Jan 11, 2010 401k/IRA Screw Job Coming? Karl Denninger 321gold ...inc ...s: "401k/IRA Screw Job Coming?
Karl Denninger
Market Ticker
Jan 11, 2010
Now this is a guaranteed rape job.
In a short conversation this noontime that CNBC apparently has omitted from their archives (Why's that folks?) Rick Santelli was talking about a potential to effectively force money into the Treasury market.
Where would they get this?
From your 401k and IRA accounts!
From Businessweek:
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.
Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!
Forcing people into Treasuries as an 'annuity' is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!
Guess what? They'll do that here too - you're going to 'invest' in Treasuries which of course are effectively a CALL option on the future taxing ability of the government.
The problem is that with an aging population and the immigrant problem (illegal immigrants that is), along with offshoring, the aggregate wage base will drop and thus this is the most dangerous investment of all!
What's even worse is that the government has intentionally suppressed Treasury yields during this crisis (and will keep doing so by various means, including manipulating the CPI - the 'inflation index' - as they have for the last 30 years) so as to guarantee that you lose over time comp"
Monday, January 11, 2010
Australian Adept Unveiled World Satanic Control
ShareThis: "Australian Adept Unveiled World Satanic Control
January 3, 2010
by Henry Makow Ph.D.
In an explosive deathbed confession, a former head of the satanist 'Alpha Lodge' in Sydney, Australia, revealed the pervasive worldwide power of organized Satanism, which is synonymous with the Illuminati.
'Things are not as they seem -- and they have not been for a long, long time,' he wrote, describing a wholesale betrayal of society by its ostensible leaders.
'Petor Narsagonan' aka 'Frater 616' died March 25, 2004. Recently, his executor, an 'Aloysius Fozdyke' (their satanic names) sent the 15 pp. document by email to Arthur Cristian, webmaster of 'loveforlife.com.au'
'I have felt it necessary to edit very little of this work,' 'Fozdyke' wrote to Cristian, 'although legal considerations have ensured that some names and details were excised. It was His intention to have this published in the popular media.'
What follows is a synopsis of this shocking document focusing on Satanic power and influence.
Satanic influence is 'now so pervasive as not to be readily noticed,' Frater says.
Satanists are laced throughout Australian society, and the pattern is replicated everywhere.
They include politicians, doctors, high ranking police officers, lawyers, decorated military men, media personalities, fashion models and social workers. The most talented have lifestyles maintained by crime under a veneer of respectable professionalism and knowledge. Marginal types (prostitutes, drug dealers) are important to Satanism but are merely tools.
Frater explains he got involved in a satanic group in university in 1971. 'I fell through a crack in reality...I escap"
January 3, 2010
by Henry Makow Ph.D.
In an explosive deathbed confession, a former head of the satanist 'Alpha Lodge' in Sydney, Australia, revealed the pervasive worldwide power of organized Satanism, which is synonymous with the Illuminati.
'Things are not as they seem -- and they have not been for a long, long time,' he wrote, describing a wholesale betrayal of society by its ostensible leaders.
'Petor Narsagonan' aka 'Frater 616' died March 25, 2004. Recently, his executor, an 'Aloysius Fozdyke' (their satanic names) sent the 15 pp. document by email to Arthur Cristian, webmaster of 'loveforlife.com.au'
'I have felt it necessary to edit very little of this work,' 'Fozdyke' wrote to Cristian, 'although legal considerations have ensured that some names and details were excised. It was His intention to have this published in the popular media.'
What follows is a synopsis of this shocking document focusing on Satanic power and influence.
Satanic influence is 'now so pervasive as not to be readily noticed,' Frater says.
Satanists are laced throughout Australian society, and the pattern is replicated everywhere.
They include politicians, doctors, high ranking police officers, lawyers, decorated military men, media personalities, fashion models and social workers. The most talented have lifestyles maintained by crime under a veneer of respectable professionalism and knowledge. Marginal types (prostitutes, drug dealers) are important to Satanism but are merely tools.
