founders of post-war Germany changed the new central bank’s status by significantly curtailing its independence. Werner wrote, “The Bundesbank was made accountable and subordinated to Parliament, as one would expect in a democracy. It became probably the world’s most successful central bank.”

But today’s central banks, he said, are following the disastrous Reichsbank model, involving an unprecedented concentration of power without accountability. Central banks are not held responsible for their massive policy mistakes and reckless creation of boom-bust cycles, banking crises and large-scale unemployment. Youth unemployment now exceeds 50 percent in Spain and Greece. Many central banks remain in private hands, including not only the Swiss National Bank but the Federal Reserve Bank of New York and the Italian, Greek and South African central banks.

Banks and Central Banks Should Be Made Public Utilities

Werner’s proposed solution to this dangerous situation is to bypass both the central banks and the big international banks and decentralize power by creating and supporting local not-for-profit public banks. Ultimately, he envisions a system of local public money issued by local authorities as receipts for services rendered to the local community. Legally, he noted, 97 percent of the money supply is already just private company credit, which can be created by any company, with or without a banking license. Governments should stop issuing government bonds, he said, and instead fund their public sector credit needs through domestic banks that create money on their books (as all banks have the power to do). These banks could offer more competitive rates than the bond markets and could stimulate the local economy with injections of new money. They could also put the big bond underwriting firms that feed on the national debt out of business.

Abolishing the central banks is one possibility, but if they were recaptured as public utilities, they could serve some useful purposes. A central bank dedicated to the service of the public could act as an unlimited source of liquidity for a system of public banks, eliminating bank runs since the central bank cannot go bankrupt. It could also fix the looming problem of an unrepayable federal debt, and it could generate “quantitative easing for the people,” which could be used to fund infrastructure, low-interest loans to cities and states, and other public services.

The ability to nationalize companies by buying them with money created on the central bank’s books could also be a useful public tool. The next time the mega-banks collapse, rather than bailing them out, they could be nationalized and their debts paid off with central bank-generated money.

There are other possibilities. Former assistant treasury secretary Paul Craig Roberts argues that we should also nationalize the media and the armaments industry. Researchers at the Democracy Collaborative have suggested nationalizing the large fossil fuel companies by simply purchasing them with Fed-generated funds. In a September 2018 policy paper titled “Taking Climate Action to the Next Level,” the researchers wrote, “This action might represent our best chance to gain time and unlock a rapid but orderly energy transition, where wealth and benefits are no longer centralized in growth-oriented, undemocratic, and ethically dubious corporations, such as ExxonMobil and Chevron.”

Critics will say this would result in hyperinflation, but an argument can be made that it wouldn’t. That argument will have to wait for another article, but the point here is that massive central bank interventions that were thought to be impossible in the 20th century are now being implemented in the 21st, and they are being done by independent central banks controlled by an international banking cartel. It is time to curb central bank independence. If their powerful tools are going to be put to work, it should be in the service of the public and the economy.

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Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution."

Banks Are Becoming Obsolete in China—Could the U.S. Be Next?

by Ellen Brown, from truthdig

AUG 22, 2018TD ORIGINALS

COMMENTS

 

Alipay in the U.K.: Alibaba's proprietary payment platform, Alipay, has shown up in advertisements overseas, such as this one in London's Tottenham Court subway station. (Ged Carroll / Flickr)(CC BY 2.0)

The U.S. credit card system siphons off excessive amounts of money from merchants. In a typical $100 credit card purchase, only $97.25 goes to the seller. The rest goes to banks and processors. But who can compete with Visa and MasterCard?

It seems China’s new mobile payment ecosystems can. According to a May 2018 article in Bloomberg titled “Why China’s Payment Apps Give U.S. Bankers Nightmares”:

The future of consumer payments may not be designed in New York or London but in China. There, money flows mainly through a pair of digital ecosystems that blend social media, commerce and banking—all run by two of the world’s most valuable companies. That contrasts with the U.S., where numerous firms feast on fees from handling and processing payments. Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.

The nightmare for the U.S. financial industry is that a major technology company—whether one from China or a U.S. giant such as Amazon or Facebook—might replicate the success of the Chinese mobile payment systems, cutting banks out.

According to John Engen, writing in American Banker in May 2018, “China processed a whopping $12.8 trillion in mobile payments” in the first ten months of 2017. Today even China’s street merchants don’t want cash. Payment for everything is handled with a phone and a QR code (a type of barcode). More than 90 percent of Chinese mobile payments are run through Alipay and WeChat Pay, rival platforms backed by the country’s two largest internet conglomerates, Alibaba and Tencent Holdings. Alibaba is the Amazon of China, while Tencent Holdings is the owner of WeChat, a messaging and social media app with more than a billion users.

Alibaba created Alipay in 2004 to let millions of potential customers who lacked credit and debit cards shop on its giant online marketplace. Alipay is free for smaller users of its platform. As total monthly transactions rise, so does the charge; but even at its maximum, it’s less than half what PayPal charges: around 1.2 percent. Tencent Holdings similarly introduced its payments function in 2005 in order to keep users inside its messaging system longer. The American equivalent would be Amazon and Facebook serving as the major conduits for U.S. payments.

WeChat and Alibaba have grown into full-blown digital ecosystems—around-the-clock hubs for managing the details of daily life. WeChat users can schedule doctor appointments, order food, hail rides and much more through “mini-apps” on the core app. Alipay calls itself a “global lifestyle super-app” and has similar functions.

Both have flourished by making mobile payments cheap and easy to use. Consumers can pay for everything with their mobile apps and can make person-to-person payments. Everyone has a unique QR code and transfers are free. Users don’t need to sign into a bank or payments app when transacting. They simply press the “pay” button on the ecosystem’s main app and their unique QR code appears for the merchant to scan. Engen writes:

A growing number of retailers, including McDonald’s and Starbucks, have self-scanning devices near the cash register to read QR codes. The process takes seconds, moving customers along so quickly that anyone using cash gets eye-rolls for slowing things down.

Merchants that lack a point-of-sale device can simply post a piece of paper with their QR code near the register for customers to point their phones’ cameras at and execute payments in reverse.

A system built on QR codes might not be as secure as the near-field communication technology used by ApplePay and other apps in the U.S. market. But it’s cheaper for merchants, who don’t have to buy a piece of technology to accept a payment.

The mobile payment systems are a boon to merchants and their customers, but local bankers complain that they are slowly being driven out of business. Alipay and WeChat have become a duopoly that is impossible to fight. Engen writes that banks are often reduced to “dumb pipes”—silent funders whose accounts are used to top up customers’ digital wallets. The bank bears the compliance and other account-related expenses, and it does not get the fees and branding opportunities typical of cards and other bank-run options. The bank is seen as a place to deposit money and link it to WeChat or Alipay. Bankers are being “disintermediated”—cut out of the loop as middlemen.

If Amazon, Facebook or one of their Chinese counterparts duplicated the success of China’s mobile ecosystems in the U.S., they could take $43 billion in merchant fees from credit card companies, processors and banks, along with about $3 billion in bank fees for checking accounts. In addition, there is the potential loss of money market deposits, which are also migrating to the mobile ecosystem duopoly in China. In 2017, Alipay’s affiliate Yu’e Bao surpassed JPMorgan Chase’s Government Money Market Fund as the world’s largest money market fund, with more than $200 billion in assets. Engen quotes one financial services leader who observes, “The speed of migration to their wealth-management and money-market funds has been tremendous. That’s bad news for traditional banks, where deposits are the foundation of the business.”

An Amazon-style mobile ecosystem could challenge not only the payments system but the lending business of banks. Amazon is already making small-business loans, finding ways to cut into banks’ swipe-fee revenue and competing against prepaid card issuers; and it evidently has broader ambitions. Checking accounts, small business credit cards and even mortgages appear to be in the company’s sights.

In an October 2017 article titled “The Future of Banks Is Probably Not Banks,” tech innovator Andy O’Sullivan observed that Amazon has a relatively new service called “Amazon Cash,” where consumers can use a barcode to load cash into their Amazon accounts through physical retailers. The service is intended for consumers who don’t have bank cards, but O’Sullivan notes that it raises some interesting possibilities. Amazon could do a deal with retailers to allow consumers to use their Amazon accounts in stores, or it could offer credit to buy particular items. No bank would be involved, just a tech giant that already has a relationship with the consumer, offering him or her additional services. Phone payment systems are already training customers to go without bank cards, which means edging out banks.

Taking those concepts even further, Amazon (or eBay or Craigslist) could set up a digital credit system that bypassed bank-created money altogether. Users could sell goods and services online for credits, which they could then spend online for other goods and services. The credits of this online ecosystem would constitute its own user-generated currency. Credits could trade in a digital credit clearing system similar to the digital community currencies used worldwide, systems in which “money” is effectively generated by users themselves.

Like community currencies, an Amazon-style credit clearing system would be independent of both banks and government; but Amazon itself is a private for-profit megalithic system. Like its Wall Street counterparts, it has a shady reputation, having been variously charged with worker exploitation, unfair trade practices, environmental degradation and extracting outsize profits from trades. However, both President Trump on the right and Sen. Elizabeth Warren on the left are now threatening to turn Amazon, Facebook and other tech giants into public utilities.

This opens some interesting theoretical possibilities. We could one day have a national nonprofit digital ecosystem operated as a cooperative, a public utility in which profits are returned to the users in the form of reduced prices. Users could create their own money by “monetizing” their own credit, in a community currency system in which the “community” is the nation—or even the world.

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Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution." A thirteenth book titled "The Coming Revolution in Banking" is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Off the Top of My Head

The 'Make a Killing and Get Out' Economy

by John Lawrence, June 9, 2018

Even the big guys expect the American economy to crash again as it did in 2018. But they don't care. They will have made their money by then. They don't care if the chickens come home to roost on the Federal debt either. If the US becomes too insufferable, they will take their money and go elsewhere. Any country would accept a million dollar bribe in order to get in. So we see the banks are at it again. They have eviscerated Dodd-Frank, the banking legislation that was supposed to say to the banking industry and the rest of America, NEVER AGAIN. Hah, they know it will happen again. Their profits are predicated on the fact that it will happen again and they don't care. They will have made their killing by then.

Same goes for CEOs. They don't care if they get fired a few years down the line after they have made their killing. They don;'t care if their company becomes unprofitable at some point in time. They just want to get that stock price up as far as possible before the collapse, get their bonuses and options and get out. They will have made their killing before their company becomes a worthless hulk. Hedge fund managers think the same way. They're not interested in building a company of value for the long term. No, they will lay off their employees to please Wall Street. Get that stock price up, Wall Street tells them, and they comply because their personal profits are based on the stock price, not how well they build the company for the long term.

Short term profits are all that's important to those who wield power in the global economy presided over by the almighty dollar. We have already seen what happens to countries that don't play ball: sanctions or the threat of sanctions. That wouldn't be possible if the US dollar did not hold sway. Even US allies are being forced to do things against their better judgment because the US told them to do it. Of course we have total nut cases running the US at the present time. They also are only in it for the money and the power. Power is an aphrodisiac. The more of it they have, the more of it they want.

If the economy comes crashing down, if the national debt becomes unpayable, if there is no money for social security or Medicare, the prevailing power and money brokers could care less. They will have made their killing and gotten out leaving the rest of us with the hollowed out shell of debt we'll be paying off for centuries..

All-Time Highs for Stock Buybacks and Bank Profits as Workers Languish in Trump's America

Published on Tuesday, May 22, 2018 by Common Dreams

"We've got to repeal the outrageous corporate welfare of this tax plan and pass real tax reform that actually helps working families—not the one percent," said Sen. Bernie Sanders

by Jake Johnson, staff writer

 

8 Comments

For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there's a big problem with their story—banks are making record profits," Sen. Elizabeth Warren (D-Mass.) concluded in a tweet on Tuesday. (Photo: Alex Proimos/Flickr/cc)

As America's largest corporations continue their unprecedented stock buyback spree in the wake of President Donald Trump's $1.5 trillion tax cut, new government data published on Tuesday showed that U.S. banks are also smashing records thanks to the GOP tax law, raking in $56 billion in net profits during the first quarter of 2018—an all-time high.

"The Trump/Republican tax plan has been nothing but a giant gift to corporations so that executives and shareholders can get richer."
—Sen. Bernie Sanders (I-Vt.)

 

The new data, released by the Federal Deposit Insurance Corporation (FDIC), comes as the House of Representatives is gearing up to pass a bipartisan deregulatory measure that would reward massive Wall Street banks like JPMorgan Chase and Citigroup while dramatically increasing the risk of another financial crisis.

As Common Dreams reported, the Senate easily passed the bill in March with the help of 16 Democrats.

The banking industry's record-shattering profits fit with an entirely predictable pattern that has emerged following the passage of the GOP tax bill last December: America's most profitable corporations are posting obscene profits and using that cash to reward wealthy shareholders through stock buybacks while investing little to nothing in workers, despite their lofty promises.

"For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there's a big problem with their story—banks are making record profits."
—Sen. Elizabeth Warren (D-Mass.)

 

According to a CNN analysis published on Sunday, "S&P 500 companies showered Wall Street with at least $178 billion of stock buybacks during the first three months of 2018." As Common Dreams reported earlier this month, major corporations are on track to send $1 trillion to rich investors through buybacks and dividend increases by the end of the year.

Most Americans, meanwhile, have said they are seeing very few noticeable benefits from the massive tax cuts and—according to a new study by United Way—nearly half of the U.S. population is still struggling to afford basic necessities like food, housing, and healthcare.

"The Trump/Republican tax plan has been nothing but a giant gift to corporations so that executives and shareholders can get richer," Sen. Bernie Sanders (I-Vt.) wrote in a Facebook post on Tuesday. "We've got to repeal the outrageous corporate welfare of this tax plan and pass real tax reform that actually helps working families—not the one percent."

How corporations are spending their tax breaks:

✅ Stock buybacks for their wealthy investors

❌ Long-term investments in their workershttps://t.co/sR1x3OYzoq

— Tax March (@taxmarch) May 22, 2018

Instead of addressing the deep-seated financial struggles much of the American public is facing even as the stock market continues to soar and as Trump boasts of an economic boom, Congress is preparing to provide an even greater windfall to wealthy bankers on Tuesday by gutting crucial post-crisis regulations and putting taxpayers on the hook for yet another bailout.

This morning, it was announced that America’s banking sector hit a new record high of $56 billion in net income in the first quarter of 2018.

This afternoon, the House is set to pass the #BankLobbyistAct to supposedly "provide relief" to the banking sector. What a shameful day. pic.twitter.com/OYNUc7FQf6

— Public Citizen (@Public_Citizen) May 22, 2018

"For years, armies of bank lobbyists and executives have groaned about how financial rules are hurting them. But there's a big problem with their story—banks are making record profits," Sen. Elizabeth Warren (D-Mass.) concluded in a tweet on Tuesday. "Congress has done enough favors for big banks—the House should reject the Bank Lobbyist Act."

This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License

Fox in the Hen House: Why Interest Rates Are Rising

by Ellen Brown, from truthdig, April 20, 2018

Scene of the action: The Federal Reserve headquarters in Washington, D.C. AgnosticPreachersKid / Wikimedia Commons (CC BY-SA 3.0)

On March 31 the Federal Reserve raised its benchmark interest rate for the sixth time in three years and signaled its intention to raise rates twice more in 2018, aiming for a Fed funds target of 3.5 percent by 2020. LIBOR (the London Interbank Offered Rate) has risen even faster than the Fed funds rate, up to 2.3 percent from just 0.3 percent 2 1/2 years ago. LIBOR is set in London by private agreement of the biggest banks, and the interest on $3.5 trillion globally is linked to it, including $1.2 trillion in consumer mortgages.

Alarmed commentators warn that global debt levels have reached $233 trillion, more than three times global GDP, and that much of that debt is at variable rates pegged either to the Fed’s interbank lending rate or to LIBOR. Raising rates further could push governments, businesses and homeowners over the edge. In its Global Financial Stability report in April 2017, the International Monetary Fund warned that projected interest rises could throw 22 percent of U.S. corporations into default.

Then there is the U.S. federal debt, which has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $21 trillion now. Adding to that debt burden, the Fed has announced it will be dumping its government bonds acquired through quantitative easing at the rate of $600 billion annually. It will sell $2.7 trillion in federal securities at the rate of $50 billion monthly beginning in October. Along with a government budget deficit of $1.2 trillion, that’s nearly $2 trillion in new government debt that will need financing annually.

If the Fed follows through with its plans, projections are that by 2027, U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Trump’s original trillion-dollar infrastructure plan every year. And it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds. Where will this money come from? Even crippling taxes, wholesale privatization of public assets and elimination of social services will not cover the bill.

With so much at stake, why is the Fed increasing interest rates and adding to government debt levels? Its proffered justifications don’t pass the smell test.

‘Faith-Based’ Monetary Policy

In setting interest rates, the Fed relies on a policy tool called the “Phillips curve,” which allegedly shows that as the economy nears full employment, prices rise. The presumption is that workers with good job prospects will demand higher wages, driving prices up. But the Phillips curve has proved virtually useless in predicting inflation, according to the Fed’s own data. Former Fed Chairman Janet Yellen has admitted that the data fail to support the thesis, and so has Fed Governor Lael Brainard. Minneapolis Fed President Neel Kashkari calls the continued reliance on the Phillips curve “faith-based” monetary policy. But the Federal Open Market Committee (FOMC), which sets monetary policy, is undeterred.

“Full employment” is considered to be 4.7 percent unemployment. When unemployment drops below that, alarm bells sound and the Fed marches into action. The official unemployment figure ignores the great mass of discouraged unemployed who are no longer looking for work, and it includes people working part-time or well below capacity. But the Fed follows models and numbers, and as of this month, the official unemployment rate had dropped to 4.3 percent. Based on its Phillips curve projections, the FOMC is therefore taking steps to aggressively tighten the money supply.

The notion that shrinking the money supply will prevent inflation is based on another controversial model, the monetarist dictum that “inflation is always and everywhere a monetary phenomenon”: Inflation is always caused by “too much money chasing too few goods.” That can happen, and it is called “demand-pull” inflation. But much more common historically is “cost-push” inflation: Prices go up because producers’ costs go up. And a major producer cost is the cost of borrowing money. Merchants and manufacturers must borrow in order to pay wages before their products are sold, to build factories, buy equipment and expand. Rather than lowering price inflation, the predictable result of increased interest rates will be to drive consumer prices up, slowing markets and increasing unemployment—another Great Recession. Increasing interest rates is supposed to cool an “overheated” economy by slowing loan growth, but lending is not growing today. Economist Steve Keen has shown that at about 150 percent private debt to GDP, countries and their populations do not take on more debt. Rather, they pay down their debts, contracting the money supply. That is where we are now.

The Fed’s reliance on the Phillips curve does not withstand scrutiny. But rather than abandoning the model, the Fed cites “transitory factors” to explain away inconsistencies in the data. In a December 2017 article in The Hill, Tate Lacey observed that the Fed has been using this excuse since 2012, citing one “transitory factor” after another, from temporary movements in oil prices to declining import prices and dollar strength, to falling energy prices, to changes in wireless plans and prescription drugs. The excuse is wearing thin.

The Fed also claims that the effects of its monetary policies lag behind the reported data, making the current rate hikes necessary to prevent problems in the future. But as Lacey observes, GDP is not a lagging indicator, and it shows that the Fed’s policy is failing. Over the last two years, leading up to and continuing through the Fed’s tightening cycle, nominal GDP growth averaged just over 3 percent, while in the two previous years, nominal GDP grew at more than 4 percent. Thus “the most reliable indicator of the stance of monetary policy, nominal GDP, is already showing the contractionary impact of the Fed’s policy decisions,” says Lacey, “signaling that its plan will result in further monetary tightening, or worse, even recession.”

Follow the Money

If the Phillips curve, the inflation rate and loan growth don’t explain the push for higher interest rates, what does? The answer was suggested in an April 12 Bloomberg article by Yalman Onaran, titled “Surging LIBOR, Once a Red Flag, Is Now a Cash Machine for Banks.” He wrote:

The largest U.S. lenders could each make at least $1 billion in additional pretax profit in 2018 from a jump in the London interbank offered rate for dollars, based on data disclosed by the companies. That’s because customers who take out loans are forced to pay more as Libor rises while the banks’ own cost of credit has mostly held steady.

During the 2008 crisis, high LIBOR rates meant capital markets were frozen, since the banks’ borrowing rates were too high for them to turn a profit. But U.S. banks are not dependent on the short-term overseas markets the way they were a decade ago. They are funding much of their operations through deposits, and the average rate paid by the largest U.S. banks on their deposits climbed only about 0.1 percent last year, despite a 0.75 percent rise in the Fed funds rate. Most banks don’t reveal how much of their lending is at variable rates or indexed to LIBOR, but Onaran comments:

JPMorgan Chase & Co., the biggest U.S. bank, said in its 2017 annual report that $122 billion of wholesale loans were at variable rates. Assuming those were all indexed to Libor, the 1.19 percentage-point increase in the rate in the past year would mean $1.45 billion in additional income.

Raising the Fed funds rate can be the same sort of cash cow for U.S. banks. According to a December 2016 Wall Street Journal article titled “Banks’ Interest-Rate Dreams Coming True”:

While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. … Bank of America … says a 1-percentage-point rise in short-term rates would add $3.29 billion. … [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank’s expected 2016 pretax profit. …

As observed in an April 12 article on Seeking Alpha:

About half of mortgages are … adjusting rate mortgages [ARMs] with trigger points that allow for automatic rate increases, often at much more than the official rate rise. …

One can see why the financial sector is keen for rate rises as they have mined the economy with exploding rate loans and need the consumer to get caught in the minefield.

Even a modest rise in interest rates will send large flows of money to the banking sector. This will be cost-push inflationary as finance is a part of almost everything we do, and the cost of business and living will rise because of it for no gain.

Cost-push inflation will drive up the consumer price index, ostensibly justifying further increases in the interest rate, in a self-fulfilling prophecy in which the FOMC will say: “We tried—we just couldn’t keep up with the CPI.”

A Closer Look at the FOMC

The FOMC is composed of the Federal Reserve’s seven-member Board of Governors, the president of the New York Fed and four presidents from the other 11 Federal Reserve Banks on a rotating basis. All 12 Federal Reserve Banks are corporations, the stock of which is 100 percent owned by the banks in their districts; and New York is the district of Wall Street. The Board of Governors currently has four vacancies, leaving the member banks in majority control of the FOMC. Wall Street calls the shots, and Wall Street stands to make a bundle off rising interest rates.

The Federal Reserve calls itself independent, but it is independent only of government. It marches to the drums of the banks that are its private owners. To prevent another Great Recession or Great Depression, Congress needs to amend the Federal Reserve Act, nationalize the Fed and turn it into a public utility, one that is responsive to the needs of the public and the economy.

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Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including "Web of Debt" and "The Public Bank Solution."

 

Off the Top of My Head

Bitcoin and the Blockchain

by John Lawrence, April 2, 2018

One of my favorite shows on RT is the Kaiser report, mainly because Kaiser is such a nut and Stacy Herbert is so cute. They are big proponents of Bitcoin. It took me a long time to figure out what Bitcoin is all about. Supposedly, it is an alternate form of currency that has some specific properties. I must say right off the bat that I'm not a big fan, and I'll tell you why in this report.

The blockchain is a computer program that traces every bitcoin throughout its whole life. Every transaction is recorded and it's possible to go back through the blockchain and see every transaction that every bitcoin has ever been involved in. So what? Is that really necessary in order to have a viable alternative currency? Every bitcoin user has a wallet that's encrypted so nobody but you can get at your money. If you lose your key, however, you've lost your money because only you possess this private key. Anyone can deposit money in your wallet, but only you can take it out. That's where the term "cryptocurrency" comes from.

Kaiser makes a big deal about how the dollar is a fiat currency, but bitcoin is not. Since the dollar is not backed up by gold or another precious metal that is "mined," the dollar is just as good as the American government says it is and people believe it to be. That's the meaning of fiat. Now bitcoin is supposedly not a fiat currency because bitcoins are "mined" through some computer algorithm that makes it difficult to get at them. Really? Not fiat because they are "mined"? That seems to me like a lot of hogwash. Then I've read that they are also given as rewards to computer programmers who "verify" the transactions. These guys are volunteers. Really? A financial system run by volunteers?

Bitcoin transactions are favored by criminals laundering money and more white collar types trying to escape paying taxes because supposedly the government has no way of finding out what's going on with buying and selling. But the government would have as much access to the blockchain as anyone else so those that think that the government has no way of monitoring these transactions have another think coming. Just because bitcoin transactions are not routed through a bank does not mean that they can't be monitored, taxed and traced by government.

So how does bitcoin differ from Paypal or M-Pesa, the Kenyan mobile phone based money transfer and microfinancing service? Or how does it differ from a simple debit card? The answer you mostly get is that bitcoin is a store of value just like the dollar and it's not a fiat currency. It's a store of value only because a number of people have invested in it and driven up the price of a bitcoin just like a stock. Its value can rise and fall just like a stock. You need an exchange to convert bitcoins to dollars just like with a stock. Paypal and M-Pesa are financial services based on the local currency. But although the transactions are digital as are most banking transactions these days, they are easily convertible to the local currency.

One of the advantages in bypassing banks when doing financial transactions is getting away from the finance charges that banks impose on every financial transaction. This could be accomplished, however, by means of a public bank that imposed more moderate charges or no charges at all for certain transactions. Certainly it would be more convenient if financial transactions could be accomplished using a mobile phone. There are some proprietary platforms for this today such as Apple Pay. Apple Pay is similar to M-Pesa. Of course Apple takes a cut of every financial transaction, and the technology is similar to a credit card.

I would like to see a public bank like the Bank of North Dakota develop a digital technology that could be used for financial transactions bypassing the traditional banks and their credit cards which still charge exorbitant interest rates while the banks themselves pay no interest on savings accounts and get their money for free by means of quantitative easing from the Fed.

Off the Top of My Head

Quantitative Easing for the People

by John Lawrence

During the banking crisis of 2008, the Federal Reserve bought up the debts of the big banks. They said in effect, "Oh poor Wells Fargo, you have a debt you can't pay? Here take this money and pay it off." Wouldn't it be nice if the Fed did this for average folk. "Oh, you have a car payment you can't make. Here take this money and pay it." Or "Take this money and pay off your student loan." Fat chance the Fed would ever help out the average folk, the hoi polloi. Why? Because the Fed is privately owned by the Big Banks. It is privately owned by Wall Street. It does not represent We the People.

The Fed shoveled money out the door to Wall Street. The government, meaning We the Taxpayers, did also. Treasury Secretary Hank Paulson with his hair on fire demanded the $700 billion TARP bailout. Beyond that the Fed committed to another $29 trillion giveaway to the Big Banks. However, the hoi polloi got foreclosed on right and left. There was no bailout for them. The Home Affordable Modification Program, known as HAMP did little to modify mortgages in favor of the average person.

This is from The Guardian:

Chris Cooley never missed a payment on his mortgage in Long Beach, California. Every month, Wells Fargo would debit him $3,100 for the four-unit building; one of the units was his, and the other three he rented out for income to cover the mortgage. In 2009, when the housing crisis hit, Cooley needed a way to reduce his mortgage. He renegotiated his loan through the Home Affordable Modification Program, known as Hamp. Initially, it was a success: his mortgage payments fell in half, to $1,560.

So it was surprising when a ReMax agent, sent on behalf of Wells Fargo, knocked on the door in December 2009 and told Cooley the building no longer belonged to him. The bank planned to take the building he had lived in and rented out for a decade – and list the property for sale.

So much for government help.

But it turned out that Cooley was not getting government help; without his knowledge, Wells Fargo had put him on what was only a trial Hamp payment program. He had been rejected for a permanent mortgage modification – only Wells Fargo never informed him about the rejection, he says, nor did they give him a reason why.

What followed was what most homeowners would consider a nightmare. While Cooley tried to stave off foreclosure to save his home and livelihood, Wells Fargo paid the other renters living in the property $5,000 to move out behind his back, and then denied Cooley further aid – because his income, which he drew from the rentals, was too low. “They took my income away from me, and then they couldn’t give me a loan because I had no income,” Cooley said. “What a wonderful catch-22.”

The bank held his final trial payment in a trust and never applied it to his loan (to this day, Cooley has never received that money back). For two years, Cooley appealed to Wells Fargo for some alternative form of relief, sending in paperwork time and again, talking to different customer service representatives who knew nothing about his situation, and generally running in place without success.

Tired of fighting, Cooley ended up leaving his home, and became just one of the seven million foreclosure victims in the US since the bursting of the housing bubble in 2007.

“Wells Fargo stole my home, plain and simple,” he said.

Nice guys at Wells Fargo. But by now everyone knows they are crooks and scam artists. They have been implicated in scam after illegal scam and fraud after illegal fraud. The only consequences have been multiple slaps on the wrist. A little over 30,000 HAMP modifications from 2009 remain active. That same year there were over one million foreclosures which shows the scale of the problem HAMP failed to fix. But for the banks nothing was too good.

