Saturday, June 07, 2014

The most important article of the week (and maybe the year)

For a while now, I've been saying that the problem is not capitalism per se, because there are really two "capitalisms": Industrial capitalism and finance capitalism. The first is exemplified by the guy who makes a shoe. The second is exemplified by the banker who loans the shoemaker enough money to start a shoe factory.

As you may have noticed, America doesn't do industrial capitalism as well as it used to. We are now known for our financial "products."

The people who produce these products are killing us. Killing us.

How bad is it? Prepare for a shock. Jerry Brown, governor of my old state of California, wants to build two water tunnels through the California delta. The project is necessary, but the cost is murderous.

Not the cost of construction. The problem is the cost of financing.
The tunnels were billed to voters as a $25 billion project. That estimate, however, omitted interest and fees. Construction itself is estimated at a relatively modest $18 billion. But financing through bonds issued at 5% for 30 years adds $24-40 billion to the tab. Another $9 billion will go to wetlands restoration, monitoring and other costs, bringing the grand total to $51-67 billion – three or four times the cost of construction.

A general rule for government bonds is that they double the cost of projects, once interest has been paid.

The San Francisco Bay Bridge earthquake retrofit was originally slated to cost $6.3 billion, but that was just for salaries and physical materials. With interest and fees, the cost to taxpayers and toll-payers will be over $12 billion.
This is why the United States was able to create such an impressive infrastructure in the 1930s-70s, and why we can't do it any longer.

It gets worse. In fact, it gets ten times worse...
And those heavy charges pale in comparison to the financing of “capital appreciation bonds.” As with the “no interest” loans that became notorious in the subprime mortgage crisis, the borrower pays only the principal for the first few years. But interest continues to compound; and after several decades, it can amount to ten times principal or more.

San Diego County taxpayers will pay $1 billion after 40 years for $105 million raised for the Poway Unified School District.
The solution: Don't socialize industrial capitalism. Let the shoemakers continue to make shoes; let the road construction guys continue to build roads. Instead...

SOCIALIZE THE BANKS. Make them accountable to the people.
In the last five years, China has managed to build an impressive 4000 miles of high-speed rail. Where did it get the money? The Chinese government has a hidden funding source: it owns its own banks. That means it gets its financing effectively interest-free.
Actually, the situation is more complex than that. China has lots of private banks -- but they still tend to dance to the government's tune. At a time when the rest of the world was talking austerity, China pushed for a massive construction binge. So far, the trick has worked.

Sounds like magic? Well, guess what: The way private banks operate right now is the real magic trick. In fact, it's little better than a scam.
All banks actually have a hidden funding source. The Bank of England just admitted in its quarterly bulletin that banks don’t lend their deposits. They simply advance credit created on their books. If someone is going to be creating our national money supply and collecting interest on it, it should be we the people, through our own publicly-owned banks.
North Dakota, as you may have heard, has led the way...
Models for this approach are not limited to China and other Asian “economic miracles.” The US has its own stellar model, in the state-owned Bank of North Dakota (BND). By law, all of North Dakota’s revenues are deposited in the BND, which is set up as a DBA of the state (“North Dakota doing business as the Bank of North Dakota”). That means all of the state’s capital is technically the bank’s capital. The bank uses its copious capital and deposit pool to generate credit for local purposes.

The BND is a major money-maker for the state, returning a sizable dividend annually to the state treasury. Every year since the 2008 banking crisis, it has reported a return on investment of between 17 percent and 26 percent. While California and other states have been slashing services and raising taxes in order to balance their budgets, North Dakota has actually been lowering taxes, something it has done twice in the last five years.
Understand? Socializing finance capitalism will lower taxes.

Socializing finance capitalism will mean easier credit for the real capitalists -- for the "make a shoe" people.

Socializing finance capitalism may be the only way to save industrial capitalism.
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson
I think its even worse. Innovation and entrepreneurship are dependent on access to capital. That access is no longer available to small and start-up businesses. And, by the way, standing armies ARE the second greatest threat to liberty.
There's been a quiet movement underway since the 2007-2008 banking debacle to reinvigorate the idea of public banking. If you recall there's been the suggestion that our post offices offer citizen banking. But for large projects, the public bank model at the city and state level makes a lot of sense. It's a way of getting around the obscene obstacles and crushing interest rates that our current financial institutions present. Of course, it means that those same financial institutions will be the biggest obstacle in bringing the public bank to fruition.

I first read about this via the Philadelphia Project which is part of a growing coalition to take the idea of public banking from the idea phase to reality.

The State Bank in North Dakota was birthed by the anger of farmers who were fed up with predatory lenders bleeding them dry. Somethings never change! And the past is never dead as C Barr's quote clearly indicates.

What's even more ridiculous about this whole bond BS scheme is how the banks create money for the bonds. THEY MAKE IT UP OUT OF THIN AIR and then get paid interest on it for decades!

Have you studied the basics of the monetary system, how money is created, how it's "loaned into existence"? It's not like there is a pile of $9 billion in Benjamins sitting in a bank vault somewhere that's moved on pallets from the bank to the government, so it can pay tunnel diggers etc. There's SUPPOSED to be $900 million in actual deposits to back that loan, under the 10:1 fractional reserve banking system. That allows banks to loan out more than they have on hand, and it's how the money supply grows. Banks have found ways to get around that 1/10th "reserve requirements" though, under the willing blind eyes of captured regulators.

So basically, when Brown or any other government approves a project and goes to banks for bond funding, they are giving the banks the privilege of sucking the taxpayers' blood for 30 or 40 years in exchange for nothing more than the banks saying "OK, little buddies. We'll let you have a pile of imaginary money." If you wonder why your taxes are so high, while your roads, schools and other public services are so crappy, wonder instead about how much of your tax money goes to pay the rentiers (and banks) instead of being used to repave the potholes.

Anyone who wants to learn about the DNA of the money creation system should watch a video titled "Money as Debt." It's not arcane, wonkish or boring -- it's mostly simple panel cartoons, at a sophistication level that a bright high-schooler could comprehend. It's also not wild-eyed conspiratorialist crapola of the 911 Troofer/Lew Rockwell/gold bugger variety. It will change the way you look at those pieces of paper (or plastic, if you live in Australia or Canada) in your wallet. Until I saw it, I never realised that those things aren't ASSETS, they are DEBTS. That "money" is essentially a cheque, (as it's spelt where I live.) Only instead of a cheque written by your neighbour, it's a cheque from the Central Bank of your country. And how do we all feel about cheques, eh? The video is 48 minutes long, but it will expand your mind.
Ellen Brown and Laura Wells just ran for office in California on a Public Baking platform. We can do this!
They don't even print the stuff. It's simply electrons... a computer entry into your account. Made up out of thin air.
Compare dates of Income Tax implementation and the establishment of the Federal Reserve.

1913 for both. Coincidence?

That's not what I was talking about, m. I favor a graduated income tax and would prefer it to be as steeply graduated as it was in the 1950s. The federal reserve is as necessary as the central banks of other industrialized nations.
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