All posts by Ellen Brown

The Public Banking Revolution Is Upon Us

As public banking gains momentum across the country, policymakers in California and Washington state are vying to form the nation’s second state-owned bank, following in the footsteps of the highly successful Bank of North Dakota, founded in 1919. The race is close, with state bank bills now passing their first round of hearings in both states’ senates.

In California, the story begins in 2011, when then-Assemblyman Ben Hueso filed his first bill to explore the creation of a state bank. The bill, which was for a blue-ribbon committee to do a feasibility study, sailed through both legislative houses and seemed to be a go. That is, until Gov. Jerry Brown vetoed it, not on grounds that he disapproved of the concept, but because he said we did not need another blue-ribbon committee. The state had a banking committee that could review the matter in-house. Needless to say, nothing was heard of the proposal after that.

So when now-Sen. Hueso filed SB 528 earlier this year, he went straight for setting up a state bank. The details could be worked out during the two to three years it would take to get a master account from the Federal Reserve, by a commission drawn from in-house staff that had access to the data and understood the issues.

Sen. Hueso also went for the low hanging fruit—a proposal to turn an existing state institution, the California Infrastructure and Development Bank (or “IBank”), into a depository bank that could leverage its capital into multiple loans. By turning the $400 million IBank currently has for loans into bank capital, it could lend $4 billion, backed by demand deposits from the local governments that are its clients. The IBank has a 15-year record of success; experienced staff and detailed procedures already in place; low-risk customers, consisting solely of government entities; and low-interest loans for infrastructure and development that are in such high demand that requests are 30 times current capacity.

The time is also right for bringing the bill, as a growing public banking movement is picking up momentum across the U.S. Over 25 public bank bills are currently active, and dozens of groups are promoting the idea. Advocates include a highly motivated generation of young millennials, who are only too aware that the old system is not working for them and a new direction is needed.

Banks now create most of our money supply and need to be made public utilities, following the stellar precedent of the Bank of North Dakota, which makes below-market loans for local communities and businesses while turning a profit for the state. The Bank of North Dakota was founded in 1919 in response to a farmers’ revolt against out-of-state banks that were foreclosing unfairly on their farms. Since then it has evolved into a $7.4 billion bank that is reported to be even more profitable than JPMorgan Chase and Goldman Sachs, although its mandate is not actually to make a profit but simply to serve the interests of local North Dakota communities. Along with hundreds of public banks worldwide, it has demonstrated what can be done by cutting out private shareholders and middlemen and mobilizing public revenues to serve the public interest.

The time is right politically to adopt that model. The newly elected California governor, Gavin Newsom, has expressed strong interest both in a state-owned bank and in the IBank approach. In Los Angeles, the City Council brought a measure for a city-owned bank that won 44% of the vote in November, and City Council President Herb Wesson has stated that the measure will be brought again. Where there is the political will, policymakers generally find a way.

Advocates in eight Golden State cities have formed the California Public Banking Alliance, which co-sponsored another public banking bill filed just last month. Introduced by Assembly Members David Chiu and Miguel Santiago, Assembly Bill 857 would enable the chartering of public banks by local California governments. The bill, which has broad grassroots support, would “authorize the lending of public credit to public banks and authorize public ownership of stock in public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.”

The first hearing on Hueso’s Senate Bill 528 was held in Sacramento last week before the Senate Committee on Governance and Finance, where it passed. The bill goes next to the Senate Banking Committee. With momentum growing, California could be the first state in the 21st century to form its own bank; but it is getting heavy competition in that race from Washington State.

Washington’s Public Bank Movement: The Virtues of Persistence

Like Sen. Hueso, Washington State Sen. Bob Hasegawa filed his first bill for a state-owned bank nearly a decade ago. The measure is now in its fifth iteration. Along the way, his Senate State Banking Caucus has acquired 23 members, just three votes short of a senate majority.

As Sen. Patty Kuderer explained at an informational forum held by the Caucus in October, their bills kept getting stalled with the same questions and concerns, and they saw that a different approach was needed; so in 2017, they advised the state to hire professional banking consultants to address the concerns and to draft a business plan that would “move the concept forward from the theoretical to the concrete, so that legislators would have a solid idea of what they would eventually be voting on.” They could bypass the studies and go straight to a business plan that laid out the nuts and bolts.

The maneuver worked. Senate Bill 6375 was the first public banking bill to be advanced out of the Policy Committee with bipartisan support. It got stalled in the Ways and Means Committee, but another bill, SB 5959, was filed this year. In yet another bill, SB 6032-Supplemental Budget, the fiscal Ways and Means committee committed $480,000 to assessing risk and developing a business plan for the effort.

The form of the proposed bank was also modified: a bank that simply would have received the state’s tax funds as deposits evolved into a “co-op” that would be open to membership not just by the state but by all “political subdivisions that have a tax base.” Opening the co-op bank’s membership would allow it to generate substantially more credit than could be made from the state’s revenues alone, since it would have the ability to hold as deposits the combined revenues of cities, counties, ports and utility districts, as well as of the state itself. Those entities would also be able to borrow at below-market rates from the co-op bank and to leverage the tax dollars they collected. The concept was similar to that being advanced in California’s SB 528, which would allow the IBank to expand its lending capacity to local governments by taking the demand deposits of those same governments and affiliated public entities.

The Washington State business plan is due no later than June 30, 2019, and legislators expect to vote on the bill no later than 2020.

Whenever it happens, says Sen. Hasegawa, “I see a public bank as almost inevitable because of the current financial structures we’re required to live under.” State infrastructure needs are huge, and the existing funding options—raising taxes, cutting services and increasing debt levels—have been exhausted. Newly-created credit directed into local communities by publicly-owned banks can provide the additional funding that local governments critically need.

Whichever state wins the race for the next state bank, the implications are huge. A century after the very successful Bank of North Dakota proved the model, the time has finally come to apply it across the country.

• This article was first published on Truthdig.com

Why Is the Fed Paying So Much Interest to Banks?

If you invest your tuppence wisely in the bank, safe and sound,
Soon that tuppence safely invested in the bank will compound,

And you’ll achieve that sense of conquest as your affluence expands
In the hands of the directors who invest as propriety demands.

— Mary Poppins, 1964

When Mary Poppins was made into a movie in 1964, Mr. Banks’ advice to his son was sound. Banks were then paying more than 5% interest on deposits, enough to double young Michael’s investment every 14 years.

Now, however, the average savings account pays only 0.10% annually – that’s 1/10th of 1% – and many of the country’s biggest banks pay less than that. If you were to put $5,000 in a regular Bank of America savings account (paying 0.01%) today, in a year you would have collected only 50 cents in interest.

That’s true for most of us, but banks themselves are earning 2.4% on their deposits at the Federal Reserve. These deposits, called “excess reserves,” include the reserves the banks got from our deposits, on which they are paying almost nothing; and unlike with our deposits, there is no $250,000 cap on the sums banks can stash at the Fed amassing interest. A whopping $1.5 trillion in reserves are now sitting in Fed reserve accounts. The Fed rebates its profits to the government after deducting its costs, and interest paid to banks is one of those costs. That means we the taxpayers are paying $36 billion annually to private banks for the privilege of parking their excess reserves at one of the most secure banks in the world – parking their reserves rather than lending them out.

The banks are getting these outsized returns while taking absolutely no risk, since the Fed as “lender of last resort” cannot go bankrupt. This is not true for other depositors, including large institutions such as the pension funds that hold our retirement money. As Matt Levine notes in a March 8 article on Bloomberg:

[I]f you are a large institutional cash investor—a money-market fund, a foreign central bank, things like that—then in some sense you have no way to keep your money perfectly safe…. The closest that big non-banks normally get is “overnight general collateral repo”: You give your money to a bank, and the bank gives you back a Treasury security as collateral, and you can get your money back the next day.

