banks

Published on Thursday, May 24, 2012 by Common Dreams
by Ellen Brown

According to both the Mayan and Hindu calendars, 2012 (or something very close) marks the transition from an age of darkness, violence and greed to one of enlightenment, justice, and peace. It’s hard to see that change just yet in the events relayed in the major media, but a shift does seem to be happening behind the scenes; and this is particularly true in the once-boring world of banking.

In the dark age of Kali Yuga, money rules; and it is through banks that the moneyed interests have gotten their power. Banking in an age of greed is fraught with usury, fraud, and gaming the system for private ends. But there is another way to do banking, the neighborly approach of George Bailey in the classic movie “It’s a Wonderful Life.” Rather than feeding off the community, banking can feed the community and local economy.

Big banks trading against local interest

Today the massive too-big-to-fail banks are hardly doing George Bailey-style loans at all. They are not interested in community lending. They are doing their own proprietary trading—trading for their own accounts—which generally means speculating against local interests. They engage in high-frequency program trading that creams profits off the top of stock market trades; speculation in commodities that drives up commodity prices; leveraged buyouts with borrowed money that can result in mass layoffs and factory closures; and investment in foreign companies that compete against our local companies.

We can’t do much to stop them. They’ve got the power, especially at the federal level. But we can quietly set up an alternative model, and that’s what is happening on various local fronts.

Alternative models

Most visible are the “Move Your Money” and “Occupy Wall Street” movements. According to the website of the Move Your Money campaign, an estimated ten million accounts have left the largest banks since 2010. Credit unions have enjoyed a surge in business as a result. The Credit Union National Association reported that in 2012, for the first time ever, credit union assets rose above $1 trillion. Credit unions are non-profit, community-minded organizations with fewer fees and less fine print than the big risk-taking banks; and their patrons are not just customers but owners, sharing partnership in a cooperative business.

Move “Our” Money: The Public Bank Movement

The Move Your Money campaign has been wildly successful in mobilizing people and raising awareness of the issues, but it has not made much of a dent in the reserves of Wall Street banks, which already had $1.6 trillion sitting in reserve accounts as a result of the Fed’s second round of quantitative easing in 2010. What might make a louder statement would be for local governments to divest their funds from Wall Street, and some local governments are now doing this. Local governments collectively have well over a trillion dollars deposited in Wall Street banks.

A major problem with the divestment process is finding local banks large enough to take the deposits. One proposed solution is for states, counties and cities to establish their own banks, capitalized with their own rainy day funds and funded with their own revenues as a deposit base.

State Bank of North Dakota amazing exception to the rule

Today only one state actually does this, North Dakota. North Dakota is also the only state to have escaped the credit crisis of 2008, sporting a sizeable budget surplus every year since. It has the lowest unemployment rate in the country, the lowest default rate on credit card debt, and no state government debt at all. The Bank of North Dakota (BND) has an excellent credit rating and returns a hefty dividend to the state every year.

The BND model hasn’t yet been duplicated in other states, but a movement is afoot. Since 2010, 18 states have introduced legislation of one sort or another for a state-owned bank.

Values-based Banking: Too Sustainable to Fail

Meanwhile, there is a strong movement at the local level for sustainable, “values-based” banking—conventional banks committed to responsible lending and service to the local community. These are George Bailey-style banks, which base their decisions first and foremost on the needs of people and the environment.

One of the leaders internationally is Triodos Bank, which has local offices in the Netherlands, Belgium, the United Kingdom, Spain, and Germany. Its website says that it makes Socially Responsible Investments that are selected according to strict sustainability criteria and overseen by an international panel of “stakeholder” representatives representing various community, environmental, and worker interest groups. Investments include the financing of more than 1,000 organic and sustainable food production projects, more than 300 renewable energy projects, 33 fair trade agricultural exporters in 22 different countries, 85 microfinance institutions in 43 countries, and 398 cultural and arts projects.

Two U.S. banks exemplifying the model are One PacificCoast Bank and New Resource Bank. Operating in California, Oregon and Washington, One PacificCoast is comprised of a sustainable community development bank with around $300 million in assets and a non-profit foundation (One PacificCoast Foundation). Its commercial lending business focuses on such sectors as specialty agriculture, renewable energy, green building, and low-income housing. Foundation activities include programs to “help eliminate discrimination, encourage affordable housing, alleviate economic distress, stimulate community development and increase financial literacy.”

New Resource Bank is a California based B-corporation (“Benefit”) with $171 million in assets, which focuses its lending and banking services on local green and sustainable businesses. New Resource was recognized in 2012 as one of the “Best for the World” businesses, being in the top 10 percent of all certified B-Corporations and scoring more than 50 percent higher than 2,000 other sustainable businesses in overall positive social and environmental impact.

Risks in choosing banks

All this might be good for the world, but isn’t investing locally in a values-based bank riskier and less profitable than putting your money on Wall Street? Not according to a study commissioned by the Global Alliance for Banking on Values (GABV). The 2012 study compared the financial profiles between 2007 and 2010 of 17 values-based banks with 27 Globally Systemically Important Financial Institutions (GSIFIs)—basically the too-big-to-fail banks, including Bank of America, JPMorgan, Barclays, Citicorp and Deutsche Bank. According to the GABV report, values-based banks delivered higher financial returns than some of the world’s largest financial institutions, with a return on assets averaging above 0.50 percent, compared to just 0.33 percent for the GSIFIs; and returns on equity averaging 7.1 percent, compared to 6.6 percent for the GSIFIs. They appeared to be stronger financially, with both higher levels of and better quality capital; and they were twice as likely to invest their assets in loans.

