681 Strip private banks of their power to create money - Martin Wolf (Financial Times)

Strip private banks of their power to create money - Martin Wolf
(Financial Times)

Newsletter published on 30 September 2014

(1) “Strip private banks of their power to create money” - Financial
Times’ Martin Wolf
(2) Strip private banks of their power to create money - Martin Wolf
(Financial Times)
(3) Bank of England admits to truth of credit creation by banks
(4) It's time to switch to a sovereign money system - Ben Dyson, Founder
of Positive Money
(5) Why QE2 Failed: The Money All Went Overseas - Ellen Brown (2011)
(6) A Postal Savings Bank could fund Infrastructure - Ellen Brown
(7) Public Banking in Costa Rica - Ellen Brown

(1) “Strip private banks of their power to create money” - Financial
Times’ Martin Wolf

http://www.positivemoney.org/2014/04/strip-private-banks-power-create-money-financial-times-martin-wolf-endorses-positive-moneys-proposals-reform

“Strip private banks of their power to create money”: Financial Times’
Martin Wolf endorses Positive Money’s proposals for reform

WRITTEN BY BEN DYSON (POSITIVE MONEY) ON APRIL 24, 2014.

Positive Money’s proposals have just been advocated by Martin Wolf, the
chief economics commentator at the Financial Times, in an article
entitled “Strip private banks of their power to create money“:

“Printing counterfeit banknotes is illegal, but creating private money
is not. The interdependence between the state and the businesses that
can do this is the source of much of the instability of our economies.
It could – and should – be terminated.”

Wolf highlights the fact that the ability of banks to create money
requires governments and taxpayers to underwrite the banking system:

“Banking is therefore not a normal market activity, because it provides
two linked public goods: money and the payments network. On one side of
banks’ balance sheets lie risky assets; on the other lie liabilities the
public thinks safe. This is why central banks act as lenders of last
resort and governments provide deposit insurance and equity injections.
It is also why banking is heavily regulated. Yet credit cycles are still
hugely destabilising.”

“What is to be done? A minimum response would leave this industry
largely as it is but both tighten regulation and insist that a bigger
proportion of the balance sheet be financed with equity or credibly
loss-absorbing debt. … A maximum response would be to give the state a
monopoly on money creation.“

The article then refers to Modernising Money, the book that we published
in early 2013, and gives an overview of our proposals (summarised below):

   The state, not banks, would create all money. Customers would own the
money in transaction accounts (which would never be put at risk), and
would pay the banks a fee for providing payments services.

   Banks would also offer investment accounts, which fund loans. But
banks could only lend money that was actively invested by customers.
They would no longer be allowed to create new money out of thin air.

   The central bank would create new money as is necessary to promote
non-inflationary growth.

   Decisions on how much money would be taken by a committee independent
of government (much like the Monetary Policy Committee).

   Finally, new money would be injected into the economy via a)
government spending, b) tax cuts, c) to make direct payments to
citizens, d) to pay down existing debts – national or public, or e) to
make new loans through banks or other lending firms (such as peer to
peer business lenders).

Wolf highlights some of the benefits of this reform:

“The transition to a system in which money creation is separated from
financial intermediation would be feasible, albeit complex. But it would
bring huge advantages. It would be possible to increase the money supply
without encouraging people to borrow to the hilt. It would end “too big
to fail” in banking. It would also transfer seignorage – the benefits
from creating money – to the public. In 2013, for example, sterling M1
(transactions money) was 80 per cent of gross domestic product. If the
central bank decided this could grow at 5 per cent a year, the
government could run a fiscal deficit of 4 per cent of GDP without
borrowing or taxing. The right might decide to cut taxes, the left to
raise spending. The choice would be political, as it should be.”

He points out only 10% of UK bank lending actually goes to businesses,
meaning that restricting the level of bank lending doesn’t have to mean
that businesses will suffer. (Speculative credit to property bubbles and
financial markets could be restricted whilst preserving credit to
businesses).

Wolf summarises by saying that:

“Our financial system is so unstable because the state first allowed it
to create almost all the money in the economy and was then forced to
insure it when performing that function. This is a giant hole at the
heart of our market economies. It could be closed by separating the
provision of money, rightly a function of the state, from the provision
of finance, a function of the private sector.”

Wolf concludes that the although this change won’t come about
immediately, we should remember the possibility of making these changes,
because “When the next crisis comes – and it surely will – we need to be
ready.”

Naturally, we’ll be working to try to bring about this change before the
current system causes another crisis.

(2) Strip private banks of their power to create money - Martin Wolf
(Financial Times)
http://www.ft.com/intl/cms/s/0/7f000b18-ca44-11e3-bb92-00144feabdc0.html

Strip private banks of their power to create money

By Martin Wolf

Financial Times, April 25, 2014

The giant hole at the heart of our market economies needs to be plugged

Printing counterfeit banknotes is illegal, but creating private money is
not. The interdependence between the state and the businesses that can
do this is the source of much of the instability of our economies. It
could – and should – be terminated.

