"So here we are at the deathbed of General Motors. The company's body not yet cold, and I find myself filled with -- dare I say it -- joy. It is not the joy of revenge against a corporation that ruined my hometown . . . Nor do I, obviously, claim any joy in knowing that 21,000 more GM workers will be told that they, too, are without a job. But you and I and the rest of America now own a car company!"
What would we want with a car company? Moore suggests that the bankrupt mega-builder of obsolete gas guzzlers can be transformed into a mega-builder of something we need more -- mass transit vehicles and alternative energy devices, including bullet trains, light rail mass transit lines, energy efficient clean buses, hybrid or all-electric cars and batteries, windmills, solar panels, and other alternative energy devices. The factories that built the cars that helped destroy the environment can become the tools for cleaning it up. This would, of course, take some investment; but Moore suggests that to pay for it all, the government could impose a two-dollar tax on every gallon of gasoline.
It sounds good right up to the gas tax, which is where politicians, the oil lobby and voters are liable to balk. Isn't there some way to fund the plan without driving up the tax burden or the national debt? In fact, there is . . . .
To Put Our New Car Company to Good Use, We Just Need to Own a Bank.
The federal government could create its own credit with its own government-owned lending facility, on the model of the Reconstruction Finance Corporation used by President Roosevelt to fund the New Deal; but instead of merely recycling borrowed money as Roosevelt did, the new facility could actually create credit on its books. Its capital base could be leveraged into many times that sum in loans, in the same way that private banks routinely create money (or "credit") today. Assuming a reserve requirement of 10%, if the $300 billion or so that remains of the TARP money were deposited in the new bank, this money could be leveraged into $3 trillion in loans. If the money were counted as capital, at an 8% capital requirement it could become $3.75 trillion in loans, or 12.5 times the original sum.
Indeed, it is the sovereign right of governments to create the national money supply, but few governments exercise that right today. The only money the U.S. government now issues are coins, which compose only about one ten-thousandth of the U.S. money supply (M3). The rest is created by private banking institutions when they make loans. This includes the privately-owned Federal Reserve, which creates Federal Reserve Notes (dollar bills) and lends them to the government and to commercial banks. Federal Reserve Notes compose only 3% of the money supply. All of the rest consists merely of credit created on the books of private banks.
Many authorities have attested that banks simply create the money they lend as accounting entries on their books. The Federal Reserve Bank of Dallas states 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."This was confirmed recently by President Obama himself. 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."
The money generated by banks through the multiplier effect comes at a heavy cost in interest. One advantage of a government-owned bank is that it could fund public projects interest-free or nearly interest-free, cutting production costs dramatically. Interest comprises as much as 77% of the cost of goods and services requiring large amounts of capital, such as public housing. The cost of interest is lower for labor-based services such as garbage collection, for which it makes up only about 12% of the cost. Averaging them all together, the overall cost of interest has been estimated to be about half the cost of everything we buy. If money for infrastructure development were issued interest-free, projects currently considered unsustainable because of the burden of interest could become not only self-sustaining but actually profitable for the government.
In The Modern Universal Paradigm (2007), Rodney Shakespeare gives the example of the Humber Bridge, which was built in the UK at a cost of ₤98 million. Every year since the bridge opened in 1981, it has turned an operating profit; that is, its running costs (basically repair, maintenance and staff salaries) have been exceeded by the fees it receives from travelers crossing the river Humber. But by the time the bridge opened in 1981, interest on its construction loans had driven its cost up to ₤151 million; and by 1992, only 10 years later, the debt had shot up to a breath-taking ₤439 million. The UK government was forced to intervene with sizeable grants and writeoffs to save the local residents from bearing the brunt of these costs. If the bridge had been financed with interest-free, government-issued credit, these costs could have been avoided and the bridge could have funded itself.
