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Homemade Money- LQD

by geezer in Paris Fri May 29th, 2009 at 12:35:17 AM EST

The Dallas Fed:

"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.

Dallas Federal Reserve

Obama, at Georgetown University:

"Although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks -- "where's our bailout?" they ask -- the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth."

NYT quoting a speech by Obama

Obama unfortunately fails to mention the fact that the institutions he has chosen to manage this "multiplier effect" have a track record -indeed a legal obligation- of multiplying mostly their own profits, without regard to social needs. It has been repeatedly estimated that the average ratio of interest costs to developmental investment is about 1 to 1. Yes, that's right. a full 50% of the cost of private bank- managed investment projects is raked off in interest or profits.

This diary is not at all US-centric, since the same problems are europe-wide, and the same principles would work almost anywhere--and have done so.

For a couple years I have been referring obliquely to the sucessful Mexican nationalization of the banking sector, it's amazing ROE results and it's contribution to the cultural richness and self-respect of Mexico, in part in the Ballet Folklorico and other archiving efforts in the incredibly complex cultural melange that is Mexico. I've not diaried it because this important event seems to have been erased from history- the books in which I originally encountered the story are long gone from my shelf, and are no longer available, and all the usual research suspects include little or nothing of the real story- just a bastard version of the event that fits acceptably into the neo-lib theology. So I was very glad when AlterNet did this piece:

Ellen Brown, AlterNet,

North Dakota boasts the only state-owned bank in the nation. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. By law, the state must deposit all its funds in the bank, which pays a competitive interest rate to the state treasurer. The state rather than the FDIC guarantees the bank's deposits, which are plowed back into the state in the form of loans. The bank's return on equity is about 25%, and it pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a trillion dollars to the state's general fund, offsetting taxes. The former president of the BND is now the state's governor.

The BND avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, and buy down the interest rate. The BND provides a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. Guarantees are also provided for entrepreneurial startups, and the BND has ample money to lend to students (over 184,000 outstanding loans). It purchases municipal bonds from public institutions, and it backs loans made to new farmers at 1% interest. The BND also has a well-funded disaster loan program, which helps explain how Fargo, when struck by a disastrous flood recently, managed to avoid the devastation suffered by New Orleans in similar circumstances.

One of the biggest impediments to community efforts to accomplish anything, both in the united States and in Europe, is the elaborately fostered perception that whatever the government touches turns to shit. An easy notion to sell, since it's sometimes true, particularly if government policy is bought and sold on K-street or in Brussels. But attach that notion securely to the "competition improves the product and all our lives", and you have the core of a powerful weapon against the evils of populist action.
Even here at ET, my mentions of the highly efficient, sucessful operation of financial services by a government entity have been received with either outright contempt or a more-or-less kindly silence, of the sort bestowed upon terminally unenlightened but harmless cranks.
Ellen Brown says it better than I can, so I'll let her do the talking:

Money in a government-owned bank could give us the best of both worlds. We could have all the credit-generating advantages of private banks, without the baggage cluttering up the books of the Wall Street giants, including bad derivatives bets, unmarketable collateralized debt obligations, mark to market accounting issues, oversized CEO salaries and bonuses, and shareholders expecting a sizeable cut of the profits. A state could deposit its vast revenues in its own state-owned bank and proceed to fan them into eight to 10 times their face value in loans. Not only would it have its own credit machine, but it would control the loan terms. The state could lend at ½% interest to itself and to municipal governments, rolling the loans over as needed until the revenues had been generated to pay them off. According to Professor Margrit Kennedy in her 1995 book Interest and Inflation-free Money, interest composes, on average, fully half the cost of every public project. Cutting costs by 50% could make currently-unsustainable projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but actually profitable for the government.

If politics -and by implication policy- is the art of the possible, perhaps this is possible.
The Obama policy of burying the rotting corpses of dead banks under mounds of public money, and creating elaborate quasi-economic theater to conceal the real situation will work just well enough to allow time for the oligarchs to make a plan to stave off (or police) popular meddling in their interests -their lock on the remaining wealth of the world. Recent events have shown, as Simon Johnson and others have begun to note, that the current crisis seems to have been wasted.

A lot of this has been discussed more than once here. but the real question is how to get the dialog going outside our comfortable corner.
Here's another good piece that should grind the bones of the Sarkoheads.