I explained how this works two weeks ago. Banks create deposits as a
byproduct of their lending. In the UK, such deposits make up about 97
per cent of the money supply. Some people object that deposits are not
money but only transferable private debts. Yet the public views the
banks’ imitation money as electronic cash: a safe source of purchasing
power.

Banking is therefore not a normal market activity, because it provides
two linked public goods: money and the payments network. On one side of
banks’ balance sheets lie risky assets; on the other lie liabilities the
public thinks safe. This is why central banks act as lenders of last
resort and governments provide deposit insurance and equity injections.
It is also why banking is heavily regulated. Yet credit cycles are still
hugely destabilising.

What is to be done? A minimum response would leave this industry largely
as it is but both tighten regulation and insist that a bigger proportion
of the balance sheet be financed with equity or credibly loss-absorbing
debt. I discussed this approach last week. Higher capital is the
recommendation made by Anat Admati of Stanford and Martin Hellwig of the
Max Planck Institute in The Bankers’ New Clothes.

A maximum response would be to give the state a monopoly on money
creation. One of the most important such proposals was in the Chicago
Plan, advanced in the 1930s by, among others, a great economist, Irving
Fisher. Its core was the requirement for 100 per cent reserves against
deposits. Fisher argued that this would greatly reduce business cycles,
end bank runs and drastically reduce public debt. A 2012 study by
International Monetary Fund staff suggests this plan could work well.

Similar ideas have come from Laurence Kotlikoff of Boston University in
Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising
Money. Here is the outline of the latter system.

First, the state, not banks, would create all transactions money, just
as it creates cash today. Customers would own the money in transaction
accounts, and would pay the banks a fee for managing them.

Second, banks could offer investment accounts, which would provide
loans. But they could only loan money actually invested by customers.
They would be stopped from creating such accounts out of thin air and so
would become the intermediaries that many wrongly believe they now are.
Holdings in such accounts could not be reassigned as a means of payment.
Holders of investment accounts would be vulnerable to losses. Regulators
might impose equity requirements and other prudential rules against such
accounts.

Third, the central bank would create new money as needed to promote
non-inflationary growth. Decisions on money creation would, as now, be
taken by a committee independent of government.

Finally, the new money would be injected into the economy in four
possible ways: to finance government spending, in place of taxes or
borrowing; to make direct payments to citizens; to redeem outstanding
debts, public or private; or to make new loans through banks or other
intermediaries. All such mechanisms could (and should) be made as
transparent as one might wish.

The transition to a system in which money creation is separated from
financial intermediation would be feasible, albeit complex. But it would
bring huge advantages. It would be possible to increase the money supply
without encouraging people to borrow to the hilt. It would end “too big
to fail” in banking. It would also transfer seignorage – the benefits
from creating money – to the public. In 2013, for example, sterling M1
(transactions money) was 80 per cent of gross domestic product. If the
central bank decided this could grow at 5 per cent a year, the
government could run a fiscal deficit of 4 per cent of GDP without
borrowing or taxing. The right might decide to cut taxes, the left to
raise spending. The choice would be political, as it should be.

Opponents will argue that the economy would die for lack of credit. I
was once sympathetic to that argument. But only about 10 per cent of UK
bank lending has financed business investment in sectors other than
commercial property. We could find other ways of funding this.

Our financial system is so unstable because the state first allowed it
to create almost all the money in the economy and was then forced to
insure it when performing that function. This is a giant hole at the
heart of our market economies. It could be closed by separating the
provision of money, rightly a function of the state, from the provision
of finance, a function of the private sector.

This will not happen now. But remember the possibility. When the next
crisis comes – and it surely will – we need to be ready.

martin.wolf@ft.com

(3) Bank of England admits to truth of credit creation by banks

From: "Mel" <bmelvi@tpg.com.au>
Subject: Bank of England admits to truth of credit creation by banks
Date: Mon, 21 Apr 2014 09:53:55 +1000

The truth is out: money is just an IOU, and the banks are rolling in it

The Bank of England's dose of honesty throws the theoretical basis for
austerity out the window

David Graeber

theguardian.com, Tuesday 18 March 2014 21.47 AEST

http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

Back in the 1930s, Henry Ford is supposed to have remarked that it was a
good thing that most Americans didn't know how banking really works,
because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the
cat out of the bag. In a paper called
"<http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf>
Money Creation in the Modern Economy", co-authored by three economists
from the Bank's Monetary Analysis Directorate, they stated outright that
most common assumptions of how banking works are simply wrong, and that
the kind of populist, heterodox positions more ordinarily associated
with groups such as Occupy Wall Street are correct. In doing so, they
have effectively thrown the entire theoretical basis for austerity out
of the window.

To get a sense of how radical the Bank's new position is, consider the
conventional view, which continues to be the basis of all respectable
debate on public policy. People put their money in banks. Banks then
lend that money out at interest – either to consumers, or to
entrepreneurs willing to invest it in some profitable enterprise. True,
the fractional reserve system does allow banks to lend out considerably
more than they hold in reserve, and true, if savings don't suffice,
private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also
careful not to print too much. In fact, we are often told this is why
independent central banks exist in the first place. If governments could
print money themselves, they would surely put out too much of it, and
the resulting inflation would throw the economy into chaos. Institutions
such as the Bank of England or US Federal Reserve were created to
carefully regulate the money supply to prevent inflation. This is why
they are forbidden to directly fund the government, say, by buying
treasury bonds, but instead fund private economic activity that the
government merely taxes.

