Emblem of an Era

Levittown
Where the story all began

By Mike Krauss
Bucks County Courier Times

Almost 300 years ago, my family was among the pioneers who settled the Pennsylvania wilderness near the present city of Reading. Sixty years ago, my generation moved into Levittown with the suburban pioneers — the modern American middle class.

Most living Americans think of the middle class as a fact of life: always been there, always will. But as Levittown hits 60, it is worth noting how short lived it has been.

Before the 1950s, the vast majority of Americans lived in crowded big cities or on farms, with a far smaller number in small-city mill and market towns, or grimy mining towns. The suburbs then were the leafy enclaves of the few and well-to-do: places like Scarsdale, N.Y., and the Philadelphia “Main Line.”

The Second World War, GI Bill and William Levitt changed all that.

The war pumped billions of dollars into the American economy for which there were few things to buy. Production went to the war. Money was saved.

The war literally blasted apart the productive capacity of all the major industrial nations of the world — except the U.S. After the world war and Korean War, U.S. manufacturers had a field day, selling to the war weary but cash rich American market and exporting globally.

Then the GI Bill sent veterans to college and gave them access to inexpensive credit to buy homes. Enter William Levitt.

Levitt and others like him changed the face of America, and during the 1950s the modern American suburbs and the middle class exploded in the most broadly shared prosperity the world has ever known.

Through the 50s, 60s and into the 70s that prosperity kept growing and expanding, until like some great battleship plowing through the ocean, the United States was the world super power drawing lesser nations in its wake.

A democratic tide was running and seemed to lift all boats — although not all equally.

“Restricted” and “exclusive” communities began to admit Jews, but blacks and other minorities lagged far behind. Women were routinely excluded from the ballot and the board room. Gays were closeted, often fearful and always careful.

The suburbs were prosperous but overwhelmingly white, and the exodus of whites from the cities left many urban centers to decay.

But the incompleteness of the egalitarian American promise realized in the suburbs cannot mask the scale of the advance for many millions of ordinary Americans.

The Levittown in which I grew up — the one in which this newspaper has circulated almost from the beginning — was very much the emblem of an era. Its various “sections” of relentlessly similar homes, with sections and streets named by some unknown marketer of genius to suggest a common pastoral life never in fact shared previously by most “Levittowners,” effectively homogenized the residents into a new, stronger and above all, hopeful whole.

That changed.

Beginning in the mid 1970s, “free trade” began to export the good paying jobs. Manufacturing began a slow decline, now almost to the point of collapse.

Unchecked immigration assured a supply of labor above demand. Wages stayed flat while costs of living climbed, despite the promise of inexpensive goods produced abroad.

Unions were systematically reduced, broken outright when possible and weakened by the declining membership brought about by the export of American manufacturing. Most union members now are public employees, who have lost public support as the economy worsens. It’s not hard to understand why.

When steelworkers went on strike there was considerable sympathy in the community. What the men in the mill wanted was a piece of corporate profit. Now, when teachers strike, what they want is a greater share of taxes from a public already struggling to make ends meet.

The reality and effects of low wages and high costs of living to support corporate profit were masked by the introduction of massive amounts of consumer credit. Families began to eat up the equity in their homes, just to stay even or “keep up with the Jones’” — whose swell and enviable lives were endlessly advertised in the media.

Debt service became an ever bigger line item in the family and national budgets, and the stress mounted. Divorce rates skyrocketed and drug use became widespread. And I don’t mean marijuana. That’s the least of our problems.

Adult Americans and their children now pop more legal pills to control their anxiety and behavior than an army of junkies.

The middle class is an anxious place these days. Levittown has not been spared.

Unemployment was a crisis in 2008. But it has lasted four years, no end in sight and is a catastrophe. Home foreclosures roll on. Levittown has been especially hard hit. Vital pubic services are battered; most especially the public schools.

Levittown and the middle class are clearly changed and changing. Meanwhile, Wall Street wallows in the former wealth of the middle class; war goes on without end, piling debt on their future; and the federal government has been completely over-run by Wall Street and the corporate elite.

If the American middle class is to survive and regain its prosperity, someone has to take a stand. As Levittown hits 60, it occurs to me: Why not here, where the story all began?

