To the President’s credit, however, he seems to have shifted his position on the settlement in response to protests before his State of the Union address.  In his speech on January 24^th, President Obama did not mention the settlement but announced instead that he would be creating a mortgage crisis unit to investigate wrongdoing related to real estate lending.  “This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans,” he said.

The Deeper Question Is Why

Whether massive robo-signing occurred is no longer in issue.  The question that needs to be investigated is why it was being done.  The alleged justification—that the bankers were so busy that they cut corners—hardly seems credible given the extent of the practice. 

The robo-signing largely involved assignments of mortgage notes to mortgage servicers or trusts representing the investors who put up the loan money.  Assignment was necessary to give the trusts legal title to the loans.  But assignment was delayed until it was necessary to foreclose on the homes, when it had to be done through the forgery and fraud of robo-signing.  Why had it been delayed?  Why did the banks not assign the mortgages to the trusts when and as required by law?

Here is a working hypothesis, suggested by Martin Andelman: securitized mortgages are the “pawns” used in the pawn shop known as the “repo market.”  “Repos” are overnight sales and repurchases of collateral.  Yale economist Gary Gorton explains that repos are the “deposit insurance” for the shadow banking system, which is now larger than the conventional banking system and is necessary for the conventional system to operate.  The problem is that repos require “sales,” which means the mortgage notes have to remain free to be bought and sold.  The mortgages are left unendorsed so they can be used in this repo market.

The Evolution of the Shadow Banking System

Gorton observes that there is a massive and growing demand for banking by large institutional investors – pension funds, mutual funds, hedge funds, sovereign wealth funds – which have millions of dollars to park somewhere between investments.  But FDIC insurance covers only up to $250,000.  FDIC insurance was resisted in the 1930s by bankers and government officials and was pushed through as a populist movement: the people demanded it.  What they got was enough insurance to cover the deposits of individuals and no more.  Today, the large institutional investors want similar coverage.  They want an investment that is secure, that provides them with a little interest, and that is liquid like a traditional deposit account, allowing quick withdrawal.

The shadow banking system evolved in response to this need, operating largely through the repo market. “Repos” are sales and repurchases of highly liquid collateral, typically Treasury debt or mortgage-backed securities—the securitized units into which American real estate has been ground up and packaged, sausage-fashion. The collateral is bought by a “special purpose vehicle” (SPV), which acts as the shadow bank. The investors put their money in the SPV and keep the securities, which substitute for FDIC insurance in a traditional bank. (If the SPV fails to pay up, the investors can foreclose on the securities.) To satisfy the demand for liquidity, the repos are one-day or short-term deals, continually rolled over until the money is withdrawn. This money is used by the banks for other lending, investing or speculating. Gorton writes:

This banking system (the “shadow” or “parallel” banking system)—repo based on securitization—is a genuine banking system, as large as the traditional, regulated banking system.  It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.

All Behind the Curtain of MERS

The housing shell game was made possible because it was all concealed behind an electronic smokescreen called MERS (an acronym for Mortgage Electronic Registration Systems, Inc.).  MERS allowed houses to be shuffled around among multiple, rapidly changing owners while circumventing local recording laws.  Title would be recorded in the name of MERS as a place holder for the investors, and MERS would foreclose on behalf of the investors.  Payments would be received by the mortgage servicer, which was typically the bank that signed the mortgage with the homeowner.  The homeowner usually thinks the servicer is the lender, but in fact it is an amorphous group of investors.         

This all worked until courts started questioning whether MERS, which admitted that it was a mere conduit without title, had standing to foreclose.  Courts have increasingly held that it does not. 

Making matters worse for the servicing banks, Fannie Mae sent out a memo telling servicers that in order to be reimbursed under HAMP—a government loan modification program designed to help at-risk homeowners meet their mortgage payments—the servicers would have to produce the paperwork showing the loan had been assigned to the trust.

The hasty solution was a rash of assignments signed by an army of “robosigners,” to be filed in the public records.  But the documents are patent forgeries, making a shambles of county title records. 

Complicating all this are tax issues.  Since 1986, mortgage-backed securities have been issued to investors through SPVs called REMICs (Real Estate Mortgage Investment Conduits).  REMICs are designed as tax shelters; but to qualify for that status, they must be “static.”  Mortgages can’t be transferred in and out once the closing date has occurred.  The REMIC Pooling and Servicing Agreement typically states that any transfer significantly after the closing date is invalid.  Yet the newly robo-signed documents, which are required to begin foreclosure proceedings, are almost always executed long after the trust’s closing date.  The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS but because the trusts purporting to foreclose do not own the properties by the terms of their own documents.

John O’Brien, Register of Deeds for the Southern Essex District of Massachusetts, calls it a “criminal enterprise.”  On January 18^th, he called for a full scale criminal investigation, including a grand jury to look into the evidence.  He sent to Massachusetts Attorney General Martha Coakley, U.S. Attorney General Eric Holder and U.S. Attorney Carmen Ortiz over 30,000 documents recorded in the Salem Registry that he says are fraudulent. 

From Lending Machines to Borrowing Machines

The bankers have engaged in what amounts to a massive fraud, not necessarily because they started out with criminal intent, but because they have been required to in order to come up with the collateral (in this case real estate) to back their loans.  It is the way our system is set up: the banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending.  Instead, they are vacuuming up our money and lending it back to us at higher rates.  

“Instead of lending into the economy,” says British money reformer Ann Pettifor, “bankers are borrowing from the real economy.”  She wrote in the Huffington Post in October 2010:

[T]he crazy facts are these: bankers now borrow from their customers and from taxpayers. They are effectively draining funds from household bank accounts, small businesses, corporations, government Treasuries and from e.g. the Federal Reserve. They do so by charging high rates of interest and fees; by demanding early repayment of loans; by illegally foreclosing on homeowners, and by appropriating, and then speculating with trillions of dollars of taxpayer-backed resources.

Not only has the system destroyed county title records, but it is highly vulnerable to bank runs and systemic collapse.  In the shadow banking system, as in the old fractional reserve banking system, the collateral is being double-counted: it is owed to the borrowers and the depositors at the same time.  This allows for expansion of the money supply, but bank runs can occur when the borrowers and the depositors demand their money at the same time.  And unlike the conventional banking system, the shadow banking system is largely unregulated.  It doesn’t have the backup of FDIC insurance to prevent bank runs.    

That is what happened in September 2008 following the bankruptcy of Lehman Brothers, a major investment bank.  Gary Gorton explains that it was a run on the shadow banking system that caused the credit collapse that followed.  Investors rushed to pull their money out overnight.  LIBOR—the London interbank lending rate for short-term loans—shot up to around 5%.  Since the cost of borrowing the money to cover loans was too high for banks to turn a profit, lending abruptly came to a halt. 

