Friday, April 20, 2012

Will Americans get their "Irish" up?

Where democracy took a stand and the bankers and barons paid

By Mike Krauss
Bucks County Courier Times

It’s not much in the news in the U.S., because people might get the wrong idea about all the good things austerity can do for a nation, but Greece is falling apart and democracy is dying there.

Some will argue that democracy is not doing all that well in the U.S., but Greece points to how bad it can get. Shops are shuttered, beggars wander aimlessly, hospitals report rising and alarming rates of suicide and mental illness. The Orthodox Church in Athens reports a food emergency, children starving.

In order to protect the banks and bondholders from losses on the debt they piled on Greece — much of it artfully concealed in complicated transactions that misled investors and even European regulators — the Greek people no longer have a democratic government. Like Italy, and soon perhaps Spain, the “prime minister” was appointed by — well, that’s not clear.

The Financial Times describes it this way: “In exchange for the most recent financing, the Greek government has had to cede part of its sovereignty to the Troika (the European Union, European Central Bank and International Monetary Fund).

“The lobby of the elegant Hotel Grande Bretagne on Syntagma Square swarms with north European lawyers and bureaucrats and their assistants laden with files. It is they who now determine Greece’s future. Many come from the law firms that advise the giants of global finance and the EU, the very institutions that helped create the Greek debt crisis.”

But the appointed Greek prime minister has excellent credentials. Like his opposite number in Italy, as well as the president of the European Central Bank and at least a dozen high ranking European ministers, he came up through the ranks on the flagship of the Wall Street pirate fleet, Goldman Sachs.

And what has the new Greek management done? They have laid off enough workers to drive official unemployment to 21.5 percent, cut pensions by 25 percent and state salaries by 60 percent. Unemployment is even more catastrophic among the young, as it is throughout Europe as austerity works its magic — about 50 percent.

Have a nice future.

But not all was lost. As European newspapers have reported, while European governments, led by the Germans, were telling the Greeks their credit was shot unless they agreed to cannibalize their economy, they financed more than $1.2 billion in military hardware to Greece — German aircraft, a French submarine, etc — and are demanding that the contracts may not be canceled, but must be paid for out of the “rescue” package imposed on the Greek people.

On both sides of the Atlantic, the military contractors get a pass on austerity.

The Irish are next in the bankers’ sights, but they are proving less amenable to coercion and have scheduled a referendum; partly because having already bowed once to the bankers’ demands, their economy is in a rapid descent to ruin.

Ireland may be where democracy makes a stand in Europe.

But if it is, it won’t be the first. Ireland is thought of by many as the frontier of Western Europe, the last island past England on the way to the New World. But it isn’t. Far out in the North Atlantic, little Iceland has already fought the bankers — and won. And while this may be news to Americans, the Irish know the story.

The same Wall Street special that blew up Ireland, then Greece and now threatens Italy and Spain, even as it devastates families and communities across the U.S., hit Iceland first. But while the rest of Europe, led by the U.S. rushed to bail out the bankers, Iceland let its big banks go down and defaulted on its debt to the big English and Dutch banks.

Today, Iceland’s economy is actually recovering, and three weeks ago, after three years of preparation, Iceland’s equivalent of the Wall Street barons went on trial — after the former prime minister was put on trial.

Iceland’s new prime minister sees this as therapeutic, and said in a recent speech that “the wide-ranging criminal investigation that is being conducted against reckless financiers” will help bring about “a national reconciliation” and “heal the wounds that the collapse inflicted.”

An Icelandic businessman who lost his 20-year-old construction company in the collapse put it differently, saying, “What is important is that this is the year when the bankers hopefully are made to pay.”

No such day of reckoning appears on the horizon in the U.S. The GOP and Democratic candidates for president, and most candidates for Congress seem determined only to talk about the twin catastrophes of unemployment and foreclosures and a rising tide of human misery, and focus on “fiscal responsibility” and protecting the wealth of their major donors in the 1 percent. The U.S. Department of Justice gave the barons on Wall Street a pass.

Certainly, there is nothing in the U.S. news about the trial of the bankers in Iceland. I mean, we wouldn’t want to send the wrong message to the American people.

But who knows? If little Iceland can tell the bankers where to get off, and the Irish people say “No” to more punishment for the sins of the bankers, maybe Americans will finally get their “Irish” up.

