State banks
In the Democratic Party primary race for governor of Oregon, former Oregon Secretary of State Bill Bradbury is proposing a state bank modeled on the Bank of North Dakota. Historically, Oregon has provided good ideas to its sluggish southern neighbor, for example recall, initiative and referendum.
Badlands JOurnal editorial board
1-20-10
KATU.com
Bill Bradbury dreams of a Bank of Oregon
http://www.katu.com/news/local/82197232.html
This challenger for the 2010 Oregon Governor race on Wednesday calls for the creation of a Bank of Oregon "to keep Oregon money in Oregon and grow Oregon-based businesses."
PORTLAND, Ore. – At a presentation Wednesday in downtown Portland, a challenger for the 2010 Oregon Governor race called for the creation of a Bank of Oregon "to keep Oregon money in Oregon and grow Oregon-based businesses."
“It is time to declare economic sovereignty from the multi-national banks that are responsible for much of our current economic crisis," declared Democrat Bill Bradbury. "It is time to keep Oregon money here in Oregon working for Oregonians.”
Bradbury proposed a Bank of Oregon modeled after the Bank of North Dakota, which manages funds guaranteed by the state rather than the FDIC. State government agencies then would be required to deposit their funds into this bank.
Bank of Oregon would "invest Oregon money in Oregon, and utilize our money as a tool for economic development, lending money and making a profit just like any other financial institution," Bradbury said.
Bradbury comes to the governor's race with nine years as Oregon's Secretary of State. He was appointed by Governor John Kitzhaber in November 1999, and elected to two four-year terms starting November 2000. Bradbury also served 14 years in the Oregon Legislature.
New Rules Project
Bank of North Dakota
http://www.newrules.org/banking/rules/bank-north-dakota
The Non Partisan League (NPL), born in 1915, united progressives, reformers, and radicals behind a platform that called for reforms to return control of North Dakota's government and economy to the people. Taking leadership of the state in 1919, the NPL formed the Bank of North Dakota (BND). Today it is the only state-owned bank in the U.S.
The bank was originally formed to create additional competition in the credit industry while providing a local source of capital for state investment and development. At the time the nearest financial centers were based in Minneapolis and St. Paul, and farmers were unable to get long-term financing at reasonable rates. BND was formed to "encourage and promote agriculture, commerce and industry in North Dakota."
The bank is governed by the ND Industrial Commission, consisting of the governor, attorney general and the commissioner of agriculture, all elected officials. The commission, in effect, serves as the bank's board of directors; it was formed with three members so voters could more easily monitor and influence bank policy.
In contrast to most commercial banks, Bank of North Dakota is not a member of the Federal Depository Insurance Corporation (FDIC). North Dakota Century Code 6-09.10 provides that all deposits in the Bank of North Dakota are guaranteed by the state.
The primary deposit base of the BNC is the State of North Dakota. All state funds and funds of state institutions are deposited with the bank as required by law. Other deposits are accepted from any source- savings and checking accounts from private sources account for between 10 percent and 20 percent of the bank's deposit base. Use of the banks' earnings are at the discretion of the state legislature. As an agent of the state it can make subsidized loans to spur development; however, its profits and losses affect state tax burdens.
The bank is used as a tool for economic development. A beginning farmer revolving loan fund was originally established through a transfer of funds from the Bank of North Dakota's profits. With its' agricultural loans the bank has developed a reputation for being more lenient than other banks in pressing forclosures.
On behalf of the State of North Dakota, the BND also administers state lending programs that promote agricultural and economic development. For example, under the PACE program for commercial and agricultural lending, a local bank originates a loan, the Bank of North Dakota participates at a rate determined by the community's economic strength (between 50 percent and 80 percent). The local economic development group and the BND "buy down" the interest rate to 3 points below prime. Since its inception in June 1991, the BND has participated in about $44 million in PACE loans to businesses.
The bank serves many other functions in the state. It underwrites municipal bonds for all of the political units in the state, and has been one of the leading banks in the nation in the number of student loans issued. The bank also serves as the state's "Mini Fed", clearing checks for more than 100 banks scattered around the state. Because of its' rural nature, many ND banks tend to be too small to meet the needs of borrowers. Banks, savings and loan associations and credit unions throughout the state come to the Bank of North Dakota for participation in loans.
As a result of the banks' services, it enjoys widespread support among the public and the independent banking community. No bill has been introduced in the legislature to do away with the bank since the 1920s.
