[CRNMC] [Fwd: [Occupymendocino] Fwd: From Ellen Brown a must read: Why public banks NOW and a road map to get there]

[agnes at mcn.org]

Dear MCN Friends,
      Here is one of the reasons why we should be working to urge the
County Board of Supervisors to pass an ordinance to establish a
Mendocino County Public Bank very soon. We need all crn help to
protect our county's public funds.Everythig else comes under this umbrella
issue.
     Also CJHolmes, who two years ago, worked with Occupy Mendocino and
she produced 2DVDs explaining  how big banks planned the foreclosure
debaucle leading to the 2007-08 economic crisis. She has sent another
warning about the end of silver coins and a shortage of silver,
further how we need to be producing things we can exchange without
money, as happened in Greece which was asset stripped sending the
country into bankruptcy, as explained below.

Agnes Woolsey

This is from Ellen Brown, the founder of the American public banking
movement and its most thoughtful advocate. A must read.

Building an Ark: How to Protect Public Revenues from the Next Meltdown
<http://ellenbrown.com/2014/10/12/building-an-ark-how-to-protect-public-revenues-from-the-next-meltdown/>
Posted on October 12, 2014 by Ellen Brown

Concerns are growing that we are heading for another banking crisis, one
that could be far worse than in 2008.  But this time, there will be no
government bailouts. Instead, per the Dodd-Frank Act, bankrupt banks will
be confiscating (or “bailing in”) their customers’ deposits
<http://ellenbrown.com/2013/04/29/bail-out-is-out-bail-in-is-in-another-argument-for-publicly-owned-banks/>
.

That includes local government deposits. The fact that public funds are
secured with collateral may not protect them, as explained earlier here
<http://www.webofdebt.com/articles/baliin.php>. Derivative claims now get
paid first in a bank bankruptcy; and derivative losses could be huge,
wiping out the collateral for other claims.

*I*n a September 24th article titled* “*5 U.S. Banks Each Have More Than 40
Trillion Dollars In Exposure To Derivatives
<http://theeconomiccollapseblog.com/archives/5-u-s-banks-each-have-more-than-40-trillion-dollars-in-exposure-to-derivatives>
*,* Michael Snyder warns:

Trading in derivatives is basically just a form of legalized gambling, and
the “too big to fail” banks have transformed Wall Street into the largest
casino in the history of the planet. When this derivatives bubble bursts
(and as surely as I am writing this it will), the pain that it will cause
the global economy will be greater than words can describe.

The too-big-to-fail banks have collectively grown 37% larger since 2008.
Five banks now account for 42% of all US loans, and six banks control 67%
<http://theeconomiccollapseblog.com/archives/we-are-in-far-worse-shape-than-we-were-just-prior-to-the-last-great-financial-crisis>of
all banking assets.

Besides their reckless derivatives gambling, these monster-sized banks have
earned our distrust by being caught in a litany of frauds. In an article in
*Forbes* titled “Big Banks and Derivatives: Why Another Financial Crisis
Is Inevitable
<http://www.forbes.com/sites/stevedenning/2013/01/08/five-years-after-the-financial-meltdown-the-water-is-still-full-of-big-sharks/>,”
Steve Denning lists rigging municipal bond interest rates, LIBOR
price-fixing, foreclosure abuses, money laundering, tax evasion, and
misleading clients with worthless securities.

Particularly harmful to local governments
<http://www.webofdebt.com/articles/interestrateswap.php> have been interest
rate swaps misrepresented as protecting government agencies from higher
rates.

Yet as Michael Snyder observes:

At this point our economic system is so completely dependent on these banks
that there is no way that it can function without them. . . . We are
steamrolling toward the greatest financial disaster in world history, and
nobody is doing much of anything to stop it.

*Sidestepping the Steamroller*

California Governor Jerry Brown sees it coming. Rather than rebuilding the
state’s crumbling infrastructure, rehiring teachers and other public
employees, and taking other steps to restore the Golden State to its former
prosperity, he has proposed a constitutional amendment
<http://ellenbrown.com/2014/05/06/robbing-main-street-to-prop-up-wall-street-why-jerry-browns-rainy-day-fund-is-a-bad-idea/>
requiring
all excess state revenues to go into a rainy day fund to prepare for the
next crisis.

But there is a better way forward.