Community Development Financial Institutions CDFIs

Along with the values-based banks, community investment is undertaken in the United States by Community Development Financial Institutions (CDFIs), including Community Development Banks, Community Development Credit Unions, Community Development Loan Funds, Community Development Venture Capital Funds, and Microenterprise Loan Funds. According to the CDFI Coalition, there are over 800 CDFIs certified by the CDFI Fund, operating in every state in the nation and the District of Columbia. In 2008 (the last year for which a report is available), CDFIs invested $5.53 billion “to create economic opportunity in the form of new jobs, affordable housing units, community facilities, and financial services for low-income citizens.”

Two of many interesting examples are the Alternatives Federal Credit Union and Boston Community Capital. Alternatives FCU, located in Ithaca, New York, is committed to community development and social change and is part of the Alternatives Group, which includes a non-profit corporation (Alternatives Community Ventures); a 40-year old trade association of community groups, cooperatives, worker owned businesses, and individuals (Alternatives Fund); and a not-for-profit organization that facilitates secondary capital investment in the credit union (Tomkins County Friends of Alternatives, Inc.). The credit union has over $70 million in assets and offers many innovative financial products, including Individual Development Accounts—special savings accounts for low income residents that offer matching deposits of 2 to 1 up to a certain amount—in addition to more traditional services such as loans for minority and women-owned businesses, and affordable mortgages. The credit union also offers small business development (classes, seminars, consultation, and networking programs), free tax preparation, and a student credit union.

Although its lending programs focus on lower-income borrowers, Alternatives FCU has had lower delinquency and charge-off rates than many major banks that avoid these types of customers. Boston Community Capital (BCC) is a CDFI that is not actually a bank but invests in projects that provide affordable housing and jobs in lower-income neighborhoods. BCC includes a loan fund, a venture fund, a mortgage lender, a real estate consultation organization, a solar energy fund, and a federal New Markets Tax Credit investment vehicle. Since 1985, it has invested over $700 million in local organizations and businesses. These funds have helped build or preserve more than 12,800 affordable housing units, as well as child care facilities for almost 9,000 children and health care facilities that reach 56,000 people. Their investments have helped renovate 850,000 square feet of commercial real estate, generate 5.9 million KW hours of solar energy capacity, and create more than 1,500 jobs.

Less Money for Banks and More for Workers: The Models of Germany and Japan

Values-based banks and CDFIs are a move in the right direction, but their market share in the U.S. remains small. To see the possibilities of a banking system with a mandate to serve the public, we need to look abroad.

Germany and Japan are export powerhouses, in second and third place globally for net exports. (The U.S. trails at 192nd.) One competitive advantage for both of these countries is that their companies have ready access to low-cost funding from cooperatively-owned banks.

In Germany, about half the total assets of the banking system are in the public sector, while another substantial chunk is in cooperative savings banks. Germany’s strong public banking system includes eleven regional public banks (Landesbanken) and thousands of municipally-owned savings banks (Sparkassen). After the Second World War, it was the publicly-owned Landesbanks that helped family-run provincial companies get a foothold in world markets. The Landesbanks are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that drive the country’s export engine.

Because of the Landesbanks, small firms in Germany have as much access to capital as large firms. Workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive. In January 2011, the net value of Germany’s exports over its imports was 7 percent of GDP, the highest of any nation. But it hasn’t had to outsource its labor force to get that result. The average hourly compensation (wages plus benefits) of German manufacturing workers is $48—a full 50 percent more than the $32 hourly average for their American counterparts.

Banks in Japan

In Japan, the banks are principally owned not by shareholders but by other companies in the same keiretsu or industrial group, in a circular arrangement in which the companies basically own each other. Even when there are nominal outside owners, corporations are managed so that the bulk of the wealth generated by the corporation flows either to the workers as income or to investment in the company, making the workers and the company the beneficial owners.

U.S. banks

Since the 1980s, U.S. companies have focused on maximizing short-term profits at the expense of workers and longer-term goals. This trend stems in part from the fact that they are now funded largely by capital from shareholders who own the company and want simply to grow their returns. According to a 2005 report from the Center for European Policy Studies (PDF 566K)(in Brussels, equity financing is more than twice as important in the U.S. as in Europe, accounting for 116 percent of GDP compared with 62 percent in Japan and 54 percent in the eurozone countries. In both Europe and Japan, the majority of corporate funding comes not from investors but from borrowing, either from banks or from the bond market.

Funding with low-interest loans from cooperatively-owned banks leaves greater control of the company in the hands of employees who either own it or have much more say in its operation. Access to low-interest loans can also slash production costs. According to German researcher Margrit Kennedy, when interest charges are added up at every level of production, 40 percent of the cost of goods, on average, comes from interest.

Globally, the burgeoning movement for local, cooperatively-owned and community-oriented banks is blazing the trail toward a new, sustainable form of banking. The results may not yet qualify as the Golden Age prophesied by Hindu cosmology, but they are a major step in that direction.

This piece originally appeared on Alternet as part of a their five-part series titled “New Economic Visions”

About the author - Ellen Brown

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest of eleven books, 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. She is president of the Public Banking Institute, http://PublicBankingInstitute.org, and has websites atWebofDebt.com and EllenBrown.com.

