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.