It's this understanding that allows us to continue to talk about money
as if it were a limited resource like bauxite or petroleum, to say
"there's just not enough money" to fund social programmes, to speak of
the immorality of government debt or of public spending "crowding out"
the private sector. What the Bank of England admitted this week is that
none of this is really true. To quote from its own initial summary:
"Rather than banks receiving deposits when households save and then
lending them out, bank lending creates deposits" … "In normal times, the
central bank does not fix the amount of money in circulation, nor is
central bank money 'multiplied up' into more loans and deposits."

In other words, everything we know is not just wrong – it's backwards.
When banks make loans, they create money. This is because money is
really just an IOU. The role of the central bank is to preside over a
legal order that effectively grants banks the exclusive right to create
IOUs of a certain kind, ones that the government will recognise as legal
tender by its willingness to accept them in payment of taxes. There's
really no limit on how much banks could create, provided they can find
someone willing to borrow it. They will never get caught short, for the
simple reason that borrowers do not, generally speaking, take the cash
and put it under their mattresses; ultimately, any money a bank loans
out will just end up back in some bank again. So for the banking system
as a whole, every loan just becomes another deposit. What's more,
insofar as banks do need to acquire funds from the central bank, they
can borrow as much as they like; all the latter really does is set the
rate of interest, the cost of money, not its quantity. Since the
beginning of the recession, the US and British central banks have
reduced that cost to almost nothing. In fact, with "quantitative easing"
they've been effectively pumping as much money as they can into the
banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in
circulation is not how much the central bank is willing to lend, but how
much government, firms, and ordinary citizens, are willing to borrow.
Government spending is the main driver in all this (and the paper does
admit, if you read it carefully, that the central bank does fund the
government after all). So there's no question of public spending
"crowding out" private investment. It's exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is
because it's obviously true. The Bank's job is to actually run the
system, and of late, the system has not been running especially well.
It's possible that it decided that maintaining the fantasy-land version
of economics that has proved so convenient to the rich is simply a
luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what
might happen if mortgage holders realised the money the bank lent them
is not, really, the life savings of some thrifty pensioner, but
something the bank just whisked into existence through its possession of
a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking
out seeming radical positions that ultimately become new orthodoxies. If
that's what's happening here, we might soon be in a position to learn if
Henry Ford was right.

(4) It's time to switch to a sovereign money system - Ben Dyson, Founder
of Positive Money

http://us1.campaign-archive2.com/?u=7396d6c5dc44c9d3b64d8265c&id=ef8d32536a&e=ea33dac773

Why it's time to switch to a sovereign money system...

by Ben Dyson, Founder of Positive Money

A couple of months ago Martin Wolf wrote that we should "strip banks of
their power to create money" in the Financial Times. He referred to the
proposals we put forwards in Modernising Money, and ended his article
saying "Remember the possibility [of this reform]. When the next crisis
comes - and surely it will - we need to be ready."

That article sparked a significant debate between economists and
bloggers, both for and against the idea of stopping banks from creating
money. Of those against, many critiques either misunderstood the
proposals or simply made claims without providing evidence. To respond
to some of the common objections, we've revised the paper that outlines
our proposals.

1) NEW Paper: Creating a Sovereign Monetary System

Download the updated paper
http://positivemoney.us1.list-manage1.com/track/click?u=7396d6c5dc44c9d3b64d8265c&id=fe5f5a2f14&e=1236bb7769

  and read the new sections that explains how Positive Money's proposals
would:

Create a better and safer banking system
Increase economic stability
Reduce the dependence on debt
Support the real economy
Improve government finances
Tackle unaffordable housing
Slow the rise in inequality
Stop the banking sector from overriding democracy

http://internationalmoneyreform.org/

(5) Why QE2 Failed: The Money All Went Overseas - Ellen Brown (2011)

http://www.huffingtonpost.com/ellen-brown/qe2-shocker-the-whole-600_b_892621.html


Why QE2 Failed: The Money All Went Overseas

by Ellen Brown

Posted: 11 July 2011

On June 30, QE2 ended with a whimper. The Fed's second round of
"quantitative easing" involved $600 billion created with a computer
keystroke for the purchase of long-term government bonds. But the
government never actually got the money, which went straight into the
reserve accounts of banks, where it still sits today. Worse, it went
into the reserve accounts of foreign banks, on which the Federal Reserve
is now paying 0.25-percent interest.

Before QE2 there was QE1, in which the Fed bought $1.25 trillion in
mortgage-backed securities from the banks. This money, too, remains in
bank reserve accounts collecting interest and dust. The Fed reports that
the accumulated excess reserves of depository institutions now total
nearly $1.6 trillion.

Interestingly, $1.6 trillion is also the size of the federal deficit --
a deficit so large that some members of Congress are threatening to
force a default on the national debt if it isn't corrected soon.

