What Real Financial Reform Looks Like
By Stephen Lendman
Be wary when Washington talks reform. Nearly always it's bogus and ends up making a bad situation worse, the likely outcome this time addressing longstanding Wall Street abuses not easily changed at a time tinkering around the edges or papering them over won't work.
Case in point - the House passed "Wall Street Reform and Consumer Protection Act of 2009" (HR 4173) and current Senate debate on the "Restoring American Financial Stability Act of 2010" (S. 3217). This writer addressed both measures on April 1:
Still a work in progress, the Senate bill will be as bogus as the House one, so whatever reconciliation produces will be another promise made, another broken. Business as usual will persist so don't be fooled - on this measure or any other, including the appalling health care bill that made a dysfunctional system worse, and took a giant step toward ending Medicare, one of the main reasons it was enacted, besides enriching corporate providers.
Instead of restraining financial fraud, House and Senate bills sanctify it. They leave too big to fail banks in place, permit greater consolidation, and let Wall Street casinos game the system with public money, gambling with unregulated exotic and fraudulent derivatives and other securities.
In Washington, the more things change, the more they worsen, and the public always gets scammed - fooled again because power and privilege trump people.
Lobbyists and corporate lawyers write legislation affecting their interests and get precisely what they want, a few public-friendly crumbs added for deception.
Consider a few measures likely to pass or not change:
-- a financial aristocracy will be coronated;
-- Wall Street will keep running the country;
-- fraud and bailouts will be institutionalized;
-- selling toxic junk to unwary buyers won't be touched;
-- excessive executive pay, bonuses and perks won't be curbed;
-- credit agency scams will continue;
-- giant banks, insurers and other financial firms will be green-lighted to get bigger;
-- an Office of National Insurance in the Senate bill will override state laws and regulations not in line with international agreements; further, the US Treasury will be empowered to enter into them without consent of Congress, so the net effect will undermine consumer protections, not enhance them;
-- criminal prosecutions won't happen, except for a few lambs perhaps thrown to the wolves, taking the fall for their bosses, the way it always works, or as someone once said - only little people have to pay with the rarest of rare exceptions to prove the rule; and
-- except for its emergency lending facilities in the Senate bill, the Federal Reserve won't be audited, and what's done will be redacted to keep Congress and the public in the dark; the Fed functions in secrecy; Senate bill provision 714, entitled "Audit of Financial Institutions Examination Council," will keep it that way; remember, the Fed is a Wall Street owned banking cartel serving its member banks in the 12 Fed districts, not the public it's empowered to scam and has with impunity for nearly 100 years.
Solution: shut it down or nationalize it, encourage establishing state and locally-owned banks, take banking out of private hands and make it a highly regulated public utility - topics never considered, discussed, or reported in the mainstream. They are below.
Fundamental change is essential. A systemic makeover is vital. In collusion with Washington, Wall Street predators wrecked the economy, profiting "all the way to the bank," and are now well advanced in their newest schemes, this time with public money, gambling with what's needed to fix America by rebuilding crumbling infrastructure, aiding budget-strapped states and cities, producing jobs, and helping homeowners facing foreclosure or in it.
As long as the privately owned Fed controls the nation's money, reform won't happen. Earlier, this writer explained that since established by the 1913 Federal Reserve Act, the dollar eroded to 5% of its former worth. We've also had rising consumer debt; record budget and trade deficits; an unsustainable national debt; a high level of personal and business bankruptcies; millions of lost homes; loss of the nation's manufacturing base; soaring poverty levels; an unprecedented wealth transfer to the rich; the gradual destruction of the middle class; sustained massive fraud for private gain; and a hugely unstable economy lurching from one crisis to another, followed by calls for reform that fail.
Is this time different? Analyst Mike Larson writes for Money and Markets, run by investor safety advocate Martin Weiss. His latest commentaries stress:
"The great interest rate explosion of 2010-2011," the result of a massive credit bubble starting to burst, especially because of the doubling of US Treasuries to $7.6 trillion in the past seven years, and, at the present pace, will more than double again in the next decade to over $18 trillion and become toxic junk vulnerable to crashing along the way.
Larson explains that when rates rise sharply, bond prices (valuations) crash, and that's what he sees ahead, the result of profligate Fed/Treasury policies making America like Greece and other troubled EU nations.
