Public Forum

When the Occupiers took an interest in moving San Francisco’s money into a city-owned bank in 2011, it was chiefly on principle, in sympathy with the nationwide Move Your Money campaign. But recent scandals have transformed the move from a political statement into a matter of protecting the city’s deposits and reducing its debt burden. The chief roadblock to forming a municipal bank has been the concern that it was not allowed under state law, but a legal opinion issued by Deputy City Attorney Thomas J. Owen has now overcome that obstacle. Establishing a city-owned San Francisco Bank is not a new idea. According to City Supervisor John Avalos, speaking at the Public Banking Institute conference in San Rafael in June, it has been on the table for over a decade. Recent interest was spurred by the Occupy movement, which adopted the proposal after Avalos presented it to an enthusiastic group of over 1000 protesters outside the Bank of America building in late 2011. David Weidner, writing in the Wall Street Journal in December of that year, called it “the boldest institutional stroke yet against banks targeted by the Occupy movement.” But Weidner conceded that:

Creating a municipal bank won’t be easy. California law forbids using taxpayer money to make private loans. That would have to be changed. Critics also argue that San Francisco could be putting taxpayer money at risk.

The law in question was California Government Code Section 23007, which prohibits a county from “giv[ing] or loan[ing] its credit to or in aid of any person or corporation.” The section has been interpreted as barring cities and counties from establishing municipal banks. But Deputy City Attorney Thomas J. Owen has now put that issue to rest in a written memorandum dated June 21, 2013, in which he states:

1. A court would likely conclude that Section 23007 does not cover San Francisco because the City is a chartered city and county. Similarly, a court would likely conclude that Article XVI, section 6 of the State Constitution, which limits the power of the State Legislature to give or lend the credit of cities or counties, does not apply to the City. . . . [A] court would likely then determine that neither those laws nor the general limitations on expending City funds for a municipal purpose bar the City from establishing a municipal bank.

2. A court would likely conclude that the City may own stock in a municipal bank and spend City money to support the bank’s operation, if the City appropriated funds for that purpose and the operation of the bank served a legitimate municipal purpose.

A number of other California cities that have explored forming their own banks are also affected by this opinion. As of June 2008, 112 of California’s 478 cities are charter cities, including not only San Francisco but Los Angeles, Richmond, Oakland and Berkeley. A charter city is one governed by its own charter document rather than by local, state or national laws.

Which Is Riskier, a Public Bank or a Wall Street Bank?

That leaves the question whether a publicly-owned bank would put taxpayer money at risk. The Bank of North Dakota, the nation’s only state-owned bank, has posed no risk to depositors or the state’s taxpayers in nearly a century of successful operation. Further, in this latest recession it has helped the state achieve a nationwide low in unemployment (3.2%) and the only budget surplus in the country. Meanwhile, the recent wave of bank scandals has shifted the focus to whether local governments can afford to risk keeping their funds in Wall Street banks.

In making investment decisions, cities are required by state law to prioritize security, liquidity and yield, in that order. The city of San Francisco moves between $10 billion and $12 billion through 133 bank accounts in roughly 5 million transactions every year; and its deposits are held chiefly at three banks, Bank of America, Wells Fargo and Union Bank. The city pays $2.7 million for banking services, nearly two-thirds of which consist of transaction fees that smaller banks and credit unions would not impose. But the city cannot use those smaller banks as depositories because the banks cannot afford the collateral necessary to protect deposits above $250,000, the FDIC insurance limit.

San Francisco and other cities and counties are losing more than just transaction fees to Wall Street. Weidner pointed to the $100 billion that the California pension funds lost as a result of Wall Street malfeasance in 2008; the foreclosures that have wrought havoc on communities and tax revenues; and the liar loans that have negatively impacted not only real estate values but the economy, employment and local and state budgets. Added to that, we now have the LIBOR and municipal debt auction riggings and the Cypress bail-in threat.