Fixing the System

The question is how to eliminate this systemic risk.  As noted by The Business Insider:

Regulate shadow banking more tightly, and you probably have to also provide government backstops. Shudder. Try to shut the thing down or restrict it and you suck credit out of the system, credit which much of the non-financial “’real” economy uses and needs.

Interestingly, countries with strong public sector banking systems largely escaped the 2008 credit crisis.  These include the BRIC countries—Brazil Russia, India, and China—which contain 40% of the global population and are today’s fastest growing economies.  They escaped because their public sector banks do not need to rely on repos and securitizations to back their loans.  The banks are owned and operated by the ultimate guarantor—the government itself.  The public sector banking model deserves further study. 

Whatever the solution, a system that requires the slicing and dicing of mortgages behind an electronic smokescreen so they can be bought and sold as collateral for the pawn shop of the repo market is obviously fraught with perils and is unsustainable.  Please contact your state attorney general and urge him or her not to go through with the robo-signing settlement, which will be granting immunity for crimes that are not yet fully known.  Phone numbers are here.  The surface of this great shadowy second banking system has barely been scratched.  It needs a very thorough investigation.    

____________ 

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

Rense & Ellen Brown – County-Owned Banks Can Save US, Pt 2 - Vid

John O’Brien is Register of Deeds for Southern Essex County, Massachusetts.  He calls his land registry a “crime scene.”  He is mad as hell and he isn’t going to take it anymore.  A formal forensic audit of the properties for which he is responsible found that:

• Only 16% of the mortgage assignments were valid.
• 27% of the invalid assignments were fraudulent, 35% were “robo-signed,” and 10% violated the Massachusetts Mortgage Fraud Statute.
• The identity of financial institutions that are current owners of the mortgages could be determined for only 287 out of 473 (60%).
• There were 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership could be traced.

At the root of the problem is that title has been recorded in the name of a private entity called Mortgage Electronic Registration Systems (MERS).  MERS is a mere place holder for the true owners, a faceless, changing pool of investors owning indeterminate portions of sliced and diced, securitized properties.  Their identities have been so well hidden that their claims to title are now in doubt.  According to the auditor:

What this means is that . . . the institutions, including many pension funds, that purchased these mortgages don’t actually own them . . . .

 The March of the AGs

 When Massachusetts Attorney General Martha Coakley went to court in December against MERS and five major banks—Bank of America Corp., JPMorgan Chase, Wells Fargo, Citigroup, and GMAC—John O’Brien said he was thrilled.  Coakley says the banks have “undermined our public land record system through the use of MERS.” 

Other attorneys general are also bringing lawsuits.  Delaware Attorney General Beau Biden is going after MERS in a suit seeking $10,000 per violation.  “Since at least the 1600s,” he says, “real property rights have been a cornerstone of our society.  MERS has raised serious questions about who owns what in America.”

Biden’s lawsuit alleges that MERS violated Delaware’s Deceptive Trade Practices Act by:

• Hiding the true mortgage owner and removing that information from the public land records. 
• Creating a systemically important, yet inherently unreliable, mortgage database that created confusion and inappropriate assignments and foreclosures of mortgages.
• Operating MERS through its members’ employees, whom MERS confusingly appoints as its corporate officers so that they may act on MERS’ behalf.
• Failing to ensure the proper transfer of mortgage loan documentation to the securitization trusts, which may have resulted in the failure of securitizations to own the loans upon which they claimed to foreclose.

Legally, this last defect may be even more fatal than filing in the name of MERS in establishing a break in the chain of title to securitized properties.  Mortgage-backed securities are sold to investors in packages representing interests in trusts called REMICs (Real Estate Mortgage Investment Conduits).  REMICs are designed as tax shelters; but to qualify for that status, they must be “static.”  Mortgages can’t be transferred in and out once the closing date has occurred.  The REMIC Pooling and Servicing Agreement typically states that any transfer after the closing date is invalid.  Yet few, if any, properties in foreclosure seem to have been assigned to these REMICs before the closing date, in blatant disregard of legal requirements.  The whole business is quite complicated, but the bottom line is that title has been clouded not only by MERS but because the trusts purporting to foreclose do not own the properties by the terms of their own documents.

Courts Are Taking Notice 

The title issues are so complicated that judges themselves have been slow to catch on, but they are increasingly waking up and taking notice.  In some cases, the judge is not even waiting for the borrowers to raise lack of standing as a defense.   In two cases decided in New York in December, the banks lost although their motions were either unopposed or the homeowner did not show up, and in one there was actually a default.  No matter, said the court; the bank simply did not have standing to foreclose.  

Failure to comply with the terms of the loan documents can make an even stronger case for dismissal.  In Horace vs. LaSalle, Circuit Court of Russell County, Alabama, 57-CV-2008-000362.00 (March 30, 2011), the court permanently enjoined the bank (now part of Bank of America) from foreclosing on the plaintiff’s home, stating:

[T]he court is surprised to the point of astonishment that the defendant trust (LaSalle Bank National Association) did not comply with New York Law in attempting to obtain assignment of plaintiff Horace’s note and mortgage. . . .

[P]laintiff’s motion for summary judgment is granted to the extent that defendant trust . . . is permanently enjoined from foreclosing on the property . . . .

Relief for Counties: Land Banks and Eminent Domain 

The legal tide is turning against MERS and the banks, giving rise to some interesting possibilities for relief at the county level.  Local governments have the power of eminent domain: they can seize real or personal property if (a) they can show that doing so is in the public interest, and (b) the owner is compensated at fair market value. 

 The public interest part is obvious enough.  In a 20-page booklet titled “Revitalizing Foreclosed Properties with Land Banks,” the U.S. Department of Housing and Urban Development (HUD) observes:

 The volume of foreclosures has become a significant problem, not only to local economies, but also to the aesthetics of neighborhoods and property values therein. At the same time, middle- to low income families continue to be priced out of the housing market while suitable housing units remain vacant.

The booklet goes on to describe an alternative being pursued by some communities:

To ameliorate the negative effects of foreclosures, some communities are creating public entities — known as land banks — to return these properties to productive reuse while simultaneously addressing the need for affordable housing.

States named as adopting land bank legislation include Michigan, Ohio, Missouri, Georgia, Indiana, Texas, Kentucky, and Maryland.  HUD notes that the federal government encourages and supports these efforts.  But states can still face obstacles to acquiring and restoring the properties, including a lack of funds and difficulties clearing title. 

Both of these obstacles might be overcome by focusing on abandoned and foreclosed properties for which the chain of title has been broken, either by MERS or by failure to transfer the promissory note according to the terms of the trust indenture.  These homes could be acquired by eminent domain both free of cost and free of adverse claims to title.  The county would simply need to give notice in the local newspaper of an intent to exercise its right of eminent domain.  The burden of proof would then transfer to the bank or trust claiming title.  If the claimant could not prove title, the county would take the property, clear title, and either work out a fair settlement with the occupants or restore the home for rent or sale. 

