Thursday, March 5, 2009

Thoughts on Breaking the Central Bank Stranglehold

So to the extent that foreign central bankers are buying dollars for reserves, it means they all think the Feds have the biggest, baddest tax collection machine on the planet, and that Americans will continue indefinitely to work hard while suffering the loss of half of all we earn. To put that differently, they judge that nowhere more than here have otherwise intelligent humans been so fully hornswaggled by the myth of government. We are certainly going to prove them quite wrong--but our prosperity in the meantime depends on our doing it quietly.

more - Jim Davies at Strike the Root


When former companies like Citicorp and AIG are history, and when former Lehman Brothers, Citibank and AIG managers, as well as most of the Pentagon Brass, are out working at civilian conservation corps camps helping to restore watersheds or replant forests, we will know that the government has finally “gotten” it.

more - Dave Lindorff


A large part of the bailout money granted by the Us government will be transferred electronically to various affiliated accounts including the hedge funds. The largest banks in the US will also use this windfall cash to buy out their weaker competitors, thereby consolidating their position. The tendency, therefore, is towards a new wave of corporate buyouts, mergers and acquisitions in the financial services industry.

In turn, the financial elites will use these large amounts of liquid assets (paper wealth), together with the hundreds of billions acquired through speculative trade, to buy out real economy corporations (airlines, the automobile industry, Telecoms, media, etc ), whose quoted value on the stock markets has tumbled.

In essence, a budget deficit ( combined with massive cuts in social programs) is required to fund the handouts to the banks as well as finance defence spending and the military surge in the Middle East war.

more - Michel Chossudovsky



Ellen Brown - California [has] avoided bankruptcy for the time being, but 46 of 50 states are insolvent and could be filing Chapter 9 bankruptcy proceedings in the next two years.

One of the four states that is not insolvent is an unlikely candidate for the distinction - North Dakota. . .

What does the State of North Dakota have that other states don't? The answer seems to be: its own bank. In fact, North Dakota has the only state-owned bank in the nation. The state legislature established the Bank of North Dakota in 1919. Fleetham writes that the bank was set up to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. Three elected officials oversee the bank: the governor, the attorney general, and the commissioner of agriculture. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. The bank operates as a bankers' bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It loans money to students (over 184,000 outstanding loans), and it purchases municipal bonds from public institutions.

Still, you may ask, how does that solve the solvency problem? Isn't the state still limited to spending only the money it has? The answer is no. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create "credit" with accounting entries on their books.

Under the "fractional reserve" lending system, banks are allowed to extend credit (create money as loans) in a sum equal to many times their deposit base. Congressman Jerry Voorhis, writing in 1973, explained it like this:

"For every $1 or $1.50 which people - or the government - deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up."

That banks actually create money with accounting entries was confirmed in a revealing booklet published by the Chicago Federal Reserve titled Modern Money Mechanics. . . On page 49 of the 1992 edition, it states:

"With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts [loans created as deposits in borrowers' accounts]."

The 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it with such devices as "overnight sweeps." What chiefly limits bank lending today is the 8 percent capital requirement imposed by the Bank for International Settlements, the head of the private global central banking system in Basel, Switzerland.

With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans. And since the state would actually own the bank, it would not have to worry about shareholders or profits. It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and it could lend to itself or to its municipal governments at as low as zero percent interest. If these loans were rolled over indefinitely, the effect would be the same as creating new, debt-free money.

Dangerously inflationary? Not if the money were used to create new goods and services. Price inflation results only when "demand" (money) exceeds "supply" (goods and services). When they increase together, prices remain stable.

Today we are in a dangerous deflationary spiral, as lending has dried up and asset values have plummeted. The monopoly on the creation of money and credit by a private banking fraternity has resulted in a malfunctioning credit system and monetary collapse. Credit markets have been frozen by the wildly speculative derivatives gambles of a few big Wall Street banks, bets that not only destroyed those banks' balance sheets but are infecting the whole private banking system with toxic debris. To get out of this deflationary debt trap requires an injection of new, debt-free money into the economy, something that can best be done through a system of public banks dedicated to serving the public interest, administering credit as a public utility. . .

Credit is merely a legal agreement, a "monetization" of future proceeds, a promise to pay later from the fruits of the advance. Banks have created credit on their books for hundreds of years, and this system would have worked quite well had it not been for the enormous tribute siphoned off to private coffers in the form of interest. A public banking system could overcome that problem by returning the interest to the public purse. This is the sort of banking system that was pioneered in the colony of Pennsylvania, where it worked brilliantly well.

Among other advantages to a state of owning its own bank are the substantial sums it could save in interest. As Fleetham notes of his own ailing state of Michigan:

"According to recent financial reports (available online), the State of Michigan, the City of Detroit, the Detroit Water and Sewerage Department, the Wayne County Airport, the Detroit Public Schools, the University of Michigan, and Michigan State University pay over $800 million a year in interest on long term debt. If you add interest paid by Michigan cities, school districts, and public utilities, the cost to our taxpayers easily tops a billion a year. What does Wall Street do with our billion plus dollars? They decorate their offices like kings."

Interestingly, the projected state budget deficit for 2009 is also $1 billion. If Michigan did not have to pay over a billion dollars in interest to Wall Street, the budget could be balanced and the state could be restored to solvency. A state-owned bank could not only provide interest-free credit for the state but could actually generate revenues for it. Fleetham notes that in 2007, the Bank of North Dakota earned a net profit of $51 million on a loan volume of $2 billion. He comments:

"Last year, Michigan citizens paid over $5 billion dollars in personal income tax. With a state bank like North Dakota's we could reduce this burden, fund new businesses, and restore our crumbling water and sewer systems. And we don't have to feel sorry about Wall Street losing our business. They didn't 'earn' the money they lent us. They created it in computers and charged us interest to boot. Let's follow North Dakota's lead and get free from Wall Street's web."

As Gandhi said, "When the people lead, the leaders will follow." We the people can beat the Wall Street bankers at their own game, by moving our legislators to set up publicly-owned banks that create credit using the same banking principles that are accepted as standard and usual in the trade by bankers themselves.

Source: Carolyn Baker

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