On July 23, 2013, Sacramento County filed a major lawsuit against Bank of America, JP Morgan Chase and other mega-banks for manipulating LIBOR rates, a fraud that has imposed huge losses on local governments in ill-advised interest-rate swaps. Sacramento is the 15th government agency in California to sue on the LIBOR rigging, which Rolling Stone’s Matt Taibbi calls “the biggest price-fixing scandal ever.” Other counties in the Bay Area that are suing on the LIBOR fraud are Sonoma and San Mateo, and the city of Richmond sued in January. Last year, Bank of America and other major banks were also caught rigging municipal debt service auctions, for which they had to pay $673 million in restitution. The question is, do taxpayers want to have their public monies in a bank that has been proven to be defrauding them?

Compounding the risk is the reason Cyprus “bail in” shocker, in which depositor funds were confiscated to recapitalize two bankrupt Cypriot banks. Dodd-Frank now replaces taxpayer-funded bank bailouts with consumer-funded bail-ins, which can force shareholders, bondholders and depositors to contribute to the cost of bank failure. Europe is negotiating rules imposing bail-ins for failed banks, and the FDIC has a U.S. advisory to that effect. Bank of America now commingles its $1 trillion in deposits with over $70 billion in risky derivatives, and has been pegged as one of the next banks likely to fail in a major gambling mishap.

San Francisco and other local governments have far more than $250,000 on deposit, so they are only marginally protected by the FDIC insurance fund. Their protection is as secured creditors with a claim on bank collateral. The problem is that in a bank bankruptcy, state and local governments will fall in line behind the derivative claimants, which are also secured creditors and now have “super-priority” in bankruptcy. In a major derivatives calamity of the sort requiring a $700 billion bailout in September 2008, there is liable to be little collateral left for either the other secured depositors or the FDIC, which has a meager $25 billion in its insurance fund. Normally, the FDIC would be backstopped by the Treasury – meaning the taxpayers – but Dodd-Frank now bars taxpayer bailouts of bank bankruptcies caused by the majority of speculative derivative losses. The question today is whether cities and counties can afford not to set up their own municipal banks, both to protect their money from confiscation and to take advantage of the very low interest rates and other perks available exclusively to the banking club. A government that owns its own bank can keep the interest and reinvest it locally, resulting in government savings of an estimated 35% to 40% just in interest. Costs can be reduced, and taxes can be cut or services can be increased. Banking and credit can become public utilities, sustaining the local economy rather than mining it for private gain; and banks can again become safe places to store our money.

This piece was reprinted by Truthout with permission or license.

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[-] 3 points by LeoYo (5909) 11 years ago

New Monetary Systems for a Sustainable Democracy and "The Great Turning"

Wednesday, 31 July 2013 00:00 By Margaret Flowers and Kevin Zeese, Truthout | News Analysis

http://truth-out.org/news/item/17878-new-monetary-systems-for-a-sustainable-democracy-and-the-great-turning

Our money system is ill-equipped to help us solve the pervasive socio-economic and ecological challenges we face. Transformation of our money system is critical because monetary diversity is just as important to human survival as biodiversity is to the fate of the earth.

There is a lot that we can learn from nature, and one important lesson is that diverse systems have greater strength and resilience. When conditions change, various components within a diverse system will step in to pick up where others fail. The weaknesses of monocultures are evident in agricultural systems where crops either flourish or wither each season. We also know that using permaculture, in which multiple types of plants are grown together to fill different functions and aid each other, creates greater abundance. Less obvious is that these same principles can be applied to monetary systems. The dominant type of money, a fiat currency, essentially a mono-currency based on debt and scarcity, is failing most of us. Inherently, it encourages competition and hoarding, traits that mean some will win, and some will be left out. It is also required to perform functions that are at odds with each other: to both circulate in the economy and to be accumulated for future use. And it requires constant growth to survive, a trait that becomes more maladaptive as we bump into the limits of a finite planet.