In March of this year, Congressman Chris Van Hollen introduced a bill to establish a Green Bank aimed at catalyzing clean energy and energy efficiency projects. The proposed bank would be an independent, tax-exempt, wholly owned corporation of the United States, with the exclusive mission of providing a comprehensive range of financial support to qualified clean energy and energy efficiency projects in the U.S. If this Green Bank were operated on the fractional reserve system, its initial capital base could be leveraged many times as loans. The loans could then be paid off with the income generated by the projects, preventing inflation and allowing additional loans to be made. Unlike the bank bailouts that have eaten up so much of the government's revenues, green projects create real goods and services and real profits; and the projects could be particularly profitable if they were created without the burden of interest.
Historical Precedents
Funding public projects with government-issued credit is not a new idea. It has a long and successful history, including these notable examples:
"To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit, thus recognizing that the most important factor in housing costs is the price of money - interest is the heaviest portion in the composition of rent. . . . This action showed . . . it was possible for the State to use the country's credit in creating new assets for the country."
The Inflation Objection
The objection invariably raised to proposals for government self-funding is that the result would be dangerously inflationary. Addressing that issue in the Winter 2004 edition of the New Zealand Guardian Political Review, Stan Fitchett explored whether the New Zealand government's 1930s approach would create price inflation today. He confirmed with bank officials that 97 percent of the New Zealand money supply is now created by commercial banks when they make loans. The year he was writing, the money supply increased by 18,527 million New Zealand dollars, or 16.8 percent; and 97 percent of this increase came from commercial bank lending. Fitchett confirmed with banking experts that if the Reserve Bank had created 100 million New Zealand dollars to build new houses in New Zealand, the sum would have had no noticeable impact on inflation, since it was only one-half of one percent of what was already being added to the money supply annually by private commercial banks. Similar ratios apply in the United States and other countries.
If it is dangerously inflationary for public banks to create money, then it is dangerously inflationary for private banks to do it; but we don't hear economists and politicians clamoring for the private credit machine to be shut down. To the contrary, a flood of money is being poured into that choking and sputtering machine in a desperate attempt to get its pistons firing again. A more efficient solution to the credit crunch would be for the government to abandon its old Tin Lizzie-model credit machine and create a shiny new public Firebird model; and the first thing the new credit engine might be tested on are green energy projects of the sort proposed by Mr. Moore. Out of the ashes of a failed GM could arise not only a new, clean way of traveling but a new way of funding government and the services we expect from it.
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This is the “third way” that all public infrastructure projects could be financed without either raising taxes or the national debt. All we would need do is return to constitutionally mandated congressional control of money. We should repeal the 1913 Federal Reserve Act, which is probably unconstitutional anyhow, and “federalize” the Fed – make it what most people have been deceptively led to believe it is now – a federal agency.
Of course it would also help to reorganize the privately owned Federal Reserve Districts and Banks, because they would no longer be “banks of issue”, or the institutions that originate money as debt. Their roles would be somewhat reversed, and would probably have to borrow a very low interest rates from the US Government, to be able to re-lend the money to lower tiered banks or state banks.
Under such a system real prosperity could again return to America, and poverty could actually become rare, and eventually a memory. Full employment could become a reality. Inflation and deflation would become distant memories.
Such was the original promise for America envisioned by Paine, Jefferson, Franklin, Madison, Adams, and the extraordinary founding fathers who wrote the Declaration of Independence and US Constitution.
As to whether we should be listening to the people that really "understand economics", here is what Nassim Taleb has to say on that subject.
http://www.cnbc.com/id/15840232?video=1147722095&play=1
As to the means suggested above for funding our social and physical infrastructure, University of Chicago economist Henry Simons developed the Chicago Plan for Monetary Reform and presented it to the FDR administration. This was in response to the Fed's failure to PREVENT the 1929 Crash. It was the organized opposition to the Chicago Plan that resulted in Glass-Steagall and the FDIC and Credit Unions, etc.
This plan had the support of the majority of economists back then, and its basic tenets were supported by Milton Friedman in his essay on "A Financial and Monetary Framework for Economic Stability".
