Occupying A

New Maine

Economy

Creating A State-owned Bank

Randall A. Parr

Goose River PressWaldoboro, ME

Copyrightc © 2014 By

Randall A. Parr

All Rights Reserved. No part of this book may be reproduced or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher.

First Edition June 2014

Library of Congress Control Number 2014942457 Includes bibliographic references and glossary

Subject and Headings Banks and Banking--History Economic history

Finance, public Debt - United StatesFederal Reserve Banks Financial Crisis - United States Imperialism - HistoryMoney History Monetary Policy

United States - Economic Policy

Printed in the United States of America

Published by Goose River Press Waldoboro, Maine

ISBN 978-1-59713-157-5

2

Preface

To many, people a bank is a hollow ceramic object with aslot on top, into which p e o p l e put s p a r e change untilthe time when t he y need it. I n r e a l i t y a bank is morecomplicated.

Six years have passed since 2008, a year when some of thebiggest financial and banking firms on Wall Street, andabroad, went belly-up, and a financial panic gripped theworld. An era of prosperity has been replaced by a epochof austerity. T h e e c o n o m y i s a cardiac patient alive,but barely breathing.

A long hard winter of discontent has been followed by a cold and rainy spring. A s we enter the summer, people wonder: W hat will the future bring?

3

Dedicated to my son, Andrew, my

grandson, Harrison,

and my lovely daughter in law, Susan.

4

Table of Contents Page ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

1

2

9

29

46

54

60

81

92

100

109

111

113

126

129

136

142

143

151

P r e f a c e,

Introduction

Chapter 1 A Brief History of Money

Chapter 2 Increasing Inequality

Chapter 3 The Maine Banking Landscape

Chapter 4 The Empire Strikes Back

Chapter 5 Riposte

Chapter 6 Maine and North Dakota

Chapter 7 Treasurer's Cash Pool Risk

Chapter 8 Money Expansion

Chapter 9 Maine Budget Forecast

Chapter 10 Transition

Chapter 11 State-Owned Bank

Chapter 12 Corporatocracy

Chapter 13 Maine Multiplier Simulation

Chapter 14 Occupying a New Economy

Table of Figures,

Glossary,

About the Author, About the Cover 152

5

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Introduction

"Our Economy has failed in every dimension: financial,environmental, and social. And the current financial collapseprovides an incontestable demonstration that it has failedeven on its own terms. Spending trillions of dollars to restorethis system to its previous condition is a reckless waste oftime and resources and may be the greatest misuse offederal government credit in history. The more intelligentcourse is to acknowledge the failure and set aboutredesigning our system from the bottom up to align with therealities and opportunities of the twenty first century."

1

- -David Korten

Treasury Secretary Hank Paulson asked Congress for a $700Billion bank bailout, called the "Troubled Asset ReliefProgram," in 2008. When citizens opposed it with stacks ofletters and calls, the U S House of Representatives rejectedthe Bill, but bank lobbyists lobbied fiercely and predictedcatastrophe if it were rejected. In fear, the Senate approvedit. After much more fear-mongering by bankers, the Houserelented and passed it over their constituents' protests and itbecame law.

Many books were written about the 2008 Panic, "In Fed WeTrust," by David Wessell; "Too Big To Fail," by Andrew RossSorkin; "Freefall", by George Stiglitz, "The Big Short," byMichael Lewis, and "It takes a Pillage" in which Nomi Prinsreported that the 2008 bank bailout was not $700 Billion asmedia were reporting, but at least $15 Trillion. Nomi createda web site itemizing the federal programs that werecreated for the largest global banks. Congress later enacteda GAO audit on the Federal Reserve and the results revealedthat Nomi was right, the amount "loaned" to banks was over

1 David Korten, "Agenda for a New Economy," BK Publishers Inc., 2009, Page 3

2 sanders.senate.gov/newsroom/press-releases/the-fed-audit

6

$16 Trillion2, not $700 Billion.