Even if the properties are acquired without charge, however, counties might lack the funds to restore them.  Additional funds could be had by establishing a public bank that serves more functions than just those of a land bank.  In a series titled “A Solution to the Foreclosure Crisis,” Michael Sauvante of the National Commonwealth Group suggests that properties obtained by eminent domain can be used as part of the capital base for a chartered, publicly-owned bank, on the model of the state-owned Bank of North Dakota.  The county could deposit its revenues into this bank and use its capital and deposits to generate credit, as all chartered banks are empowered to do.  This credit could then be used not just to finance property redevelopment but for other county needs, again on the model of the Bank of North Dakota.  For a fuller discussion of publicly-owned banks, see http://PublicBankingInstitute.org. 

Sauvante adds that the use of eminent domain is often viewed negatively by homeowners.  To overcome this prejudice, the county could exercise eminent domain on the mortgage contract rather than on title to the property.  (The power of eminent domain applies both to real and to personal property rights.)  Title would then remain with the homeowner.  The county would just have a secured interest in the property, putting it in the shoes of the bank.  It could then renegotiate reasonable terms with the homeowner, something banks have been either unwilling or unable to do.  They have to get all the investor-owners to agree, a difficult task; and they have little incentive to negotiate when they can make more money on fees and credit default swaps on contracts that go into default. 

Settling with the Investors

What about the rights of the investors who bought the securities allegedly backed by the foreclosed homes?  The banks selling these collateralized debt obligations represented that they were protected with credit default swaps.  The investors’ remedy is against the counterparties to those bets—or against the banks that sold them a bill of goods.

Foreclosure defense attorney Neil Garfield says the investors are unlikely to recover on abandoned and foreclosed properties in any case.  Banks and servicers can earn more when the homes are bulldozed—something that is happening in some counties—than from a sale or workout at a loss.  Not only is more earned on credit default swaps and fees, but bulldozed homes tell no tales.  Garfield maintains that fully a third of the investors’ money has gone into middleman profits rather than into real estate purchases.  “With a complete loss no one asks for an accounting.” 

Not only homes and neighborhoods but 400 years of property law are being destroyed by banker and investor greed.  As Barry Ritholtz observes, the ability of a property owner to confidently convey his property is a bedrock of our society.  Bailing out reckless financiers and refusing to hold them accountable has led to a fundamental breakdown in the role of government and the court system.  This can be righted only by holding the 1% to the same set of laws as are applied to the 99%.  Those laws include that a contract for the sale of real estate must be in writing signed by seller and buyer; that an assignment must bear the signatures required by local law; and that forging signatures gives rise to an actionable claim for fraud. 

In 2006, Congress passed the Postal Accountability Enhancement Act (PAEA), which forced the USPS to put aside billions of dollars to pay for the health benefits of employees, many of whom hadn’t even been hired yet.  Over a mere 10 year period, the USPS was required to prefund its future health care benefit payments to retirees for the next 75 years, something no other government or private corporation is required to do.  As consumer advocate Ralph Nader observed, if PAEA had never been enacted, USPS would now be facing a $1.5 billion surplus.     

The USPS is a profitable, self-funded venture that is not supported by the taxpayers.  It is funded with postage stamps—one of the last vestiges of government-issued money.  Stamps are fungible and can be traded at par; and they are backed, not by mere government “fiat,” but by labor.  One stamp will buy the labor to transport your letter 3000 miles. 

The USPS is one of the few businesses the government is allowed to operate in competition with private companies; it is the only U.S. agency that services all its citizens six days per week; and it is perhaps the last form of communication that protects privacy, since tampering with it is against federal law.  In 1999, it employed nearly a million people; and today, it employs over 600,000.  Where are those workers to go, when the post office is no more?

To Downsize or Diversify? 

Whatever caused the financial woes of the USPS, there is another way to mitigate the crisis than slashing employee benefits and customer services.  In a December 21^st article in Reader Supported News, Tim Fernholz suggested that instead of focusing on cuts, the post office should approach the problem from a business perspective and find a new way to make money.  One way to keep the USPS alive, he says, is for it to include basic banking services in its product line, providing a “public option” in banking:

[R]oughly 9 million Americans don’t have a bank account and 21 million rely largely on fringe financial services like usurious check cashers rather than traditional financial institutions. Giving low-income people access to a safe banking system will firm up their economic futures. 

The Proud, Forgotten History of Postal Banking

Banking in post offices is not new.  Many countries, including Germany, France, Italy, Japan, and New Zealand, have a long and successful history of it; and so does the United States. 

From 1911 to 1967, the U.S. Postal Savings System provided a safe and efficient place for customers to save and transfer funds.  It issued U.S. Postal Savings Bonds in various denominations that paid annual interest, as well as Postal Savings Certificates and domestic money orders.  The U.S. Postal Savings System was set up early in the 20^th century to attract the savings of immigrants accustomed to saving at post offices in their native countries, provide safe depositories for people who had lost confidence in private banks, and furnish more convenient depositories for working people than were provided by private banks.  (Post offices were then open from 8 a.m. to 6 p.m. six days a week, substantially longer than bankers’ hours.)  The postal system paid two percent interest on deposits annually.  The minimum deposit was $1 and the maximum was $2,500.  Savings in the system spurted to $1.2 billion during the 1930s and jumped again during World War II, peaking in 1947 at almost $3.4 billion. 

The U.S. Postal Savings System was shut down in 1967, not because it was inefficient but because it was considered unnecessary after private banks raised their interest rates and offered the same governmental guarantees that the postal savings system had.

The Kiwibank Model: Postal Banks to Serve Local Communities

Postal banks are now thriving in New Zealand, not as a historical artifact but as a popular new innovation.  When they were instituted in 2002, it was not to save the post office but to save New Zealand families and small businesses from big-bank predators.  By 2001, Australian mega-banks controlled some 80% of New Zealand’s retail banking.  Profits went abroad and were maximized by closing less profitable branches, especially in rural areas.  The result was to place hardships on many New Zealand families and small businesses.

The New Zealand government decided to launch a state-owned bank that would compete with the Aussies.  They called their new bank Kiwibank after their national symbol, the kiwi bird.  But the government team planning the new bank faced major challenges.  How could they keep costs low while still providing services in communities throughout New Zealand?  

Their solution was to open bank branches in post offices.  Kiwibank was established as a subsidiary of the government-owned New Zealand Post.  The Kiwibank website states:

Back in 2002, we launched with a thought: New Zealand needs a better banking alternative—a bank that provides real value for money, that has Kiwi values at heart, and that keeps Kiwi money where it belongs—right here, in New Zealand.

