Saving the Post Office: Letter Carriers Consider Bringing Back Banking Services

WebofDebt

Ellen Brown

On July 27, 2012, the National Association of Letter Carriers adopted a resolution at their National Convention in Minneapolis to investigate establishing a postal banking system.  The resolution noted that expanding postal services and developing new sources of revenue are important to the effort to save the public Post Office and preserve living-wage jobs; that many countries have a successful history of postal banking, including Germany, France, Italy, Japan, and the United States itself; and that postal banks could serve the 9 million people who don’t have bank accounts and the 21 million who use usurious check cashers, giving low-income people access to a safe banking system.  “A USPS bank would offer a ‘public option’ for banking,” concluded the resolution, “providing basic checking and savings – and no complex financial wheeling and dealing.”

The USPS has been declared insolvent, but it is not because it is inefficient (it has been self-funded throughout its history).  It is because in 2006, Congress required it to prefund postal retiree health benefits for 75 years into the future, an onerous burden no other public or private company is required to carry.  The USPS has evidently been targeted by a plutocratic Congress bent on destroying the most powerful unions and privatizing all public services, including education.  Britain’s 150-year-old postal service is also on the privatization chopping block, and its postal workers have also vowed to fight.  Adding banking services is an internationally proven way to maintain post office solvency and profitability.

Serving an Underserved Market, Without Going Broke

Many countries operate postal savings systems through their post offices, providing people without access to banks a safe, convenient way to save.  Great Britain first offered this arrangement in 1861.  It was wildly popular, attracting over 600,000 accounts and £8.2 million in deposits in its first five years. By 1927, there were twelve million accounts—one in four Britons—with £283 million on deposit.

Other postal banks followed.  They were popular because they serviced a huge untapped market—the unbanked and underbanked.  According to a Discussion Paperof the United Nations Department of Economic and Social Affairs:

The essential characteristic distinguishing postal financial services from the private banking sector is the obligation and capacity of the postal system to serve the entire spectrum of the national population, unlike conventional private banks which allocate their institutional resources to service the sectors of the population they deem most profitable.

Serving the unbanked and underbanked may sound like a losing proposition, but numerous precedents show that postal savings banks serving low-income and rural populations can be quite profitable.  (See below.)  In many countries, according to the UN Paper, banking revenues are actually crucial to maintaining the profitability of their postal network.  Letter delivery generates losses and often requires cross-subsidies from other activities to maintain its network.  One effective solution has been to create or expand postal financial services.

Public postal banks are profitable because their market is large and their costs are low: the infrastructure is already built and available, advertising costs are minimal, and government-owned banks do not award their management extravagant bonuses or commissions that drain profits away.  Profits return to the government and the people.

Profits return to the government in another way: money that comes out from under mattresses and gets deposited in savings accounts can be used to purchase government bonds.  Japan Post Bank, for example, holds 20% of Japan’s national debt.  The government has its own captive public lender, servicing the debt at low interest without risking the vagaries of the international bond market.  Fully 95% of Japan’s national debt is held domestically in one way or another.  That helps explain how Japan can have the worst debt-to-GDP ratio of any major country and still maintain its standing as the world’s largest creditor.

Some Examples of Successful Public Postal Banks

Kiwibank:

New Zealand’s profitable postal bank had a return on equity of 11.7% in the second half of 2011, with net profits almost trebling.  It is the only New Zealand bank able to compete with the big four Australian banks that dominate the New Zealand financial sector.

In fact, it was set up for that purpose. By 2001, Australian mega-banks controlled some 80% of New Zealand’s retail banking. Profits went abroad and were maximized by closing less profitable branches, especially in rural areas.  The New Zealand government decided to launch a state-owned bank that would compete with the Aussie banks. To keep costs low while still providing services throughout New Zealand, the planning team opened bank branches in post offices.

In an early version of the “move your money” campaign, 500,000 customers transferred their deposits to public postal banks in Kiwibank’s first five years—this in a country of only 4 million people.  Kiwibank consistently earns the nation’s highest customer satisfaction ratings, forcing the Australia-owned banks to improve their service to compete.

China’s Postal Savings Bureau:

With the assistance of the People’s Bank of China, China’s Postal Savings Bureau was re-established in 1986 after a 34-year lapse.  As in New Zealand, savings deposits flooded in, growing at over 50% annually in the first half of the 1990s and over 24% in the second half.  By 1998, postal savings accounted for 47% of China Post’s operating revenues; and 80% of China’s post offices provided postal savings services.  The Postal Savings Bureau has served as a vital link in mobilizing income and profits from the private sector, providing credit for local development. In 2007, thePostal Savings Bank of China was set up from the Postal Savings Bureau as a state-owned limited company that provides postal banking services.

Japan Post Bank:

By 2007, Japan Post was the largest holder of personal savings in the world, boasting combined assets for its savings bank and insurance arms of more than ¥380 trillion ($3.2 trillion).  It was also the largest employer in Japan. As in China, Japan Post recaptures and mobilizes income from the private sector, funding the government at low interest rates and protecting the nation’s debt from speculative raids.

Switzerland’s Swiss Post:

Postal financial services are by far the most profitable activity of Swiss Post, which suffers heavy losses from its parcel delivery and only marginal profits from letter delivery operations.

India’s Post Office Savings Bank (POSB):

POSB is India’s largest banking institution and its oldest, having been established in the latter half of the 19^th century following the success of the postal savings system in England.  Operated by the government of India, it provides small savings banking and financial services.  The Department of Posts is now seeking to expand these services by creating a full-fledged bank that would offer full lending and investing services.

Russia’s PochtaBank:

Russia, too, is seeking to expand its post office services.  The head of the highly successful state-owned Sberbank has stepped down to take on the task of revitalizing the Russian post office and create a post office bank.  PochtaBank will operate in the Russian Post’s 40,000 local post offices. The post office will function as a banking institution and compete on equal footing not only with private banks but with Sberbank itself.

Brazil’s ECT:

Brazil instituted a postal banking system in 2002 on a public/private model, with the national postal service (ECT) forming a partnership with the nation’s largest private bank (Bradesco) to provide financial services at post offices. The current partnership is with Bank of Brazil.  ECT (also known as Correios) is one of the largest state-owned companies in Latin America, with an international service network reaching more than 220 countries worldwide.

The U.S. Postal Savings System:

The now-defunct U.S. Postal Savings System was also quite successful in its day.  It was set up in 1911 to get money out of hiding, attract the savings of immigrants, provide safe depositories for people who had lost confidence in private banks, and furnish depositories with longer hours that were convenient for working people.  The minimum deposit was $1 and the maximum was $2,500.  The postal system paid two percent interest on deposits annually.  It issued U.S. Postal Savings Bonds that paid annual interest, as well as Postal Savings Certificates and domestic money orders.  Postal savings peaked in 1947 at almost $3.4 billion.

The U.S. Postal Savings System was shut down in 1967, not because it was inefficient but because it became unnecessary after its profitability became apparent.  Private banks then captured the market, raising their interest rates and offering the same governmental guarantees that the postal savings system had.

Time to Revive the U.S. Postal Savings System?

