[R-G] [BillTottenWeblog] How California Could Turn its IOUs into Dollars

Thu Jul 30 06:18:55 MDT 2009

by Ellen Brown

webofdebt.com (July 22 2009)

California has over $17 billion on deposit in banks that have refused to
honor its IOUs, forcing legislators to accept crippling budget cuts. These
austerity measures are unnecessary. If the state were to deposit its money
in its own state-owned bank, it could have enough credit to solve its
budget crisis with funds to spare.

"We make money the old-fashioned way", said Art Rolnick, chief economist
of the Minneapolis Federal Reserve. "We print it". That works for the
federal government's central bank, but states are forbidden by the
Constitution to issue "bills of credit", a term that has been interpreted
to mean the state's own paper money. "Sacramento is not Washington", said
California Governor Arnold Schwarzenegger in May. "We cannot print our own
money". When legislators could not agree on how to solve the state's $26.3
billion budget deficit, the Governor therefore did the next best thing: he
began paying the bills with IOUs ("I Owe You's", or promises to pay
bearing interest).

The problem was that most banks declined to honor the IOUs, at least after
July 24. "They said something about not wanting to enable the
dysfunctional state legislature", observed a San Diego Union-Tribune {1}
staff writer, "which is kind of funny as the federal government has been
enabling the dysfunctional financial sector for almost a year".

On July 21, California legislators were strong-armed into a tentative
agreement {2} on budget cuts, a forced move that was called "painful" by
the Speaker of the Assembly and "devastating" by the executive director of
the California State Association of Counties. The cuts involve more job
losses, more bleeding of school funds, more closing of facilities. Worse,
they will not solve the budget crisis long-term. The state's economy is
expected to continue to deteriorate along with its revenues. But without
banks to honor the state's IOUs, California has no time to negotiate or
explore alternatives. There is no "quick fix" {3}, says UCLA Professor
Daniel Mitchell.

Or is there?

More Than One Way to Solve a Budget Crisis

Among the banks rejecting California's IOUs are six of particular
interest: Citibank, Union Bank, Bank of America, Wells Fargo, US Bank, and
Westamerica Bank. These banks are interesting because they are six of the
seven depository banks {4} in which the state of California currently
deposits its money. (The seventh is Bank of the West, which loyally said
it would accept the IOUs indefinitely.)

Banks operate under federal or state charters that grant them special
rights and privileges. Chartered banks are endowed with a gift that keeps
on giving: they can "leverage" the value of their deposits into anywhere
from ten to thirty times that sum in interest-bearing loans. This
"multiplier effect" is attested to by many authorities {5}, including
President Obama himself. He said in a speech at Georgetown University on
April 14:

"[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".

The website of the Federal Reserve Bank of Dallas {6} explains:

"Banks actually create money when they lend it. Here's how it works: Most
of a bank's loans are made to its own customers and are deposited in their
checking accounts. Because the loan becomes a new deposit, just like a
paycheck does, the bank ... holds a small percentage of that new amount in
reserve and again lends the remainder to someone else, repeating the
money-creation process many times."

Combine this with another interesting fact: according to the California
Treasurer's report {7}, as of May 2009 the state had aggregate deposits
and investments exceeding $55 billion. Of this sum, $1.1 billion was held
in demand deposit accounts (non-interest-bearing accounts allowing
unlimited deposits and withdrawals) and $16.5 billion was in NOW accounts
(interest-bearing accounts allowing unlimited deposits and withdrawals).
According to the Treasurer's office, the non-interest-bearing demand
deposits are held at the seven depository banks named earlier, while the
NOW accounts are held at Citibank and Union Bank. Applying a "multiplier
effect" of ten to the total sum on deposit at these seven banks ($17.6
billion), the banks collectively have the ability to make $176 billion in
loans. At five percent, $176 billion can generate $8.8 billion in interest
for the banks.

Rather than showing their gratitude by reciprocating, however, six of the
seven depository banks have refused to honor California's IOUs. Worse,
three of these six actually received federal bailout money from the
taxpayers, something that was supposedly done to keep credit flowing to
the states and their citizens. Citibank got $45 billion in bailout money
{8}, Wells Fargo got $25 billion, and Bank of America got $45 billion, not
to mention guarantees of $300 billion for Citibank and $118 billion for
Bank of America. When Governor Schwarzenegger asked for a loan guarantee
for a mere $6 billion {9} to bolster California's credit rating, on the
other hand, he was turned down. Californians compose one-eighth of the
nation's population.

When the state's appeal for aid was rejected by the banks, California
State Treasurer Bill Lockyer said he was "disappointed". He and other
state leaders should show their disappointment with their feet. California
could pull its deposits out of those depository banks refusing its IOUs
and put them instead in its own state-owned bank, following the lead of
North Dakota, which now has the only state-owned bank in the country. Set
up in 1919 to escape Wall Street predators, the Bank of North Dakota {10}
has been generating low-interest credit for the state and its residents
for nearly a century. North Dakota is one of only two states {11} (along
with Montana) currently able to meet their budgets.

A state-owned bank could be fast-tracked into operation in a matter of
weeks. With over $17 billion available to deposit in its own bank,
California could create $170 billion or more in credit - enough not only
to meet its budget shortfall but to fund many other much-needed projects;
and rather than feeding an ungrateful Wall Street, the bank's profits
would return to the state and its people.

Links:

1.
http://www3.signonsandiego.com/stories/2009/jul/11/1c11talkm191924/?uniontrib

2.
http://seekingalpha.com/article/150158-is-the-california-budget-crisis-really-over

3. http://www.bakersfieldnow.com/news/business/51363952.html

4. http://www.treasurer.ca.gov/pmia-laif/reports/52annualrpt.pdf

5. http://www.webofdebt.com/articles/newdeal.php

6. http://www.dallasfed.org/educate/everyday/ev9.html

7. http://www.treasurer.ca.gov/pmia-laif/reports.asp

8.
http://www.dailymarkets.com/stocks/2009/01/16/bank-of-america-gets-138-billion-bailout-as-merrill-takeover-backfires/

9. http://www.nytimes.com/2009/06/17/us/politics/17calif.html

10. http://www.webofdebt.com/articles/state_bank_option.php

11. http://www.cbpp.org/cms/?fa=view&id=711

_____

Ellen Hodgson Brown is an attorney and the author of eleven books,
including Web of Debt: the Shocking Truth About Our Money System and How
We Can Break Free (2007). She can be reached through her website at
www.webofdebt.com.

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

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