The credit crunch is getting worse on Main Street, despite a
Wall Street bailout now in the trillions of dollars. The
Federal Reserve's
charts show that "base money" is rapidly expanding—meaning
coins, paper money, and commercial banks' reserves with the
central bank. But the money
isn't getting where it needs to go to stimulate economic
growth: into the bank accounts of American businesses and
consumers. The Fed has been pumping out money to the banks,
and their reserves have been growing at unprecedented rates,
but the money supply in the real economy has been declining.
According to
Ambrose Evans-Pritchard, writing last month in the UK
Telegraph, U.S. bank credit and M3 (the broadest measure
of the money supply) contracted over the summer at rates
comparable to the onset of the Great Depression. In the summer
quarter, U.S. bank loans fell at an annual pace of almost 14
percent. "There has been nothing like this in the USA since
the 1930s," said Professor Tim Congdon of International
Monetary Research. "The rapid destruction of money balances is
madness."
Chartered banks are allowed to create credit on their books
equal to many times their deposit base, but lately they
haven't been doing it. In more normal times, one dollar in
base money has been fanned by the banks into $8.50 in loans.
Today, one dollar in base money produces only one dollar in
loans. Although the Fed has been frantically pushing cash into
the banks, it can't make them lend to consumers.
This is not because the banks are trying to be difficult.
If they had prudent loans on which to turn a profit and the
capital base to do it, they no doubt would. But their books
have been choked with toxic assets, destroying their capital
positions; and the "shadow lenders" who once took subprime
loans off their books have gotten wise to the scam and gone
away. Bankers who know the endangered state of their own books
don't trust each other, so money is tight all around. And the
Fed has already dropped interest rates as low as they can go,
so it has no more leverage with which to entice borrowers.
Local Government to the
Rescue?
The Fed may have played all its cards, but
state and local governments still hold a few aces. Some
local politicians are looking into the feasibility of opening
their own publicly-owned banks, providing them with their own
credit machines. A new publicly owned bank would have a clean
set of books, untainted by the Wall Street addiction to
gambling in complex derivatives; and its profits would go back
to the local government and community, rather than being
siphoned off in exorbitant salaries, bonuses, and dividends. A
publicly-owned bank could funnel credit where it is needed
most, directly into the local economy.
One legislator who is considering a publicly-owned bank is
Bruno Barreiro, County Commissioner for Miami-Dade County in
Florida. In a September 23 article titled "Capital Sources:
Recession Steers Banks Away from Business as Usual", The
Daily Business Review reported that Miami-Dade is planning
to conduct a feasibility study proposing alternatives for
becoming its own depository. Said the journal:
"Barreiro notes that throughout the year, a portion of
the county's $7.5 billion operating budget is deposited with
outside financial institutions in return for an interest
rate. However, he feels that given the instability of many
banks, the county might be better off going into such a
business on its own."
Brian Bandell, writing in The South Florida Business
Journal on September 11, reported that Barreiro is
concerned that bank accounts are insured by the FDIC for only
up to $250,000. The county often has over $50 million in a
single account. If the county were to open its own depository
institution, it could safeguard against these losses.
However, said Bandell, Barreiro is not proposing to allow
the institution to make loans. Rather, the state's money would
be invested conservatively in Treasury bonds. The problem with
that approach, said Miami banking analyst Kenneth Thomas, is
that it would be a challenge to get good interest rates for
the county's deposits without making loans. "There's a reason
most other municipalities aren't doing it," he said.
In stopping short of making loans, the county could be
missing a major business opportunity. The average interest
rate on U.S. government bonds is currently 3.35 percent. If
the funds in Miami-Dade's operating budget were deposited in
the county's own bank, the money could serve as a reserve fund
to support at least nine times that sum in loans. Assuming an
average interest rate of 5 percent on these loans, the county
could increase its revenues by over 1,000 percent (earning 45
percent interest instead of 3.35 percent). [A fuller
explanation and references are available
here.]
Maximizing the Potential of a Publicly-owned Bank
Economist Farid Khavari, a Democratic candidate for
governor of Florida in 2010, is proposing a
Bank of the State of Florida (BSF) that would take full
advantage of the potential of a bank charter. It would not
only act as a depository for the state's funds but would
actually make loans to Floridians at much lower interest rates
than they are getting now. Among other benefits, the BSF could
open up frozen credit markets, save homeowners many thousands
of dollars in payments, produce major revenues for the state,
and allow the state's own debts to be refinanced at much lower
rates. All those benefits are possible, says Khavari, because
of the "fractional reserve" banking system used by all banks
when they make loans. As he explained in a July 29
article in Reuters:
"Using the fractional reserve regulations that govern all
banks, we can earn billions per year for Florida's treasury,
while saving thousands of dollars per year for Florida
homeowners...For $100 in deposits, a bank can create $900 in
new money by making loans. So, the BSF can pay 6% for CDs,
and make mortgage loans at 2 percent. For $6 per year in
interest paid out, the BSF can earn $18 by lending $900 at 2
percent for mortgages.