Today, the market of the underbanked has grown again, including about one in four U.S. households according to a 2009 FDIC survey. Without access to conventional financial services, people turn to an alternative banking market of bill pay, prepaid debit cards and check cashing services, and payday loans. They pay excessive fees for basic financial services and are susceptible to high-cost predatory lenders. On average, a payday borrower pays back $800 for a $300 loan, with $500 going just toward interest. Low-income adults in the U.S spend over 5 billion dollars paying off fees and debt associated with predatory loans annually.

Another underserviced market is the rural population.  In May 2012, a move to shutter 3,700 low-revenue post offices was halted only by months of dissent from rural states and their lawmakers.  Banking services are also more limited for farmers following the 2008 financial crisis.  With shrinking resources for obtaining credit, farmers are finding it increasingly difficult to stay in their homes.

It is clear that there is a market for postal banking.  Countries such as Russia and India are exploring full-fledged lending services through their post offices; but if lending to the underbanked seems too risky, a U.S. postal bank could follow the lead of Japan Post and use the credit generated from its deposits to buy safe and liquid government bonds.  That could still make the bank a win-win-win, providing income for the post office, safe and inexpensive depository and checking services for the underbanked, and a reliable source of public funding for the government.

__________________

Ellen Brown is an attorney and president of the Public Banking Institute,http://PublicBankingInstitute.org.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites arehttp://WebofDebt.com and http://EllenBrown.com.

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Titanic Banks Hit LIBOR Iceberg: Will Lawsuits Sink the Ship?

Web of Debt
Ellen Brown

At one time, calling the large multinational banks a “cartel” branded you as a conspiracy theorist.   Today the banking giants are being called that and worse, not just in the major media but in court documents intended to prove the allegations as facts.  Charges include racketeering (organized crime under the U.S. Racketeer Influenced and Corrupt Organizations Act or RICO), antitrust violations, wire fraud, bid-rigging, and price-fixing.  Damning charges have already been proven, and major damages and penalties assessed.  Conspiracy theory has become established fact.

In an article in the July 3^rd Guardian titled “Private Banks Have Failed – We Need a Public Solution”, Seumas Milne writes of the LIBOR rate-rigging scandal admitted to by Barclays Bank:

It’s already clear that the rate rigging, which depends on collusion, goes far beyond Barclays, and indeed the City of London. This is one of multiple scams that have become endemic in a disastrously deregulated system with inbuilt incentives for cartels to manipulate the core price of finance.

. . . It could of course have happened only in a private-dominated financial sector, and makes a nonsense of the bankrupt free-market ideology that still holds sway in public life.

. . . A crucial part of the explanation is the unmuzzled political and economic power of the City. . . . Finance has usurped democracy.

Bid-rigging and Rate-rigging

Bid-rigging was the subject of U.S. v. Carollo, Goldberg and Grimm, a ten-year suit in which the U.S. Department of Justice obtained a judgment on May 11 against three GE Capital employees.  Billions of dollars were skimmed from cities all across America by colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion.  Other banks involved in the bidding scheme included Bank of America, JPMorgan Chase, Wells Fargo and UBS.  These banks have already paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.

Hot on the heels of the Carollo decision came the LIBOR scandal, involving collusion to rig the inter-bank interest rate that affects $500 trillion worth of contracts, financial instruments, mortgages and loans.  Barclays Bank admitted to regulators in June that it tried to manipulate LIBOR before and during the financial crisis in 2008.  It said that other banks were doing the same.  Barclays paid $450 million to settle the charges.

The U. S. Commodities Futures Trading Commission said in a press release that Barclays Bank “pervasively” reported fictitious rates rather than actual rates; that it asked other big banks to assist, and helped them to assist; and that Barclays did so “to benefit the Bank’s derivatives trading positions” and “to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.”

After resigning, top executives at Barclays promptly implicated both the Bank of England and the Federal Reserve.  The upshot is that the biggest banks and their protector central banks engaged in conspiracies to manipulate the most important market interest rates globally, along with the exchange rates propping up the U.S. dollar.

CFTC did not charge Barclays with a crime or require restitution to victims.  But Barclays’ activities with the other banks appear to be criminal racketeering under federal RICO statutes, which authorize victims to recover treble damages; and class action RICO suits by victims are expected.

Why the Senate Won’t Touch Jamie Dimon: JPM Derivatives Prop Up U.S. Debt

Web of Debt
Ellen Brown

When Jamie Dimon, CEO of JPMorgan Chase Bank, appeared before the Senate Banking Committee on June 13, he was wearing cufflinks bearing the presidential seal.  “Was Dimon trying to send any particular message by wearing the presidential cufflinks?” asked CNBC editor John Carney.  “Was he . . . subtly hinting that he’s really the guy in charge?”

The groveling of the Senators was so obvious that Jon Stewart did a spoof news clip on it, featured in a Huffington Post piece titled “Jon Stewart Blasts Senate’s Coddling Of JP Morgan Chase CEO Jamie Dimon,” and Matt Taibbi wrote an op-ed called “Senators Grovel, Embarrass Themselves at Dimon Hearing.”  He said the whole thing was painful to watch.


“What is going on with this panel of senators?” asked Stewart.  “They’re sucking up to Jamie Dimon like they’re on JPMorgan’s payroll.”  The explanation in a news clip that followed was that JPMorgan Chase is the biggest campaign donor to many of the members of the Banking Committee.

That is one obvious answer, but financial analysts Jim Willie and Rob Kirby think it may be something far larger, deeper, and more ominous.  They contend that the $3 billion-plus losses in London hedging transactions that were the subject of the hearing can be traced, not to European sovereign debt (as alleged), but to the record-low interest rates maintained on U.S. government bonds.

The national debt is growing at $1.5 trillion per year.  Ultra-low interest rates MUST be maintained to prevent the debt from overwhelming the government budget.  Near-zero rates also need to be maintained because even a moderate rise would cause multi-trillion dollar derivative losses for the banks, and would remove the banks’ chief income stream, the arbitrage afforded by borrowing at 0% and investing at higher rates.

The low rates are maintained by interest rate swaps, called by Willie a “derivative tool which controls the bond market in a devious artificial manner.”  How they control it is complicated, and is explored in detail in the Willie piece here and Kirby piece here.

Kirby contends that the only organization large enough to act as counterparty to some of these trades is the U.S. Treasury itself.  He suspects the Treasury’s Exchange Stabilization Fund, a covert entity without oversight and accountable to no one. Kirby also notes that if publicly-traded companies (including JPMorgan, Goldman Sachs, and Morgan Stanley) are deemed to be integral to U.S. national security (meaning protecting the integrity of the dollar), they can legally be excused from reporting their true financial condition.  They are allowed to keep two sets of books.

Interest rate swaps are now over 80 percent of the massive derivatives market, and JPMorgan holds about $57.5 trillion of them.  Without the protective JPMorgan swaps, interest rates on U.S. debt could follow those of Greece and climb to 30%.  CEO Dimon could, then, indeed be “the guy in charge”: he could be controlling the lever propping up the whole U.S. financial system.

Hero or Felon?

