Topic: Federal Reserve
Could Fed Style Banking Save California? As was mentioned in this column last week, given the defeat of tax hike propositions in California, the state is in a real quandary to find $24 billion dollars by July to close its budget gap.by Kenn Jacobine
(libertarian)
Saturday, May 30, 2009
Without those funds or new debt guaranteed by the federal government, California will face insolvency by mid-summer. Unlike Washington, Sacramento cannot just print money out of thin air to put off paying its bills indefinitely. Even that technique of monetary policy is about to catch up with the entire country soon when people begin spending and prices hit the roof. No, it seems the only way for the Gold Plated State to settle its fiscal woes is to cut payrolls and services.
Not so fast you doomsayers, Ellen Brown, author of Web of Debt, and blogger on the leftist Huffington Post believes she has come up with a scheme to keep the socialistic gravy train in the state rolling without interruption. She admits California cannot print its own money, but it can open a state owned bank that can create money through credit entries on its books. To explain how it would work she quotes the webpage for the Federal Reserve Bank of Dallas: "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."Pretty neat huh, new money is created by a simple accounting entry and then loaned out again. Because it owns the bank, the state could afford itself a sweetheart deal by giving itself rates below market value and then roll those loans over as needed until revenues had been generated to pay them off. Brown credits the state owned bank in North Dakota for that state being one of only 3 currently that are solvent. She also believes North Dakota's GNP and personal income growth is directly related to the bank's operation. One can have their cake and eat it too in the Peace Garden State.
Now, on the surface, Brown's assertion that the difference between North Dakota's solvency and the 47 states that are insolvent in this economic crisis is the state owned bank seems legitimate. However, upon closer inspection this is proven inaccurate. First of all, North Dakota is the 3rd least populous state in the union. It doesn't even have a million people. There is little crime, hardly any costs associated with illegal immigration, and much less of a need for social programs. It is after all a conservative Midwestern farming state.
Indeed, it is probably because of the state's two biggest industries, agriculture and petroleum, that North Dakota is doing so well. These industries have done very well in recent years and would account for the huge growth in the state's GNP and personal income. Incidentally, the exclusion of food and energy costs from the consumer price index has contributed to moderating the national inflation rate at a time when both commodities' costs have been relatively high. As far as the solvency of the state is concerned, North Dakota is not a low tax state and given the prosperity of the two aforementioned industries it's no wonder the state's coffers are overflowing.
Secondly, what Brown is suggesting is responsible for North Dakota's prosperity is really just fractional reserve banking albeit through a state run bank instead of the private system. Fractional reserve banking is nothing new and in fact is what the Federal Reserve System is based on (hence the quote from the Dallas Fed). It is a monetary scheme whereby banks keep only a portion of all its deposits (currently approximately 10 percent) in reserve and loan out the remainder while at the same time maintaining their obligation to pay on demand all deposits to savers. There are two problems with fractional reserve banking: Loss of liquidity and inflation. The Fed maintains what is called a discount window for banks to use to borrow short term from the Fed when their liquidity is insufficient. Fed chairman Ben Bernanke has been asked several times by Congress to divulge the names of banks that utilize the discount window. He refuses on the grounds that the information would unnecessarily cause a lack of confidence in those banks and put them at risk of real insolvency. However, it is more likely that the number of banks utilizing the discount window is immense primarily because of fractional reserve banking and to make that information public would destroy all confidence of Americans in the banking system. Think about it, when a bank writes down a bad loan it is also writing down a deposit it must eventually make good on. How many banks have written down bad loans in the current crisis?
But fractional reserve is a funny money scheme for another reason. It is a hidden tax because it leads to general price inflation. It probably is more responsible for the increase in money supply than low interest rates. As banks create new money through creating credit out of thin air the value of every dollar is decreased. It then takes more dollars to purchase the same goods if the supply of those goods has not increased. More research would be needed, but the Bank of North Dakota's inflationary policies are probably being offset by the high market prices of their two main industries – food and petroleum. In any event, besides Alan Greenspan's artificially low interest rates of the early 2000s, fractional reserve banking also contributed to the housing bubble and will be a contributing factor to the inflation the U.S. will face in the future.