Refusing to 'Play Dead for Big Banks,' Warren Gives Fellow Senators 17 Chances to Put Consumers First

Published on Thursday, March 08, 2018 by Common Dreams

"The Senate is expected to pass the #BankLobbyistAct—with Democratic support. But I'm not going down without a fight."

by Jake Johnson, staff writer

 

9 Comments

"The fight over the Bank Lobbyist Act isn't over yet," Warren wrote on Twitter, unveiling 17 amendments that, if passed, would uphold strict oversight of big banks. (Photo: Sen. Elizabeth Warren/Facebook)

Thanks to the help of 16 Senate Democrats and Sen. Angus King (I-Maine), a Wall Street deregulation measure disguised as a "community banking" bill is barreling toward passage—but Sen. Elizabeth Warren (D-Mass.) vowed Wednesday to not let the bill sail through without forcing votes on a series of amendments aimed at showing Americans whose side their lawmakers are really on.

"The Senate is expected to pass the #BankLobbyistAct—with Democratic support. But I'm not going down without a fight."
—Sen. Elizabeth Warren"The fight over the Bank Lobbyist Act isn't over yet," Warren wrote on Twitter, unveiling 17 amendments that, if approved, would uphold strict oversight of big banks and shield consumers from Wall Street fraud and abuse. "I'm not going to roll over and play dead for the big banks."

First introduced last November by Sen. Mike Crapo (R-Idaho), the officially named "Economic Growth, Regulatory Relief, and Consumer Protection Act" (S.2155) could hit the Senate floor for a final vote as soon as Thursday after it easily cleared a procedural hurdle earlier this week.

Far from what its title suggests, progressive lawmakers and independent analysts argue the legislation would dismantle many consumer protections, provide huge gifts to Wall Street firms, and—according to the Congressional Budget Office (CBO)—significantly increase the likelihood of future taxpayer-funded bank bailouts.

In an effort to let the American people know whether their senators are on the side of "working families or the big banks," Warren announced her plan on Wednesday to push for votes on amendments to the bill that, if implemented in its current form, would "turn over the keys to our economy to the same people who crashed it ten years ago."

"The Senate is expected to pass the #BankLobbyistAct—with Democratic support. But I'm not going down without a fight," Warren declared.

Below is a full list of the amendments accompanied by a short summary of their contents. The full amendments can be viewed on Warren's Twitter page.

'The Charade Is Over': CBO Reveals Democrat-Backed Bill Really Just Big Gift to Wall Street

Published on Tuesday, March 06, 2018 by Common Dreams

"The Wall Street crash of 2008 showed the American people how fraudulent many of these large banks are. The last thing we should be doing is deregulating them."

by Jake Johnson, staff writer

 

13 Comments

Sen. Mark Warner (D-Va.) listens to testimony from Secretary of Treasury Steve Mnuchin during a Senate Finance Committee hearing concerning fiscal year 2018 budget proposals for the Department of Treasury and tax reform, on Capitol Hill, May 25, 2017 in Washington, D.C. (Photo: Drew Angerer/Getty Images)

Providing further evidence that the bank deregulation bill currently sailing through the Senate—with the essential help of 12 Democrats and Sen. Angus King (I-Maine)—is more about enriching large financial institutions than helping community banks, the Congressional Budget Office (CBO) estimated in a report unveiled late Monday that the bipartisan measure would exempt big banks from strict regulations and significantly increase the likelihood of future taxpayer bailouts.

"Any Democrat voting to advance this bill ought to just retire and start working directly as a lobbyist for the big banks."
—Kurt Walters, Rootstrikers

 

"A major feature of the bill is exempting about two dozen financial companies with assets between $50 billion and $250 billion from the highest levels of regulatory scrutiny from the Federal Reserve," notes the Washington Post's Jeff Stein, who first reported on the CBO's findings.

According to the CBO, such exemptions would give large institutions—including so-called "too big to fail" banks—more freedom to engage in the kind of risky behavior that led to the 2008 financial crash, thus making them more likely to collapse again.

"This banking bill is a disaster," Sen. Bernie Sanders (I-Vt.) said in a statement responding to the CBO's findings. "The Wall Street crash of 2008 showed the American people how fraudulent many of these large banks are. The last thing we should be doing is deregulating them. Why would any member of Congress vote to move us closer to another taxpayer bailout of large financial institutions?"

Sen. Sherrod Brown (D-Ohio) also seized upon the CBO's report on Monday as confirmation of what the bill's opponents have been saying for months.

The independent budget scorekeeper confirmed what we know – this bank giveaway bill will cost taxpayers. Hardworking Americans shouldn’t have to pay for favors to Wall Street, foreign megabanks and their lobbyists. -SB https://t.co/WqfMWNJOig

— Sherrod Brown (@SenSherrodBrown) March 6, 2018

The Economic Growth, Regulatory Relief, and Consumer Protection Act—or, as critics call it, the "Bank Lobbyist Act"—was introduced by Sen. Mike Crapo (R-Idaho) last November, and currently boasts 12 Democratic co-sponsors, in addition to Sen. Angus King (I-Maine): Doug Jones (Ala.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Jon Tester (Mont.), Mark Warner (Va.), Claire McCaskill (Mo.), Joe Manchin (W.Va.), Tim Kaine (Va.), Gary Peters (Mich.), Michael Bennet (Colo.), Chris Coons (Del.), and Tom Carper (Del.).

With the legislation scheduled for a procedural vote on Tuesday, Kurt Walters, campaign director at the advocacy group Rootstrikers, suggested in a statement on Monday that "any Democrat voting to advance this bill ought to just retire and start working directly as a lobbyist for the big banks."

"The charade is over," Walters added. "The CBO's report just destroyed any case that this bill is 'community banking' legislation. A neutral arbiter just confirmed that this bill would increase the risk of future bank bailouts and gave even odds that it would let Wall Street giants CitiBank and JPMorgan pile on more risk. In what universe does this make sense as policy? In what universe is this what voters are clamoring for?"

 

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Off the Top of My Head

Microfinance is Helping World's Poor Do Business

by John Lawrence, February 27, 2018

While Bitcoin, supposedly finance's alternative to traditional banks, is fluctuating all over the place thus being more of a speculative investment rather than a means of doing business, another mobile based banking service, completely independent of traditional banks, called M-Pesa is enabling people in the poorest parts of the world to do business with extremely low transaction charges. The service enables its users to:

*deposit and withdraw money
*transfer money to other users
*pay bills
*purchase airtime and

transfer money between the service and, in some markets like Kenya, a bank account. A partnership with Kenya-based Equity Bank launched M-KESHO, a product using M-PESA’s platform and agent network, that offers expanded banking services like interest-bearing accounts, loans, and insurance.

M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. It has since expanded to Afghanistan, South Africa, India and in 2014 to Romania and in 2015 to Albania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services (Lipa na M-Pesa) easily with a mobile device.

One might ask how does this service differ from Bitcoin and other blockchain type forms of money currently all the rage in the western world. The difference seems to be that M-Pesa is a practical service that fulfills a need - inexpensive financial transactions that bypass the more expensive banking system. M-Pesa allows for digital wallets just as Bitcoin does.

Supposedly Bitcoin is unhackable, but is it really? Mt.Gox, which was an exchange on which one could buy and sell Bitcoin, lost $400 million dollars. And is the blockchain really necessary in order to secure financial transactions? I don't think so. I don't think every unit of currency needs to be tracked from its birth to its grave which is what Bitcoin does. I think the blockchain is a hoax.

Bitcoin has a way of creating "bitcoins' called mining similar to mining for gold only in this case everything is digital and there is no actual physical substance involved. Hokey to say the least when all you are trying to do are simple financial transactions like M-Pesa is capable of.

One might ask how would a public bank be able to make use of a facility like M-Pesa to enable very low cost financial transactions. This would be similar to a debit card, but would also enable small loans without a huge amount of paperwork and hence higher cost - sort of a debit/credit card combination.

Ellen Brown, author of Web of Debt and The Public Bank Solution, is currently writing a book on the comparison of Bitcoin and public banking. Maybe she can enlighten us as to how a solution like M-Pesa can fit into the public banking solution. There are some exciting things happening that will change the role of traditional banking.

Regulation Is Killing Community Banks – Public Banks Can Revive Them

by Ellen Brown

Posted on October 30, 2017 by Ellen Brown on Web of Debt

Crushing regulations are driving small banks to sell out to the megabanks, a consolidation process that appears to be intentional.

Publicly-owned banks can help avoid that trend and keep credit flowing in local economies.

At his confirmation hearing in January 2017, Treasury Secretary Stephen Mnuchin said, “regulation is killing community banks.” If the process is not reversed, he warned, we could “end up in a world where we have four big banks in this country.” That would be bad for both jobs and the economy. “I think that we all appreciate the engine of growth is with small and medium-sized businesses,” said Mnuchin. “We’re losing the ability for small and medium-sized banks to make good loans to small and medium-sized businesses in the community, where they understand those credit risks better than anybody else.”

The number of US banks with assets under $100 million dropped from 13,000 in 1995 to under 1,900 in 2014. The regulatory burden imposed by the 2010 Dodd-Frank Act exacerbated this trend, with community banks losing market share at double the rate during the four years after 2010 as in the four years before. But the number had already dropped to only 2,625 in 2010.  What happened between 1995 and 2010?

Six weeks after September 11, 2001, the 1,100 page Patriot Act was dropped on congressional legislators, who were required to vote on it the next day. The Patriot Act added provisions to the 1970 Bank Secrecy Act that not only expanded the federal government’s wiretapping and surveillance powers but outlawed the funding of terrorism, imposing greater scrutiny on banks and stiff criminal penalties for non-compliance. Banks must now collect and verify customer-provided information, check names of customers against lists of known or suspected terrorists, determine risk levels posed by customers, and report suspicious persons, organizations and transactions. One small banker complained that banks have been turned into spies secretly reporting to the federal government. If they fail to comply, they can face stiff enforcement actions, whether or not actual money-laundering crimes are alleged.

In 2010, one small New Jersey bank pleaded guilty to conspiracy to violate the Bank Secrecy Act and was fined $5 million for failure to file suspicious-activity and cash-transaction reports. The bank was acquired a few months later by another bank. Another small New Jersey bank was ordered to shut down a large international wire transfer business because of deficiencies in monitoring for suspicious transactions. It closed its doors after it was hit with $8 million in fines over its inadequate monitoring policies.

Complying with the new rules demands a level of technical expertise not available to ordinary mortals, requiring the hiring of yet more specialized staff and buying more anti-laundering software. Small banks cannot afford the risk of massive fines or the added staff needed to avoid them, and that burden is getting worse. In February 2017, the Financial Crimes Enforcement Network proposed a new rule that would add a new category requiring the flagging of suspicious “cyberevents.” According to an April 2017 article in American Banker:

[T]he “cyberevent” category requires institutions to detect and report all varieties of digital mischief, whether directed at a customer’s account or at the bank itself. . . .

Under a worst-case scenario, a bank’s failure to detect a suspicious [email] attachment or a phishing attack could theoretically result in criminal prosecution, massive fines and additional oversight.

One large bank estimated that the proposed change with the new cyberevent reporting requirement would cost it an additional $9.6 million every year.

Besides the cost of hiring an army of compliance officers to deal with a thousand pages of regulations, banks have been hit with increased capital requirements imposed by the Financial Stability Board under Basel III, eliminating the smaller banks’ profit margins. They have little recourse but to sell to the larger banks, which have large compliance departments and can skirt the capital requirements by parking assets in off-balance-sheet vehicles.

Off the Top of My Head

LA to Form Public Bank For Cannabis Deposits

by John Lawrence

Los Angeles is considering the formation of a public bank so that the cannabis industry has some place to deposit their money. Since cannabis is illegal at the Federal level, Wall Street banks like Wells Fargo cannot accept their money as deposits. However, since cannabis is legal at the state level in some states like California, a public bank similar to the Public Bank of North Dakota which is wholly state owned is the logical solution.

The Bank of North Dakota, the only publicly owned bank in the country, has paid $85 million into various state government funds over the last four years, according to its most recent annual report. It makes low-interest student loans and farm loans and helps finance local public-works projects, all priorities set by state leaders.

So instead of sending city or state deposits off to Wall Street banks like Wells Fargo which have been shown to be fraudulent and which play games with pension fund money including siphoning it off for their own benefit, why not keep the money in the state for the purposes of benefiting the people of the state.

One of the key questions surrounding the establishment of a public bank is how to capitalize it. This would seem to be solved initially by taking deposits from the cannabis industry. After the bank was established other deposits from city and state tax revenues could be deposited in the public bank without Wall Street taking a cut. There is also the question of Federal institutions and oversight that would be denied to a bank taking cannabis money. They could mainly be gotten around except for one. To be able to process checks, wire transfers and electronic payments — in other words, to interact with the rest of the financial system — banks must have an account with one of the nation’s 12 regional Federal Reserve banks. That conundrum remains to be solved unless the Federal Reserve Bank of San Francisco, the central bank for California and eight other western states, decides to accept LA's application even if it accepts cannabis money.

Ellen Brown, author of The Public Bank Solution and Web of Debt is considered the foremost expert in this field and several cities and states are actively looking into the establishment of public banks to serve the people of their respective jurisdictions and cut out Wall Street profits.

More Banking Follies

Published on Saturday, August 19, 2017

by Common Dreams

 

by

Christopher Brauchli

 

5 Comments

"Wells Fargo was just beginning to recover from the reputational losses it suffered from what, in Trumpian terms would be described as “fake” bank accounts, when it was disclosed that its employees had discovered a new way of bilking customers-insurance sales connected with car loans," Brauchli writes. (Photo: Alex Proimos/Flickr/cc)

A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests . . . and held together by the cohesive power of the vast surplus in the banks.
—John Calhoun, May 27, 1836 Speech

It was a sad coincidence. It occurred within a couple days after the public was apprised of Wells Fargo’s new foray into discovering ways to make more money by bilking its customers.

It was not, of course, a first for that venerable institution. Last year it was learned that millions of customers of the bank had bank accounts and credit cards opened for them by employees of the bank, without being authorized to do so by the customer. If the employee had not only opened the account, but had caused the bank to deposit, for example, $1000 into the account in order to give it life, the practice would not have upset the unsuspecting customers. Instead, the employees simply opened the accounts and, instead of depositing money into them, charged the account holders fees for creating the accounts and associated fees for services that accompanied the new accounts.

That, of course, did not please the customers and, when the practice was discovered, caused the bank to pay a $185 million dollar fine and $142 million to the millions of its customers who were victims of the bank’s practices. Wells Fargo was just beginning to recover from the reputational losses it suffered from what, in Trumpian terms would be described as “fake” bank accounts, when it was disclosed that its employees had discovered a new way of bilking customers-insurance sales connected with car loans.

In late July 2017, we learned that approximately 500,000 bank clients were sold car insurance when taking out car loans with the bank, even though they already had car insurance. According to reports, the bank will pay $80 million to clients who were bilked. Whether fines will be imposed on the banks will not be known until some time in the future. (In fairness to Wells Fargo it should be noted that in 2013 JPMorgan Chase paid $13 billion in fines and penalties for some of its activities. It makes Wells Fargo’s recent activities seem trivial.) The other event of note that happened at the end of July was purely coincidental.

Off the Top of My Head

The Banksters Got Away With Fraud Because They Were Too Big to Jail

Now the Trump Administration is Getting Away With Crime Because He's Too Big to Fail

by John Lawrence

Wells Fargo has committed all sorts of crimes. Wells Fargo employees opened up a vast number of new checking and credit accounts without account holders’ consent or knowledge. They stole customer's identities and sold them life insurance policies they never bought. "This is a huge case of fraud," said Beth Givens, executive director the Privacy Rights Clearinghouse, a nonprofit San Diego-based consumer advocacy organization. "At its face value, these individuals' identities have certainly been stolen." So why is Wells Fargo still in business?

In addition to the fact that they were charged overdraft and maintenance fees, some customers also dealt with — and, surely, are currently dealing with — significant hits to their credit scores as a result of not staying current on accounts they didn’t even know they had. They’ll likely have difficulty securing home and car loans at reasonable rates for years to come, simply because their bank decided to defraud them. This was criminal activity on a massive scale, and it is going to have lingering effects on innocent people’s abilities to live their lives.

Now the latest criminal activity is the overcharging of small business. For several years, Wells Fargo's merchant services division overcharged small businesses for processing credit card transactions, a lawsuit alleges. Business owners who tried to leave Wells Fargo were charged "massive early termination fees," according to the lawsuit filed in US District Court.

The message being sent to Americans is that these banks can engage in criminal activity and get away with it. At most they will be charged a small (for them) fine. Same things happened for all the criminal activity engaged in by Wall Street that led to the 2008 Great Recession. The Justice Department under Eric Holder declined to prosecute. No one went to jail.

Message to US lawmakers: you can get away with criminal activity with impunity as long as you're big, powerful and important enough. This message hasn't been lost on Donald Trump who has been cutting corners, skirting the law ever since he was elected President. He will undoubtedly get away with it because he has immunity to prosecution just because of the fact he's President. No Republican Congress is going to impeach him. No President gets impeached except by the opposing party when they are in control of Congress which, unfortunately, isn't the case right now.

So the US marches down the road to dictatorship.

Saving Illinois: Getting More Bang for the State’s Bucks

Published on

Monday, July 24, 2017

 by

Common Dreams

Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.

 

by

 Ellen Brown

 

 7 Comments

"If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route." (Photo: Andrew Harrer/Bloomberg via Getty Images)

Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.

Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.

If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route. The state could follow the lead of Detroit and cut its public pension funds, but Illinois has a constitutional provision forbidding that as well. It could follow Detroit in privatizing public utilities (notably water), but that would drive consumer utility prices through the roof. And taxes have been raised about as far as the legislature can be pushed to go.

The state cannot meet its budget because the tax base has shrunk. The economy has shrunk and so has the money supply, triggered by the 2008 banking crisis. Jobs were lost, homes were foreclosed on, and businesses and people quit borrowing, either because they were “all borrowed up” and could not go further into debt or, in the case of businesses, because they did not have sufficient customer demand to warrant business expansion. And today, virtually the entire circulating money supply is created when banks make loans When loans are paid down and new loans are not taken out, the money supply shrinks. What to do?

What if People Owned the Banks, Instead of Wall Street?

From the Nation:

From Seattle to Santa Fe, cities are at the center of a movement to create publicly owned banks.

By Jimmy Tobias

May 22, 2017

Demonstrators protest against the Wall Street bailout outside Chase in Times Square. (AP Photo / Edouard H.R. Gluck)

 

When Craig Brandt marched into the City Council chambers in Oakland, California, in the summer of 2015, he was furious about fraud.

The long-time local attorney and father of two had been following the fallout from the Libor scandal, a brazen financial scam that saw some of the biggest banks on Wall Street illegally manipulate international interest rates in order to boost their profits. By some estimates, the scheme cost cities and states around the country well over $6 billion. In June of 2015, Citigroup, JPMorgan Chase, and Barclays, among other Libor-rigging giants, pleaded guilty to felony charges related to the conspiracy and agreed to pay more than $2.5 billion in criminal fines to US regulators. But, for Brandt, that wasn’t enough. He wanted the banks banished, blocked from doing business in his city.

“I was totally pissed about it,” he says. “It was straight-up fraud.”

So, in a small act of stick-it-to-the-man defiance, Brandt drafted a resolution that barred the municipality from working with any firm that had either committed a felony or had recently paid more than $150 million in fines. He presented the homespun and eminently reasonable legislation to city officials and urged them to adopt it.

“The city councilors said they couldn’t do it,” Brandt says. “If they did, they wouldn’t have a bank left to work with. They said there wouldn’t be any bank big enough to take the city’s deposits.” Oakland, it seemed, was hopelessly dependent on ethically dubious and occasionally criminal financial titans. Brandt, however, was undeterred.

After the City Council turned him down, he started looking for other ways to wean Oakland off Wall Street. That’s when he fell in with a group of locals who have been nursing an audacious idea. They want their city to take radical action to combat plutocracy, inequality, and financial dislocation. They want their city to do something that hasn’t been done in this country in nearly a century, not since the trust-busting days of the Progressive Era. They want their city to create a bank—and, strange as the idea may seem, it’s not some utopian scheme. It’s a cause that’s catching on.

Across the country, community activists, mayors, city council members, and more are waking up to the power and the promise of public banks. Such banks are established and controlled by cities or states, rather than private interests. They collect deposits from government entities—from school districts, from city tax receipts, from state infrastructure funds—and use that money to issue loans and support public priorities. They are led by independent professionals but accountable to elected officials. Public banks are a way, supporters say, to build local wealth and resist the market’s predatory predilections. They are a way to end municipal reliance on Wall Street institutions, with their high fees, their scandal-ridden track records, and their vile investments in private prisons and pipelines. They are a way, at long last, to manage money in the public interest.

How the Rich Get Richer

Sovereign Debt Jubilee, Japanese-Style

Posted on June 27, 2017 by Ellen Brown

Japan has found a way to write off nearly half its national debt without creating inflation. We could do that too.

Let’s face it. There is no way the US government is ever going to pay back a $20 trillion federal debt. The taxpayers will just continue to pay interest on it, year after year.

A lot of interest.

If the Federal Reserve raises the fed funds rate to 3.5% and sells its federal securities into the market, as it is proposing to do, by 2026 the projected tab will be $830 billion annually. That’s nearly $1 trillion owed by the taxpayers every year, just for interest.

Personal income taxes are at record highs, ringing in at $550 billion in the first four months of fiscal year 2017, or $1.6 trillion annually. But even at those high levels, handing over $830 billion to bondholders will wipe out over half the annual personal income tax take. Yet what is the alternative?

Japan seems to have found one. While the US government is busy driving up its “sovereign” debt and the interest owed on it, Japan has been canceling its debt at the rate of $720 billion (¥80tn) per year. How? By selling the debt to its own central bank, which returns the interest to the government. While most central banks have ended their quantitative easing programs and are planning to sell their federal securities, the Bank of Japan continues to aggressively buy its government’s debt. An interest-free debt owed to oneself that is rolled over from year to year is effectively void – a debt “jubilee.” As noted by fund manager Eric Lonergan in a February 2017 article:

The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%). BoJ holdings are part of the consolidated government balance sheet. So its holdings are in fact the accounting equivalent of a debt cancellation. If I buy back my own mortgage, I don’t have a mortgage.

If the Federal Reserve followed the same policy and bought 40% of the US national debt, the Fed would be holding $8 trillion in federal securities, three times its current holdings from its quantitative easing programs.

The Federal Reserve Bank is Wall Street's Best Friend

by John Lawrence

Wall Street Controls the Bets in the Casino Economy

From Century of Enslavement: The History of the Federal Reserve

The Federal Reserve controls interest rates in the US, and the Federal Reserve is privately owned by the big Wall Street banks that it supposedly controls. Only it doesn't really control them so much as it represents their interests. The powers that be would have you believe that the Federal Reserve, which is the US' central bank, is publicly owned, that is, that it's a government institution accountable to the people. Nothing could be further from the truth. Bernie Sanders commented: "The conflicts of interest are so apparent that they're laughable," Sanders told CNN's Wolf Blitzer "Here you have the Fed, which is supposed to regulate Wall Street. Then you have the CEO of the largest Wall Street company on the board which [it] is supposed to be regulating. This is the fox guarding the henhouse." He was speaking of Jamie Diamond, CEO of JPMorgan Chase.

Jamie Diamond is a billionaire, and he donates to the Democratic party. He's a Democrat, obviously a very influential one. No wonder Hillary was getting paid $250K per speech. After leaving office as Secretary of State in 2013, Clinton embarked on a career speaking to banks, securities firms and other financial institutions. Tax returns show that her minimum fee was $225,000 per speech. So Jamie was no stranger to her. Neither was Lloyd Blankfein, CEO of Goldman Sachs. He supported Hillary in more ways than one in the last election. He's also a Democrat. Is it any wonder the Democratic party does not want to alienate Wall Street?

The Fed supposedly has a "dual mandate" as far as the government is concerned. It is supposed to maximize employment and regulate interest rates. In other words it is supposed to keep inflation under control. But this amounts to a 'wish list' since neither the government or the people "own" the Federal Reserve bank. It is owned privately by the banks which it supposedly regulates. Also, its "mandate" to maximize employment has nothing to do with how well employees are paid, only that they are "employed." Most of the jobs being created these days are low level service jobs paying minimum wage or slightly above it. In reality the Fed operates in such a way as to increase income inequality.

Interest rate swaps are based on either the Fed's prime rate or on the LIBOR rate. That’s because the prime and LIBOR rates, two important benchmarks to which these loans are often pegged, have a close relationship to the federal funds rate. And the banks themselves determine all these rates either directly or indirectly. The LIBOR is an average interest rate calculated through submissions of interest rates by major banks across the world. The LIBOR scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades. LIBOR underpins approximately $350 trillion in derivatives so the banks themselves were in a position to make sure that their bets on interest rate swaps were covered in their favor at the expense of other naive parties like pension funds.

“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.” – FDR letter to Colonel Edward House, Nov. 21 1933

Is it any wonder that, after the 2008 financial crisis, Wall Street banks and other financial institutions were bailed out and middle class homeowners with underwater mortgages were left to twist in the wind? The Fed flooded the market with liquidity by buying up toxic securities, securities which would have caused bankruptcies of major financial institutions if nothing was done about it. They also lowered interest rates to zero so the Big Banks could borrow money from the Fed at no interest and then make money off the spread by charging average citizens interest rates well above zero. This not only bailed out the Big Banks; it kept the debt based American economy going in full swing. Student loan debt soared. Credit card debt soared. And savers got no return on their savings accounts. Take that, senior citizens.

How a Bank Actually Works

Mumbo Jumbo and Sleight of Hand

From CNBC:

Basics of Banking: Loans Create a Lot More Than Deposits

John Carney | @carney

Tuesday, 26 Feb 2013 | 5:57 PM ETCNBC.com

265

SHARES

The Denver Post | Getty Images

International Trust Bank, Denver 1956

When someone says "loans create deposits," usually that means at least that the marginal impact of new lending will be to create a new asset and a new liability for the banking system. But in our system it's actually a bit more complicated than that.

A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower. The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's.

It's worth noting that at least two more types of liabilities are also created at this moment: a reserve requirement is created and a capital requirement is created. These aren't standard financial liabilities. They are regulatory liabilities.

The reserve requirement arises with the creation of the deposit (the bank's liability), while the capital requirement arises with the creation of the loan (the bank's asset). So loans create capital requirements, deposits create reserve requirements.

 

Crash and Burn!

by the Man in the Bowler Hat

Crash and burn!  That’s what happens to a belief system which runs into the harsh wall of reality.  Here the term “Harsh wall of reality” means some kind of constraint or logical inconsistency.  So ever wonder why there are problems in the economy?  Its because we believe in money and ignore the math!

…“math” demonstration showing that money is an ∞ “problem”

                    _______       ____________

5 cents = √ 25 cents = √ (1/4 of a dollar) = 1/2 of a dollar

so without “faith” in money its game over because “math” shows (5 cents ⇔ 1/2 of a dollar)

Consider prior to the great recession of 2007/2008 there was a tacit belief that stated income loans were credit worthy risks and we should have an ownership society where everyone “owned” their home.  In other words it was believed anyone should be able to get a loan even if they had to lie about how much money they had AND that there would be no problems as a consequence. One decade on from the onset of the great recession of 2007/2008, we are still feeling the adverse effects of a belief system in lending which ignored the ability of borrowers to pay back loans to banks.  

Now the year of our lord 2017 is upon us and economist say we are well into the recovery stage, yet what does that mean?  History its been said never repeats, but it rhymes; so what’s next?  How the economic machine works isn’t something that is immediately intuitive, but just as night follows day, there will be another economic downturn.  The only unknowns are when will it start and to what degree will people suffer.

Looking back to the turn of the century, we see the dot com bomb involved stocks associated with the internet.  As a result the next economic bubble wasn’t associated with stocks because people learned not to trust stocks.  Long story short, we have seen economic down turns associated with “tech” that people might buy as teens or twenty somethings.  The following economic down turn was associated with “housing” that people might buy when starting families in their thirties or forties.  So what’s next?  If the pattern continues, my guess is the next down turn in the economy is going to involve something to do with “retirement.”

In order to understand the economic problem associated with “retirement” think of a pension.  Basically a pension is money put into a bank during an individuals working years and is suppose to earn interest so that the savings grow to be a big nest egg.  The harsh reality is, public pension “sustainability” (as things currently exist) like the idea of a mermaid is just a fantasy.  Basically the “big” nest egg, isn’t all that big.

The math is pretty simple to understand, basically the amount(s) saved does not grow large enough to cover the promised pension payments made by $hit for brains politicians.  Said another way, the belief in pensions is going to eventually crash and burn because in the long run, more money was promised to be paid out, than is possible to gather.  

Politicians who are suppose to be leaders, will do nothing to prevent a pension crisis because they will never receive a vote or any credit to fix, let alone acknowledge the issue.  Hence its not a matter of “if” but “when” the proverbial $hit hits the fan and causes a big mess.

There is a saying “All news is local.”  Essentially this means our view of the world is shaped by where we live.  Since my home town is that other city in California (not San Francisco and not quite L.A.), lets look at what no one wants to admit to in the city whose other nick name is “Enron by the Sea.”  FYI perhaps this moniker arose because it was sunny and TPTB were too busy drinking a beer at the beach.  In my neck of the woods, the problem being swept under the carpet is for three decades there has been the practice of a 13th pension payment, which the local public pension board approved yet again for 2016 despite a recently reported $380 million “debt” spike.

To put figures into context, for the finances to work out there is an assumption that the custodian(s) of pension account will look at certain performance benchmarks; more or less the portfolio needs to grows @ 7.125% each year to be “sustainable”.  Yet the latest reported FY return is just a hair above 1% (far below the target of 7.125%).  So using nothing more than elementary school math, the numbers indicate the “debt” grows ever larger and the business as usual three decade old practice of a 13th pension payment only exacerbates the problem. Basically more is being paid out than is being brought in; so by ignoring the problem, things start to add up,… to a debt of a few billion!