Alternatively, new types of money are being developed to complement the dominant currency. Over the past 40 years, the number of complementary currencies has grown from two to many thousands. Time is proving that these new currencies can be designed to fulfill vital functions that the dominant currency cannot and that they actually strengthen the overall monetary system. This is leading to a whole new way of thinking about money.

Money is an agreement between people about how to structure exchanges. It can be used to connect unmet needs with unused resources, however a community decides to define those terms. And money can be designed to shape behavior in ways that are positive for individuals and for society, that encourage cooperation, trust, protecting the environment and sharing prosperity.

The transition to a more diverse monetary system is happening largely outside of governments and large financial institutions. People within communities are working together to solve problems and meet their basic needs. It is possible to create what Jacqui Dunne, coauthor with Bernard Lietaer of Rethinking Money: How New Currencies Turn Scarcity Into Prosperity, calls "sustainable abundance."

And as long as complementary currencies are designed in ways that are transparent, hyper-democratic and restorative, they will avoid the negative forces of the current system that defaults to increased wealth inequality and isolation of individuals. We are in the early phase of a transition, from the industrial age to the information age, from growth at any cost to sustainability and from competition to cooperation. Conditions are ripe to create the kind of world in which we want to live and to fund it using a diverse monetary system.

Debt-based Currency Creates Scarcity, Competition

To understand money more fully, we must first address how money is created and how the design of monetary systems shapes human behavior.

The dominant currencies worldwide are fiat-currencies, meaning that they are created from nothing tangible. Rather than being based on gold or other substances, they are guaranteed by the reputation of a government. This is important to note, because there is nothing magical about money. You don't need special power or wealth to create it. Money is a medium of exchange, and any community, no matter how small or how large, can design their own way to handle exchanges among themselves.

Another important concept to understand is that dominant currencies are based on debt. In the United States, the Federal Reserve, which is organized like a private corporation, creates money that is lent to private banks, which then create more money by issuing loans for amounts of up to 10 times the amount that the bank has in holdings and charging interest on those loans.

The US government also obtains money by incurring debt. Even though the Constitution gives it the power to create money, it has ceded that power to the Federal Reserve. Of course, the US Treasury prints money and produces coins, but to have access to that money, the government must issue bonds, which are bought by banks or investors with an expectation of more money in return. Money that is based on debt inherently creates scarcity and competition. To put it in simple terms, all money that is borrowed must be paid back with added interest. The more that is loaned, the more that must be repaid. That extra money, the interest, goes to the bank rather than being spent in the community. In other words, interest consumes money and removes it from circulation within the community, thereby creating scarcity. It also drives the need for an economy to continually grow.

Interest also creates competition, as people vie for the dollars within the community to be able to pay off their interest. Some will succeed and some will lose. And some may spiral deeper and deeper into debt, ending in financial ruin. This is the reason that debt-based money goes hand-in-hand with bankruptcy.

The current system also encourages hoarding and isolation. Most of us depend on money to meet our basic needs for food, shelter, health care and so on. We fear that without money, we may one day end up on the street, hungry and in need. There is no sense of safety net or that our community will be there to take care of us. This drives the feeling that we must hang onto our money and protect it from others who might try to take it from us. It erodes our trust in each other. Dunne describes trust as an important aspect of social capital that is being eroded by the current system.

Complementary Currencies Balance Weaknesses

Lietaer and Dunne point out in Rethinking Money that the current monetary system is very fragile. In the past four decades, there have been "no fewer than 145 banking crises, 208 monetary crashes and 72 sovereign debt crises. This adds up to an astounding total of 425 systemic crises - an average of more than 10 countries in crises each and every year!"

But it doesn't have to be this way. It is especially during these times of crisis that complementary currencies are the most beneficial and can balance out the weaknesses of the dominant currency. This has been most clearly demonstrated by the Swiss WIR, which is nearing its 80th anniversary.