Frater explains he got involved in a satanic group in university in 1971. 'I fell through a crack in reality...I escap"
"New speed cameras enrage Arizona drivers
An attempt to introduce UK-style fixed speed cameras in America has ended in a public revolt, with motorists binning speeding tickets worth $90 million (£60 million)."
The Arizona scheme, which was the first statewide effort to bring speed camera enforcement to the US, is now on the verge of bankruptcy and could be dumped.
Many Americans, including judges and elected officials, regard the devices as an unconstitutional tax collection method and have flatly refused to pay the fines, the Times reports.
"I see all the cameras in Arizona completely coming down," Shawn Dow, who is leading the public revolt via his chairmanship of Arizona Citizens Against Photo Radar, told the paper. "The citizens of Arizona took away the cash cow of Arizona by refusing to pay." He is now trying to get the cameras banned in November's elections.
Although about 700,000 tickets have been issued since Arizona's 76-camera plan was rolled out last year, a mere $37 million of the $127 million in fines and surcharges has been collected. That is because Arizonans have realised that they can simply ignore tickets sent to them in the post, and the authorities cannot prove that they have received them. Unless the tickets are served in person something Arizona cannot afford to do they become void after three months.
Motorists have shown their opposition to the machines in other ways, placing large cardboard boxes over them, decorating them with sticky notes, attacking them with pickaxes and, in one case, setting off the cameras while standing in front wearing a monkey mask.
The company hired to install Arizona's cameras, Redflex, is under financial pressure, because it invested $16 million upfront in the equipment. But it says it is persevering. "Redflex is in this for the long haul," it said.
An attempt to introduce UK-style fixed speed cameras in America has ended in a public revolt, with motorists binning speeding tickets worth $90 million (£60 million)."
The Arizona scheme, which was the first statewide effort to bring speed camera enforcement to the US, is now on the verge of bankruptcy and could be dumped.
Many Americans, including judges and elected officials, regard the devices as an unconstitutional tax collection method and have flatly refused to pay the fines, the Times reports.
"I see all the cameras in Arizona completely coming down," Shawn Dow, who is leading the public revolt via his chairmanship of Arizona Citizens Against Photo Radar, told the paper. "The citizens of Arizona took away the cash cow of Arizona by refusing to pay." He is now trying to get the cameras banned in November's elections.
Although about 700,000 tickets have been issued since Arizona's 76-camera plan was rolled out last year, a mere $37 million of the $127 million in fines and surcharges has been collected. That is because Arizonans have realised that they can simply ignore tickets sent to them in the post, and the authorities cannot prove that they have received them. Unless the tickets are served in person something Arizona cannot afford to do they become void after three months.
Motorists have shown their opposition to the machines in other ways, placing large cardboard boxes over them, decorating them with sticky notes, attacking them with pickaxes and, in one case, setting off the cameras while standing in front wearing a monkey mask.
The company hired to install Arizona's cameras, Redflex, is under financial pressure, because it invested $16 million upfront in the equipment. But it says it is persevering. "Redflex is in this for the long haul," it said.
Corrupt China officials pocket 50 billion: media
Corrupt China officials pocket 50 billion: media: "Corrupt China officials pocket 50 billion: media
AFP
Monday , January 11th, 2010
Thousands of officials have fled China over the past 30 years with some 50 billion dollars in public funds, state media said Monday, as the government scrambles to stem the tide of corruption.
As many as 4,000 officials have disappeared, using criminal gangs, mainly in the United States and Australia, to launder their ill-gotten gains, buy real estate and set up false identities, the Global Times said.
A joint task force involving 15 Chinese ministries has been set up to choke off graft in government ranks, the paper said.
In 2009, authorities investigated 103 cases involving the outbound travel of more than 300 officials, the paper said, citing a party official tasked with disciplinary issues.
Full article here"
AFP
Monday , January 11th, 2010
Thousands of officials have fled China over the past 30 years with some 50 billion dollars in public funds, state media said Monday, as the government scrambles to stem the tide of corruption.
As many as 4,000 officials have disappeared, using criminal gangs, mainly in the United States and Australia, to launder their ill-gotten gains, buy real estate and set up false identities, the Global Times said.