So should Dimon be regarded as a national hero?  Not if past conduct is any gauge.  Besides the recent $3 billion in JPMorgan losses, which look more like illegal speculation than legal hedging, there is JPM’s use of its conflicting positions as clearing house and creditor of MF Global to siphon off funds that should have gone into customer accounts, and its responsibility in dooming Lehman Brothers by withholding $7 billion in cash and collateral.  There is also the fact that Dimon sat on the board of the New York Federal Reserve when it lent $55 billion to JPMorgan in 2008 to buy Bear Stearns for pennies on the dollar.  Dimon then owned nearly three million shares of JPM stock and options, in clear violation of 18 U.S.C. Section 208, which makes that sort of conflict of interest a felony.

Financial analyst John Olagues, a former stock options market maker, points out that the loan was guaranteed by $55 billion of Bear Stearns assets.  If Bear had that much in assets, the Fed could have given it the loan directly, saving it from being swallowed up by JPMorgan.  But Bear did not have a director on the board of the NY Fed.

Social Security Garnished for Student Debts

DissidentVoice
Ellen Brown

Indentured Servitude for Seniors

The Social Security program…represents our commitment as a society to the belief that workers should not live in dread that a disability, death, or old age could leave them or their families destitute.
— President Jimmy Carter, December 20, 1977

[This law] assures the elderly that America will always keep the promises made in troubled times a half century ago…[The Social Security Amendments of 1983 are] a monument to the spirit of compassion and commitment that unites us as a people.

— President Ronald Reagan, April 20, 1983

So said Presidents Carter and Reagan, but that was before 1996, when Congress voted to allow federal agencies to offset portions of Social Security payments to collect debts owed to those agencies. (31 U.S.C. §3716).  Now we read of horror stories like this:

I’m a 68 year old grandma of 2 young grandchildren. I went to college to upgrade my employment status in 1998 or 1999. I finished in 2000 and at that time had a student loan balance of about 3500.00.

Could not find a job and had to request forbearance to carry me. Over the years I forgot about the loan, dealt with poor health, had brain surgery in 2006 and the collection agents decided to collect for the loan in 2008.

At no time during the 6-7 year gap did anyone remind me or let me know that I could make a minimum payment on the loan. Now that I am on Social Security (have been since I was 62), they have decided to garnishee my SS check to the tune of 15%.

I have not been employed since 2004 and have the two dependents ….  I don’t dispute that I owed them the $3500.00 but am wondering why they let it build up to somewhere around $17,000/20,000 before they attempted to collect.

Her debt went from $3500 to over $17,000 in 10 years?!  How could that be?

Wall Street Confidence Trick: The Interest Rate Swaps that Are Bankrupting Local Governments

Ellen Brown

Far from reducing risk, derivatives increase risk, often with catastrophic results.

—   Derivatives expert Satyajit Das, Extreme Money (2011)

The “toxic culture of greed” on Wall Street was highlighted again last week, when Greg Smith went public with his resignation from Goldman Sachs in a scathing oped published in the New York Times.  In other recent eyebrow-raisers, LIBOR rates—the benchmark interest rates involved in interest rate swaps—were shown to be manipulated by the banks that would have to pay up; and the objectivity of the ISDA (International Swaps and Derivatives Association) was called into question, when a 50% haircut for creditors was not declared a “default” requiring counterparties to pay on credit default swaps on Greek sovereign debt.

Interest rate swaps are less often in the news than credit default swaps, but they are far more important in terms of revenue, composing fully 82% of the derivatives trade.  In February, JP Morgan Chase revealed that it had cleared $1.4 billion in revenue on trading interest rate swaps in 2011, making them one of the bank’s biggest sources of profit.  According to the Bank for International Settlements:
[I]nterest rate swaps are the largest component of the global OTC derivative market.  The notional amount outstanding as of June 2009 in OTC interest rate swaps was $342 trillion, up from $310 trillion in Dec 2007.  The gross market value was $13.9 trillion in June 2009, up from $6.2 trillion in Dec 2007.

For more than a decade, banks and insurance companies convinced local governments, hospitals, universities and other non-profits that interest rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools.  The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels.  This was not a flood, earthquake, or other insurable risk due to environmental unknowns or “acts of God.”  It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008.  The banks got in trouble, and the Federal Reserve and federal government rushed in to bail them out, rewarding them for their misdeeds at the expense of the taxpayers.
 How the swaps were supposed to work was explained by Michael McDonald in a November 2010 Bloomberg article titled “Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire”:

In an interest-rate swap, two parties exchange payments on an agreed-upon amount of principal. Most of the swaps Wall Street sold in the municipal market required borrowers to issue long-term securities with interest rates that changed every week or month. The borrowers would then exchange payments, leaving them paying a fixed-rate to a bank or insurance company and receiving a variable rate in return. Sometimes borrowers got lump sums for entering agreements.

Banks and borrowers were supposed to be paying equal rates: the fat years would balance out the lean.  But the Fed artificially manipulated the rates to the save the banks.  After the credit crisis broke out, borrowers had to continue selling adjustable-rate securities at auction under the deals.  Auction interest rates soared when bond insurers’ ratings were downgraded because of subprime mortgage losses; but the periodic payments that banks made to borrowers as part of the swaps plunged, because they were linked to benchmarks such as Federal Reserve lending rates, which were slashed to almost zero.

How Greece Could Take Down Wall Street

The Web of Debt Blog
Ellen Brown
In an article titled “Still No End to ‘Too Big to Fail,’” William Greider wrote in The Nation on February 15^th:

Financial market cynics have assumed all along that Dodd-Frank did not end “too big to fail” but instead created a charmed circle of protected banks labeled “systemically important” that will not be allowed to fail, no matter how badly they behave.

That may be, but there is one bit of bad behavior that Uncle Sam himself does not have the funds to underwrite: the $32 trillion market in credit default swaps (CDS). Thirty-two trillion dollars is more than twice the U.S. GDP and more than twice the national debt.


CDS are a form of derivative taken out by investors as insurance against default. According to the Comptroller of the Currency, nearly 95% of the banking industry’s total exposure to derivatives contracts is held by the nation’s five largest banks: JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs. The CDS market is unregulated, and there is no requirement that the “insurer” actually have the funds to pay up. CDS are more like bets, and a massive loss at the casino could bring the house down.

It could, at least, unless the casino is rigged. Whether a “credit event” is a “default” triggering a payout is determined by the International Swaps and Derivatives Association (ISDA), and it seems that the ISDA is owned by the world’s largest banks and hedge funds. That means the house determines whether the house has to pay.

The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an “event of default” declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme. According to Rudy Avizius in an article on The Market Oracle (UK) on February 15^th, that explains what happened at MF Global, and why the 50% Greek bond write-down was not declared an event of default.

Saving the Post Office: The Models of Kiwibank and Japan Post

Ellen Brown

Neither rain nor sleet nor snow may have stopped the Pony Express, but the nation’s oldest and second largest employer is now under attack.  Claiming the Postal Service is bankrupt, critics are pushing legislation that would defuse the postal crisis bybreaking the backs  of the postal workers’ unions and mandating widespread layoffs.  But the “crisis” is an artificial one, created by Congress itself.  