Backing up just a bit, in finance there are two competing ways of valuing a pension fund.  Politicians use the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities).  Then there is the market approach, which reflects more hard-nosed math which politicians don’t want voters and tax payers to think about, because guess who gets stuck with the bill.  Another useful concept to understand what is happening is to employ the idea of a math “fractal” (which is SmartyPants way of saying a never-ending pattern that looks the same at different size levels).  Perhaps a simpler way to ponder a math fractal, is imagine a nested doll.

Bottom line, applying the idea of fractal math to public pensions, reveals a pattern of pensions being under funded happens at the city, county, state then national level.  For example, calculation done by Stanford University researchers using “the market approach,” indicate the fiscal gap (for the state of California) is in the TRILLION dollar range.  Looking at the national level, the fractal pattern again repeats,…  Research by Laurence Kotlikoff indicates that in the United States the total fiscal gap if you include unfunded liabilities like Medicare and Medicaid and Social Security is $200+ trillion. This is ten times the size of the national debt.

Perhaps this might be considered sacrilegious, but looking at the numbers and the trends, this tells me god is eventually going to go medieval on the economy…

The path of the righteous man is beset on all sides by the iniquities of the selfish and the tyranny of evil men.  Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother’s keeper and the finder of lost children.  And I will strike down upon thee with great vengeance and furious anger those who would attempt to poison and destroy my brothers.  And you will know my name is the Lord when I lay my vengeance upon thee.

Ezekiel 25:17

 Next time, biblical plagues…

Why Banks Love Public Debt

The Triple Bottom Line

by the Man in the Bowler Hat

 

As a kid I remember hearing lots of quotes from the Bible and have to confess, most of it went in one ear and promptly went out the other.  But that is normal, and why kids (as well as adults) have to be repeatedly exposed to a subject in the hopes something sticks.  There is also the fact that we all learn to master a subject different ways, so that is why I thought it might be interesting to blog about money and banking using stuff I was exposed to as a kid.  Lets face it the bible is a pretty big text with lots of general concepts.  So given various verses like:

 

A wise man thinks ahead; a fool doesn’t, and even brags about it!

Proverbs 13:16

 

Six days you are to do your work, but on the seventh day you shall cease from labor so that your ox and your donkey may rest...

Exodus 23:12

 

No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money.

Matthew 6:24

 

which are about ideas like planning ahead, the need for rest and money, how do you think these quotes play a role in your life?  Back in the day since I went to parochial school, I actually had to take tests on this stuff.

 

Looking back I’d say its just not normal for a kid to put things into context because at that stage, life experiences were limited.  Its only when one grows older and deals with the real world, is it possible to even start pondering what is the answer to life, the universe and everything and figure out if there is a pragmatic way to balance these concepts in normal every day life.

 

So what’s the optimal “lifestyle” solution if one wants to follow the general teachings in the good book that would work for believers as well as non-believers and incorporates the idea of the capitalist mentality of looking at the bottom line?

 

If I was to bet money on the topic, I would say the short answer is “The triple bottom line” philosophy!  For those religiously inclined, perhaps parallels between the idea of the triple bottom line and the idea of the holy trinity might be a way of trying to relate the topics.  I could just imagine my old parochial school teacher saying; “The holy trinity” bottom line is, its in the business of saving souls!  Ah, memory lane…

 

Looking at the issue from a business stand point, to be sustainable three different factors should be taken into account:profit, people and planet.   

 

Suppose the business was a local farm.  Looking at the triple bottom line, for a permaculture farm to be sustainable, basically ordinary “people” (i.e. consumers) need to demand a product (like organic vegetables) so there will be “profits” to motivate the farmer to continue planting more crops.  In this example if the farmer isn’t a good custodian of their small part of the “planet” (and does dumb stuff like poisoning the soil, so organic vegetables can no longer grow), then the farm goes out of business.

 

Think the triple bottom line only works in certain business sectors like farming?  Well DHL is taking the shipping business back-to-the-basics, enacting a revolutionary delivery program to illustrate that shipping can be more efficient. How? They now use couriers on bicycles in many European countries, including Germany and the Netherlands.  DHL estimates that this change alone will reduce their carbon dioxide emissions by 152 metric tons per year.

 

Back to thinking “local.”  One does not need to be a rocket scientist to understand that a local business like a community farm, needs local community consumers to buy the produce in order to keep the business as an on going concern, (which in turn encourages trade and development).

 

Now lets do a thought experiment, and think about a brick-and-mortar bank.  Basically the function of a bank in an economy is to bind together all the players in the economic system, by managing the supply of money.  Consider what happens if the bank isn’t a local community institution; in this case the product is “money” and profits get sucked out of the local community.  Bottom line, the local economy suffers when an outside player takes a cut.  As POTUS would tweet, #’SAD!’

 

Suppose, if there were a local community bank which was enthusiastically supported by local consumers and honest local politicians, the question that begs to be asked is,… will the local economy with a public bank be better off?  All signs point to “yes!”

 

Next time, what is a public bank?

Dear President Trump: Breaking Up (Banks) Isn’t So Hard to Do

Published on

Thursday, June 08, 2017

by

TomDispatch

 

What's your pleasure: A new Glass-Steagall or another economic meltdown?

by

 Nomi Prins

6 Comments

Activists have been calling for the restoration of Glass-Steagall since the Occupy Wall Street protests in 2011. (Photo: Scott Teresi/flickr/cc)

Donald, listen, whatever you’ve done so far, whatever you’ve messed up, there’s one thing you could do that would make up for a lot.  It would be huge!  Terrific!  It could change our world for the better in a big-league way!  It could save us all from economic disaster!  And it isn’t even hard to grasp or complicated to do.  It’s simple, in fact.  Reinstitute the Glass-Steagall Act. Let me explain.

In the world of romance, if you break up with someone, it’s pretty simple (emotional complications aside).  You’re just not together anymore. In the world of financial regulation, it used to be as simple as that, too. It was like installing a traffic light at a dangerous intersection to avoid deaths. In 1933, when the Glass-Steagall Act was passed, it helped break up the biggest banks of the day and for good reason: they had had a major hand in triggering the most disastrous economic depression our country ever experienced.

Certain divisions of those banks were no longer allowed to coexist with others. The law split the parts of banks that placed bets by creating and trading certain risky securities and those that took deposits and provided loans.  In other words, it ensured that the investment bank and the commercial bank would no longer cohabit. Put another way, it separated bankers with a heinous gambling habit from those who only wanted a secure nest egg. It was simplicity itself.

After 1933, the gamblers and savers went their separate ways, which proved a boon for the economy and the financial system for nearly seven decades. Then legislators, lobbyists, bankers, and regulators started to chisel away at the wall separating those two kinds of banks. By November 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act that repealed the Glass-Steagall Act totally. The abusive marriages of gamblers and savers could once again be consummated.

And who doesn’t remember the result: the financial crisis of 2007-2008 that led to taxpayer-funded bailouts, subsidies, loans, and sweetheart fraud-settlement deals. Just as the Crash of 1929 had been catalyzed by the manufacturing of shady “trusts” stuffed with shady securities, this crisis was enabled by the big banks that engineered complex assets stuffed with subprime mortgages and other loans that were sold around the world.

Dishonest Money Dwindles Away

by the Man in the Bowler Hat   

Dishonest money dwindles away, but whoever gathers money little by little makes it grow.

Proverbs 13:11

 

So you want to be rich?  Seems its a preoccupation by many.  DISCLOSURE: having a bit more money in the “bank” than the average person in the overall population is a comfort, that allows for a few more options.  For example, ever hear of the pejorative expression “fuck you money?”  This simply means that there is a personal level of saving in the bank, that makes it possible to concentrate on non-monetary incentives or interests (like blogging) a lot more than on monetary ones.  Sadly IMHO human nature being what it is, too many individuals do not seem to be able to differentiate a “want” from a “need” and therefore do not find an inner peace or realize that money can’t buy happiness.  So this manifests itself in various self destructive behaviors like always trying to get more money any way possible (i.e. “greed” which is one of the so called deadly sins).

 

Back to the topic at hand, answering the question what is a bank and why is it important.

 

Basically the way I look at things, a “bank” is a place where an individual stores things of value to be used later on in times of need.  Bet you were surprised I did not include anything specifically about money or mention the economy, which is the conventional way of looking at things.  This is because as a kid I was taught that education is something of value and that once you have it, its something (like a moral compass) which can’t be stolen or taken away once its obtained.  Basically, building upon the foundation of knowledge it's possible put away something that has the potential to grow into “fuck you money” in a brick-and-mortar bank.

 

As for actual mechanics of a traditional bank, basically its function is to be an institution to maintain deposits, make loans, and directly control the checkable deposits portion of the economy’s money supply.  In other words banks act as the middle man or glue that binds together all the players in the economic system. In theory banks or other financial institutions like credit unions are suppose to serve the financial needs of the community. Mainly by  providing loans, banks and other financial institutions maintain and build up the economy.

 

With respect to loans, the SOP of a bank should be to use the “Five C’s” (capacity, character, capital, collateral and conditions) check list to verify creditworthiness, by an in depth study of:

 

“Capacity” - the debt-to-income ratio, in other words how much does a person or business owe compared to how much they earn (the lower the ratio, the more confident a bank will be in the capacity to repay the money)

 

“Character” - here a banker will look at the track record of a person or business and ask questions like is there a good record of paying your bills on time and in full (which is an indication of fiscal responsibility and trustworthiness)

 

“Capital” - the bottom line “value” of your assets minus your liabilities

 

“Collateral” - an asset (for example, a home) that a lender has a right to take ownership of and use to pay off the debt, if the loan payments cannot be made as agreed

 

“Conditions” - the overall environment (economic and other wise), in other words do conditions look favorable or unfavorable

 

Sadly the fly in the ointment of the theory in the “traditional banking” system is the human factor which can cause corruption and mismanagement.  Basically this is because a bank is an institution which processes “money” and is run by people with different skill sets and a collective moral compass that perhaps is broken or non existent.  Bottom line, an institution is only as strong as the people setting the tone of management and the front line persons following the lead.

 

Last thought for now,… The conventional view of a traditional bank is, it starts off with investors who exchange their money for shares in the institution. The theory is the money raised by selling shares in a startup brick-and-mortar bank, is akin to the idea that a small seed mustard that is planted, grows to dominate the land scape. The hard reality is a pure profit motive takes over and smaller banks merge with other smaller banks or are out right bought by bigger banks in a process called, M&A which is short hand for mergers and acquisitions.  The capitalist bottom line thinking goes if a little is good, then lots is very, very, very GOOD! Or looked at another way, depending upon the dose, its poison.

 

Next time, what is the triple bottom line?

The Savings and Stability of Public Banking

Posted April 11, 2017

By Ralph Nader

April 11, 2017

As a society obsessed by money, we pay a gigantic price for not educating high school and college students about money and banking. The ways of the giant global banks – both commercial and investment operations – are as mysterious as they are damaging to the people. Big banks use the Federal Reserve to maximize their influence and profits. The federal Freedom of Information Act provides an exemption for matters that are “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” This exemption allows financial institutions to wallow in secrecy. Financial institutions are so influential in Congress that Senator Durbin (D, IL) says “[The banks] frankly own this place.”

Although anti-union, giant financial institutions have significant influence over the investments of worker pension funds. Their certainty of being bailed out because they are seen as “too big to fail” harms the competitiveness of smaller, community banks and allows the big bankers to take bigger risks with “other people’s money,” as Justice Brandeis put it.

These big banks are so pervasive in their reach that even unions and progressive media, such as The Nation magazine and Democracy Now have their accounts with JP Morgan Chase.

The government allows banks to have concentrated power. Taxpayers and Consumers are charged excessive fees and paid paltry interest rates on savings. The bonds of municipalities are are also hit with staggering fees and public assets like highways and public drinking water systems are corporatized by Goldman Sachs and other privatizers with sweetheart multi-decade leases.

Then there are the immense taxpayer bailouts of Wall Street, such as those in2008-2009 after the financial industry’s recklessness and crimes brought down the economy, cost workers 8 million jobs, and shredded the pension and mutual fund savings of the American people.

Standing like a beacon of stability, responsiveness and profitability is the 98 year-old, state-owned Bank of North Dakota (BND). As reported by Ellen Brown, prolific author and founder of the Public Banking Institute (Santa Clarita, California), “The BND has had record profits for the last 12 years” (avoiding the Wall Street crash) “each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on investment of a whopping 18.1 percent. Its lending portfolio grew by $486 million, a 12.7 percent increase, with growth in all four of its areas of concentration: agriculture, business, residential and student loans…”

North Dakota’s economy is depressed because of the sharp drop in oil prices. So the BND moved to help. Again, Ellen Brown:

“In 2015, it introduced new infrastructure programs to improve access to medical facilities, remodel or construct new schools, and build new road and water infrastructure. The Farm Financial Stability Loan was introduced to assist farmers affected by low commodity prices or below-average crop production. The BND also helped fund 300 new businesses.”

All this is in a state with half the population of Phoenix or Philadelphia.

A California coalition is forming to establish a state-owned bank for California. Coalition organizers say a California State Bank will cut the state’s long-term financing costs in half, compared to what avaricious Wall Street is charging. The nation’s largest state (equivalent to the world’s sixth largest economy) can free itself from massive debt accumulation, bid-rigging, deceptive interest-rate swaps and capital appreciation bonds at 300% interest over time.

What assets does the state have to make this bank fully operational? California has surplus funds which total about $600 billion, including those in a Pooled Money Investment account managed by the State Treasurer that contains $54 billion earning less than 1 percent interest.

Money in these funds is earmarked for specific expenditure purposes, but they can be invested – in a new state bank. To escape from a Wall Street that is, in Brown’s words “sucking massive sums in interest, fees and interest rate swap payments out of California and into offshore tax havens,” a state bank can use its impressive credit power to develop infrastructure in California.

Huge state pension funds and other state funds can provide the deposits. Each one billion dollar capital investment can lend $10 billion for projects less expensively and under open stable banking control by California. Presently, California and other states routinely deposit hundreds of billions of dollars in Wall Street banks at minimal interest, turn around and borrow for infrastructure construction and repair from the Wall Street bond market at much higher interest and fees.

This is a ridiculous form of debt peonage, a lesson Governor Jerry Brown has yet to learn. He and other officials similarly uninformed about how the state of California can be its own banker should visit publicbankinginstitute.org and read Ellen Brown’s book, The Public Bank Solution.

Legislation for public banks is being pursued in the states of Washington, Michigan, Arizona and New Jersey, as well as the cities of Philadelphia and Santa Fe. Look for county commissioners and state treasurers to come on board when they see the enormous safeguards and savings that can be secured through “public banks” in contrast to the convoluted casino run by unaccountable Wall Street gamblers and speculators.

A longtime backer of public banking, retired entrepreneur Richard Mazess, hopes that national civic groups like Public Citizen, Common Cause, People for the American Way and Consumer Watchdog can get behind the proposal. “Public, not private, infrastructure is essential for an equitable economy,” he says.

California already has a public infrastructure bank called the IBank. Mr. Mazess and others believe that expanding the existing IBank into a depository institution would be more likely to pass through the California legislature. The deposits would come from public institutions, and NGOs (not from private persons). These pension funds and other public deposits would become reserves and serve as the basis for safely leveraged loans to public projects at a conservative tenfold multiplier. No derivatives or other shenanigans allowed.

Before that proposal can be enacted, however, there needs to be much more education of state legislators and the public at large.

Such enlightenment would illuminate the enormous savings, along with the restoration of state sovereignty from the absentee, exploitative grip of an unrepentant, speculating, profiteering Wall Street that believes it can always go to Washington, DC for its taxpayer bailouts.

Amazon Go: The End of Jobs?

by John Lawrence from the San Diego Free Press

Amazon Go is the latest job destroyer by virtue of the fact that it is a grocery store with no check-out lines. High tech devices will monitor every item you put in your high tech grocery basket so you just load up and go. Your credit card will be charged the correct amount. It isn't clear if a robot will bag your groceries or if you'll do that yourself. This feat of automation is only the harbinger of things to come. With artificial intelligence and robots, jobs will be automated out of existence except for a few software engineers who will design the various systems.

So far there is only one store open and that's in Seattle, but soon ... soon check-out cashiers can kiss their jobs good-bye. By the same token truck drivers will be losing their jobs to self-driving trucks. This technology is well along (it's in beta as they say in the tech world). Already self checkout is underway at Home Depot and many supermarkets. Amazon Go is just taking self-checkout to the next level. I suppose, if they're out of an item, Amazon Prime will have it delivered to your house by drone within a few hours. Bank tellers have already been replaced by ATM machines although a few are still needed for those sticky situations that only a human can deal with.

I suppose the shopping experience will also include text messages or alerts which sense what you want to purchase and then try to upsell you. Why buy that hunk of cheese when for just a few dollars more you could get artisan cheese made locally at a vintage shop? And as for coupons, that will all be handled electronically. You would just scan them with your smartphone, and they would automatically be deducted from your bill. As you continue to shop, Amazon would be gathering valuable information about your purchases so it can suggest other items you might be interested in.

It’s not that retail tech companies haven’t already been hard at work tracking people as they explore physical stores and shop. A host of companies with names like RetailNext, Euclid, and Nomi, among others, are all part of this trend. It’s in a store’s interest to track people because they can target and upsell customers on more products and in-store promotions. When you go home and go online, the first ad you see might be for a product that the data acquired during your shopping experience suggests that you might need or want.

Just Tell Alexa What You Need

The Amazon app Alexa already responds to voice commands in your home. It's not a stretch that this technology might be incorporated in your smartphone so all you'd need to do is say "Hey, Alexa, where's the craft beer, and also I need a bouquet of flowers." Then Alexa might come back and say, "Why don't you get that special someone a box of chocolates too?" Then you'd say, "That's a great suggestion, Alexa, I'd like a dozen red roses, but I want to have them delivered to her home on Valentine's day." Alexa would come back, "No problem, Mr. Mertz." You see Alexa already knows the address of that special someone.

Or why even go to the store? Just tell Alexa your shopping list and she'll have it delivered within the next couple of hours. You'll need a personal robot, however, to put all the stuff away. That may be coming soon.

Amazon is capable of deploying an array of cameras and sensors to control this whole process but all it really needs is a souped up RFID (Radio Frequency IDentification). So instead of running each product through a bar code scanner, each product would have a label containing a little chip that would transmit it's ID to a receptor wherever that receptor is located. It could be in the shopping cart or at the door. There might be a number of them located throughout the store. It's a bar code on steroids.

And for fast food - it will be automated too as advocated by Trump's pick for Secretary of Labor (now defunct), the owner of Carl's Jr and Hardee's, Andrew Puzder. No need for minimum wage workers any more. Robots don't require bathroom breaks or sick leave. Puzder can now get back to automating minimum wage workers out of his fast food chains.

Robot Baristas Will Make Your Coffee

It's not only grocery stores and supermarkets that will be automated. Robotic baristas will churn out your coffee drinks without the need for the intervention of human hands. Cafe X has created an automated barista and a “coffee shop”. According to Forbes:

Cafe X is 100% automated from the ordering and payment system that can be from within the app or the order/payment screens on the front of the system to the preparation and delivery of the coffee. The system is by far faster than any current coffee shop experience. Once the amortization of the system has been met, the cost to operate this “coffee shop” is orders of magnitude lower than the 2.5 baristas a single system replaces.

According to the San Diego Union, February 22, 2017:

Franco’s barista was a robot. It’s part of an automated coffee shop called Cafe X — the latest example of the San Francisco’s dual infatuations: artisanal coffee and automated technology.

“It’s incredibly convenient,” said Franco, who has used Cafe X twice since it opened Jan. 30. “And the coffee is really good, too.”

Moments earlier, Franco had ordered her coffee using the Cafe X mobile app. Now a white robotic arm, the same kind used in car manufacturing facilities, was moving around a paper cup, pushing on syrup levers and brewing her a hot cup of coffee.

“I prefer this because you don’t have to wait,” said Franco, whose coffee was made in less than a minute. “It even accepts PayPal.” ...

On the speed front, Cafe X can make a hot espresso beverage in less than a minute and is able to pump out 120 coffee drinks in an hour. A Cafe X kiosk can occupy as little as 50 square feet, although its footprint in San Francisco’s Metreon shopping mall is a little over 100 square feet and was most recently home to another automated tenant: a Bank of America ATM.

Encased in plexiglass, the kiosk contains two coffee machines equipped to brew Americanos, espressos, cappuccinos, lattes and flat whites. Customers can order their drink from the Cafe X mobile app or at one of two iPads mounted outside the kiosk. The entire transaction is cashless, and customers even get a notification on their phone when their coffee is ready.

“It’s similar to calling an Uber,” said Hu, who sees his kiosk as filling a void. “It’s for people who want a grab-and-go coffee, who want consistency.” ...

Automation helps keep costs low for business owners, which in turn makes products and services more affordable for consumers, Ling said. That’s why automation — particularly in the food service and hospitality industries — seems inevitable. ...

“This is just the leading edge,” said Martin Ford, author of “Rise of the Robots: Technology and the Threat of a Jobless Future.” “The really significant thing will be when the big chains — the McDonalds, the Burger Kings, the Starbucks — begin to adopt these technologies. Eventually it is going to create a big problem for us.”

As of May 2015, the largest overall occupations in the United States, according to the Bureau of Labor Statistics, were retail salespersons (4.6 million), cashiers (3.5 million), and food preparation and service workers (3.2 million).

Ford quotes the co-founder of a start-up dedicated to the automation of gourmet hamburger production: “Our device isn’t meant to make employees more efficient. It’s meant to completely obviate them.”

Basically every job that doesn't have to do with the FIRE (Finance, Insurance and Real Estate) sector or the military-industrial complex is in the process of being eliminated. However, janitorial jobs, child care and fruit and vegetable picking will probably always be with us. It might be hard to get anyone to fill those job positions as Trump plans to deport most of the people who have been doing them. Any job that could remotely be considered manufacturing will be gone. That's why corporations are investing more in the US rather than abroad. However, their investments are not creating jobs; they're eliminating them.

According to Our Automated Future by Elizabeth Kolbert:

During the recent Presidential campaign, much was said—most of it critical—about trade deals like the North American Free Trade Agreement and the Trans-Pacific Partnership. The argument, made by both Bernie Sanders and Donald Trump, was that these deals have shafted middle-class workers by encouraging companies to move jobs to countries like China and Mexico, where wages are lower. Trump has vowed to renegotiate NAFTA and to withdraw from the T.P.P., and has threatened to slap tariffs on goods manufactured by American companies overseas. “Under a Trump Presidency, the American worker will finally have a President who will protect them and fight for them,” he has declared.

[But], such talk misses the point: trying to save jobs by tearing up trade deals is like applying leeches to a head wound. Industries in China are being automated just as fast as, if not faster than, those in the U.S. Foxconn, the world’s largest contract-electronics company, which has become famous for its city-size factories and grim working conditions, plans to automate a third of its positions out of existence by 2020.The South China Morning Post recently reported that, thanks to a significant investment in robots, the company already has succeeded in reducing the workforce at its plant in Kunshan, near Shanghai, from a hundred and ten thousand people to fifty thousand. “More companies are likely to follow suit,” a Kunshan official told the newspaper.

Jobs in Oil Fields Decline Despite Trump

So-called President Trump promised to bring back all those good paying blue collar jobs by going full steam ahead with oil production. But guess what? The oil companies are going full steam ahead with automation eliminating all those good paying jobs. Some of the workers losing their jobs in the oil patch are even migrating to the renewable energy industry! Did Trump get it wrong? In an article entitled Texas Oil Fields Rebound From Price Lull, But Jobs Are Left Behind, Clifford Krauss writes:

Oil and gas workers have traditionally had some of the highest-paying blue-collar jobs — just the type that President Trump has vowed to preserve and bring back. But the West Texas oil fields, where activity is gearing back up as prices rebound, illustrate how difficult it will be to meet that goal. As in other industries, automation is creating a new demand for high-tech workers — sometimes hundreds of miles away in a control center — but their numbers don’t offset the ranks of field hands no longer required to sling chains and lift iron. ...

Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check.

The message is that blue collar jobs, jobs for those with only a high school education, are going bye-bye. There's not much that Trump can do about it to assuage his Red State base, the "forgotten men." So he will be left in the position of convincing them that those jobs have come back as an alternative fact of an alternative reality, something he and his cohorts are really good at.

Professional Jobs Will Be Taken Over By Robots Too

Machines are also getting smarter so that not only are they replacing manual laborers, but they are replacing people employed in white collar jobs as well. For instance, a highly skilled radiologist may soon be replaced by a machine whose powers of pattern recognition exceed those of humans. So while the doctor may find his job going by the wayside, his executive assistant's job could be more secure. After all bringing him his coffee and delivering it with a smile is something far more difficult for a robot.

The belief that the digital revolution, automation and robotization will create more jobs than they destroy is wishful thinking according to Charles Hugh Smith.

Charles Hugh Smith writes in A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful:

Issuing more STEM degrees doesn’t create jobs for the graduates.

This faith that technology will magically create more jobs than it destroys is wishful thinking. This theology arose as a result of the transition from low-skill agricultural labor to low-skill factory labor in the First Industrial Revolution (1750 – 1860, steam, railways, factories, etc.) and the Second Industrial Revolution (1870-1930) (mass production, electric lights, autos, aircraft, radio, telephones, movies). Each transition offered millions of new low-skill jobs to those displaced by technology and created increasing numbers of higher-skill jobs in design, technology, marketing and management. But history is not repeating itself in the latest Industrial revolution....

Since automation/software is now eating higher-skill jobs, advancing the skills of workers does not automatically create jobs for them. Pushing the entire populace to get a college diploma does not automatically create jobs that require college diplomas.

The conventional narrative overlooks a key dynamic in the Third Industrial Revolution: the number of skilled workers needed to eliminate entire industries of highly skilled employees is much smaller than the work forces being eliminated. 

Some are suggesting that everyone needs to have a universal basic income since their labor power will not be needed in the future. Robert Reich thinks that there has to be a way to recycle money from the owners of the robots to all the people those robots will displace so that money can continue to circulate and the American economy which depends 70% on consumption will continue to function. How else are consumers to consume unless they have the wherewithal to do so? Researchers estimate that half of all US jobs will be automated in the next two decades.

Smith disagrees with Reich because he doesn't believe that taxing the Googles, Facebooks and Apples of the world will generate enough money to support the masses in a super welfare state. Besides that he doesn't believe that just being a consumer can ever satisfy human needs for having productive and dignified work. A society of people who do nothing but consume will lead not to a utopia but to a dystopia because human beings have a need to be something more than just consumers.

But perhaps both Smith and Reich miss the point. There is no need to recycle money from the taxation system to provide a basic income for everyone. A Central Bank that was controlled by the people instead of by Wall Street, which is what we have now, could generate money the way Abraham Lincoln did. Lincoln endorsed the printing of $450 million in US Notes or “greenbacks” during the Civil War. The greenbacks not only helped the Union win the war but triggered a period of robust national growth and saved the taxpayers about $14 billion in interest payments. Instead of debt based money created by Wall Street through loans, the government could just print and distribute it directly to the people.

Trump's Goldman Sachs Connections

by John Lawrence from the San Diego Free Press

Restocking the Swamp

Trump's new pick for Treasury Secretary, Steve Mnuchin, his top campaign fundraiser, was a Goldman Sachs executive.  Mnuchin spent 17 years working at Goldman Sachs where he became a partner. He also worked for hedge fund manager George Soros, founded a hedge fund of his own and was the lead investor in IndyMac, a failed subprime lender that turned into a “foreclosure machine” during the housing crisis.

As the financial crisis worsened, Mnuchin was looking to make a profit off of homeowners who couldn't pay their mortgages. In 2009, he got together with a group of billionaire investors and bought a failed California-based bank, IndyMac, which had been taken over by the FDIC after its portfolio went bust. Mnuchin and his partners bought IndyMac on the condition that the FDIC agree to pay future losses above a certain threshold. They renamed the bank OneWest Bank and, after running it for six years, they sold it last year for a profit, estimated at close to $1.5 billion.

According to NPR:

According to the coalition, OneWest foreclosed on more than 36,000 homeowners under Mnuchin. During that time, the FDIC made payments to OneWest totaling more $1 billion. Those payments went to the "billionaire investors of OneWest Bank," says Stein, "to cover the cost of foreclosing on working-class, everyday, American folks," many of whom lived in California.

Rex Schaffer, 86, and his wife Rose were among those who lost their homes, in a OneWest foreclosure. After living nearly 50 years in their home in La Puente, Calif., the Schaffers took a home equity loan but struggled to make the payments. They say they qualified three times for a government assisted modification, but OneWest failed to modify the loan.

"It was a disaster dealing with those people," Rex Shaffer says. "We'd have a different person every time we called in." He counted 33 OneWest employees, in all, and each one would give him "a different story."

Facing threats that their home would be auctioned off, the Schaffers finally got through to a OneWest vice president. According to Rex Shaffer, the VP said, "I'm going to get you a 60-day extension on the sale date, so we can work this thing out." That was on Feb. 17, 2011. But the next day, the Schaffers' house was sold without their knowledge. "We didn't even know it — didn't have the faintest idea," Rex Shaffer says.

Despite their hardships at the hands of Mnuchin, the Shaffers voted for Trump. I guess victims really are attracted to those who abuse them.