3Media had either been

deceiving the public, or were not checking facts.

A video, "Zeitgeist Addendum," derived from Ellen H.Brown's 12th book, "Web of Debt; The Shocking Truthabout our Money System and How We Can Break Free,"mentioned Federal Reserve Bank of Chicago booklet, "Modern

Money Mechanics." 4

Reports about the 2008 financial panicwere alarming. It went far beyond corporate power,corporate personhood, and corporate control over people andelections. I read "Creature from Jekyll Island" by G. EdwardGriffin, which triggered Ellen Brown to write "Web of Debt"and her sequel, "The Public Bank Solution: From Austerity toProsperity" in which she revealed that there was a shadoweconomy of securitized derivatives with a notional value

estimated by BIS in 2008 at over $650 trillion.

The 2011 Occupy Movement resulted partly from publicoutrage at financial revelations and massive increase inincome and wealth inequality from blatant fraud, abuses,scandals, unearned, excessive executive bonuses and taxbreaks from the 2008 global financial meltdown. In 2013, Itestified at a Legislative Hearing for Maine Partnership Bank,went to Ellen Brown's Annual Public Banking InstituteConference in California, and taught a money and bankingcourse at Coastal Senior College in Camden, Maine, mainlyusing material from Ellen Brown's 2 books. I followed up onthe state-owned bank concept, fleshed it out, definedboundaries and how we could transition our dysfunctionalstate government into a people-oriented state-owned bank.

After the new 2013 U. S . Speaker of the House, in h i sswearing-in speech, said that the United States' number one

problem was national debt. 6 I asked myself: Since there

would be no money if there were no debt, did he think therewas too much money?3 comfortless/sites/traceygreenstein/2011/09/20/the-feds-16-trillion- bailouts-under-reported/5 BIS is the "Bank of International Settlements," Switzerland6 businessinsider.com/boehner-reelected-speaker-speech-house-text-

7

House politicians talked about a "crisis" they called "FiscalCliff." The House majority tried to make opponents passbig budget cuts by threatening to default on t h e nationaldebt, even though the 14th Amendment to the Constitutionsays "the validity of the public debt shall not bequestioned," and some of the proposed cuts, such as SocialSecurity, did not contribute to the national debt at all. AllCongressmen had recently sworn an oath to office sayingthey would : "preserve, protect, and defend the Constitution,so help me God." Wasn't that a contradiction, or perhapsgrounds for impeachment? If too much debt were our biggestproblem, and all money comes from debt, then too muchmoney would be our biggest problem. If everyone had toomuch money, why would people be poor? Why wouldpeople need food stamps? If everyone had too much money,why is the economy in recession? Why wasn't the absurdityof the Speaker's comments being discussed in the media?

For my 2013 "Shocking truth about money" course I hadprepared over 200 PowerPoint slides, so I decided to use thismaterial to explain to people the truth about money, perhapsin a book about money and public banking. Apparentlyalmost no one in the media, except perhaps "Guardian"reporter, David Graeber and "Rolling Stone" writer, Matt Taibbi,really seemed to understand the ideas in Ellen Brown's books.To break free from the money trust, we can create public-owned banks. Many still don't understand the connectionbetween money and banking. If they did there would be arevolution before tomorrow morning, said Henry Ford. So, Iwrote this book to tell the public about money and banks;then hoped for the revolution..

8

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Chapter 1 A Brief History of Money

"People who think they are are too intelligent to be involvedin politics end up being ruled by imbeciles." - Plato.

A former Minnesota Governor, ex-Navy Seal, ex-wrestler, andex-actor once said that "politics" is a combination of twowords, "poly," meaning "many," and "ticks," which are"blood-sucking parasites."

The earliest Greek civilizations connected wealth and evil.Pluto, ruler of the underworld, which we call "hell," and theword for government rule by the rich, "plutocracy", springfrom the same Greek root, "Ploutos."