In 2006, Congress passed the Postal Accountability Enhancement Act (PAEA), which forced the USPS to put aside billions of dollars to pay for the health benefits of employees, many of whom hadn’t even been hired yet.  Over a mere 10 year period, the USPS was required to prefund its future health care benefit payments to retirees for the next 75 years, something no other government or private corporation is required to do.  As consumer advocate Ralph Nader observed, if PAEA had never been enacted, USPS would now be facing a $1.5 billion surplus.     

The USPS is a profitable, self-funded venture that is not supported by the taxpayers.  It is funded with postage stamps—one of the last vestiges of government-issued money.  Stamps are fungible and can be traded at par; and they are backed, not by mere government “fiat,” but by labor.  One stamp will buy the labor to transport your letter 3000 miles. 

The USPS is one of the few businesses the government is allowed to operate in competition with private companies; it is the only U.S. agency that services all its citizens six days per week; and it is perhaps the last form of communication that protects privacy, since tampering with it is against federal law.  In 1999, it employed nearly a million people; and today, it employs over 600,000.  Where are those workers to go, when the post office is no more?

To Downsize or Diversify? 

Whatever caused the financial woes of the USPS, there is another way to mitigate the crisis than slashing employee benefits and customer services.  In a December 21^starticle in Reader Supported News, Tim Fernholz suggested that instead of focusing on cuts, the post office should approach the problem from a business perspective and find a new way to make money.  One way to keep the USPS alive, he says, is for it to include basic banking services in its product line, providing a “public option” in banking:

[R]oughly 9 million Americans don’t have a bank account and 21 million rely largely on fringe financial services like usurious check cashers rather than traditional financial institutions. Giving low-income people access to a safe banking system will firm up their economic futures. 

The Proud, Forgotten History of Postal Banking

Banking in post offices is not new.  Many countries, including Germany, France, Italy, Japan, and New Zealand, have a long and successful history of it; and so does the United States. 

From 1911 to 1967, the U.S. Postal Savings System provided a safe and efficient place for customers to save and transfer funds.  It issued U.S. Postal Savings Bonds in various denominations that paid annual interest, as well as Postal Savings Certificates and domestic money orders.  The U.S. Postal Savings System was set up early in the 20^th century to attract the savings of immigrants accustomed to saving at post offices in their native countries, provide safe depositories for people who had lost confidence in private banks, and furnish more convenient depositories for working people than were provided by private banks.  (Post offices were then open from 8 a.m. to 6 p.m. six days a week, substantially longer than bankers’ hours.)  The postal system paid two percent interest on deposits annually.  The minimum deposit was $1 and the maximum was $2,500.  Savings in the system spurted to $1.2 billion during the 1930s and jumped again during World War II, peaking in 1947 at almost $3.4 billion. 

The U.S. Postal Savings System was shut down in 1967, not because it was inefficient but because it was considered unnecessary after private banks raised their interest rates and offered the same governmental guarantees that the postal savings system had.

The Kiwibank Model: Postal Banks to Serve Local Communities

Postal banks are now thriving in New Zealand, not as a historical artifact but as a popular new innovation.  When they were instituted in 2002, it was not to save the post office but to save New Zealand families and small businesses from big-bank predators.  By 2001, Australian mega-banks controlled some 80% of New Zealand’s retail banking.  Profits went abroad and were maximized by closing less profitable branches, especially in rural areas.  The result was to place hardships on many New Zealand families and small businesses.

The New Zealand government decided to launch a state-owned bank that would compete with the Aussies.  They called their new bank Kiwibank after their national symbol, the kiwi bird.  But the government team planning the new bank faced major challenges.  How could they keep costs low while still providing services in communities throughout New Zealand?  

Their solution was to open bank branches in post offices.  Kiwibank was established as a subsidiary of the government-owned New Zealand Post.  The Kiwibank websitestates:

Back in 2002, we launched with a thought: New Zealand needs a better banking alternative—a bank that provides real value for money, that has Kiwi values at heart, and that keeps Kiwi money where it belongs—right here, in New Zealand.

So we set up shop in PostShops throughout the country, putting us in more locations than any other bank in New Zealand literally overnight (without wasting millions on new premises!). 

Suddenly, New Zealanders had a choice in banking.  In an early “move your money” campaign, they voted with their feet.  In an island nation of only 4 million people, in its first five years Kiwibank attracted 500,000 customers away from the big banks.  It consistently earns the nation’s highest customer satisfaction ratings, forcing the Australia-owned banks to improve their service in order to compete.

Postal Banking Japan-style: Funding the Government’s Debt with Its Own Bank

Another interesting model is Japan Post Bank, now the largest publicly-owned bank in the world.  Japan Post is also the largest holder of personal savings, making it the world’s largest credit engine.  Most money today originates as bank loans, and deposits are the magic pool from which this credit-money is generated.  Japan Post uses its excess credit power to buy government bonds.  By 2007, it was the holder of one-fifth of the nation’s debt.  As noted by Joe Weisenthal, writing in Business Insider in February 2010:

Because Japan’s enormous public debt is largely held by its own citizens, the country doesn’t have to worry about foreign investors losing confidence.

If the U.S. Postal Service were to add commercial banking to its product line, it too could use its own bank-generated credit to help relieve its debt problems. The USPS is being forced to fund the health care costs of its employees for 75 years into the future, and a large portion of this unreasonable burden is composed of interest charges.  According to German researcher Margrit Kennedy, interest composes on averageabout 40% of the cost of all goods and services. That suggests that eliminating interest could reduce the USPS debt by about 40%.  If the USPS became a bank, it could use the credit generated from customer deposits either to service its own debt directly—something that would effectively be interest-free, since it would own the bank and would get the profits back—or by buying interest-bearing government bonds.  The interest earned on the bonds could then be used to pay the interest on the USPS debt.

Other government agencies and local governments could improve their balance sheets in the same way.  Public institutions with sizeable capital and revenues can cut their infrastructure costs by about 40% by establishing their own banks, allowing them to avoid a massive toll in interest to private banker middlemen.    

The Post Office Deserves to Be Preserved

 The U.S. Postal Service is a venerable institution that is older than the Constitution.  It should be saved, and it can be saved.  One way is to support HR 1351, a bill introduced by Rep. Stephen Lynch of Massachusetts to repeal the Postal Accountability Enhancement Act. 

Another way is for the post office to combine mail services with teller services, restoring the Postal Savings System of an earlier era.  The result could be not only to save the Post Office but to establish a competitive alternative to a runaway Wall Street banking monopoly that even Congress seems unable to control.

______________

Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back.  Her websites arehttp://WebofDebt.com and http://EllenBrown.com.

THE PUBLIC OPTION IN BANKING: ANOTHER LOOK AT THE GERMAN MODEL

Ellen Brown

Children playing with money at the height of
inflation in Germany

Publicly-owned banks were instrumental in funding Germany’s “economic miracle” after the devastation of World War II. Although the German public banks have been targeted in the last decade for takedown by their private competitors, the model remains a viable alternative to the private profiteering being protested on Wall Street today.