So we set up shop in PostShops throughout the country, putting us in more locations than any other bank in New Zealand literally overnight (without wasting millions on new premises!). 

Suddenly, New Zealanders had a choice in banking.  In an early “move your money” campaign, they voted with their feet.  In an island nation of only 4 million people, in its first five years Kiwibank attracted 500,000 customers away from the big banks.  It consistently earns the nation’s highest customer satisfaction ratings, forcing the Australia-owned banks to improve their service in order to compete.

Postal Banking Japan-style: Funding the Government’s Debt with Its Own Bank

Another interesting model is Japan Post Bank, now the largest publicly-owned bank in the world.  Japan Post is also the largest holder of personal savings, making it the world’s largest credit engine.  Most money today originates as bank loans, and deposits are the magic pool from which this credit-money is generated.  Japan Post uses its excess credit power to buy government bonds.  By 2007, it was the holder of one-fifth of the nation’s debt.  As noted by Joe Weisenthal, writing in Business Insider in February 2010:

Because Japan’s enormous public debt is largely held by its own citizens, the country doesn’t have to worry about foreign investors losing confidence.

If the U.S. Postal Service were to add commercial banking to its product line, it too could use its own bank-generated credit to help relieve its debt problems. The USPS is being forced to fund the health care costs of its employees for 75 years into the future, and a large portion of this unreasonable burden is composed of interest charges.  According to German researcher Margrit Kennedy, interest composes on average about 40% of the cost of all goods and services. That suggests that eliminating interest could reduce the USPS debt by about 40%.  If the USPS became a bank, it could use the credit generated from customer deposits either to service its own debt directly—something that would effectively be interest-free, since it would own the bank and would get the profits back—or by buying interest-bearing government bonds.  The interest earned on the bonds could then be used to pay the interest on the USPS debt.

Other government agencies and local governments could improve their balance sheets in the same way.  Public institutions with sizeable capital and revenues can cut their infrastructure costs by about 40% by establishing their own banks, allowing them to avoid a massive toll in interest to private banker middlemen.    

The Post Office Deserves to Be Preserved

 The U.S. Postal Service is a venerable institution that is older than the Constitution.  It should be saved, and it can be saved.  One way is to support HR 1351, a bill introduced by Rep. Stephen Lynch of Massachusetts to repeal the Postal Accountability Enhancement Act. 

Another way is for the post office to combine mail services with teller services, restoring the Postal Savings System of an earlier era.  The result could be not only to save the Post Office but to establish a competitive alternative to a runaway Wall Street banking monopoly that even Congress seems unable to control.

______________

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

Occupy Wall Street has been both criticized and applauded for not endorsing any official platform.  But there are unofficial platforms, including one titled the 99% Declaration which calls for a “National General Assembly” to convene on July 4, 2012 in Philadelphia.  The 99% Declaration seeks everything from reining in the corporate state to ending the Fed to eliminating censorship of the Internet.  But none of these demands seems to go to the heart of what prompted Occupiers to camp out on Wall Street in the first place – a corrupt banking system that serves the 1% at the expense of the 99%.  To redress that, we need a banking system that serves the 99%.

Occupy San Francisco has now endorsed a plan aimed at doing just that.  In a December 1 Wall Street Journal article titled “Occupy Shocker: A Realistic, Actionable Idea,” David Weidner writes:

[P]rotesters in the Bay Area, especially Occupy San Francisco, have something their East Coast neighbors don’t: a realistic plan aimed at the heart of banks. The idea could be expanded nationwide to send a message to a compromised Washington and the financial industry.

It’s called a municipal bank. Simply put, it would transfer the City of San Francisco’s bank accounts—about $2 billion now spread between such banks as Bank of America Corp., UnionBanCal Corp. and Wells Fargo & Co.—into a public bank. That bank would use small local banks to lend to the community.

The public bank concept is not new.  It has been proposed before in San Francisco and has a successful 90-year track record in North Dakota.  Weidner notes that the state-owned Bank of North Dakota earned taxpayers more than $61 million last year and reported a profit of $57 million in 2008, when Bank of America had a $1.2 billion net loss.  The San Francisco bank proposal is sponsored by city supervisor John Avalos, who has been thinking about a municipal bank for several years.

Weidner calls the proposal “the boldest institutional stroke yet against banks targeted by the Occupy movement.”

Responding to the Critics

 He acknowledges that it will be an uphill climb.  In a follow-up article on December 6^th, Weidner wrote:

Of course, there are critics. . . . They argue that public banks would put public money at risk.  Would you be surprised to know that most of the critics are bankers?

That’s why you don’t hear them talking about the $100 billion they lost for the California pension funds in 2008.  They don’t talk about the foreclosures that have wrought havoc on communities and tax revenues.  They don’t talk about liar loans and what kind of impact that’s had on the economy, employment and the real estate market — not to mention local and state budgets.

Risk to the taxpayers remains the chief objection of banker opponents.  “There is no need for such lending,” they say.  “We already provide loans to any creditworthy applicant who comes to us.  Why put taxpayer money at risk, lending for every crackpot scheme that some politician wants to waste taxpayer money on?”

Tom Hagan, who pays taxes in Maine, has a response to that argument.  In a December 3rd letter to the editor in the Press Herald (Portland), he maintained there is no need to invest public bank money in risky retail ventures.  The money could be saved for infrastructure projects, at least while the public banking model is being proven.  The salubrious result could be to cut local infrastructure costs in half.  Making his case in conjunction with a Maine turnpike project, he wrote:

Why does Maine pay double for turnpike improvements?

Improvements are funded by bonds issued by the Maine Turnpike Authority, which collects the principal amounts, then pays the bonds back with interest.

Over time, interest payments add up to about the original principal, doubling the cost of turnpike improvements and the tolls that must be collected to pay for them. The interest money is shipped out of state to Wall Street banks.

Why not keep the interest money here in Maine, to the benefit of all Mainers? This could be done by creating a state-owned bank. State funds now deposited in low- or no-interest checking accounts would instead be deposited in the state bank.

Those funds would be used to buy up the authority bonds and municipal bonds issued by the Maine Bond Bank. All of them. Since all interest payments would flow into the state treasury, we would end up paying half what we now pay for our roads, bridges and schools.

North Dakota has profited from a state-owned bank for 90 years. Why not Maine?

The state bank could generate “bank credit” on its books, as all chartered banks are authorized to do.  This credit could then be used to buy the bonds.  The government’s deposits would not be “spent” but would remain in the government’s account, as safe as they are in Bank of America—arguably more so, since the solvency of the public bank would be guaranteed by the local government.

