By John Lawrence
Ellen Brown, author of the Public Bank Solution, is running for California State Treasurer. The primary election takes place June 3. There are three candidates. Two will advance to the general election.
She is running on a platform to establish a public bank for the state of California similar to the one in North Dakota. She has the endorsement of the Green Party – along with Luis Rodriguez for governor and David Curtis for secretary of state. Green Party candidates take no corporate money.
Candidates who take corporate money – and that means nearly all conventional candidates – are beholden to large corporate interests and cannot properly represent the interests of the disenfranchised 99%.
A public bank will bring many benefits to California including the fact that interest on outstanding loans will accrue to the taxpayers of the state instead of to private Wall Street banks. State and local finances could be restored by making sure that profits now going to Wall Street will remain at home. Taxes could be lowered, public services expanded. The cost of a college education could be reduced. The cost of borrowing for in state businesses could be lowered thus attracting more businesses to California.
The Bank of North Dakota (BND) earns more than 20% annual return on equity by investing within the state. The BND has earned profits of $300M over 10 years which go into the state treasury. North Dakota had the lowest foreclosure rate in the nation and has had no bank failures in over 20 years. Far from competing with community banks, a public bank of California would backstop local banks making them more creditworthy and capable of making larger loans.
A public bank could control rising credit costs. A year ago, California was rated BBB, barely higher than bankrupt Greece. That means that the state’s borrowing costs go up when it has to borrow at market rates from Wall Street. A state owned public bank could keep borrowing costs down because it wouldn’t have to charge market rates. This would help municipalities as well.
Today, state and local governments are investing their capital in the form of pension funds as well as depositing their tax revenues on Wall Street. They are handing over their huge credit generating power to the same big banks that got us into the Great Recession and had to be bailed out by the Federal government. They are investing in Wall Street, not Main Street.
Wall Street takes the money and gambles with it in the financial casinos loaning out huge amounts to hedge funds, arbitrageurs, high frequency traders and corporate raiders. They are involved in stripmining the economy rather than building up wealth in and for the state of California and its municipalities.
Over 20 towns in the state of Vermont considered a resolution at this year’s town hall meeting on March 4 to direct their legislators to create a state bank for Vermont. The vote does not have legally binding effects; it is only advisory. But it offers an important indicator of public sentiment on legislation being considered.
The bills pending before both houses of the Vermont state legislature would transfer 10 percent of tax dollars to a publicly held agency, VEDA, the Vermont Economic Development Authority, and would give VEDA a banking license. The proposal would completely transform the way state revenues are used to finance public services.
Wall Street invests states’ money in projects that its citizens do not necessarily support like the Keystone pipeline. They do not advance loans to small local businesses because they are more interested in loaning huge amounts of money to hedge funds and private equity groups which use the money to take over profitable companies, get rid of the unionized workers and raid the pensions funds before taking them into bankruptcy.
At the same time, the state borrows the money used for economic development and infrastructure projects from Wall Street investment banks at market rates. Neither of these things would be true if California had a public bank. In 18 states besides Vermont, including California, there are proposals for public banks being considered at the state or the city level. Arizona just chartered a commission to study the issue, and Reading, PA, is in the process of establishing a city public bank.
Another reason to charter a public bank in the state of California is the massive fraud that exists and has existed on Wall Street. In March the FDIC filed a massive 24-count civil suit for damages for LIBOR manipulation against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup. LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.
A report done by the Service Employees International Union (SEIU) entitled Big Banks Squeeze Billions in Profits from Public Budgets noted the following:
No one has yet completely categorized all the outstanding swap deals entered into by local and state governments. But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.
Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. No wonder tuition is so high. The money is needed to pay off Wall Street!
The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs.
One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.
Why, you might ask, doesn’t the University of California do something about their escalating borrowing costs? The answer might be found in the fact that the UC Board of Regents, which controls such decisions, is populated to a great extent by people who already have ties to Wall Street.
They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf ever since.
Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:
Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.
Blum’s firm, Blum Capital, is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be trusted like a public bank.
A public bank would not be involved in the Wall Street derivatives casino games. It would make money and return interest on deposits the old fashioned way: by loaning out deposits to local businesses and paying interest on deposits to pension funds, university endowments and other depositors.
A bill to study the feasibility of a public bank of California was introduced by State Senator from Chula Vista, Ben Hueso, in 2011. Hueso was born in San Diego and grew up in Logan Heights. He served on the San Diego City Council, including two years as city council president. The bill he introduced was to establish a commission to study the feasibility of a public bank for the state of California. The following is from Yes magazine:
California is the eighth largest economy in the world, and it has a debt burden to match. The state has outstanding general obligation bonds and revenue bonds of $158 billion, largely incurred for building infrastructure. Over $7 billion of California’s annual budget goes to pay interest on the state’s debt.
As large as California’s liabilities are, they are exceeded by its assets, which are sufficient to capitalize a bank rivaling any in the world. That’s the idea behind Assembly Bill 750, introduced by Assemblyman Ben Hueso of San Diego, which would establish a blue ribbon task force to consider the viability of creating the California Investment Trust, a state-owned bank receiving deposits of state funds. Instead of relying on Wall Street banks for credit—or allowing a Wall Street bank to enjoy the benefits of lending its capital—California may decide to create its own, publicly owned bank.
What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies.
On May 2, AB 750 moved out of the Banking and Finance Committee with only one nay vote, and is now on its way to the Appropriations Committee. Three unions—the California Nurses Association, the California Firefighters, and the California Labor Council—submitted their support for the bill. The state bank idea also got a nod from former Secretary of Labor Robert Reich in his speech at the California Democratic Convention in Sacramento the previous day.
The bill was passed by both Houses of Congress only to have Governor Jerry Brown veto it. Later in 2012 Hueso introduced another bill – this time to establish, not just to study the viability of, a public bank of California – Assembly Bill 2500. He later withdrew that bill. The reasons why are not clear.
Ellen Brown has said:
The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.
Check out this video presentation by Ellen on why California needs a public bank:
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
VOTE FOR ELLEN ON JUNE 3!
Editor Note: The San Diego Free Press has not yet made a determination about endorsing any candidates. The views are solely those of the author.