Clinton Spanks Obama

Wall Street Rules
By Mike Krauss
Bucks County Courier Times

The Declaration of Independence and U.S. Constitution are among the most important achievements of mankind. They established democratic and republican government in the modern world: a free people of equal and inalienable rights who confer power on their government.

It was never a sure thing that either would last.

Wise Ben Franklin knew it. After the Constitution was adopted and Franklin was asked what kind of government had been created, he replied, “A republic, if you can keep it.”

Lincoln knew it. He wondered in the Gettysburg Address if a nation “conceived in liberty and dedicated to the proposition that all men are created equal… can long endure.”

The great enemy of democratic and republican government is well established in human affairs. It is the concentration of wealth in the hands of the few, which creates a concentration of power that over time becomes ever more self serving, until those who monopolize wealth and power can break the law with impunity and ignore even the urgent needs of the people.

Understood in this way, the United States has ceased to be either a democracy or a republic, so great is the concentration of vast wealth in the hands of the few. Really, the number is even smaller than 1 percent.

The finance industry, dominated by a handful of big banks, now accounts for more than 60 percent of all domestic profit and rules the roost. When Wall Street says jump, presidents, Congress and candidates ask, “How high?”

But the big banks and major corporations – defense, security, energy, health care, pharmaceutical, agribusiness – rarely need to ask, at least not in public. An army of lobbyists, mountains of campaign cash and lucrative post-office rewards have made the elected “representatives” of the people fully attentive to the needs of the nation’s corporate elite – like well trained dogs.

“Sit! Lie down. Roll over. Good boy!” And you give the dog a treat.

The 2012 contest for president illustrates the undemocratic and unrepublican reality of the American government. The lessons are being taught by the huckster-in-chief, former president Bill Clinton.

Clinton was one of the “New Democrats” of the mid 1980s who stole the Democratic Party for Wall Street. Their getaway vehicle was the Democratic Leadership Council (DLC).

The DLC supported free trade, the mechanism for off shoring jobs, holding down wages and maximizing corporate profit, and supported creation of the too-big-to-fail banks.

And when the Mexican peso collapsed – another Wall Street special – then-President Clinton bailed out Mexico, so the big banks could be bailed out.

Near the end of his term, Clinton allied with the GOP to nullify the Glass-Steagall Act, which since the 1929 crash had separated the banks from their investment and speculation operations. This gave Wall Street access to the hard assets of the American people – savings, pensions, investments and mortgages – which they looted.

Later, when Bush II declared war on Iraq, Clinton and the DLC supported that.

War is always good for Wall Street.

When Obama was elected, Wall Street moved into the White House – and the Treasury, Department of Justice and dozens of important policy and regulatory offices, and the DLC closed up shop. Mission accomplished.

Bill figured to have Wall Street as an ally when Hillary ran for president, but she had too much baggage and Wall Street dumped her for Obama. Bill took it like a man, the way he took the book deals, foundation money, speaking fees, secretary of State for Hillary, and of course, another shot at the White House if she behaves herself – and Bill carries the water for Wall Street.

So when an Obama campaign ad criticized Mitt Romney’s Wall Street, deal-making days at Bain Capital, Clinton went public to spank the president: the stick. Then, just days later, Clinton chaperoned Obama to Manhattan for a series of fundraisers: the carrot.

Last week Clinton was again in the media to discipline the president, suggesting that any new taxes on the wealthy were really not a good idea, “at this time.”

Now I know and you know, I hope, that Obama’s call for slightly higher taxes on the rich is not going anywhere. The GOP would rather die. And perhaps Wall Street will oblige them to do so.

Still, to have Clinton again take a public position in opposition to the president is – instructive.

If John Kennedy, Lyndon Johnson or Dick Nixon had been crossed in that way – twice ! – both Clintons would be missing body parts. The president of the United States is the leader of his party and The Most Powerful Man in the World, right?

Wrong. He, like Clinton and Romney now executes the plays called in from the sidelines – or Executive Dining Room or Super Box, whatever – making only the slightest of attempts to address the needs of the great struggling majority of the American people.

The 2012 election for president is a sham. So are most “contests” for the Congress. The candidates have been pre-approved. Not Obama, Romney or the Congress will deviate from Wall Street’s playbook, and the consolidation of wealth and power in the hands of the few will continue in the once democratic republic of the United States.