6-22-09
Webofdebt.com
HOW CALIFORNIA COULD TURN ITS IOU’S INTO DOLLARS...Ellen Brown
http://www.webofdebt.com/articles/california_iou.php
California has over $17 billion on deposit in banks that have refused to honor its IOUs, forcing legislators to accept crippling budget cuts. These austerity measures are unnecessary. If the state were to deposit its money in its own state-owned bank, it could have enough credit to solve its budget crisis with funds to spare.
“We make money the old-fashioned way,” said Art Rolnick, chief economist of the Minneapolis Federal Reserve. “We print it.” That works for the federal government’s central bank, but states are forbidden by the Constitution to issue “bills of credit,” a term that has been interpreted to mean the state’s own paper money. “Sacramento is not Washington,” said California Governor Arnold Schwarzenegger in May. “We cannot print our own money.” When legislators could not agree on how to solve the state’s $26.3 billion budget deficit, the Governor therefore did the next best thing: he began paying the bills with IOUs (“I Owe You’s,” or promises to pay bearing interest).
The problem was that most banks declined to honor the IOUs, at least after July 24. “They said something about not wanting to enable the dysfunctional state legislature,” observed a San Diego Union-Tribune staff writer, “which is kind of funny as the federal government has been enabling the dysfunctional financial sector for almost a year.”
On July 21, California legislators were strong-armed into a tentative agreement on budget cuts, a forced move that was called “painful” by the Speaker of the Assembly and “devastating” by the executive director of the California State Association of Counties. The cuts involve more job losses, more bleeding of school funds, more closing of facilities. Worse, they will not solve the budget crisis long-term. The state’s economy is expected to continue to deteriorate along with its revenues. But without banks to honor the state’s IOUs, California has no time to negotiate or explore alternatives. There is no “quick fix,” says UCLA Professor Daniel Mitchell.
Or is there?
More Than One Way to Solve a Budget Crisis
Among the banks rejecting California’s IOUs are six of particular interest: Citibank, Union Bank, Bank of America, Wells Fargo, U.S. Bank, and Westamerica Bank. These banks are interesting because they are six of the seven depository banks in which the state of California currently deposits its money. (The seventh is Bank of the West, which loyally said it would accept the IOUs indefinitely.)
Banks operate under federal or state charters that grant them special rights and privileges. Chartered banks are endowed with a gift that keeps on giving: they can “leverage” the value of their deposits into anywhere from ten to thirty times that sum in interest-bearing loans. This “multiplier effect” is attested to by many authorities, including President Obama himself. He said in a speech at Georgetown University on April 14:
“[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”
The website of the Federal Reserve Bank of Dallas explains:
“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank . . . holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”
Combine this with another interesting fact: according to the California Treasurer’s report, as of May 2009 the state had aggregate deposits and investments exceeding $55 billion. Of this sum, $1.1 billion was held in demand deposit accounts (non-interest-bearing accounts allowing unlimited deposits and withdrawals) and $16.5 billion was in NOW accounts (interest-bearing accounts allowing unlimited deposits and withdrawals). According to the Treasurer’s office, the non-interest-bearing demand deposits are held at the seven depository banks named earlier, while the NOW accounts are held at Citibank and Union Bank. Applying a “multiplier effect” of ten to the total sum on deposit at these seven banks ($17.6 billion), the banks collectively have the ability to make $176 billion in loans. At 5%, $176 billion can generate $8.8 billion in interest for the banks.
Rather than showing their gratitude by reciprocating, however, six of the seven depository banks have refused to honor California’s IOUs. Worse, three of these six actually received federal bailout money from the taxpayers, something that was supposedly done to keep credit flowing to the states and their citizens. Citibank got $45 billion in bailout money, Wells Fargo got $25 billion, and Bank of America got $45 billion, not to mention guarantees of $300 billion for Citibank and $118 billion for Bank of America. When Governor Schwarzenegger asked for a loan guarantee for a mere $6 billion to bolster California’s credit rating, on the other hand, he was turned down. Californians compose one-eighth of the nation’s population.
When the state’s appeal for aid was rejected by the banks, California State Treasurer Bill Lockyer said he was “disappointed.” He and other state leaders should show their disappointment with their feet. California could pull its deposits out of those depository banks refusing its IOUs and put them instead in its own state-owned bank, following the lead of North Dakota, which now has the only state-owned bank in the country. Set up in 1919 to escape Wall Street predators, the Bank of North Dakota has been generating low-interest credit for the state and its residents for nearly a century. North Dakota is one of only two states (along with Montana) currently able to meet their budgets.