So here we have the anomalous situation of a $1.6 trillion hole in the
federal budget, and $1.6 trillion created by the Fed that is now sitting
idle in bank reserve accounts. If the intent of "quantitative easing"
was to stimulate the economy, it might have worked better if the money
earmarked for the purchase of Treasuries had been delivered directly to
the Treasury. That was actually how it was done before 1935, when the
law was changed to require private bond dealers to be cut into the deal.

The one thing QE2 did for the taxpayers was to reduce the interest tab
on the federal debt. The long-term bonds that the Fed bought on the open
market are now effectively interest-free to the government, since the
Fed rebates its profits to the Treasury after deducting its costs.

But QE2 has not helped the anemic local credit market, on which smaller
businesses rely; and it is these businesses that are largely responsible
for creating new jobs. 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 percent of smaller
businesses said they were able to land needed bank financing.

How QE2 Wound Up In Foreign Banks

Before the Banking Act of 1935, the government was able to borrow
directly from its own central bank. Other countries followed that policy
as well, including Canada, Australia and New Zealand, and they prospered
as a result. After 1935, however, if the U.S. central bank wanted to buy
government securities, it had to purchase them from private banks on the
"open market." Former Fed Chairman Marinner Eccles wrote in support of
an act to remove that requirement that it was intended to keep
politicians from spending too much. But all the law succeeded in doing
was to give the bond-dealer banks a cut as middlemen.

Worse, it caused the Fed to lose control of where the money went. Rather
than buying more bonds from the Treasury, the banks that got the cash
could just sit on it or use it for their own purposes, and that is
apparently what is happening today.

In carrying out its QE2 purchases, the Fed had to follow standard
operating procedure for "open market operations": it took secret bids
from the 20 "primary dealers" authorized to sell securities to the Fed
and accepted the best offers. The problem was that 12 of these dealers
-- or over half -- are U.S.-based branches of foreign banks (including
BNP Paribas, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS and
others), and they evidently won the bids.

The fact that foreign banks got the money was established in a June 12
post on Zero Hedge by "Tyler Durden" (a pseudonym), who compared two
charts: the total cash holdings of foreign-related banks in the U.S.,
using weekly Federal Reserve data, and the total reserve balances held
at Federal Reserve banks, from the Fed's statement ending the week of
June 1. The charts showed that after Nov. 3, 2010, when QE2 operations
began, total bank reserves increased by $610 billion. Foreign bank cash
reserves increased in lock step, by $630 billion -- or more than the
entire QE2.

In a June 27 blog, John Mason, Professor of Finance at Penn State
University and a former senior economist at the Federal Reserve, wrote:

     In essence, it appears as if much of the monetary stimulus
generated by the Federal Reserve System went into the Eurodollar market.
This is all part of the "Carry Trade" as foreign branches of an American
bank could borrow dollars from the "home" bank creating a Eurodollar
deposit.     ...

     Cash assets at the smaller [U.S.] banks remained relatively flat.
... Thus, the reserves the Fed was pumping into the banking system were
not going into the smaller banks. ... [B]usiness loans continue to
"tank" at the smaller banking institutions.     ...

     The real lending by commercial banks is not taking place in the
United States. The lending is taking place off-shore, underwritten by
the Federal Reserve System and this is doing little or nothing to help
the American economy grow.

"Tyler Durden" concluded:

     [T]he only beneficiary of the reserves generated were US-based
branches of foreign banks (which in turn turned around and funnelled the
cash back to their domestic branches), a shocking finding which explains
... why US banks have been unwilling and, far more importantly, unable
to lend out these reserves...

     [T]he data above proves beyond a reasonable doubt why there has
been no excess lending by US banks to US borrowers: none of the cash
ever even made it to US banks! ... This also resolves the mystery of the
broken money multiplier and why the velocity of money has imploded.

Well, not exactly. The fact that the QE2 money all wound up in foreign
banks is a shocking finding, but it doesn't seem to be the reason banks
aren't lending. There were already $1 trillion in excess reserves
sitting idle in U.S. reserve accounts, not counting the $600 billion
from QE2.

According to Scott Fullwiler, Associate Professor of Economics at
Wartburg College, the money multiplier model is not just broken but
obsolete. Banks do not lend based on what they have in reserve. They can
borrow reserves as needed after making loans. Whether banks will lend
depends rather on a) whether they have creditworthy borrowers, b)
whether they have sufficient capital to satisfy the capital requirement,
and c) the cost of funds -- meaning the cost to the bank of borrowing to
meet the reserve requirement, either from depositors, other banks or the
Federal Reserve.

Setting Things Right

Whatever is responsible for causing the local credit crunch, trillions
of dollars thrown at Wall Street by Congress and the Fed haven't fixed
the problem. It may be time for local governments to take matters into
their own hands. While we wait for federal lawmakers to get it right,
local credit markets can be revitalized by establishing state-owned
banks, on the model of the Bank of North Dakota (BND). The BND services
the liquidity needs of local banks and keeps credit flowing in the
state. (For more information, see here and here.)

Concerning the gaping federal deficit, Congressman Ron Paul has an
excellent idea: have the Fed simply write off the federal securities
purchased with funds created in its quantitative easing programs. No
creditors would be harmed, because the money was generated out of thin
air with a computer keystroke in the first place. The government would
just be canceling a debt to itself and saving the interest.