Gary Cohn Was Second in Command at Goldman

Then there is Trump's pick for Director of the National Economic Council, Gary Cohn, who was second in command at Goldman in his prior life. Cohn was President of Goldman and also Chief Operating Officer. Cohn joined Goldman in 1990 and rose through the ranks to become Lloyd Blankfein’s deputy. Blankfein is CEO and Chairman of Goldman.  Cohn will help Trump set economic policy. Jared Kushner, Trump’s son-in-law, is good friends with Cohn. Kushner can’t take a West Wing post for legal reasons, so Cohn will be his proxy inside the administration.

Conservatives are upset by the appointment of Cohn who they don't feel is conservative enough. Cohn is a member of the clique of global superrich and superelite in contrast to the populist and nationalist values that Trump preached on the campaign trail. Trump's designated Chief Strategist, Steve Bannon, is also a Goldman Sachs veteran. Preventing Cohn from exerting too much influence on Trump seems to have become a goal for Bannon. “He’s a huge Democrat and knows zero about politics,” Bannon supposedly said.

On the campaign trail, Donald Trump was no fan of financial industry giant Goldman Sachs. One of his campaign ads in the days just before the vote even featured Goldman CEO Lloyd Blankfein. The voiceover didn't name him, but as his image flashed onscreen, the narration described “a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put that money into the pockets of a handful of large corporations and political entities.” Trump never lost an opportunity of rubbing Hillary's Goldman connections in her face. In a CNN town hall forum when asked why she accepted $675,000 for speeches to Goldman Sachs, she replied “That’s what they offered,” adding that “every secretary of state that I know has done that.”

According to public records, Clinton gave 92 speeches between 2013 and 2015. Her standard fee was $225,000, and she collected $21.6 million dollars in just under two years including the $675,000 from Goldman for 3 speeches. Hillary would not release the transcripts of those speeches. During one she cozied up to Lloyd Blankfein in a two way conversation. Blankfein was a Clinton supporter.

On the campaign trail, Trump also attacked Republican rival Ted Cruz for his ties to Goldman Sachs. Cruz’s wife worked at Goldman, and he’d taken a loan from the bank to help fund his campaign. So now that he has won the Presidency, Trump follows preceding Presidents by filling up his administration with Goldman Sachs former employees. This is draining the swamp?! Goldman has been in the swamp through numerous other administrations and has never had to leave. They are permanent residents of the swamp.

Many Presidents Including Obama and Clinton have had Goldman Alums as Treasury Secretaries

Like Trump Obama ran as an outsider. He attacked NAFTA and wanted to soak the rich. Then he appointed Tim Geithner his Treasury Secretary. Supposedly only a Goldman former managing director and President of the New York Fed could get the country out of the economic crisis. Geithner's solution was to pay investors back 100 cents on the dollar while giving little if any relief to homeowners who had been foreclosed on. Geithner was totally on the side of the banks, not the average American. The banks were seen as crucial to the economic system; the average homeowner was just collateral damage.

In all there were 34, count 'em, people in the Obama administration with Goldman connections including Larry Summers, Obama's chief economic adviser and head of the National Economic Council; Neel Kashkari, former VP at Goldman; Gary Gensler, an Obama appointee to the Commodity Futures Trading Commission, which is supposed to regulate derivatives trading. Gensler, a former Goldman banker had been instrumental in helping to pass the infamous Commodity Futures Modernization Act of 2000, which prevented regulation of derivative instruments like collateralized debt obligations and credit default swaps that played such a big role in cratering the economy last year. Then there was Peter Orszag, Obama's Budget Director. Orszag was founding director of the Hamilton Project, funded by Goldman Sachs and Robert Rubin. I could go on but I refer you, dear reader, to the link.

As Geithner's replacement Obama appointed Jack Lew, Treasury Secretary. Lew sits on the Brookings-Rubin funded Hamilton Project Advisory Board. Lew has been called an acolyte of Bill Clinton's Treasury Secretary and Goldman alum, Robert Rubin. Before his government service, Rubin spent 26 years at Goldman Sachs. Rubin oversaw the loosening of financial industry underwriting guidelines which had been intact since the 1930s leading to the 2008 financial crisis. Rubin was later at Citigroup where he went to claim his reward for his government service.

Clinton's Treasury Secretary Responsible for Deregulating Wall Street

Rubin was Bill Clinton’s Treasury Secretary from January 1995 until July 1999 and was an architect of the financial deregulation that left financial derivatives largely free of controls. This paved the way for the large-scale, unregulated speculation in financial derivatives by Wall Street banks beginning in the early 2000s.

Common Dreams reported:

Taken together, the rash of appointments with ties to Bob Rubin may well represent the most sweeping influence by a single Wall Street insider in the history of government. "Rather than having a team of rivals, they've got a team of Rubins," says Steven Clemons, director of the American Strategy Program at the New America Foundation. "You see that in policy choices that have resuscitated - but not reformed - Wall Street." While Rubin's allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles.

The Financial Crisis Inquiry Commission, the panel responsible for determining who and what caused the financial meltdown that lead to the worst recession in decades voted to refer Robert Rubin to the Department of Justice for investigation. The panel stated it believed Rubin "may have violated the laws of the United States in relation to the financial crisis." Rubin, the commission alleged, along with some other members of Citi's top management, may have been "culpable" for misleading Citi's investors and the market by hiding the extent of the bank's subprime exposure, stating at one point that it was 76% lower than what it actually was.

The George W Bush administration had a similar cast of Goldman characters including Bush's Treasury Secretary, Hank Paulson, who was at Treasury from 2006 to 2009. His former Goldman Sachs Title: Chairman and CEO (1998-2006). If anyone doesn't believe that Wall Street bankers formulate the economic policy of US Presidential administrations, they have another think coming. This has been true throughout American history. Trump is no different. Both he and Obama campaigned against Wall Street and then, as soon as they were elected, they got in bed with them. Hillary's mistake was to get in bed with them before she was elected.

Trump is not the first US President to attempt to run the country as a business. That was Calvin Coolidge who famously said, "The chief business of the American people is business." In All the President's Bankers, author Nomi Prins says: [Coolidge's Treasury Secretary, Andrew Mellon, wrote] "The Government is just a business, and can and should be run on business principles." Mellon's principles included lowering taxes to 25% during the Coolidge administration, a move that benefited him personally more than any other person, except one, in the country. There's not a dime's worth of difference between Coolidge and Trump. Coolidge left office in 1929 shortly before the stock market crash that year that precipitated the Great Depression. During his Presidency, though, he made America great again. As a Coolidge biographer wrote, "He embodied the spirit and hopes of the middle class, could interpret their longings and express their opinions."

Get Ready for the Market Crash and Recession of 2016

by John Lawrence from the San Diego Free Press

Oil is less than $30. a barrel. This is over three times less than what it costs just to buy the barrel itself! Iran has been accepted back into the world community and is revving up to sell its oil on the world market which will bring down the price of oil even more. Frackers and oil producers in the US have taken on a huge amount of debt under the assumption that it would pay off down the road. They hadn't counted on the price of oil plummeting. What will they do when we convert 100% to renewables?

The debt overhang in the US economy is, as The Donald would say, UUUUGE! All the Wall Street banks and hedge funds, which have bet on the US becoming oil independent and have bought derivatives up the ying yang, are on the losing end of their bets. This presages a crash similar to the mortgage based crash of 2008. Then the Big Banks will ask for another bailout. Or maybe they won't ask; they'll just tell us that we're bailing them out because, after all, they run the government.

Goldman Runs the Government While Committing Fraud

Goldman Sachs runs the government's finance department. Treasury Secretaries Robert Rubin (1995-99) and Hank Paulson (2006-2009) were at Goldman from 1966 to 1992 and 1974 to 2006 respectively. At Treasury, Paulson was aided by Chief of Staff Mark Patterson (Goldman lobbyist 2003-2008), Neel Kashkari (Goldman Vice President 2002-2006) , Under-Secretary Robert K Steel (Vice Chairman at Goldman, where he worked from 1976 to 2004), and advisors Kendrick Wilson (at Goldman from 1998 to 2008) and Edward C Forst (former Global Head of Goldman's Investment Management Division).

Paulson's successor, Timothy Geithner, a protege of Robert Rubin, was kept close to the Goldman fold with the usual tactic of paying him lucrative speaking fees, the same tactic they use to keep Hillary's ear. I could go on with Goldman's connections to the US government, but I don't want to bore you. For a fuller account I refer you to Michael Hudson's book, Killing the Host, How Financial Parasites and Debt Destroy the Global Economy.

This January 2016 Goldman admitted to committing massive fraud and was fined $5 billion. The Wall Street firm had agreed with federal prosecutors and regulators to resolve claims stemming from the marketing and selling of faulty mortgage securities to investors. These are the people who are running your democratic (ha, ha) government. While the 99% got screwed, Wall Street got bailed out because they ARE the government.

But not to worry. This looming market crash is a problem for the big guys, the billionaires, the investor class, not the 99%. The mortgage defaults of 2008, on the other hand, brought real pain to the middle class. While the banks got bailed out, the average middle class homeowner did not. HAMP, the Home Affordable Mortgage Program which was supposed to help homeowners stay in their homes with loan modifications, was a colossal failure.

The program gave permanent mortgage modifications to 1.3 million people, but 350,000 of them defaulted again on their mortgages and were evicted from their homes. Fewer than one million homeowners remain in the HAMP program – just a quarter of its target – and $28 billion of the funding remains unspent. The HAMP program, supposed to help homeowners save their houses, may have led them deeper into a bureaucratic swamp.

401ks - the Worst Idea Perpetrated on the American People

Now that that crisis has settled down, the main worry of the middle class is that, when the stock market tanks, so will their 401k. 401ks were one of the worst travesties visited on the average American worker. Folks lucky enough to have traditional pensions don't have to worry especially if it's a government pension. On the other hand those with traditional pensions from corporations have to worry about corporate raiders and hedge fund takeover artists raiding their pension funds. Those with 401ks are taking all the risk in their individual portfolios over which they have no control really. They are at the mercy of the market and Wall Street. God help them.

There is also widening inequality which means that American consumers have less money to spend to keep the economy going. US GDP depends on consumer purchases because they are 70% of the economy. If everyone goes to ground and starts growing their own vegetables and keeping their own chickens, all those nonpurchases at the supermarket will drive the economy down. 2015 was a big year for car sales; that means that 2016 will not be because consumers are carred up.

Robert Reich thinks the economy is on the edge of recession:

Consider: The median wage is 4 percent below what it was in 2000, adjusted for inflation. The median wage of young people, even those with college degrees, is also dropping, adjusted for inflation. That means a continued slowdown in the rate of family formation—more young people living at home and deferring marriage and children – and less demand for goods and services. 

At the same time, the labor participation rate—the percentage of Americans of working age who have jobs—remains near a 40-year low. 

The giant boomer generation won’t and can’t take up the slack. Boomers haven’t saved nearly enough for retirement, so they’re being forced to cut back expenditures.

Wall Street and hedge funds are running the economy. They are the central planners not the US government which is basically just a pawn in their hands. They borrow money from the Federal Reserve at extremely low rates and then buy Treasury bonds which amounts to making money off the spread or making money off their ability to finance the American government which boils down to us, the American taxpayers.

Fortunately, the US isn't dependent on Japanese or Chinese or Saudi Arabian investors to buy its bonds. Wall Street has taken over that role in a symbiotic Ponzi scheme which requires the Fed, Wall Street and the US Treasury to all play their parts. That means that now the Big Banks are really, really Too Big To Fail. They are an essential part of funding and running the US government!

Better to Put Your Money Under the Mattress

While Wall Street banks are too big to fail, the next banking crisis could trigger not a bail out but a bail in. According to Ellen Brown, the mechanics are already in place to loot depositors' bank accounts:

While the mainstream media focus on ISIS extremists, a threat that has gone virtually unreported is that your life savings could be wiped out in a massive derivatives collapse. Bank bail-ins have begun in Europe, and the infrastructure is in place in the US. Poverty also kills.

At the end of November, an Italian pensioner hanged himself after his entire €100,000 savings were confiscated in a bank “rescue” scheme. He left a suicide note blaming the bank, where he had been a customer for 50 years and had invested in bank-issued bonds. But he might better have blamed the EU and the G20’s Financial Stability Board, which have imposed an “Orderly Resolution” regime that keeps insolvent banks afloat by confiscating the savings of investors and depositors. Some 130,000 shareholders and junior bond holders suffered losses in the “rescue.”

Something to think about. Maybe hiding your money under the mattress is the best solution since it's not earning any interest in the bank anyway.

Thom Hartmann has written a book, The Crash of 2016: The Plot to Destroy America--and What We Can Do to Stop It. Marketwatch.com writes:

“The United States is more vulnerable today than ever before including during the Great Depression and the Civil War,” says Thom Hartmann, in “The Crash of 2016.” Why? “Because the pillars of democracy that once supported a booming middle class have been corrupted, and without them, America teeters on the verge of the next Great Crash.” Thanks to an obstructionist GOP, hell-bent on destroying Obama the past six years. [Thom's] indictment hits hard, but matching something you might hear from Rush Limbaugh on the Right.

“The United States is in the midst of an economic implosion that could make the Great Depression look like child’s play,” warns Hartmann. His analysis is brutal, sees that “the facade of our once-great United States will soon disintegrate to reveal the rotting core where corporate and billionaire power and greed have replaced democratic infrastructure and governance. Our once-enlightened political and economic systems have been manipulated to ensure the success of only a fraction of the population at the expense of the rest of us.” And he wrote that before Picketty’s “Capital in the 21st Century.”

The US has a boom bust economy. Unfortunately, the busts are becoming more frequent and the booms more superficial. People get all euphoric when the stock market goes up. As someone once said, it leads to "irrational exuberance." Then when it crashes, they sell leaving their 401ks and retirement incomes in shambles. That's what happens when investing is left in the hands of amateurs. The big guys, the hedge funds will make money either way - when the stock market goes up they go long; when it goes down they're short. They are high frequency traders and act on insider information. They commit fraud.

They have billions of dollars at their disposal from low interest loans from Wall Street. That's why they can buy entire corporations, break them up, lay off the employees, raid their pension funds and sell the remaining eviscerated hulk off to the unsuspecting and naive. The hedge (vulture) funds and Wall Street make out like bandits which is what they essentially are. The banks, whose function used to be capital formation to fund industry which created jobs, now functions as a conduit to hedge funds to wreak havoc with the American economy in pursuit of short term profits.

The world is polarized between the uber wealthy and the rest of us. Just 62 people own as much wealth as the 3.6 billion poorest. That's globalization for you. Nation states are no longer important or in control. The uber wealthy, the billionaires, who can buy and sell politicians and governments at their whim are the controllers. They - not the communists or socialists - are the central planners of the economy, and their plan for the economy is to benefit them and only them. The World Bank and the IMF are their henchmen.

The New Feudalism - Billionaires Replace the Nobility

This is from a recent report from Oxfam, AN ECONOMY FOR THE 1% How privilege and power in the economy drive extreme inequality and how this can be stopped:

The gap between rich and poor is reaching new extremes.  The richest 1 percent have now accumulated more wealth than the rest of the world put together… Meanwhile, the wealth owned by the bottom half of humanity has fallen by a trillion dollars in the past five years.”

The wealth of the richest 62 people has risen by 44 percent in the five years since 2010—that’s an increase of more than half a trillion dollars ($542 billion), to $1.76 trillion,” Oxfam noted. “Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period—a drop of 41 percent. Since the turn of the century, the poorest half of the world’s population has received just 1 percent of the total increase in global wealth, while half of that increase has gone to the top 1 percent.

There is really only one candidate for President who is addressing these issues - Bernie Sanders. Republicans want us to take our eyes off the ball of growing inequality and impoverishment of the 99% while the billionaires take on the role of oligarchs. They want us to focus on international terrorism and the threat that that brings to our everyday lives.

While that is surely a threat, ISIS cannot do major damage to the US. A few people can be blown up here and there and that is a tragedy. It's just not as great a tragedy as the gun violence done by Americans to other Americans on a daily basis which is orders of magnitude bigger.

If the economy takes a tumble, Hillary Clinton's ties to Wall Street will take on an even more ominous cloud over her campaign while the fact that Bernie Sanders has raised millions in small donations without the help of Wall Street or Super PACs will cast him in an even more favorable light. That might be the deciding factor. The Republicans will surely be left behind if they place all their bets on getting the American people to vote for them out of fear of ISIS.

It's Time for Quantitative Easing for People Instead of Banks

by John Lawrence from the San Diego Free Press

Income Inequality is Getting Worse

Income and wealth inequality is only getting worse. It's not hard to understand why. Certain corporations have a lock on economic activity throughout the world. Mom and Pop operations have been forced out of business or have merged with the Big Guys. Artificial intelligence, automation, robots and computers have taken over many menial but used-to-be-better-than-minimum-wage jobs like check-out clerks, bank tellers and customer service operators. Other jobs have been off shored to cheaper labor jurisdictions.

The rest of us, college graduates included, have been reduced to being expendable appendages of the large corporate machines to be sucked in and spit out at their pleasure. When our skill sets are outmoded, we will be laid off and fresh talent will be acquired. The job pool is shrinking because the number of necessary jobs is shrinking. Today, there are approximately 1.2 million fewer jobs in mid-and higher-wage industries than there were prior to the 2008 recession, while there are 2.3 million more jobs in lower-wage industries. According to the Bureau of Labor Statistics most jobs in the next decade won't even require a college education. They are jobs that can't be done by robots: care givers, nurses, house cleaners, gardeners, retail.

Another reason for income and wealth inequality is that the US Federal Reserve's quantitative easing policy screws savers who get zero interest on their life savings while injecting money into the largest Wall Street banks. This money is siphoned off by wealthy investors and hedge funds. It never enters the real economy. It only encourages the average Joes and Janes to take on more debt. Ninty percent of the money supply is created by private banks who loan money into the economy through their policy of fractional reserve banking. As the money supply increases, so does debt.

Wall Street Banking Giants Create Most of the US Money Supply

Fractional reserve banking is a simple concept that has become more complicated and convoluted as it has evolved over the years. In its simplest terms, if a bank takes in a deposit of $100 from 10 people or $1000 total, it loans out $900 of that keeping $100 back as a reserve in case someone wants their deposit back before the principal and interest on the loans start flowing in. Their premise is that not everyone will demand their deposit back at the same time. If, however, everyone does want their money back at the same time, there could be a run on the bank unless the bank can borrow the money from some other entity like another bank or the Federal Reserve

Thus money is created by the bank with a few keystrokes on a computer and is fed into the economy as debt. The banks are at the top of the food chain since they create the money and loan it out on interest. Thus the US economy is a debt based economy. Bad things happen when people all demand their money back at the same time or collective debt becomes so big and untenable that it can't be paid back. This is what happened in the 2008 financial crisis when mortgages were given to people who couldn't pay them back and hence defaulted. Eventually this whole financial structure, which was a house built upon sand instead of a rock, to use a Biblical metaphor, collapsed.

It is to be noted that when a bank creates money, it is not backed by gold. Nixon took us off the gold standard in 1971. Money not based on anything but the government's say so is called fiat money. Thus all money created by private banks is fiat money, and, although the government says it is all good, it is the private banks that actually create it, not the supposedly democratically elected government.

The Federal Reserve has also been involved in money creation recently with a process called quantitative easing (QE). When the government needs money beyond the revenues it takes in by means of taxes, it goes into debt by issuing bonds. Sometimes those bonds are bought by Joe and Jane Average Investor or sometimes by other countries like Japan. However, much of the time they are bought by Wall Street banks. Then the Federal Reserve turns around and pays cash for those bonds taking them off the hands of the big banks. The result is that the banks end up with more money and the loans disappear on the Federal Reserve's balance sheet which is sort of like a black hole. Effectively, the government never has to pay those loans back.

Quantitative Easing for the People

There is another way that money could be created and injected into the economy. It might be called quantitative easing for the people (PQE) as Britain's Leader of the Labor Party, Jeremy Corbyn has termed it. He proposes to give the Bank of England a new mandate to upgrade the economy to invest in new large scale housing, energy, transport and digital projects. The investments would be made through a National Investment Bank set up to invest in new infrastructure and in the hi-tech innovative industries of the future.

The money creation (or printing if you like) would entail the government issuing a bond that a National Investment Bank would buy. Then the central bank would take that loan on its balance sheet in return for cash that the bank would then use to pay for infrastructure. The end result is that the government would owe the central bank the amount of the loan, but because the central bank is a financial black hole, it would never have to pay.

In Addition to Pocketing the QE, Wall Street Bankrupts Cities

The City of Los Angeles is paying a Wall Street bank $200. million annually in fees just to manage its money. The Huffington Post revealed:

LOS ANGELES, CA- At a lively downtown rally in front of the Bank of NY Mellon in Los Angeles, the Fix LA Coalition unveiled a groundbreaking research report, entitled "No Small Fees: LA Spends More on Wall Street than Our Streets," revealing that Wall Street charges the City of Los Angeles more than $200  million in fees. Coalition members called for action to reduce the high fees and put that money back into neighborhood services. After the rally, Fix LA Coalition members delivered the report to elected officials in City Hall.

In addition LA like a lot of cities that have gone bankrupt (Birmingham, Alabama for instance) has been snookered into interest rate swaps that end up costing much more money than  if they had kept the original loan at the original rate. Then to get out of these toxic deals, they have to pay a substantial "termination fee."

Lisa Cody, SEIU 721 Research Analyst and report co-author stated: "Based on what we know, there are some concrete steps we can take to save LA millions. For example, we can start with Mellon Bank to renegotiate a 'swap' deal that was supposed to save the city money, but is instead costing LA almost $5 million a year. To fix this toxic deal, the bank wants $24 million more in fees. In 2012, NY Mellon charged the city $26 million in termination fees for another swap they had sold us that turned out to be a terrible deal for LA." 

LA is not the first and probably won't be the last to be tricked into engaging in a fancy derivative deal that was way over the heads of the city employees that were talked into it by Wall Street hit men. If they had formed their own Public Bank of Los Angeles, they could not only have avoided being ripped off, but they could have actually made money and then be in a position to fix all those potholes they've been screaming about. And they could have created their own money supply the way Wall Street does it: fractional reserve banking.

In August 2014 the Fix LA coalition released the following statement:

Los Angeles Becomes Largest U.S. City to Take Action on Toxic Bank Deals; Unanimous Vote Requires City to Renegotiate or Terminate Multi-Million Dollar Interest Rate Rip-Off on Behalf of Taxpayers

Unanimous City Council vote sends strong message to Bank of NY Mellon, Wall Street: LA is not your ATM

The Los Angeles City Council voted 14-0 Wednesday to renegotiate or terminate without penalty a toxic swap deal the City entered into with two Wall Street banks, Bank of New York Mellon and Dexia. The measure, advanced by Fix LA, a coalition of clergy, unions and community groups aligned to restore city services and expand middle class jobs in the public sector, could save the City as much as $138 million. The International Business Times, noting the significance, reported that Los Angeles is now the largest city in the nation "to challenge ballooning Wall Street levies that accompany similar interest rate swap deals throughout the nation."

The motion further calls on the banks to return unfair profits and fees paid since 2008, estimated at more than $65 million to date. The deal costs taxpayers $4.9 million annually.

Los Angeles is now spending $290 million a year in financial fees or more than the entire city budget for maintaining its vast array of streets and highways. LA isn't the only sucker to enter into an interest rate swap in 2007 which was essentially a bet that interest rates would not fall below 2%. Then when the Federal Reserve, with its policy of QE, lowered interest rates to zero, LA and many other jurisdictions found themselves on the wrong end of a bet and were forced to shell out much more than they would have if they had kept the interest rate on the original loan.

The next sucker: Puerto Rico.  Puerto Rico ran itself into debt and then tried to make up for it with interest rate swaps. Recent credit downgrades allowed Wall Street to demand hundreds of millions more in short-term lending fees, credit-default-swap termination fees, and higher interest rates. Between 2012 and 2014, Puerto Rico paid nearly $640 billion to terminate swaps in addition to $12 million annual swap payments. As a result Puerto Rico is in the same situation as Greece - borrowing money in order to make debt payments which is the same as borrowing money on one credit card to make the payments on another.

The Chicago Public School Teachers' Pension and Retirement Fund has brought suit against 10 of Wall Street's biggest banks including Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America for colluding to prevent the trading of interest rate swaps with the result that it cost the Fund more money.

I could go on ... about Birmingham, San Bernadino, Stockton and others ... but I won't.

If these jurisdictions - whether they be cities, counties or states - formed public banks as the state of North Dakota did, there would be no outflow of cash to Wall Street. Money would stay at the local level and could be used to support local businesses and create jobs repairing and building infrastructure.

An Infrastructure Bank Would Mean Good Jobs in a Much Needed Enterprise

If the government creates money and puts it in an infrastructure bank, that money would be spent into the economy by creating jobs to build and repair infrastructure. Thus good jobs would be created at the low and middle parts of the economic spectrum. This money would have a multiplier effect as the job holders would spend their paychecks on the necessities and luxuries of life. American GDP is based on 70% consumer spending so that would go up. Thus the democratically elected government - not private banks - would be in charge of creating the money supply and it would be to the advantage of average workers not high end financiers. Since the big banks are the current recipients of the QE largesse, that money goes into the pockets of billionaires in various ways and drives wealth and income inequality.

Or the government, instead of the private Wall Street banks, could create money itself directly and inject it into the economy in a variety of ways as Abraham Lincoln did when he had the American government create and spend greenbacks into the economy. This money, therefore, does not create debt as money created by private banks and loaned into the economy does. It's a bottom up rather than a trickle down method. Problem is that most money created today does not trickle down into the real economy.

Ellen Brown says in Time for the Nuclear Option: Raining Money on Main Street:

Australian blogger Prof. Bill Mitchell agrees that PQE is economically sound. But he says it should not be called “quantitative easing.” QE is just an asset swap – cash for federal securities or mortgage-backed securities on bank balance sheets. What Corbyn is proposing is actually Overt Money Financing (OMF) – injecting money directly into the economy.

Mitchell acknowledges that OMF is a taboo concept in mainstream economics. Allegedly, this is because it would lead to hyperinflation. But the real reasons, he says, are that:

It cuts out the private sector bond traders from their dose of corporate welfare which unlike other forms of welfare like sickness and unemployment benefits etc. has made the recipients rich in the extreme. . . .

It takes away the ‘debt monkey’ that is used to clobber governments that seek to run larger fiscal deficits.

So the government could just create money and inject it into the economy in one of two ways: directly to the people in the form of a basic guaranteed income or through an infrastructure bank that creates jobs. In the first instance money would be transferred directly to people to bolster consumption. In the second case jobs would be created that would get needed work done. Or a combination of both could be used.

A third way of reducing income inequality would be to redistribute money from the 1% to the 99% through the tax code. This is the method that Bernie Sanders advocates. Taxes on wealth and financial transactions would provide additional monies which could be  transferred to the 99% through social programs such as Medicare-For-All, or it could be given directly in terms of a deposit to checking accounts as was done in the Economic Stimulus Act of 2008. Money was deducted from tax liabilities or deposited directly to American citizens.

 

The Concept of a Basic Guaranteed Annual Income

The concept of a Basic Income in the U.S. goes back to Thomas Paine, one of the driving forces for independence and reducing inequality during the American Revolution. More recently, it’s been supported by very non-liberal individuals like Fredrick Hayek, Milton Friedman, and Richard Nixon. This would eliminate poverty in one fell swoop. All the anti-poverty programs could be rolled into one with much fewer administrative costs. Just as Medicare-For-All would simplify and reduce medical costs, a basic guaranteed income would amount to Social-Security-For-All. The state of Alaska already has such a program called the Alaska Permanent Fund which hands out money to each resident on an annual basis. In 2015 each man, woman and child received $2,072.00. For a family of four that was a nice basic income of approximately $8000. Sweet!

In the Netherlands a number of cities are experimenting with a basic income after the city of Utrecht announced that it would give no-strings-attached money to some of its residents. Tilburg, a city of 200,000 inhabitants close to the border with Belgium, will follow Utrecht’s initiative, and the cities of Groningen, Maastricht, Gouda, Enschede, Nijmegen and Wageningen are also considering it. A recent study conducted in 18 European countries concluded that generous welfare benefits make people likely to want to work more, not less.

In Switzerland, the necessary 100,000 signatures have been obtained for holding a referendum on whether Swiss citizens should receive an unconditional basic income of €2,500 per month, independently of whether they are employed or not. Other countries such as Finland and Catalonia are also moving in the direction of a no-strings-attached guaranteed income. This would do more to reduce inequality and poverty than perhaps any other measure.

According to The Dutch “basic income” experiment is expanding across multiple cities:

If Tilburg’s basic income project gets the green light from Netherland’s state secretary of social affairs, the town will provide an extra paycheck to a pilot group of 250 people starting in January 2016, Tillburg officials said. The city has not confirmed the amount of the stipend, but in Utrecht checks will range from around €900 ($1,000) for one adult to €1,300 ($1,450).

Although the classic basic income theory proposes universal payments across the population, the two Dutch experiments will only focus on residents who are already recipients of social assistance. Those in the program will be exempt from the severe job-seeking requirements and penalties in Dutch law.

Authorities aim to test how citizens react without that sword of Damocles over their heads. Will the money encourage them to find a job or will they sit on their couches comfortably?