A state-owned bank could be fast-tracked into operation in a matter of weeks. With over $17 billion available to deposit in its own bank, California could create $170 billion or more in credit -- enough not only to meet its budget shortfall but to fund many other much-needed projects; and rather than feeding an ungrateful Wall Street, the bank’s profits would return to the state and its people.
1-3-10
Webpfdebt/com
ESCAPE FROM POTTERSVILLE:
THE NORTH DAKOTA MODEL FOR CAPITALIZING COMMUNITY BANKS...Ellen Brown
http://www.webofdebt.com/articles/pottersville.php
Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota.
Arianna Huffington just posted an article on the Huffington Post that has sparked a remarkable wave of interest, evoking nearly 5,000 comments in less than a week. Called “Move Your Money,” the article maintains that we can get credit flowing again on Main Street by moving our money out of the Wall Street behemoths and into our local community banks. This solution has been suggested before, but Arianna added the very appealing draw of a video clip featuring Jimmy Stewart in It’s a Wonderful Life. In the holiday season, we are all hungry for a glimpse of that wonderful movie that used to be a mainstay of Christmas, showing daily throughout the holidays. The copyright holders have suddenly gotten very Scrooge-like and are allowing it to be shown only once a year on NBC. Whatever their motives, Wall Street no doubt approves of this restriction, since the movie continually reminded viewers of the potentially villainous nature of Big Banking.
Pulling our money out of Wall Street and putting it into our local community banks is an idea with definite popular appeal. Unfortunately, however, this move alone won't be sufficient to strengthen the small banks. Community banks lack capital – money that belongs to the bank -- and the deposits of customers don’t count as capital. Rather, they represent liabilities of the bank, since the money has to be available for the depositors on demand. Bank “capital” is the money paid in by investors plus accumulated retained earnings. It is the net worth of the bank, or assets minus liabilities. Lending ability is limited by a bank’s assets, not its deposits; and today, investors willing to build up the asset base of small community banks are scarce, due to the banks’ increasing propensity to go bankrupt.
It’s a Wonderful Life actually illustrated the weakness of local community banking without major capital backup. George Bailey’s bank was a savings and loan, which lent out the deposits of its customers. It “borrowed short and lent long,” meaning it took in short-term deposits and made long-term mortgage loans with them. When the customers panicked and all came for their deposits at once, the money was not to be had. George’s neighbors and family saved the day by raiding their cookie jars, but that miracle cannot be counted on outside Hollywood.
The savings and loan model collapsed completely in the 1980s. Since then, all banks have been allowed to create credit as needed just by writing it as loans on their books, a system called “fractional reserve” lending. Banks can do this up to a certain limit, which used to be capped by a “reserve requirement” of 10%. That meant the bank had to have on hand a sum equal to 10% of its deposits, either in its vault as cash or in the bank’s reserve account at its local Federal Reserve bank. But many exceptions were carved out of the rule, and the banks devised ways to get around it.
That was when the Bank for International Settlements stepped in and imposed “capital requirements.” The BIS is the “central bankers’ central bank” in Basel, Switzerland. In 1988, its Basel Committee on Banking Supervision published a set of minimal requirements for banks, called Basel I. No longer would “reserves” in the form of other people’s deposits be sufficient to cover loan losses. The Committee said that loans had to be classified according to risk, and that the banks had to maintain real capital – their own money – generally equal to 8% of these “risk-weighted” assets. Half of this had to be “Tier 1" capital, completely liquid assets in the form of equity owned by shareholders – funds paid in by investors plus retained earnings. The other half could include such things as unencumbered real estate and loans, but they still had to be the bank’s own assets, not the depositors’.
For a number of years, U.S. banks managed to get around this rule too. They did it by removing loans from their books, bundling them up as “securities,” and selling them off to investors. But when the "shadow lenders" – the investors buying the bundled loans – realized these securities were far more risky than alleged, they exited the market; and they aren’t expected to return any time soon. That means banks are now stuck with their loans; and if the loans go into default, as many are doing, the assets of the banks must be marked down. The banks can then become “zombie banks” (unable to make new loans) or can go bankrupt and have to close their doors.
The final blow to the easy credit provided by U.S. banks came with another stricture on capital, called Basel II. It manifested in the U.S. as the “mark-to-market” rule, which required a bank’s loan portfolio to be valued at what it could be sold for (the “market”), not its original book value. In today’s unfavorable market, that meant a huge drop in asset value for the banks, dramatically reducing their ability to generate new loans. When the announcement was made in November 2007 that this rule was going to be imposed on U.S. banks, credit dried up and the stock market plunged. The market did not begin to recover until 2009, when the rule was largely lifted. However, on December 17, 2009, the Basel Committee announced plans to impose even tighter capital requirements. The foreseeable result is the collapse of yet more community banks and the drying up of yet more credit on Main Street.
