By Robert Wolf
Decorah, IA, USA
In 2005, the City of Chicago needs a desperate infusion of cash. Mayor Richard Daley arranges to lease the Chicago Skyway—a portion of Interstate 94 crossing the Calumet River—to a joint venture between two foreign corporations. For $1.8 billion the corporations will collect Skyway tolls for 99 years.
Three years later, in 2008, Chicago is in need of another cash infusion. In three days Mayor Daley rams through a parking meter lease agreement with Chicago's city council. For $1 billion an investment group led by Morgan Stanley will collect tolls for 75 years. An independent consultant later says the city undersold the lease by $1 billion.
Because street repairs cause some streets to be blocked off, the Morgan Stanley group loses revenue and successfully sues Chicago for $62 million.
How are other cities doing?
In 2013, Crain's reported that the Citizens Budget Committee declared New York City's debt to be $110 billion, double the amount from 2002.
This February, a Federal court approved Stockton, California's bankruptcy plan.
In 2012, San Bernardino another California city filed for bankruptcy.
In 2013, Detroit filed Chapter 13 in the largest municipal bankruptcy case in U.S. history.
And that is just a small list of cities in crisis.
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Most of this public debt is owed either to individual banks or to banking syndicates. When a municipal bond offer is considered risky or too large, banks will group together in a syndicate to share the payout or the risk. Chicago's bonds, which Moody's has rated at junk, have now forced the city to borrow at close to eight percent interest. Richard Daley's successor, Rahm Emmanuel, proposed a recently approved plan to borrow another $1.1 billion.
When city services are continuously cut and, in Chicago's case, property taxes are not raised, how much longer can the shell game continue until a city, Chicago perhaps, resembles Detroit or Camden?
Consider what the difference would be for Chicago and other debt-ridden American cities if, instead of borrowing from the megabanks or investment firms, the same cities had their own publicly-owned banks. These banks would issue loans at moderate rates to the city which would use them for public works projects or social services or any other project that would expand the city's economy. The interest would be returned to the bank for future investment in civic works. Instead, the usurious interest rates charged by Wall Street banks and investment firms go into the same private hands that set off the Great Recession in 2008, and continue to strip cities of money and impoverishes millions, causing cutbacks in needed services including education and health care.
The malfeasance of the too-big-to-fail banks continues to generate public outrage, such as expressed by journalist and author Chris Hedges. In the online progressive journal, Common Dreams, Hedges wrote, "Speculators at megabanks or investment firms such as Goldman Sachs are not, in a strict sense, capitalists. They do not make money from the means of production."
This point was made years earlier by John Ransom Saul in his book, Voltaire's Bastards, published in 1992. In one chapter, "The Hijacking of Capitalism," Saul wrote that of the corporate leaders calling themselves capitalists, "very few of them are capitalists. Instead, there are bevies of corporate managers, financial managers, financial speculators, and service providers . . . they are horrified by the personal commitment and personal risk that is central to capitalism. They are, in effect, prophets and defenders of a system they reject."
He calls such a person "an employee in drag. He is chairman, president, chief executive officer, chief operating officer—he is anything he wants to call himself, but he doesn't own the place."
And ownership and use of the means of production are what makes a capitalist. But the employee in drag cares for one thing only: profit. That is his obsession; that defines his soul.
Hedges goes on to write, "they . . . steal from everyone, including their shareholders. They are parasites. They feed off the carcass of industrial capitalism. They produce nothing. They make nothing. They just manipulate money. Speculation in the 17th century was a crime. Speculators were hanged."
Of course none of our corporate felons were hanged. Only one scapegoat did any time in jail. The rest are still feeding off governments and citizens worldwide.
When the too-big-to-fail banks form syndicates to loan to states or cities, they reduce their own risk, but they exhaust municipal and state treasuries and send the borrowers into crippling debt. But this fact, sufficient in itself to have us question the current banking system, is augmented by the fact that the megabanks not only engage in highly speculative and therefore destabilizing practices, many of the largest have been convicted of felonies.
This year Citicorp, JPMorgan Chase, Barclays, and The Royal Bank of Scotland pled guilty to felony charges, which included rigging the market price of dollars and interest rates on the euro. "Citicorp, JPMorgan Chase, Barclays, [and] The Royal Bank of Scotland," the Chicago Tribune wrote, "will pay fines totaling $2.5 billion to the Justice Department. In addition, the Federal Reserve is imposing fines of more than $1.6 billion on the five banks."