Mike Krauss, formerly of Levittown, is an international logistics executive and chairman of the Pennsylvania Project. Email:

Thursday, April 5, 2012

Horse and Buggy Banking

Too-Big-To-Fail: The sequel

By Mike Krauss

The creation of the Federal Reserve in 1913 was a fateful end-run around democratic government. It gave control of the supply and cost of the nation’s money and credit to what is in fact a private banking cartel — Wall Street.

It was sold as a great reform — taking these vital matters out of the hands of those elected in the political process, and giving them to the experts.

“In experts we trust.”

But this set-up made it possible for a small number of people in the private banking industry to accumulate fantastic wealth and political power at the expense of the whole of the American people. That was, of course, the intent.

Now, as Americans survey the wreckage of the economy and deride Fed Chairman Ben Bernanke as the greatest failure in the history of modern economics, the experts don’t look so good.

So they have doubled down, arguing that the U.S. has a “horse and buggy” regulatory system for a 21st century financial system, and what we really need is a more centralized and interconnected regulatory system, run by the experts, to manage a centralized and interconnected banking system.

This puts the American people between a rock and a hard place.

When Wall Street wanted to change an accounting rule, so that the banks’ near-worthless mortgages could be booked at several times their value, or wanted to exclude liabilities from the balance sheets altogether in order to mislead investors, boost the stock price and insure the gigantic bonuses, they had to deal with an agency that reports to Congress.

But since Wall Street owns Congress, this was no big problem.

Similarly, Wall Street is now spending millions in lobbying and campaign contributions to protect its gigantic derivative business. The latest quarterly report from the Office of the Comptroller of the Currency reports that four banks hold $250 trillion in the gross notional amount of derivative contracts outstanding, a whopping 95.9 percent of all derivative exposure.

One shock, one failed gamble of the kind that brought down AIG and Lehman Brothers, and there won’t be enough money in the world to cover the losses — not that they won’t try.

This is “Too-Big-To-Fail,” the sequel.

Incredibly, these same banks want more risk and are buying Congress to get it. As the New York Times lamented in an editorial, one bill would exempt a host of derivatives transactions from almost all regulation. Another would water down pending rules to require that most derivatives be traded on open exchanges, where investors can at least see what is going on. A third would let the banks trade derivatives through foreign subsidiaries and away from the scrutiny of U.S. regulators, which the Times accurately called “a loophole that would virtually invite banks to engage in unregulated transactions on a potentially vast scale.”

So, there’s the rock. A bought Congress and unbridled risk taking on Wall Street, with the capacity to sooner or later deliver another shock to the American economy — this time possibly fatal.

Now here’s the hard place. Give the Fed more control.

The Dodd-Frank “reform” creates the Consumer Financial Protection Bureau (CFPB). This sprawling new bureaucracy will be as reported, “an independent unit located inside and funded by the United States Federal Reserve.”

Independent of what and who? Well, of the Congress and the American people.

The CFSB will be funded, managed and staffed by the Fed. It won’t need to ask the Congress for nothin’. And that is precisely what Congress and the American people will get from them in the way of information and accountability.

The CFSB will “write and enforce bank rules (and) conduct bank examinations.” The Fed owns the CFSB and Wall Street owns the Fed. Think the Wall Street banks will pass the test?

The idea that the “expert” regulators cannot also be bought is laughable. In its least crude form, the purchase price is called the “round trip ticket” — depart Wall Street to Washington from a $500,000 a year job, to a few years of “public service” as a regulator at maybe $175,000 a year, and return Washington to Wall Street for $5 million a year.

There is a way out of this trap. It is to bypass the American central banking system and its incestuous relationship between the regulated and the regulators — whether the politicians or the experts — and create a network of locally authorized, autonomous, democratically operated and locally accountable public banks at the state and municipal level, to partner as “mini-Feds” with local banks and financial institutions in the business of banking and not speculation.

The U.S. banking and economic crisis was not brought on by antiquated banking regulation. Its cause is antiquated banking — the same “horse and buggy,” centralized banking system of 1913, organized now as a century ago to insure Wall Street against the certain losses of reckless speculation, at whatever the cost to the American people.

And it fails to create the affordable credit which in modern societies is an absolute necessity for economic development and the creation of widespread wealth and prosperity.