This arrangement is reasonably safe for the institutional investor, which can withdraw its money on a day’s notice; and it gets interest that is close to 2.4%. But the bank is using the investor’s money to run its business, and the bank is leveraged. The money it gets from repoing Treasuries is used to buy other things and to trade in stocks, bonds, derivatives and the like. This makes the repo business highly risky for the market as a whole, as was seen when a run on the repo market triggered the credit crisis of 2008-09. As Jennifer Taub explained the problem in a 2014 article in the New York Times titled “Time to Reduce Repo Run Risk”:

An overnight repo would be like you having a car loan that is due in full every morning and if the lender does not renew your loan that day, you need to find a new one, each and every day or they take your car away.

When trust is strong and cash plentiful, repos are rolled over. When trust reasonably erodes, or there is a panic, cash is demanded from the repo borrowers who might have to sell the collateral or relinquish it…. Indeed, the Federal Reserve Bank of New York has repeatedly warned of the repo “fire sale” risk.

Taub cited FDIC officials Thomas Hoenig and Sheila Bair, who warned that the banks remain dangerously interconnected and vulnerable to sudden runs due to their dependence on short-term, often overnight borrowing through the multitrillion-dollar repo market.

For large institutional investors, one proposed alternative is something called “The Narrow Bank” (TNB). TNB would take large-depositor money and park it at the Fed, and that’s all the bank would do. The Fed would pay 2.4%, TNB would take a small cut, and the rest would be passed to the depositors. But the Fed has refused to open this sort of pass-through account, and in a recent notice of proposed rulemaking it explained why. As Matt Levine summarized its concerns:

[T]he Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.

Besides impairing its ability to target interest rates, the Fed is worried that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo) as well as jeopardizing their lending business. All of which shows, says Levine, that the Fed is not a neutral arbiter. It is working for the banks:

The Fed just gets to decide who gets to compete in the banking business, and how that competition will work, and what their business models can be, by virtue of its control of access to reserve accounts…. There is no modern banking that is independent of the sovereign’s power to control money, and the question is just who the sovereign shares that power with.

The European Approach: Negative Interest Rates

While US banks are being paid an unprecedented 2.4% for leaving their reserves at the Fed, the European Central Bank is taking the opposite tack: it is charging banks a negative interest rate of 0.4% for holding their reserves. The goal is to get banks to move the reserves off their books by making new loans. If they lend money on to the real economy, and particularly to companies, this interest payment may be rebated to the banks under a facility called “targeted longer-term refinancing operations” or TLTROs. In 2016 and 2017, the ECB returned a total of 739 billion euros to banks through TLTROs, and it is expected to renew that program, in an effort to avoid an even greater economic downturn than Europe is suffering now.

Negative interest rates were supposed to be a temporary emergency measure, but in comments on March 27, ECB President Mario Draghi hinted that they could be around for a long time if not permanently. The “new normal” is evidently a chronically abnormal state of emergency in which central banks can experiment with the formerly unthinkable and get away with it.

A Public Option for the Rest of Us

Even if large depositors were allowed to participate in the perks of Fed accounts through TNB, small depositors and small businesses would still be left with a meager 1/10th of 1% annually on their deposits. But some interesting proposals are on the table for opening the Fed’s deposit window to everyone, allowing us all to collect 2.4% on our deposits.

One such plan was presented in a June 2018 policy paper titled “Central Banking for All: A Public Option for Bank Accounts” by a trio of law professors and former Treasury advisors headed by Morgan Ricks. They suggested that for the physical infrastructure to handle so many accounts, the Fed could use the post offices peppered across the country. Postal banking has been popular for two centuries in Europe and was offered in US post offices from 1911 to 1967. Postal banks were in their heyday in the 1930s, when private banks were going bankrupt and were vulnerable to crushing bank runs. The postal banks were government-backed, paid 2% interest on deposits, and were very safe. Congress could have expanded that system into a national public utility that safely and efficiently served the banking needs of local communities. But instead it chose to back the private banking system with federal deposit insurance, guaranteeing private bank deposits with taxpayer funds – again showing how the winners and losers are picked by government officials, depending on whose lobbyists have the most clout.

To prevent public banks from competing with private banks, Congress capped the amount of interest postal banks could pay and strictly limited their lending. As a result, in 1967 the postal banking system was shut down as being no longer competitive or necessary. But efforts are now underway to revive it. In April 2018, US Sen. Kirsten Gillibrand introduced legislation that would require every US post office to provide basic banking services.

A movement is also afoot to establish state- and city-owned banks that would have the ability to lend for infrastructure and other local needs. Local governments cannot get a risk-free 2.4% from the Fed for their demand deposits, but city- or state-owned banks could. Combining postal banks with a network of local public banks having affordable access to the Fed’s deep pocket could provide a safe and efficient public banking option for individuals, businesses and local governments.

This article was first published on Truthdig.com.

Monetary Policy Takes Center Stage: MMT, QE, or Public Banks?

As alarm bells sound over the advancing destruction of the environment, a variety of Green New Deal proposals have appeared in the US and Europe, along with some interesting academic debates about how to fund them. Monetary policy, normally relegated to obscure academic tomes and bureaucratic meetings behind closed doors, has suddenly taken center stage.

The 14 page proposal for a Green New Deal submitted to the US House of Representatives by Congresswoman Alexandria Ocasio Cortez does not actually mention Modern Monetary Theory, but that is th it’s e approach currently capturing the attention of the media – and taking most of the heat. The concept is good: abundance can be ours without worrying about taxes or debt, at least until we hit full productive capacity. But the devil is in the details….

MMT advocates say the government does not need to collect taxes before it spends. It actually creates new money in the process of spending it; and there is plenty of room in the economy for public spending before demand outstrips supply, driving up prices.

Critics, however, say this is not true. The government is not allowed to spend before it has the money in its account, and the money must come from tax revenues or bond sales.

In a 2013 treatise called “Modern Monetary Theory 101: A Reply to Critics,” MMT academics actually concede this point. But they write that “these constraints do not change the end result,” and here the argument gets a bit technical. Their reasoning is that “The Fed is the monopoly supplier of CB currency [central bank reserves], Treasury spends by using CB currency, and since the Treasury obtained CB currency by taxing and issuing treasuries, CB currency must be injected before taxes and bond offerings can occur.”

The counterargument, made by American Monetary Institute researchers among others, is that the central bank is not the monopoly supplier of dollars. The vast majority of the dollars circulating in the United States are created, not by the government, but by private banks when they make loans. The Fed accommodates this process by supplying central bank currency (bank reserves) as needed; and this bank-created money can be taxed or borrowed by the Treasury before a single dollar is spent by Congress. The AMI researchers contend, “All bank reserves are originally created by the Fed for banks. Government expenditure merely transfers (previous) bank reserves back to banks.” As the Federal Reserve Bank of St. Louis puts it, “federal deficits do not require that the Federal Reserve purchase more government securities; therefore, federal deficits, per se, need not lead to increases in bank reserves or the money supply.”

What federal deficits do increase is the federal debt;  and while the debt itself can be rolled over from year to year (as it virtually always is), the exponentially growing interest tab is one of those mandatory budget items that taxpayers must pay. Predictions are that in the next decade, interest alone could add $1 trillion to the annual bill, an unsustainable tax burden.

To fund a project as massive as the Green New Deal, we need a mechanism that involves neither raising taxes nor adding to the federal debt; and such a mechanism is actually proposed in the US Green New Deal – a network of public banks. While little discussed in the US media, that alternative is being debated in Europe, where Green New Deal proposals have been on the table since 2008. European economists have had more time to think these initiatives through, and they are less hampered by labels like “socialist” and “capitalist,” which have long been integrated into their multiparty systems.

A Decade of Gestation in Europe

The first Green New Deal proposal was published in 2008 by the New Economics Foundation on behalf of the Green New Deal Group in the UK. The latest debate is between proponents of the Democracy in Europe Movement 2025 (DiEM25), led by former Greek finance minister Yanis Varoufakis, and French economist Thomas Piketty, author of the best-selling Capital in the 21st Century. Piketty recommends funding a European Green New Deal by raising taxes, while Varoufakis favors a system of public green banks.