The Australian group Citizens Electoral Council who promote the political program of Lyndon La Rouche is certainly a group with which candobetter has serious differences. They could fairly be described as extreme techonologically optimistic_#main-fn1">1 cornucupians. Examples of media releases which illustrate this include: Populate or Perish: Australia needs 50 million people plus! and "Lies, damned lies, and 'global warming' statistics" of 6 Jan 10.

Nevertheless, we aim to give credit where credit is due. If we can put aside the CEC's environmental myopia, it does have some ideas of merit. These include proposals for radical reform of our monetary system. Of Lyndon Larouche, Ellen Brown wrote in  "Web of Debt":

[Lyndon La Rouche proposes] to make cheap national credit available for putting the unemployed to work developing national infrastructure. La Rouche has launched an appeal for a new Bretton Woods Conference to reorganize the world's financial system, a plan he says is endorsed by many international leaders. It would call for:

1. A new system of fixed exchange rates,
2. A treaty between governments to ban speculation in deriviatives,
3. The cancellation or reorganisation of international debt, and
4. The issuance of "credit" by national governments in sufficient quantites to bring their economies up to full employment, to be used for technical innovation and to develop critical infrastructure.

La Rouche's proposed system of exchange rates would be based on an international unit of currency pegged against the price of an agreed basket of hard commodities. With such a system, he says, it would be the currencies, not the commodities, [which are] given implicitly adjusted vaues, as based upon the basket of commodities used to define the unit._#main-fn2">2

In accord with La Rouche's fourth point, the CEC's media release of 14 January calls for the re-establishment of a national bank as the (now privatised) Commonwealth Bank was prior to 1960, when Prime Minister Menzies took away its central banking powers that are now vested in the Reserve Bank which uses these powers secretively beyond any scrutiny by Parliament or the Australian public.

Candobetter would certainly want to join in the CEC's "fight to re-establish a national bank," referred to in the media release below, but we could not recommend a vote for CEC candidates should they choose to stand in the Federal elections, because of their extreme anti-environmental stance.

However, we see no reason why such policies could not be adopted by other parties with stances less hostile to the environment, such as the Greens or the New Australia Party.

If such parties, seriously wish to be considered as serious alternatives to both of the two major pro-big-business parties, then their adopting such a proposal would almost certainly add enormously to their electoral appeal.

However, after two and a half decades of their existence, the Greens, for their part, have failed to adopt any policy which challenges the fundumental economic direction of this country, so we don't hold out any hope that that will change any time soon.

The full media release from the Citizens Electoral Council is included below.

Citizens Electoral Council of Australia

Media Release 14 January 2010

To defeat the Money Power and guarantee Australia's economic future:
Re-establish a true national bank

Fifty years ago today—14 January, 1960—Prime Minister Robert Menzies committed an act of treachery on behalf of his private banker friends, and neutered Australia's national bank, by removing the Commonwealth Bank's central banking powers, and reducing it to a mere trading and savings bank.

The powerful central banking function, by which the Commonwealth Bank had regulated and leashed the private banks, was renamed the Reserve Bank of Australia, and placed under the control of a private board of directors; its first Governor, H.C. "Nugget" Coombs, boasted that he was a member of "the international freemasonry of central bankers".

The City of London-directed private banker fraternity, including Menzies' best friend, financier Staniforth Ricketson of J.B. Were & Son, whom the patriots in the early Labor Party called the "Money Power", had finally achieved what they had strived for since the Commonwealth Bank's establishment in 1911—the end of sovereign government control over banking.

Today, Citizens Electoral Council leader Craig Isherwood called on Australians to rejoin "old" Labor's fight against the Money Power, and demand the re-establishment of a true national bank like the Commonwealth Bank.

"If Australia is to have a prosperous economic future, we must harness the nation's credit to build large-scale water, power and transport infrastructure, and foster essential agricultural and manufacturing industries, which means we need a true national bank, owned and run by the government for the common good," he said.

"The early Labor Party fought against the Money Power's private control of banking, because they understood that a government only had true sovereignty, if it exercised ultimate control over the monetary system through a national bank.

"Thanks to the influence of pro-American forces in the early Labor Party and among the writers of our Constitution, Australia is a unique country, in that we are the only nation outside of the U.S. to have had a true, Hamiltonian-style national bank, which was expatriate American and Commonwealth Bank architect King O'Malley's intention when he created it, going so far as to proclaim, 'I am the Hamilton of Australia...'" [Alexander Hamilton was the 1st U.S. Treasury Secretary under President George Washington, and the inventor of national banking.]

In the two periods when the Commonwealth Bank was able to function as a true national bank under government control and directing finance for the public good, 1912-1923_#main-fn3">3 (under the governorship of Sir Denison Miller) and 1941-1945 (under the Labor government during WWII), its achievements were stunning:

• The Trans-Australian railway;
• Financing the national wool clip in WWI;
• Stopping a run on the private banks during WWI;
• Financing Australia's miraculous war-time economic mobilisation in WWII;
• Zero war-time inflation during WWII.

In 2001, the CEC published its book, What Australia Must Do to Survive the Depression, which includes ready-to-enact legislation for a new national bank, the Commonwealth National Credit Bank Bill, and an explanation for how a new national bank would function to be as successful as its predecessor.

Mr Isherwood concluded with a challenge: "Next year, 2011, is the 100th anniversary of the 22nd of December, 1911 passage of the Commonwealth Bank Act, the single most important piece of legislation in our history," he said.