William Pfaff on the French economy

When the economists and financial analysts outside the mental lockdown of the Chicago School mindset reported the good results of the Mexican nationalization, it was no surprise that the story disappeared into the black hole of the damned--it was Reaganland, and things economic seemed to be proceeding swimmingly. Lots of dead commies in Nicaragua, the sound of money trick-ling down.
This is our chance, and it's slipping away.
For a long time one of my more outrageous opinions was that one could conduct government by reading chicken guts, and if you had enough money and enough compliant fools to throw at it, it would work for a while.

We've still got the fools, but not the money.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Fri May 29th, 2009 at 05:25:08 AM EST
chicken-gut readers will work for free.


'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Jun 1st, 2009 at 07:15:25 AM EST
[ Parent ]
I now have an Economy 3.0 weekly slot on Labour List which is cross posted from our Nordic Enterprise Trust blog.

Municipal Banks? Or Municipal Banking? | LabourList.org

Municipal Banks? Or Municipal Banking?

After the Lehman insolvency in September 2008 there was a brief flurry of interest in the possibility of municipal banks being set up in the UK, and apparently both Birmingham and Essex County Councils remain interested, albeit their proposals have stalled for differing reasons. In Scotland, Municipal Banks never went away, and five still remain: North Lanarkshire, West Lothian, North Ayrshire, Clydebank, and East Dunbartonshire.

Municipal Banks are extremely limited in their operations and may not offer services to individuals other than to pay interest on deposits, which are typically those of council employees and pensioners. They can't lend to individuals - as a Credit Union may - and while they may technically lend to virtually any type of organisation, in practice, the Treasurers of the relevant Council are the sole customer and use their captive Banks as a source of reasonably cheap funding.

Municipal Banks, like Credit Unions, essentially do what everybody thinks commercial banks do - they take in deposits and lend a matching amount to borrowers. But if you think about it, if that were all that commercial banks did, then there could not be any new money. Commercial banks are therefore known as Credit Institutions who have the privilege of creating credit on the base of an amount of regulatory capital prescribed by the Bank of International Settlements in Basel.

Such credit creation is now increasingly scarce and expensive, and this is the business that Councils really need to enter in order to adequately stimulate the local economy. As Ellen Brown points out today in the Huffington Post, this is not only possible but has been going on in North Dakota for 90 years to the great benefit of the citizens of that State.

However, public sector credit creation is unacceptable for politically dogmatic reasons, and no change to banking legislation would be likely against the organised resistance of the banking industry against "unfair" municipal competition - to wit, the freedom from paying returns to rentier shareholders.

Introducing the Guarantee Society

My concept of a "Guarantee Society" was introduced by the Scottish LibDems in March 2004 in order to solve the problem faced by small businesses in meeting public sector procurement criteria.

It essentially allows businesses to mutually guarantee their collective performance, supported by provisions made into a suitable fund, insurance, or both. The policy appears tohave fallen by the wayside, although there is increasing evidence that the major firms with whom Councils are prepared to engage are now routinely engaging in "subbie-bashing" and imposing upon sub-contractors delayed payment, spurious claims to avoid payment, or both.

Be that as it may, it is in fact quite straightforward for such a collective guarantee to be extended to credit provided to Guarantee Society members. This occurs routinely on the continent in respect of bank loans : the European Mutual Guarantee Association membership extends to 17 countries across Europe.

Peer to Peer Credit

The innovation I propose is to extend collective guarantees to the interest-free trade credit provided directly by trade sellers to buyers as 'time to pay'. While this credit is interest-free, both the seller and the buyer will make a provision into a default fund, which would be held by a Municipal Bank as a Custodian.

This guaranteed trade credit may be settled in conventional money, but there is also the possibility of alternative forms of settlement whereby the seller may agree to accept all or part of the balance in money's worth (ie barter) from the buyer instead.


In North Dakota, the State owned bank works in partnership with local banks, and the form of municipal banking I advocate would be little different. Service providers are necessary to set and maintain "Guarantee Limits" for both sellers and buyers; maintain accounting records; monitor the system; and handle defaults in accordance with the Guarantee Society's policies.

This is of course a classic banking role, the only difference being that the bank no longer puts its capital at risk by creating credit based upon it, but instead acts for a fee as a service provider managing the bilateral creation of credit among the membership which is supported by a pool of funds in common ownership.

Municipal Banking

The Guarantee Society model described may be straightforwardly achieved by using the simple but infinitely flexible UK Limited Liability Partnership as a framework for the guarantee, with any funds being held by Municipal Banks as Custodians and conventional banks or credit unions acting as service providers.