Varoufakis explains that Europe needs a new source of investment money that does not involve higher taxes or government deficits. DiEM25 proposes for this purpose “an investment-led recovery, or New Deal, program … to be financed via public bonds issued by Europe’s public investment banks (e.g. the new investment vehicle foreshadowed in countries like Britain, the European Investment Bank and the European Investment Fund in the European Union, etc.).” To ensure that these bonds do not lose their value, the central banks would stand ready to buy them above a certain yield. “In summary, DiEM25 is proposing a re-calibrated real-green investment version of Quantitative Easing that utilises the central bank.

Public development banks already have a successful track record in Europe, and their debts are not considered debts of the government. They are financed not through taxes but by the borrowers when they repay the loans. Like other banks, development banks are moneymaking institutions that not only don’t cost the government money but actually generate a profit for it. DiEM25 collaborator Stuart Holland observes:

While Piketty is concerned to highlight differences between his proposals and those for a Green New Deal, the real difference between them is that his—however well-intentioned—are a wish list for a new treaty, a new institution and taxation of wealth and income. A Green New Deal needs neither treaty revisions nor new institutions and would generate both income and direct and indirect taxation from a recovery of employment. It is grounded in the precedent of the success of the bond-funded, Roosevelt New Deal which, from 1933 to 1941, reduced unemployment from over a fifth to less than a tenth, with an average annual fiscal deficit of only 3 per cent.

Roosevelt’s New Deal was largely funded through the Reconstruction Finance Corporation (RFC), a public financial institution set up earlier by President Hoover. Its funding source was the sale of bonds, but 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; and it funded all this while generating income for the government.

A System of Public Banks and “Green QE”

The US Green New Deal envisions funding with “a combination of the Federal Reserve [and] a new public bank or system of regional and specialized public banks,” which could include banks owned locally by cities and states. As Sylvia Chi, chair of the legislative committee of the California Public Banking Alliance, explains on Medium.com:

The Green New Deal relies on a network of public banks — like a decentralized version of the RFC — as part of the plan to help finance the contemplated public investments. This approach has worked in Germany, where public banks have been integral in financing renewable energy installations and energy efficiency retrofits.

Local or regional public banks, says Chi, could help pay for the Green New Deal by making “low-interest loans for building and upgrading infrastructure, deploying clean energy resources, transforming our food and transportation systems to be more sustainable and accessible, and other projects. The federal government can help by, for example, capitalizing public banks, setting environmental or social responsibility standards for loan programs, or tying tax incentives to participating in public bank loans.”

UK professor Richard Murphy adds another role for the central bank – as the issuer of new money in the form of  “Green Infrastructure Quantitative Easing.” Murphy, who was a member of the original 2008 UK Green New Deal Group, explains:

All QE works by the [central bank] buying debt issued by the government or other bodies using money that it, quite literally, creates out of thin air. … [T]his money creation process is … what happens every time a bank makes a loan. All that is unusual is that we are suggesting that the funds created by the [central bank] using this process be used to buy back debt that is due by the government in one of its many forms, meaning that it is effectively canceled.

The invariable objection to that solution is that it would act as an inflationary force driving up prices, but as argued in my earlier article here, this need not be the case. There is a chronic gap between debt and the money available to repay it that actually needs to be filled with new money every year to avoid a “balance sheet recession.” As UK Prof. Mary Mellor formulates the problem in Debt or Democracy (2016), page 42:

A major contradiction of tying money supply to debt is that the creators of the money always want more money back than they have issued. Debt-based money must be continually repaid with interest. As money is continually being repaid, new debt must be being generated if the money supply is to be maintained.… This builds a growth dynamic into the money supply that would frustrate the aims of those who seek to achieve a more socially and ecologically sustainable economy.

In addition to interest, says Mellor, there is the problem that bankers and other rich people generally do not return their profits to local economies. Unlike public banks, which must use their profits for local needs, the wealthy hoard their money, invest it in the speculative markets, hide it in offshore tax havens, or send it abroad.

To avoid the cyclical booms and busts that have routinely devastated the US economy, this missing money needs to be replaced; and if the new money is used to pay down debt, it will be extinguished along with the debt, leaving the overall money supply and the inflation rate unchanged. If too much money is added to the economy, it can always be taxed back; but as MMTers note, we are a long way from the full productive capacity that would “overheat” the economy today.

Murphy writes of his Green QE proposal:

The QE program that was put in place between 2009 and 2012 had just one central purpose, which was to refinance the City of London and its banks.… What we are suggesting is a smaller programme … to kickstart the UK economy by investing in all those things that we would wish our children to inherit whilst creating the opportunities for everyone in every city, town, village and hamlet in the UK to undertake meaningful and appropriately paid work.

A network of public banks including a central bank operated as a public utility could similarly fund a US Green New Deal – without raising taxes, driving up the federal debt, or inflating prices.

­­­­­­­­­­• This article was first published under a different title on Truthdig.com.

QE Forever: The Fed’s Dramatic About-face

“Quantitative easing” was supposed to be an emergency measure. The Federal Reserve “eased” shrinkage in the money supply due to the 2008-09 credit crisis by pumping out trillions of dollars in new bank reserves. After the crisis, the presumption was that the Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT) – raising interest rates and selling the securities it had bought with new reserves back into the market.

The Fed relentlessly pushed on with quantitative tightening through 2018, despite a severe market correction in the fall. In December, Fed Chairman Jerome Powell said that QT would be on “autopilot,” meaning the Fed would continue to raise interest rates and to sell $50 billion monthly in securities until it hit its target. But the market protested loudly to this move, with the Nasdaq Composite Index dropping 22% from its late-summer high.

Worse, defaults on consumer loans were rising. December 2018 was the first time in two years that all loan types and all major metropolitan statistical areas showed a higher default rate month-over-month. Consumer debt – including auto, student and credit card debt – is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates.

Chairman Powell evidently got the memo. In January, he abruptly changed course and announced that QT would be halted if needed. On February 4th, Mary Daly, president of the Federal Reserve Bank of San Francisco, said they were considering going much further. “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, one that you would use more readily,” she said. QE and QT would no longer be emergency measures but would be routine tools for managing the money supply. In a February 13th article on Seeking Alpha titled “Quantitative Easing on Demand,” Mark Grant wrote:

If the Fed does decide to pursue this strategy it will be a wholesale change in the way the financial system in the United States operates and I think that very few institutions or people appreciate what is taking place or what it will mean to the markets, all of the markets.

The Problem of Debt Deflation

The Fed is realizing that it cannot bring its balance sheet back to “normal.” It must keep pumping new money into the banking system to avoid a recession. This naturally alarms Fed watchers worried about hyperinflation. But QE need not create unwanted inflation if directed properly. The money spigots just need to be aimed at the debtors rather than the creditor banks. In fact, regular injections of new money directly into the economy may be just what the economy needs to escape the boom and bust cycle that has characterized it for two centuries. Mark Grant concluded his article by quoting Abraham Lincoln:

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.

The quote is apparently apocryphal, but the principle still holds: new money needs to be regularly added to the money supply to avoid an overwhelming debt burden and allow the economy to reach its true productive potential. Regular injections of new money are necessary to avoid something economists fear even more than inflation – the sort of “debt deflation” that took down the economy in the 1930s.

Most money today is created by banks when they make loans. When overextended borrowers pay down old loans without taking out new ones, the money supply “deflates” or shrinks. Demand shrinks with it, and businesses lacking customers close their doors, in the sort of self-feeding death spiral seen in the Great Depression.

As Australian economist Steve Keen observes, today the level of private debt is way too high, and that is why so little lending is occurring. But mainstream economists consider the rate of growth of debt to be irrelevant to macroeconomic policy, because lending is thought to simply redistribute spending power from savers to investors. Conventional economic theory says that banks are merely intermediaries, recirculating existing money rather than creating spending power in their own right. But this is not true, says Prof. Keen. Banks actually create new money when they make loans. He cites the Bank of England, which said in its 2014 quarterly report:

[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. . . .