"Join the CEC's fight to re-establish a national bank, and let us set that anniversary as the deadline to achieve it.

"God knows we need it," he said.

Craig Isherwood, National Secretary

PO Box 376 Coburg VIC 3058
Phone: 03 9354 0544 Fax: 03 9354 0166
E mail: cec [ AT ] cecaust.com.au
Website: www.cecaust.com.au

See also: Cut Wall Street out! How states can finance their own economic recovery of 3 Nov 09 by Ellen Brown, How a state-owned bank could make Queensland asset fire sale unnecessary based on original article by Ellen Brown of 29 May 09 by Ellen Brown, Call for the re-establishment of a true national bank of 17 Jan 2010

Footnotes

#main-fn1" id="main-fn1">1. #main-fn1-txt">↑ The CEC does have some worthwhile ideas about technology. An example is their media Isherwood: Australia & India should cooperate on thorium nuclear power of 11 Jan 10. However, we regard their apparent belief that such technologies can fix all possible ecological, social and economic problems is reckless in the extreme.

#main-fn2" id="main-fn2">2. #main-fn2-txt">↑ The Web of Debt(2008 edition) is a towering work which blows apart the mystique of the worldwide monetary system. Its core thesis is that money has no intrinsic value and is no more than a means to exchange goods and services. As such, all money should be created as a service by the Government, whether as coins, paper, or electronically and not by private banks. The book shows how the undemocratic usurping of this function by private banks in most countries, principly the United States, has been the cause of almost every major economic crisis for the last 300 years. (This somewhat casts doubt on the Marxist thesis, that I had previously accepted, that capitalism, in and of itself, has an inbuilt dynamic that inevitably leads to economic crises.) The book does have flaws, including its implicit argument that monetary reform alone can fix nearly all the world's problems. As an example, it fails to acknowledge that China, which does have essentially the kind of monetary system that Brown (rightly) advocates, faces serious ecological crisis and may well be the casue of global ecological collapse. Also precisely because China's own economy works so well, other economies largely crippled by private banking system, such as Australia's face the threat of colonisation by China.

#main-fn3" id="main-fn3">3. The achievements of the Commonwealth Bank during this period, including enabling Australia's participation at a cost considerably less than would have been otherwise possible has to be somewhat tempered by the ongoing controversy about our participation in that war at the cost of 60,000 Australian lives. Another cost, not widely acknowledged, is the Armenian genocide, largely triggered as a consequence of Australia's participation in the attempted invasion of Turkey at Gallipoli. The Armenian genocide was swept under the carpet during rapproachment between Australia and Turkey following the war. The outcome of the First World, in paricular the Treaty of Versailles, was unjust and laid the basis for almost continuous conflict since then including the Second World War.

See also: Call for the re-establishment of a true national bank of 17 Jan 2010.

Saturday 31 October 2009

by Ellen Hodgson Brown J.D.
Originally published on truthout.

Pouring money into the private banking system has only fixed the economy for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans find themselves in.

President Obama's $787 billion stimulus plan has so far failed to halt the growth of unemployment: 2.7 million jobs have been lost since the stimulus plan began. California has lost 336,400 jobs. Arizona has lost 77,300. Michigan has lost 137,300. A total of 49 states and the District of Columbia have all reported net job losses.

In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) North Dakota is a sparsely populated state of less than 700,000 people, largely located in cold and isolated farming communities. Yet, since 2000, the state's GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.

Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. 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.

The Advantages of Owning Your Own Bank

So, how does owning a bank solve the state's funding problems? Isn't the state still limited to the money it has? The answer is no. Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of "fractional reserve" lending. As the Federal Reserve Bank of Dallas explains on its web site:

"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."

How many times? President Obama puts this "multiplier effect" at eight to ten. In a speech on April 14, he said:

"[A]lthough 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."

It can, but it hasn't recently, because private banks are limited by bank capital requirements and by their for-profit business models. And that is where a state-owned bank has enormous advantages: States own huge amounts of capital, and they can think farther ahead that their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses; they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.

The Bank of North Dakota (BND) is set up as a dba: "the State of North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. Projecting the possibilities of this arrangement to California, the State of California owns about $200 billion in real estate, has $62 billion in various investments and has $128 billion in projected 2009 revenues. Leveraged by a factor of eight, that capital base could support nearly $4 trillion in loans.

To get a bank charter, specific investments would probably need to be earmarked by the state as startup capital; but the startup capital required for a typical California bank is only about $20 million. This is small potatoes for the world's eighth largest economy, and the money would not actually be "spent." It would just become bank equity, transmuting from one form of investment into another - and a lucrative investment at that. In the case of the BND, the bank's return on equity (Link broken. Am following this up. - JS) is about 25 percent. 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 billion dollars to the state's general fund, offsetting taxes. California could do substantially better than that. California pays $5 billion annually just in interest on its debt. If it had its own bank, the bank could refinance its debt and return that $5 billion to the state's coffers; and it would make substantially more on money lent out.

Besides capital, a bank needs "reserves," which it gets from deposits. For the BND, this too is no problem, since it has a captive deposit base. By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts deposits from other entities. These copious deposits can then be plowed back into the state in the form of loans.

Public Banking on the Central Bank Model

The BND's populist organizers originally conceived of the bank as a credit union-like institution that would free farmers from predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND is now chiefly a "bankers' bank." It acts like a central bank, with functions similar to those of a branch of the Federal Reserve. It 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.