As for "quantitative easing," if the intent is to stimulate the economy,
the money needs to go directly into the purchase of goods and services,
stimulating "demand." If it goes onto the balance sheets of banks, it
may stop there or go into speculation rather than local lending -- as is
happening now. Money that goes directly to the government, on the other
hand, will be spent on goods and services in the real economy, creating
much-needed jobs, generating demand and rebuilding the tax base. To make
sure the money gets there, the 1935 law forbidding the Fed to buy
Treasuries directly from the Treasury needs to be repealed.

(6) A Postal Savings Bank could fund Infrastructure - Ellen Brown

http://www.occupy.com/article/launching-postal-savings-bank-infrastructure-doesn%E2%80%99t-cost-taxpayers-dime

Launching a Postal Savings Bank: Infrastructure that Doesn’t Cost
Taxpayers a Dime

Tue, 9/24/2013

by Ellen Brown

The U.S. Postal Service (USPS) is the nation’s second largest civilian
employer after Walmart. Although successfully self-funded throughout its
long history, it is currently struggling to stay afloat. This is not, as
sometimes asserted, because it has been made obsolete by the Internet.
In fact the post office has gotten more business from Internet orders
than it has lost to electronic email. What has pushed the USPS into
insolvency is an oppressive 2006 congressional mandate that it prefund
healthcare for its workers 75 years into the future. No other entity,
public or private, has the burden of funding multiple generations of
employees who have not yet even been born.

The Carper-Coburn bill (S. 1486) is the subject of congressional
hearings this week. It threatens to make the situation worse, by
eliminating Saturday mail service and door-to-door delivery and laying
off more than 100,000 workers over several years.

The Postal Service Modernization Bills brought by Peter DeFazio and
Bernie Sanders, on the other hand, would allow the post office to
recapitalize itself by diversifying its range of services to meet unmet
public needs.

Needs that the post office might diversify into include (1) funding the
rebuilding of our crumbling national infrastructure; (2) servicing the
massive market of the “unbanked” and “underbanked” who lack access to
basic banking services; and (3) providing a safe place to save our
money, in the face of Wall Street’s new “bail in” policies for
confiscating depositor funds. All these needs could be met at a stroke
by some simple legislation authorizing the post office to revive the
banking services it efficiently performed in the past.

Funding Infrastructure Tax-free

In a July 2013 article titled “Delivering A National Infrastructure
Bank...through the Post Office,” Frederic V. Rolando, president of the
National Association of Letter Carriers, addressed the woeful state of
US infrastructure. He noted that the idea of forming a national
infrastructure bank (NIB) has had bipartisan congressional support over
the past six years, with senators from both parties introducing bills
for such a bank:

  "An NIB would provide a means to channel public funds into regional
and national projects identified by political and community leaders
across the country to keep the economy healthy. It could issue bonds,
back public-private partnerships and guarantee long-term, low-interest
loans to states and investment groups willing to rebuild our schools,
hospitals, airports and energy grids. An NIB with $10 billion in capital
could leverage hundreds of billions in investments."

What has blocked these bills is opposition to using tax money for the
purpose. But Rolando asks:

  "[W]hat if we set up the NIB without using taxpayer funds? What if we
allowed Americans to open savings accounts in the nation’s post offices
and directed those funds into national infrastructure bonds that would
earn interest for depositors and fund job-creating projects to replace
and modernize our crumbling infrastructure? "A post office bank...would
not offer commercial loans or mortgages. But it could serve the unbanked
and fund infrastructure projects selected by a non-partisan NIB."

The Unbanked and Underbanked: A Massive Untapped Market

The “unbanked” are not a small segment of the population. In a 2011
survey, the unbanked and underbanked included about one in four
households. Without access to conventional financial services, people
turn to an expensive alternative banking market of bill-pay, prepaid
debit cards, check cashing services, and payday loans. They pay
excessive fees and are susceptible to high-cost predatory lenders.

Globally, postal banks are major contributors to financial inclusion.
Catering to this underserved population is a revenue-generator for the
post office while saving the underbanked large sums in fees. Worldwide,
according to the Universal Postal Union, 1 billion people now use the
postal sector for savings and deposit accounts, and more than 1.5
billion take advantage of basic transactional services through the post.
According to a discussion paper of 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."

Expanding to include postal financial services has been crucial in many
countries to maintaining the profitability of their postal network.
Maintaining post offices in some rural or low-income areas can be a
losing proposition, so the postal service often cross-subsidizes with
other activities to maintain its universal network. 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 reward their management with
extravagant bonuses or commissions that drain profits away. Profits
return to the government and the people.

Wall Street Is No Longer a Safe Place to Keep Our Money

A postal bank could have appeal not just to the unbanked but to savers
generally who are concerned about the safety of their deposits.
Traditionally, people have deposited their money in banks for three
reasons: safety from theft, the convenience of check writing and bill
paying, and to earn some interest. Today, not only do our bank deposits
earn virtually no interest, but they are not safe from theft – and the
prospective thief is Wall Street itself.