A joint task force involving 15 Chinese ministries has been set up to choke off graft in government ranks, the paper said.
In 2009, authorities investigated 103 cases involving the outbound travel of more than 300 officials, the paper said, citing a party official tasked with disciplinary issues.
Full article here"
Lawmaker presses NY Fed on AIG payment details
Lawmaker presses NY Fed on AIG payment details: "Lawmaker presses NY Fed on AIG payment details
David Lawder
Reuters
Monday , January 11th, 2010
A U.S. lawmaker said on Sunday he is seeking more information from the New York Federal Reserve Bank about its controversial emails on insurer AIG’s bailout, saying he was shocked that the disclosures were never brought to then-bank president Timothy Geithner’s attention.
U.S. Rep. Darrell Issa, the California Republican who last week distributed email exchanges over AIG’s decision not to disclose specific payments to banks in a December 24, 2008 Securities and Exchange Commission filing, released a letter from the New York Fed responding to the controversy.
In the letter, New York Fed general counsel Thomas Baxter said Geithner, now U.S. Treasury Secretary, had no involvement in the deliberations about the disclosures — consistent with statements he made last week.
“In my judgment, as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president,” Baxter wrote in the letter dated Friday. “Further, Mr. Geithner played no role in, and had no knowledge of, the disclosure deliberations and communications referenced in those emails,” Baxter wrote.
Full article here"
David Lawder
Reuters
Monday , January 11th, 2010
A U.S. lawmaker said on Sunday he is seeking more information from the New York Federal Reserve Bank about its controversial emails on insurer AIG’s bailout, saying he was shocked that the disclosures were never brought to then-bank president Timothy Geithner’s attention.
U.S. Rep. Darrell Issa, the California Republican who last week distributed email exchanges over AIG’s decision not to disclose specific payments to banks in a December 24, 2008 Securities and Exchange Commission filing, released a letter from the New York Fed responding to the controversy.
In the letter, New York Fed general counsel Thomas Baxter said Geithner, now U.S. Treasury Secretary, had no involvement in the deliberations about the disclosures — consistent with statements he made last week.
“In my judgment, as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president,” Baxter wrote in the letter dated Friday. “Further, Mr. Geithner played no role in, and had no knowledge of, the disclosure deliberations and communications referenced in those emails,” Baxter wrote.
Full article here"
America slides deeper into depression as Wall Street revels
America slides deeper into depression as Wall Street revels: "America slides deeper into depression as Wall Street revels
Ambrose Evans-Pritchard
London Telegraph
Monday , January 11th, 2010
December was the worst month for US unemployment since the Great Recession began.
The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.
Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.
The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.
Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath.
Full article here"
Ambrose Evans-Pritchard
London Telegraph
Monday , January 11th, 2010
December was the worst month for US unemployment since the Great Recession began.
The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.
Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.
The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.
Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath.
Full article here"
Ron Paul: Geithner Should Be Fired Over Bankergate
Ron Paul: Geithner Should Be Fired Over Bankergate: "Ron Paul: Geithner Should Be Fired Over Bankergate
Congressman says scandal proves need to strip Federal Reserve of its powers
Paul Joseph Watson
Prison Planet.com
Monday, January 11, 2010
Congressman Ron Paul has called for Treasury Secretary Timothy Geithner to be fired for his involvement in the AIG bailout scandal, adding that the fiasco proves the Fed should be stripped of its powers and audited.
Explosive emails released last week could see Treasury secretary Timothy Geithner become embroiled in criminal charges for his role in a cover up that exposes the monumental criminality behind the $182.3 billion bailout of American International Group Inc.
In November and December 2008, The Federal Reserve Bank of New York instructed the bailed out AIG to hide from the public details regarding payments the insurance giant made to banks, including Goldman Sachs Group Inc. and Societe Generale SA.
Using Fed secured taxpayer bailout money, AIG paid several banks 100 percent of the face value of credit-default swaps, as other financial institutions were negotiating deep discounts for the unregulated paper assets that do not have to be backed by cash.