If you look on a one dollar bill to the left of the picture ofGeorge Washington, you will see the words; "This note islegal tender for all debts, public and private."

When money is legal tender7

if offered in payment ofdebt, it must be accepted by creditors. Throughout worldhistory, money has been connected with banks, financeorganizations, or their predecessors.

Trading goods, or commodities, without money is called"barter."

Since the cost of trading with barter is extremely

expensive compared to using money, barter is rarely used intrading today.

Some of the earliest publicly-owned banks were communaltemples in Sumer, 5200-2270 BC, recording payrolls oncuneiform clay tablets using tokens for money.9

7 en.wikipedia.org/wiki/Legal_tender8 en.wikipedia.org/wiki/Barter9 Ellen Hodgson Brown,"The Public Bank Solution: From Austerity to Prosperity," 3rd Millennium Press, Page 82.

9

In Egypt between 3500 BC and 20 BC, wages for ancientEgyptian laborers were paid in bread and beer. Papyrus wasused for tracking goods and services trades. Stockpiles offood were kept by farmers, who received pottery inscribedwith the contribution amount, which was used as money.10

In Italy between the 13th and 15th Century ADFranciscan Monks created "Mons Pietus",

11

which, likepublicly-owned banks, loaned small amounts of money at lowinterest rates to peasants on valuables left as collateral byborrowers. "Mons" in Latin means stash of collected funds.Mons Pietus started the European publicly-owned banktradition, which later evolved into charitable publicly-ownedbanks for the needy. European countries continue to havepublicly-owned banks today.

After 1642 English Civil War between the king andParliament, backed by money lenders, King Charles I, wasbeheaded and the King's right to issue money wasabolished.

1Future monarchs were forced to borrow from

money lenders at excessive interest rates. Such began theso-called "British system" of private banking that existsnow.

Paper “Bills of Credit” were issued by Massachusetts BritishColony Assembly in 1691 to pay militia for the Frenchand Indian War Quebec attack. This was legal tender fiatmoney backed by colony government's “full faith andcredit.”

14 Other American colonies also issued paper currency.

British Financier Mayer de Rothschild once said: "Give methe power to print money and I don't care who makes thelaws."

9. Ibid, Page 89.10 Ibid, Page 100.11 publicbanking.wordpress.com/2012/11/26/european-association-of-public- banks-eapb/12 Ellen Hodgson Brown,"The Public Bank Solution", 3d Millennium Press, P. 112.

14 "Web of Debt," Ellen H. Brown, 3d Millennium Press, Page 36.

10

After British Merchants complained that colonial currencieswere depreciating against the the British Pound, Parliamentpassed the 1751 Currency Act banning colonial fiatcurrencies. In the American colonies the Currency Act

caused liquidity15

crises, economic depression, and poverty Itoutraged American colony citizens and began a rebellion thateventually led to the Revolutionary war, although this causeis seldom mentioned in history books.

Benjamin Franklin said: "The inability of colonists to getpower to issue their own money permanently out of thehands of George III and international bankers was the prime

reason for the Revolutionary War. 16

"

President Thomas Jefferson once said: "I believe that bankinginstitutions are more dangerous to our liberties than standingarmies. If the American people ever allow private banks tocontrol the issue of their currency, first by inflation, then bydeflation, the banks and corporations that will grow uparound the banks will deprive the people of all property untiltheir children wake-up homeless on the continent theirfathers conquered. The issuing power should be taken fromthe banks and restored to the people, to whom it properlybelongs.

17"" Ellen Hodgson Brown wrote in Web of Debt:

"Jefferson was instrumental in Congress' refusal to renewthe charter of the First bank of the United States in 1811.When the bank was liquidated, Jefferson's suspicions wereconfirmed: 18,000 of the bank's 25,000 shares were ownedby foreigners, mostly English and Dutch. the foreigndomination the revolution had been fought to eliminate hadcrept back in through the country's private banking system.18

When First U S Bank Charter extension was being debated,Nathan de Rothschild, son of Mayer commented: "Eitherapplication for renewal of charter is granted, or the UnitedStates will find itself in a most disastrous war.”