Anchoring Community Banks to State-owned Banks
Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota, one of only two states (along with Montana) expected to meet its budget in 2010. North Dakota was also the only state to actually gain jobs in 2009 while other states were losing them. Since 2000, North Dakota’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but in 2009 it had a budget surplus of $1.3 billion, the largest it ever had – not bad for a state of only 700,000 people.
North Dakota is the only state in the union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its populist organizers originally conceived of the bank as a credit union-like institution that would provide an alternative to predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND now chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve.
However, the BND differs from the Federal Reserve in significant ways. The stock of the branches of the Fed is 100% privately owned by banks. The BND is 100% owned by the state, and it is required to operate in the interest of the public. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.
Although the BND is operated in the public interest, it avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. One of the BND's functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 million to $600 million. This function has helped the state avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate. The secondary market provided by the “shadow lenders” is provided in North Dakota by the BND, something other state banks could do for their community banks as well.
Other services the Bank provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program. When North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.
A New Vision for a New Decade
A state-owned bank has enormous advantages over smaller private institutions: states own huge amounts of capital (cash, investments, buildings, land, parks and other infrastructure), and they can think farther ahead than their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.
The BND is set up as a dba: "the State of North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. The BND's return on equity is about 25 percent. It pays a hefty dividend to the state, projected at over $60 million in 2009. In the last decade, the BND has turned back a third of a billion dollars to the state's general fund, offsetting taxes.
By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts funds from other depositors. These copious deposits can then be used to plow money back into the state in the form of loans.
Although the BND operates mainly as a “bankers’ bank,” other publicly-owned banks, including the Commonwealth Bank of Australia, have successfully engaged in direct commercial lending as well. This has proven to be a win-win for both the borrowers and the government. The public bank model also offers exciting possibilities for refinancing the state’s own debts and funding infrastructure nearly interest-free. For a fuller discussion, see “Cut Wall Street Out! How States Can Finance Their Own Recovery.”
For three centuries, the United States has thrived on what Benjamin Franklin called “ready money” and today we call “ready credit.” We can have that abundance again, by generating our own credit through our own state and local banks. Just as George Bailey needed a visit from an angel to point the way, so we just need the vision to see the possibilities.
Arianna’s vision for moving our money from the large banks into our local community banks is a very admirable first step. However, those community banks are not likely to have sufficient capital to free up credit for their local businesses and other customers without the partnership of state-owned banks, or the publicly-owned banks of counties and larger cities, which also have ample capital assets. A number of states, counties and cities are actively exploring this option. The BND model shows us how government-owned banks and community banks can work together to get money flowing back to Main Street again.
1-21-10
Webofdebt.com
FUNDING PUBLIC HEALTH CARE WITH A PUBLICLY-OWNED BANK:
HOW CANADA DID IT...Ellen Brown
http://www.webofdebt.com/articles/canadian_healthcare.php
The story goes that Churchill offered a woman 5 million pounds to sleep with him. She hedged and said they would have to discuss terms. Then he offered her 5 pounds. “Sir!” she said. “What sort of woman do you think I am?” “Madam,” he replied, “We’ve already established that. Now we’re just haggling over the price.”
The same might be said of President Obama’s health care bill, which was sold out to corporate interests early on. The insurance lobby had its way with the bill; after that they were just haggling over the price. The “public option” was so watered down in congressional deal-making that it finally disappeared altogether.
However, the bill passed both Houses by razor-thin margins, and the stunning loss on January 19 of the late Ted Kennedy’s Democratic seat to a Republican may force Obama to start over with his agenda. The good news is that this means there is still a chance of getting legislation that includes what Obama’s supporters thought they were getting when they elected him – a universal health care plan on the model of Medicare.
That still leaves the question of price, but all industrialized countries except the United States have managed to foot the bill for universal health care. How is it that they can afford it when we can’t? Do they have some secret funding source that we don’t have?
In the case of our nearest neighbor Canada, the answer is actually that they do. At least, they did for the first two decades of their national health service -- long enough to get it up and running. Now the Canadian government, too, is struggling with a mounting debt to private banks at compound interest; and its national health service is suffering along with other public programs. But when Canada first launched its national health service, the funding came from money created by its own central bank. Canada’s innovative funding model is one that could still be followed by a President committed to deliver on his promises.