Via his Texas Straight Talk phone update, Congressman Paul said today that Geithner had helped hide from taxpayers the fact that banks were compensated for “making some horrifically bad decisions”.
“These banks should have suffered the consequences of the huge risks they were taking,” said the Congressman. “After all, they kept plenty of rewards when times were good. Instead, the Fed found a way to socialize these major losses so these banks could survive and continue making more bad decisions, at the expense of the American people and the value of the dollar"
Congressman says scandal proves need to strip Federal Reserve of its powers
Paul Joseph Watson
Prison Planet.com
Monday, January 11, 2010
Congressman Ron Paul has called for Treasury Secretary Timothy Geithner to be fired for his involvement in the AIG bailout scandal, adding that the fiasco proves the Fed should be stripped of its powers and audited.
Explosive emails released last week could see Treasury secretary Timothy Geithner become embroiled in criminal charges for his role in a cover up that exposes the monumental criminality behind the $182.3 billion bailout of American International Group Inc.
In November and December 2008, The Federal Reserve Bank of New York instructed the bailed out AIG to hide from the public details regarding payments the insurance giant made to banks, including Goldman Sachs Group Inc. and Societe Generale SA.
Using Fed secured taxpayer bailout money, AIG paid several banks 100 percent of the face value of credit-default swaps, as other financial institutions were negotiating deep discounts for the unregulated paper assets that do not have to be backed by cash.
Via his Texas Straight Talk phone update, Congressman Paul said today that Geithner had helped hide from taxpayers the fact that banks were compensated for “making some horrifically bad decisions”.
“These banks should have suffered the consequences of the huge risks they were taking,” said the Congressman. “After all, they kept plenty of rewards when times were good. Instead, the Fed found a way to socialize these major losses so these banks could survive and continue making more bad decisions, at the expense of the American people and the value of the dollar"
Bankergate: Emails Expose Criminal Financial Dictatorship At Work
Bankergate: Emails Expose Criminal Financial Dictatorship At Work: "Bankergate: Emails Expose Criminal Financial Dictatorship At Work"
Tuesday, January 5, 2010
ESCAPE FROM POTTERSVILLE:
THE NORTH DAKOTA MODEL FOR CAPITALIZING COMMUNITY BANKS
Ellen Brown, January 3rd, 2010
http://www.webofdebt.com/articles/pottersville.php
Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota.
Arianna Huffington just posted an article on the Huffington Post that has sparked a remarkable wave of interest, evoking nearly 5,000 comments in less than a week. Called “Move Your Money,” the article maintains that we can get credit flowing again on Main Street by moving our money out of the Wall Street behemoths and into our local community banks. This solution has been suggested before, but Arianna added the very appealing draw of a video clip featuring Jimmy Stewart in It’s a Wonderful Life. In the holiday season, we are all hungry for a glimpse of that wonderful movie that used to be a mainstay of Christmas, showing daily throughout the holidays. The copyright holders have suddenly gotten very Scrooge-like and are allowing it to be shown only once a year on NBC. Whatever their motives, Wall Street no doubt approves of this restriction, since the movie continually reminded viewers of the potentially villainous nature of Big Banking.
Pulling our money out of Wall Street and putting it into our local community banks is an idea with definite popular appeal. Unfortunately, however, this move alone won't be sufficient to strengthen the small banks. Community banks lack capital – money that belongs to the bank -- and the deposits of customers don’t count as capital. Rather, they represent liabilities of the bank, since the money has to be available for the depositors on demand. Bank “capital” is the money paid in by investors plus accumulated retained earnings. It is the net worth of the bank, or assets minus liabilities. Lending ability is limited by a bank’s assets, not its deposits; and today, investors willing to build up the asset base of small community banks are scarce, due to the banks’ increasing propensity to go bankrupt.
It’s a Wonderful Life actually illustrated the weakness of local community banking without major capital backup. George Bailey’s bank was a savings and loan, which lent out the deposits of its customers. It “borrowed short and lent long,” meaning it took in short-term deposits and made long-term mortgage loans with them. When the customers panicked and all came for their deposits at once, the money was not to be had. George’s neighbors and family saved the day by raiding their cookie jars, but that miracle cannot be counted on outside Hollywood.