During the financial crisis of the 1930s, a group of 17 businessmen figured out a way to continue to operate their businesses even though they had all received notices from the banks that their credit was either reduced or cut off completely. They realized that their debts were to each other for goods and services. So they created a mutual credit system to keep track of what they owed each other and strove to keep their credits and debits relatively equal.

The resultant WIR system is flourishing today. In 2010, it reported that 16 percent of Swiss businesses were trading in WIR at a volume of $1.6 billion each year. Moreover, the WIR is a major reason that the Swiss economy is so stable. It turns out that WIR currency is countercyclical. When there is a recession, trading in WIR increases, and it decreases when francs are available again. WIR is also highly-leveraged, meaning that trading in WIR increases the circulation of francs in the economy. This happens because not all transactions are strictly in WIR, some are part WIR and part francs.

Dunne reports that the WIR system is being piloted in Burlington, Vermont, by the Vermont Businesses for Social Responsibility program. The WIR system is a mutual credit system that is only used by businesses, but there are other types of complementary currencies as well. Another one that has been very successful is the Banco Palmas, which started in a very poor community in Brazil. The people of Conjunto Palmeira realized that money was being drained from their communities because 80 percent of what they earned was spent elsewhere. They created a currency called "Fomentos," which could only be spent locally. Additionally, they created a lending system without interest that provided small loans to help people meet their basic needs during tough times and larger loans to help businesses. Initially, loans were made in Fomentos so the money had to be spent locally. Eligibility for the loan was determined by one's social capital or trustworthiness. Research has found that the Fomento creates a multiplier effect because use of the local currency avoids excessive leaking of purchasing power to the nonlocal economy. Local currency circulates more quickly and for longer periods, changing more hands in the local economy than its national equivalent. Further, as this report describes, "the Fomento method seeks to generate a dynamic of development within the community: support for local production, lower costs for local producers, more employment, increased sense of community. This dynamic of development will last beyond the program's duration in a self-reinforcing 'virtuous circle.' "

Over time, because of the success of Banco Palmas currency in creating jobs and reducing poverty, the Brazilian government and the largest bank in Brazil partnered with the Instituto Palmas. The Palmas currency is now present in 66 communities around Brazil.

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[-] 3 points by LeoYo (5909) 11 years ago

Complementary Currencies Shape Human Behavior

There are many types of complementary currencies. Some are very specific to a community, such as the Banco Palmas, or the BNotes used in Baltimore, and some are used in large areas such as the WIR in Switzerland or the Regio in Germany. The Baltimore BNotes are exchanged for federal dollars, but other types of currencies are based on time. And still others are earned through certain behaviors. A well-known complementary currency that shapes behavior is the frequent flyer program. It was designed to develop customer loyalty to a particular airline and was initially only exchanged for plane tickets. Now, many frequent flyer programs have expanded so that earned points can be exchanged for car rentals, hotel stays and goods.

Another successful currency that began out of a desire to change behavior took place in Curitiba, Brazil. In the poor neighborhoods, the roadways were too small for trash trucks to get through, and the trash was piling up. The mayor recognized that the city's buses had a lot of empty seats. He solved both problems by announcing that a bag of trash brought onto a bus could be exchanged for a bus token. Within two weeks, the trash-filled neighborhoods were cleaned up. The story of Curitiba doesn't end there. Farmers began accepting the bus tokens in exchange for produce. And fishermen started trawling for trash on the days they were not fishing. The standard of living in the city rose so that it became one-third higher than the standard of living for the entire country. And Curitiba was designated the most ecologically advanced city in the world.

A key ingredient for the design of a successful complementary currency is to connect an unused resource, seats on the bus, with an unmet need, trash removal, using a form of currency, the bus token. In every community there are unmet needs that can be met by unused resources. There are many possibilities. It is up to communities to decide what the ingredients are for their complementary currency system.

Other key ingredients for success are to make sure that the system is transparent and that it has a good governance system that is hyper-democratic and can handle difficulties as they inevitably arise. The new currency system should also be created in a way that reflects the values of the community and builds the type of future that the community wants to see.