The Canadian National Health Service Today
Despite what you may have read in the corporate-controlled press, studies show that Canadians are generally happy with the care they receive; and they live an average of 2.5 years longer than Americans. They receive free health service for all diagnostic procedures, hospital and home care deemed medically necessary. People can choose the general practitioners they want; there are no deductibles on basic care; and co-pays are low or zero. Care continues despite changing jobs, and no one is excluded for having a pre-existing condition. Drug prices are negotiated by the government and are paid with public money for the elderly and homeless. For the rest of the population, cost-sharing schemes are arranged between private insurers and provincial governments, with most provinces requiring families to pay small monthly premiums (generally around $100 for a family of four).
According to a 2007 study, the government pays for more than two-thirds of all Canadian health care costs. The US government, by contrast, pays for less than half of these costs. In 2007, the US spent a staggering 16% of GDP on health care compared to 10% in Canada. Health costs paid for out-of-pocket by Canadians amount to less than $300 per capita annually.
But while that arrangement may look good to people in the U.S., it is only a shadow of Canada’s former system. The federal government’s contributions have decreased significantly, making up only slightly more than 20% of provincial medical care costs in 2002; and this money is largely borrowed by the Canadian government at interest. The portion not paid by the federal government must be borne by provincial governments through taxes. In its early years, however, Canada’s public health system was funded under a provision of the Bank of Canada Act allowing the Bank to create the money to finance federal, provincial, and municipal projects on a nearly interest-free basis.
Money Created the Old-fashioned Way – by the Government Rather than the Banks
What was extraordinary about the Bank of Canada was not so much that it created money on its books as that it managed to wrest that power away from the private banking monopoly. All banks actually create the money they lend simply with accounting entries on their books. This was confirmed by Graham Towers, the first governor of the Bank of Canada, in hearings in 1935. Asked whether banks create “the medium of exchange,” he replied:
“That is right. That is what they are there for. . . . That is the banking business, just in the way that a steel plant makes steel. The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all.”
The decision to fund government programs through a publicly-owned central bank was driven by a crisis much like that in the U.S. today. The country was in the throes of the Great Depression, and the money supply had radically contracted, causing businesses to close and unemployment to soar. Many Canadians blamed the private banks for making conditions worse by failing to extend loans.
Prior to the 1935 Bank of Canada Act, private banks in Canada issued their own banknotes, which were regulated less by the government than by the Canadian Banker’s Association. The country’s largest private bank, the Bank of Montreal, served as the government’s de facto banker. By the eve of the Great Depression, interest on Canada’s public debt had reached one-third of government expenditures, and many officials believed that the government needed a central bank to come up with the money to pay its foreign debts. A Royal Commission was put together in 1933 which supported creating a Bank. A major debate then ensued over whether the central bank should be public or private.
Much of the credit for the Canadian public banking model goes to a Canadian mayor named Gerald Gratton McGeer. He has been largely lost to history, and his book The Conquest of Poverty has been long out of print; but according to local historian Will Abrams, it was McGeer’s lengthy presentations to the Ottawa Common Banking Committee that clarified for bankers, economists and legislators how well a publicly-owned bank could work. McGeer’s model was based on the public banking system of Guernsey, an island state between Britain and France. The Guernsey government began issuing currency to pay for public works as far back as 1816. To this day, its system of publicly-issued money has allowed its inhabitants to maintain full employment and enjoy quality infrastructure, while paying modest taxes and without suffering from price inflation.
The Bank of Canada became publicly-owned in 1938 under Prime Minister William Lyon Mackenzie King, a staunch supporter of McGeer’s vision for a public central bank. King maintained:
“Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile. Once a nation parts with the control of its currency and credit, it matters not who makes that nation's laws. Usury, once in control, will wreck any nation.”
What Can Be Done by a Government Issuing Its Own Currency
Along with New Zealand, Australia and other progressive countries, Canada proceeded to fund infrastructure and social programs using national credit issued by its own central bank. The potential of this new credit tool for the Canadian economy was first demonstrated in World War II, in which Canada ranked fourth among the Allies for production of war goods. Under the Returning Veterans Rehabilitation Act of 1945, some 54,000 returning vets were given financial aid to attend university. The Department of Veterans Affairs provided another 80,000 vets with vocational training, and the Veterans’ Land Act helped 33,000 vets buy farmland.