The savings and loan model collapsed completely in the 1980s. Since then, all banks have been allowed to create credit as needed just by writing it as loans on their books, a system called “fractional reserve” lending. Banks can do this up to a certain limit, which used to be capped by a “reserve requirement” of 10%. That meant the bank had to have on hand a sum equal to 10% of its deposits, either in its vault as cash or in the bank’s reserve account at its local Federal Reserve bank. But many exceptions were carved out of the rule, and the banks devised ways to get around it.
That was when the Bank for International Settlements stepped in and imposed “capital requirements.” The BIS is the “central bankers’ central bank” in Basel, Switzerland. In 1988, its Basel Committee on Banking Supervision published a set of minimal requirements for banks, called Basel I. No longer would “reserves” in the form of other people’s deposits be sufficient to cover loan losses. The Committee said that loans had to be classified according to risk, and that the banks had to maintain real capital – their own money – generally equal to 8% of these “risk-weighted” assets. Half of this had to be “Tier 1" capital, completely liquid assets in the form of equity owned by shareholders – funds paid in by investors plus retained earnings. The other half could include such things as unencumbered real estate and loans, but they still had to be the bank’s own assets, not the depositors’.
For a number of years, U.S. banks managed to get around this rule too. They did it by removing loans from their books, bundling them up as “securities,” and selling them off to investors. But when the "shadow lenders" – the investors buying the bundled loans – realized these securities were far more risky than alleged, they exited the market; and they aren’t expected to return any time soon. That means banks are now stuck with their loans; and if the loans go into default, as many are doing, the assets of the banks must be marked down. The banks can then become “zombie banks” (unable to make new loans) or can go bankrupt and have to close their doors.
The final blow to the easy credit provided by U.S. banks came with another stricture on capital, called Basel II. It manifested in the U.S. as the “mark-to-market” rule, which required a bank’s loan portfolio to be valued at what it could be sold for (the “market”), not its original book value. In today’s unfavorable market, that meant a huge drop in asset value for the banks, dramatically reducing their ability to generate new loans. When the announcement was made in November 2007 that this rule was going to be imposed on U.S. banks, credit dried up and the stock market plunged. The market did not begin to recover until 2009, when the rule was largely lifted. However, on December 17, 2009, the Basel Committee announced plans to impose even tighter capital requirements. The foreseeable result is the collapse of yet more community banks and the drying up of yet more credit on Main Street.
Anchoring Community Banks to State-owned Banks
Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota, one of only two states (along with Montana) expected to meet its budget in 2010. North Dakota was also the only state to actually gain jobs in 2009 while other states were losing them. Since 2000, North Dakota’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but in 2009 it had a budget surplus of $1.3 billion, the largest it ever had – not bad for a state of only 700,000 people.
North Dakota is the only state in the union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its populist organizers originally conceived of the bank as a credit union-like institution that would provide an alternative to predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND now chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve.
However, the BND differs from the Federal Reserve in significant ways. The stock of the branches of the Fed is 100% privately owned by banks. The BND is 100% owned by the state, and it is required to operate in the interest of the public. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.
Although the BND is operated in the public interest, it avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. One of the BND's functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state 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. The secondary market provided by the “shadow lenders” is provided in North Dakota by the BND, something other state banks could do for their community banks as well.
Other services the Bank provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program. When North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.
A New Vision for a New Decade
A state-owned bank has enormous advantages over smaller private institutions: states own huge amounts of capital (cash, investments, buildings, land, parks and other infrastructure), and they can think farther ahead than their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.
The BND is set up as a dba: "the State of North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. The BND's return on equity is about 25 percent. It pays a hefty dividend to the state, projected at over $60 million in 2009. In the last decade, the BND has turned back a third of a billion dollars to the state's general fund, offsetting taxes.
By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts funds from other depositors. These copious deposits can then be used to plow money back into the state in the form of loans.