One of the BND's functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state to avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007. Before that, investors routinely bought securitized loans (CDOs) from the banks, making room on the banks' books for more loans. But these "shadow lenders" disappeared when they realized that the derivatives called "credit default swaps" supposedly protecting their CDOs were a highly unreliable form of insurance. In North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.

Other services the BND provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions and a well-funded disaster loan program. When the city of Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.

The Commercial Banking Model: The Commonwealth Bank of Australia

The BND studiously avoids competition with private banks, but a publicly-owned bank could profitably engage in commercial lending. A successful model for that approach was the Commonwealth Bank of Australia, which served both central bank and commercial bank functions. For nearly a century, the publicly-owned Commonwealth Bank provided financing for housing, small business, and other enterprise, affording effective public competition that "kept the banks honest" and kept interest rates low. Commonwealth Bank put the needs of borrowers ahead of profits, ensuring that sound investment flows were maintained to farming and other essential areas; yet, the bank was always profitable, from 1911 until nearly the end of the century.

Indeed, it seems to have been too profitable, making it a takeover target. It was simply "too good not to be privatized." The bank was sold in the 1990s for a good deal of money, but it's proponents consider it's loss as a social and economic institution to be incalculable.

A State Bank of Florida?

Could the sort of commercial model tested by Commonwealth Bank work today in the United States? Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending. He explains:

"For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6 percent 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 state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700, while 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," says Dr. Khavari. He also proposes 6 percent credit cards and 6 percent certificates of deposit.

The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates. According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable, but profitable for the state, while at the same time creating much-needed jobs.

    --------

    Ellen Brown 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 earlier books focused on the pharmaceutical cartel that gets its power from "the money trust." Her eleven books include "Forbidden Medicine, Nature's Pharmacy" (co-authored with Dr. Lynne Walker) and "The Key to Ultimate Health" (co-authored with Dr. Richard Hansen). Her web sites are www.webofdebt.com and www.ellenbrown.com.

#StevenKeen" id="StevenKeen">Appendix: Steven Keen on bankers

The following is an excerpt from the story "This Keen professor overlooked by MSM" by David Hirst in the Business Day section of the Sydney Morning Herald of 10 Sep 09 :

Then Keen told what must have been a startled TV audience that bankers long ago ceased being humble lubricants of commerce, and had instead become parasites. They lend us money to play in a Ponzi scheme, launder the loot through stock and housing markets - where prices are driven up using the money they lent us - and then take a slice of the rising prices and call it a performance bonus.

Far from deserving their salaries, let alone their bonuses, Keen told six o'clock Sunday viewers, bankers deserved to be paid no more than plumbers, and to be given less respect. After all, plumbers fix leaks; if bankers did anywhere near as well, we'd be having a financial ball, not a financial crisis.

Queensland State Treasure Andrew Fraser claims that he has no option but to sell off yet more state-owned assets in order to solve Queensland's financial crisis. In this article, Ellen Brown, author of "The Web of Debt" urges Arnold Schwarzenegger the Governor of California, which faces financial difficulties similar to those faced by Queensland, to follow the example of North Dakota, which has its own bank, in order to create money to lend itself in a manner no different to the way that private banks create money to lend Governments, but at interest rates much lower than would be charged by the private banks.

But Governor, you can create money! Just form your own bank.

By Ellen Brown. Link to original article.

"I understand that these cuts are very painful and they affect real lives. This is the harsh reality and the reality that we face. Sacramento is not Washington -- we cannot print our own money. We can only spend what we have."

   -- Governor Arnold Schwarzenegger quoted in Time, May 22, 2009

In a May 22 article titled "Billions in the Red: Fiscal Reckoning in CA," Juliet Williams reports that since California voters have now vetoed higher taxes and further state government borrowing, Gov. Arnold Schwarzenegger has indicated that he intends to close the budget gap almost entirely through drastic spending cuts. The cutbacks could include laying off thousands of state workers and teachers, ending the state's main welfare program for the poor, eliminating health coverage for about 1.5 million poor children, halting cash grants for about 77,000 college students, slashing money for state parks, and releasing thousands of prisoners before their sentences are finished. Schwarzenegger bemoaned the fact that the state could not print its own money but said it could only spend what it had.

But wait -- perhaps the state can create its own money. After all, banks do this every day. Certified, card-carrying bankers are allowed to do something nobody else can do: they create "credit" with accounting entries on their books. As the Federal Reserve Bank of Dallas explains 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."_#main-fn1">1

President Obama has also acknowledged that banks create money through the "multiplier effect." In a speech at Georgetown University on April 14, he said:

"[A]lthough 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."_#main-fn2">2

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 8 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. On average, interest has been calculated to compose fully half the cost of every public project._#main-fn3">3 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.

Is all this too radical and unprecedented to consider? Not at all. One state has had its own bank for 90 years, and it has escaped the credit crunch and is doing remarkably well . . . .

The state-owned bank of North Dakota

Only four of fifty states are now solvent, meaning they can meet their state budgets; and one of them is North Dakota._#main-fn4">4 It is an unlikely candidate for the distinction. It is a sparsely populated state of less than 700,000, known for cold weather and isolated farmers. Yet since 2000, the state's GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. This year the state has a budget surplus of $1.2 billion.

