California has over $17 billion on deposit in banks that have refused to honor its IOUs, forcing legislators to accept crippling budget cuts. These austerity measures are unnecessary. If the state were to deposit its money in its own state-owned bank, it could have enough credit to solve its budget crisis with funds to spare.
"We make money the old-fashioned way," said Art Rolnick, chief economist of the Minneapolis Federal Reserve. "We print it." That works for the federal government's central bank, but states are forbidden by the Constitution to issue "bills of credit," a term that has been interpreted to mean the state's own paper money. "Sacramento is not Washington," said California Governor Arnold Schwarzenegger in May. "We cannot print our own money." When legislators could not agree on how to solve the state's $26.3 billion budget deficit, the Governor therefore did the next best thing: he began paying the bills with IOUs ("I Owe You's," or promises to pay bearing interest).
The problem was that most banks declined to honor the IOUs, at least after July 24. "They said something about not wanting to enable the dysfunctional state legislature," observed a San Diego Union-Tribune staff writer, "which is kind of funny as the federal government has been enabling the dysfunctional financial sector for almost a year."
On July 21, California legislators were strong-armed into a tentative agreement on budget cuts, a forced move that was called "painful" by the Speaker of the Assembly and "devastating" by the executive director of the California State Association of Counties. The cuts involve more job losses, more bleeding of school funds, more closing of facilities. Worse, they will not solve the budget crisis long-term. The state's economy is expected to continue to deteriorate along with its revenues. But without banks to honor the state's IOUs, California has no time to negotiate or explore alternatives. There is no "quick fix," says UCLA Professor Daniel Mitchell.
Or is there?
More Than One Way to Solve a Budget Crisis
Among the banks rejecting California's IOUs are six of particular interest: Citibank, Union Bank, Bank of America, Wells Fargo, U.S. Bank, and Westamerica Bank. These banks are interesting because they are six of the seven depository banks in which the state of California currently deposits its money. (The seventh is Bank of the West, which loyally said it would accept the IOUs indefinitely.)
Banks operate under federal or state charters that grant them special rights and privileges. Chartered banks are endowed with a gift that keeps on giving: they can "leverage" the value of their deposits into anywhere from ten to thirty times that sum in interest-bearing loans. This "multiplier effect" is attested to by many authorities, including President Obama himself. He said in a speech at Georgetown University on April 14:
[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.The website of the Federal Reserve Bank of Dallas explains:
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.
Combine this with another interesting fact: according to the California Treasurer's report, as of May 2009 the state had aggregate deposits and investments exceeding $55 billion. Of this sum, $1.1 billion was held in demand deposit accounts (non-interest-bearing accounts allowing unlimited deposits and withdrawals) and $16.5 billion was in NOW accounts (interest-bearing accounts allowing unlimited deposits and withdrawals). According to the Treasurer's office, the non-interest-bearing demand deposits are held at the seven depository banks named earlier, while the NOW accounts are held at Citibank and Union Bank. Applying a "multiplier effect" of ten to the total sum on deposit at these seven banks ($17.6 billion), the banks collectively have the ability to make $176 billion in loans. At 5%, $176 billion can generate $8.8 billion in interest for the banks.
Rather than showing their gratitude by reciprocating, however, six of the seven depository banks have refused to honor California's IOUs. Worse, three of these six actually received federal bailout money from the taxpayers, something that was supposedly done to keep credit flowing to the states and their citizens. Citibank got $45 billion in bailout money, Wells Fargo got $25 billion, and Bank of America got $45 billion, not to mention guarantees of $300 billion for Citibank and $118 billion for Bank of America. When Governor Schwarzenegger asked for a loan guarantee for a mere $6 billion to bolster California's credit rating, on the other hand, he was turned down. Californians compose one-eighth of the nation's population.
When the state's appeal for aid was rejected by the banks, California State Treasurer Bill Lockyer said he was "disappointed." He and other state leaders should show their disappointment with their feet. California could pull its deposits out of those depository banks refusing its IOUs and put them instead in its own state-owned bank, following the lead of North Dakota, which now has the only state-owned bank in the country. Set up in 1919 to escape Wall Street predators, the Bank of North Dakota has been generating low-interest credit for the state and its residents for nearly a century. North Dakota is one of only two states (along with Montana) currently able to meet their budgets.
A state-owned bank could be fast-tracked into operation in a matter of weeks. With over $17 billion available to deposit in its own bank, California could create $170 billion or more in credit -- enough not only to meet its budget shortfall but to fund many other much-needed projects; and rather than feeding an ungrateful Wall Street, the bank's profits would return to the state and its people.