"Financial Ebola Sweeps Through Global Bond Markets," he shows in a frightening graph on Greece, its two year note rates exploding from 2.1% in October 2009 to 18.9% in late April. Over the same period, the country's 10 year notes (due July 19, 2019) crashed 39%. "That is bond market Armageddon," he said. It's happening in real time, spreading to all troubled countries, and it augurs the next stage in the financial crisis, worst than the first, because governments let banking fraud persist instead of curbing it to save disaster.
What better reason for change, what's not considered by Congress. With out-of-control public debt, fraud a way of life on Wall Street, and politicians blessing it like always, the eventual lid blowing will reverberate globally, crushing people, not bankers, who'll keep gaming the system to get richer, larger, and more powerful at the public's expense.
The Case for State-Owned Banks
The clear lesson - The private sector failed. A new way is essential. Public utility banking at state and local levels is an attractive alternative based on North Dakota's experience. The time is now, and the name of the game is change, fairness, workability, and freedom from predatory too big to fail banks that are too big to exist, so shouldn't. Shut them down. Break them up. Nationalize them. Replace them with publicly owned ones that work.
North Dakota's experience is instructive. What does it have that others don't? It has the nation's only state-owned bank, the Bank of North Dakota (BND). Established in 1919, it's financed industrial, commercial, and agricultural growth soundly, something no other state can match because they're not run like North Dakota.
BND also provides residential and student loans, and operates as a banker's bank, financing private sector lenders with accounts, backed by the full faith and credit of the state, not the FDIC (now bankrupt), and for over 90 years it's worked.
Well enough to encourage other states to check it out, including Illinois, Massachusetts, Virginia, Washington and others in touch with the bank to learn more at a time they're struggling to balance budgets by cutting expenses, laying off staff, reducing services, and raising taxes - counterproductive measures when stimulus is needed.
During hard times, North Dakota also had the largest $1.3 billion budget surplus in its history, cut income and property taxes as a result, expanded the state's Homestead Property Tax program for seniors and disabled people, and has the nation's lowest unemployment rate at 4%. The model works. It's time all states tried it to fix their financial crisis at a time Washington proposed change promises worse ahead endangering them with insolvency.
Ellen Brown does exceptional financial writing, her book, "Web of Debt (now in a new edition), must reading on how the Fed and Wall Street usurped money creation power, and how we can take it back.
She calls the Bank of North Dakota a "credit machine (delivering) sound financial services that promote agriculture, commerce and industry" as follows. It "create(s) 'credit' with accounting entries on (its) books" through fractional reserve banking that multiplies each deposited amount about tenfold in the form of loans or computer-generated funds. As a result, it can re-lend many times over, and the more deposits, the greater amount of it for sustained, productive growth. If other states (and cities) owned public banks, they'd be as prosperous as North Dakota, be able to rebate taxes not raise them, and expand employment and public services, not retrench.
BND "chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve." Although 100% state owned, it "avoids rivalry with private banks by partnering with them." They do most lending, "BND then com(ing) in to participate in the loan, share the risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. (It also) provide(s) a secondary market for real estate loans, which it buys from local banks."
Its property market function helped it "avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate. (Its other services) include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program." When the state didn't meet its budget "a few years ago, the BND met the shortfall."
In sum, state-owned banks have "enormous advantages over small private institutions....Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders" demanding high returns, and they don't speculate in derivatives or other high-risk investments. As a result, BND is healthy with a 25% return on equity, paying "a hefty dividend to the state" annually, so it begs the question why other states don't operate the same way. As their crises deepen, some are considering becoming credit machines like North Dakota, but why have they waited this long, and will they act now?
On April 18, McClatchy-Tribune writer Jake Grovum headlined, "State-owned bank in North Dakota an inspiration," saying:
The BND "has come to be seen both in and out of the state as a beacon of economic stability and financial independence." Moreover, since 1997, it provided over $350 million in profits for the state's general fund.
Other states may follow suit, advocates, like Brown, saying "the benefits are obvious." Yet private bankers like Chris Cole have reservations. A senior VP and senior regulatory counsel at Independent Community Bankers of America, he said "lending to small businesses is making a comeback and has been keeping up with demand from qualified applicants."
Others disagree, saying banks are reluctant to lend. On March 12, McClatchy writer Kevin Hall headlined, "Small firms would like to hire you, if only they could get loans," citing the continued credit crunch affecting businesses like Quantum Energy Solutions co-owner Jim Collins saying he was turned down and can't expand.