North Dakota boasts the only state-owned bank in the nation. It has avoided the credit freeze by creating its own credit, leading the nation in establishing state economic sovereignty. The Bank of North Dakota 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. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. 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 has ample money to lend to students (over 184,000 outstanding loans); it purchases municipal bonds from public institutions; and it makes loans at 1% interest to new farmers. The state's current governor was formerly president of the Bank of North Dakota.

In California and other states, workers and factories are sitting idle because the private credit system has failed. An injection of new money from a system of publicly-owned banks on the model of the Bank of North Dakota could thaw the credit freeze and bring spring to the markets once again.

Footnotes

Cash-starved states need to play the banking game:
north dakota shows how

#main-fn1" id="main-fn1">1. #main-fn1-txt">↑ "Money, Banking and Monetary Policy -- Everyday Economics," www.dallasfed.org/educate/everyday/ev9.html.

#main-fn2" id="main-fn2">2. #main-fn2-txt">↑ "Obama's Remarks on the Economy," New York Times, April 14, 2009.

#main-fn3" id="main-fn3">3. #main-fn3-txt">↑ Margrit Kennedy, Interest and Inflation-free Money (1995), discussed in Deidre Kent, "Margrit Kennedy Inspires New Zealand Groups to Establish Regional Money Systems," McKeever Institute of Economic Policy Analysis, www.mkeever.com (2002).

#main-fn4" id="main-fn4">4. #main-fn4-txt">↑ John Mitchell, "46 of 50 States Could File Bankruptcy in 2009-2010," Freedom Arizona (January 30, 2009).

Original article published as "But Governor, You CAN Create Money! Just Form Your Own Bank." on 29 May 09 Op Ed News
See also: "Revive Lincoln's monetary policy - an open letter to President Obama" of 9 Apr 09 by Ellen Brown (also published here), "Cash-starved states need to play the banking game:
North Dakota shows how" of 2 Mar 09, "Take back the power to create money from the private banking industry" - submission by Ellen Brown to President Barack Obama's Open Government Dialogue of   of 29 May 09.

by Ellen Brown

Originally published on Global Research

Contents: #MonetaryBreakthrough">Lincoln's Monetary Breakthrough, #SuccessfulTradition">Building on a Successful Tradition, #InflationQuestion">The Perennial Inflation Question, #Wake-upCall">A Wake-up Call, #Notes">Notes

Dear President Obama:

The world was transfixed on that remarkable day in January when, to poetry, song, and dance, you gazed upon Abraham Lincoln's likeness at the Lincoln Memorial and searched for wisdom to navigate these difficult times. Indeed, you have so many things in common with that venerable President that one might imagine you were his reincarnation in different dress. You are both thin and wiry, brilliant speakers, appearing on the national stage at pivotal times. Fertile imaginations could envision you coming back triumphantly as one of those slaves you freed, to prove once and for all the proposition that all men are created equal and can achieve great things if given a fighting chance. But as Wordsworth said, our birth is but a sleep and a forgetting; and if that is true, you may have forgotten a more subtle form of slavery from which Lincoln freed his countrymen, even if you were there at the time. You may have forgotten it because it has been omitted from the history books, leaving Americans ill-equipped to interpret the lessons of our own past. This letter is therefore meant to remind you.

We are now met on another battlefield of that same economic war that visited Lincoln and the Founding Fathers before him. President Obama, the fate of our economy and the nation itself may depend on how well you understand Lincoln's monetary breakthrough, the most far-reaching "economic stimulus plan" ever implemented by a U.S. President. You can solve our economic crisis quickly and permanently, by implementing the same economic solution that allowed Lincoln to win the Civil War and thus save the Union from foreign economic masters.

#MonetaryBreakthrough" id="MonetaryBreakthrough">Lincoln's Monetary Breakthrough

The bankers had Lincoln's government over a barrel, just as Wall Street has Congress in its vice-like grip today. The North needed money to fund a war, and the bankers were willing to lend it only under circumstances that amounted to extortion, involving staggering interest rates of 24 to 36 percent. Lincoln saw that this would bankrupt the North and asked a trusted colleague to research the matter and find a solution. In what may be the best piece of advice ever given to a sitting President, Colonel Dick Taylor of Illinois reported back that the Union had the power under the Constitution to solve its financing problem by printing its money as a sovereign government. Taylor said:

"Just get Congress to pass a bill authorizing the printing of full legal tender treasury notes . . . and pay your soldiers with them and go ahead and win your war with them also. If you make them full legal tender . . . they will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution."

The Greenbacks actually were just as good as the bankers' banknotes. Both were created on a printing press, but the banknotes had the veneer of legitimacy because they were "backed" by gold. The catch was that this backing was based on "fractional reserves," meaning the bankers held only a small fraction of the gold necessary to support all the loans represented by their banknotes. The "fractional reserve" ruse is still used today to create the impression that bankers are lending something other than mere debt created with accounting entries on their books._#main-fn1">1

Lincoln took Col. Taylor's advice and funded the war by printing paper notes backed by the credit of the government. These legal-tender U.S. Notes or "Greenbacks" represented receipts for labor and goods delivered to the United States. They were paid to soldiers and suppliers and were tradeable for goods and services of a value equivalent to their service to the community. The Greenbacks aided the Union not only in winning the war but in funding a period of unprecedented economic expansion. Lincoln's government created the greatest industrial giant the world had yet seen. The steel industry was launched, a continental railroad system was created, a new era of farm machinery and cheap tools was promoted, free higher education was established, government support was provided to all branches of science, the Bureau of Mines was organized, and labor productivity was increased by 50 to 75 percent. The Greenback was not the only currency used to fund these achievements; but they could not have been accomplished without it, and they could not have been accomplished on money borrowed at the usurious rates the bankers were attempting to extort from the North.