The Financial Stability Board (FSB) in Switzerland has mandated that
“systemically important” banks come up with “living wills” stating what
they would do in the event of insolvency. The template set out by the
FSB is for these too-big-to-fail banks to confiscate their creditors’
funds and convert them to bank equity or stock. Legally, “creditors”
include the depositors. In fact depositors compose thelargest class of
creditors of any bank.

In 2009, President Obama agreed along with other G20 leaders to be bound
by the regulations imposed by the FSB, giving them the force of law.
This agreement should properly have been a treaty, subject to the
approval of two-thirds of the Senate; but the deal was sealed on a
handshake, ostensibly to prevent another Lehman-style banking collapse.
Thus the next time JPMorganChase or Bank of America finds itself on the
wrong side of a massive derivatives bet, it can avoid insolvency by
recapitalizing itself with our deposits. Both JPM and BOAhold over $1
trillion in deposits and over $70 trillion in derivatives; and with the
repeal of Glass-Steagall, the banks have been able to merge these
operations. The FDIC deposit insurance fund has only $32 billion in it
to cover losses for the entire country.

For guaranteed safety, we need a network of publicly-owned banks devoted
solely to taking deposits and providing check-cashing services – no
gambling with deposits allowed. The US Post Office can safely and
efficiently provide the infrastructure for such a banking network, as it
did from 1911 until 1967. The post office is ubiquitous, with branches
in every town and community.

A Proven Model

Postal banking systems are also ubiquitous in other countries, where
their long record of safe and profitable public banking has proved the
viability of the model. The mother of all postal banks was in Great
Britain in the 19th century. The leader today is Japan Post Bank (JPB),
now the largest depository bank in the world. Not only is it a
convenient place for Japanese citizens to save their money, but the
government has succeeded in drawing on JPB’s massive deposit base to
fund a major portion of the federal budget. Rather than using its
deposits to back commercial loans as most banks do, Japan Post invests
them in government securities. That means the government is borrowing
from its own bank and its own people rather than from foreign bondholders.

That is the basic idea behind the national postal savings and
infrastructure bank. The deposits of the nation’s savers can be invested
in government securities that are in turn used for rebuilding the
nation. It is a win-win-win, providing a way to save the post office
while at the same time protecting our deposits and rebuilding our
decaying roads and bridges without dipping into taxes. It is also a way
to vote with our feet, moving our money out of an increasingly risky and
rapacious Wall Street into a network of publicly-owned banks that serves
rather than exploits us.

Another Option: Rescind the Prefunding Requirement

Another alternative for putting the USPS in the black, of course, is
simply to rescind the healthcare pre-funding requirement that put it in
the red. The mandate to fund healthcare 75 years into the future appears
so unreasonable as to raise suspicions that the nation’s largest
publicly-owned industry has been intentionally targeted for takedown.
Why? Is it because competitors want the business, or because private
developers want the valuable postal properties that are being
systematically sold off to meet its now-crippled the budget?

In a revealing exposé in the September 18 East Bay Express, Peter Byrne
provides evidence that C.B. Richard Ellis (CBRE), the company holding
the exclusive contract to negotiate sales for the $85 billion postal
real estate portfolio, has sold off 52 postal properties for at least
$79 million less than their fair market value. Worse, the buyers
included its own business partners and shareholders, including Goldman
Sachs. CBRE is chaired by Richard C. Blum, the husband of US Senator
Dianne Feinstein, a family Byrne says has a history of accessing public
pension funds to make private investments (citing here and here).

The post office has been made to look inefficient and obsolete, as if
public enterprises are incapable of generating public revenues; yet the
postal service has been both self-funding and profitable for over two
centuries. If we refuse to allow our government to make money through
public enterprises, we will be destined to bear the burden of supporting
government with our taxes, while we watch countries such as China, Korea
and Japan, which do allow public industries, enjoy the fruits of that
profitable and efficient arrangement.

(7) Public Banking in Costa Rica - Ellen Brown

http://www.opednews.com/populum/pagem.php?f=Public-Banking-in-Costa-Ri-by-Ellen-Brown-Banking_Military_Public-Banking_Public-Banks-131112-153.html

Public Banking in Costa Rica: A Remarkable Little-known Model

By Ellen Brown

November 12, 2013 at 12:32:55

In Costa Rica, publicly-owned banks have been available for so long and
work so well that people take for granted that any country that knows
how to run an economy has a public banking option. Costa Ricans are
amazed to hear there is only one public depository bank in the United
States (the Bank of North Dakota), and few people have private access to it.

So says political activist Scott Bidstrup, who writes:

  For the last decade, I have resided in Costa Rica , where we have had
a "Public Option" for the last 64 years.

  There are 29 licensed banks, mutual associations and credit unions in
Costa Rica , of which four were established as national, publicly-owned
banks in 1949. They have remained open and in public hands ever
since--in spite of enormous pressure by the I.M.F. [International
Monetary Fund] and the U.S. to privatize them along with other public
assets. The Costa Ricans have resisted that pressure--because the value
of a public banking option has become abundantly clear to everyone in
this country.