If you read same you will see that in BOTH cases the purpose IS to eliminate price inflation and deflation - thus economic stability.
Full employment, however defined, is already a basic purpose of our monetary policy as laid out in the Federal Reserve Act. Unfortunately, the seriously flawed debt-money system is exactly the pro-cyclical vehicle that cause both unemployment and economic INstability.
Whether an honest debt-free money system can eventually eliminate poverty as we know it, again however defined, really depends on how the debt-free money system is implemented, and that depends on who controls the development of our monetary policies in the future.
Perhaps just another dreamer here.
Many energy efficiency measures take 5-15 years to return the initially invested energy, so they are, while ultimately more effective than renewables, even slower in their (E)ROI.
This does not mean we should not attempt to become more energy efficient and, ultimately, energy independent as a country. Indeed we have to. But it does mean that even if we pull all the stops on the economy to make ourselves less energy dependent, it will take us decades to get even close to these goals. The limits are physical, not financial. Which, of course, implies that any and all attempts to solve this problem with some sort of magic banking trick, are doomed to fail.
More than ever it is my belief that Americans simply can not wrap their minds around the mathematical implications of the concept of "interest". And I have to say that seems to include some of the people who write articles on Huffpo.
The CREATION of debt-free money has NOTHING to do with the LENDING of money interest-free.
The LENDING of money is properly a banking function, and it should take place in an honest and open market, AFTER the money has been created.
One of the monetary system functions is the creation of the money supply. THAT function belongs to the sovereign nation in whose name the issuance is denominated. UNITED STATES dollar.The sovereign people of the United States, acting through their elected government, should CREATE the nation's money. NOT the private bankers at the Fed.
The other function of the money system is the distribution of the money through deposit and lending systems. THIS is properly the workings of the banks. NOT the government.
The banks pay money for deposits and charge money for loans, making their profits on the spread - this is what most people think they do now.
Take a quick read of Milton Friedman's "Financial and Monetary Framework for Economic Stability". You will see how this can all make sense.
The issuance of debt-free money is not only NOT inflationary, it is an anti-cyclical measure that is, by definition, anti-inflationary.
Here's what Thomas Edison had to say:
" If the nation can issue a dollar bond, it can also issue a dollar
bill. The element that makes the bond good, makes the bill good, also".
There are already companies that manufacture mass transit vehicles, alternative energy devices, buses, batteries, windmills, solar panels, etc, and most those companies are profitable ones without a history of failure or the legacy costs of GM. General Motors business is manufacturing automobiles. They also lend money to consumers who want to buy their vehicles. Moving into new areas of business would require substantial new investments. BUt they have no money and nobody would be willing to lend them money for it as they're bankrupt and have no knowledge of those other businesses, plus it wouldn't solve the core of the company's problems, which is 450,000 retirees that get paychecks each month from revenue generated from only about 50,000 workers. GM simply needs to focus on cutting costs first, then building automobiles that will sell and make the company money second. I personally don't think either will happen in its current state, even after the recent cost cuts, debt liquidation, deal with the unions and retirees, and govt ownership.
Had the spent the money directly, it would still end up in the banks.
It's a false argument.
It shows that Obama is really ignorant and being led down the Summers-Geithner path towards taxpayer servitude to the American bankcorporations.
But even more to the point, the banks have kept that money, not lent it out, creating excess reserves and making their capitalization structure appear whole.
All this, using a loan from the taxpayers.
The fact of the matter is that the American peope have become debt-averse.
And if you recall that infamous quote from Atlanta Fed Credit Manager Robert Hemphill, we are at the point of the threat to our economic civilization from NOT correcting the debt-money system's defects.
The money would be spent, the person receiving it would put it in the bank, the banks would lend out 10 times your deposit, just like they do with Fed money.
Georgia)
"This is a staggering thought. We are completely dependent on the
Commercial Banks. Someone has to borrow every dollar we have in
circulation, cash or credit. If the Banks create ample synthetic money,
we are prosperous; if not, we starve.