The outcome will be to enable the credit necessary for the circulation of goods and services, and for the creation of productive assets, to be simply created "at cost" without the payment of unnecessary returns to rentier shareholders. Investment, and long term funding of productive assets, such as affordable housing, or municipal infrastructure, is another story, and represents another opportunity for banks to reinvent themselves.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri May 29th, 2009 at 05:48:01 AM EST
I talked about this exactly several times in the past. The present system is a return several millennia back, when the local lord (the banker) decided who gets the money (as he takes a hefty slice on the side). Instead of nebulous utopia, my solution is to enforce strict regulations in permissible behavior (deontology) of bankers, under oath, viewing them in a position similar to public notaries.
There was strictly no comment on my essay on the subject last week. I should stick to the Qur'an and Islamic banking...

Patrice Ayme Patriceayme.com Patriceayme.wordpress.com http://tyranosopher.blogspot.com/
by Patrice Ayme on Fri May 29th, 2009 at 10:34:15 AM EST
Sorry, PA- I read it. Good piece. I keep searching for a way to help people see that innovative, original creative banking wizardry is not necessary. The perceived need is an illustration of an ahistorical world view. 100 years of BND, and it's just invisible.
Now that I got my 8 comments, I'm ok-- gonna move on to the reality world of broken bow thrusters.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Jun 1st, 2009 at 03:36:57 AM EST
[ Parent ]
This would seem to be something that Schwartznegger and the Democrats who control the Assembly and Senate might agree on.  With Arnie's help, they might be able to peel away enough Republicans to achieve a 2/3rds majority, if that is required, and create a state bank.  California has a proud progressive history.  Were it revived and updated, it could provide a way out of their current dilemma.  A state bank along the lines of that in North Dakota could be a start.

But for such a project to really succeed a public figure who commands an audience is needed to re-educate the public on how the world CAN work and show exactly how and why it is working so disastrously today.  It would be a highly improbable but highly amusing spectacle for The Terminator to terminate the evil spell cast by  Neo-Classical Economics, even if only in California.  A nice thought though.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 29th, 2009 at 02:37:42 PM EST
Won't happen. Arnold and the Republicans see their opportunity to apply the shock doctrine to California and destroy government in one fell swoop. The current plan is to end welfare entirely, end funding for children's health care entirely, close the state's program to give grants for students to attend college (while at the same time raising fees at the colleges), close the state parks, etc.

Together Arnold and the Republican legislature are going to ensure nothing remotely progressive comes out of this crisis, and that instead a whole lot of people suffer.

And the world will live as one

by Montereyan (robert at calitics dot com) on Fri May 29th, 2009 at 07:29:34 PM EST
[ Parent ]
Sad to hear.  I obviously havn't been following developments in California since the initiative failed.  I didn't think it was likely that Arnie would join forces with the Dems, but he is not, by his own inclination, so nihilistic as the "cave men" and then there is his wife.  If he follows that path, he will leave a legacy of ashes.  I guess we can hope that a phoenix will arise....Talk about a death grip!!!  That is certainly what the Republicans have wrought with their successful initiatives since Prop 13.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 29th, 2009 at 09:09:56 PM EST
[ Parent ]
is 100% equal to what would have been gathered from the tax on car titles that the T800 terminated (his one pet project). So, in that sense the Schwarznegger created his own problem. I doubt he can cut to the bone, thought, even the sheep may get angry, and do terrible things... Sale tax has been going up... Cars are getting ever more vandalized...

Patrice Ayme Patriceayme.com Patriceayme.wordpress.com http://tyranosopher.blogspot.com/
by Patrice Ayme on Fri May 29th, 2009 at 09:43:39 PM EST
[ Parent ]
I recall.  That was just before I left Ca.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 30th, 2009 at 11:44:12 AM EST
[ Parent ]
"---Cars are getting ever more vandalized..."

Strangely appropriate that the central device, the architypal symbol of neoliberal domination, the perfect device to perpetuate wage slavery, the Car, would be the target of that incohate anger, in California as well as in the Paris banlieu.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Jun 1st, 2009 at 03:50:24 AM EST
[ Parent ]
...or the law of carma.


'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Jun 1st, 2009 at 07:18:05 AM EST
[ Parent ]
It would be a highly improbable but highly amusing spectacle for The Terminator to terminate the evil spell cast by  Neo-Classical Economics, even if only in California.  A nice thought though.

Yes. Whimsical, sweet hollywood dream. --And if it went in California, the world would be next.

Actually might make a good toung-in-cheek thriller-- the attempts of the Geithner-Summers Banksters to eliminate The Terminator, with the bumbling aid of the mega-banks--a la a convention of Jabba the Hut characters--

---May the Farce be with you, ARG.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Jun 1st, 2009 at 03:44:37 AM EST
[ Parent ]

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