Lincoln succeeded in restoring the government's power to issue the national currency, but his revolutionary monetary policy was opposed by powerful forces. The threat to established interests was captured in an editorial of unknown authorship, said to have been published in The London Times in 1865:

If that mischievous financial policy which had its origin in the North American Republic during the late war in that country, should become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off its debts and be without debt. It will become prosperous beyond precedent in the history of the civilized governments of the world. The brains and wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe."

Lincoln was assassinated in 1865. According to historian W. Cleon Skousen:

"Right after the Civil War there was considerable talk about reviving Lincoln's brief experiment with the Constitutional monetary system. Had not the European money-trust intervened, it would have no doubt become an established institution."

The institution that became established instead was the Federal Reserve, a privately-owned central bank given the power in 1913 to print Federal Reserve Notes (or dollar bills) and lend them to the government. The government was submerged in a debt that has grown exponentially since, until it is now an unrepayable $11 trillion. For nearly a century, Lincoln's statue at the Lincoln Memorial has gazed out pensively across the reflecting pool toward the Federal Reserve building, as if pondering what the bankers had wrought since his death and how to remedy it.

#SuccessfulTradition" id="SuccessfulTradition">Building on a Successful Tradition

Lincoln did not invent government-issued paper money. Rather, he restored a brilliant innovation of the American colonists. According to Benjamin Franklin, it was the colonists' home-grown paper "scrip" that was responsible for the remarkable abundance in the colonies at a time when England was suffering from the ravages of the Industrial Revolution. Like with Lincoln's Greenbacks, this prosperity posed a threat to the control of the British Crown and the emerging network of private British banks, prompting the King to ban the colonists' paper money and require the payment of taxes in gold. According to Franklin and several other historians of the period, it was these onerous demands by the Crown, and the corresponding collapse of the colonists' paper money supply, that actually sparked the Revolutionary War._#main-fn2">2

The colonists won the war but ultimately lost the money power to a private banking cartel, one that issued another form of paper money called "banknotes." Today the bankers' debt-based money has come to dominate most of the economies of the world; but there are a number of historical examples of the successful funding of economic development in other countries simply with government-issued credit. In Australia and New Zealand in the 1930s, the Depression conditions suffered elsewhere were avoided by drawing on a national credit card issued by publicly-owned central banks. The governments of the island states of Guernsey and Jersey created thriving economies that carried no federal debt, just by issuing their own debt-free public currencies. China has also funded impressive internal development through a system of state-owned banks.

Here in the United States, the state of North Dakota has a wholly state-owned bank that creates credit on its books just as private banks do. This credit is used to serve the needs of the community, and the interest on loans is returned to the government. Not coincidentally, North Dakota has a $1.2 billion budget surplus at a time when 46 of 50 states are insolvent, ...

Here in the United States, the state of North Dakota has a wholly state-owned bank that creates credit on its books just as private banks do. This credit is used to serve the needs of the community, and the interest on loans is returned to the government. Not coincidentally, North Dakota has a $1.2 billion budget surplus at a time when 46 of 50 states are insolvent, an impressive achievement for a state of isolated farmers battling challenging weather._#main-fn3">3 The North Dakota prototype could be copied not only in every U.S. state but at the federal level.

#InflationQuestion" id="InflationQuestion">The Perennial Inflation Question

The objection invariably raised to government-issued currency or credit is that it would create dangerous hyperinflation. However, in none of these models has that proven to be true. Price inflation results either when the supply of money goes up but the supply of goods doesn't, or when speculators devalue currencies by massive short selling, as in those cases of Latin American hyperinflation when printing-press money was used to pay off foreign debt. When new money is used to produce new goods and services, price inflation does not result because supply and demand rise together. Prices did increase during the American Civil War, but this was attributed to the scarcity of goods common in wartime rather than to the Greenback itself. War produces weapons rather than consumer goods.

Today, with trillions of dollars being committed for bailouts and stimulus plans, another objection to Lincoln's solution is likely to be, "The U.S. government is already printing its own money -- and lots of it." This, however, is a misconception. What the government prints are bonds -- its I.O.U.s or debt. If the government did print dollars, instead of borrowing them from a privately-owned central bank that prints them, Uncle Sam would not have an eleven trillion dollar millstone hanging around his neck. As Thomas Edison astutely observed:

"If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is that the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way.
It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people."