Critics worry about the profligate risk-taking of politicians, but the trusty civil servants at the Bank of North Dakota insist that they are not politicians; they are bankers.  Unlike the Wall Street banks that had to be bailed out by the taxpayers, the Bank of North Dakota invests conservatively.  It avoided the derivatives and toxic mortgage-backed securities that precipitated the credit crisis, and it helped the state avoid the crisis by partnering with local banks, helping them with capital and liquidity requirements.  As a result, the state has had no bank failures in at least a decade.

With intelligent use of the ever-evolving Internet, truly effective public oversight can minimize any cronyism.  California’s pension funds might have avoided losing $100 billion if, instead of gambling in the Wall Street casino, they had invested in infrastructure through the state’s own state bank.

The Constitutional Challenge

In Weidner’s Wall Street Journal article, he raises another argument of opponents—that California law forbids using taxpayer money to make private loans.  That, he said, would have to be changed.

The U.S. Supreme Court, however, has held otherwise.  In 1920, the constitutional objection was raised in conjunction with the Bank of North Dakota and was rejected both by the Supreme Court of North Dakota and the U.S. Supreme Court.  See Green v. Frazier, 253 U. S. 233 (1920), and fuller discussion here.

A municipal bank would be doing with the public’s funds only what Bank of America does now: it would be lending “bank credit” backed by the bank’s capital and deposits.  The difference would be that the local community, not Florida or Europe, would get the loans; and the city of San Francisco, not Bank of America, would get the profits.

California and many other states already own infrastructure banks that use the states’ funds to back loans.  If that use of public monies is legal, and if public funds can be deposited in Bank of America and used as the basis for loans to multi-national corporations, they can be deposited in the Bank of San Francisco and used as the basis for loans to the local community.

Better yet, they can be used to buy municipal bonds.  Investing in municipal bonds would avoid the constitutional issue with “private loans” altogether, since the loans would be to local government.

Sending a Message to Wall Street

The campaign to “move your money” has gotten a groundswell of support, but move your money into what?  Weidner repeats the complaint of critics that private credit unions have gotten too big and threaten commercial banking.  Having greater impact would be to “move our money”—move our local government revenues out of Wall Street banks into our own publicly-owned banks, which could then generate credit for the local economy and public works.

________________

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

The Fed insisted that the loans were repaid and there have been no losses, but the Bloomberg report said the banks reaped a $13 billion windfall in profits; and “details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.”

 The revelations provoked shock and outrage among commentators.  But in a letter to the leaders of the House and Senate Committees focused on the financial services industry, Fed Chairman Ben Bernanke responded on December 6^th that the figures were greatly exaggerated.  He said the loans were being double-counted: short-term loans rolled over from day to day were counted as separate cumulative loans rather than as a single extended loan. 

The Fed, it seems, was doing only what banks and the money market do for each other every day: making “liquidity” available at very low interest rates.  In 2008, bank liquidity dried up after Lehman Brothers collapsed, and the banks could not get the cheap, ready credit on which their lending scheme depends.  The Fed then stepped in as “lender of last resort,” doing what it had to do to keep the banking scheme going.  

Keeping the banking system afloat is all well and good.  What is wrong with the existing scheme is that it allows the Fed to play favorites.  As Alan Grayson observed in a December 5^th editorial:

The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. . . .

During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn’t borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there be 24 million Americans today who can’t find a full-time job?

All in the Name of Liquidity

 What is this need for “liquidity” that justifies such extraordinary measures on behalf of the banks?  Why do banks need cheap and ready access to funds?  Aren’t they the lenders rather than the borrowers of funds?  Don’t they simply take in deposits and lend them out?

 The answer is no.  Today when banks make loans, they extend credit FIRST, then fund the loans by borrowing from the cheapest available source.  If deposits are not available, they borrow from another bank, the money market, or the Federal Reserve. 

 Rather than loans being created from deposits, loans actually CREATE deposits.  They create deposits when checks are drawn on the borrower’s account and deposited in another bank.  These deposits can then be borrowed back at the Fed funds rate—currently a very low 0.25%.  A bank can thus create money in the form of “bank credit,” lend it to a customer at high interest, and borrow it back at very low interest, pocketing the difference as its profit. 

 If all this looks like sleight of hand, it is.  The process has been compared to “check kiting,” defined in Barron’s Business Dictionary as:

 [An] illegal scheme that establishes a false line of credit by the exchange of worthless checks between two banks. For instance, a check kiter might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the bank A account and deposits it in the bank B account. If the kiter has good credit at bank B, he will be able to draw funds against the deposited check before it clears, that is, is forwarded to bank A for payment and paid by bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days and then deposit it in the bank A account before the $50,000 check drawn on that account clears.

                                            Setting Things Right

As suspicious as all this appears, the economy actually needs an expandable credit system, and an expandable credit system needs a lender of last resort.  What is wrong with the current scheme is that it discriminates against Main Street in favor of Wall Street.  Banks can borrow very cheaply, while individuals, corporations and governments pay “whatever the market will bear.”  The banker middlemen take their cut in a scheme in which money is actually manufactured in the process of lending it.  The profits are siphoned off to the 1% at the expense of the 99%. 

 To fix the system, the profits need to be returned to the 99%.  How that could be done was suggested by Thom Hartmann in a recent editorial:

 Have the central bank owned by the US government and run by the Treasury Department, so all the profits . . . go directly into the Treasury and you and I pay less in taxes . . . .

 For a model on the local level, he pointed to the Bank of North Dakota:

 The good people of North Dakota . . . established something very much like this—the Bank of North Dakota—and it’s kept the state in the black, and kept its farmers, manufacturers and students protected from the predations of New York banksters for nearly a century. It’s time for every state to charter their own state bank, just like North Dakota did, and for the Treasury Department to either buy the Fed from the for-profit banks that own it, or simply nationalize it.

 We have been distracted here and in Europe by a sudden panic over our “sovereign debt” crises, when the real crisis is that our debt is NOT sovereign.  We are indentured to a Wall Street money machine that creates our money and lends it back to us at interest, money our sovereign government could be creating itself, with full democratic oversight and accountability to the people.  We have forgotten our roots, when the American colonists thrived on a system of money created by the people themselves, debt-free and interest-free.  The continued dominance of the Wall Street money machine depends on that collective amnesia.  The fact that this memory is surfacing again may be the machine’s greatest threat—and our greatest hope as a nation.

– Prepared in consultation with Timothy Canova, Professor of Law, Chapman University; and Robert Bows, board of directors, Public Banking Institute

The recent interest in state-owned banks has provoked challenges on grounds that they violate state constitutional prohibitions against lending the credit of the state.  The argument is not valid, for several reasons:

(1)  The U.S. Supreme Court has already considered it and rejected it.

(2)  A number of states have owned banks historically, and many states have infrastructure banks today, which are specifically authorized by 23 U.S. Code Section 610.