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

Loans create deposits, and deposits make up the bulk of the money supply. Money today is created by banks as a debt on their balance sheets, and more is always owed back than was created, since the interest claimed by the banks is not created in the original loan. Debt thus grows faster than the money supply. When overextended borrowers quit taking out the new loans needed to repay old loans, the gap widens even further. The result is debt deflation – a debt-induced reduction in the new money needed to stimulate economic activity and growth. Thus the need for injections of new money to fill the gap between debt and the money available to repay it.

However, the money created through QE to date has not gone to the consuming public, where it must go to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialized markets. Nomi Prins calls this “dark money” – the trillions of dollars flowing yearly in and around global stock, bond and derivatives markets generated by central banks when they electronically fabricate money by buying bonds and stocks. She writes, “These dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups.” She shows graphically that the rise in dark money is directly correlated with the rise in financial markets.

QE has worked to reverse the debts of the banks and to prop up the stock market, but it has not relieved the debts of consumers, businesses or governments; and it is these debts that will trigger the sort of debt deflation that can take the economy down. Keen concludes that “no amount of exhorting banks to ‘Intermediate’ will end the drought in credit growth that is the real cause of The Great Malaise.” The only way to reduce the private debt burden without causing a depression, he says, is a Modern Debt Jubilee or People’s Quantitative Easing.

QE-funded Debt Relief

In antiquity, as Prof. Michael Hudson observes, debts were routinely forgiven when a new ruler took the throne. The rulers and their advisors knew that debt at interest grew faster than the money supply and that debt relief was necessary to avoid economic collapse from an overwhelming debt overhang. Economic growth is arithmetic and can’t keep up with the exponential growth of debt growing at compound interest.

Consumers need that sort of debt relief today, but simply voiding out their debts as was done in antiquity will not work because the debts are not owed to the government. They are owed to banks and private investors who would have to bear the loss. The alternative suggested by Keen and others is to fill the debt gap with a form of QE dropped not into bank reserve accounts but digitally into the bank accounts of the general public. Debtors could then use the money to pay down their debts. In fact, Keen says it should go first to pay down debts. Non-debtors would receive a cash injection.

Properly managed, these injections need not create inflation. (See my earlier article here.) Money is created as loans and extinguished when they are paid off, so the money used to pay down debt would be extinguished along with the debt. And the cash injections not used to pay down debt would just help fill the gap between real and potential productivity, allowing demand and supply to rise together, keeping prices stable.

A regular injection of money into personal bank accounts has been called a “universal basic income,” but better would be to call it a “national dividend” – something all citizens are entitled to equally, without regard to economic status or ability to work. It would serve as a safety net for people living paycheck to paycheck, but the larger purpose would be as economic policy to stimulate demand and productivity, keeping the wheels of industry turning.

Money might then indeed become a servant of humanity, transformed from a tool of oppression into a means of securing common prosperity. But first the central bank needs to become a public servant. It needs to be made a public utility, responsive to the needs of the people and the economy.

• This article was first published on Truthdig.com.

The Venezuela Myth Keeping Us From Transforming Our Economy

Modern Monetary Theory (MMT) is getting significant media attention these days, after Alexandria Ocasio-Cortez said in an interview that 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 advisor Prof. 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, and then not to fund government spending but 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 February 1st 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 raise 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%, and inflation is predicted to hit 1,000,000% 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 that the US does not have and will never have: it owes massive debts in a currency it cannot print itself, namely US dollars. When oil (its principal resource) was booming, Venezuela was able to meet its repayment schedule. But when oil plummeted, the government was reduced to printing Venezuelan Bolivars and selling them for US 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. Prof. Michael Hudson, an 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. A number of contemporary and historical examples were discussed 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. US economic sanctions have been going on for years, causing at least $20 billion in losses to the country. About $7 billion of its assets are now being held hostage by the US, which has waged an undeclared war against Venezuela ever since George W. Bush’s failed military coup against President Hugo Chavez in 2002. Chavez boldly announced the “Bolivarian Revolution,” a series of economic and social reforms that dramatically reduced poverty and illiteracy and improved health and living conditions for millions of Venezuelans. The reforms, which included nationalizing key components of the nation’s economy, made Chavez a hero to millions of people and the enemy of Venezuela’s oligarchs.

Nicolas Maduro was elected president following Chavez’s death in 2013 and vowed to continue the Bolivarian Revolution. Like Saddam Hussein and Omar Gaddafi before him, he defiantly announced that Venezuela would not be trading oil in US dollars, following sanctions imposed by President Trump.

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

Bolton does not even pretend that it’s all about restoring “democracy.” He 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 US tactics against 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 US 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 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 US, in 2009 the government nationalized seven Venezuelan banks, accounting for around 12% of the nation’s bank deposits.  In 2010, more were taken over.  The 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% of assets as of March 2011, while foreign institutions held just 13.2% of assets.

Over the howls of the media, in 2010 Chavez took the bold step of passing legislation defining the banking industry as one of “public service.”  The legislation specified that 5% of the banks’ net profits must go towards 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 the operations of private financial institutions.  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 an April 2012 article called “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% 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 the progressive wing of the Democratic Party is stepping in in the US – and why AOC’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. 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, however, our government does not adequately represent the people. We first need to take our government back, and that is what AOC and her congressional allies are attempting to do.

• First published on Truthdig.com.

Why Germany Leads in Renewables: It Has Its Own Green Bank

The Green New Deal endorsed by Alexandria Ocasio-Cortez and more than 40 other US Representatives has been criticized as imposing a too-heavy burden on the rich and upper-middle-class taxpayers who will have to pay for it, but taxing the rich is not what the Green New Deal resolution proposes. It says funding will come primarily from certain public agencies, including the 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, like 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 belonging to bilateral or multinational development institutions that are jointly owned by multiple governments. Unlike the US 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 advisor on President 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 Wiederaufbau or “Reconstruction Credit Institute”), which is even larger than the World Bank. Along with Germany’s non-profit 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 assets as of December 2017 of $566.5 billion. 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? Apparently 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 US 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% of the country’s electricity in 2017, up from just 6% in 2000; and public banks provided over 72% 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 but has been ranked one of the two safest banks in the world. (The other is also a publicly-owned bank, the Zurich Cantonal Bank in Switzerland.) 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 from 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%. By 2017, the issue volume of KfW Green Bonds was $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; and the bank can offer these low rates because its triple-A ratings allow it to cheaply mobilize funds from capital markets, and because 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 US banks were bankrupt and incapable of financing the country’s recovery. Roosevelt attempted to set up a system of 12 public “industrial banks” through the Federal Reserve, but the measure failed; so he made an end run around his opponents by using the RFC that had been set up earlier by President 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; and it funded all 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 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 Eisenhower. The United States was left without a development bank, while Germany and other countries were hitting the ground running with theirs.

Today some US 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 revenues. 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. (See my earlier article here.)

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.

This article was first published on Truthdig.com.

Universal Basic Income Is Easier Than It Looks

Calls for a Universal Basic Income have been increasing, most recently as part of the Green New Deal introduced by Rep. Alexandria Ocasio-Cortez (D-NY) and supported in the last month by at least 40 members of Congress. A Universal Basic Income (UBI) is a monthly payment to all adults with no strings attached, similar to Social Security. Critics say the Green New Deal asks too much of the rich and upper-middle-class taxpayers who will have to pay for it, but taxing the rich is not what the resolution proposes. It says funding would primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks,” and other vehicles.