Public banking can address both these needs and bring American banking into the 21st century

Mike Krauss is a director of the Public Banking Institute and chairman of the Pennsylvania Project. Email

Sunday, April 1, 2012

Public Banking and the Post Wall Street Era

Public banking: A new era in state and municipal finance

By Mike Krauss
Bucks County Courier Times

Like state and municipal financial officers across the nation, Ohio Treasurer Josh Mandel is charged with the stewardship of a lot of other people’s money, including more than $41 billion in pension funds of Ohio workers.

Two weeks ago he announced plans to remove Bank of New York Mellon and State Street Bank as custodians of those funds, and transfer that responsibility, and business, to JP Morgan and CitiBank.

In a written statement, Mr. Mandel cited allegations of fraud against the present custodians as the basis for his decision. But his alternative leaves a lot to be desired.

The new custodians, JP Morgan and Citibank, are at this moment themselves the target of numerous lawsuits and legal actions on the part of state attorneys general, the SEC, investors, other banks, municipalities and pension funds. Allegations include mismanagement, deception, conflict of interest and fraud. The damages sought range from many millions to many billions of dollars.

And JP Morgan is the Wall Street leader ($1.4 billion in 2011 revenue) in the market of the interest rate swaps that have blown up municipal finances across the United States.

As Ellen Brown, author of “Web of Debt” explains, “The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was not a flood, earthquake, or other insurable risk due to environmental unknowns or ‘acts of God.’ It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008 ... rewarding them for their misdeeds at the expense of the taxpayers.”

Brown concludes, “This ‘financial engineering’ is sold, not by disinterested third parties, but by the very sharks who stand to profit from their counter-parties’ loss. Fairness is thrown out in favor of gaming the system.”

From New England to California, municipal governments and authorities have lost billions. Reading, Pa., already reeling from collapsing revenue, a vanishing middle class and jobs sent off-shore, lost $21 million — more than a year’s worth of real-estate taxes.

With the switch from NY Mellon and State Street to JP Morgan and Citibank, the Ohio treasurer may have done no more than take Ohio retirees from the proverbial frying pan and into the fire. It is a dilemma faced by state and municipal financial officers across the U.S.

Where does a steward of public funds — charged to do more than simply stuff money in a mattress and stand guard — bank and invest those funds?

The alternative to the Wall Street casinos is now emerging among state legislators and state and municipal financial officers nationwide. It is to place those funds in publicly owned state and municipal banks, where risk-taking is controlled and 100 percent of the substantial income generated is retained by local communities.

One model is the very successful Bank of North Dakota, which is managed by salaried civil servants with banking experience. The managers charged with day-to-day operations and decision making have no incentives for risk taking — no super-sized salaries, no fabulous bonuses, no recurring commissions for a short-term focus on boosting profit for quarterly statements.

Treasury officers across the nation generally have similar criteria to judge where to bank the funds of which they have stewardship. Safety of principal is foremost, but there must be sufficient liquidity to insure all anticipated demands on the funds are met, and a reasonable return.

Wall Street fails on two out of three. The safety of public funds has taken a back seat to private profit, and the return is diminished by commissions and fees to Wall Street managers, who all are paid — it is fair to say — a lot more than any manager in a state treasury or municipal finance department.

In fact, a public bank can return many times more on principal than Wall Street could hope to match, because capital, assets and deposits of the public bank can be leveraged — as with any bank — to create credit directed into the community in partnership with community banks, credit unions, savings and loans and local authorities, to generate economic development, jobs and tax revenue.

This is the real “multiplier effect” that never materialized when Congress and the Federal Reserve funneled first hundreds of billions, and then trillions into rescuing Wall Street from its premeditated recklessness.

With respect to municipal bonds and “hedging” in the complicated world of modern finance and interest-rate fluctuation, a public bank could buy municipal bonds at the market rate (And taxpayers would pay the debt service to themselves); and if it were deemed prudent, hedge the interest rates on their own bonds — cutting out the Wall Street middleman who is now playing everybody, as even Wall Street insiders have now begun to attest.

Seventeen states and a growing number of municipalities are now taking a serious look at public banking: keeping their substantial assets close to home, invested locally and managed prudently.

The first national Public Banking In America Conference takes place in Philadelphia at the end of April. We encourage state and municipal treasury officials to join this discussion and take an active role in shaping the post-Wall Street era in state and municipal finance.

Mike Kraussis a director of the Public Banking Institute and chair of the Pennsylvania Project. Email