[Occupymendocino] How money is created, Why we need Public Banks

[agnes at mcn.org]

Here's a simple explanation of how banks create credit/money and the
source from Jon Sakowicz email to me and the board of supervisors.

As Michael Sauvante explains it on the website of the Commonwealth Group:

The number one privilege enjoyed by banks is their ability to create new
money, in
the form of credit granted to their borrowers. Banking laws permit a bank
to create
that credit based on the assets of the bank (generally defined by the
Basel II
Accord). This credit is not extracted from those assets (which remain
untouched in
the process), nor is it drawn from any other pool of money, but rather the
assets
serve strictly as the basis for calculating the total amount of new money
that the
bank is allowed to issue in the form of credit. That amount (usually a
multiple of
the assets, typically in the range of 10-12 times the value of the assets) is
governed by regulators, and varies from bank to bank.
</blockquote>


A state-owned bank would not lend the state’s credit but would accept the
state’s
revenues as deposits, just as Bank of America does now. The state’s
revenues would
simply be shifted from one deposit account to another.

Some small portion of its capital would also be shifted from one
investment to
another. Some idle rainy day fund, for example, might be used. This would
be an
investment in equity, not an expenditure. It would not cost the state
money but
rather would make money for the state. The Bank of North Dakota has
reported a
return on equity in recent years ranging from 19% to 26%.

This is also true for the state’s deposits: they would not be spent or
lent but
would remain at all times deposited in the bank.

The state-owned bank would then do what all banks do: leverage this
capital into
credit backed by deposits. And because the bank would be publicly owned
and would
have a mandate to serve the public, it could be expected, like the BND, to
advance
this credit conservatively for creditworthy local projects and needs.
Banking “would
become boring again.”

In North Dakota (population 647,000), the Bank of North Dakota has $2.7
billion in
deposits, or $4000 per capita; and virtually all of these deposits are
drawn from
the state’s own revenues. The bank has nearly the same sum ($2.6 billion) in
outstanding loans.

California has 37 million people. On the same scale, California might
amass $148
billion in deposits. Assuming an 8% capital requirement, with $12 billion in
capital, this $148 billion in deposits could generate $133 billion in
credit for the
state (subtracting 10%, or 14.8 billion, to satisfy reserve requirements).

If that credit were used, for example, to purchase $133 billion in
municipal bonds
paying 5% interest, the state would have made nearly $7 billion annually
on its
investment. This is new revenue for the state, acquired without spending a
penny
more in taxes.

If it is constitutional for the Bank of America to make this income by
leveraging
the state’s capital and deposits for the benefit of the bank’s investors,
it is
constitutional for a state-owned bank to do it for the benefit of the
state and its
people.