(3)  The argument misconstrues the nature of banking.  All states deposit their revenues and invest their capital in banks.  This does not mean they are “lending the credit of the state.”  The bank lends its own credit.  If a state can put its revenues and invest its capital in Bank of America or Chase Bank, it can put them in a state-owned bank.

These arguments also apply to county-owned banks, city-owned banks and any other chartered banks owned by the people as public institutions. 

(1)  The U.S. Supreme Court Has Considered the Constitutional Argument and Rejected It

State constitutions typically have provisions forbidding the government to “give or lend the credit of the state.”  California’s constitution, for example, provides at Article 16 (Public Finance), Section 6:

The Legislature shall have no power to give or to lend, or to authorize the giving or lending, of the credit of the State, or of any county, city and county, city, township or other political corporation or subdivision of the State now existing, or that may be hereafter established, in aid of or to any person, association, or corporation, whether municipal or otherwise, or to pledge the credit thereof, in any manner whatever, for the payment of the liabilities of any individual, association, municipal or other corporation whatever . . . .

In the Washington State constitution, the prohibition is in Article VIII, Section 5:

CREDIT NOT TO BE LOANED. The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation.

In the Colorado state constitution, Article XI, Section 1 prohibits the state from pledging its “credit or faith thereof” in favor of “any person, company, or corporation, public or private.”  Article XI, Section 3, prohibits the state from contracting “any debt by loan in any form.”

The Constitution of North Dakota has similar provisions:

 ARTICLE X: FINANCE AND PUBLIC DEBT

Section 18. The state, any county or city may make internal improvements and may engage in any industry, enterprise or business, not prohibited by article XX of the constitution, but neither the state nor any political subdivision thereof shall otherwise loan or give its credit or make donations to or in aid of any individual, association or corporation except for reasonable support of the poor, nor subscribe to or become the owner of capital stock in any association or corporation.

North Dakota has had a state-owned bank since 1919, along with a state-owned granary.  In 1920, the legislation that enabled the Bank of North Dakota was challenged by a consortium of Minneapolis banks on behalf of 42 North Dakota taxpayers, on grounds that it violated state constitutional provisions and the Fourteenth Amendment.  In GREEN V. FRAZIER, 253 U. S. 233 (1920), the U.S. Supreme Court rejected this challenge.  It held that:

[L]egislation which provides for engaging the state in the businesses of manufacturing and marketing farm products, and of providing homes for the people, and which appropriates money, creates a state banking system, and authorizes bond issues and taxation for carrying the scheme into effect is not unconstitutional as respects taxpayers. 

The Court noted that the constitutionality of the legislation had been sustained by the Supreme Court of North Dakota.  To the extent that the decision rested on state grounds, it was therefore conclusive.  The only question left for the U.S. Supreme Court to decide was the attack under the Fourteenth Amendment, alleging a deprivation of the plaintiffs’ right to property (their taxes) without due process of law.  The court observed:

This legislation was adopted under the broad power of the state to enact laws raising by taxation such sums as are deemed necessary to promote purposes essential to the general welfare of its people. . . .

[T]he Supreme Court of North Dakota held . . . concerning what may in general terms be denominated the “banking legislation,” that it was justified for the purpose of providing banking facilities . . . .

As to the Home Building Act, that was sustained because of the promotion of the general welfare in providing homes for the people, a large proportion of whom were tenants moving from place to place. It was believed and affirmed by the Supreme Court of North Dakota that the opportunity to secure and maintain homes would promote the general welfare, and that the provisions of the statutes to enable this feature of the system to become effective would redound to the general benefit.

The decision of the Supreme Court of North Dakota upholding the legislation was therefore affirmed.  The Bank of North Dakota (BND) has been operating successfully ever since, serving largely as a “banker’s bank” and “mini-Federal Reserve” within the state. 

(2)  Many States Already Own Banks

North Dakota is the only state to own a bank on the “mini-Fed” model today, but a number of states have owned similar banks historically; and many states, including California, own infrastructure banks today.  A July 2011 release by the Council of State Governments observed: 

More than 30 states and Puerto Rico have created a state infrastructure bank, a type of revolving infrastructure investment fund that can offer loans and credit assistance to public and private sponsors of certain highway construction, transit or rail projects. Five states–Florida, Georgia, Kansas, Ohio and Virginia–have established banks or accounts within their banks that are capitalized solely with state funds.

If state funds can be used to capitalize a state infrastructure bank without violating state constitutional provisions, those funds can be used to capitalize a state-owned bank on the model of the Bank of North Dakota without violating state provisions.

(3)  Banks Advance Their Own Credit, Not the Credit of Their Depositors

The contention that a state-owned bank would “lend the credit of the state” misconstrues the nature of banking.  Banks do not lend the deposits of their depositors.  If they did, the state would not be able to deposit its revenues in Bank of America or Chase Bank without violating state constitutional provisions.  What banks lend is simply “bank credit” created on their books.  As the Federal Reserve Bank of Dallas explains the process on its website:

Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank . . . holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.

Or as Michael Sauvante explains on the website of the Commonwealth Group:

The number one privilege enjoyed by banks is their ability to create new money, in the form of credit granted to their borrowers. Banking laws permit a bank to create that credit based on the assets of the bank (generally defined by the Basel II Accord). This credit is not extracted from those assets (which remain untouched in the process), nor is it drawn from any other pool of money, but rather the assets serve strictly as the basis for calculating the total amount of new money that the bank is allowed to issue in the form of credit. That amount (usually a multiple of the assets, typically in the range of 10-12 times the value of the assets) is governed by regulators, and varies from bank to bank.

A state-owned bank would not be lending the state’s credit but would simply be accepting the state’s revenues as deposits, as Bank of America does now.  The deposits would at all times remain in the bank, just as they remain in Bank of America now.  They would be shifted from a deposit account in one bank to a deposit account in another bank; that is all. 

A small portion of the state’s capital would also be shifted from one investment to another.  Some idle rainy day fund, for example, might be used.  This would be an investment in equity, not an expenditure.  It would not cost the state money but would make money for the state.  The Bank of North Dakota has reported a return on equity in recent years ranging from 19% to 26%.

The state-owned bank would use these resources to do what all banks do: leverage their capital into credit, backed by their deposits.  And because the bank would be publicly owned and would have a mandate to serve the public, it could be expected, like the BND, to advance this credit conservatively for creditworthy local projects and needs.  Banking “would become boring again.”

In North Dakota (population 647,000), the Bank of North Dakota has $2.7 billion in deposits, or $4000 per capita; and virtually all of these deposits are drawn from the state’s own revenues.  The bank has nearly the same sum ($2.6 billion) in outstanding loans. 