To sign a petition that will go electronically to Governor Schwarzenegger and to elected officials in your State, click here. You could also try faxing this article or a letter to Governor Schwarzenegger at 916-558-3160. See http://gov.ca.gov/interact#contact.
Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown
Jackson knew they were out tp kill him, and they tried. What is interesting is how even then, around 1836, the Elite Money Men had enough control over judiciary, and much of Gov, etc, to get the would be Assassin off the charges and out of the country ! Other presidential assassins have just been killed off to silence them ( incl killers of JFK and Bobby ).
The Money control over Gov - especially Federal - has just got worse, which is why the proposal here for State and City banks is so timely. I believe Andrew Jackson was thinking of state banks as a good option because he shifted Federal gold into the hands of some States.
Asset sales are a lethal, but preferred tool of the Financial Globalists now wrecking America.
Asset sales , Austerity measures and Privatising bodies that should be public are all part of the IMF's Shock Therapy program....to hold the masses in debt slavery.
Note that Timothy Geithner is a policy planner for IMF and Henry Paulson is a board member.
How long does Schwarzennegger have to run in his term ?
Best hope may be that there is enough good groundwork in the Legislature so that, with the state in ruin at the next election there can be a new program of state controlled finance and banks....and there are still enough of the state assets unsold to achieve this ?
I also agree with KilltheMessenger: "It's not programs the CA government wants. There are tons of voter approved initiatives which cost money which the government has no say over. The voters decide not to pay taxes and they decide to waste money they don't have. Democracy at work."
Coming up with a long term solution that creates stable prosperity for our state means addressing both sides of the problem: revenue generation/investment AND spending. We in California have for too long compromised our legislature with an unending appetite for social programs approved by initiative with required cost increase annually. The initiative process has crippled both our budget and the quality of service we must demand from our legislature: we have the power through initiatives to bypass the legislature so we don't truly focus on electing people who will be making all the key decisions.
We cannot continue to approve every social program we'd like to have--just as in our personal lives we cannot have everything we want. We must balance with revenue generation and investment—and inspire self-motivation for all of us to re-awaken the energy and commitment it took to create the California dream in the beginning: the spirit of self-reliance and hard work, not safety net and fear.
Clearly the State banks can achieve the Capital requirements for a bank, they can use Federal/normal currency and they don't even need Federal approval - but I'd suggest doing that ( or another State or City acting before California does ? ) to make this a big national issue.........especially if your 'controlled' Fed Gov refuses.
North Dakota bank is outside the FDIC network, okay. But with a 'certified' trading bank, California can take 'powered money' created from the Fed and multiply it out ( eg 10 to 1 ) like having a gold base ( as in 2nd US national bank 1816-1836 ).
Then, the rule was that US banks could also take incoming private deposits and lend those out, while holding, say 8%. So....the whole retail bank system profits as the money is re-lent, at interest, in a reducing way ( eg 8% retained each time ). Which still multiplies the original money.
This Deposit ratio control ( not the 10 to 1 expansion ) was common in banking in Australia and NewZealand.
But since 2004, the BIS's Basel Accord 2 has taken over so that now banks can lend/create whatever as long as they hold 8% of that value in Tier 1 capital - more 'solid' wealth such as real estate, their own cash and income, and share issues.
All encouraging banks to do shareholding, other business ventures and also foreclose rapidly. Not good ?
Money supply and banks should be fully nationalised, and no-one else authorised to charge Interest. Then money and pricing can be stabilised, at very low Interest rates, and private enterprise, construction and Infrastructure( Gov directed ) would take off.
Money must flow, confidently, to facilitate the REAL economy. But when Private banking controls that flow, on a mission to make a profit at any cost - via foreclosure and sucking out compounding interest - then the system is inadequate.....and bad in a crisis.
Since your Federal Gov is so dominated by big bucks/biz , going for State or City ' Development or Retail banks must be the best approach now ?...like Helge's Alberta bank.
I've been agitating for nationalised banking here in New Zealand, and some politicians are now joining the call ( as we're again being prepared for National Asset sales, under IMF direction ! ).
But even in a tiny country, the State/City bank idea has more chance than the National/Federal approach.
And once successful, it will spread.
As Chris Cook recognizes, there are far better options then, since the banks exist to serve the people ...not blind profit.
Such as taking State equity in houses instead of evicting people. Payment then deferred, or very small rental charged.
Thank you for providing sound solutions to our financial fiasco. Every state in the country must become aware of these alternatives as it sure doesn't look like any answers are coming from Washington.