A guaranteed income could be means tested. Why not? Rich people don't need an extra $1000. a month. It would reduce poverty, increase consumption and bolster GDP. Rich corporations would probably increase the price of staples as people had more money to buy them causing inflation. That's why the behemoth world wide franchise operations need to be broken up so they don't collude to raise prices on staples thus defeating the purpose of the basic income. With fiat money entering the real economy instead of the billionaire economy, inflation could become a concern.

Hyperinflation is always a concern when fiat money is created. When that money is spent by consumers, it will still wind up in the hands of a few major corporations, and that would be a problem. They could just keep raising prices. That's why breaking up those large behemoths by using the Sherman Anti-Trust Act is important. Money can also be pulled back by the government by taxation if inflation threatens to get out of hand.

As Ellen Brown says: "Thus there are many ways to recycle an issue of new money back to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply."

However, when fiat money ends up in the pockets of billionaires as has been the case with QE, inflation is not a concern because it doesn't enter the real economy and prices don't rise. Income inequality though becomes a major concern as does the influence of big money on the political system. Billionaire money has bought and paid for the political system through lobbying and campaign donations with the result that the US is effectively no longer a democracy but a plutocracy.

Trickle Down Economics Trickles Up Instead

As the article The Case for Universal Basic Income states:

What’s really scary is the general acceptance of a status quo in which most people are getting poorer and poorer, even while recent studies demonstrate that so-called “trickle-down” economics actually means an upwards flow of income until it stagnates as hoarded wealth. This stymies wealth creation in the economy, as the Institute for Policy Studies concluded after using standard economic multiplier models to show that every extra dollar paid to low-wage workers adds about $1.21 to the US economy. If this dollar went to a high-wage worker it would add only 39 cents to GDP. In other words, if the $26.7 billion paid in bonuses to Wall Street punters in 2013 had gone to poor workers, GDP would have risen by some $32.3 billion. ...

One of the main advantages of a universal basic income is that it would free people from the tyranny of the job market in which they are mere commodities by guaranteeing the most basic human right of all, that of material existence.

With inequality increasing some way or ways must be found to redress the balance. The alternative is to wake up and find ourselves in a neo-feudal society controlled by a few behemoth corporations employing only a few high level people at good wages. The rest of the population would be employed in low level service type jobs and live in relative poverty. What money they had would be spent in the troughs of the giant corporations and end up in the pockets of the 1%. Even if the 99% were given money to spend, it would still end up there - in the pockets of a few. An infrastructure bank funded by government created fiat money would provide people with decent jobs in which workers could maintain a sense of dignity and improve the quality of the nation's infrastructure at the same time.

In addition recipients of a basic income should have to give something back in terms of creating a better life for poor people around the world. Instead of armies with guns and weapons which have cost trillions and produced mainly negative results, a Peace Army could help poor people around the globe attain at least a minimally acceptable lifestyle in terms of clean water and sanitation, adequate nutrition, energy and education.

Installing solar around the world will not only provide energy for people who don't have anything but the most primitive kind while cleaning up the environment at the same time. The commitment of rich nations to help poorer nations convert to renewable energy could be manifested by funding unemployed and underemployed Americans to help build such infrastructure around the world.

It's not good for people to be idle. If they have no other job, they should at least be required to perform community service. If they have another job so that the basic income is just a supplement, this would be the ideal situation.

Income inequality will only increase as long as Wall Street banks control the money creation process, and the rest of US citizens keep going into debt whether it be with mortgages, student loans, car loans or credit cards. Local jurisdictions should take back the money creation process from Wall Street by creating their own public banks. Then the people will have the say in who gets the QE.

Bernie Sanders, American Socialist

by John Lawrence from the San Diego Free Press

Bernie for President

Bernie Sanders has been drawing huge crowds to his rallies. The American media cannot ignore that. But they will never use the S word to describe Bernie even though that is how he describes himself. Bernie represents those who would tax Wall Street to preserve social security and a host of other common sense proposals. He dares to suggest that college should be free rather than the first stage of a life of indentured servitude and indebtedness.

People are listening - especially young people. Bernie has been saying these things for years but the media for the most part has been ignoring him. Now he has a bigger megaphone. His decision to run for President in order to get his message out there is paying off.

As Bernie himself has said: “the ideas and the points that we are making are reverberating very strongly with the American people.” Whoever would have thought that Bernie Sanders, Socialist, would be reverberating with the American people, the American people who love freedom and think that society should be set up in such a way that everybody has a chance, no matter how small, of getting rich?

On the other hand Bernie points out that social security is not in danger of running out of money. All you have to do is lift the cap and let rich people pay the same percentage of their income into it as do poor people. That is pretty reverberating if you can just get the message out. Bernie is getting the message out.

The media wants to call Bernie a "populist." Well, in this instance populism equals socialism. The notion that rich people should pay a higher percentage of their income in taxes as they did during the Eisenhauer administration, that there should be a tax on financial transactions and that taxes on the rich should support programs that aid the poor, is that populism or socialism, or both?

But then Americans have always been hypocritical about socialism. Even when they are enjoying the benefits from it, they don't want to acknowledge it. In an article in the New York Times, Socialism, American Style, Gar Alperovitz and Thomas M Hanna point out that socialism is a way of life in many American states including those that are considered "conservative." Only you can't call it that. That would not be politically correct.

Conservative Alaska is a Hotbed of Socialism

Take Alaska, for example. In this ultra conservative state there is a little socialist program known as The Alaska Permanent Fund. The Alaska Permanent Fund, established by a Republican governor in 1976, combines not one, but two socialist principles: public ownership and the provision of a basic income for all residents. The fund collects and invests proceeds from the extraction of oil and minerals in the state. Dividends are paid out annually to every man, woman and child in the state. Even Sarah Palin's family collects them.

This is from an article I wrote titled The Alaska Permanent Fund: Socialism in a Republican State:

Alaska is a land of rugged individualists - Republicans all the way. However, a little known fact is that Alaska taxes the oil and gas corporations operating there and distributes the proceeds on an annual basis equally among every man, woman and child living in the state. The biggest farce of all is that Tea Party touter, Governor Sarah Palin, slapped an excess profits tax on the state's oil companies in 2008, the year she ran for vice-President alongside John McCain, so that every person in Alaska received a dividend of $3269 that year. That was a pretty good haul for a family of four: $13,076. For Palin's family - husband Todd, sons Track and Trig and daughters Bristol, Willow and Piper - it came to an even better haul - $22,883!

We have also written about the Alaska Permanent Fund here. With global warming heating up the climate, more people will be moving to Alaska, not only in search of a moderate climate, but also to take advantage of the yearly stipend which might grow to the point that citizens of Alaska wouldn't have to work at all especially in view of the minerals that are becoming available due to the melting of the Arctic ice cap. Of course, that oil should stay in the ground if the earth has a chance of not warming up by 2 degrees C and causing widespread calamity.

Political correctness and hypocrisy demands that neither Palin nor any Republican politician mention the Alaska Permanent Fund nor any other socialist program from which money is taken from corporations and redistributed to the people. After all other states might get the idea that, if Alaska can do it, their state might be able to do the same thing. Well, in ultra conservative Texas, they've already figured that out: give lip service to conservative, rugged individualist principles while employing de facto socialist ones.

Texans Don't Mind Benefiting from a Socialist Policy

As Alperovitz and Hanna state:

Texas is another example of conservative socialism in practice. Almost 150 years ago the Texas Permanent School Fund took control of roughly half of all the land and associated mineral rights still in the public domain. In 1953, coastal “submerged lands” were added after being relinquished by the federal government. Each year distributions from the fund go to support education; in 2014 alone it gave $838.7 million to state schools. Another fund, the $17.5 billion Permanent University Fund, owns more than two million acres of land, the proceeds of which help underwrite the state’s public university system.

You'd think that Bernie Sanders would have plenty of supporters in Texas, namely all those who benefit from the Texas Permanent School Fund and Permanent University Fund, but instead they're all supporters of ultra conservative Governor Rick Perry, at least the majority consisting of white Texans are. Again lip service to conservatism while the actual reality they benefit from is socialism.

It's the same with Obamacare. All those southern conservatives who are benefiting from it love the reality while at the same time calling for its repeal. As a Washington Post article stated: "When the political history of the Affordable Care Act is written, Kentucky will occupy a special place in the tale. The implementation of the ACA there has helped produce the second steepest drop in the uninsured rate of any state. Yet even though that’s occurring in one of the most unhealthy regions in the country, the general idea of 'Obamacare' remains deeply unpopular."

Many countries employ the same principles, but without the hypocrisy. These funds are called sovereign wealth funds. Norway imposes a 50% tax on oil extraction which is put into its sovereign wealth fund which provides pensions and benefits for the Norwegian people. There's no talk there of "ending social security" because they don't have the money. Norwegians have plenty of money since they have profited from their co-owned public wealth in the form of oil extraction.

Only in America is there talk about the nonviability of social security. Most people don't even realize that if the rich paid into social security at the same rate as the poor, social security would be overfunded not underfunded and senior citizens could get a nice raise especially the needy ones.

Frank Thomas has written knowledgeably about Norway's sovereign wealth fund here:

The sovereign wealth fund in which Norway saves its oil-gas income is invested internationally primarily in stocks, bonds, and, starting recently, real estate. The strict primary goal is to save for future generations, when hydrocarbons run out.  Investing abroad also helps to avoid overheating the Norwegian economy. In 2009, the fund advanced 34% to recover most of the bubble losses.The fund now owns more than 1% of the world’s shares in over 8000 companies. It is Europe’s biggest equity investor. Strategically, the fund takes a 30 year investment horizon. Thus, not surprisingly,the fund is  currently investing aggressively in green industries. Helped by the past 30 year petroleum revenues that have been well-invested, Norway has become the 2nd richest nation per capita.

What if California Had Invested in a Sovereign Wealth Fund?

What if California would have taken control of its oil and gas revenues and invested in a sovereign wealth fund? There would be no budget problems today and there would be plenty of money to invest in infrastructure like desalination plants. California would have had the money to deal with its water shortage problems. Instead it became a debt based economy owing what amounts to a mortgage to Wall Street.

Another example: The Permanent Wyoming Mineral Trust Fund, with a market value of more than $7 billion accumulated from mineral extraction, has helped to eliminate income taxes in the state. The basic principle is that the mineral resources of the state belong to the citizens of that state not some private corporation. The idea is that the state should endeavor to enter into a relationship that adequately compensates the citizens for the extraction of their property.

One of the largest “socialist” enterprises in the nation is the Tennessee Valley Authority, a publicly owned company with $11 billion in sales revenue, nine million customers and 11,260 employees that produces electricity and helps manage the Tennessee River system. It seems that some socialist enterprises are not only very successful but are also very popular with the citizens who collectively profit from such enterprises.

Another example is publicly owned utilities. There are, in fact, already more than 2,000 publicly owned electric utilities that, along with cooperatives, supply more than 25 percent of the country’s electricity, now operating throughout the United States. In one of the most conservative states, Nebraska, every single resident and business receives electricity from publicly owned utilities, cooperatives or public power districts. Partly as a result, Nebraskans pay one of the lowest rates for electricity in the nation.

Perhaps the best example of public ownership or socialism, if you will, is the Public Bank of North Dakota (BND). Instead of shipping money to Wall Street, North Dakota uses the profits from its state owned bank to reduce taxes, invest in infrastructure and provide reasonable student loans. Many cities, counties and states are waking up to the fact that the profits that have heretofore been reaped by Wall Street from operations in their states should instead be reinvested in the state or public entity itself. The BND is serving as an example for them to follow. Private profit that goes into out of state investors' pockets is replaced by public profit which benefits citizens locally whether in a state or a city or other public entity.

The American People Should Derive Part of their Income From Public Wealth

As I said in the aforementioned article: Rich people live off of dividends, rent or interest paid to them in one form or other from their accumulated wealth. Public wealth is owned by the citizens of the US collectively. To receive a dividend from their co-owned wealth would tend to ameliorate the growing inequality of wealth ownership in the US and supplement poor and middle class incomes. Every citizen should be in a position of deriving at least a part of their income from co-owned wealth, especially since income from jobs is going downhill due to automation and outsourcing. This would eliminate poverty, provide a basic income guarantee, stimulate the economic system from the bottom up and restore the middle class.

The US is a debt based country which by virtue of the dollar's place as the world's reserve currency can continue to go into debt. Most other countries don't have this luxury so they start sovereign wealth funds which invest in American debt among other things so that their citizens are in the position of being investors while American citizens are essentially debtors for whom the chickens have not yet come home to roost.

Bernie Sanders' message is starting to make good sense to thousands of American people who are fed up with the BS Republicans have been feeding them. They are listening to Bernie, Elizabeth Warren, the Pope and the Dalai Lama and beginning to take seriously the facts of climate change, free public education up to the university level, Medicare for all and a beefed up social security program. Ownership of wealth and assets should not be only for the rich. Socialism provides that public wealth shall be redistributed to the poor and middle class as well.

Buy Now Pay Later: How San Diego School Districts Were Hoodwinked by Wall Street

by John Lawrence

In 2009 then Governor Arnold Schwarzenegger signed into law AB 1388 which eliminated prudent controls over how much debt school districts could enter into. Wall Street bankers then swarmed all over the state promoting Capital Appreciation Bonds (CABs), the equivalent of payday loans for school districts. One fantastic advantage of these loans was the "buy now, pay later" aspect. School districts could get their money now and not have to raise taxes on current residents. Easy money. There would not have to be any payments made for 20 years. Current residents would be off the hook. But their children and grandchildren would enter an era of crushing debt when the bill became due. And Wall Street is patient, very patient.

The ticking time bomb could cause crushing property tax increases for later generations or even bankruptcies by municipal governments. For example, San Diego County’s Poway Unified will have to pay $982 million for a $105 million CAB it issued. Poway has a payback ratio of $9.35 paid for every $1 borrowed. The final payout will be almost $1 billion. This is payday lending for school districts. They end up with shiny new auditoriums and gymnasiums but then the same old cramped classes and underpaid teachers since CABs only apply to capital improvements, not current expenses.

According to Ellen Brown:

Then-State Treasurer Bill Lockyer called the bonds “debt for the next generation.” But some economists argue that it is a transfer of wealth, not between generations, but between classes – from the poor to the rich. Capital investments were once funded with property taxes, particularly those paid by wealthy homeowners and corporations. But California’s property tax receipts were slashed by Proposition 13 and the housing crisis, forcing school costs to be borne by middle-class households and the students themselves.

Buy now, pay later is an old marketing ploy attributable to every commercial enterprise from furniture stores to car salesmen. Nothing down, no payments till 20 whatever. Now school districts have been suckered by easy money and Wall Street salesmen eager to cash in on the public's aversion to tax increases, but, nevertheless, wanting it all -NOW.

Poway won't have to start paying on its loan for 20 years. That payment will be a little more than $30 million, $24 million of which is interest. That should let most of the principals who entered into this disastrous decision off the hook. They will be long forgotten having left a legacy of crushing debt for their children to pay off. After the first payment Poway taxpayers will have to pay for the next 19 years - until 2051 - about $50 million per year essentially paying off their initial loan every two years for the next two decades.

In a September 2013 op-ed in SFGate.com called “School Bonds Are a Wall Street Scam,” attorney Nanci Nishimura wrote:

Unlike conventional bonds that have to be paid off on a regular basis, the bonds approved in AB1388 relaxed regulatory safeguards and allowed them to be paid back 25 to 40 years in the future. The problem is that from the time the bonds are issued until payment is due, interest accrues and compounds at exorbitant rates, requiring a balloon payment in the millions of dollars.

Wall Street exploited the school boards’ lack of business acumen and proposed the bonds as blank checks written against taxpayers’ pocketbooks. One school administrator described a Wall Street meeting to discuss the system as like “swimming with the big sharks.”

Wall Street has preyed on these school boards because of the millions of dollars in commissions. Banks, financial advisers and credit rating firms have billed California public entities almost $400 million since 2007.

Poway Unified is not the only San Diego school district that has been lured by the promise of shiny new facilities and no payments for 20 years. Vista Del Mar Elementary is the newest school in the San Ysidro School District. It got the school virtually for free using CABs. The district won’t have to make any payments on its CAB for three decades. But starting in 2041 the district will pay, on average, almost the full cost of Vista Del Mar each year for a decade. By 2050, the San Ysidro School District will have paid out $228.9 million, almost $15 for every $1 the district borrowed. From 2041 to 2050, the district will pay, on average, $22.9 million each year.

According to inewsource, Santee School District issued the most expensive capital appreciation bond in San Diego County and the fourth most expensive in California in 2011. Its payback ratio beats San Ysidro’s at $16.57 to $1. The district got $3.5 million from that bond, and by 2051 will pay back $58.6 million.

If these school districts cannot pay when their free money time is up and the bill becomes due, public school districts could be sold off to private investors. The conservatives' wet dreams of privatizing everything could become a reality. After all it was the stupidity of the democratic system of elected school board members which will have gotten them into such difficulty. Hedge fund managers wouldn't have been so stupid and out of touch with financial reality.

What could have happened is that the Federal Reserve could have made low interest loans available to municipalities and school districts, the way it did for GM and AIG during the 2008 financial crisis. But by charter the Fed can only make them available to banks. After all the Fed is owned by the large Wall Street banks and it serves their interests. By keeping money and debt creation in the hands of Wall Street, the Fed guarantees that Wall Street will continue to reap exorbitant profits while the rest of us labor under increasing debt.

There is a better way for school districts to borrow money. Take the state of North Dakota for example. One might think that North Dakota can afford to spend money on schools because of the oil boom there, but that would be wrong.

Ellen Brown assesses the matter correctly:

One thing that does single the state out is that North Dakota alone has its own depository bank. The state-owned Bank of North Dakota (BND) was making 1% loans to school districts even in December 2014, when global oil prices had dropped by half. That month, the BND granted a $10 million construction loan to McKenzie County Public School No. 1, at an interest rate of 1% payable over 20 years. Over the life of the loan, that works out to $.20 in simple interest or $.22 in compound interest for every $1 borrowed. Compare that to the $15 owed for every dollar borrowed by Anaheim’s Savanna School District or the $10 owed for every dollar borrowed by Santa Ana Unified.

How can the BND afford to make these very low interest loans and still turn a profit? The answer is that its costs are very low. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; pays no dividends to private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesale bank that partners with local banks, which find the borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives. Unlike the vampire squids of Wall Street, it is not motivated to maximize its bottom line in a predatory way. Its mandate is simply to serve the public interest.

No exorbitantly paid executives with million dollar bonuses? But that isn't the capitalist way, you say. A bank set up to serve the people instead of the pursuit of private profit? Again, not the capitalist way. Doesn't that verge on socialism maybe even communism? Why isn't the GOP up in arms insisting that North Dakota be ostracized, maybe even booted out of the union unless they conform to capitalist principles. Oh well, we have a perfect example right here in the good old US of A of how a bank could be set up to serve the people instead of gouging the people. Instead of money sent to Wall Street, money could stay and generate interest right in the same state or municipality or even school or hospital district.

In fact there are movements afoot in many states to do just that. A Connecticut legislator is seeking a study of whether the state should create a publicly held bank as a way to provide a stable source of funding for various projects, among other potential benefits. State Rep. Susan Johnson proposed the bill, which is under deliberation by the Connecticut General Assembly's Banking Committee, co-chaired by Sen. Carlo Leone, D-Stamford. Johnson said she became interested in the concept of a public bank following the financial collapse of 2008 and 2009, when many consumers and business owners voiced frustration with banks for what they felt were restrictive credit policies.

Pennsylvania is doing the same. Across the nation, in Pennsylvania and more than two dozen state legislatures and city councils, a well organized effort is underway to create a new tool to insure sound municipal finances and economic development: the creation of public banks; to take hundreds of millions of taxpayer funds out of Wall Street banks, and put them to work locally with our community banks and credit unions for locally directed economic development and jobs creation. The Wall Street banks and their allies are not anxious for the competition for our deposits, and want to keep them to underwrite their speculation in derivatives and commodities.

Even Canada is considering going back to the debt free issuance of money for public benefit rather than private profit. A landmark Canadian federal appellate-court ruling could conceivably lead to the cancellation of Canada’s debt-based money system, and its repercussions are expected to be felt by central banks around the world. On December 12 of 2011, the Committee for Monetary and Economic Reform filed suit to legally restore the former arrangement wherein The Bank of Canada—which, unlike the United States Federal Reserve with respect to U.S. citizens, is owned by the people of Canada—would return to the monetary practices it followed from 1938 to 1974, under the Bank of Canada Act. During those years, the Canadian government borrowed money free of interest from the public Bank of Canada and made significant national progress.

In fact the movement for public banking is becoming so successful that the Big Wall Street banks are pushing back against this movement:

At the beginning of March [2015], responding to the impressive wave of state-level public banking movements in the news, Mark Calabria of the Cato Institute wrote a template that became two different published OpEds. The Denver Post titled Calabria’s piece “Colorado would be wise to reject state-owned banking,” while American Banker titled the piece “Promises of Public Banks Don't Match Reality.” The wording differs in the two pieces, but the message points are the same. In the course of delivering those points, Mr. Calabria distorts other scholars’ published research, gets some historical anecdotes wrong, and plays on tired old fears of “government control” while glossing over the rampant, widespread corruption of Wall Street banking.

Although ostensibly associated with libertarian thought, Cato really argues in the interests of its supporters, who, in addition to the Koch family, include American Express, Chase Manhattan, CME Group, and Citicorp/Citibank. Mr. Calabria does not disclose Cato’s or his own financial interest in maintaining those corporations’ business, which might well be undercut by the success of both public and community banks. These are not “libertarian” interests in the sense of being genuinely committed to local control or even qualitatively less regulation. These companies know that regulatory systems covering powerful private banks are easier to game, and the rewards are big for those who can play the system. Public banks are regulated too, but their structurally limited power and absolute transparency create substantially fewer incentives for corruption. That Mr. Calabria can’t find any anecdotes of corruption from a currently existing public bank nearing 100 years of age (the Bank of North Dakota) is more informative than his Bill and Ted-style trip through history.

Why doesn't San Diego get with the public banking movement? It could have prevented Poway, Santee and San Ysidro among others from being sucked into CABs by Wall Street. Those municipalities now face devastating property tax increases 20 years from now. Until then all is well. It always is until you actually go over the edge of a cliff. Instead of the money leaving San Diego and migrating to Wall Street where it will become grist for the derivatives mill, where hedge fund managers will bet against those school districts and others ever being able to pay it back, the money could have been deposited right here and been made to serve the public rather than private interests.

As it turns out there is a movement afoot to form a public bank in San Diego. Ian Mackenzie is a member of the nationally recognized Public Banking Institute (PBI) (www.publicbankinginstitute.org) a non-profit, nonpartisan public policy organization, engaged in campaigns of public education through the New Economy Academy to create a new economy with public banks at the state, county and city levels. Ian is presently forming a PBI San Diego Chapter and looking for people who want to join the movement. Parties interested in joining with Ian to promote public banking in San Diego can contact him at ianmackenzie24@gmail.com.

 

HSBC: A Criminal Enterprise Too Big To Jail

by John Lawrence

The bank, HSBC, has been involved in criminal enterprises from dealing with terrorists and drug dealers to advising clients how to escape paying taxes. Yet no HSBC banker has gone to jail. Dealing with drug dealers is nothing new for HSBC also know as the Hong Kong and Shanghai Banking Corporation. They have always been associated with drugs. Founded in 1865, HSBC became the major commercial bank in colonial China after the conclusion of the Second Opium War. That's the war in which European powers forced the Chinese to legalize the drug trade.

If you or I got caught with a few stems or seeds of marijuana, we would go to jail. HSBC laundered money for the Sinaloa drug cartel, but yet they had to pay only a small fine and got off the hook. The fine, $1.9 billion, is about five weeks of income for the bank. Their executives had to partially defer their bonuses as well. This made some publications such as Rolling Stone apoplectic with rage:

And not only did they sell out to drug dealers, they sold out cheap. You'll hear bragging this week by the Obama administration that they wrested a record penalty from HSBC, but it's a joke. Some of the penalties involved will literally make you laugh out loud. This is from [Assistant Attorney General] Lanny Breuer's announcement:

As a result of the government's investigation, HSBC has . . . "clawed back" deferred compensation bonuses given to some of its most senior U.S. anti-money laundering and compliance officers, and agreed to partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.

Wow. So the executives who spent a decade laundering billions of dollars will have to partially defer their bonuses during the five-year deferred prosecution agreement? Are you fucking kidding me? That's the punishment? The government's negotiators couldn't hold firm on forcing HSBC officials to completely wait to receive their ill-gotten bonuses? They had to settle on making them "partially" wait? Every honest prosecutor in America has to be puking his guts out at such bargaining tactics. What was the Justice Department's opening offer – asking executives to restrict their Caribbean vacation time to nine weeks a year?

The Department of Justice said it didn't want to upset the international banking system. Well, they could have jailed just those individual bankers involved in the scam who later quit HSBC anyway, but it failed to do so. They just proved themselves to be the biggest hypocrites in the world capable of prosecuting the little guy for a fraction of the criminal activities HSBC was involved in, but unwilling to prosecute bankers who bought a plane for the cartel to smuggle drugs with.

Matt Taibbi reported in Rolling Stone:

The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks' profit – but they didn't extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.

The bank also moved money around for organizations and states that had official sanctions against them like Al Qaeda and Hezbollah. They helped countries like Iran, the Sudan and North Korea evade sanctions. And just to round out their criminal and gangster rap sheet they aided countless common tax cheats in hiding their cash.

"They violated every goddamn law in the book," says Jack Blum, an attorney and former Senate investigator. "They took every imaginable form of illegal and illicit business."

So why and how does HSBC get away with this stuff? It turns out that prosecutors thought that by punishing HSBC, they would pull down the whole world banking system. "Had the U.S. authorities decided to press criminal charges," said Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."

Yeah, sure. Believe that and I have a bridge in Brooklyn to sell you. Many of the individuals involved have left the company anyway and the institution has still survived. If it could survive without them, it could have survived without them while they were sitting in jail cells.

While no individuals at HSBC were punished, plenty of lowly everyday Janes and Johns have been. Two top executives of JM2 Auto Sales of Orlando, Florida, got 40 months and 72 months in jail after they sold the Sinaloa cartel two automobiles. They were convicted for money laundering.

In 2013, a Mississippi woman named Bridget Michelle Bland was sentenced to 60 months in prison for laundering drug proceeds by setting up a trucking company. In 2014, a California truck driver named Adolfo Pulido was sentenced to 50 months in prison for transporting $1.5 million in cash the old-fashioned way across the border from Mexico.

While these guys paid a stiff price, no one at HSBC spent a day in jail after they helped the Sinaloa cartel buy a plane which they used to fly drugs over the border. What's more is that $1 billion in cash was moved by HSBC from the cartel’s Mexican hometown of Culiacán to New York between 2006 and 2008.

Other people were prosecuted as tax cheats after they believed HSBC who had advised them about how to escape paying taxes. These cases would never have come to light except for the fact that there was a whistleblower - the "Edward Snowden of HSBC." While these clients and, as it turns out, dupes, of HSBC went to jail, no one at HSBC ever did.

The DOJ went after the little guys while letting the big fish off the hook. That's how they do business. DOJ aggressively prosecuted private citizens such as a New Jersey businessman who was lured into a tax scheme by HSBC and a Virginia doctor who sought to avoid paying taxes on money his deceased mother had stashed in a secret HSBC account in Switzerland.

HSBC and its executives were never so much as named in court papers and proceedings. Even as the doctor, Andrew Silva, pleaded guilty to tax evasion in June 2010, the government termed HSBC only as “the International Bank.” The DOJ is afraid to call a spade a spade even for a non-US bank. They could easily have revoked HSBC's US license, but, evidently, it is more important not to prosecute a foreign criminal bank than it is to prosecute - to the full extent of the law - low level US citizens.

According to the Daily Beast:

A New Jersey businessman named Sanjay Sethi also received probation after pleading guilty in June 2012 to a tax-evasion scheme that court papers say was conceived and proposed by HSBC—which again was named only as “the International Bank.”

The criminal complaint charges that the bank “marketed offshore banking services for U.S. citizens of Indian descent,” encouraging them “to open undeclared bank accounts in India.”

Sethi opened such an account in India in 2001. He received a call the following year from someone identified in the complaint as U.S. Banker A, a senior vice president at the New York office of the International Bank.

U.S. Banker A allegedly set up a meeting between Sethi and someone identified as U.K. Banker A, a London-based “high-ranking executive of the International Bank” who headed a division “focused on developing and serving clients worldwide with ties to countries in south Asia.”

Not long afterward, Sethi met with U.K. Banker A in the International Bank’s New York offices and discussed opening another undeclared account, this one in Switzerland.

“U.K. Banker A told Sethi that the undeclared account would allow Sethi’s assets to grow tax-free and that the bank secrecy laws in Switzerland would allow Sethi to conceal the existence of the account,” the complaint says.

Sethi proceeded to stash $3.4 million in an HSBC account in Switzerland. Neither he nor the bank could have foreseen that an HSBC computer analyst turned whistleblower in Switzerland would hack into the bank’s computers in 2008.

HSBC is clearly an outlaw, criminal, renegade institution and not even an American one, but the Justice Department under Eric Holder was a bunch of fools who couldn't even correctly assess who and what to prosecute. Their only consideration is that by prosecuting some individuals, the whole world wide banking system would collapse. This is sheer and patent nonsense to anyone who has any inkling of common sense or rationality concerning the banking system.