Until the American people take their nation back. We need to start thinking hard about how to do that.

The state budget shell game

Pennsylvania broke, unless you count the $91 billion


By Mike Krauss
Bucks County Courier Times

For almost four years, the administration and Congress have showered money, protection and even praise on those who caused an economic catastrophe that still rolls across America like a slow motion tidal wave.

It is crystal clear who Washington represents, and what the American people can expect from the next administration and Congress -– more of the same, rhetoric and excuses.

But the needs of the American people can’t wait another four years. States and local governments must do the job Washington will not. New leaders and new ideas are urgently needed. One such idea is public banking.

A public bank, such as the hugely successful Bank of North Dakota (BND), is capitalized with public funds, has one shareholder — the people — no outrageous compensation for managers and no incentive to gamble.

A public bank partners with community banks, credit unions, other local financial institutions and municipal governments to provide the sustainable and affordable credit that is essential to support locally directed economic development, restore vital public services and create jobs.

Wall Street hates the idea, fearing the loss of trillions of dollars of state and municipal deposits, and the huge fees they reap for providing cash management, payroll and other services that states and municipalities could provide internally and at far lower cost -– if they owned their own bank.

The parasites-in-pinstripes argue, “But your state is broke. Where will you get the money to capitalize a bank?”

But are the states broke? An examination of the finances of U.S. states and municipalities turns up an astonishing fact. They keep two sets of books.

The one that gets all the attention is used for operating budgets, and generally paints a picture of state and municipal budgets stretched to the limit. But the other set of books, required by law and called the Consolidated Annual Financial Report (CAFR), indicates that there is public money stashed all over the place. Nationally, it amounts to trillions of dollars.

California, with its giant economy, reports more than $600 billion in these “off budget” funds. In Pennsylvania, the total is about $91 billion -- not exactly small change –- and it can be found in the state’s 2011 CAFR in three categories.

Proprietary Funds, generated when a government charges customers for the services it provides.

Fiduciary Funds, in which the state acts as a trustee to hold resources for the benefit of others, such as pensions; and

Component Units, which are legally separated organizations for which the government is financially accountable, and the revenue is derived from assessments, fines, penalties, licenses, etc.

If only 20 percent of these funds were used to capitalize a bank and were leveraged at a conservative ratio of 8-1, Pennsylvania could inject more than $145 billion into its economy, creating an economic revival on a scale never before seen.

Wall Street responds to this prospect with scare tactics. “You mean put 20 percent of your pensions at risk?”

To which proponents rightly respond, “No, we mean get those pension funds under better and more productive management.”

As the New York Times reported, the $26.3 billion Pennsylvania State Employees’ Retirement System (PSERS) has more than 46 percent of its assets in what analysts describe as “riskier” alternatives, including hundreds of private equity, venture capital and real estate funds. PSERS paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent.

“That is below the target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.

“By contrast, Georgia’s $14.4 billion municipal retirement system, which is prohibited by state law from investing in the alternative investments favored in Pennsylvania, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.”

Even adjusting for the size of the respective funds, Pennsylvania retirees paid out 13 times more in fees than Georgia, for a worse result.

The conservatively managed BND produced a 17 percent return on equity last year, while the PSRS reported in a press release that it had “achieved” a 2.7 percent return for 2011 -– not even meeting the previous and anemic 3.6 percent average return.

That’s like boasting about a C- report card.

A far more prudent and productive policy would be to rein in risk-taking fund managers, reduce their gigantic fees and shift at least 20 percent of investments from their riskier deals into the lower risk, higher return equity of a public bank.

A closer look at Pennsylvania’s 2011 CAFR turns up another interesting item. At page 99, there is a discussion of how these off-budget funds manage the risk of investments in 36 foreign currencies.

Foreign currencies? Thirty-six? The high-rolling fund managers are shifting billions of dollars out of the Pennsylvania economy, and into foreign economies and job creation, while Pennsylvanians go begging.

Even a modestly capitalized public bank can put billions of dollars of affordable credit to work in Pennsylvania, generate substantial non-tax revenue as a direct return on investment and increase local and state tax revenue in an improving economy.