After the War, the Industrial Development Bank, a subsidiary of the Bank of Canada, was formed to boost Canadian businesses by offering loans at low interest rates. The Bank of Canada also funded many infrastructure projects and social programs directly. Under the 1950 Trans Canada Highway Act, Canada built the world’s longest road and the world’s longest inland waterway (a joint venture with the United States), as well as the 28-mile Welland Canal. People over 70, regardless of income or assets, received $40 a month from the government under the Old Age Security Act; and children under 15 got a tax-free allowance of $5-$8 a month.
Canadians first began talking about a government-run health system during the Great Depression, but at that time the government felt it could not afford the service. Various provincial programs were launched in the 1940s, often to care for returning veterans. But it was not until 1957 that the Canadian federal health care system was actually initiated, with funding from the Bank of Canada. A Hospital Act was passed under which the federal government agreed to pay half its citizens’ bills at most hospitals; and a Diagnostic Services Act gave all Canadians free acute hospital care, as well as lab and radiology work. In 1966, the Hospital Act was expanded to cover physician services. In 1984, the Canada Health Act ensured that no medically-necessary care would include private fees or a charge to citizens.
A Misguided Economic Policy Kills the Golden Goose
For three decades, Canada paid for these projects through its own government-owned central bank, without sparking price inflation. Then in the late 1960s, a period of “stagflation” set in --rising prices accompanied by high unemployment. According to former Canadian Defense Minister Paul Hellyer, these elevated prices were the result of “cost-push” inflation, which could be traced to a combination of causes. Big labor unions, big government, and big corporations all negotiated top dollar for their contracts. In 1971, President Richard Nixon took the U.S. dollar off the gold standard, putting a strain on currencies in international markets. In 1974, the price of oil quadrupled, following a secret deal between Henry Kissinger and the OPEC countries in which the latter agreed to sell their oil only in U.S. dollars and to deposit the dollars in U.S. banks. Countries without sufficient dollar reserves had to borrow from these banks to buy the oil they needed, setting a debt trap that sprang shut when U.S. Federal Reserve Chairman Paul Volcker raised interest rates to 20% in 1980.
These increased costs drove up prices worldwide; but in Canada, price inflation was blamed on the government drawing money from its own central bank. Under the sway of the classical monetarist theory promoted by U.S. economist Milton Friedman, the Canadian government abandoned its successful experiment in self-funding and began borrowing from private international lenders. These private banks created “credit” on their books just as the Bank of Canada had done; but they lent it to the government at compound interest, creating a soaring national debt. Today, interest on the debt is the Canadian government’s single largest budget expenditure -- larger than health care, senior entitlements or national defense.
The provision of government-paid services is gradually being undermined by a combination of cuts to funding and provision of private services. Canada’s health care system is suffering along with the rest of the economy, necessitating the cutbacks and long waits for elective procedures described by critics. But the achievements of an earlier debt-free era attest to the sustainability of a system of public health care funded with money issued through the government’s own central bank.
Goosing the Economy Again
The Bank of Canada was created to end the hardships of the depression and give the government full responsibility for the health of the economy. As it turned out, the Bank also funded the health of the Canadian people.
The U.S. government could fund universal health coverage in the same way. Ideally, it would nationalize the Federal Reserve or set up a separate government-owned bank for this purpose. However, the same result could be achieved by borrowing from the privately-owned Federal Reserve, which always rebates the interest to the government after deducting its costs. The federal debt is never paid off but is just rolled over from year to year. Interest-free loans rolled over from year to year are the equivalent of debt-free government-issued money.
Contrary to popular belief, adding to the money supply in this way would not be inflationary. Inflation results when “demand” (“money”) exceeds “supply” (goods and services). In this case the new money would be used to create new goods and services, so supply would be kept in balance with demand. The result would particularly not be inflationary today, when we are suffering from a deflationary crisis. As in the Great Depression, money is not available to buy products and fund programs because the money supply itself has collapsed. The solution is not to slash programs but to put more money into the economy; and that can be done by authorizing the government to create the funds it needs through its own bank.
1-29-10
Opednews.com
BATTLE OF THE TITANS: JPMORGAN VS. GOLDMAN SACHS -- or Why the Market Was Down 7 Days in a Row...Ellen Brown - Writer
http://www.opednews.com/articles/BATTLE-OF-THE-TITANS-JPMO-by-Ellen-Brown-100129-118.html
We are witnessing an epic battle between two banking giants, JPMorgan Chase (Paul Volcker) and Goldman Sachs (Rubin/Geithner). The bodiesstrewn on the battleground could include your pension fund and 401K.