#Wake-upCall" id="Wake-upCall">A Wake-up Call

Henry Ford observed at about the same time:

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Today we the people are starting to understand our banking and monetary system, and we are shocked, dismayed, and furious at what we are discovering. The wizard behind the curtain turns out to be a small group of men pulling levers and dials, creating an illusory money scheme that, behind all the talk and bravado, is mere smoke and mirrors. These levers are controlled by a privately-owned, unaccountable central bank called the Federal Reserve, which has recently dispensed billions if not trillions in funds to its banker cronies, without revealing where these monies are going even under Congressional inquiry or in response to Freedom of Information Act (FOIA) requests. As Chris Powell pointed out recently in conjunction with an FOIA request brought by Bloomberg News, which the Fed declined to comply with:

"Any government that can disburse $2 trillion secretly, without any accountability, is not a democratic government. It is government of, by, and, for the bankers."_#main-fn4">4

There was a time when private central bankers were the heavyweights in control, able to run their ultra-secret agenda with impunity; but that era is coming to an end. The bankers are scrambling, trying to patch up their crumbling creations with schemes, bailouts and sleight of hand. That effort, however, must ultimately prove futile. As investment adviser Rolfe Winkler said in a recent article:

"The great Ponzi scheme that is the Western World's economy has grown so big there's simply no 'fixing' it. Flushing more debt through the system would be like giving Madoff a few billion to tide him over. Or like adding another floor to the Tower of Babel. To what end? The collapse is already here. The question is: How much do we want it to hurt? Using the public's purse to finance 'confidence' in a system that is already kaput may delay the Day of Reckoning, sure, but at the cost of multiplying our losses. Perhaps fantastically."_#main-fn5">5

The bankers are on the run, feverishly trying to use the collapse of the current system to steer us toward an "Amero"-style North American currency, or a one-world private banking system and privately-issued global currency that they and only they control. We the people will not accept those solutions, however, no matter how bad things get. We demand real solutions that empower us, not further enslave us.

Abraham Lincoln had such a solution. President Obama, you can finally bring his monetary solution to fruition. Manifest the vision of Lincoln, Jefferson, Madison and Franklin, and we the people will make sure you are placed in the pantheon of our greatest leaders and are revered for all time. America's greatest days can still be ahead of us; but for this to happen, we need to expose and root out the deceptive banking scheme that would enslave us to a future of debt and increasing homelessness in this great country our forefathers founded. The time has come for democracy to rise superior to a private banking cartel and take back the power to create money once again. Such a transformation would represent the most epochal and empowering shift that humanity has ever seen. As you recently said:

"This country has never responded to a crisis by sitting on the sidelines and hoping for the best. Throughout our history we have met every great challenge with bold action and big ideas."

Your words are a timely reminder of our long legacy of action and bold solutions in the face of adversity. Can we do this? Yes we can.

For more information, see the writings of a variety of money reformers including David Korten, Richard Cook, Stephen Zarlenga, Michael Hudson and this author; articles collected at www.webofdebt.com/articles and www.GlobalResearch.ca; the documentary videos "The Money Masters" and "Money as Debt;" and proposed legislation by Congressman Dennis Kucinich to nationalize the Fed, and by Congressman Ron Paul to audit it (HR 1027).

#Notes" id="Notes">Notes:

Contents: Lincoln's Monetary Breakthrough, #SuccessfulTradition">Building on a Successful Tradition, #InflationQuestion">The Perennial Inflation Question, #Wake-upCall">A Wake-up Call, #Notes">Notes

#main-fn1" id="main-fn1">1. #main-fn1-txt">↑ See Ellen Brown, "Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking," www.webofdebt.com/articles (December 29, 2008).

#main-fn2" id="main-fn2">2. #main-fn2-txt">↑ Congressman Charles Binderup in a 1941 speech, "How America Created Its Own Money in 1750: How Benjamin Franklin Made New England Prosperous." Binderup quotes historian John Twells on this point.

#main-fn3" id="main-fn3">3. #main-fn3-txt">↑ E. Brown, "Turning the Tables on Wall Street: North Dakota Shows Cash-starved States How They Can Create Their Own Credit," www.webofdebt.com/articles (March 11, 2009).

#main-fn4" id="main-fn4">4. #main-fn4-txt">↑ Chris Powell, "Fed Refuses to Disclose Recipients of $2 Trillion," GATA (December 12, 2008).

#main-fn5" id="main-fn5">5. #main-fn5-txt">↑ Rolfe Winkler, "More Debt Won't Rescue the Great American Ponzi," Option Armageddon (March 9, 2009).

Special thanks to CC for his invaluable help with this article.

Ellen Brown 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 earlier books focused on the pharmaceutical cartel that gets its power from "the money trust." Her eleven books include Forbidden Medicine, Nature's Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.

Ellen Brown is a frequent contributor to Global Research. Global Research Articles by Ellen Brown

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© Copyright Ellen Brown, webofdebt.com, 2009

The url address of the original article is: www.globalresearch.ca/index.php?context=va&aid=13118

[The original title was "With governments like this, who needs enemies" - changed for a more indicative one.]

At Rudd to announce rescue package for homeowners, we can read that the Federal Government says that the Commonwealth, NAB, Westpac and the ANZ banks are postponing mortgage repayments for up to one year for people in financial difficulty.

The interest, however, will be added to the total amount of the loan.

Mike Stasse of Running on Empty Oz, (Australia's peak-oil list) says, "Let's analyse this. You have a $400,000 mortgage and lose your job.
The payments are ~$2500 a month (round figures over 25 years) or $30,000 a year. So 12 months later, if you still don't have a job, you now owe the bank $430,000...... and the repayments are now $2700!"

"Plus there's the distinct possibility that if/when inflation kicks in from all the money printing. or oil prices going back up, interest rates will also go back up."

"If interest rates go up 0.5%, the repayments are now $2830
If they go up a full % repayments would be $2970"

"This is no solution!" he says.

Editor: Debt and house prices are what is keeping people poor and production expensive and working hours long and wages down. Who cares about the banks - which have become nothing much more than growth-lobbyist home loan merchants? They have been having their cake and eating it for years. They need the chop, like Marie-Antoinette.