"The BSF can be started at no cost to taxpayers, and will
be a permanent engine driving Florida's economy. We can
refinance state and local projects at 3 percent, saving
taxpayers billions and balancing state and local budgets
without higher taxes."
The state would earn $15,000 per $100,000 of mortgage, at a
cost of about $1,700; the homeowner would save $88,000 in
interest and pay for the home 15 years sooner. "Our bank will
save people about seven years of their pay over the course of
30 years, just on interest costs," Khavari said. "We should
work to support ourselves and our families, not the
banks...What we have now...makes everyone work for a few
greedy fat cats."
Earlier Models
This sort of healthy public competition for the private
banking monopoly has earlier precedents, going back to the
colony of Pennsylvania in Benjamin Franklin's day. Before
Pennsylvania founded its own bank, the province was having
difficulty attracting settlers, because there was a shortage
of money with which to conduct trade. The settlers could get
credit only by borrowing from British bankers at a hefty 8%
interest, and even those loans were hard to come by. The
provincial government then got the bright idea of printing its
own paper money and lending it to the farmers at 5% interest.
When credit became cheaper and more freely available, the
local economy flourished.
The only state that owns its own bank today is North
Dakota. North Dakota is also one of only two states (along
with Montana) on track to meet their budgets by 2010. It
currently has the lowest unemployment rate in the country and
the largest budget surplus it has ever had, tallying in at
$1.3 billion. Why this cold and isolated farming state should
be doing so well when other states are teetering on bankruptcy
has been the subject of several TV commentaries, including a
spoof by Conan O'Brien on NBC's Tonight Show, which attributed
it to theft from tourists by local farmers. But North Dakota's
real secret seems to be that it has escaped the Wall Street
credit debacle. The state has generated its own credit through
its own publicly-owned bank for nearly a century.
The Bank of North Dakota (BND) was founded in 1919, when a
political party called the Non Partisan League succeeded in
uniting farmers suffering from an earlier credit crisis. The
BND's website states that the bank was originally formed to
create additional competition in the credit industry, while
providing a local source of capital for state investment and
development. The BND avoids opposition from other banks by
partnering with them in loan projects. According to the bank's
website:
"The primary deposit base of the BND is the State of
North Dakota. All state funds and funds of state
institutions are deposited with the bank as required by
law...Use of the banks' earnings are at the discretion of
the state legislature. As an agent of the state it can make
subsidized loans to spur development...[It] underwrites
municipal bonds for all of the political units in the state,
and has been one of the leading banks in the nation in the
number of student loans issued. The bank also serves as the
state's ‘Mini Fed'...As a result of the banks' services, it
enjoys widespread support among the public and the
independent banking community."
Bringing the Model Current
The private banking system is in
systemic failure, and the public is waking up to the fact.
We have been fleeced by Wall Street; banks are not providing
loans; and our savings are no longer secure. The publicly
owned Bank of North Dakota has provided an alternative model
that has worked remarkably well for nearly a century.
The BND has been around for so long, however, that skeptics
can write off the state's remarkable success to other factors.
A modern-day public bank that quickly turned its flagging
local economy around could set a precedent that was
irrefutable. If Florida were to establish a successful public
banking model, it could blaze a trail out of the economic
wilderness for local governments everywhere.
Ellen Brown wrote this article for
YES! Magazine, a national nonprofit media organization
that fuses powerful ideas with practical actions. Ellen
developed her research skills as an attorney practicing
civil litigation in Los Angeles. In
Web of Debt, her
latest book, she turns those skills to an analysis of the
Federal Reserve and "the money trust." She shows how this
private cartel has usurped the power to create money from
the people themselves, and how we the people can get it
back. Her eleven books include
Forbidden Medicine,
Nature's Pharmacy (co-authored with Dr. Lynne Walker),
and
The Key to Ultimate Health: Non-toxic Dentistry
(co-authored with Dr. Richard Hansen). Her websites are
www.webofdebt.com and
www.ellenbrown.com.