The Federal Reserve alone could do the job. It could buy “Green” federal bonds with money created on its balance sheet, just as the Fed funded the purchase of $3.7 trillion in bonds in its “quantitative easing” program to save the banks. The Treasury could also do it. The Treasury has the constitutional power to issue coins in any denomination, even trillion dollar coins. What prevents legislators from pursuing those options is the fear of hyperinflation from excess “demand” (spendable income) driving prices up. But, in fact, the consumer economy is chronically short of spendable income, due to the way money enters the consumer economy. We actually need regular injections of money to avoid a “balance sheet recession” and allow for growth, and a UBI is one way to do it.

The pros and cons of a UBI are hotly debated and have been discussed elsewhere. The point here is to show that it could actually be funded year after year without driving up taxes or prices. New money is continually being added to the money supply, but it is added as debt created privately by banks. (How banks rather than the government create most of the money supply today is explained on the Bank of England website here.) A UBI would replace money-created-as-debt with debt-free money – a “debt jubilee” for consumers – while leaving the money supply for the most part unchanged; and to the extent that new money was added, it could help create the demand needed to fill the gap between actual and potential productivity.

The Debt Overhang Crippling Economies

The “bank money” composing most of the money in circulation is created only when someone borrows, and today businesses and consumers are burdened with debts that are higher than ever before. In 2018, credit card debt alone exceeded $1 trillion, student debt exceeded $1.5 trillion, auto loan debt exceeded $1.1 trillion, and non-financial corporate debt hit $5.7 trillion. When businesses and individuals pay down old loans rather than taking out new loans, the money supply shrinks, causing a “balance sheet recession.” In that situation, the central bank, rather than removing money from the economy (as the Fed is doing now), needs to add money to fill the gap between debt and the spendable income available to repay it.

Debt always grows faster than the money available to repay it. One problem is the interest, which is not created along with the principal, so more money is always owed back than was created in the original loan. Beyond that, some of the money created as debt is held off the consumer market by “savers” and investors who place it elsewhere, making it unavailable to companies selling their wares and the wage-earners they employ. The result is a debt bubble that continues to grow until it is not sustainable and the system collapses, in the familiar death spiral euphemistically called the “business cycle.” As economist Michael Hudson shows in his 2018 book And Forgive Them Their Debts, this inevitable debt overhang was corrected historically with periodic “debt jubilees” – debt forgiveness – something he argues we need to do again today.

For governments, a debt jubilee could be effected by allowing the central bank to buy government securities and hold them on its books. For individuals, one way to do it fairly across the board would be with a UBI.

Why a UBI Need Not Be Inflationary

In a 2018 book called The Road to Debt Bondage: How Banks Create Unpayable Debt, political economist Derryl Hermanutz proposes a central-bank-issued UBI of one thousand dollars per month, credited directly to people’s bank accounts. Assuming this payment went to all US residents over 18, or about 241 million people, the outlay would be close to $3 trillion annually. For people with overdue debt, Hermanutz proposes that it automatically go to pay down those debts. Since money is created as loans and extinguished when they are repaid, that portion of a UBI disbursement would be extinguished along with the debt.

People who were current on their debts could choose whether or not to pay them down, but many would also no doubt go for that option. Hermanutz estimates that roughly half of a UBI payout could be extinguished in this way through mandatory and voluntary loan repayments. That money would not increase the money supply or demand. It would just allow debtors to spend on necessities with debt-free money rather than hocking their futures with unrepayable debt.

He estimates that another third of a UBI disbursement would go to “savers” who did not need the money for expenditures. This money, too, would not be likely to drive up consumer prices, since it would go into investment and savings vehicles rather than circulating in the consumer economy. That leaves only about one-sixth of payouts, or $500 billion, that would actually be competing for goods and services; and that sum could easily be absorbed by the “output gap” between actual and forecasted productivity.

According to a July 2017 paper from the Roosevelt Institute called “What Recovery? The Case for Continued Expansionary Policy at the Fed”:

GDP remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10% below the Congressional Budget Office’s (CBO) 2006 forecast, and shows no signs of returning to the predicted level.

The report showed that the most likely explanation for this lackluster growth was inadequate demand. Wages have remained stagnant; and before producers will produce, they need customers knocking on their doors.

In 2017, the US Gross Domestic Product was $19.4 trillion. If the economy is running at 10% below full capacity, $2 trillion could be injected into the economy every year without creating price inflation. It would just generate the demand needed to stimulate an additional $2 trillion in GDP. In fact, a UBI might pay for itself, just as the G.I. Bill produced a sevenfold return from increased productivity after World War II.

The Evidence of China

That new money can be injected year after year without triggering price inflation is evident from a look at China. In the last 20 years, its M2 money supply has grown from just over 10 trillion yuan to 80 trillion yuan ($11.6T), a nearly 800% increase. Yet the inflation rate of its Consumer Price Index (CPI) remains a modest 2.2%.

Why has all that excess money not driven prices up? The answer is that China’s Gross Domestic Product has grown at the same fast clip as its money supply. When supply (GDP) and demand (money) increase together, prices remain stable.

Whether or not the Chinese government would approve of a UBI, it does recognize that to stimulate productivity, the money must get out there first; and since the government owns 80% of China’s banks, it is in a position to borrow money into existence as needed. For “self-funding” loans – those that generate income (fees for rail travel and electricity, rents for real estate) – repayment extinguishes the debt along with the money it created, leaving the net money supply unchanged. When loans are not repaid, the money they created is not extinguished; but if it goes to consumers and businesses that then buy goods and services with it, demand will still stimulate the production of supply, so that supply and demand rise together and prices remain stable.

Without demand, producers will not produce and workers will not get hired, leaving them without the funds to generate supply, in a vicious cycle that leads to recession and depression. And that cycle is what our own central bank is triggering now.

The Fed Tightens the Screws

Rather than stimulating the economy with new demand, the Fed has been engaging in “quantitative tightening.” On December 19, 2018, it raised the fed funds rate for the ninth time in 3 years, despite a “brutal” stock market in which the Dow Jones Industrial Average had already lost 3,000 points in 2-½ months. The Fed is still struggling to reach even its modest 2% inflation target, and GDP growth is trending down, with estimates at only 2-2.7% for 2019. So why did it again raise rates, over the protests of commentators including the president himself?

For its barometer, the Fed looks at whether the economy has hit “full employment,” which it considers to be 4.7% unemployment, taking into account the “natural rate of unemployment” of people between jobs or voluntarily out of work. At full employment, workers are expected to demand more wages, causing prices to rise. But unemployment is now officially at 3.7% – beyond technical full employment – and neither wages nor consumer prices have shot up. There is obviously something wrong with the theory, as is evident from a look at Japan, where prices have long refused to rise despite a serious lack of workers.

The official unemployment figures are actually misleading. Including short-term discouraged workers, the rate of US unemployed or underemployed workers as of May 2018 was 7.6%, double the widely reported rate. When long-term discouraged workers are included, the real unemployment figure was 21.5%. Beyond that large untapped pool of workers, there is the seemingly endless supply of cheap labor from abroad and the expanding labor potential of robots, computers and machines. In fact, the economy’s ability to generate supply in response to demand is far from reaching full capacity today.

Our central bank is driving us into another recession based on bad economic theory. Adding money to the economy for productive, non-speculative purposes will not drive up prices so long as materials and workers (human or mechanical) are available to create the supply necessary to meet demand; and they are available now. There will always be price increases in particular markets when there are shortages, bottlenecks, monopolies or patents limiting competition, but these increases are not due to an economy awash with money. Housing, healthcare, education and gas have all gone up, but it is not because people have too much money to spend. In fact, it is those necessary expenses that are driving people into unrepayable debt, and it is this massive debt overhang that is preventing economic growth.

Without some form of debt jubilee, the debt bubble will continue to grow until it can again no longer be sustained. A UBI can help correct that problem without fear of “overheating” the economy, so long as the new money is limited to filling the gap between real and potential productivity and goes into generating jobs, building infrastructure and providing for the needs of the people, rather than being diverted into the speculative, parasitic economy that feeds off them.