One of the demands voiced by protesters in the Occupy Wall Street movement is for a “public option” in banking. What that means was explained by Dr. Michael Hudson, Professor of Economics at the University of Missouri in Kansas City, in an interview by Paul Jay of the Real News Network on October 6:

[T]he demand isn’t simply to make a public bank but is to treat the banks generally as a public utility, just as you treat electric companies as a public utility. . . . Just as there was pressure for a public option in health care, there should be a public option in banking. There should be a government bank that offers credit card rates without punitive 30% interest rates, without penalties, without raising the rate if you don’t pay your electric bill. This is how America got strong in the 19th and early 20th century, by essentially having public infrastructure, just like you’d have roads and bridges. . . . The idea of public infrastructure was to lower the cost of living and to lower the cost of doing business.

We don’t hear much about a public banking option in the United States, but a number of countries already have a resilient public banking sector. A May 2010 article in The Economist noted that the strong and stable publicly-owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the world in the last few years.

In the U.S., North Dakota is the only state to own its own bank. It is also the only state that has sported a budget surplus every year since the 2008 credit crisis. It has the lowest unemployment rate in the country and the lowest default rate on loans. It also has oil, but so do other states that are not doing so well. Still, the media tend to attribute North Dakota’s success to its oil fields.

However, there are other Western public banking models that are successful without oil booms. Europe has a strong public banking sector; and leading it is Germany, with eleven regional public banks and thousands of municipally-owned savings banks. Germany emerged from World War II with a collapsed economy that had degenerated into barter. Today it is the largest and most robust economy in the Eurozone. Manufacturing in Germany contributes 25% of GDP, more than twice that in the UK. Despite the recession, Germany’s unemployment rate, at 6.8%, is the lowest in 20 years. Underlying the economy’s strength is its Mittelstand—small to medium sized enterprises—supported by a strong regional banking system that is willing to lend to fund research and development.

Titanic Battle or Insider Trading? The S&P Downgrade and the Bilderbergers: All Part of the Plan?

Global Research
Ellen Brown

What just happened in the stock market?

Last week, the Dow Jones Industrial Average rose or fell by at least 400 points for four straight days, a stock market first.

The worst drop was on Monday, 8-8-11, when the Dow plunged 624 points. Monday was the first day of trading after US Treasury bonds were downgraded from AAA to AA+ by Standard and Poor’s.

But the roller coaster actually began on Tuesday, 8-2-11, the day after the last-minute deal to raise the U.S. debt ceiling -- a deal that was supposed to avoid the downgrade that happened anyway five days later.  The Dow changed directions for eight consecutive trading sessions after that, another first. 

The volatility was unprecedented, leaving analysts at a loss to explain it. High frequency program trading no doubt added to the wild swings, but why the daily reversals?  Why didn’t the market head down and just keep going, as it did in September 2008?

The plunge on 8-8-11 was the worst since 2008 and the sixth largest stock market crash ever. According to Der Spiegel, one of the most widely read periodicals in Europe:

Many economists have been pointing out that last week's panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008.

Then as now, banks stopped lending each other money. Then as now, banks' cash deposits at the central bank doubled within days.

But on Tuesday, August 9, the market gained more points from its low than it lost on Monday. Why? A tug of war seemed to be going on between two titanic forces, one bent on crashing the market, the other on propping it up.

The Dubious S&P Downgrade

Many commentators questioned the validity of the downgrade that threatened to be another Lehman Brothers. Dean Baker, co-director of the Center for Economic and Policy Research, said in a statement:

"The Treasury Department revealed that S&P’s decision was initially based on a $2 trillion error in accounting. However, even after this enormous error was corrected, S&P went ahead with the downgrade. This suggests that S&P had made the decision to downgrade independent of the evidence.  [Emphasis added.]

Paul Krugman, writing in the New York Times, was also skeptical, stating:

[E]verything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs . . . .

In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.

In an illuminating expose posted on Firedoglake on August 5, Jane Hamsher concluded:

It’s becoming more and more obvious that Standard and Poor’s has a political agenda riding on the notion that the US is at risk of default on its debt based on some arbitrary limit to the debt-to-GDP ratio. There is no sound basis for that limit, or for S&P’s insistence on at least a $4 trillion down payment on debt reduction, any more than there is for the crackpot notion that a non-crazy US can be forced to default on its debt. . . .

It’s time the media and Congress started asking Standard and Poors what their political agenda is and whom it serves.

Who Drove the S&P Agenda?

Jason Schwarz shed light on this question in an article on Seeking Alpha titled “The Rise of Financial Terrorism”. He wrote:

[A]fter the market close on Friday August 5th, we received word that S&P CEO Deven Sharma had taken control of the ratings agency and personally led the push for a U.S. downgrade. There is a lot of evidence that he has deliberately tried to trash the U.S. economy. Even after discovering that the S&P debt calculations were off by $2 trillion, Sharma made the decision to go ahead with the unethical downgrade. This is a guy who was a key contributor at the 2009 Bilderberg Summit that organized 120 of the world's richest men and women to push for an end to the dollar as the global reserve currency.

[T]hrough his writings on “competitive strategy” S&P CEO Sharma considers the United States the PROBLEM in today’s world, operating with what he implies is an unfair and reckless advantage. The brutal reality is that for "globalization" to succeed the United States must be torn asunder . . .

Also named by Schwarz as a suspect in the market manipulations was Michel Barnier, head of European Regulation.  Barnier triggered an alarming 513-point drop in the Dow on August 4, when he blocked the plan of Hans Hoogervorst, newly appointed Chairman of the International Accounting Standards Board, to save Europe by adopting a new rule called IFRS 9. The rule would have eliminated mark-to-market accounting of sovereign debt from European bank balance sheets. Schwarz writes:

We all should be experts on the dangers of mark-to-market accounting after observing the U.S. banking crisis of 2008/2009 and the Great Depression in the 1930s. Mark-to-market was repealed at 8:45 a.m on April 2, 2009, which finally put a stop to the short term liquidity crisis and at the same time ushered in a stock market recovery. Banks no longer had to raise capital as long term stability was brought back to the system. The exact same scenario would have happened in 2011 Europe under Hoogervorst's plan. Without the threat of failure by those banks who hold high amounts of euro sovereign debt, investors would be free to move on from the European crisis and the stock market could resume its fundamental course.

Schwarz notes that Barnier, like Sharma, was a confirmed attendee at past Bilderberger conferences. What, then, is the agenda of the Bilderbergers?

The One World Company

Daniel Estulin, noted expert on the Bilderbergers, describes that secretive globalist group as “a medium of bringing together financial institutions which are the world’s most powerful and most predatory financial interests.” Writing in June 2011, he said:

Bilderberg isn’t a secret society. . . . It’s a meeting of people who represent a certain ideology. . . . Not OWG [One World Government] or NWO [New World Order] as too many people mistakenly believe. Rather, the ideology is of a ONE WORLD COMPANY LIMITED.

It seems the Bilderbergers are less interested in governing the world than in owning the world. The “world company” was a term first used at a Bilderberger meeting in Canada in 1968 by George Ball, U.S. Undersecretary of State for Economic Affairs and a managing director of banking giants Lehman Brothers and Kuhn Loeb. The world company was to be a new form of colonialism, in which global assets would be acquired by economic rather than military coercion. The company would extend across national boundaries, aggressively engaging in mergers and acquisitions until the assets of the world were subsumed under one privately-owned corporation, with nation-states subservient to a private international central banking system. 