Although the BND operates mainly as a “bankers’ bank,” other publicly-owned banks, including the Commonwealth Bank of Australia, have successfully engaged in direct commercial lending as well. This has proven to be a win-win for both the borrowers and the government. The public bank model also offers exciting possibilities for refinancing the state’s own debts and funding infrastructure nearly interest-free. For a fuller discussion, see “Cut Wall Street Out! How States Can Finance Their Own Recovery.”
For three centuries, the United States has thrived on what Benjamin Franklin called “ready money” and today we call “ready credit.” We can have that abundance again, by generating our own credit through our own state and local banks. Just as George Bailey needed a visit from an angel to point the way, so we just need the vision to see the possibilities.
Arianna’s vision for moving our money from the large banks into our local community banks is a very admirable first step. However, those community banks are not likely to have sufficient capital to free up credit for their local businesses and other customers without the partnership of state-owned banks, or the publicly-owned banks of counties and larger cities, which also have ample capital assets. A number of states, counties and cities are actively exploring this option. The BND model shows us how government-owned banks and community banks can work together to get money flowing back to Main Street again.
THE NORTH DAKOTA MODEL FOR CAPITALIZING COMMUNITY BANKS
Ellen Brown, January 3rd, 2010
http://www.webofdebt.com/articles/pottersville.php
Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota.
Arianna Huffington just posted an article on the Huffington Post that has sparked a remarkable wave of interest, evoking nearly 5,000 comments in less than a week. Called “Move Your Money,” the article maintains that we can get credit flowing again on Main Street by moving our money out of the Wall Street behemoths and into our local community banks. This solution has been suggested before, but Arianna added the very appealing draw of a video clip featuring Jimmy Stewart in It’s a Wonderful Life. In the holiday season, we are all hungry for a glimpse of that wonderful movie that used to be a mainstay of Christmas, showing daily throughout the holidays. The copyright holders have suddenly gotten very Scrooge-like and are allowing it to be shown only once a year on NBC. Whatever their motives, Wall Street no doubt approves of this restriction, since the movie continually reminded viewers of the potentially villainous nature of Big Banking.
Pulling our money out of Wall Street and putting it into our local community banks is an idea with definite popular appeal. Unfortunately, however, this move alone won't be sufficient to strengthen the small banks. Community banks lack capital – money that belongs to the bank -- and the deposits of customers don’t count as capital. Rather, they represent liabilities of the bank, since the money has to be available for the depositors on demand. Bank “capital” is the money paid in by investors plus accumulated retained earnings. It is the net worth of the bank, or assets minus liabilities. Lending ability is limited by a bank’s assets, not its deposits; and today, investors willing to build up the asset base of small community banks are scarce, due to the banks’ increasing propensity to go bankrupt.
It’s a Wonderful Life actually illustrated the weakness of local community banking without major capital backup. George Bailey’s bank was a savings and loan, which lent out the deposits of its customers. It “borrowed short and lent long,” meaning it took in short-term deposits and made long-term mortgage loans with them. When the customers panicked and all came for their deposits at once, the money was not to be had. George’s neighbors and family saved the day by raiding their cookie jars, but that miracle cannot be counted on outside Hollywood.
The savings and loan model collapsed completely in the 1980s. Since then, all banks have been allowed to create credit as needed just by writing it as loans on their books, a system called “fractional reserve” lending. Banks can do this up to a certain limit, which used to be capped by a “reserve requirement” of 10%. That meant the bank had to have on hand a sum equal to 10% of its deposits, either in its vault as cash or in the bank’s reserve account at its local Federal Reserve bank. But many exceptions were carved out of the rule, and the banks devised ways to get around it.
That was when the Bank for International Settlements stepped in and imposed “capital requirements.” The BIS is the “central bankers’ central bank” in Basel, Switzerland. In 1988, its Basel Committee on Banking Supervision published a set of minimal requirements for banks, called Basel I. No longer would “reserves” in the form of other people’s deposits be sufficient to cover loan losses. The Committee said that loans had to be classified according to risk, and that the banks had to maintain real capital – their own money – generally equal to 8% of these “risk-weighted” assets. Half of this had to be “Tier 1" capital, completely liquid assets in the form of equity owned by shareholders – funds paid in by investors plus retained earnings. The other half could include such things as unencumbered real estate and loans, but they still had to be the bank’s own assets, not the depositors’.