Small Business Administration head, Karen Mills, said: "There's a big gap in access to credit for small firms now, and it's a huge problem. We have a sense that the banks are not back to lending the way that they need to be, going forward. If we're going to come out of this recession and get people back working, it's going to be because we give small businesses the support that they need."
It's especially serious because small business accounts for around two-thirds of private hiring. Starve them and harm the economy, as they're its growth engine. Yet they're even having trouble tapping existing credit lines, let alone get new ones.
According to Brookings Institution researcher Douglas Elliott, "The anecdotal evidence certainly suggests there's a credit crunch for small business." Even thriving concerns can't get loans. According to another analyst, "The banks don't want to take a chance on anybody that might fail" in a very risky environment, one that has credit contracting at a record pace, at least through Q 1 2010. The evidence shows banks aren't lending and repaid loans aren't being replaced with new ones, no matter how fast the money supply expands.
What better argument for public banks with every incentive to want to stimulate state and local growth, especially when Wall Street prefers to speculate, not lend as banks are supposed to do, and their model hurts everyone except their bottom line.
Hartwick College, New York Research/Scholar Adrian Kuzminski cites 19th century "proto-populist, Edward Kellogg....a kind of godfather" to later monetary populists and a "profound" writer on monetary issues, yet little known.
He "advocated a decentralized but nationally regulated monetary system based on non-usurious, low-interest public loans to individuals. His vision inspired 19th-century mutualists, greenbackers, populists, and others who sought to restructure the monetary system to redistribute wealth."
He proposed a public credit model with local public banks replacing private monopoly control, charging what the market will bear, and profiting hugely at borrowers' expense.
"Once lent out....public credit notes would flow into circulation, providing the basis for a new currency backed by the assets of individual borrowers....A centralized national currency would be replaced....by a locally issued currency....subject to common national standards, ensuring that each local public credit bank reliably issued equivalent units of currency."
For Kellogg, every dollar would have the same value nationally and would be freely interchangeable with all others. His goal was publicly controlled economic decentralization, and to maintain a stable currency, he said rates must be fixed by law, if necessary by a constitutional amendment.
Australian economist Steve Keen believes financial reform is essential, but his "analysis of how credit is created (makes him) skeptical that any new system will 'hold' so long as financiers can make money by financing asset-price speculation. (He thinks history shows) that every system we've tried so far has finally succumbed to a debt-financed asset-price bubble, whose bursting has brought in at best a recession and at worst a Depression."
He worries as well about publicly created credit so long as "money can still be used to speculate on asset prices." He proposes measures to curb it and suggests ideas of his own. For Brown and others, it's to use public credit for productive industrial development, and as long as new money produces goods and services, it'll work inflation-free.
It's why late 17th-early 18th century colonial America thrived inflation-free for over 25 years, beginning after Massachusetts (in 1691) issued its own paper money (called scrip) and other colonies followed.
Lincoln was also successful after he refused to pay bankers up to 36% interest and got Congress to pass the 1862 Legal Tender Act, empowering the Treasury to issue "greenbacks," public money. Without paying interest to bankers, his achievements were remarkable. Besides building the world's largest army and defeating the South, he turned the country into an industrial giant, launched the steel industry, the continental railroad system, and a new era of farm machinery and cheap tools. He also established free higher education and much more.
He did it by nationalizing control of banking so government could create its own interest free money, as required under the Constitution's Article I, Section 8 giving Congress alone the power "To coin Money, (and) regulate the Value thereof." Bankers do it illegally, and that's the problem, so it's crucial to stop them once in for all. No new law is needed to do it.
Enforce the one in place and revoke the 1913 Federal Reserve Act, enacted in the middle of night on December 23 after many in Congress left for Christmas, and others there hadn't read it. It didn't matter as, like today, the language was so vague that only its crafters knew the scheme was to let private bankers usurp money control, in violation of Article I, Section 8. It's time to reverse this ugly chapter once and for all.
In her August 5, 2009 article titled "The Public Option in Banking: How We Can Beat Wall Street at Its Own Game," Brown cites the "litany of abuses (by) profligate banks that nearly destroyed our economic system," and may end up doing it given their reluctance to change and no authority demanding it.
The alternative, she says is "pit(ting) the public banking option against the private (one) and see which works best. My money is on the public option." Why not, it's a sure bet given how badly the private model failed - defrauding the public with the full faith and credit of Washington, its partner in crime.
Stephen Lendman lives in Chicago and can be reached at email@example.com. Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.