  During the last three decades, countless private banks, mutual
associations (a kind of Savings and Loan) and credit unions have come
and gone, and depositors in them have inevitably lost most of the value
of their accounts.

  But the four state banks, which compete fiercely with each other, just
go on and on. Because they are stable and none have failed in 31 years,
most Costa Ricans have moved the bulk of their money into them. Those
four banks now account for fully 80% of all retail deposits in Costa
Rica, and the 25 private institutions share among themselves the rest.

According to a 2003 report by the World Bank, the public sector banks
dominating Costa Rica's onshore banking system include three state-owned
commercial banks (Banco Nacional, Banco de Costa Rica, and Banco Credito
Agr-cola de Cartago ) and a special-charter bank called Banco Popular,
which in principle is owned by all Costa Rican workers. These banks
accounted for 75 percent of total banking deposits in 2003.

In Competition Policies in Emerging Economies: Lessons and Challenges
from Central America and Mexico (2008), Claudia Schatan writes that
Costa Rica nationalized all of its banks and imposed a monopoly on
deposits in 1949. Effectively, only state-owned banks existed in the
country after that. The monopoly was loosened in the 1980s and was
eliminated in 1995. But the extensive network of branches developed by
the public banks and the existence of an unlimited state guarantee on
their deposits has made Costa Rica the only country in the region in
which public banking clearly predominates.

Scott Bidstrup comments:

  By 1980, the Costa Rican economy had grown to the point where it was
by far the richest nation in Latin America in per-capita terms. It was
so much richer than its neighbors that Latin American economic
statistics were routinely quoted with and without Costa Rica included.
Growth rates were in the double digits for a generation and a half. And
the prosperity was broadly shared. Costa Rica 's middle class -
nonexistent before 1949 - became the dominant part of the economy during
this period. Poverty was all but abolished, favelas [shanty towns]
disappeared, and the economy was booming.

This was not because Costa Rica had natural resources or other natural
advantages over its neighbors. To the contrary, says Bidstrup:

  At the conclusion of the civil war of 1948 (which was brought on by
the desperate social conditions of the masses), Costa Rica was
desperately poor, the poorest nation in the hemisphere, as it had been
since the Spanish Conquest.

  The winner of the 1948 civil war, Jose "Pepe" Figueres, now a national
hero, realized that it would happen again if nothing was done to relieve
the crushing poverty and deprivation of the rural population. He
formulated a plan in which the public sector would be financed by
profits from state-owned enterprises, and the private sector would be
financed by state banking.

  A large number of state-owned capitalist enterprises were founded.
Their profits were returned to the national treasury, and they financed
dozens of major infrastructure projects. At one point, more than 240
state-owned corporations were providing so much money that Costa Rica
was building infrastructure like mad and financing it largely with cash.
Yet it still had the lowest taxes in the region, and it could still
afford to spend 30% of its national income on health and education.

  A provision of the Figueres constitution guaranteed a job to anyone
who wanted one. At one point, 42% of the working population of Costa
Rica was working for the government directly or in one of the
state-owned corporations. Most of the rest of the economy not involved
in the coffee trade was working for small mom-and-pop companies that
were suppliers to the larger state-owned firms--and it was state
banking, offering credit on favorable terms, that made the founding and
growth of those small firms possible. Had they been forced to rely on
private-sector banking, few of them would have been able to obtain the
financing needed to become established and prosperous. State banking was
key to the private sector growth. Lending policy was government policy
and was designed to facilitate national development, not bankers'
wallets. Virtually everything the country needed was locally produced.
Toilets, window glass, cement, rebar, roofing materials, window and door
joinery, wire and cable, all were made by state-owned capitalist
enterprises, most of them quite profitable. Costa Rica was the dominant
player regionally in most consumer products and was on the move
internationally.

Needless to say, this good example did not sit well with foreign
business interests. It earned Figueres two coup attempts and one
attempted assassination. He responded by abolishing the military (except
for the Coast Guard), leaving even more revenues for social services and
infrastructure.

When attempted coups and assassination failed, says Bidstrup, Costa Rica
was brought down with a form of economic warfare called the "currency
crisis" of 1982. Over just a few months, the cost of financing its
external debt went from 3% to extremely high variable rates (27% at one
point). As a result, along with every other Latin American country,
Costa Rica was facing default. Bidstrup writes:

  That's when the IMF and World Bank came to town.

  Privatize everything in sight, we were told. We had little choice, so
we did. End your employment guarantee, we were told. So we did. Open
your markets to foreign competition, we were told. So we did. Most of
the former state-owned firms were sold off, mostly to foreign
corporations. Many ended up shut down in a short time by foreigners who
didn't know how to run them, and unemployment appeared (and with it,
poverty and crime) for the first time in a decade. Many of the local
firms went broke or sold out quickly in the face of ruinous foreign
competition. Very little of Costa Rica 's manufacturing economy is still
locally owned. And so now, instead of earning forex [foreign exchange]
through exporting locally produced goods and retaining profits locally,
these firms are now forex liabilities, expatriating their profits and
earning relatively little through exports. Costa Ricans now darkly joke
that their economy is a wholly-owned subsidiary of the United States.