California has 37 million people.  On the same scale, California might amass $148 billion in deposits.  Assuming an 8% capital requirement, with $12 billion in capital this $148 billion in deposits could generate $133 billion in credit for the state (subtracting 10%, or 14.8 billion, to satisfy reserve requirements). 

If that credit were used, for example, to purchase $133 billion in municipal bonds paying 5% interest, the state could make nearly $7 billion annually on its investment.  This is new revenue for the state, acquired without spending a penny more in taxes. 

The state of California deposits its money in private banks and invests its capital in private institutions including banks.  The banking institutions receiving these public monies then leverage them for the benefit of the bank’s investors and management.  If this is a constitutional use of public funds, it is constitutional for the state-owned Bank of California to leverage the public’s money for the benefit of the state and its people.  

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

“To some people, the European Central Bank seems like a fire department that is letting the house burn down to teach the children not to play with matches.”

So wrote Jack Ewing in the New York Times last week. . . .

“The E.C.B. has a fire hose — its ability to print money. But the bank is refusing to train it on the euro zone’s debt crisis.

“The flames climbed higher Friday after the Italian Treasury had to pay an interest rate of 6.5 percent on a new issue of six-month bills . . . the highest interest rate Italy has had to pay to sell such debt since August 1997 . . . .

“But there is no sign the E.C.B. plans a major response, like buying large quantities of the country’s bonds to bring down its borrowing costs.”

Why not?  According to the November 28^th Wall Street Journal, “The ECB has long worried that buying government bonds in big enough amounts to bring down countries’ borrowing costs would make it easier for national politicians to delay the budget austerity and economic overhauls that are needed.”

As with the manufactured debt ceiling crisis in the United States, the E.C.B. is withholding relief in order to extort austerity measures from member governments—and the threat seems to be working.  The same authors write:

“Euro-zone leaders are negotiating a potentially groundbreaking fiscal pact . . . [that] would make budget discipline legally binding and enforceable by European authorities. . . . European officials hope a new agreement, which would aim to shrink the excessive public debt that helped spark the crisis, would persuade the European Central Bank to undertake more drastic action to reverse the recent selloff in euro-zone debt markets.”

The Eurozone appears to be in the process of being “structurally readjusted” – the same process imposed earlier by the IMF on Third World countries.  Structural demands routinely include harsh austerity measures, government cutbacks, privatization, and the disempowerment of national central banks, so that there is no national entity capable of creating and controlling the money supply on behalf of the people.  The latter result has officially been achieved in the Eurozone, which is now dependent on the E.C.B. as the sole lender of last resort and printer of new euros.

The E.C.B. Serves Banks, Not Governments

The legal justification for the E.C.B.’s inaction in the sovereign debt crisis is Article 123 of the Lisbon Treaty, signed by EU members in 2007.  As Jens Eidmann, President of the Bundesbank and a member of the E.C.B. Governing Council, stated in a November 14 interview:

“The eurosystem is a lender of last resort for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty.”

The language of Article 123 is rather obscure, but basically it says that the European central bank is the lender of last resort for banks, not for governments.  It provides:

“1.  Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

“2.  Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.”

Banks can borrow from the E.C.B. at 1.25%, the minimum rate available for banks.  Member governments, on the other hand, must put themselves at the mercy of the markets, which can squeeze them for “whatever the market will bear”—in Italy’s case, 6.5%.

The Real Reason Eurozone Countries Are Drowning in Debt

Why should banks be able to borrow at 1.25% from the E.C.B.’s unlimited fountain of euros, while the tap is closed for governments?  The conventional argument is that for governments to borrow money created by their own central banks would be “inflationary.”  But private banks create the money they lend just as government-owned central banks do.  Private banks issue money in the form of “bank credit” on their books, and they often do this before they have the liquidity to back the loans.  Then they borrow from wherever they can get funds most cheaply.  When banks borrow from the E.C.B. as lender of last resort, the E.C.B. “prints money” just as it would if it were lending to governments directly.

The burgeoning debts of the Eurozone countries are being blamed on their large welfare states, but these social systems were set up before the 1970s, when European governments had very little national debt.  Their national debts shot up, not because they spent on social services, but because they switched bankers.  Before the 1970s, European governments borrowed from their own central banks.  The money was effectively interest-free, since they owned the banks and got the profits back as dividends.  After the European Monetary Union was established, member countries had to borrow from private banks at interest—often substantial interest.

And the result?  Interest totals for Eurozone countries are not readily accessible; but for France, at least, the total sum paid in interest since the 1970s appears to be as great as the French federal debt itself.  That means that if the French government had been borrowing from its central bank all along, it could have been debt-free today.

The figures are nearly as bad for Canada, and they may actually be worse for the United States.  The Federal Reserve’s website lists the sums paid in interest on the U.S. federal debt for the last 24 years.  During that period, taxpayers paid a total of $8.2 trillion in interest.  That’s more than half the total $15 trillion debt, in just 24 years.  The U.S. federal debt has not been paid off since 1835, so taxpayers could well have paid more than $15 trillion by now in interest.  That means our entire federal debt could have been avoided if we had been borrowing from our own government-owned central bank all along, effectively interest-free.  And that is probably true for other countries as well.

To avoid an overwhelming national debt and the forced austerity measures destined to follow, the Eurozone’s citizens need to get the fire hose of money creation out of the hands of private banks and back into the hands of the people.  But how?

Governments Cannot Borrow from the E.C.B., but Government-owned Banks Can

Interestingly, Paragraph 2 of Article 123 of the Lisbon Treaty carves out an exception to the rule that governments cannot borrow from the E.C.B.  It says that government-owned banks can borrow on the same terms as privately-owned banks.  Many Eurozone countries have publicly-owned banks; and as nationalization of insolvent banks looms, they could soon find themselves with many more.

One solution might be for the publicly-owned banks of Eurozone governments to exercise their right to borrow from the E.C.B. at 1.25%, then use that liquidity to buy up the country’s debt, or as much of it as does not sell at auction.  (The Federal Reserve does this routinely in open market operations in the U.S.)   The government’s securities would be stabilized, keeping speculators at bay; and the government would get the interest spread, since it would own the banks and would get the profits back as dividends.

Taking a Stand in the Class War

In a November 25^th article titled “Goldman Sachs Has Taken Over,” Paul Craig Roberts writes:

“The European Union, just like everything else, is merely another scheme to concentrate wealth in a few hands at the expense of European citizens, who are destined, like Americans, to be the serfs of the 21^st century.”