I live in Pennsylvania and rest assured, my local representatives are getting a copy of your solution. The problem is getting the first state to take action. After that, I think many will follow as we are forced to save ourselves.
Once people start realizing that they hold the "power of the purse" then they will begin to understand that we can build a sustainable economy. It all comes down to who issues our money. The private Federal Reserve monetizes our debt while we as a nation or states, are able to directly monetize our wealth.
As Thomas Edison said "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." Why should the Government pay interest to a private banking system for the use of its own money, that it could issue itself without interest?
Larry
There is the real possibility of California defaulting on its debts over the long term especially as this is going to be a much more long and protracted downturn for the Californian economy as opposed the USA as a whole. If it were to default, the value of those IOU's and deposits backed by those IOUs would have more inherent value as toilet paper than as currency.
in addition, the problem is not that banks can't make loans because they don't have the money, the problem is that they are apprehensive about lending in the face of an economic downturn where default rates are going to be higher. Its not reserve requirements staying the flow of loans, its the banks recently rediscovered sense of risk.
Thus, I fully support the right of banks that did not accept Federal Funds to go tell the state of California where to stick its fraudulent paper.
They use fear as a rationale for this, and that fear was created by their own behavior, so they are fully responsible for the present situation. That's why the government has to have the guts to put them in their place, and bypass them if needed by issuing scrip.
Who's in charge anyway? Why cow tow to a bunch of crooks?
That would be my response as a bank manager to any California politician pressuring me to accept their IOU's.
you have the gall to justify California issuing IOU's? You mean if CA state issued IOU's I must accept them ?
what kind of rationale is this ?
It is not rocket science and Arnold has a "tough guy" image to live up to. Is there anything there, or is it just smoke and mirrors?
http://hemp4fuel.com/
What next? I believe that one of the first things to be done by the readers of this article who agree with Ellen's plan should be to contact all of the teachers that they know, send them the article, and ask them to ask their Teachers Union to support the plan. Teachers comprise approximately one percent of the population, and California has about 30 million citizens, so about 300,000 Californians are teachers. Their union knows how to contact the legislature, Governor, Treasurer, Controller, etc. Their union needs to demand that the legislature adopt Ellen's plan instead of the so-called compromise just announced on Monday.
Know any policemen? Tell them to contact their union and do the same. Know any park department workers? Same thing. Know any one else who is currently employed, and will be affected if we don't implement Ellen's plan? We need to work right down the list from the most affected workers to the least affected.
Since 76% of our economy is consumer based, it is essential to keep workers employed so that they can consume. Bottom line is that Californians need to stimulate the California economy to end the California Depression. Ellen's plan can generate the credit to do this.
:-)
The budget shortfall is 26B, so 170B credit - 26B shortfall = 144B credit remaining. Now apply this credit to fund interest-free revenue-producing projects for the state (toll bridges, toll roads, sustainable energy, etc.), and/or loan some of it at interest to the corporations who desperately need loans to finance their short term needs. Both will stimulate the California economy. This will increase tax revenues from the entire state economy, which I think we all agree is needed.
In the face of an economy that is giving every sign of soon erupting like Vesuvius on Pompeii (Arianna" analogy) all states, counties and local communities need to prepare for the inevitably monetary collapse that is coming. Ellen's proposal is as good or better than anything I've yet seen.
Another option might be to simply issue tax credit certificates that could be used to pay state fees and taxes, and allow them to circulate like money.
But the ultimate solution for the nation is to transfer the private control of money from the Fed and FRS to the public and congress, by way of revoking the Federal Reserve Act of 1913. Public issue and control of money is an essential feature of democracy. Lessening the gap in the distribution of wealth is mandatory if we are to preserve this experiment in representative government.
The answers are out there. It's up to the US voting citizenry to find them, and make our elected officials implement them.
http://wealthmoney.wordpress.com
http://webofdebt.wordpress.com
http://www.monetary.org
Following this logic, it should be even easier for counties to establish County banks to solve their county financial problems. LA County has already stated that they intend to sue the state for violating some agreements. This strongly suggests that LA County might be sufficiently motivated to try some new ideas, namely Ellen's proposal.
Similarly, LA City has the same problem. Clearly, LA City should consider creating an LA City bank to solve its problems.
Bottom line, I think it would be easier to work our way down the governmental chain to ask local governments to respond to the governmental needs of local citizens. Schwartzenegger already asked the US Government to help California, and this request was denied. Does anyone think that LA City would be any more successful in obtaining federal relief for its budget problems? Citizens need to help themselves by pressuring their most local forms of government. And ask their unions to help with this too.