  The dire effects of the IMF's austerity measures were confirmed in a
1993 book excerpt by Karen Hansen-Kuhn titled "Structural Adjustment in
Costa Rica: Sapping the Economy." She noted that Costa Rica stood out in
Central America because of its near half-century history of stable
democracy and well-functioning government, featuring the region's
largest middle class and the absence of both an army and a guerrilla
movement. Eliminating the military allowed the government to support a
Scandinavian-type social-welfare system that still provides free health
care and education, and has helped produce the lowest infant mortality
rate and highest average life expectancy in all of Central America.

In the 1970s, however, the country fell into debt when coffee and other
commodity prices suddenly fell, and oil prices shot up. To get the
dollars to buy oil, Costa Rica had to resort to foreign borrowing; and
in 1980, the U.S. Federal Reserve under Paul Volcker raised interest
rates to unprecedented levels.

In The Gods of Money (2009), William Engdahl fills in the back story. In
1971, Richard Nixon took the U.S. dollar off the gold standard, causing
it to drop precipitously in international markets. In 1972, US Secretary
of State Henry Kissinger and President Nixon had a clandestine meeting
with the Shah of Iran. In 1973, a group of powerful financiers and
politicians met secretly in Sweden and discussed effectively "backing"
the dollar with oil. An arrangement was then finalized in which the
oil-producing countries of OPEC would sell their oil only in U.S.
dollars. The quid pro quo was military protection and a strategic boost
in oil prices. The dollars would wind up in Wall Street and London
banks, where they would fund the burgeoning U.S. debt. In 1974, an oil
embargo conveniently caused the price of oil to quadruple. Countries
without sufficient dollar reserves had to borrow from Wall Street and
London banks to buy the oil they needed. Increased costs then drove up
prices worldwide.

By late 1981, says Hansen-Kuhn, Costa Rica had one of the world's
highest levels of debt per capita, with debt-service payments amounting
to 60 percent of export earnings. When the government had to choose
between defending its stellar social-service system or bowing to its
creditors, it chose the social services. It suspended debt payments to
nearly all its creditors, predominately commercial banks. But that left
it without foreign exchange. That was when it resorted to borrowing from
the World Bank and IMF, which imposed "austerity measures" as a required
condition. The result was to increase poverty levels dramatically.

Bidstrup writes of subsequent developments:

  Indebted to the IMF, the Costa Rican government had to sell off its
state-owned enterprises, depriving it of most of its revenue, and the
country has since been forced to eat its seed corn. No major
infrastructure projects have been conceived and built to completion out
of tax revenues, and maintenance of existing infrastructure built during
that era must wait in line for funding, with predictable results.

  About every year, there has been a closure of one of the private banks
or major savings co-ops. In every case, there has been a corruption or
embezzlement scandal, proving the old saying that the best way to rob a
bank is to own one. This is why about 80% of retail deposits in Costa
Rica are now held by the four state banks. They're trusted.

  Costa Rica still has a robust economy, and is much less affected by
the vicissitudes of rising and falling international economic tides than
enterprises in neighboring countries, because local businesses can get
money when they need it. During the credit freezeup of 2009, things went
on in Costa Rica pretty much as normal. Yes, there was a contraction in
the economy, mostly as a result of a huge drop in foreign tourism, but
it would have been far worse if local business had not been able to
obtain financing when it was needed. It was available because most
lending activity is set by government policy, not by a local banker's
fear index.

  Stability of the local economy is one of the reasons that Costa Rica
has never had much difficulty in attracting direct foreign investment,
and is still the leader in the region in that regard. And it is clear to
me that state banking is one of the principal reasons why.

  The value and importance of a public banking sector to the overall
stability and health of an economy has been well proven by the Costa
Rican experience. Meanwhile, our neighbors, with their fully privatized
banking systems have, de facto, encouraged people to keep their money in
Mattress First National, and as a result, the financial sectors in
neighboring countries have not prospered. Here, they have--because most
money is kept in banks that carry the full faith and credit of the
Republic of Costa Rica, so the money is in the banks and available for
lending. While our neighbors' financial systems lurch from crisis to
crisis, and suffer frequent resulting bank failures, the Costa Rican
public system just keeps chugging along. And so does the Costa Rican
economy.

He concludes:

  My dream scenario for any third world country wishing to develop, is
to do exactly what Costa Rica did so successfully for so many years.
Invest in the Holy Trinity of national development--health, education
and infrastructure. Pay for it with the earnings of state capitalist
enterprises that are profitable because they are protected from ruinous
foreign competition; and help out local private enterprise get started
and grow, and become major exporters, with stable state-owned banks that
prioritize national development over making bankers rich. It worked well
for Costa Rica for a generation and a half. It can work for any other
country as well. Including the United States.

The new Happy Planet Index, which rates countries based on how many long
and happy lives they produce per unit of environmental output, has
ranked Costa Rica #1 globally. The Costa Rican model is particularly
instructive at a time when US citizens are groaning under the twin
burdens of taxes and increased health insurance costs. Like the Costa
Ricans, we could reduce taxes while increasing social services and
rebuilding infrastructure, if we were to allow the government to make
some money itself; and a giant first step would be for it to establish
some publicly-owned banks.