He observes that Mario Draghi, the new president of the European Central Bank, was Vice Chairman and Managing Director of Goldman Sachs International, a member of Goldman Sachs’ Management Committee, a member of the governing council of the European Central Bank, a member of the board of directors of the Bank for International Settlements, and Chairman of the Financial Stability Board.  Italy’s new prime minister Mario Monti, who was appointed rather than elected, was a member of Goldman Sachs’ Board of International Advisers, European Chairman of the Trilateral Commission (“a US organization that advances American hegemony over the world”), and a member of the Bilderberg group.  And Lucas Papademos, an unelected banker who was installed as prime minister of Greece, was Vice President of the European Central Bank and a member of America’s Trilateral Commission.

Roberts points to the suspicious fact that the German government was unable to sell 35% of its 10-year bonds at its last auction; yet Germany’s economy is in far better shape than that of Italy, which managed to sell all its bonds.  Why?  Roberts suspects an orchestrated scheme to pressure Germany to back off from its demands to make the banks pay a share of their bailout.

Europe is in the process of being “structurally readjusted” by a private banking cartel.  If its people are to resist this silent conquest, they need to rise up and, using the ballot box and public banks, throw out the new banking hegemony before it is too late.

_____________

Postscript, November 30: The Euro and the stock market rallied today on the news that the Federal Reserve and five other central banks had agreed to lower the cost of emergency dollar funding for European banks.  But what does it really mean?  As noted on the CNBC website:

In essence, the US central bank, or Federal Reserve, agreed to provide cheaper dollar funding to the European Central Bank–which can then provide cheaper dollar loans to cash-strapped European banks. . . .

The participation of the central banks of Canada, England, Japan and Switzerland is more of an effort to show that all the central bankers are working together than any expectation that there will be lots of dollar borrowings under their facility.

It was good news for the banks, but again it didn’t do anything for EU governments.  To participate in the benefits showered on banks, they need to have some public banks that qualify for this largesse.       

Whether the super committee reaches agreement or not, however, the deficit hawks win.  If they agree, either $1.2 trillion gets cut from the budget or taxes go up by that amount; and the committee co-chair has categorically stated taxes are not going up, so that means the budget will be cut.  If agreement is not reached, $1.2 trillion in cuts automatically kick in, split evenly between domestic and military spending.  Either way, the economy will wind up with $1.2 trillion less in the way purchasing power.  The result will be to reduce demand, kill jobs, and put more people on the streets.

For the deficit hawks, however, it all seems to be going according to plan.  The super committee is characterized as an emergency measure that was rushed through to avoid an arbitrarily imposed August deadline for freezing the debt ceiling, but it has actually been in the works for years.  In 2009, it was called the “Bipartisan Task Force for Responsible Fiscal Action”.  That plan died when its Senate sponsors, Judd Gregg and Kent Conrad, failed to secure 60 votes for passage in the Senate.  The Gregg-Conrad bill was criticized as railroading through legislation that would unconstitutionally slash domestic services without congressional debate, but its task force would actually have been LESS autocratic than the super committee, which has sweeping powers and needs only a simple majority among its 12 members to prevail.

What has been forced out of the debate is whether cutting the budget is a good idea at all.  The Peter Peterson Foundation, which has been pushing “austerity” for years, has finally gotten its way.  Hedge fund magnate Peter G. Peterson was Chairman of the Council on Foreign Relations until 2007 and head of the New York Federal Reserve between 2000 and 2004.  He made his fortune with the controversial Blackstone Group, which he co-founded and chaired for many years.  The Peter Peterson Foundation was established in 2008 with a $1 billion endowment to raise public awareness about U.S. fiscal-sustainability issues related to federal deficits, entitlement programs, and tax policies.  The money was used to spearhead a massive campaign to reduce the runaway federal debt.  Hysteria over the debt then prompted Tea Party newbies in Congress to hold a gun to Congress’ head by arbitrarily capping the debt.   

In the campaign to educate us to the debt’s perils, we were repeatedly warned that when foreign lenders decided to pull the plug, the U.S. would have to declare bankruptcy; that we were mortgaging our grandchildren’s futures and selling them into debt-slavery; and that all this was the fault of the citizenry for borrowing and spending too much.  The American people, who are already suffering massive unemployment and cutbacks in government services, would have to sacrifice more and pay the piper more, just as in those debt-strapped countries forced into austerity measures by the IMF.

The fear-mongering, however, is a red herring.  A sovereign nation can always find the money to pay debts owed in its own currency.  The Federal Reserve can buy the debt itself – just as it has been doing.  That alternative would effectively eliminate the problem of interest, since the Fed returns its profits to the government after deducting its costs.    

Alternatively, Congress could reclaim the power to issue money from the banks and fund its budget directly.  The U.S. could pay its bills using debt-free U.S. Notes or Greenbacks, just as President Lincoln did to avoid a crippling debt during the Civil War.  Congress could do this without changing any laws. Congress is empowered to “coin money,” and the Constitution sets no limit on the face amount of the coins.  It could issue a few one-trillion dollar coins, deposit them in an account, and start writing checks.

Neither option need inflate prices.  As long as the money is used to purchase goods and services, the result will simply be to increase demand, increasing production.  Prices will not increase until the economy reaches full employment, and at that point any excess in the money supply can be taxed back to the government, keeping prices stable. 

The key to all this is that our debt is owed in our own currency – U.S. dollars.  Our government has the power to fix its solvency problems itself, by simply issuing the money it needs to pay off or refinance its debt.  The U.S. federal debt has been carried on the books since 1835.  It has NEVER been paid off during that time but just continues to grow.  This has not hurt the economy, which for most of that period has been among the most vibrant in the world.  The federal debt IS the money supply.  All of our money except coins is created as bank debt.  Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession.

The real problem with a growing federal debt is the interest on it, which WILL become an insurmountable burden if allowed to grow exponentially.  Interest paid on the federal debt in 2010 was $414 billion, or about one-half of personal income tax receipts.  That’s about as high as we dare let it go.  But this problem can be eliminated either by funding the debt through the nation’s own central bank, effectively interest-free; or by the Treasury issuing the money outright, interest-free. 

The burgeoning debt has been blamed on reckless government and consumer spending; but the debt crisis was created, not by a social safety net bought and paid for by the taxpayers, but by a banking system taken over by Wall Street gamblers.  The banking debacle of 2008 caused credit to collapse, businesses to go bankrupt, and unemployment to soar, drastically reducing the federal tax base.  If anyone should be held to account, it is Wall Street; but the bankers were bailed rather than jailed, and the taxpayers got billed for the crime.  

We have been deluded into thinking that “fiscal responsibility” is something for our benefit, something we actually need in order to save the country from bankruptcy.  In fact, it has simply been an excuse to impose radical austerity measures on the people, measures that benefit the 1% while locking the 99% in a dungeon of debt peonage.

_____________________

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

Mr. Rozeff seems to think that (1) saving the government money is a bad idea, and (2) keeping the status quo, in which private bankers get the inflated cost of money — a cost that is passed on to the consumer — is a good idea. . . .

Read full post here.