Citicorp, for example, will pay fines totaling $1.26 billion and JPMorgan will pay $892 million. To any of us, a fine of even a fraction of these amounts would be permanently crippling. Aren't fines of this magnitude crippling the megabanks?
No. In the first place, our government considers these banks too-big-to-fail, so the Department of Justice would not want to cripple them. These fines probably don't affect them any more than if one of us lost a twenty or fifty dollar bill. After all, banks create money out of thin air. Every time a bank issues credit—makes a loan—it is creating money. Consequently, the megabanks, which make money through loans, swaps and other derivatives, gross enormous revenues. In just the fourth quarter of 2014, for example, Citigroup's revenues were $17.8 billion.
So there's not a tremendous incentive for the megabanks to develop a conscience and work on anyone's behalf besides their own.
Since speculation is just as rampant now as it was before 2008, we have no assurance that the biggest six U.S.-based banks will not fail once again. The banks themselves indirectly acknowledge the possibility as illustrated when JPMorgan Chase lobbyists wrote the so-called "CRomnibus" bill passed by Congress in late 2013 that mandates, in the event of another crash, that the banks will be at the front of the reimbursement line.
The conclusion that numerous critics of the current banking system make is that we need to decentralize economic power by establishing state, city, and county public banks. The current interest in publicly-owned banks was initiated by The Public Banking Institute, founded by lawyer and activist Ellen Brown, author of The Web of Debt and The Public Bank Solution.
In her talks, Brown frequently refers to the example of the State Bank of North Dakota, established in 1919 in response to Populist pressure to shore up North Dakota farmers. The bank's account of its history says, "Grain dealers outside the state suppressed grain prices; farm suppliers increased their prices; and interest rates on farm loans climbed." But commercial banks refused to buy the bank's bonds that would finance the bank's lending, consequently its proposed scope was narrowed and now the bank makes limited commercial loans, and these are in conjunction with commercial banks.
North Dakota Bank president, Eric Hardmeyer, told Mother Jones that in addition to granting commercial and student loans, and acting as a clearinghouse for other North Dakota banks, "We also provide a dividend back to the state. Probably this year we'll make somewhere north of $60 million, and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we've turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs."
This is the great appeal that North Dakota Bank has for progressives. A group of Vermont legislators introduced a bill to create a state bank, but the Vermont Bankers Association lobbied against it, and instead of a bank, a compromise was reached. Ten percent of the state's revenue is set aside for state projects and commercial loans.
Seeing the opposition that Vermont and North Dakota faced, public banking advocates elsewhere are aiming for a more modest goal: the creation of city banks. Santa Fe, one of those cities, has a working group, We Are People Here!. Its founder and leader is Craig Barnes. The group grew out of a series of lectures and discussions led by Barnes in 2011 titled, "Democracy at the Crossroads and the Evolution of Civilization." On his organization's website, Barnes writes, "Initially, we actively supported the initiative of New Mexico State Representative, Brian Egolf, to establish a New Mexico State Bank, similar to the 95-year-old, and very successful, Bank of North Dakota. These efforts were thwarted by the strong banking lobby. From this experience we understood that we could only be effective by starting at the county or municipal government level."
Santa Fe's mayor supports the locally popular idea, and the city recently conducted a study on the feasibility of a pubic bank.
The word is spreading, and initiatives are underway in major cities, including San Francisco, to establish city-owned banks that would put public needs ahead of private greed.
But what are the chances of public banks raising the capitalization needed to issue loans? A state, county, or city whose treasury is in the black would be able to issue credit in proportion to its own reserves, a cash-to-reserve ratio mandated by the Federal Reserve. Those states, counties, and cities have the wherewithal to establish a public bank.
But what chance would a city like Chicago that is teetering on the edge, or Detroit, which has filed bankruptcy, have? A public bank by definition does not have investors, and what cash reserves does Detroit or Chicago have?
If the public banking concept catches on, we can expect dramas to unfold in the future across the country as public banking advocates and bankers' associations negotiate, or lock horns. The debt clock is ticking.