The DOJ probe which resulted in criminal information against HSBC was signed by the U.S. attorney for the Eastern District, Loretta Lynch, who is now the nominee to become the next attorney general. So it looks like we're in store for more of the same mealy mouthed DOJ prosecutions - get the little guy, let the big guy go. That is if Loretta Lynch can ever get herself confirmed. She's been waiting for over four months while Republicans do everything they can to gum up the works for an Obama appointee. A top Senate Democrat accused Republican leadership of treating the would-be first African-American woman attorney general like a second-class citizen, having to wait at the back of the bus. Lynch has waited longer for a vote in the full Senate than the past five nominees to the post combined.

Outgoing Attorney General Eric Holder said: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” Holder will go down as an aider and abettor of criminal institutions such as HSBC while presiding over prosecuting little guys to the max.

Holder will leave office with a perfect record of not having busted a single senior banker. Will Loretta Lynch do the same or will she try to prove that the office of the AG has some real teeth to it?

Senator Elizabeth Warren was notably outraged when she found out about the Deferred Prosecution Agreement. “The new allegations that HSBC colluded to help wealthy people and rich corporations hide money and avoid taxes are very serious, and, if true, the Department of Justice should reconsider the earlier deferred prosecution agreement it entered into with HSBC and prosecute the new violations to the full extent of the law,” she said.

The Bail-In: How You and Your Money Will Be Parted During the Next Banking Crisis

by John Lawrence

There will be no more taxpayer bailouts for the Big Wall Street banks. That much has been established by the lobbied to death Dodd-Frank banking reform (yeah, right) bill. However, instead of taking money from the government (taxpayers), the principal has been established that the next source of money for profligate banks will be your deposit accounts. Yeah, that's right, the money to stabilize the banking sector during the next crisis will come out of your savings and checking accounts. To add insult to injury - since the banks pay you zero percent on your savings account in the first place - the banks have the right to confiscate your funds if they crash the economy again as they did in 2008. Remember the Great Recession? It's coming again to a bank near you.

How can they do this, you ask? Simple. When you deposit money in a checking or savings account, that money no longer belongs to you. Technically and legally, it becomes the property of the bank, and the bank just issues you what amounts to an IOU. As far as the bank is concerned, it's an unsecured debt. The way Dodd-Frank has managed to screw things around, derivatives (bets banks have made in the Wall Street casino) have priority over your checking and savings accounts when it comes to paying off their debts. And don't think that the FDIC (Federal Deposit Insurance Corporation) will save your money. The assets of the FDIC are miniscule (in the billions) compared to the valuation of outstanding derivatives (in the trillions). Your deposits are protected only up to the $250,000 insurance limit, and also only to the extent that the FDIC has the money to cover deposit claims or can come up with it.

Ellen Brown asks, "What happens when Bank of America or JPMorganChase, which have commingled their massive derivatives casinos with their depositary arms, is propelled into bankruptcy by a major derivatives fiasco?  These two banks both have deposits exceeding $1 trillion, and they both have derivatives books with notional values exceeding the GDP of the world." The answer is a Cypress style bail-in. You might recall that money was taken out of depositor's accounts during the last banking crisis in Cypress. These depositors were mainly Russian oligarchs so what the heck. Now this principle has been extended to depositors in the big Wall Street banks and actually to depositors all over the world. Now is a good time to take your money out of banks such as Bank of America, JPMorgan Chase and Citibank and deposit it in smaller banks or credit unions. Otherwise, $1 trillion of depositors' funds could go bye-bye, and that's not small change.

Ellen Brown elucidates:

According to an International Monetary Fund paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”:

[B]ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.

The language is a bit obscure, but here are some points to note:

• What was formerly called a “bankruptcy” is now a “resolution proceeding.” The bank’s insolvency is “resolved” by the neat trick of turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual.
• “Unsecured debt” includes deposits, the largest class of unsecured debt of any bank. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings.
• The power is statutory. Cyprus-style confiscations are to become the law.
• Rather than having their assets sold off and closing their doors, as happens to lesser bankrupt businesses in a capitalist economy, “zombie” banks are to be kept alive and open for business at all costs – and the costs are again to be borne by us.

So as far as you, the depositor, are concerned, your money in checking and savings accounts is the bank's "unsecured debt." You will have to stand in line behind trillions of dollars of derivative payouts before your checking and savings accounts will be made whole. Both the Bankruptcy Reform Act of 2005 and the Dodd Frank Act provide special protections for derivative counterparties, giving them the legal right to demand collateral to cover losses in the event of insolvency. They get first dibs, even before the secured deposits of state and local governments. Your chances of recovering your money are about as great as the chances of a snowball in hell.

Since most poor and middle class people have a major portion of their assets in checking and savings accounts while rich people have the major portion in real estate, stocks and bonds, who do you think will be most affected by bail-ins? You guessed it: the poor and middle class will be hit the hardest. And don't think your money will be safe in a bank's safe deposit box. The banks have the right to go into your safe deposit box and take your money out of it.

Pension funds, which were the biggest suckers for Wall Street during the last banking crisis, will also be drained by Wall Street during the next one. Their funds will be subject to confiscation as bail-ins as well since many of the bonds they purchase are subject to being converted to bail-inable deposits if the banks really need the money which they no doubt will sooner or later when the derivatives bubble goes bust.

So taxpayers you can sleep soundly as taxpayer bail-outs have been taken off the table in the next banking crisis. Whew, that's a relief. But if your savings get taken over by the bank, ouch, that'll hurt even more than a widely distributed taxpayer bail-out which might add a couple of dollars to your income tax. Be careful of what you wish for. It could be even worse than what you already had.

There is a better way. Let the zombie banks go bankrupt instead of confiscating depositor funds. A better way is to create public banks and transfer funds from Wall Street. Then the gambling casino with all the attendant risks for bail-outs and bail-ins comes to an abrupt halt. Profits go to the local community or to the state in the case of North Dakota, the nations's first and oldest public bank..

On a personal note, a representative of my bank, Union Bank, called me a few weeks ago to inform me that I was only allowed five debits per month out of my savings account and that I had used up my five debits for December. So I would have to wait until January before I was allowed to take any more money out of my savings account. I was furious. "It's my money isn't it, and besides you call it a savings account. It gets zero interest." He kept repeating that I was only allowed five debits per month and said it was a Federal law.

Well, this means nothing because it's well known that all Federal banking regulations are written by lobbyists for the banking industry in the interests of the banking industry. I asked him what was the rationale for this regulation. He said, "The government doesn't want you to spend your money too fast." Hmmm. Since when does Big Brother have an interest in making sure I don't spend my money? I don't think so.

It probably has more to do with keeping your money in the bank so that the bank can meet its currency reserve requirements or possibly slow down the exodus of money from worthless savings accounts which pay no interest or even perhaps to confiscate your money for bail-ins during the next banking crisis at which time there will be undoubtedly a run on the banks 1930s style. Whoops, if you've already had your five debits, you won't be able to get your hands on your money before it's "bailed-in."

 

 

 

 

Russian Roulette: Taxpayers Could Be on the Hook for Trillions in Oil Derivatives

 

Noticed the drop in gas prices recently? Unfortunately, this is just an act of geopolitical warfare against Russia, which could lead to astronomical oil derivative losses.

Published: December 21, 2014 | Authors: Ellen Brown | Web of Debt | Op-Ed

The sudden dramatic collapse in the price of oil appears to be an act of geopolitical warfare against Russia. The result could be trillions of dollars in oil derivative losses; and the FDIC could be liable, following repeal of key portions of the Dodd-Frank Act last weekend.

Senator Elizabeth Warren charged Citigroup last week with “holding government funding hostage to ram through its government bailout provision.” At issue was a section in the omnibus budget bill repealing the Lincoln Amendment to the Dodd-Frank Act, which protected depositor funds by requiring the largest banks to push out a portion of their derivatives business into non-FDIC-insured subsidiaries.

Warren and Representative Maxine Waters came close to killing the spending bill because of this provision. But the tide turned, according to Waters, when not only Jamie Dimon, CEO of JPMorgan Chase, but President Obama himself lobbied lawmakers to vote for the bill.

It was not only a notable about-face for the president but represented an apparent shift in position for the banks. Before Jamie Dimon intervened, it had been reported that the bailout provision was not a big deal for the banks and that they were not lobbying heavily for it, because it covered only a small portion of their derivatives. As explained inTime:

The best argument for not freaking out about the repeal of the Lincoln Amendment is that it wasn’t nearly as strong as its drafters intended it to be. . . . [W]hile the Lincoln Amendment was intended to lasso all risky instruments, by the time all was said and done, it really only applied to about 5% of the derivatives activity of banks like Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, according to a 2012 Fitch report.

Quibbling over a mere 5% of the derivatives business sounds like much ado about nothing, but Jamie Dimon and the president evidently didn’t think so. Why?

A Closer Look at the Lincoln Amendment

The preamble to the Dodd-Frank Act claims “to protect the American taxpayer by ending bailouts.” But it does this through “bail-in”: authorizing “systemically important” too-big-to-fail banks to expropriate the assets of their creditors, including depositors. Under the Lincoln Amendment, however, FDIC-insured banks were not allowed to put depositor funds at risk for their bets on derivatives, with certain broad exceptions.

In an article posted on December 10th titled “Banks Get To Use Taxpayer Money For Derivative Speculation,” Chriss W. Street explained the amendment like this:

Starting in 2013, federally insured banks would be prohibited from directly engaging in derivative transactions not specifically hedging (1) lending risks, (2) interest rate volatility, and (3) cushion against credit defaults. The “push-out rule” sought to force banks to move their speculative trading into non-federally insured subsidiaries.

The Federal Reserve and Office of the Comptroller of the Currency in 2013 allowed a two-year delay on the condition that banks take steps to move swaps to subsidiaries that don’t benefit from federal deposit insurance or borrowing directly from the Fed.

The rule would have impacted the $280 trillion in derivatives primarily held by the “too-big-to-fail (TBTF) banks that include JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. Although 95% of TBTF derivative holdings are exempt as legitimate lending hedges, leveraging cheap money from the U.S. Federal Reserve into $10 trillion of derivative speculation is one of the TBTF banks’ most profitable business activities.

What was and was not included in the exemption was explained by Steve Shaefer in a June 2012 article in Forbes. According to Fitch Ratings, interest rate, currency, gold/silver, credit derivatives referencing investment-grade securities, and hedges were permissible activities within an insured depositary institution. Those not permitted included “equity, some credit and most commodity derivatives.” Schaefer wrote:

For Goldman Sachs and Morgan Stanley, the rule is almost a non-event, as they already conduct derivatives activity outside of their bank subsidiaries. (Which makes sense, since neither actually had commercial banking operations of any significant substance until converting into bank holding companies during the 2008 crisis).

The impact on Bank of America, Citigroup, JPMorgan Chase, and to a lesser extent, Wells Fargo, would be greater, but still rather middling, as the size and scope of the restricted activities is but a fraction of these firms’ overall derivative operations.

A fraction, but a critical fraction, as it included the banks’ bets on commodities. Five percent of $280 trillion is $14 trillion in derivatives exposure – close to the size of the existing federal debt. And as financial blogger Michael Snyder points out, $3.9 trillion of this speculation is on the price of commodities.

Among the banks’ most important commodities bets are oil derivatives. An oil derivative typically involves an oil producer who wants to lock in the price at a future date, and a counterparty – typically a bank – willing to pay that price in exchange for the opportunity to earn additional profits if the price goes above the contract rate. The downside is that the bank has to make up the loss if the price drops.

As Snyder observes, the recent drop in the price of oil by over $50 a barrel – a drop of nearly 50% since June – was completely unanticipated and outside the predictions covered by the banks’ computer models. The drop could cost the big banks trillions of dollars in losses. And with the repeal of the Lincoln Amendment, taxpayers could be picking up the bill.

When Markets Cannot Be Manipulated

Interest rate swaps compose 82% of the derivatives market. Interest rates are predictable and can be controlled, since the Federal Reserve sets the prime rate. The Fed’s mandate includes maintaining the stability of the banking system, which means protecting the interests of the largest banks. The Fed obliged after the 2008 credit crisis by dropping the prime rate nearly to zero, a major windfall for the derivatives banks – and a major loss for their counterparties, including state and local governments.

Manipulating markets anywhere is illegal – unless you are a central bank or a federal government, in which case you can apparently do it with impunity.

In this case, the shocking $50 drop in the price of oil was not due merely to the forces of supply and demand, which are predictable and can be hedged against. According to an article by Larry Elliott in the UK Guardian titled “Stakes Are High as US Plays the Oil Card Against Iran and Russia,” the unanticipated drop was an act of geopolitical warfare administered by the Saudis. History, he says, is repeating itself:

The fourfold increase in oil prices triggered by the embargo on exports organised by Saudi Arabia in response to the Yom Kippur war in 1973 showed how crude could be used as a diplomatic and economic weapon.

Now, says Elliott, the oil card is being played to force prices lower:

John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.

. . . [A]ccording to Middle East specialists, the Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria.

War on the Ruble

If the plan was to break the ruble, it worked. The ruble has dropped by more than 60%against the dollar since January.

On December 16th, the Russian central bank counterattacked by raising interest rates to 17% in order to stem “capital flight” – the dumping of rubles on the currency markets. Deposits are less likely to be withdrawn and exchanged for dollars if they are earning a high rate of return.

The move was also a short squeeze on the short sellers attempting to crash the ruble. Short sellers sell currency they don’t have, forcing down the price; then cover by buying at the lower price, pocketing the difference. But the short squeeze worked only briefly,as trading in the ruble was quickly suspended, allowing short sellers to cover their bets. Who has the power to shut down a currency exchange? One suspects that more than mere speculation was at work.

Protecting Our Money from Wall Street Gambling

The short sellers were saved, but the derivatives banks will still get killed if oil prices don’t go back up soon. At least they would have been killed before the bailout ban was lifted. Now, it seems, that burden could fall on depositors and taxpayers. Did the Obama administration make a deal with the big derivatives banks to save them from Kerry’s clandestine economic warfare at taxpayer expense?

Whatever happened behind closed doors, we the people could again be stuck with the tab. We will continue to be at the mercy of the biggest banks until depository banking is separated from speculative investment banking. Reinstating the Glass-Steagall Act is supported not only by Elizabeth Warren and others on the left but by prominent voices such as David Stockman’s on the right.

Another alternative for protecting our funds from Wall Street gambling can be done at the local level. Our state and local governments can establish publicly-owned banks; and our monies, public and private, can be moved into them.

Wall Street Criminals Walk Free After Inflicting Enormous Damage on American Citizens

by John Lawrence from the San Diego Free Press

Wall Street Fraud on a Massive Basis

In an article in Rolling Stone, Matt Taibbi lays out the case involving massive fraud on the part of JP Morgan Chase, one of Wall Street's biggest and unfinest banks, considered too big to fail and, evidently, too big to prosecute for the massive criminality it is guilty of. It has been well documented what they and other Wall Street banks did that caused the financial crisis of 2008.

First, their counterparts lured everyone with a beating heart into their offices and gave them a mortgage regardless of their credit score, regardless of whether or not they were working, regardless of whether they could even afford to make a mortgage payment. Countrywide is the prime example of the predatory recruitment of low income people in order to turn them into homeowners despite their inability to pay.

As soon as they had signed on the dotted line and Countrywide had collected their commissions, they offloaded the mortgages to JP Morgan Chase and others so that they could be collectivized with other mortgages, securitized and given triple A ratings by credit rating agencies like Standard and Poor's and Moody's, then sliced and diced into tranches and sold off as Collateralized Debt Obligations (CDOs) to pension funds, retirement funds, insurance companies and other unsuspecting dupes.

People who would have qualified for prime mortgages were pushed into subprime mortgages with all the attendant risks involved because larger commissions were given as incentives to mortgage brokers. Then JP Morgan insured themselves against losses by purchasing Credit Default Swaps (CDSs) from AIG whose purpose was ostensibly to insure the Big Banks against losses that they knew were coming because they knew the CDOs were complete crap. What brought down the whole financial mess was the fact that AIG did not have the money to pay off on the insurance policies when the whole structure started to come tumbling down. They owed JP Morgan Chase and particularly Goldman Sachs huge amounts of money that AIG didn't have.

So it was necessary for the taxpayer to step in and pay AIG money which it should have had backing up their worthless insurance policies so they could pay off Goldman and Chase monies that they were owed on the CDSs. Taxpayer money went to AIG and from there to Chase and Goldman. Meanwhile, Chase and Goldman were foreclosing on houses that Countrywide should never have written mortgages for at a rate to beat the band, actually a rate to beat 100 bands. The foreclosures were illegitimate because of the phony electronic records that had replaced the normal records that had been kept by counties because Wall Street did not want to pay the county recording fees. As a result there were enormous paperwork screwups with the result that in many cases no one could prove who was the legal owner of the properties. So Wall Street hired robo-signers - low level workers who didn't know shit from shinola - to sign documents testifying that the foreclosures were legitimate.

Regulators Asleep at the Switch

Regulators were clueless about the whole mess in part because they were in collusion with the banks and their lobbyists who held out the promise of much better paying jobs than they currently had with the Securities and Exchange Commission. Credit rating agencies rated pure crap as triple A because the banks were paying them for their services and they didn't want to lose business by rating the securities honestly.

Mortgages were foreclosed on after banks had supposedly worked out deals with homeowners to modify them so that payments could continue. In some cases people were foreclosed on that were current on their payments.

Unsuspecting investors were royally screwed by Wall Street. For instance, hedge fund manager John Paulson phoned up Goldman Sachs with an idea. He wanted to handpick the CDOs that would be placed in a new fund called ABACUS. Paulson selected the shittiest subprime mortgages he could find to put in the fund and paid Goldman a substantial fee (about $15 million) for their help in this atrocity. Then Goldman sold off the fund to unsuspecting investors. Meanwhile, Paulson shorted the fund which was designed by him to fail in the first place. When it did, Paulson pocketed $1 billion.

So the American public was screwed four ways to Sunday. 1) Most subprime mortgages, which violated prudent underwriting standards, never should have been written. 2) AIG should have been required by their worthless regulators to have sufficient collateral to pay off on its insurance policies with the big Wall Street banks. 3) Pension funds, retirement funds and other institutional investors were screwed because they were sold worthless junk passed off as triple A rated securities. 4) Taxpayers were screwed by having to bail out Wall Street to the tune of trillions of dollars while being foreclosed on right and left.

The Whistleblower That the Government Wouldn't Let Blow Her Whistle

Whistleblower Alayne Fleischman was an insider at Chase when it was taking part in criminal activities involving knowingly selling crappy funds to an unsuspecting public. Fleischman was akin to a diligence manager, someone who was supposed to verify that the mortgages placed in a fund were sufficient to justify the fund's rating. However, she found that her bosses and managers were condoning putting the crappiest mortgages in triple A rated funds, and they didn't want any back talk from her. Case in point: Fleischmann and her group were asked to evaluate a packet of home loans from a mortgage originator called GreenPoint that was collectively worth about $900 million. Fleischmann smelled a rat almost immediately. The dates on the mortgages were suspiciously old. Normally, mortgages are sold off and securitized at warp speed. These had sat around for awhile or been returmed by other banks who knew they were rotten.

These GreenPoint loans were the bottom of the barrel. Somethng, indeed, was rotten in Denmark or perhaps even closer to home on Wall Street. They reeked. They were not rated as subprime, but were instead sold off as Alt-A to investors who were duped. It was like putting a fresh coat of paint on a junk car and selling it off as top quality merchandise.  "Everything that I thought was bad at the time," Fleischmann says, "turned out to be a million times worse."

When Fleischmann and her team reviewed random samples of the loans, they found that around 40 percent of them were based on overstated incomes. For instance, there was a manicurist who stated her income as $117,000. There was no way on God's green earth that she possibly could have earned that much, but such liar loans were passed off so Chase could make hefty commissions. Fleischman was instructed to put nothing in writing; she could not even e-mail her superiors!

Taibbi reports:

As late as December 11th, 2006, diligence managers had marked a full 33 percent of one loan sample as "stated income unreasonable for profession," meaning that it was nearly inevitable that there would be a high number of defaults. Several high-ranking executives were copied on this report.

Fleischman approached her superiors about these obviously fraudulent securities. She told one that the bank could not sell the high-risk loans as low-risk securities without committing fraud. "You can't securitize these loans without special disclosure about what's wrong with them," Fleischmann told him, "and if you make that disclosure, no one will buy them."

But Chase went ahead and sold them anyway without disclosing how putrid they were. In early 2007, Fleischman sent a long letter to another managing director which warned of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase's diligence process. She assumed this letter would be enough to force the bank to stop selling the bad loans. But she understimated the depths of fraud that Chase would stoop to. A few months later Fleischman was laid off.

A few months before the GreenPoint deal, Chase CEO Jamie Dimon informed the media that he knew about some of the toxic loans circulating in the industry. But this didn't stop him from greenlighting the sale of the GreenPoint securities anyway. Then later when testifying before the Financial Crisis Inquiry Commission, he told investigators that he had been duped like everybody else. These guys were supposed to be the smartest wizards of the universe, but all of a sudden they were dumber then hell.

Chase Doubles Down on Fraud

But Chase continued to sell worthless securities:

A single lawsuit by a single angry litigant gives some insight. In 2011, Chase was sued over massive losses suffered by a group of credit unions. One of them had invested $135 million in one of the bank's mortgage--backed securities. About 40 percent of the loans in that deal came from the GreenPoint pool.

The lawsuit alleged that in just the first year, the security suffered $51 million in losses, nearly 50 times what had been projected. It's hard to say how much of that was due to the GreenPoint loans. But this was just one security, one year, and the losses were in the tens of millions. And Chase did deal after deal with the same methodology. So did most of the other banks. It's theft on a scale that blows the mind.

In 2012, President Obama, giving in to pressure from the Occupy movement and other reformers, had formed the Residential Mortgage-Backed Securities Working Group. This seemed like a serious show of force against banks like Chase. The group included noted anti-corruption investigator and New York Attorney General Eric Schneiderman, which gave many observers reason to hope that finally something would be done about the crimes that led to the crash. However, investigators at the highest level including Attorney General Eric Holder participated in a whitewash of Chase and gave them a little slap on the wrist without Chase having to admit anything regarding its criminal activities.

The following year, the SEC would fine Chase $297 million for misrepresentations in another deal. "The kid-gloves approach that the DOJ and the SEC take with Wall Street is as inexplicable as it is indefensible," said Dennis Kelleher of the financial reform group Better Markets, which would later file suit challenging the Chase settlement. "They typically charge only one offense when there are dozens. It would be like charging a serial murderer with a single assault and giving them probation.

In 2013 AG Eric Holder was scheduled to hold a press conference at which he would announce civil fraud charges against Chase. Before he could do so, however, CEO Jamie Dimon got on the phone with him and convinced him to open talks for a negotiated settlement for the situation which Holder agreed to. So a criminal calls the highest law enforcement official in the US and persuades him to agree to a negotiated settlement which subsequently amounted to a slap on the wrist with no admission of wrongdoing.

It goes without saying that the ordinary citizen who is the target of a government investigation cannot simply pick up the phone, call up the prosecutor in charge of his case and have a legal proceeding canceled. But Dimon did just that. "And he didn't just call the prosecutor, he called the prosecutor's boss," Fleischmann says. According to The New York Times, after Dimon had already offered $3 billion to settle the case and was turned down, he went to Holder's office and upped the offer, but apparently not by enough.

Fleischman was led to believe that she was the chief witness in the corruption case against Chase. But the fact was that she was being used by the government as motivation to get Jamie Dimon to up the amount he agreed to pay to settle the case. In fact Dimon upped the amount to $9 billion and Fleischman never got a chance to testify in court.

Jamie Dimon Comes Out Smelling Like a Rose

Newspapers announced erroneously that the "$13 billion" deal, which ended Chase's civil liability, was the largest white collar settlement in history, but Chase could still be gone after for criminal liability. It turned out that the government crackdown on Chase was a carefully contrived fiction. $4 billion of the deal was in "consumer relief" which Chase was not even responsible for paying. Chase was allowed to sign a short "statement of facts" which effectively whitewashed their entire involvement in fraud and criminality. The kicker was that some $7 billion dollars of the deal was allowed to be written off Chase's taxes because the settlement monies were not called fines or penalties. Duhhh. So the hapless American taxpayer effectively paid for Chase's crimes. Shortly after the deal was done, Chase announced their innocence.

Meanwhile, Fleischman was waiting to be interviewed by the goverment's criminal investigators. The meeting never happened. It seemed that a tacit part of the government's deal was that the case for criminal fraud would not be pursued.

Taibbi reports:

As Fleischmann was waiting for the Justice Department to call, Chase and its lawyers had been going to tremendous lengths to keep her muzzled. A number of major institutional investors had sued the bank in an effort to recover money lost in investing in Chase's fraud-ridden home loans. In October 2013, one of those investors – the Fort Worth Employees' Retirement Fund – asked a federal judge to force Chase to grant access to a series of current and former employees, including Fleischmann, whose status as a key cooperator in the federal investigation had made headlines in The Wall Street Journal and other major media outlets. 

Other investors sued to gain access to Fleischman and her inditement of Chase's top executives. In each case Chase did an end run to keep what Fleischman had to say out of the spotlight. Nevertheless, she has the proof for all the elements of the crime as defined by federal law – the bank made material misrepresentations, it made material omissions, and it did so willfully and with specific intent, consciously ignoring warnings from inside the firm and out.

Eric Holder in a speech hemmed and hawed about how you couldn't really blame any executive for the things that happened which blew up the economy. Responsibility was too diffuse, and besides is it worth really undermining the whole world's banking system to punish a few wrongdoers? I guess not because the government hasn't put one of them in jail. During the Savings & Loan crisis they prosecuted over 600 individuals, but now fraud is completely acceptable as long as it is done at a high enough level. But don't try stealing a few candy bars from 7-11; you'll surely go to jail. Matt Taibbi makes this point abundantly clear in his latest book, The Divide and as reported by us here.

Fleischman is still waiting for the opportunity to get what she saw and experienced off her chest even though she has no financial incentive for doing so. "The assumption they make is that I won't blow up my life to do it," Fleischmann says. "But they're wrong about that."

For an interview wth Alayne and Matt by Democracy Now!, check this out.

Lobbyists are also going after states' Attorney Generals and getting them to ignore the American people in favor of the banksters. This is from the New York Times, October 28, 2014:

Our leaders are self-congratulating after every new “settlement” the government reaches with the financial institutions – like they scored the biggest prize of their lives. The hypocrisy that they can claim to have executed justice over the banks, while not criminally prosecuting a single person who was responsible for the crimes that these multi-billion-dollar settlements are now addressing, is something we, as a nation, should not accept or forget.

The facts are clear: those who perpetrated enormous fraud are being let free with a small price tag to pay in compensation, while the victims of their crimes remain left out in the cold, many years later, without any rectification for their losses.

The National Mortgage Settlement was supposed to get $5 billion from the banks. In reality it only allocated $1.5 billion for compensation to homeowners who lost their homes to unlawful foreclosures between 2008-2011. The rest of the settlement money went to the states. Some states used this money to balance their budgets, and some, like Florida, used it to fund even more speedy foreclosures that gave homeowners no chance of due process in court.

Just a few days ago the media announced another fraud perpetrated by the big banks including JP Morgan Chase and Citibank and the obligatory slap on the wrist fines. This time it was rigging foreign exchange markets. Oh well, another day, another Wall Street fraud and no one jailed. Ho Hum.

BRICS Banking: A Break from Bailouts, Debt and Poverty?

by Christina Sarich

 

NationofChange       / News Report

 

Published: Monday 22 September 2014

 

Brazil, Russia, India, China, South Africa, etc. are trying to influence the world market and compete with the current American-European based central banking system. Isn’t it time for a new banking system?

The BRICS countries (Brazil, Russia, India, China, South Africa, etc.) with a few being singled out as demographically and economically roseate for their potential to influence the world market in the 21^st century are starting a $100 billion dollar bank to compete with the current American-European based central banking system, the International Monetary Fund (IMF) and the World Bank.

This is no small alliance. Together, just the four original BRIC countries comprise more than 2.8 billion people or 40 percent of the world’s population, and dominate more than a quarter of the world’s land area over three continents, as well as account for more than 25 percent of global GDP.

Liu Haifang, a professor at Peking University’s Center for African Studies, explains that the bank will provide developing countries with more options for financing:

“Finally they got some alternative sources to get funding for infrastructure and they do not come with these conditionalities. So it for me is very symbolic in terms of political meaning, it means the whole world order is not unipolar. It is not a west centered world. It is a multipolar world.  African countries trying to get funding do not have to only follow the rules of the developed world.”

President Vladimir Putin of Russia commented at the 6th BRICS summit in Fortaleza, Brazil:

“BRICS Bank will be one of the major multilateral development finance institutions in this world.”

It is obvious some other type of banking system is desperately needed. Devotion to the all-mighty-dollar has been the cause of bailouts almost too numerable to list. Consider the multi-billion dollar ‘deals’ that have been worked out between the US government, banks and corporations in the past decade. This partial list comprising trillions provided by Pro Publica is staggering. For the sake of space, I was tempted to abbreviate the list more fully, but it makes an all-too-important point:

The first figure is the total disbursed. The second figure is the profit/loss for government.