In North Dakota – the only state to post a budget surplus every year since
2001 – the state owns its own bank. When the state last went over-budget in
2001 due to the Dot.com crisis, it merely issued itself an extra dividend
through the Bank of North Dakota – the only state-owned depository bank in
the country – and the next year it was back on track.

Other local governments would do well to follow suit, not just for the
promising profit potential, but as protection against a “bail in” of
public
deposits.

Forming their own banks can also protect local governments from a looming
and  unaffordable rise in municipal bond interest rates. State treasurers
fear that the Fed’s September 2014 exclusion of municipal bonds
<http://ellenbrown.com/2014/09/08/preparing-to-asset-strip-local-government-the-feds-bizarre-new-rules/>
from
the category of “high quality liquid assets” that big banks must hold
will
drive up bond rates, as it shrinks the market for those bonds and drives up
the interest required to attract buyers.

There is also the big money local governments lose to Wall Street just in
fees. A 2013 study found that the city of Los Angeles spends over $200
million annually on big bank fees
<http://d3n8a8pro7vhmx.cloudfront.net/seiu721/pages/1/attachments/original/1395715866/No_Small_Fees_A_Report_by_the_Fix_LA_Coalition.pdf?1395715866>
and
management – more than its budget to maintain its extensive streets and
highways.

In a recent press conference
<http://www.publicbankinginstitute.org/santa_fe_mayor_discusses_the_promise_of_public_banking>,
Mayor Javier Gonzalez of Santa Fe raised provocative questions facing all
elected officials today. He said:

Right now our bank is Wells Fargo.  They serve the City according to our
contract.  But they also take city revenues, taxpayer dollars, and they use
those taxpayer dollars as part of their loan portfolio that goes to places
outside of Santa Fe and certainly outside of New Mexico.  And when you
think of that most basic concept of taxpayer money being used to earn
revenues for national banks that have reduced their small business lending
by 53%, you have to pause and wonder – is this the best structure for our
community?

Addressing these concerns, Mayor Gonzalez has launched a formal process to
study the feasibility of a city-owned bank of Santa Fe. Public banking
efforts are also underway in other cities and states.

*How to Start a Bank Overnight*

Forming a state or municipal public bank need not be slow or expensive. An
online bank could be run out of the Treasurer’s office and operational in a
few months. And the bank could be turning a profit immediately – without
spending the local government’s own revenues.

How? The way Wall Street does it <http://www.cnbc.com/id/100497710#.> with
our public deposits and investments: by leveraging. We could reclaim those
funds and put them to work for our local economies.

The bank could be capitalized with a bond issue (borrowing from the
public), and this capital could be leveraged into a loan portfolio that is
about eight times the capital base. The bond issue could be financed with
1/8th of the interest accruing from this portfolio. The remaining 7/8th could
be pocketed as profit.

This profit could be earned immediately and without risk, by buying
municipal bonds rather than issuing loans. That move could also help
municipalities, by guaranteeing that their bond rates remain low in the
face of threatened interest rate rises on the private market.

*How to Start a Bank at Virtually No Cost or Risk*

To demonstrate the safety and viability of the model, the bank can start
small and build from there. For startup capital
<http://www.huffingtonpost.com/2010/03/19/how-to-start-your-own-ban_n_497261.html>,
a new bank needs anywhere from a few million to $20 million nationwide.
(The amount varies from state to state.) To be cautious and conservative,
however, let’s say $40 million.

Many cities have this money available in “rainy day” or reserve funds.
Many
others have substantial investments, often underperforming, that could be
more responsibly invested as an equity position in a bank. In California,
for example, a whopping $55 billion is languishing in the Treasurer’s
Pooled Money Investment Account, earning a mere 0.23% interest
<http://www.treasurer.ca.gov/pmia-laif/performance/pmia-laif_perform.pdf>.

Moving a portion of those funds into the state’s own bank would just be
good portfolio management. State pension funds are another investment
option.

If surplus funds are not available, capital can be raised with a bond
issue. (That is how the Bank of North Dakota got its start in 1919.) Assume
the interest due on these bonds is 3%. The local government’s cost of funds
will be $1.2 million annually.

At a 10% capital requirement, $40 million is sufficient to capitalize $400
million in loans. But again assume the bank is started conservatively at a
20% capitalization, for a loan portfolio of $200 million.