Statists are good at devising schemes to prolong their wasteful policies. Ellen Brown's funny money scheme is just the latest. It won't work for California because it hasn't worked for America. A bailout of the state should be out of the question. The voters have spoken and they have said no new taxes! The only thing left for the benevolent politicians in Sacramento to do is to free thousands of non-violent drug offenders, lay off thousands of state workers, and end welfare as they know it. Maybe then California can be known again as the Golden State.
Kenn Jacobine teaches internationally and maintains a summer residence in Haywood County, North Carolina. Visit his blog site online at: The View from Abroad.
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Posted By: Walt Thiessen
Date: 2009-05-30 03:51:52
To make your point in different words, Ellen Brown does not realize that manipulations of the money supply as she describes it undermine the value of money and therefore harms us all, particularly the poorest among us. Since the Fed's creation in 1913, the value of the dollar has fallen to less than 5 cents in 1913 dollars because of the Fed's manipulation of the money supply. This is the price paid for using fractional reserve banking to create new money for the government to spend.
The hidden tax you refer to happened because the value of the dollar is now less than 1/20th what it used to be worth in 1913. It means that it takes more than 20 times as many dollars to buy something now than it used to take in 1913.
The importance of this point eludes many people. To understand why it's important, we must return to basics.
What is prosperity? Prosperity is where the cost of goods and services over time decreases in relation to the unit of money. In other words, prosperity is where your money goes farther than it did before. Thus, the prices of things they buy decrease over time compared to the money they earned.
Thus, when you earn a dollar and save, say, 20 cents of it, over time that 20 cents can buy more and more in terms of goods and services. This is how a free market (which we currently do not have) spreads prosperity to all, even the poorest among us.
The opposite of prosperity is poverty.
What is poverty? Poverty is where the cost of goods and services over time increases in relation to the unit of money. In other words, poverty is where your money doesn't go as far as it used to. Looked at this way, it's easy to see why people end up impoverished. They can never earn enough to improve their living condition, because the prices of things they buy keep going up compared to their incomes.
Sorry, but i think when discussing the finance, it is incredibly difficult to have a really good sense of scale.
I would suggest the arguments used thus far here against Brown sound amazingly poorly researched.
And rather pseudo economic....A real mish mash of quite insubstantial arguments from a bag of plenty.
"What is poverty? Poverty is where the cost of goods and services over time increases in relation to the unit of money. In other words, poverty is where your money doesn't go as far as it used to. Looked at this way, it's easy to see why people end up impoverished. They can never earn enough to improve their living condition, because the prices of things they buy keep going up compared to their incomes".
I find it difficult to believe this is being used as some sort of effective reasoning....it seems very silly and belongs somewhere else.
Walt, i hardly think Brown is not aware....what an insubstantial thing to say.
"To make your point in different words, Ellen Brown does not realize that manipulations of the money supply as she describes it undermine the value of money and therefore harms us all, particularly the poorest among us".
A waste of time arguing or reasoning with this sort of drivel..good grief!!
RBC Bank President Gordon Nixon - Salary $11.73 Million
$100,000 - MISTAKE (FISHERMEN'S LOAN)
I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC Bank account.
There was no monthly interest payment date or amount of interest payable per month on my loan agreement. Date of first installment payment (Principal + interest) is approximately 1 year from the signing of my contract. Demand loan agreements signed by other fishermen around the same time disclosed monthly interest payment dates and interest amounts payable per month.The lending policy for fishermen did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC. Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.
Phone or e-mail: RBC President, Gordon Nixon, Toronto (416)974-6415 RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821 RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mail to:greg.grice@rbc.com RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600 RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mail to:brian.conway@rbc.com RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mail to:tammy.holland@rbc.com RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mail to:beja.rodeck@rbc.com RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mail to:ombudsman@rbc.com Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519 mail to:ombudsman@obsi.ca
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