For a number of years, U.S. banks managed to get around this rule too. They did it by removing loans from their books, bundling them up as “securities,” and selling them off to investors. But when the "shadow lenders" – the investors buying the bundled loans – realized these securities were far more risky than alleged, they exited the market; and they aren’t expected to return any time soon. That means banks are now stuck with their loans; and if the loans go into default, as many are doing, the assets of the banks must be marked down. The banks can then become “zombie banks” (unable to make new loans) or can go bankrupt and have to close their doors.
The final blow to the easy credit provided by U.S. banks came with another stricture on capital, called Basel II. It manifested in the U.S. as the “mark-to-market” rule, which required a bank’s loan portfolio to be valued at what it could be sold for (the “market”), not its original book value. In today’s unfavorable market, that meant a huge drop in asset value for the banks, dramatically reducing their ability to generate new loans. When the announcement was made in November 2007 that this rule was going to be imposed on U.S. banks, credit dried up and the stock market plunged. The market did not begin to recover until 2009, when the rule was largely lifted. However, on December 17, 2009, the Basel Committee announced plans to impose even tighter capital requirements. The foreseeable result is the collapse of yet more community banks and the drying up of yet more credit on Main Street.
Anchoring Community Banks to State-owned Banks
Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota, one of only two states (along with Montana) expected to meet its budget in 2010. North Dakota was also the only state to actually gain jobs in 2009 while other states were losing them. Since 2000, North Dakota’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but in 2009 it had a budget surplus of $1.3 billion, the largest it ever had – not bad for a state of only 700,000 people.
North Dakota is the only state in the union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its populist organizers originally conceived of the bank as a credit union-like institution that would provide an alternative to predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND now chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve.
However, the BND differs from the Federal Reserve in significant ways. The stock of the branches of the Fed is 100% privately owned by banks. The BND is 100% owned by the state, and it is required to operate in the interest of the public. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.
Although the BND is operated in the public interest, it avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. One of the BND's functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state 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. The secondary market provided by the “shadow lenders” is provided in North Dakota by the BND, something other state banks could do for their community banks as well.
Other services the Bank provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program. When North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.
A New Vision for a New Decade
A state-owned bank has enormous advantages over smaller private institutions: states own huge amounts of capital (cash, investments, buildings, land, parks and other infrastructure), and they can think farther ahead than their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.
The BND is set up as a dba: "the State of North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. The BND's return on equity is about 25 percent. It pays a hefty dividend to the state, projected at over $60 million in 2009. In the last decade, the BND has turned back a third of a billion dollars to the state's general fund, offsetting taxes.
By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts funds from other depositors. These copious deposits can then be used to plow money back into the state in the form of loans.
Although the BND operates mainly as a “bankers’ bank,” other publicly-owned banks, including the Commonwealth Bank of Australia, have successfully engaged in direct commercial lending as well. This has proven to be a win-win for both the borrowers and the government. The public bank model also offers exciting possibilities for refinancing the state’s own debts and funding infrastructure nearly interest-free. For a fuller discussion, see “Cut Wall Street Out! How States Can Finance Their Own Recovery.”
For three centuries, the United States has thrived on what Benjamin Franklin called “ready money” and today we call “ready credit.” We can have that abundance again, by generating our own credit through our own state and local banks. Just as George Bailey needed a visit from an angel to point the way, so we just need the vision to see the possibilities.
Arianna’s vision for moving our money from the large banks into our local community banks is a very admirable first step. However, those community banks are not likely to have sufficient capital to free up credit for their local businesses and other customers without the partnership of state-owned banks, or the publicly-owned banks of counties and larger cities, which also have ample capital assets. A number of states, counties and cities are actively exploring this option. The BND model shows us how government-owned banks and community banks can work together to get money flowing back to Main Street again.
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