This article was first published on Truthdig.com

This Radical Plan to Fund the “Green New Deal” Just Might Work

With what Naomi Klein calls “galloping momentum,” the “Green New Deal” promoted by newly-elected Rep. Alexandria Ocasio-Cortez (D-NY) appears to be forging a political pathway for solving all of the ills of society and the planet in one fell swoop. It would give a House Select Committee “a mandate that connects the dots between energy, transportation, housing, as well as healthcare, living wages, a jobs guarantee” and more. But to critics even on the left it is just political theater, since “everyone knows” a program of that scope cannot be funded without a massive redistribution of wealth and slashing of other programs (notably the military), which is not politically feasible.

Perhaps, but Ocasio-Cortez and the 22 representatives joining her in calling for a Select Committee are also proposing a novel way to fund the program, one which could actually work. The resolution says funding will primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks, public venture funds and such other vehicles or structures that the select committee deems appropriate, in order to ensure that interest and other investment returns generated from public investments made in connection with the Plan will be returned to the treasury, reduce taxpayer burden and allow for more investment.”  

A network of public banks could fund the Green New Deal in the same way President Franklin Roosevelt funded the original New Deal. At a time when the banks were bankrupt, he used the publicly-owned Reconstruction Finance Corporation as a public infrastructure bank. The Federal Reserve could also fund any program Congress wanted, if mandated to do it. Congress wrote the Federal Reserve Act and can amend it. Or the Treasury itself could do it, without the need even to change any laws. The Constitution authorizes Congress to “coin money” and “regulate the value thereof,” and that power has been delegated to the Treasury. It could mint a few trillion dollar platinum coins, put them in its bank account, and start writing checks against them. What stops legislators from exercising those constitutional powers is simply that “everyone knows” Zimbabwe-style hyperinflation will result. But will it? Compelling historical precedent shows that this need not be the case.

Michael Hudson, professor of economics at the University of Missouri, Kansas City, has studied the hyperinflation question extensively. He writes that those disasters were not due to government money-printing to stimulate the economy. Rather, “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.”

As long as workers and materials are available and the money is added in a way that reaches consumers, adding money will create the demand necessary to prompt producers to create more supply. Supply and demand will rise together and prices will remain stable. The reverse is also true. If demand (money) is not increased, supply and GDP will not go up. New demand needs to precede new supply.

The Public Bank Option: The Precedent of Roosevelt’s New Deal

Infrastructure projects of the sort proposed in the Green New Deal are “self-funding,” generating resources and fees that can repay the loans. For these loans, advancing funds through a network of publicly-owned banks will not require taxpayer money and can actually generate a profit for the government. That was how the original New Deal rebuilt the country in the 1930s at a time when the economy was desperately short of money.

The publicly-owned Reconstruction Finance Corporation (RFC) was a remarkable publicly-owned credit machine that allowed the government to finance the New Deal and World War II without turning to Congress or the taxpayers for appropriations. First instituted in 1932 by President Herbert Hoover, the RFC was not called an infrastructure bank and was not even a bank, but it served the same basic functions. It was continually enlarged and modified by President Roosevelt to meet the crisis of the times, until it became America’s largest corporation and the world’s largest financial organization. Its semi-independent status let it work quickly, allowing New Deal agencies to be financed as the need arose.

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). The initial capital came from a stock sale to the US Treasury. With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. A small part of this came from its initial capitalization. The rest was borrowed, chiefly from the government itself. Bonds were sold to the Treasury, some of which were then sold to the public; but most were held by the Treasury. The RFC ended up borrowing a total of $51.3 billion from the Treasury and $3.1 billion from the public.

Thus the Treasury was the lender, not the borrower, in this arrangement. As the self-funding loans were repaid, so were the bonds that were sold to the Treasury, leaving the RFC with a net profit. The RFC was the lender for thousands of infrastructure and small business projects that revitalized the economy, and these loans produced a total net income of $690,017,232 on the RFC’s “normal” lending functions (omitting such things as extraordinary grants for wartime). The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.

The Central Bank Option: How Japan Is Funding Abenomics with Quantitative Easing 

The Federal Reserve is another funding option before the Green New Deal. The Fed showed what it can do with “quantitative easing” when it created the funds to buy $2.46 trillion in federal debt and $1.77 trillion in mortgage-backed securities, all without inflating consumer prices. The Fed could use the same tool to buy bonds ear-marked for a Green New Deal; and since it returns its profits to the Treasury after deducting its costs, the bonds would be nearly interest-free. If they were rolled over from year to year, the government would in effect be issuing new money.

This is not just theory. Japan is actually doing it, without creating even the modest 2 percent inflation the government is aiming for. “Abenomics,” the economic agenda of Japan’s Prime Minister Shinzo Abe, combines central bank quantitative easing with fiscal stimulus (large-scale increases in government spending). Since Abe came into power in 2012, Japan has seen steady economic growth, and its unemployment rate has fallen by nearly half; yet inflation remains very low, at 0.7 percent. Social Security-related expenses accounted for 55 percent of general expenditure in the 2018 federal budget, and a universal healthcare insurance system is maintained for all citizens. Nominal GDP is up 11 percent since the end of the first quarter of 2013, a much better record than during the prior two decades of Japanese stagnation; and the Nikkei stock market is at levels not seen since the early 1990s, driven by improved company earnings. Growth remains below targeted levels, but according to the Financial Times in May 2018, this is because fiscal stimulus has actually been too small. While spending with the left hand, the government has been taking the money back with the right, increasing the sales tax from 5 percent to 8 percent.

Abenomics has been declared a success even by the once-critical International Monetary Fund. After Prime Minister Shinzo Abe crushed his opponents in October 2017, Noah Smith wrote in Bloomberg, “Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power – govern pragmatically, focus on the economy and give people what they want.” He said everyone who wanted a job had one; small and midsized businesses were doing well; and the BOJ’s unprecedented program of monetary easing had provided easy credit for corporate restructuring without generating inflation. Abe had also vowed to make both preschool and college free.

Not that all is idyllic in Japan. Forty percent of Japanese workers lack secure full-time employment and adequate pensions. But the point underscored here is that large-scale digital money-printing by the central bank to buy back the government’s debt combined with fiscal stimulus by the government (spending on “what the people want”) has not inflated Japanese prices, the alleged concern preventing other countries from doing it.

Abe’s novel economic program has achieved more than just stimulating growth. By selling its debt to its own central bank, which returns the interest to the government, the Japanese government has in effect been canceling its debt; and until recently, it was doing this at the rate of a whopping $720 billion (¥80tn) per year. According to 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 suit and bought 40 percent of the US national debt, it would be holding $8 trillion in federal securities, three times its current holdings from its quantitative easing programs. Yet liquidating a full 40 percent of Japan’s government debt has not triggered price inflation.

Filling the Gap Between Wages, Debt and GDP

Rather than stepping up its bond-buying, the Federal Reserve is now bent on “quantitative tightening,” raising interest rates and reducing the money supply by selling its bonds into the market in anticipation of “full employment” driving up prices. “Full employment” is considered to be 4.7 percent unemployment, taking into account the “natural rate of unemployment” of people between jobs or voluntarily out of work. But the economy has now hit that level and prices are not in the danger zone, despite nearly 10 years of “accommodative” monetary policy. In fact, the economy is not near either true full employment or full productive capacity, with Gross Domestic Product remaining well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10 percent below the 2006 forecast of the Congressional Budget Office, and it shows no signs of returning to the predicted level.

In 2017, US gross domestic product was $19.4 trillion. Assuming that sum is 10 percent below full productive capacity, the money circulating in the economy needs to be increased by another $2 trillion to create the demand to bring it up to full capacity. That means $2 trillion could be injected into the economy every year without creating price inflation. New supply would just be generated to meet the new demand, bringing GDP to full capacity while keeping prices stable.