To make those loans, the bank will need deposits. These can be acquired
without advertising or other costs, by moving $200 million out of the local
government’s existing deposit account at JPMorgan Chase or another Wall
Street bank. (In North Dakota, all of the state’s revenues are deposited by
law in its state-owned bank.) Assume the new bank pays 0.3% interest on
these deposits, or $0.6 million annually as its cost of funds.

To satisfy the 10% reserve requirement for deposits (something different
from the capital requirement), $20 million of this deposit pool would be
held in reserve. The remaining $180 million are counted as “excess
reserves,” which can be used to make an equivalent sum in loans or bond
purchases.

Assume the excess reserves are used to buy local municipal bonds paying 3%
annually. The return to the bank will be $5.4 million less $0.6 million in
interest on the deposits, for a total of  $4.8 million annually.

To recoup the cost of the bond issue, $1.2 million can be paid from these
profits as a dividend to the local government. The bank will then have a
net profit of $3.6 million annually; and this profit will have accrued to
the local government as the bank’s owner, without needing to advance any
money from its own budget.

What if the state needs its deposits for its budget?

That is the beauty of being a bank rather than a revolving fund: *banks do
not actually lend their deposits*, as the Bank of England recently
acknowledged
<http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf>.
Rather, they*create *deposits when they make loans. If the state or local
government needs more cash for its operating expenses than the bank has
kept in reserve, the bank can do what all banks do: it can borrow. And if
it has grown to be a large bank, it can borrow quickly and cheaply – from
other banks through the Fed funds market at 0.25%, or from the money market
at 0.15%.

A smaller public bank might want to keep a larger cushion of deposits in
reserve for liquidity purposes. If it keeps 30% in reserve, in the above
example $140 million would be left to invest in bonds, generating $4.2
million annually in interest. Deducting $1.8 million as the cost of
servicing deposits and capital, the bank would still generate $2.4 million
in profit, while providing a safe place to park public revenues.

What of the bank’s operating costs? These can be kept quite low. The Bank
of North Dakota operates without branches, tellers, ATMs, retail services,
mega-salaries or mega-bonuses. All those saved costs fall to the bank’s
bottom line.

Ballpark operating expenses for a small but growing public bank with a
President, Chief Financial Officer, Chief Lending Officer, Chief Credit
Risk Management Officer, Compliance Officer, and the systems required to
support a banking function are estimated at under $1 million per year. A
start-up focused on municipal bonds could be operated for even less. This
expense could come out of the initial $40 million in capitalization, again
without impairing the local government’s own operating budget.

*Manifesting the Bank’s Full Potential*

Once a charter has been obtained and sound banking practices have been
demonstrated, the capital ratio can be dropped toward 10%. When the bank
has built up a sufficient capital cushion, it can begin to work with
community banks and other financial institutions for the broad range of
commercial lending that creates jobs and prosperity and generates profits
as non-tax revenue for the municipality, following the Bank of North Dakota
model.

The public bank can also invest in infrastructure loans to the state or
local government itself. Interest now composes about half
<http://ellenbrown.com/2014/06/01/infrastructure-sticker-shock-financing-costs-more-than-construction/>
of
capital outlays for public projects. Since the local government will own
the bank, it will get this interest back, cutting infrastructure costs in
half.

These are just a few of the possibilities for a publicly-owned bank, which
can provide security from risk while generating a far greater return on the
local government’s money than it is getting now on its Wall Street deposit
accounts. As we peer into the jaws of another economic meltdown, moving our
public funds into our own banks is an investment we can hardly afford not
to make.

________________________

Ellen Brown is an attorney, founder of the Public Banking Institute
<http://publicbankinginstitute.org/>, and author of twelve books, including
the best-selling Web of Debt <http://webofdebt.com/>. In The Public Bank
Solution <http://publicbanksolution.com/>, her latest book, she explores
successful public banking models historically and globally. Her 200+ blog
articles are at EllenBrown.com <http://ellenbrown.com/>.
http://ellenbrown.com/2014/10/12/building-an-ark-how-to-protect-public-revenues-from-the-next-meltdown/
Mike
Mike Krauss
Chair, the Pennsylvania Project
Director, the Public Banking Institute
Skype: mikekrausscomments
www.publicbankingpa.org
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