A public bank has the capacity to turn a tidal wave of economic devastation into a wave of opportunity and prosperity. Pennsylvania needs to catch that wave.

Tune out the elections

The first step to a better future

By Mike Krauss
Bucks County Courier Times

It has begun to dawn on even the most ardent of President Obama’s supporters that there is a gap between what he said he would do as a candidate in 2008, and what he has done since his election.

“Gap” might not be the right word. It is a chasm in which you could lose a continent.

He promised to close Guantánamo Bay. It is still there, along with who knows how many secret “rendition centers” where U.S. laws against torture do not apply. Worse, his administration has produced a new rationale for indefinite detention without trial.

He promised to clean out the lobbyists, but they still own Washington.

Candidate Obama promised transparency and access by the media and public to the deliberations of his administration. Instead, his administration has prosecuted more people under the Espionage Act than all former administrations combined, for the crime of getting information to the American people.

Mr. Obama promised an end to war, but the U.S. is still bogged down in Afghanistan, is fighting undeclared wars in Pakistan and Yemen, conducting “operations” in Africa and Latin America and rattling swords against Syria, Iran and China.

The Nobel Peace Prize Mr. Obama won after weeks in office begins to look like the Norwegians’ idea of humor. The joke, of course, is on the U.S. taxpayer, and who knows how many dead civilians on three continents.

Candidate Obama promised health care, and delivered a give-away to the insurance and pharmaceutical companies –- and skyrocketing costs.

And of course, as candidate and president, Mr. Obama promised jobs –- repeatedly. But the layoffs continue, the reality masked by doctored statistics. It is a catastrophe. Unemployment is not only massive, it goes on and on. And the longer it goes on, the less likely it is that those unemployed will ever again find work.

Americans are becoming aware that young people can’t find work, and millions are saddled with student loans they will be paying off for decades. But what is not yet fully understood is that legions of adult Americans will never re-enter the work force. Older men have been especially hard hit.

With prolonged unemployment came the foreclosures. The “sub-prime” borrowers were wiped out in the early stages of the first wave. Now the middle class is being battered. Millions will not make it.

In one area, Mr. Obama has been good for his word. He said it was vitally important to bail out Wall Street. That he did; and surrounded himself with Wall Street advisers, including a Secretary of the Treasury who has protected his once and future colleagues at every turn, and an Attorney General who has turned a blind eye to the fraud that brought the American economy – and people – to their knees.

Two weeks ago JP Morgan and its CEO had to go public with a fantastic loss in the kind of out-of-control speculation that brought down the banks in 2008, proving that nothing has changed and the so-called reforms of Wall Street are a sham.

Incredibly, the president rushed to publicly defend the bank and its CEO.

Given all that –- and there is more –- you might think the president would not stand a snowball’s chance in hell of being re-elected. But my guess is he will be. How is that possible?

The short hand answer of political pundits is that the GOP is on a death march to defeat, doubling down on a shrinking constituency of the ever more marginalized party faithful, playing the “no more taxes for the wealthy,” abortion, marriage, and “Remember the 50s” cards to a nation that has urgent business and will never again be the 1950s.

But that analysis sidesteps what is actually going on.

There are no longer two political parties in the United States, each offering a constructive if differing view of how to secure the welfare, prosperity, security and liberty of the American people. Instead, there is one party, the party of corporate profit and the status quo, kept in power by the ability to spend vast sums of money no political party can hope to match, and able to so dominate elections as to set up a choice for president that can only be described as one between two sides of the same bent coin.

The same money owns Congress.

Where does that leave the American people? I would say, on their own. And that’s OK. There is enormous diversity, vitality and talent in America. And it is beginning to stir.

The first step to a better future is to show that we “get it”. Tune out the elections of 2012. They do not matter. The only possible result is more of the same. Go to the polls in November just long enough to vote for anybody for president but Mr. Obama and Mr. Romney. If there is no other candidate on your local ballot, write in your own name.

And then start looking around locally for the new ideas that can begin to rebuild the American democracy and what was the greatest and most broadly shared prosperity the word had even known.

It is the only way.

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. www.papublicbankproject.org Email: mike@mikekrausscomments.com

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. www.papublicbankproject.org Email mike@mikekrausscomments.com

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. www.papublicbankproject.org Email mike@mikekrausscomments.com