It is important to think about the desired outcomes for a complementary currency because there are ways to design the system that encourage specific behaviors. One concept that is used when the goal is to keep the money circulating within and stimulating the local economy rather than being hoarded is the demurrage or negative interest. In this type of system, the currency loses value over time.

For example, if a currency has to be used within a certain time period, like a gift certificate that expires, as the expiration date approaches, a person will feel an incentive to use it. Dunne describes this as thinking about money that rusts if not used. Complementary currencies create cultural change. The use of local currencies teaches that spending in and investing in one's community makes the local economy stronger. It also teaches cooperation, mutual assistance and fosters personal relationships and trust within a community. And it strengthens democracy if it is structured in a way that allows people to participate in and have a voice in the system.

Many currencies are local or specific to a community, but there are other options. The infrastructure is being created using cellphones so that trade can occur globally without being locked into one system like PayPal and without using a conventional banking system.

The Time is Ripe for a Diverse Monetary System

The conditions for real systemic change are here: crises, cultural shift and information.

There are real economic crises and hardships that are motivating people to search for alternative ways to meet their needs. Another massive economic crash is looming as big banks engage in high-risk derivative trading at high volumes and expect to be able to bail themselves out by seizing deposits, as happened in Cyprus.

And the financial crisis is converging with an ecological crisis. Unlimited growth is just not possible, and people are more motivated to change their behavior and create systems that are less harmful to the planet and more sustainable.

This is part of the cultural shift that is occurring. Also, as our government and large institutions operate more secretly and independently from a democratic process, the public is beginning to realize the damage that this causes. There are greater demands for open communication, transparency, sharing and participatory democracy.

And finally, we are transforming away from the industrial age to an information age that Dunne describes as an "age of wisdom." Information is readily available through the internet and can be shared easily and quickly with others around the globe. This transformation is also affecting the types of work that are available: less manufacturing and more technology.

We are in a time that some call "The Great Turning." It is a time for broad systemic changes. And it is possible to make these changes in ways that create sustainable abundance for all. We can learn from the weaknesses of the current systems so that our new systems do not default at a later date to the situation we are in now.

Some of the weaknesses of the current monetary system are being resolved by applying principles used in permaculture. On a side note, the transition town movement arose by applying permaculture principles to the design of societies.

In "Currency Solutions for a Wiser World," Bernard Lietaer asks, "Have you ever wondered why cash shortage so bottlenecks our best efforts and initiatives when we actually live in a world where there is neither a shortage of things needing to get done, nor a shortage of people wanting to do them?" Note the combination in his question of unmet needs and unused resources that Dunne also highlights. Then, he provides the answer, focusing in on the system of currency:

"The answer to this question has to do with the monopoly of the kind of money system we use, which is the source of the scarcity which so many people experience and the root cause of a great number of our problems. Our money system was designed a long time ago and is now out of date. It is particularly ill equipped to help us solve the pervasive socio-economic and ecological challenges facing us today. . . the transformation of our money system is critical to resolving the challenges of our times . . . monetary diversity is just as important to human survival as biodiversity is to the fate of the earth." New complementary monetary systems are forming more rapidly than ever before in history. In this information age, people can learn from each other, learn from history and create new community-based solutions like never before and avoid the corrupt and dysfunctional government that prevents solutions to the urgent problems we face. People are yearning for real democracy, and part of that means remaking and democratizing the monetary system. People can build community and break from the Wall Street finance system. Finance can be re-made as a tool to solve problems, create meaningful work for everyone and transform to a new economy. We can create "sustainable abundance" in ways that are restorative and cooperative.

The creation of the world in which we want to live is in our hands. We've only scratched the surface in this article. We urge you to read Rethinking Money and more that is available on the new economy. And you can hear Jacqui Dunne speak at the Economic Democracy Conference of the Democracy Convention in Madison, Wisconsin, August 7 to 11.