This annual injection of new money not only can be done without creating price inflation; it actually needs to be done to reverse the massive debt bubble now threatening to propel the economy into another Great Recession. Moreover, the money can be added in such a way that the net effect will not be to increase the money supply. Virtually our entire money supply is created by banks as loans, and any money used to pay down those loans will be extinguished along with the debt. Other money will be extinguished when it returns to the government in the form of taxes. The mechanics of that process, and what could be done with another $2 trillion injected directly into the economy yearly, will be explored in Part 2 of this article.

This article was first posted on Truthdig.com

Trump’s War on the Fed

October was a brutal month for the stock market. After the Federal Reserve’s eighth interest rate hike, on September 26, the Dow Jones Industrial Average dropped more than 2,000 points, and the NASDAQ had its worst month in nearly 10 years. After the Dow lost more than 800 points on October 10 and the S and P 500 suffered its first week-long losing streak since Trump’s election, the president said, “I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy.” In a later interview on Fox News, he called the Fed’s rate hikes “loco.” And in a Wall Street Journal interview published on October 24, Trump said he thought the biggest risk to the economy was the Federal Reserve, because “interest rates are being raised too quickly.” He also criticized the Fed and its chairman in July and August.

Trump’s criticisms are worrisome to some commentators, who fear he is attempting to manipulate the Fed and its chairman for political gain. Ever since the 1970s, the Fed has declared its independence from government, and presidents are supposed to avoid influencing its decisions. But other Fed watchers think politicians should be allowed to criticize the market manipulations of an apparently out-of-control central bank.

Why the Frontal Attack?

Even if the president’s challenges are a needed check on the Fed, some question whether he is going about it in the right way. Challenging the central bank in public forces it to stick to its guns, because it must maintain its credibility with the markets by showing that its decisions are based on sound economic principles rather than on political influence. If the president really wants the Fed to back off on interest rates, it has been argued, he should do it with a nod and a nudge, not a frontal attack on the Fed’s sanity.

True, but perhaps the president’s goal is not to subtly affect Fed behavior so much as to make it patently obvious who is to blame when the next Great Recession hits. And recession is fairly certain to hit, because higher interest rates almost always trigger recessions. The Fed’s current policy of “quantitative tightening”—tightening or contracting the money supply—is the very definition of recession, a term Wikipedia defines as “a business cycle contraction which results in a general slowdown in economic activity.”

This “business cycle” is not something inevitable, like the weather. It is triggered by the central bank. When the Fed drops interest rates, banks flood the market with “easy money,” allowing speculators to snatch up homes and other assets. When the central bank then raises interest rates, it contracts the amount of money available to spend and to pay down debt. Borrowers go into default and foreclosed homes go on the market at fire-sale prices, again to be snatched up by the monied class.

But it is a game of Monopoly that cannot go on forever. According to Elga Bartsch, chief European economist at Morgan Stanley, one more financial cataclysm could be all that it takes for central bank independence to end. “Having been overburdened for a long time, many central banks might just be one more economic downturn or financial crisis away from a full-on political backlash,” she wrote in a note to clients in 2017. “Such a political backlash could call into question one of the long-standing tenets of modern monetary policy making—central bank independence.”

And that may be the president’s endgame. When higher rates trigger another recession, Trump can point an accusing finger at the central bank, absolving his own policies of liability and underscoring the need for a major overhaul of the Fed.

End the Fed

Trump has not overtly joined the End the Fed campaign, but he has had the ear of several advocates of that approach. One is John Allison, whom the president evidently considered for both Fed chairman and treasury secretary. Allison has proposed ending the Fed altogether and returning to the gold standard, and Trump suggested on the campaign trail that he approved of a gold-backed currency.

But a gold standard is the ultimate in tight money—keeping money in limited supply tied to gold—and today Trump seems to want to return to the low-interest policies of former Fed Chair Janet Yellen. Jerome Powell, Trump’s replacement pick, has been called “Yellen without Yellen,” a dovish alternative in acceptable Republican dress. That’s what the president evidently thought he was getting, but in his October 24 Wall Street Journal interview, Trump said of Powell, “[H]e was supposed to be a low-interest-rate guy. It’s turned out that he’s not.” The president complained:

[E]very time we do something great, he raises the interest rates. … That means we pay more on debt and we slow down the economy, both bad things. … I mean, we had a case where he raised interest rates right before we have a bond offering. So you have a bond offering and you have somebody raising interest rates, so you end up paying more on the bonds. … To me it doesn’t make sense.

Trump acknowledged the independence of the Fed and its chairman but said, “I’m allowed to say what I think. … I think he’s making a mistake.”

Presidential Impropriety or a Needed Debate

In a November 2016 article in Politico titled “Donald Trump Isn’t Crazy to Attack the Fed,” Danny Vinik agreed with that contention. Trump, who is not a stickler for consistency, was then criticizing Yellen for keeping interest rates too low. Vinik said that while he disagreed with Trump’s interpretation of events, he agreed that the president should be allowed to talk about Fed policy. Vinik observed:

The Federal Reserve is, by definition, not independent. Unlike the Supreme Court, the central bank is a creation of Congress and is accountable to lawmakers on Capitol Hill. It can be changed—or abolished—by Congress as well. And to pretend it’s not—to treat the Fed as an entity totally removed from American politics—also leaves us powerless to talk about the ways it might be improved. …

The long tradition of deference to the Fed’s policy independence can even pose a risk: It creates an environment in which any critique of the Fed is seen as out of line, including the idea of reforming how it works.

Vinik quoted Andrew Levin, a Dartmouth economist and 20-year veteran of the Fed, who published a set of recommended central bank reforms in conjunction with the Center for Popular Democracy’s Fed Up campaign in 2016. One goal was to make the Federal Open Market Committee, which sets Fed policy, more representative of the American public. The FOMC is composed of the president of the New York Fed, four other Federal Reserve bank presidents and the Federal Reserve Board, which currently has only four members (three positions are vacant). That means the FOMC is majority-controlled by heads of Federal Reserve banks, all of whom must have “tested banker experience.” As Vinik quoted Levin:

The Federal Reserve is a crucial public agency, so there are lots of important questions—including the selection of its leaders, the determination of their priorities, and the specific strategy that they’re following—that should all be open to public discourse.

Vinik also cited Ady Barkan, the head of the Fed Up campaign, who agreed that questioning Fed policy is appropriate, even for the president. Barkan said the Fed’s independence comes from its structure: Its leaders are appointed, not elected, for long terms, which inherently insulates them from political pressure. But the Fed must still be accountable to the public, and one way policymakers fulfill that responsibility is through public comments. Monetary policy decisions, said Barkan, are therefore appropriate topics for political debate.

Reassessing Fed Independence

According to Timothy Canova, professor of law and public finance at Nova Southeastern University, the Fed is not a neutral arbiter. It might be independent of oversight by politicians, but Fed “independence” has really come to mean a central bank that has been captured by very large banking interests. This has not always been the case. During the period coming out of the Great Depression, the Fed as a practical matter was not independent, but took its marching orders from the White House and the Treasury; and that period, says Canova, was the most successful in American economic history.

The Fed’s justification for raising interest rates despite admittedly low inflation is that we are nearing “full employment,” which will drive up prices because labor costs will go up. But wages have not gone up. Why? Because in a globalized world, the availability of cheap labor abroad keeps American wages low, even if most people are working (which is questionable today, despite official statistics).

Higher interest rates do not serve consumers, homebuyers, businesses or governments. They serve the banks that dominate the policy-setting FOMC. The president’s critiques of the Fed, however controversial, have opened the door to a much-needed discourse on whether the fate of the economy should be in the hands of unelected bureaucrats marching to the drums of Wall Street.

Postscript: The stock market has turned positive as of this writing (Thursday), but the rebound has been led by the FANG stocks—Facebook, Amazon, Netflix and Google. As noted in my article of Sept. 13, these are the stocks that central banks are now purchasing in large quantities. The FANG stocks jumped in unison on Wednesday, although only one (Facebook) had positive news to report, suggesting possible market manipulation for political purposes.