Estulin continues:

The idea behind each and every Bilderberg meeting is to create what they themselves call THE ARISTOCRACY OF PURPOSE between European and North American elites on the best way to manage the planet. In other words, the creation of a global network of giant cartels, more powerful than any nation on Earth, destined to control the necessities of life of the rest of humanity.

. . . This explains what George Ball . . . said back in 1968, at a Bilderberg meeting in Canada: “Where does one find a legitimate base for the power of corporate management to make decisions that can profoundly affect the economic life of nations to whose governments they have only limited responsibility?”

That base of power was found in the private global banking system. Estulin goes on:

Forget Compromise: The Debt Ceiling Is Unconstitutional

Web of Debt Blog
Ellen Brown

The debt ceiling crisis can be averted by enforcing the Fourteenth Amendment, which mandates the  government to pay its debts already incurred, including pensions.  That means Social Security, which IS an “entitlement,” in the original sense of the word.  We’re entitled to it because we’ve paid for it with taxes. 

The game of Russian roulette being played with the U.S. federal debt has been called a “grotesque political carnival” and political blackmail.  The uproar stems from a statute that is unique to the United States and never did make much sense.  First passed in 1917 and revised multiple times since, it imposes a dollar limit on the federal debt.  What doesn’t make sense is that the same Congress that voted on the statute votes on the budget, which periodically exceeds the limit, requiring the statute to be revised.  The debt ceiling has been raised 74 times since 1962, 10 of them since 2001.  The most recent increase, to $14.294 trillion by H.J.Res. 45, was  signed into law on February 12, 2010.
Taxes aren’t collected until after the annual budget is passed, so Congress can’t know in advance whether or how much additional borrowing will be required.  Inevitably, there will be some years that the budget pushes the debt over the limit, requiring new legislation.  And inevitably, now that this tactic has been discovered, there will be a costly battle over the increase, wasting congressional time, destabilizing markets, and rattling faith in the American financial and political systems.  There will be continual blackmail, arm-twisting and concessions.  The situation is untenable and cries out for a definitive resolution.

Fortunately, there is one.  A bevy of legal scholars are recommending that the issue be eliminated altogether by playing the Constitutional trump card.  The Fourteenth Amendment provides at Section 4:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Where statute and the Constitution collide, the Constitution prevails.  Whether the government should pay the bills it has already incurred is not a matter of negotiation.  It is a Constitutional mandate.  And those are the bills we are talking about here, as President Obama stressed in his remarks on the issue last Friday.  He said:

“Raising the debt ceiling simply gives our country the ability to pay the bills that Congress has already racked up.  I want to emphasize that.  The debt ceiling does not determine how much more money we can spend, it simply authorizes us to pay the bills we already have racked up.  It gives the United States of America the ability to keep its word.”

Ignoring the debt ceiling on Constitutional grounds would not, as Michelle Bachmann declares, make President Obama a “dictator.”  It would simply mean he is complying with his Constitutional mandate to pay the government’s bills on time and in full.

Social Security Is Not Welfare.  It Is a Debt Due and Owing.

The President could have a clean resolution of the issue, but he is not jumping at the opportunity.  Rather, he appears to be ready to throw Granny under the bus by slashing Social Security, Medicare and Medicaid, all in the name of “compromise.”

The Fourteenth Amendment says debts already incurred shall not be questioned, “including debts incurred for payment of pensions.”  That includes Social Security, which is an “entitlement” in the true sense of the word: we’re entitled to it because we’ve already paid for it.  In fact, the Social Security Act was originally sold to Congress and the nation in 1935 not as a government benefit, but as a retirement savings program. Earlier this year, the Urban Institute published a study evaluating the program in this way, concluding that the average worker who retires today will withdraw from Social Security just about the same amount he put in over the years, with a modest 2% real interest rate (after inflation).

A deal is a deal.  We paid for it, we are owed it, and the U.S. government is good for it.  To change the terms of the deal ex post facto is both a breach of contract and a violation of the Constitution.

Where to Get the Money: Ron Paul’s Creative Plan

A sovereign nation can always find the money to pay debts owed in its own currency.  The U.S. could, if it wished, pay its bills using debt-free U.S. Notes or Greenbacks, just as President Lincoln did to avoid a crippling debt during the Civil War.  Alternatively, it could eliminate the deficit with Ron Paul’s plan, which amounts to the same thing.  As Stephen Gandel explains Paul’s solution in Time Magazine:

“In the last year or two the Fed has been buying up U.S. Treasury bonds in an effort to lower interest rates and boost the economy. The most recent round of that buying has been dubbed QE2, and has come under a good deal of criticism, though most economists agree that it was a generally helpful policy. The result is that the Fed now holds nearly $1.7 trillion in U.S. debt. But that is really phony debt. The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90 percent of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total federal debt at $14.3 trillion.

“Paul’s plan: Get the Fed and the Treasury to rip up that debt. It’s fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed. A trillion and a half dollars is currently about what spending is expected to exceed tax revenue in 2011.”

The biggest drawback to the plan, says Gandel, is just that it “looks bad.”  It looks as if the government is paying off its debts by printing money.  But that is what government-issued money is: a note acknowledging a debt due and owed from the public, good for an equivalent value from the public, traded in the marketplace.  A U.S. Note or Greenback and a Federal Reserve Note or dollar bill are both forms of promissory notes.  The government can as easily issue a dollar bill as a dollar note or a dollar bond, as Thomas Edison pointed out in the 1920s.

Why Banks Aren’t Lending: The Silent Liquidity Squeeze

Editor's Note:  As Suggested by Mike Rivero of WhatReallyHappened.com:

Raising the debt limit is not necessary. Congress has the right to revoke the Federal Reserve's charter - at any time.

Call or email your local congressman and ask them,

"Why does the government insist on borrowing money from outside banks when Article 1, Section 8 of the constitution allows the government to simply print its own money?"

Contact the Whitehouse:

http://www.whitehouse.gov/contact 

Contact Congress:

http://weeklyintercept.blogspot.com/p/complete-contact-list-for-us-congress_15.html

Global Research
Ellen Brown

Why aren’t banks lending to local businesses?  The Fed’s decision to pay interest on $1.6 trillion in “excess” reserves is a chief suspect.

Where did all the jobs go?  Small and medium-sized businesses are the major source of new job creation, and they are not hiring.  Startup businesses, which contribute a fifth of the nation’s new jobs, often can’t even get off the ground. Why?

In a June 30 article in the Wall Street Journal titled “Smaller Businesses Seeking Loans Still Come Up Empty,” Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17% of smaller businesses said they were able to land needed bank financing.  Businesses have to pay for workers and materials before they can get paid for the products they produce, and for that they need bank credit; but they are reporting that their credit lines are being cut.  They are being pushed instead into credit card accounts that average 16 percent interest, more than double the rate of the average business loan.  It is one of many changes in banking trends that have been very lucrative for Wall Street banks but are killing local businesses.