The late Libertarian economist Murray Rothbard wrote that U.S. politics since 1900, when William Jennings Bryan narrowly lost the presidency, has been a struggle between two competing banking giants, the Morgans and the Rockefellers. The parties would sometimes change hands, but the puppeteers pulling the strings were always one of these two big-money players. No popular third party candidate had a real chance at winning, because the bankers had the exclusive power to create the national money supply and therefore held the winning cards.
In 2000, the Rockefellers and the Morgans joined forces, when JPMorgan and Chase Manhattan merged to become JPMorgan Chase Co. Today the battling banking titans are JPMorgan Chase and Goldman Sachs, an investment bank that gained notoriety for its speculative practices in the 1920s. In 1928, it launched the Goldman Sachs Trading Corp., a closed-end fund similar to a Ponzi scheme. The fund failed in the stock market crash of 1929, marring the firm's reputation for years afterwards. Former Treasury Secretaries Henry Paulson and Robert Rubin, came from Goldman, and current Treasury Secretary Timothy Geithner rose through the ranks of government as a Rubin protégé. One commentator called the U.S. Treasury "Goldman Sachs South."
Goldman's superpower status comes from something more than just access to the money spigots of the banking system. It actually has the ability to manipulate markets. Formerly just an investment bank, in 2008 Goldman magically transformed into a bank holding company. That gave it access to the Federal Reserve's lending window; but at the same time it remained an investment bank, aggressively speculating in the markets. The upshot was that it can now borrow massive amounts of money at virtually 0% interest, and it can use this money not only to speculate for its own account but to bend markets to its will.
But Goldman Sachs has been caught in this blatant market manipulation so often that the JPMorgan faction of the banking empire has finally had enough. The voters too have evidently had enough, as demonstrated in the recent upset in Massachusetts that threw the late Senator Ted Kennedy's Democratic seat to a Republican. That pivotal loss gave Paul Volcker, chairman of President Obama's newly formed Economic Recovery Advisory Board, an opportunity to step up to the plate with some proposals for serious banking reform. Unlike the string of Treasury Secretaries who came to the position through the revolving door of Goldman Sachs, former Federal Reserve Chairman Volcker came up through Chase Manhattan Bank, where he was vice president before joining the Treasury. On January 27, market commentator Bob Chapman wrote in his weekly investment newsletter The International Forecaster:
"A split has occurred between the paper forces of Goldman Sachs and JP Morgan Chase. Mr. Volcker represents Morgan interests. Both sides are Illuminists, but the Morgan side is tired of Goldman's greed and arrogance. . . . Not that JP Morgan Chase was blameless, they did their looting and damage to the system as well, but not in the high handed arrogant way the others did. The recall of Volcker is an attempt to reverse the damage as much as possible. That means the influence of Geithner, Summers, Rubin, et al will be put on the back shelf at least for now, as will be the Goldman influence. It will be slowly and subtly phased out. . . . Washington needs a new face on Wall Street, not that of a criminal syndicate."
Goldman's crimes, says Chapman, were that it "got caught stealing. First in naked shorts, then front-running the market, both of which they are still doing, as the SEC looks the other way, and then selling MBS-CDOs to their best clients and simultaneously shorting them."
Volcker's proposal would rein in these abuses, either by ending the risky "proprietary trading" (trading for their own accounts) engaged in by the too-big-to-fail banks, or by forcing them to downsize by selling off those portions of their businesses engaging in it. Until recently, President Obama has declined to support Volcker's plan, but on January 21 he finally endorsed it.
The immediate reaction of the market was to drop and drop, day after day. At least, that appeared to be the reaction of "the market." Financial analyst Max Keiser suggests a more sinister possibility. Goldman, which has the power to manipulate markets with its high-speed program trades, may be engaging in a Mexican standoff. The veiled threat is, "Back off on the banking reforms, or stand by and watch us continue to crash your markets." The same manipulations were evident in the bank bailout forced on Congress by Treasury Secretary Hank Paulson in September 2008.