Does the Federal Reserve Print Money?

by John Lawrence from the San Diego Free Press

The Federal Reserve is America's Central Bank

The Fed doesn't actually "print" money in the sense of ink on paper hundred dollar bills. But what it can do is create money with a few keystrokes on a computer. Money so created is called "fiat money" since it's not backed by gold or anything else. The Fed currently prints the money to purchase $40 billion in mortgage backed securities and $45 billion in government bonds each month. The rationale for doing this is that it keeps interest rates low which is thought to be necessary to keep the economy humming. Before the financial crisis of 2008-09, the Fed managed to keep interest rates low by adjusting the interest rate at which banks borrow overnight. But after the financial crisis, the Fed needed a more robust policy which is called Quantitative Easing or QE. This policy is mainly a giveaway to the big Wall Street banks to augment their reserves. The lack of sufficient reserves is thought to have been the problem that caused the financial crisis.

The Fed’s massive QE program was ostensibly designed to lower mortgage interest rates, stimulating the economy. And rates have indeed been lowered – for banks. But the form of QE the Fed has engaged in – creating money on a computer screen and trading it for assets on bank balance sheets – has not delivered money where it needs to go: into the pockets of consumers, who create the demand that drives the real economy. Low interest rates will certainly stimulate the economy in the sense that they will encourage the sale of cars and houses, both of which are usually done by borrowing money at interest. So the Fed's policies are all about generating economic activity by creating more debt for average Americans and this results in bigger profits for Wall Street.

The Fed's QE policy means that the Fed buys government bonds and mortgage backed securities from private investors - mainly the big Wall Street banks - and then credits the accounts of those banks with the cash. In return the Fed takes possession of the bond or security it has just bought which is just added to the Fed's balance sheet. Now if the Fed sells that bond back into the market or redeems it from the government, it would get the cash that it had created back and could just extinguish it by a few more keystrokes on the computer. At that point the money that had previously been created will have been destroyed and would be subtracted from the Fed's balance sheet. So in that long run scenario the Fed would not have "printed" or created any money at all except on a temporaray basis. The rub is that the Fed may never remove that money from its balance sheet. It certainly hasn't done so thus far. The Fed has been buying bonds since early 2009. During that time its balance sheet has increased from $900 billion to over $4 trillion today.

A secondary effect of keeping interest rates low is that it lowers the Federal government's interest payments on its gargantuan Federal debt. That tends to neutralize the issue of government spending and deficits as a political issue. The Fed has also been buying the bonds being sold by the US government to finance its deficit. This is considered a Ponzi scheme by some writers as the Fed buys up government deficits and in effect disappears them making sure that bond redeemers always get paid. Bernie Madoff went to jail for doing the same thing except Bernie could not create money with a few keystrokes on a computer like the Fed can.

The negative side of low interest rates is that it hurts savers. Saving accounts produce hardly any interest so there is not much incentive to save. There is, therefore, an incentive to invest in the stock market which has risen dramatically and basically has become a bubble similar to the rapid increase in home values prior to the Great Recession of 2008. When that bubble burst, home values fell precipitously. The same thing could happen to the stock market if the Fed eases off its policy of QE and interest rates rise. Then the stock market could deflate like a punctured balloon.

So what is the other negative aspect of the Fed's QE policy? All that money the Fed is creating or printing, if you will, is pooling in the financial system mainly among rich investors. It is not going into the real economy or into the average person's pocket. If that money were injected into the real economy, it could be used for rebuilding, repairing and building new infrastructure, for example, which would create jobs. Instead the Fed's idea of creating jobs is to keep interest rates low so that more cars and houses will be built and sold. The jobs created will be mainly for car salesmen and real estate salespersons as well as construction crews and assembly line workers.

Money pooling in the financial system and not entering the real economy has only an indirect effect on economic growth, and has the primary purpose of making rich people, especially bankers, richer. This is thought to be a good thing in that it shores up bank reserves which were drastically depleted due to the casino operations leading up to the Great Recession when the banks collapsed not essentially because they had little in the way of reserves but primarily because they had run up their gambling debts to excessive levels with nothing to back them up.

So what will the Fed do now? It may never be able to reduce its balance sheet by either redeeming government bonds or selling them into the market because that would raise interest rates and drive up the amount the Federal government would have to pay in interest on its debt. At that point paying interest on the debt might take up the entire or almost the entire Federal budget. In addition raising interest rates would put a damper on economic activity in the form of discouraging people from purchasing cars, houses and other consumer items. Since consumption is 70% of GDP, this could lead to a recession. This would again place the big banks in jeopardy because, as economic activity diminishes, interest payments to the banks - a big part of their income - will go down, and this will add to the downward spiral which could produce Great Recession, Part 2.

Therefore, the government bonds and mortgage backed securities that the Fed is taking on its balance sheet via their money printing operations may never be redeemed or sold and may have effectively disappeared into a black hole as the Fed's balance sheet continues to increase. The Fed may be stuck printing money ad infinitum and subsidizing the banks at the expense of the average American in perpetuity. The Wall Street banks, it should be pointed out, make money every time the Fed purchases a government bond or mortgage backed security from them. Since the Fed is prohibited by law from buying government bonds from the government directly, Wall Street banks effectively act as middle men and they do so for a price, a price the Fed gladly pays, and for no risk on the part of the banks.

As the Fed continues to subsidize the big banks with money pooling at the upper end of the income spectrum, inequality increases in American society. The Fed policy of QE is a policy designed to increase inequality as the price to be paid to keep the economy rolling. The price of increased economic activity and rising GDP is the further indebtedness of the American people as they buy cars, houses and other consumer items with borrowed money. The Fed, which is not publicly owned, functions to improve the financial prospects of the Wall Street banks which are its real owners. (They actually own most of the stock in the Federal Reserve.) Is it any wonder then that the Fed's policies primarily serve the interests of its owners - the big Wall Street banks? A truly public central bank, one owned by the people of the US, could have the same function of increasing the money supply as needed, but it might do so by using the fiat money so created to more directly benefit the American people.

Germany tried “abnormal” money printing in the early 1920’s after WW 1 and the result was hyperinflation, collapse of the German economy, and the rise of Hitler. The same might happen in the US if hyperinflation were to start taking place while the Fed is stuck in handing out money to the big banks in order to keep them afloat. To fight hyperinflation the Fed would have to raise interest rates and this might bring the US economy to a grinding halt. The policy of reducing the amount of QE on a monthly basis is called "tapering." This doesn't mean that the Fed is selling off the government bonds or mortgage backed securities on its balance sheet, just buying less of them than they had previously. The Fed will still be adding billions to its balance sheet every month. Inflation is the only thing that will force the Fed to reduce its balance sheet. Otherwise, it could disappear government deficits and bank owned mortgage backed securities into its black hole indefinitely.

If the Fed starts to taper, the big boys at the Big Banks might take this as a signal to short the stock market, and this might cause the stock market bubble to burst as stock values are driven down. The average non sophisticated 401k investor would probably panic and sell on the dip losing the value of his or her retirement savings as the Wall Street guys make a killing. When the market reaches its lowest ebb, the Big Guys will start buying again driving the market back up. After the market rallies sufficiently, the average guy will work up the courage to get back in with his 401k, having lost a ton of money selling on the dip and buying on the rally, just the opposite of what sophisticated investors do. Concomitantly, the Fed will probably reintroduce its policy of QE in order to stabilize the economy, and it might have to admit that this policy will continue indefinitely or even ad infinitum. The denouement is that the rich will have gotten richer while the middle class will have been reduced to penury, just the same tendency as happened after the recession of 2008.

This debt based, Wall Street centric, unstable economy know as US capitalism could be changed by replacing the privately owned Federal Reserve with a publicly owned central bank that created and extinguished fiat money as necessary in order to more directly benefit the American people and in such a way that it serves the needs of the real economy rather than being an effort to stabilize and profit Wall Street banks. Rather than providing jobs indirectly only if more debt for the American people is created, a public central bank could inject money as needed directly into the real economy creating jobs in the process and building wealth for the average American while reducing inequality.

Public Banking Advocate, Ellen Brown, Is Running For California State Treasurer

by John Lawrence from San Diego Free Press

Ellen Brown, author of the Public Bank Solution, is running for California State Treasurer. The primary election takes place June 3. There are three candidates. Two will advance to the general election. She is running on a platform to establish a public bank for the state of California similar to the one in North Dakota. She has the endorsement of the Green Party – along with Luis Rodriguez for governor and David Curtis for secretary of state. Green Party candidates take no corporate money. Candidates who take corporate money – and that means nearly all conventional candidates – are beholden to large corporate interests and cannot properly represent the interests of the disenfranchised 99%.

A public bank will bring many benefits to California including the fact that interest on outstanding loans will accrue to the taxpayers of the state instead of to private Wall Street banks. State and local finances could be restored by making sure that profits now going to Wall Street will remain at home. Taxes could be lowered, public services expanded. The cost of a college education could be reduced. The cost of borrowing for in state businesses could be lowered thus attracting more businesses to California.

The Bank of North Dakota (BND) earns more than 20% annual return on equity by investing within the state. The BND has earned profits of $300M over 10 years which go into the state treasury. North Dakota had the lowest foreclosure rate in the nation and has had no bank failures in over 20 years. Far from competing with community banks, a public bank of California would backstop local banks making them more creditworthy and capable of making larger loans.

A public bank could control rising credit costs. A year ago, California was rated BBB, barely higher than bankrupt Greece. That means that the state's borrowing costs go up when it has to borrow at market rates from Wall Street. A state owned public bank could keep borrowing costs down because it wouldn't have to charge market rates. This would help municipalities as well.

Today, state and local governments are investing their capital in the form of pension funds as well as depositing their tax revenues on Wall Street. They are handing over their huge credit generating power to the same big banks that got us into the Great Recession and had to be bailed out by the Federal government. They are investing in Wall Street, not Main Street. Wall Street takes the money and gambles with it in the financial casinos loaning out huge amounts to hedge funds, arbitrageurs, high frequency traders and corporate raiders. They are involved in stripmining the economy rather than building up wealth in and for the state of California and its municipalities.

Over 20 towns in the state of Vermont considered a resolution at this year’s town hall meeting on March 4 to direct their legislators to create a state bank for Vermont. The vote does not have legally binding effects; it is only advisory. But it offers an important indicator of public sentiment on legislation being considered. The bills pending before both houses of the Vermont state legislature would transfer 10 percent of tax dollars to a publicly held agency, VEDA, the Vermont Economic Development Authority, and would give VEDA a banking license. The proposal would completely transform the way state revenues are used to finance public services.

Wall Street invests states' money in projects that its citizens do not necessarily support like the Keystone pipeline. They do not advance loans to small local businesses because they are more interested in loaning huge amounts of money to hedge funds and private equity groups which use the money to take over profitable companies, get rid of the unionized workers and raid the pensions funds before taking them into bankruptcy.

At the same time, the state borrows the money used for economic development and infrastructure projects from Wall Street investment banks at market rates. Neither of these things would be true if California had a public bank. In 18 states besides Vermont, including California, there are proposals for public banks being considered at the state or the city level. Arizona just chartered a commission to study the issue, and Reading, PA, is in the process of establishing a city public bank.

Another reason to charter a public bank in the state of California is the massive fraud that exists and has existed on Wall Street. In March the FDIC filed a massive 24-count civil suit for damages for LIBOR manipulation against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup. LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.

A report done by the Service Employees International Union (SEIU) entitled Big Banks Squeeze Billions in Profits from Public Budgets noted the following:

No one has yet completely categorized all the outstanding swap deals entered into by local and state governments.  But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.

Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. No wonder tuition is so high. The money is needed to pay off Wall Street!

The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.

Why, you might ask, doesn't the University of California do something about their escalating borrowing costs? The answer might be found in the fact that the UC Board of Regents, which controls such decisions, is populated to a great extent by people who already have ties to Wall Street. They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf ever since.

Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:

Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.

Blum’s firm, Blum Capital, is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be trusted like a public bank.

A public bank would not be involved in the Wall Street derivatives casino games. It would make money and return interest on deposits the old fashioned way: by loaning out deposits to local businesses and paying interest on deposits to pension funds, university endowments and other depositors.

A bill to study the feasibility of a public bank of California was introduced by State Senator from Chula Vista, Ben Hueso, in 2011. Hueso was born in San Diego and grew up in Logan Heights. He served on the San Diego City Council, including two years as city council president. The bill he introduced was to establish a commission to study the feasibility of a public bank for the state of California. The following is from Yes magazine:

California is the eighth largest economy in the world, and it has a debt burden to match. The state has outstanding general obligation bonds and revenue bonds of $158 billion, largely incurred for building infrastructure. 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-owned 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.

What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies.

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—the California Nurses Association, the California Firefighters, and the California Labor Council—submitted their support for the bill. 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.

The bill was passed by both Houses of Congress only to have Governor Jerry Brown veto it. Later in 2012 Hueso introduced another bill - this time to establish, not just to study the viability of, a public bank of California - Assembly Bill 2500. He later withdrew that bill. The reasons why are not clear.

Ellen Brown has said:

The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.

Check out this video presentation by Ellen on why California needs a public bank:

 

Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

VOTE FOR ELLEN ON JUNE 3!

It’s the Interest, Stupid! Why Bankers Rule the World

by Ellen Brown

from Global Research, February 15, 2013

In the 2012 edition of Occupy Money released last week, Professor Margrit Kennedy writes that a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of “Wall Street greed” but because of the inexorable mathematics of our private banking system.

This hidden tribute to the banks will come as a surprise to most people, who think that if they pay their credit card bills on time and don’t take out loans, they aren’t paying interest. This, says Dr. Kennedy, is not true. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills. They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later. Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer. Dr. Kennedy cites interest charges ranging from 12% for garbage collection, to 38% for drinking water to, 77% for rent in public housing in her native Germany.

Her figures are drawn from the research of economist Helmut Creutz, writing in German and interpreting Bundesbank publications.  They apply to the expenditures of German households for everyday goods and services in 2006; but similar figures are seen in financial sector profits in the United States, where they composed a whopping 40% of U.S. business profits in 2006.  That was five times the 7% made by the banking sector in 1980.  Bank assets, financial profits, interest, and debt have all been growing exponentially.

http://www.oftwominds.com/blogsept12/cui-bono-Fed9-12.html.

 

Exponential growth in financial sector profits has occurred at the expense of the non-financial sectors, where incomes have at best grown linearly.

http://lanekenworthy.net/2010/07/20/the-best-inequality-graph-updated/

 

By 2010, 1% of the population owned 42% of financial wealth, while 80% of the population owned only 5% percent of financial wealth.  Dr. Kennedy observes that the bottom 80% pay the hidden interest charges that the top 10% collect, making interest a strongly regressive tax that the poor pay to the rich.

Exponential growth is unsustainable. In nature, sustainable growth progresses in a logarithmic curve that grows increasingly more slowly until it levels off (the red line in the first chart above). Exponential growth does the reverse: it begins slowly and increases over time, until the curve shoots up vertically (the chart below). Exponential growth is seen in parasites, cancers . . . and compound interest. When the parasite runs out of its food source, the growth curve suddenly collapses.

People generally assume that if they pay their bills on time, they aren’t paying compound interest; but again, this isn’t true.  Compound interest is baked into the formula for most mortgages, which compose 80% of U.S. loans.  And if credit cards aren’t paid within the one-month grace period, interest charges are compounded daily.

Even if you pay within the grace period, you are paying 2% to 3% for the use of the card, since merchants pass their merchant fees on to the consumer.  Debit cards, which are the equivalent of writing checks, also involve fees.  Visa-MasterCard and the banks at both ends of these interchange transactions charge an average fee of 44 cents per transaction—though the cost to them is about four cents.

How to Recapture the Interest: Own the Bank

The implications of all this are stunning. If we had a financial system that returned the interest collected from the public directly to the public, 35% could be lopped off the price of everything we buy. That means we could buy three items for the current price of two, and that our paychecks could go 50% farther than they go today.

Direct reimbursement to the people is a hard system to work out, but there is a way we could collectively recover the interest paid to banks. We could do it by turning the banks into public utilities and their profits into public assets. Profits would return to the public, either reducing taxes or increasing the availability of public services and infrastructure.

By borrowing from their own publicly-owned banks, governments could eliminate their interest burden altogether.  This has been demonstrated elsewhere with stellar results, including in Canada, Australia, and Argentina among other countries.

In 2011, the U.S. federal government paid $454 billion in interest on the federal debt—nearly one-third the total $1,100 billion paid in personal income taxes that year.  If the government had been borrowing directly from the Federal Reserve—which has the power to create credit on its books and now rebates its profits directly to the government—personal income taxes could have been cut by a third.

Borrowing from its own central bank interest-free might even allow a government to eliminate its national debt altogether.  In Money and Sustainability: The Missing Link(at page 126), Bernard Lietaer and Christian Asperger, et al., cite the example of France.  The Treasury borrowed interest-free from the nationalized Banque de France from 1946 to 1973.  The law then changed to forbid this practice, requiring the Treasury to borrow instead from the private sector.  The authors include a chart showing what would have happened if the French government had continued to borrow interest-free versus what did happen.  Rather than dropping from 21% to 8.6% of GDP, the debt shot up from 21% to 78% of GDP.

“No ‘spendthrift government’ can be blamed in this case,” write the authors. “Compound interest explains it all!”

More than Just a Federal Solution

It is not just federal governments that could eliminate their interest charges in this way. State and local governments could do it too.

Consider California.  At the end of 2010, it had general obligation and revenue bond debt of $158 billion.  Of this, $70 billion, or 44%, was owed for interest.  If the state had incurred that debt to its own bank—which then returned the profits to the state—California could be $70 billion richer today.  Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.

The only U.S. state to own its own depository bank today is North Dakota.  North Dakota is also the only state to have escaped the 2008 banking crisis, sporting a sizable budget surplus every year since then.  It has the lowest unemployment rate in the country, the lowest foreclosure rate, and the lowest default rate on credit card debt.

Globally, 40% of banks are publicly owned, and they are concentrated in countries that also escaped the 2008 banking crisis.  These are the BRIC countries—Brazil, Russia, India, and China—which are home to 40% of the global population.  The BRICs grew economically by 92% in the last decade, while Western economies were floundering.

Cities and counties could also set up their own banks; but in the U.S., this model has yet to be developed. In North Dakota, meanwhile, the Bank of North Dakota underwrites the bond issues of municipal governments, saving them from the vagaries of the “bond vigilantes” and speculators, as well as from the high fees of Wall Street underwriters and the risk of coming out on the wrong side of interest rate swaps required by the underwriters as “insurance.”

One of many cities crushed by this Wall Street “insurance” scheme is Philadelphia, which has lost $500 million on interest swaps alone.  (How the swaps work and their link to the LIBOR scandal was explained in an earlier article here.)  Last week, the Philadelphia City Council held hearings on what to do about these lost revenues.  In an October 30^th article titled “Can Public Banks End Wall Street Hegemony?”, Willie Osterweil discussed a solution presented at the hearings in a fiery speech by Mike Krauss, a director of the Public Banking Institute.

Krauss’ solution was to do as Iceland did: just walk away. He proposed “a strategic default until the bank negotiates at better terms.” Osterweil called it “radical,” since the city would lose it favorable credit rating and might have trouble borrowing. But Krauss had a solution to that problem: the city could form its own bank and use it to generate credit for the city from public revenues, just as Wall Street banks generate credit from those revenues now.

A Radical Solution Whose Time Has Come

Public banking may be a radical solution, but it is also an obvious one. This is not rocket science. By developing a public banking system, governments can keep the interest and reinvest it locally. According to Kennedy and Creutz, that means public savings of 35% to 40%. Costs can be reduced across the board; taxes can be cut or services can be increased; and market stability can be created for governments, borrowers and consumers. Banking and credit can become public utilities, feeding the economy rather than feeding off it.

Ellen Brown is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

Basics of Banking: Loans Create a Lot More Than Deposits

John Carney | @carney

 

Tuesday, 26 Feb 2013 |  5:57  PM ET

 

from CNBC.com

 

 

The Denver Post | Getty Images

International Trust Bank, Denver 1956

 When someone says "loans create deposits," usually that means at least that the marginal impact of new lending will be to create a new asset and a new liability for the banking system.  But in our system it's actually a bit more complicated than that. 

  A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower.  The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan.  The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's.

  It's worth noting that at least two more types of liabilities are also created at this moment: a reserve requirement is created and a capital requirement is created. These aren't standard financial liabilities. They are regulatory liabilities.

The reserve requirement arises with the creation of the deposit (the bank's liability), while the capital requirement arises with the creation of the loan (the bank's asset). So loans create capital requirements, deposits create reserve requirements.

(See also: What Really Constrains Bank Lending.)

Banks are required to have a 10 percent reserve for deposits. (For simplicity's sake we're going to ignore some technical aspects of reserve requirements that actually make this number smaller than 10 percent.)  Which means that a bank incurs a reserve requirement of $10 for every $100 deposit it takes on.  Since loans create deposits, a $100 loan gives rise to a $10 required reserve liability.

To be considered well-capitalized, a bank in the U.S. must currently have a 10 percent combined Tier One and Tier Two Capital ratio (we'll ignore the more complicated angles for capital requirements also).  What this means is that the $100 bank loan gives rise to a regulatory capital liability of $10 of Tier One/Two Capital.

What this means is that the $100 loan that created a $100 deposit, actually created a $100 asset for the bank (the loan) and $120 of liabilities (the deposit plus the required reserves and capital). That might sound like a pretty bad deal for a bank.  But it's not quite as bad as you might think.

Let's imagine a bank that is starting off from scratch. Scratch Bank lends $100 to Mr. Parker. It does this by crediting Mr. Parker's deposit account at Scratch Bank with $100. The bank must now immediately figure out how to meet its two new liabilities: its reserve requirement and its capital requirement.

To raise the $10 of required capital, Scratch Bank will have to sell shares, raise equity-like debt or retain earnings.  Since Scratch Bank just got started, the only way to create immediate earnings would be to charge a ten percent origination fee to Mr. Parker.  The last option isn't really as outlandish as it sounds (although 10 percent is way too high).  Lots of loans come with versions of origination fees that can go to help banks settle their capital requirements.  A $10 fee that is kept as retained earnings would completely satisfy the capital requirement.

This is actually quite extraordinary. The bank is meeting its capital requirement by discounting a deposit that it created out of its own loan.  Which is to say, it is meeting the capital requirement with nothing other than its own money creation power. This makes sense because, as we will see in a moment, the effect of it is to reduce the liability of the bank without reducing its asset. What it really does is allow the bank to have an asset that is greater than the deposit liability it created.

Note that the way this would be done, in most circumstances, would be to net the $10 fee directly out of the $100. So the actual deposit would be just $90 dollars. The bank's reserve requirement would decrease by $1 dollar because of this accounting. Which means that the $100 loan really creates $119 of liabilities for the bank: a $9 reserve requirement plus a $10 capital requirement.

How can the bank meet the requirement for $9 of reserves?  It could try to attract a new customer, let's call him Mr. Christie, who would deposit at least $10 dollars. This would create a liability for the bank of $10 as well as a cash balance (an asset) of $10. The bank would need to use $1 dollar of this as a reserve for Mr. Christie's account and could use the rest as the reserve for Mr. Parker's account. (There's no capital requirement for a cash asset, so the reserve requirement is the only one that applies.)

The bank could also borrow the reserves from another bank in what's known as Fed Funds market. This is the unsecured overnight lending market in which banks with excess reserves lend to banks with deficient reserves. Basically, instead of getting Mr. Christie to deposit $10 in Scratch Bank, Scratch Bank would borrow that deposit from Establishment Savings Bank instead. Right now the Federal Reserve targets the interest rate in this market as between 0 and 0.25 percent.  In other words, acquiring the $9 of reserves is easy as pie.

Now here's what happens when Mr. Parker writes a check on his account to pay for a new window for his shop (it was broken by someone who wanted to stimulate the local economy, of course.)  Scratch Bank will need to transfer $90 dollars to the window maker's bank through the payment system of the Federal Reserve.  Scratch Bank, however, doesn't have anything like $90.  All it has is $9 dollars in borrowed reserves plus $10 in retained earnings.

The bank can't use those $10 in retained earnings, however, because it needs them to meet its capital requirement.  Even though the withdrawal of the $90 from the bank account extinguishes the need for a reserve requirement against the deposit, the loan still remains outstanding. Which, in turn, means the capital requirement remains in place.

So it needs to raise $81 from someone — more depositors, the interbank market, or perhaps money market funds willing to lend against some collateral. The only collateral it has is the loan to Parker, which is worth $100.  After a haircut of a couple of points, however, raising $81 shouldn't be too much of a problem.

Note that the capital requirement has done its job, even though it was funded with bank created money.  Because the bank effectively lent out only $90 dollars while creating a $100 loan, it is able to borrow on the collateralized market to fund its liability when the deposit created by the loan is drawn.  It can borrow the $90 it needs to satisfy its reserve and withdrawal liability, take a pretty steep discount and still make a profit on the spread.

In other words, the effect of the origination fee is the same as if it actually raised outside capital.  If instead of funding the loan with a fee, the bank met the capital requirement by sell $10 worth of equity, it would have had a $100 liability, a $100 asset, a $10 reserve requirement and a $10 capital requirement.  When the money was withdrawn, it would owe $100 to the receiving bank. This could be paid with the $10 raised in equity, and $90 in borrowed funds. It doesn't really matter whether the capital requirement is met through outside capital, fee income or a combination of both (which is how it is done in real life).

Of course, for this to work, the market has to believe that the value of the loan to Mr. Parker is actually worth more than the $90. If counter-parties believe there is a significant chance that Mr. Parker will default on his loan, it could be worth less than $90. In that case, Scratch Bank would be forced to find other sources of funding — new investors, a government bailout—or default on its obligations to the window maker's bank.

But let's say it does work. What we have here is a functioning bank, a demonstration of how the basic infrastructure of banking is not built on a foundation of a bunch of cash that is then lent out. It's built on the loans themselves, with capital and reserves raised to meet regulatory requirements.

Follow me on Twitter   @Carney

John Carney Senior Editor, CNBC.com

Everybody Should Read This Explanation Of Where Money Really Comes From

by Joe Weisenthal

April 27, 2014 from Business Insider

More and more people are calling for a "ban on banking," but that's not as crazy as it sounds.

Under a new regime, there would still be entities called "banks." But they'd have a radically scaled back function. They would primarily serve as places that process payments and hold deposits, but they would be stripped of their most pivotal function, which is creating money.

This is a point that's presumably missed by most of the population. You look at money and you think it's something created by the government or the Fed. In fact, money is for the most part created by private banks.

In March, the Bank of England published an excellent, very clear paper titled Money Creation In The Modern Economy.

It explains how, contrary to what people might think, a bank doesn't make loans, by taking the deposits of a client and then lending those deposits out. Instead, the bank creates money out of thin air. If you want to get a mortgage for a house, and the bank deems you to be credit-worthy, it puts the amount of money you need into an account. That money in your account becomes a liability for the bank. And the mortgage it now owns is an asset of the bank.

These two images from the Bank of England report spell out nicely how it works.

The first shows how money is created from a bank's perspective.

Bank of England

Prior to your taking out the loan, the bank has a certain amount of reserves, and a small amount of currency as assets, and its liabilities are its customer deposits.

After you take out your own, the bank doesn't dip into its assets to give you money. Instead it creates a brand new asset (the loan it gives you) and a new liability, the brand new money you have as a deposit, which the bank just gave you.

Now here's the same transaction from the customer's perspective.

Bank of England

Your assets consist of some deposits and currency prior to the loan. Then after the loan, you have way more deposits than you had more (remember, when you get a loan, it's not like the bank sends you out with a basket of cash. When you get a loan you have more money in your bank account than you had before). That loan is also a liability, since you have to pay it back.

This might seem basic, except this is where money is created these days, not from some other outside force.

Along with their paper, the Bank of England made a nice video explaining money creation. It's worth a quick viewing.

And read the full paper here >

        

SEE ALSO:                      BAN THE BANKS — It's not as crazy as it sounds

Read more:  http://www.businessinsider.com/where-does-money-come-from-2014-4#ixzz30HnJ3PFD

WALL STREET GREED: Not too big for a California jury

 April 26, 2014 from Sky Valley Chronicle

Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform.

News & Opinion by Ellen Brown

(NATIONAL)  --  Sixteen of the world’s largest banks have been caught colluding to rig global interest rates.  Why are we doing business with a corrupt global banking cartel?

 

United States Attorney General Eric Holder has declared that the too-big-to-fail Wall Street banks are too big to prosecute.  But an outraged California jury might have different ideas. As noted in the California legal newspaper The Daily Journal:

 

California juries are not bashful – they have been known to render massive punitive damages awards that dwarf the award of compensatory (actual) damages.For example, in one securities fraud case jurors awarded $5.7 million in compensatory damages and $165 million in punitive damages. . . . And in a tobacco case with $5.5 million in compensatory damages, the jury awarded $3 billion in punitive damages . . . .  

 

The question, then, is how to get Wall Street banks before a California jury. How about charging them with common law fraud and breach of contract?  That’s what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup.   

 

LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.

 

The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.

 

Trapped in a Fraud

 

Nationally, municipalities and other large non-profits are thought to have as much as $300 billion in outstanding swap contracts based on LIBOR, deals in which they are trapped due to prohibitive termination fees. According to a 2010 report by the SEIU (Service Employees International Union):

 

The overall effect is staggering. Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks. . . .  

 

While the press have reported numerous stories of cities like Detroit, caught with high termination payments, the reality is there are hundreds (maybe even thousands) more cities, counties, utility districts, school districts and state governments with swap agreements [that] are causing cash strapped local and city governments to pay millions of dollars in unneeded fees directly to Wall Street.  