Why banks aren’t lending is a matter of debate, but the Fed’s decision to pay interest on bank reserves is high on the list of suspects.  Bruce Bartlett, writing in the Fiscal Times in July 2010, observed:

Economists are divided on why banks are not lending, but increasingly are focusing on a Fed policy of paying interest on reserves — a policy that began, interestingly enough, on October 9, 2008, at almost exactly the moment when the financial crisis became acute. . .  

Historically, the Fed paid banks nothing on required reserves. This was like a tax equivalent to the interest rate banks could have earned if they had been allowed to lend such funds. But in 2006, the Fed requested permission to pay interest on reserves because it believes that it would help control the money supply should inflation reappear.

. . . [M]any economists believe that the Fed has unwittingly encouraged banks to sit on their cash and not lend it by paying interest on reserves.

At one time, banks collected deposits from their own customers and stored them for their own liquidity needs, using them to back loans and clear outgoing checks.  But today banks typically borrow (or “buy”) liquidity, either from other banks, from the money market, or from the commercial paper market.  The Fed’s payment of interest on reserves competes with all of these markets for ready-access short-term funds, creating a shortage of the liquidity that banks need to make loans.

By inhibiting interbank lending, the Fed appears to be creating a silent “liquidity squeeze” -- the same sort of thing that brought on the banking crisis of September 2008.  According to Jeff Hummel, associate professor of economics at San Jose State University, it could happen again.  He warns that paying interest on reserves “may eventually rank with the Fed's doubling of reserve requirements in the 1930s and bringing on the recession of 1937 within the midst of the Great Depression.” 

The Travesty of the $1.6 Trillion in “Excess Reserves”

The bank bailout and the Federal Reserve’s two “quantitative easing” programs were supposedly intended to keep credit flowing to the local economy; but despite trillions of dollars thrown at Wall Street banks, these programs have succeeded only in producing mountains of “excess reserves” that are now sitting idle in Federal Reserve bank accounts.  A stunning $1.6 trillion in excess reserves have accumulated since the collapse of Lehman Brothers on September 15, 2008.

The justification for TARP -- the Trouble Asset Relief Program that subsidized the nation’s largest banks -- was that it was necessary to unfreeze credit markets.  The contention was that banks were refusing to lend to each other, cutting them off from the liquidity that was essential to the lending business.  But an MIT study reported in September 2010 showed that immediately after the Lehman collapse, the interbank lending markets were actually working.  They froze, not when Lehman died, but when the Fed started paying interest on excess reserves in October 2008.  According to the study, as summarized in The Daily Bail:

. . . [T]he NY Fed's own data show that interbank lending during the period from September to November did not "freeze," collapse, melt down or anything else.  In fact, every single day throughout this period, hundreds of billions were borrowed and paid back.  The decline in daily interbank lending came only when the Fed ballooned its balance sheet and started paying interest on excess reserves.

On October 9, 2008, the Fed began paying interest, not just on required bank reserves (amounting to 10% of deposits for larger banks), but on “excess” reserves.  Reserve balances immediately shot up, and they have been going up almost vertically ever since.

By March 2011, interbank loans outstanding were only one-third their level in May 2008, before the banking crisis hit. And on June 29, 2011, the Fed reported excess reserves of nearly $1.57 trillion – 20 times what the banks needed to satisfy their reserve requirements.  

Why Pay Interest on Reserves?

Why the Fed decided to pay interest on reserves is a complicated question, but it was evidently a desperate attempt to keep control of “monetary policy.”  The Fed theoretically controls the money supply by controlling the Fed funds rate. This hasn’t worked very well in practice, but neither has anything else, and the Fed is apparently determined to hang onto this last arrow in its regulatory quiver.  

The Military as a Jobs Program: There are More Efficient Ways to Stimulate the Economy

Ellen Brown

Dwight David Eisenhower

Global Research, June 22, 2011
Web of Debt

"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. . . . We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people."

–Dwight David Eisenhower, "The Chance for Peace," speech given to the American Society of Newspaper Editors, Apr. 16, 1953

In a Wall Street Journal editorial on June 8 bemoaning the failure of the Obama stimulus package, Martin Feldstein wrote:

"Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending. The most obvious way to achieve that in 2009 was to repair and replace the military equipment used in Iraq and Afghanistan that would otherwise have to be done in the future.?But the Obama stimulus had nothing for the Defense Department."

You can’t make this stuff up. The most obvious way to stimulate the economy is to replace military equipment? And the Obama stimulus had nothing for the Defense Department? When veterans’ benefits and other past military costs are factored in, the military now devours half the U.S. budget. If military spending is such a cost-effective stimulus, why have the trillions poured into it in the last decade left the economy reeling?

The military is the nation’s largest and most firmly entrenched entitlement program, one that takes half of every tax dollar. Even if "national security" is considered our number one priority (a dubious choice when the real unemployment rate is over 16%), estimates are that the military budget could be cut in half or more and we would still have the most powerful military machine in the world. Our enemies (if any) are now "terrorists," not countries; and what is needed to contain them (if anything) is local policing, not global warfare. Much of our military hardware is just good for "shock and awe," not needed for any "real and present danger."

Military spending is the very essence of "built-in obsolescence": it turns out products that are designed to blow up. The military is not subject to ordinary market principles but works on a "cost-plus" basis, with producers reimbursed for whatever they have spent plus a guaranteed profit. Gone are the usual competitive restraints that keep capitalist corporations "lean and mean." Private contractors hired by the government on no-bid contracts can be as wasteful and inefficient as they like and still make a tidy profit. Yet legislators looking to slash wasteful "entitlements" persist in overlooking this obvious elephant in the room.

The reason massive military spending is considered the most "obvious" way to produce a fiscal stimulus is simply that it is the only form of direct government spending that gets a pass from the deficit hawks. The economy is desperate to get money flowing through it, and today only the government is in a position to turn on the spigots; but there is a tourniquet on government spending. That is true for everything but the military, the only program on which the government is allowed to spend seemingly without limit, often even without oversight.

Japan Shows How to Defuse the Debt Time-bomb

Global Research
Ellen Brown

[T]hreatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea.

- Alan S. Blinder, Princeton professor of economics, former vice chairman of the Federal Reserve

A game of Russian roulette is being played with the national debt ceiling.  Fire the wrong chamber of the gun, and the result could be the second Great Depression.

The first Great Depression led to totalitarian dictatorships, war to consolidate power, and concentrations of capital in the hands of a financial elite.  The trigger was a default on the global reserve currency, in that case the pound sterling. The U.S. dollar is now the global reserve currency. The concern is that default could create the same sort of global panic today. Dark visions are evoked of the President declaring a national emergency, FEMA plans locking into place, camps being readied for protesters, and the secret government taking over . . . .

This may all just be political theater, but do we really want to get close enough to the economic precipice to find out? The conservative ideologues toying with the debt ceiling are doing it to force cuts in the budget, a budget that was already approved by Congress. Congress is being held hostage by a radical minority pushing a risky agenda, one that is based on an economic model that is obsolete.