In Keiser's January 23 broadcast with co-host Stacy Herbert, he explains how Goldman's manipulations are done. Keiser is a fast talker, so this transcription is not verbatim, but it is close. He says:
"High frequency trading accounts for 70% of trading on the New York Stock Exchange. Ordinarily, a buyer and a seller show up on the floor, and a specialist determines the price of a trade that would satisfy buyer and seller, and that's the market price. If there are too many sellers and not enough buyers, the specialist lowers the price. High frequency trading as conducted by Goldman means that before the specialist buys and sells and makes that market, Goldman will electronically flood the specialist with thousands and thousands of trades to totally disrupt that process and essentially commandeer that process, for the benefit of siphoning off nickels and dimes for themselves. Not only are they siphoning cash from the New York Stock Exchange but they are also manipulating prices. What I see as a possibility is that next week, if the bankers on Wall Street decide they don't want to be reformed in any way, they simply set the high frequency trading algorithm to sell, creating a huge negative bias for the direction of stocks. And they'll basically crash the market, and it will be a standoff. The market was down three days in a row, which it hasn't been since last summer. It's a game of chicken, till Obama says, "Okay, maybe we need to rethink this.'"
But the President hasn't knuckled under yet. In his State of the Union address on January 27, he did not dwell long on the issue of bank reform, but he held to his position. He said:
"We can't allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy. The House has already passed financial reform with many of these changes. And the lobbyists are already trying to kill it. Well, we cannot let them win this fight. And if the bill that ends up on my desk does not meet the test of real reform, I will send it back."
What this "real reform" would look like was left to conjecture, but Bob Chapman fills in some blanks and suggests what might be needed for an effective overhaul:
"The attempt will be to bring the financial system back to brass tacks. . . . That would include little or no MBS and CDOs, the regulation of derivatives and hedge funds and the end of massive market manipulation, both by Treasury, Fed and Wall Street players. Congress has to end the "President's Working Group on Financial Markets,' or at least limit its use to real emergencies. . . . The Glass-Steagall Act should be reintroduced into the system and lobbying and campaign contributions should end. . . . No more politics in lending and banks should be limited to a lending ratio of 10 to 1. . . . It is bad enough they have the leverage that they have. State banks such as North Dakota's are a better idea."
On January 28, the predictable reaction of "the market" was to fall for the seventh straight day. The battle of the Titans was on.
12-17-09
New York Times
Global Panel Proposes Stronger Rules for Banks...MATTHEW SALTMARSH and DAVID JOLLY
http://www.nytimes.com/2009/12/18/business/global/18basel.html?_r=3
PARIS — Banks should hold on to more of their earnings and improve the quality of their assets to guard against the kind of shocks that brought the financial system to the brink of collapse, an international financial regulator said Thursday.
The regulator, the Basel Committee on Banking Supervision, which brings together central bankers and regulators from around the world, was charged with developing tighter rules to discourage excessive risk-taking and the use of off-balance sheet accounting. The coordinated approach was meant to smooth regulatory differences and keep financial institutions from playing one nation against another.
The proposals must be adopted by the national governments to become binding.
Building on recommendations made in July, the committee called for lenders to strengthen their capital bases, lower the amount of risky assets they hold and bolster their balance sheets during expansions to prepare for leaner times.
The panel also urged caution on dividends and bonuses, especially for weakened banks, saying it was unacceptable “to use future predictions of recovery as justification for maintaining generous distributions to shareholders, other capital providers and employees.”
Patrick W. Fell, who consults on banking capital regulation at PricewaterhouseCoopers in London, said the report showed that “regulators in the different countries are coming around to the same way of thinking.”
“Differences remain,” Mr. Fell said, “but over the next year and a half they’ll come much closer.”
The committee, based in Basel, Switzerland, at the Bank for International Settlements, called for improving the quality of the so-called Tier 1 capital base, which refers to liquid assets that banks have to retain as a cushion.
It did not provide a target figure. Currently, the global standard Basel II agreement calls for a minimum of 4 percent of “core” Tier 1 capital and 8 percent total Tier 1.
The committee said it would decide on minimum capital requirements through an “impact assessment” and in consultation with banks. But the core Tier 1 capital must be in the form of common shares and retained earnings, it said, adding that the use of hybrid securities — instruments that blend characteristics of debt and equity — would be phased out.
Regulators also called for the introduction of leverage-ratio limits, which would cap the total amount banks could lend out relative to their capital.
That is meant to give regulators a better handle on systemic risk and to close a loophole that allowed financial institutions to take on unmanageable risks even as they adhered to the letter of the law.
The committee called for enacting most of the measures by the end of 2012, but full adoption may take as much as a decade. Banks should also maintain high quality, liquid assets adequate to survive 30 days of “acute short-term stress,” it said.
“The good news is the reforms are going broadly in the right direction to strengthen the capital base and reduce the possibility for regulatory arbitrage,” said Nicolas Véron, a specialist in financial regulation at the Bruegel research center in Brussels. “But there are still significant challenges in terms of the room for circumvention and the consistency of implementation.”