We are, absolutely, without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity, of our hopeless position is almost incredible,
but there it is.
It is the most, important subject, intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse, unless it becomes widely understood, and the defects remedied very soon."
So, I think he agrees with you.
And that you have described the problem, not the solution.
The money supply would be exactly the same under either a debt-money system or a debt-free money system. Why would it not?
If you read Milton Friedman's Financial and Monetary Framework for Economic Stability, you will see that the purpose of such a system is anti-inflationary and anti-cyclical, which is PRECISELY where all the calls for uber-regulation are aiming these days.
We all know how inflation works, so save some keystrokes.
Tell us something we don't know, please.
If it's such a terrible idea, why did most economists support it back in the 30s, and why did the Nobel Prize winner suggest it in his writings?
Time to take the blinders off, Dugie.
Now, if you propose funneling money to Electro-Motive Diesel (Formerly GM Electro-Motive Division, but split from GM 5 years ago) to produce some high-speed rail components, or if you want to pump money into some of the existing American companies that build buses, or build railroad parts, I'm all for it.
Forcing GM to change the core essentials of what they do, when there are companies far more suited to the task, would be a colossal waste of time and money.
Expect GM to do what they do very well-- build cars and trucks for sale both here, and abroad. Refusing to acknowledge the progress GM has made in improving their vehicles in the past 5 years reflects a complete lack of awareness of the automotive industry-- almost as much as not realizing that Buick is an incredibly popular brand in China, or that the Pontiac Firebird was discontinued in 2002.
I know that the people in the automobile industry are hurting, but there are no one step solutions to that. This is the real world, and yes, around here some people get hurt at times and there is not a thing we can do about it to make the pain go away right now, right here and for free.
It's idiotic and ill-informed to keep referencing countries like Japan for a comparision re: public transportation. Japan is an island slightly larger than the average mid-sized state. Like the UK, which is my home nation, it has a population density forced upon it by its lack of size. Public transportation works well because major cities are less than 30 miles apart. Heck, Edinburg and London, two capital cities are only a few hundred miles apart.
The sheer density of the web of public transportation necessary to replicate a similar system in the US would be mind-boggling and would result in a carbon footprint that makes China look clean and non-polluting in comparison.
The Huff Po has an extremely myopic city centric view which is divorced from reality in many ways. This issue is a prime example.
Cars are not going away until they invent a personal teleporter or something equally fantastical. Buses and trains certainly won't be replacing them. Given reality, it would be much smarter to focus on making those cars more efficient (although not smaller, as that would also defeat teh point as the vast majority of people will not buy them if so).
Most of the population in the US lives in relatively dense cities along the coasts. That many of these are not dense enough to support public transportation systems is by choice, not by chance. Many city planners understand this but are locked into the results of decades of poor, or even non-existent planning. Rail based transportation systems in the US are so expensive (and ineffective) because we can (and routinely do) evoke eminent domain to build yet another strip mall, but do not dare to do the same for a railway corridor and to secure rights of way where we need them.
Money all by itself does not create anything. People using energy create things. Money is merely a tool along the way to exchange labor for food, other goods and services.
Have you read the Modern Money Mechanics publication of the Fed?
If you REALLY believe that banks create money out of the interest payments they receive, then I DO have a bridge-tunnel to sell you.
I KNOW you're smarter than that.
Banks create money out of thin air.
That is to say, banks create money on the basis of the privileges granted under the Federal Reserve Act, which is to lend out 10 to 20 to 30 times the amount of money they have in their reserve accounts, or their equity accounts for the IBs.
From the Fed's MMM publication:
"Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could "spend" by writing checks, thereby "printing" their own money."
If "printing their own money", and "making book entries crediting deposits to borrowers" are not equivalent to creating money out of thin air, we may some new definitions.
But that is exactly what happens.
And, sorry, but there IS something wrong with that.