High-stakes Gambling

On May 16, the Wall Street Journal published an opinion piece titled “The Armaggedon Lobby,” which claimed that a “technical default” on the federal debt was just “political melodrama” and not really a big deal:

markets can figure out the difference between a genuine default when a country can’t pay its bills and a technical default of a few days if it serves the purpose of fixing America’s fiscal mess

Not so, said Saudi Prince Alwaleed bin Talal in a May 20 interview on CNBC. "That's gambling. This is the United States. You're leading the whole world. You cannot play games with that."

It is not just that the government could be brought to a standstill, with a third of its bills now being paid by borrowing; or that interest rates would shoot up, forcing thousands of homeowners into foreclosure.  Failure to pay on the national debt could trigger a default on the global reserve currency. As one commentator described what could go wrong:
[T]he consequences of a US default could spark yet another global financial crisis. The US could lose its triple-A rating, which could cause a sell-off in Treasury notes by institutional and foreign investors. This sell-off could lead to higher interest rates, and banks’ balance sheets might be decimated by the decline in their bond portfolios. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive.

The sort of chaos that could ensue was seen when Great Britain reneged on its deal to redeem pound sterling banknotes in gold in 1931. The result was the worst global depression in history.

When the pound went off the gold standard, markets panicked. People rushed to exchange their paper money for gold, in any currencies in which that was still possible. The gold wound up hidden under mattresses and in safety deposit boxes, unspent; and the banks from which it was pulled, having no reserves to back their loans, quit lending or closed their doors. Credit froze; business ground to a halt.

As other countries ran short of gold, they too were forced to take their currencies off the gold standard. The last holdouts suffered the most, including the United States, which kept its gold window open until 1933.

The 19^th century had been plagued by bank runs, caused by banks having too little gold to back their outstanding loans. The Federal Reserve was instituted in 1913 ostensibly to prevent those runs, but its levee did not hold back the run of the 1930s. In 1933, the country suffered a massive banking collapse, forcing President Roosevelt to declare a banking holiday and take the U.S. dollar, too, off the gold standard.

Freed from the Bankers’ “Cross of Gold”

The transition off the gold standard was a painful one; but according to Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, the country was the better for it. In a paper read before the American Bar Association in 1946, he said that going off the gold standard had finally allowed the country to be economically sovereign:

Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.

Freed from the strictures of gold, Roosevelt was able to jump-start the economy with deficit spending. As Marshall Auerback details, the next four years constituted the biggest cyclical boom in U.S. economic history. Real GDP grew at a 12% rate and nominal GDP grew at a 14% rate.

Then in 1937, Roosevelt listened to the deficit hawks of his day and slashed the deficit. The result was a surge in unemployment, and the economy slipped back into depression.

What lifted the country out of the doldrums was again deficit spending, liberally engaged in to fund World War II. In wartime, few people worry about the national debt. The debt grew to 120% of GDP – twice what it is today -- and wound up sustaining another very productive period in U.S. history, one that set the country up to lead the world in manufacturing for the next half century.

On Inflation and Taxes
Ruml said federal taxes were no longer needed to fund the budget, which could be financed by issuing bonds. The principal purpose of taxes, he said, was the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’"

The government could spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency. Then, and only then, would the money supply need to be contracted with taxes.

“The dollars the government spends become purchasing power in the hands of the people who have received them,” Ruml said.  “The dollars the government takes by taxes cannot be spent by the people,” so the money supply can be contracted with taxes as needed.

When the economy is in a recession, however – as it is now -- the government needs to spend in order to get purchasing power into the hands of the people. Businesses cannot hire more workers until they have more customers demanding their products, and the customers won’t come until they have money to spend. The money (“demand”) must come first. Adding money will not drive up prices until the economy is at full employment. Before that, increasing “demand” will drive up “supply” by setting the engines of production in motion. When supply and demand rise together, prices remain stable.

We now know that a government can go quite far into debt without a dangerous level of price inflation occurring – much farther than the U.S. has gone today. Besides World War II, when U.S. debt was 120% of GDP, there is the remarkable example of Japan. Japan has retained its status as the world’s third largest economy, although it has a debt to GDP ratio of 226% -- and it is still fighting deflation.

Critics of the deflationary theory point to commodity prices, which are soaring today. But if those prices were due to the economy being awash with “too much money chasing too few goods,” real estate prices would be soaring too.  Instead, the real estate market has collapsed.  What has actually happened is that the housing bubble has transmuted into the commodity bubble, as “hot money” has fled from one to the other. The overall money supply is still in

The deficit hawks have been predicting for years that the federal debt would sink the dollar and the economy, and it hasn’t happened yet. In fact the federal debt has not been paid off since 1835, and no disaster has resulted. The debt has not only been carried on the government’s books but has continued to grow, and the economy has grown and flourished along with it.

This is not an economic anomaly. The economy has flourished because of the national debt. Nothing backs the currency today but “the full faith and credit of the United States.” Money is no longer a metal; it is an inflow and outflow, credits and debits. The liabilities of the government are the assets of the private economy. The national debt is what backs the money supply.

Dealing with the Rising Cost of Debt Service
There is a potential time bomb in a growing federal debt, but it is one that can be defused. The debt has risen from $10 trillion to $14 trillion just since the banking crisis of 2008, not from “entitlements” but due to the Wall Street collapse and bailout. Just the interest on this growing debt could cripple the tax base if interest rates were at normal levels, so they have had to be pushed almost to zero. The result has been to create a dollar carry trade. This has facilitated speculation in commodities, a major cause of today’s commodity bubbles.
There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Beardsley Ruml recommended. The Bank of Japan now holds an amount of public debt equal to the country’s GDP! As noted by the Center for Economic and Policy Research:

Interest on [Japanese] debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. . . . Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt.

Like the Bank of Japan, the Federal Reserve now returns the interest it receives to the government. With a rising interest tab on the federal debt no longer a problem, private interest rates could be allowed to rise to normal levels.

Today the Fed is not permitted to buy bonds directly from the Treasury but must go through middleman bond dealers. But that problem too could be fixed. In a supporting statement in 1947, Federal Reserve Chairman Marriner Eccles discussed a bill to eliminate the unnecessary cost of these middlemen. He said the Federal Reserve had been allowed to purchase securities directly from the government from its inception in 1914 until the Banking Act of 1935. Then:

A provision was inserted in that act requiring all purchases of government securities by Federal Reserve banks to be made in the open market, which means purchased chiefly from dealers in Government bonds. Those who inserted this proviso were motivated by the mistaken theory that it would help to prevent deficit financing. . . .

Nothing constructive would be accomplished by the proviso that the Reserve System must purchase Government securities exclusively in the open market. About all such a ban means is that in making such purchases a commission has to be paid to Government bond dealers.

The interest cost and the bond dealers’ cut could both be eliminated by allowing the Treasury to borrow directly from its own central bank, interest free.

Nothing to Fear But Fear Itself

We have been frightened into believing that government debt is a bad thing, but nearly all money today originates as debt. As Marriner Eccles observed in the 1930s, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”

The public debt is the people’s money, and today the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy.

Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of eleven books, she shows how the power to create money has been usurped from the people, and how we can get it back. Her websites are http://webofdebt.com and http://ellenbrown.com.


Ellen Brown is a frequent contributor to Global Research.
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