 

All of these entities could have damage claims for fraud, breach of contract and rescission; and that is true whether or not they negotiated directly with one of the LIBOR-rigging banks.

 

To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.

 

At least, that is how they are supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index.  The rate owed by the bank is based on the privately-fixed LIBOR rate.

 

As noted by Stephen Gandel on CNNMoney, when the rate-setting banks started manipulating LIBOR, the two rates decoupled, sometimes radically. Public entities wound up paying substantially more than the fixed rate they had bargained for – a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.

 

Pain and Suffering in California

The SEIU report noted that no one has yet completely categorized all the outstanding swap deals entered into by local and state governments.  But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.

 

Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. According to the article:

 

Already officials have been forced to unwind a contract at UC Davis, requiring the university to pay $9 million in termination fees and other costs to several banks. That sum would have covered the tuition and fees of 682 undergraduates for a year.  

 

The university is facing the losses at a time when it is under tremendous financial stress. Administrators have tripled the cost of tuition and fees in the past 10 years, but still can’t cover escalating expenses. Class sizes have increased. Families have been angered by the rising price of attending the university, which has left students in deeper debt.  

 

Peter Taylor, the university’s Chief Financial Officer, defended the swaps, saying he was confident that interest rates would rise in coming years, reversing what the deals have lost. But for that to be true, rates would have to rise by multiples that would drive interest on the soaring federal debt to prohibitive levels, something the Federal Reserve is not likely to allow.

 

The Revolving Door

 

The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.

 

Why, asked the authors, has UC’s management not tried to renegotiate the deals? They pointed to the revolving door between management and Wall Street. Unlike in earlier years, current and former business and finance executives now play a prominent role on the UC Board of Regents.

 

They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf since.

 

Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:

 

Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.  

 

Blum’s firm Blum Capital is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be.

 

Remedies

 

The Public Sociologists of Berkeley recommend renegotiation of the onerous interest rate swaps, which could save up to $200 million for the UC system; and evaluation of the university’s legal options concerning the manipulation of LIBOR. As demonstrated in the new FDIC suit, those options include not just renegotiating on better terms but rescission and damages for fraud and breach of contract. These are remedies that could be sought by local governments and public entities across the state and the nation.

 

The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.

 

 

__________________

 

Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

Wall Street Greed and the Corrupt Global Banking Cartel: Too Big to Prosecute? Not for a California Jury

By Ellen Brown

 

Global Research, April 23, 2014

 

Web of Debt

Sixteen of the world’s largest banks have been caught colluding to rig global interest rates.  Why are we doing business with a corrupt global banking cartel?

United States Attorney General Eric Holder has declared that the too-big-to-fail Wall Street banks are too big to prosecute.  But an outraged California jury might have different ideas. As noted in the California legal newspaper The Daily Journal:

California juries are not bashful – they have been known to render massive punitive damages awards that dwarf the award of compensatory (actual) damages. For example, in one securities fraud case jurors awarded $5.7 million in compensatory damages and $165 million in punitive damages. . . . And in a tobacco case with $5.5 million in compensatory damages, the jury awarded $3 billion in punitive damages . . . .

The question, then, is how to get Wall Street banks before a California jury. How about charging them with common law fraud and breach of contract?  That’s what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup.

LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.

The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.

Trapped in a Fraud

Nationally, municipalities and other large non-profits are thought to have as much as $300 billion in outstanding swap contracts based on LIBOR, deals in which they are trapped due to prohibitive termination fees. According to a 2010 report by the SEIU(Service Employees International Union):

The overall effect is staggering. Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks. . . .

While the press have reported numerous stories of cities like Detroit, caught with high termination payments, the reality is there are hundreds (maybe even thousands) more cities, counties, utility districts, school districts and state governments with swap agreements [that] are causing cash strapped local and city governments to pay millions of dollars in unneeded fees directly to Wall Street.

All of these entities could have damage claims for fraud, breach of contract and rescission; and that is true whether or not they negotiated directly with one of the LIBOR-rigging banks.

To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.

At least, that is how they are supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index.  The rate owed by the bank is based on the privately-fixed LIBOR rate.

As noted by Stephen Gandel on CNNMoney, when the rate-setting banks started manipulating LIBOR, the two rates decoupled, sometimes radically. Public entities wound up paying substantially more than the fixed rate they had bargained for – a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.

Pain and Suffering in California

The SEIU report noted that no one has yet completely categorized all the outstanding swap deals entered into by local and state governments.  But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.

Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. According to the article:

Already officials have been forced to unwind a contract at UC Davis, requiring the university to pay $9 million in termination fees and other costs to several banks. That sum would have covered the tuition and fees of 682 undergraduates for a year.

The university is facing the losses at a time when it is under tremendous financial stress. Administrators have tripled the cost of tuition and fees in the past 10 years, but still can’t cover escalating expenses. Class sizes have increased. Families have been angered by the rising price of attending the university, which has left students in deeper debt.

Peter Taylor, the university’s Chief Financial Officer, defended the swaps, saying he was confident that interest rates would rise in coming years, reversing what the deals have lost. But for that to be true, rates would have to rise by multiples that would drive interest on the soaring federal debt to prohibitive levels, something the Federal Reserve is not likely to allow.

The Revolving Door

The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.

Why, asked the authors, has UC’s management not tried to renegotiate the deals? They pointed to the revolving door between management and Wall Street. Unlike in earlier years, current and former business and finance executives now play a prominent role on the UC Board of Regents.

They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf since.

Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:

Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.

Blum’s firm Blum Capital is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be.

Remedies

The Public Sociologists of Berkeley recommend renegotiation of the onerous interest rate swaps, which could save up to $200 million for the UC system; and evaluation of the university’s legal options concerning the manipulation of LIBOR. As demonstrated in the new FDIC suit, those options include not just renegotiating on better terms but rescission and damages for fraud and breach of contract. These are remedies that could be sought by local governments and public entities across the state and the nation.

The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.

Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

Public Banking: The Antidote to Wall Street’s Domination of the Economy – Part 2

by John Lawrence from the San Diego Free Press

California Could Solve Its Budget Problems by Starting a Public Bank Like North Dakota Did

The most solvent state in the US is North Dakota which has low unemployment, no budget deficit and a burgeoning economy. The main reason is that the state has a public bank (BND) in which state revenues and pension funds can be invested making it unnecessary to send the money out of the state to Wall Street. All state revenues are deposited in the BND by law. Instead of Wall Street making the profits on North Dakota's money, North Dakota is making the profits.

Instead of paying interest on debt bonds, North Dakota is reinvesting the interest its public bank makes on infrastructure improvements and lowering state income taxes among other things. Whereas private banks are required by law to extract as much in debt service as the market will bear, a public bank can pass on the lower interest rates it has access to to its customers such as public agencies, local businesses and residents. Infrastructure projects are effectively interest free since the bank returns interest on its loans to the state treasury in the form of an annual dividend.

The BND's revenues have been a major boost to the state budget. In the first decade of this century the BND contributed over $300 million to state coffers, a substantial sum for a state with a population one-fifteenth the size of Los Angeles County. In April 2011 the BND reported annual profits of  over $62 million. These profits belong to North Dakota's citizens and they are generated without state income taxes. In fact the BND added nearly as much to the state's general fund from 2007 to 2009 as oil and gas tax revenues did.

As mentioned in Part 1, California could follow North Dakota's lead and start a public bank. The Public Bank of California (PBC) could reap the interest on California's immense pension funds instead of paying interest to Wall Street. The California Public Employees’ Retirement System, or CalPERS, is the nation’s largest pension fund for government workers. CalSTRS is the pension fund that provides retirement benefits for California's teachers. Together these funds have $400 billion in assets, a huge pot of money which they have been farming out to Wall Street in the hopes of growing this prodigious sum even more. Echoing former New York Mayor Ed Koch, we might ask 'how is Wall Street doing?'

Ellen Brown in her book The Public Bank Solution responds this way:

"Every year from the 2008 banking crisis up through 2012, the BND has reported a return on investment of between 17 percent and 26 percent. Compare that to California's pension funds - CalPERS and CalSTRS - the largest pension funds in the world. From a peak of $260 billion in 2007, CalPERS fell to $160 billion in March 2009, a 37% decline. CalSTRS peaked at $180 billion in October 2007 and dropped to $112 billion in the same period, a 34% decline. They did better in 2011 and 2012, but they are still way below where they were before the crisis. For their questionable performance in managing the CalPERS portfolio, Wall Street firms reported earning $1.1 billion in 2010."

Many pension funds, not just California's, have lost money on Wall Street investing in fancy derivatives.  Many cities have gone bankrupt investing in interest rate swaps. Take San Bernadino and Stockton, for example. Their bankruptcies have let them off the hook for their contributions to CalPERS making that pension fund even worse off. All of this could have been prevented if, instead of farming California municipal and state revenues out to Wall Street, those same revenues could have been invested by a public bank, whether at the state or municipal level. Monies thus invested would not have had to leave the state, would have been earmarked for the benefit of Californians and not subjected to the profit imperatives of Wall Street.

A California public bank could use its power to create credit in many ways. It would have the same power of fractional reserve banking as any other bank. That is it could take in deposits and loan out ten times the amount of those deposits using the deposits as collateral. Instead of paying bond interest to Wall Street, the California public bank (PBC) could use collected interest to pay down its budget deficit. In November 2010 the state of California had outstanding general obligation bonds and revenue bonds of $158 billion. Of that $70 billion was owed just for interest! If California had been funding its debt through its own public bank, the state could have saved that $70 billion which would have been enough to pay its budget deficit several times over. By depositing its revenues and investing its capital on Wall Street, the state is effectively giving this money away to line the pockets of Jamie Dimon, CEO of JP Morgan Chase, and Lloyd Blankfein, CEO of Goldman Sachs.

As a recent example of the fleecing of California by Wall Street consider the new San Francisco-Oakland Bay Bridge which just opened recently. The price tag for the new east span jumped from an estimated $1.3 billion in 1996 to $6.3 billion in 2009 to an estimated final price of over $12 billion. due largely to interest on bond debt and other Wall Street finance charges. Commuters will be paying this debt off until at least 2049. Tolls have shot up to $6 during rush hours for regular vehicles and $35 for some trucks. Debt servicing now eats up 55.2% of toll revenue. With a PBC this debt service would be plowed right back into public coffers for the benefit of taxpayers and no toll might be required at all.

Public banking is now under consideration by at least 20 states. Among the states now considering the establishment of a public bank is Pennsylvania. You can check out their website here. This is from their website: "Through partnerships with community banks, credit unions, savings and loans and municipal authorities, public banks inject sustainable and affordable credit into local economies: for business start up and expansion, farmers, students, home buyers and home builders, economic development, infrastructure, assistance to municipalities and  jobs."

It is not just states that can establish public banks. They can be set up by cities and municipalities as well. The City of San Diego could start one. If it did, there might be funds available for such things as improving neighborhoods, fixing potholes, keeping libraries open longer hours, fixing infrastructure such as water lines which burst frequently, more parks and recreation, building adequate facilities for the homeless and many other items. Too bad we just lost a Mayor who might have been interested.

 

 

Public Banking: The Antidote to Wall Street's Domination of the Economy - Part 1

by John Lawrence from the San Diego Free Press

States, Cities and Pension Funds Have Gone into Debt to Wall Street When They Could Have Started a Public Bank and Paid Interest to Themselves

Public banks plow their revenues back into community needs like infrastructure, education, health facilities, local enterprises and other public banks. When municipalities, cities, states, countries and even smaller jurisdictions like school districts fund their deficits with Wall Street, the profits go into the pockets of executives and investors. Currently, only the state of North Dakota has a public bank. As a consequence North Dakota suffered very little from the Great Recession of 2008, has a robust economy and no budget deficit. California on the other hand struggles every year with its budget because it pays a lot of interest on its loans to Wall Street. If California had a public bank similar to North Dakota's, it would have no budget deficit at all and could fund its infrastructure needs out of its own revenues.

Many pension funds have gone bust lately because the cities funding them have gone bankrupt. Take Detroit for example. In bankruptcy court investors will be given priority and pensioners will be screwed. If Detroit had had a public bank instead of going into debt with Wall Street, this needn't have happened.

How do public banks differ from private banks? First, they are nothing new. Public banking has been around for centuries. All banks, both public and private, with the exception of central banks like the Federal Reserve, create money by what is know as 'fractional reserve banking.' They take in deposits and based on those deposits as collateral they loan out a multiple of those deposits, typically ten times the amount of their deposits. The general rationale is that not everyone will want their money back at the same time. If they do, that constitutes a run on the bank, and the bank is in trouble.

The Fed and other central banks simply create money out of thin air. The Fed prints money via a few keystrokes on a computer. Currently, the Fed is buying $85 billion worth of US government securities every month, a phenomenon known as 'quantitative easing'. Since by law the Fed cannot purchase US Treasury bonds directly, it uses Wall Street banks as a middleman. Wall Street then makes a nice cut simply by buying the Treasuries in order to sell them to the Fed. The money created for the bonds goes onto the Fed's balance sheet where it can stay ad infinitum because nobody or no government is going to go after the Fed to pay it back.

European countries like Greece and Cyprus have gotten themselves into trouble because they have given up their national currencies and adopted the euro. Since only the European Central Bank can print euros, these countries have borrowed money to offset their deficits from Wall Street. As they get deeper in debt, Wall Street raises the interest rate they have to pay and it becomes a downwards spiral from which they are unlikely to recover. If they had maintained their national currencies, their central banks could simply print the money needed to offset their deficits like the US does. Instead Wall Street has them in a death grip. Many European cities have also been bankrupted this way especially if they have bought fancy derivatives from Wall Street like interest rate swaps.

Take Milan for example. Milan, Italy’s second-biggest city, is one of dozens of Italian municipalities that undertook swaps — contracts in which a fixed interest rate is exchanged for a floating one — in the hopes of saving on interest payments. Instead, they ended up getting screwed as interest rates went up. They essentially placed a bet that interest rates would not go up and when they did, they ended up owing more to the Wall Street banks than they would have if they had just paid straight interest in the first place. The same thing happened to Detroit, and that's what got it and other US bankrupted cities like Birmingham, Alabama in trouble. The banks are secured creditors that will be paid in bankruptcy court before the pensioners will. There probably won't be much left for the pensioners after the banks take their cut.

What does this have to do with public banking? It turns out a lot. Ellen Brown is the leading advocate of public banking. In her books Web of Debt and The Public Bank Solution, she explains what a public bank is, how it differs from private banking and all the advantages it offers, the main advantage being that the profits flow into public coffers instead of into private pockets. The wealth so created goes to the people that the public bank serves - whether that is a state, a municipality, a country or even a hospital district - instead of to Wall Street. For example, the public state Bank of North Dakota uses its profits to reduce state income taxes among other things.

Ellen Brown states:

"A functioning economy needs bank credit to flow freely. What impairs this flow is that the spigots are under private control. Private banks use that control to their own advantage rather than to serve business, industry, and societal needs. They can turn credit on and off at will, direct it to their cronies [like hedge funds], or speculate with it; and they collect the interest on loans as middlemen. This is not just a modest service fee. Interest has been calculated to compose a third of everything we buy.

"Anyone with money has a right to lend it, of course, and any group with money can pool it and lend it; but the ability to create money-as-credit ex nihilo (out of nothing), backed by the "full faith and credit" of the government and the people, is properly a public function, and the proceeds should properly return to the public. The virtues of an expandable credit system can be retained while avoiding the parasitic exploitation to which private banks are prone, by establishing a network of public banks that serve the people because they are owned by the people."

For instance, monies collected as interest on loans by the Bank of North Dakota (BND), a public bank, are not shipped off to Wall Street but remain in the state. They can be used for student loans at reasonable rates without predatory fees for defaults. The BND website states: "The Dakota Education Alternative Loan (DEAL) is one of the most competitive alternative loans in the nation. North Dakota students or those who attend school in ND pay zero fees, have the option of a fixed interest rate of 5.70% APR or a variable interest rate of 1.78% APR effective July 1 and can count on quality local customer service. Variable rates can change quarterly and may increase. Rate will never exceed 10%." And the bank lets you consolidate other loans, something private banks won't let you do. Deferment and forbearance options are available, something private banks are much less user friendly about. The state of Oregon is considering a similar alternative for student loans.

This article has just scratched the surface of public banking. Follow on articles will get more in depth. The public banking option can exist at all levels from central banks of entire nations to banks devoted, for instance, to just one hospital district. The main thing to keep in mind is that with public banking the profits stay local where they can be devoted to solving local problems. They don't need to be shipped off to Wall Street where they will support a debt based economy controlled by Wall Street for Wall Street's benefit.

 

 

 

The “Bankization” of America

Published on Friday, August 16, 2013 by Campaign for America's Future Blog    

by  Richard Eskow  

The share of our national income which goes to corporate profit is the highest it’s been since they started tracking it in 1929, while the share going to people – as salary and wages – is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.

We’re becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.

And none of it is an accident.

When Wall Street catches a cold …

The Wall Street Journal reported this Thursday that “Stock and bond prices tumbled after stronger-than-expected economic data …”

Why would good news about the economy cause the stock market to fall? The sentences continues: “… raised investor anxiety about a pullback next month in central-bank support for financial markets …”

Investors had been relying on the Federal Reserve to keep pumping up the stock market’s record run, but some mildly favorable economic reports raised fears were raised that the Fed’s market-friendly interventions might come to an end.

“We’re getting another knee-jerk reaction to fears of tapering,” a market analyst told the Journal, referring to the Fed’s monthly purchase of $85 billion in bonds.  As Reuters reported last month, “Many on Wall Street believe the Federal Reserve’s monetary policy is behind record corporate earnings and the stock market’s surge to all-time highs this year.”

When Wall Street catches a cold – when it even might catch a cold — the economy catches pneumonia.

Reality Bites

Meanwhile, the “real” economy – the one where people live, and work, and buy things – has suffered even as Wall Street and the stock market have boomed.  That trend continued this week, too, Wal-Mart announced disappointing sales and lowered its projections. Its Chief Financial Officer observed that “The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending.”

Cisco also lowered its sales expectations. As the Journal article notes, these announcements added to the fear that the Fed’s interventions might wind down.

This stock market story illustrates the gulf between a stock-market economy increasingly driven by the banking industry – an economy which has been booming, today’s news notwithstanding – and a human economy wracked by consumer fears, falling wages, joblessness, and low-level jobs for  a growing number of people who are working.

The gulf between these two economies drove this morning’s stock market story. It’s also driving the long-term depression-like misery which holds millions of Americans in its grip.

This is not the playing out of some divinely-decreed order. The financialization of the US economy is the result of very deliberate governmental choices. Unless different choices are made going forward, we will continue to become a “Bankistan” whose wealth and economic fate is increasingly hijacked by Wall Street.

Financialized

The Federal Reserve’s data on corporate profits were helpfully compiled by a contributor to the investment site The Motley Fool, who notes that financial profits were 11 percent of total corporate profits in the US back in 1947, the first year these numbers were compiled.

These profits soared in the first decade of the 21^st Century. After taking a hit in the crisis of 2008 – a crisis which the banking industry caused – they rose again and are now at record highs.  Their share of total corporate profits has risen from 11 percent to 42 percent, as of the latest report, and the Fed expects them to keep rising.

Here’s how that looks:

The money nowadays isn’t in manufacturing, or retail, or any of the other traditionally jobs-producing industries. The money now is in money.

How did this happen?

A series of policy decisions enabled this explosive growth, including the deregulation of Wall Street; the repeal of Glass-Steagall, which separated bank customers’ money from money which the bank could invest for its own profit; runaway banker salaries and bonuses, which prompted the “best and the brightest” to flock to Wall Street and apply their ingenuity to flouting the rules; and government’s increasing unwillingness to indict bankers for criminal behavior.

And then, when banker criminality and incompetence created the crisis of 2008, they were rescued by the government without being held financially or legally accountable for their wrongdoing.

The Federal Reserve continues to pursue stimulus policies that moderately help the economy as a whole, but which emphasize the economic health of banks and publicly-traded corporations over that of companies that hire workers – and therefore increase the consumption of consumer goods.

Profit by the slice …

Banks have a bigger share of the corporate-profit pie – and that pie’s bigger than ever.  As Floyd Norris notes in the New York Times, the government’s revised estimate of wage and salary income is 42.6 percent of GDP, which matches the 2010 figure as the lowest percentage since this data was first captured in 1929.

Using the latest revisions to the national income and product account (NIPA) data produced by the Bureau of Economic Analysis, Norris also notes that corporate profits are now 9.6 percent of GDP. That’s the highest since these figures were first captured.

As Norris also notes, corporate taxes rose slightly in 2012 as a percentage of GDP but are still well below their historical averages. That’s not an accident either.

Meanwhile, as this chart shows, unemployment remains horrendous:

 

                                                                                     (via Bill McBride, Calculated Risk)

Wages actually fell for most people after the 2008 crisis, as high-income individuals (the top 1 percent) captured all of the economic gains created by the government-sponsored recovery – and even enlarged their share, capturing 121 percent of the recovery as the rest of the country fell behind.

Indebted

You might think that financial institutions feel indebted to the public for rescuing them. But the opposite is true: We’re indebted to them. According to the latest report from the New York Federal Reserve, auto loan balances increased by $20 billion over the previous quarter while credit card balances and student loan debt increased by $8 billion each.

The falling rates of mortgage debt, driven by range of factors which included falling housing values and foreclosures, resulted in an overall decline in total indebtedness. But these figures show that our household debt in many key areas continues to rise.

As wages and salaries decline, people are struggling to keep up with the way of life they once know. So they fall deeper in debt – a debt which allows them, and the banks, to delay the day of reckoning once again.

Fixing a Hole

These figures paint the picture of an economy that has become seriously unbalanced in favor of the banks – “financialized,” as observers increasingly describe it. How can the economy be rebalanced?

Many solutions are well-known to bank reformers and well-informed voters:  Reinstate Glass-Steagall, or something very much like it. Insist on strong regulatory oversight of the banking sector, and give regulators the authority to do their jobs. End “too big to fail” banks, instead of encouraging their consolidation (as the government has done in recent years). Prosecute criminal bankers.

Other solutions are equally important. The interbank database and shell company called MERS must be ended, so that financial institutions can’t collude against consumers and the states. The Federal Reserve must demand that banks perform their central economic function – responsible lending to consumers and job-creating businesses – rather than reward them for speculation and other forms of non-productive profiteering.

(That’s why the choice of Federal Reserve head is so important.)

Genuine shareholder reform is also needed, so bankers don’t overpay themselves at shareholder expense or use the bank’s coffers as a “get out of jail” card for massive settlements caused by their own misdeeds.

Lastly, no comprehensive solution can be found until banks and other corporations are once again taxed at reasonable levels and the revenues are used to create well-paying jobs for the American middle class.

A healthy economy needs banks that lend, and consumers with the money to buy. Until that happens we’ll be living in a highly-financialized “Bankistan” that excludes most of its citizens from sharing in the American dream.

This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License

      

Richard (RJ) Eskow is a well-known blogger and writer, a former Wall Street executive, an experienced consultant, and a former musician. He has experience in health insurance and economics, occupational health, benefits, risk management, finance, and information technology. Richard has consulting experience in the US and over 20 countries.

Green Light for City-owned San Francisco Bank

From Web of Debt blog

Posted on July 29, 2013 by Ellen Brown   

When the Occupiers took an interest in moving San Francisco’s money into a city-owned bank in 2011, it was chiefly on principle, in sympathy with the nationwide Move Your Money campaign.  But recent scandals have transformed the move from a political statement into a matter of protecting the city’s deposits and reducing its debt burden.  The chief roadblock to forming a municipal bank has been the concern that it was not allowed under state law, but a legal opinion  issued by Deputy City Attorney Thomas J. Owen has now overcome that obstacle.

Establishing a city-owned San Francisco Bank is not a new idea. According to City Supervisor John Avalos, speaking at the Public Banking Institute conference in San Rafael in June, it has been on the table for over a decade. Recent interest was spurred by the Occupy movement, which adopted the proposal after Avalos presented it to an enthusiastic group of over 1000 protesters outside the Bank of America building in late 2011. David Weidner, writing in the Wall Street Journal in December of that year, called it “the boldest institutional stroke yet against banks targeted by the Occupy movement.” But Weidner conceded that:

Creating a municipal bank won’t be easy. California law forbids using taxpayer money to make private loans. That would have to be changed. Critics also argue that San Francisco could be putting taxpayer money at risk.

The law in question was California Government Code Section 23007, which prohibits a county from “giv[ing] or loan[ing] its credit to or in aid of any person or corporation.” The section has been interpreted as barring cities and counties from establishing municipal banks. But Deputy City Attorney Thomas J. Owen has now put that issue to rest in a written memorandum dated June 21, 2013, in which he states:

1. A court would likely conclude that Section 23007 does not cover San Francisco because the City is a chartered city and county. Similarly, a court would likely conclude that Article XVI, section 6 of the State Constitution, which limits the power of the State Legislature to give or lend the credit of cities or counties, does not apply to the City. . . . [A] court would likely then determine that neither those laws nor the general limitations on expending City funds for a municipal purpose bar the City from establishing a municipal bank.

2. A court would likely conclude that the City may own stock in a municipal bank and spend City money to support the bank’s operation, if the City appropriated funds for that purpose and the operation of the bank served a legitimate municipal purpose.

A number of other California cities that have explored forming their own banks are also affected by this opinion. As of June 2008, 112 of California’s 478 cities are charter cities, including not only San Francisco but Los Angeles, Richmond, Oakland and Berkeley. A charter city is one governed by its own charter document rather than by local, state or national laws.

Which Is Riskier, a Public Bank or a Wall Street Bank?

That leaves the question whether a publicly-owned bank would put taxpayer money at risk. The Bank of North Dakota, the nation’s only state-owned bank, has posed no risk to depositors or the state’s taxpayers in nearly a century of successful operation. Further, in this latest recession it has helped the state achieve a nationwide low in unemployment (3.2%) and the only budget surplus in the country.

Meanwhile, the recent wave of bank scandals has shifted the focus to whether local governments can afford to risk keeping their funds in Wall Street banks.

In making investment decisions, cities are required by state law to prioritize security, liquidity and yield, in that order. The city of San Francisco moves between $10 billion and $12 billion through 133 bank accounts in roughly 5 million transactions every year; and its deposits are held chiefly at three banks, Bank of America, Wells Fargo and Union Bank. The city pays $2.7 million for banking services, nearly two-thirds of which consist of transaction fees that smaller banks and credit unions would not impose.  But the city cannot use those smaller banks as depositories because the banks cannot afford the collateral necessary to protect deposits above $250,000, the FDIC insurance limit.

San Francisco and other cities and counties are losing more than just transaction fees to Wall Street. Weidner pointed to the $100 billion that the California pension funds lost as a result of Wall Street malfeasance in 2008; the foreclosures that have wrought havoc on communities and tax revenues; and the liar loans that have negatively impacted not only real estate values but the economy, employment and local and state budgets. Added to that, we now have the LIBOR and municipal debt auction riggings and the Cyprus bail-in threat.

On July 23, 2013, Sacramento County filed a major lawsuit against Bank of America, JP Morgan Chase and other mega-banks for manipulating LIBOR rates, a fraud that has imposed huge losses on local governments in ill-advised interest-rate swaps. Sacramento is the 15^th government agency in California to sue on the LIBOR rigging, which Rolling Stone’s Matt Taibbi calls “the biggest price-fixing scandal ever.” Other counties in the Bay Area that are suing on the LIBOR fraud are Sonoma and San Mateo, and the city of Richmond sued in January.  Last year, Bank of America and other major banks were also caught rigging municipal debt service auctions, for which they had to pay $673 million in restitution.

The question is, do taxpayers want to have their public monies in a bank that has been proven to be defrauding them?

Compounding the risk is the reason Cyprus “bail in” shocker, in which depositor funds were confiscated to recapitalize two bankrupt Cypriot banks. Dodd-Frank now replaces taxpayer-funded bank bailouts with consumer-funded bail-ins, which can force shareholders, bondholders and depositors to contribute to the cost of bank failure. Europe is negotiating rules imposing bail-ins for failed banks, and the FDIC has a U.S. advisory to that effect. Bank of America now commingles its $1 trillion in deposits with over $70 trillion in risky derivatives, and has been pegged as one of the next banks likely to fail in a major gambling mishap.

San Francisco and other local governments have far more than $250,000 on deposit, so they are only marginally protected by the FDIC insurance fund. Their protection is as secured creditors with a claim on bank collateral. The problem is that in a bank bankruptcy, state and local governments will fall in line behind the derivative claimants, which are also secured creditors and now have “super-priority” in bankruptcy. In a major derivatives calamity of the sort requiring a $700 billion bailout in September 2008, there is liable to be little collateral left for either the other secured depositors or the FDIC, which has a meager $25 billion in its insurance fund. Normally, the FDIC would be backstopped by the Treasury – meaning the taxpayers – but Dodd-Frank now bars taxpayer bailouts of bank bankruptcies caused by the majority of speculative derivative losses.

The question today is whether cities and counties can afford not to set up their own municipal banks, both to protect their money from confiscation and to take advantage of the very low interest rates and other perks available exclusively to the banking club. A government that owns its own bank can keep the interest and reinvest it locally, resulting in government savings of an estimated 35% to 40% just in interest. Costs can be reduced, and taxes can be cut or services can be increased. Banking and credit can become public utilities, sustaining the local economy rather than mining it for private gain; and banks can again become safe places to store our money.

______________________

Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt and its 2013 sequel, The Public Bank Solution. Her websites are http://WebofDebt.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.