[R-G] [BillTottenWeblog] From Sunshine State to Subprime State?

Wed Jul 15 03:14:53 MDT 2009

The Sun Could Shine Again on California

by Ellen Brown

webofdebt.com (July 13 2009)

Four Wall Street banks, which received $15 to 25 billion each from the
taxpayers, have rejected California's IOUs because the State is supposedly
a bad credit risk. The bailed out banks would seem to have a duty to lend
a helping hand, but they say they don't want to delay an agreement on
further austerity measures. State legislators are not bowing quickly to
the pressure, but what is the alternative?

In the latest twist to the California budget saga, Citigroup, Wells Fargo,
and JPMorgan Chase (which each got $25 billion in bailout money from the
taxpayers) and Bank of America (which got $15 billion) have refused
California's request for a loan to tide it over until October. Until the
State can get things sorted out, it has started paying its creditors in
IOUs ("I Owe You's" or promises to pay bearing interest, technically
called registered warrants). Its Wall Street creditors, however, have
refused to take them. Why? The pot says the kettle is a poor credit risk!

California expects to need to issue only about $13 billion in IOUs through
September, and all its Governor has asked for in the way of a loan from
the federal government is a guarantee for $6 billion. Total loans,
commitments and guarantees to rescue the financial sector and stem the
credit crisis have been estimated at $12.8 trillion {1}. But California
has not been invited to the banquet. The total sum California needs to
balance its budget is $26.3 billion. That is about the same sum given to
Citigroup, Wells Fargo and JPMorgan in bailout money; and it is only about
one-tenth the sum given to AIG, a mere insurance company. Corporations
evidently trump States and their citizens in the eyes of the powers
controlling the purse strings. California has a gross domestic product of
$1.7 trillion annually and has been rated the world's eighth largest
economy. Its 38.3 million people are one-eighth of the nation's population
and a key catalyst for US retail sales. When the California consumer base
falters, businesses are shaken nationwide. If AIG and the other Wall
Street welfare recipients are too big to fail, California is way too big
to fail.

Fitch Rating Agency has downgraded California's municipal bonds to junk
bond status, triple B. Why? AIG and Lehman Brothers had A ratings right up
until they declared bankruptcy. California has never defaulted on its
bonds, and it cannot arbitrarily decide to default; the State Constitution
mandates that debt principal and interest must be paid as promised.
California bonds lost their triple A rating only when the municipal bond
insurers (Ambac and MBIA) lost theirs. It was these insurers, not the
State of California, that got into hot water gambling in derivatives. The
State Attorney General has opined that California's IOUs are valid and
binding obligations of the State. In rejecting them, however, Wall Street
may have ulterior motives. A lower credit rating can justify investors in
demanding higher interest rates. The interest offered on the IOUs is
substantially lower than the interest banks can get on triple B rated
municipal bonds.

There may be deeper motives than that. Considering the enormous importance
of the California economy to the country, and the relatively small sum it
needs in loans, the refusal to support the State financially seems highly
suspicious, especially when much more has been given to less creditworthy
private institutions. The banks say they want to keep the pressure on
California legislators to work it out among themselves, but what does that
mean? The options are even higher taxes, even more cuts in services, or
even more fire sales of public assets; in short, the sort of austerity
measures expected of supplicants reduced to Third World debtor status.
State legislators are understandably reluctant to crawl into that debt
pit. Governor Schwarzenegger has refused to approve higher taxes, while
Democratic leaders say further cuts in services could leave some
Californians starving in the streets.

The Sun Could Shine Again on the Sunshine State

There is an alternative to that dark future, and perhaps it is to keep the
public from waking up to it that arms are being twisted to accept the new
burdens quickly. If Wall Street and the Feds won't extend credit to
California on reasonable terms, the State could simply walk away and
create its own credit machine. California could put its revenues in its
own state-owned bank and fan these "reserves" into many times their face
value in loans, using the same "fractional reserve" system that private
banks use. Many authorities {2} have attested that banks simply create the
money they lend on their books. Congressman Jerry Voorhis, writing in
1973, explained it like this:

"[F]or every $1 or $1.50 which people, or the government, deposit in a
bank, the banking system can create out of thin air and by the stroke of a
pen some $10 of checkbook money or demand deposits. It can lend all that
$10 into circulation at interest just so long as it has the $1 or a little
more in reserve to back it up."

President Obama himself has acknowledged this "multiplier effect". In a
speech at Georgetown University on April 14 2009, he said:

"[A]lthough there are a lot of Americans who understandably think that
government money would be better spent going directly to families and
businesses instead of banks - where's our bailout?, they ask - the truth
is that a dollar of capital in a bank can actually result in eight or ten
dollars of loans to families and businesses, a multiplier effect that can
ultimately lead to a faster pace of economic growth".

If private banks can leverage deposits into multiple amounts of "credit"
on their books, a state-owned bank could do the same thing, and return the
profits to the public purse. One State already does this. North Dakota
boasts the only state-owned bank in the nation. It is also one of only two
states (along with Montana) that are currently able to meet their budgets
{3}. The Bank of North Dakota {4} was established by the legislature in
1919 to free farmers and small businessmen from the clutches of
out-of-state bankers and railroad men. By law, the State must deposit all
its funds in the bank, and the State guarantees its deposits. The bank's
surplus profits are returned to the State's coffers. The bank operates as
a bankers' bank, partnering with private banks to lend money to farmers,
real estate developers, schools and small businesses. It makes one percent
loans to startup farms, has a thriving student loan business, and
purchases municipal bonds from public institutions.

North Dakota is not suffering from unemployment or feeling the pinch of
the economic downturn. Rather, it sports the largest surplus it has ever
had. If this isolated farming State can escape Wall Street's credit
crisis, the world's eighth largest economy can do it too!

To sign a petition that will go electronically to Governor Schwarzenegger
and to elected officials in your State, click here:
http://www.change.org/actions/view/help_the_terminator_save_california

You could also try faxing this article or a letter to Governor
Schwarzenegger at 916-558-3160. See http://gov.ca.gov/interact#contact.

Links:

{1} http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4

{2} http://www.webofdebt.com/articles/newdeal.php

{3} http://www.cbpp.org/cms/?fa=view&id=711

{4} http://www.webofdebt.com/articles/state_bank_option.php

_____

Ellen Brown developed her research skills as an attorney practicing civil
litigation in Los Angeles. In Web of Debt (2007), her latest book, she
turns those skills to an analysis of the Federal Reserve and "the money
trust". She shows how this private cartel has usurped the power to create
money from the people themselves, and how we the people can get it back.
Her earlier books focused on the pharmaceutical cartel that gets its power
from "the money trust." Her eleven books include Forbidden Medicine
(1998), Nature's Pharmacy (1998), co-authored with Dr Lynne Walker, and
The Key to Ultimate Health (2000), co-authored with Dr Richard Hansen. Her
websites are www.webofdebt.com and www.ellenbrown.com.

http://www.webofdebt.com/articles/sunshine_state.php

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