•  Article first published at Truthdig

How America can Free Itself from Wall Street

Wall Street owns the country.  That was the opening line of a fiery speech that populist leader Mary Ellen Lease delivered around 1890. Franklin Roosevelt said it again in a letter to Colonel House in 1933, and Sen. Dick Durbin was still saying it in 2009. “The banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill,” Durbin said in an interview. “And they frankly own the place.”

Wall Street banks triggered a credit crisis in 2008-09 that wiped out over $19 trillion in household wealth, turned some 10 million families out of their homes and cost almost 9 million jobs in the U.S. alone. Yet the banks were bailed out without penalty, while defrauded home buyers were left without recourse or compensation. The banks made a killing on interest rate swaps with cities and states across the country, after a compliant and accommodating Federal Reserve dropped interest rates nearly to zero. Attempts to renegotiate these deals have failed.

In Los Angeles, the City Council was forced to reduce the city’s budget by 19 percent following the banking crisis, slashing essential services, while Wall Street has not budged on the $4.9 million it claims annually from the city on its swaps. Wall Street banks are now collecting more from Los Angeles just in fees than it has available to fix its ailing roads.

Local governments have been in bondage to Wall Street ever since the 19th century despite multiple efforts to rein them in. Regulation has not worked. To break free, we need to divest our public funds from these banks and move them into our own publicly owned banks.

L.A. Takes It to the Voters

Some cities and states have already moved forward with feasibility studies and business plans for forming their own banks. But the city of Los Angeles faces a barrier to entry that other cities don’t have. In 1913, the same year the Federal Reserve was formed to backstop the private banking industry, the city amended its charter to state that it had all the powers of a municipal corporation, “with the provision added that the city shall not engage in any purely commercial or industrial enterprise not now engaged in, except on the approval of the majority of electors voting thereon at an election.”

Under this provision, voter approval would apparently not be necessary for a city-owned bank that limited itself to taking the city’s deposits and refinancing municipal bonds as they came due, since that sort of bank would not be a “purely commercial or industrial enterprise” but would simply be a public utility that made more efficient use of public funds. But voter approval would evidently be required to allow the city to explore how public banks can benefit local economic development, rather than just finance public projects.

The L.A. City Council could have relied on this 1913 charter amendment to say no to the dynamic local movement led by millennial activists to divest from Wall Street and create a city-owned bank. But the City Council chose instead to jump that hurdle by putting the matter to the voters. In July 2018, it added Charter Amendment B to the November ballot. A “yes” vote will allow the creation of a city-owned bank that can partner with local banks to provide low-cost credit for the community, following the stellar precedent of the century-old Bank of North Dakota, currently the nation’s only state-owned bank. By cutting out Wall Street middlemen, the Bank of North Dakota has been able to make below-market credit available to local businesses, farmers and students while still being more profitable than some of Wall Street’s largest banks. Following that model would have a substantial upside for both the small business and the local banking communities in Los Angeles.

Rebutting the Opposition

On September 20, the Los Angeles Times editorial board threw cold water on this effort, calling the amendment “half-baked” and “ill-conceived,” and recommending a “no” vote.

Yet not only was the measure well-conceived, but L.A. City Council President Herb Wesson has shown visionary leadership in recognizing its revolutionary potential. He sees the need to declare our independence from Wall Street. He has said that the country looks to California to lead, and that Los Angeles needs to lead California. The people deserve it, and the millennials whose future is in the balance have demanded it.

The City Council recognizes that it’s going to be an uphill battle. Charter Amendment B just asks voters, “Do you want us to proceed?” It is merely an invitation to begin a dialogue on creating a new kind of bank—one geared to serving the people rather than Wall Street.

Amendment B does not give the City Council a blank check to create whatever bank it likes. It just jumps the first of many legal hurdles to obtaining a bank charter. The California Department of Business Oversight (DBO) will have the last word, and it grants bank charters only to applicants that are properly capitalized, collateralized and protected against risk. Public banking experts have talked to the DBO at length and understand these requirements, and a detailed summary of a model business plan has been prepared, to be posted shortly.

The L.A. Times editorial board erroneously compares the new effort with the failed Los Angeles Community Development Bank, which was founded in 1992 and was insolvent a decade later. That institution was not a true bank and did not have to meet the DBO’s stringent requirements for a bank charter. It was an unregulated, non-depository, nonprofit loan and equity fund, capitalized with funds that were basically a handout from the federal government to pacify the restless inner city after riots broke out in 1992—and its creation was actually supported by the L.A. Times.

The Times also erroneously cites a 2011 report by the Boston Federal Reserve contending that a Massachusetts state-owned bank would require $3.6 billion in capitalization. That prohibitive sum is regularly cited by critics bent on shutting down the debate without looking at the very questionable way in which it was derived. The Boston authors began with the $2 million used in 1919 to capitalize the Bank of North Dakota, multiplied that number up for inflation, multiplied it up again for the increase in GDP over a century and multiplied it up again for the larger population of Massachusetts. This dubious triple-counting is cited as serious research, although economic growth and population size have nothing to do with how capital requirements are determined.

Bank capital is simply the money that is invested in a bank to leverage loans. The capital needed is based on the size of the loan portfolio. At a 10 percent capital requirement, $100 million is sufficient to capitalize $1 billion in loans, which would be plenty for a startup bank designed to prove the model. That sum is already more than three times the loan portfolio of the California Infrastructure and Development Bank, which makes below-market loans on behalf of the state. As profits increase the bank’s capital, more loans can be added. Bank capitalization is not an expenditure but an investment, which can come from existing pools of unused funds or from a bond issue to be repaid from the bank’s own profits.

Deposits will be needed to balance a $1 billion loan portfolio, but Los Angeles easily has them—they are now sitting in Wall Street banks having no fiduciary obligation to reinvest them in Los Angeles. The city’s latest Comprehensive Annual Financial Report shows a government net position of over $8 billion in cash and investments (liquid assets), plus proprietary, fiduciary and other liquid funds. According to a 2014 study published by the Fix LA Coalition:

Together, the City of Los Angeles, its airport, seaport, utilities and pension funds control $106 billion that flows through financial institutions in the form of assets, payments and debt issuance. Wall Street profits from each of these flows of money not only through the multiple fees it charges, but also by lending or leveraging the city’s deposited funds and by structuring deals in unnecessarily complex ways that generate significant commissions.

Despite having slashed spending in the wake of revenue losses from the Wall Street-engineered financial crisis, Los Angeles is still being  crushed by Wall Street financial fees, to the tune of nearly $300 million—just in 2014. The savings in fees alone from cutting out Wall Street middlemen could thus be considerable, and substantially more could be saved in interest payments. These savings could then be applied to other city needs, including for affordable housing, transportation, schools and other infrastructure.

In 2017, Los Angeles paid $1.1 billion in interest to bondholders, constituting the wealthiest 5 percent of the population. Refinancing that debt at just 1 percent below its current rate could save up to 25 percent on the cost of infrastructure, half the cost of which is typically financing. Consider, for example, Proposition 68, a water bond passed by California voters last summer. Although it was billed as a $4 billion bond, the total outlay over 40 years at 4 percent will actually be $8 billion. Refinancing the bond at 3 percent (the below-market rate charged by the California Infrastructure and Development Bank) would save taxpayers nearly $2 billion on the overall cost of the bond.

Finding the Political Will 

The numbers are there to support the case for a city-owned bank, but a critical ingredient in effecting revolutionary change is finding the political will. Being first in any innovation is always the hardest. Reasons can easily be found for saying no. What is visionary and revolutionary is to say, “Yes, we can do this.”

As California goes, so goes the nation, and legislators around the country are watching to see how it goes in Los Angeles. Rather than criticism, council President Wesson deserves high praise for stepping forth in the face of predictable pushback and daunting legal hurdles to lead the country in breaking free from our centuries-old subjugation to Wall Street exploitation.

• First published in Truthdig