15 Liquidity Crisis is a crisis in which money in circulation is not enough for people and businesseshard pressed to break even because of low sales, recession. op cit, Ellen Hodgson Brown, "Web of Debt", 2009, 3rd Millennium Press.16 cpe.us.com/article/famous-monetary-quotes/17 monticello.org/site/jefferson/private-banks-quotation

11

During the War of 1812 President James Madison survivedsacking of Washington, DC, when he and his wife, Dolly,escaped after saving some of the nation's most prizedpossessions, although the White House was burned.Madison later remarked: "History records that the moneychangers have used every form of abuse, intrigue, deceit,and violent means possible to maintain their control overgovernments by controlling money and its issuance."

19

International bankers are reported to have created the warbetween England and the United States of 1812 to punishthe U. S. for ending the first central Bank of the UnitedStates.

President Andrew Jackson said: "If Congress has the rightunder the Constitution to issue paper money, it was giventhem to use themselves, not to be delegated to individualsor corporations.

20" President Jackson ended the second

central Bank of the United States by vetoing the bill toextend it.

President Abraham Lincoln stated: "The Government shouldcreate, issue, and circulate all the currency and creditsneeded to satisfy the spending power of the Governmentand the buying power of consumers. By the adoption ofthese principles, the taxpayers will be saved immense sumsof interest. Money will cease to be master and become the

servant of humanity."21

"The privilege of creating andissuing money is not only the supreme prerogative ofgovernment, but it is the government’s greatest creative

opportunity."22

Lincoln stood up to global bankers, issuinggovernment currency instead of borrowing it at exorbitantinterest rates f r o m ba nks to finance the Civil War. Thesenotes were called "greenbacks" because the ink on theback was green, unlike previous currency.

18 Op Cit, Ellen Hodgson Brown "Web of Debt" Page 74.19 themoneymasters.com/the-money-masters/famous-quotations-on-banking/20 ibid.21 ibid.

12

In 1865, however, Lincoln signed a Nat iona l BankingAct, which gave banks ability to create money whenthey lend it, which has persisted until t h e p r e s e n td a y . In rebellion against the United States during theCivil War Confederate States were reportedly financedby global bankers. Otto Von Bismark Chancellor ofGermany later said that international bankers instigatedthe U. S. Civil war to suppress the growing power of theUnited States which was challenging their dominance ofglobal finance, making enormous profits chargingexorbitant interest rates. 23

President James A. Garfield remarked: "Whoever controlsthe volume of money in any country is absolute master ofall industry and commerce.. And when you realize that theentire system is very easily controlled, one way oranother, by a few powerful men at the top, you will nothave to be told how periods of inflation and depressionoriginate."24

President Theodore Roosevelt commented: “It may wellbe that the determination of government, in which, it willnot waver, to punish malefactors of great wealth, hascaused these men to bring as much financial stress aspossible, to discredit policy of government and secure areversal, so they may enjoy fruits of their own evil-doingunmolested. I regard this contest as one to determine whoshould rule this country—people through governmentalagents, or a few ruthless domineering men whose wealthmakes them peculiarly formidable because they hide

behind breastworks of corporate organizations25

.”

22 cpe.us.com/article/famous-monetary-quotes/23 Op Cit, Ellen Hodgson Brown,"Web of Debt," 3d Millennium Press, Page 89-9124 cpe.us.com/article/famous-monetary-quotes/

25 boatagainstthecurrent.blogspot.com/2008/10/quote-of-day-theodore-roosevelt-

13

Henry Ford asserted: “It is well enough that people of thenation do not understand our banking and monetarysystem, for if they did, I believe there would be arevolution before tomorrow morning.”26

President Woodrow Wilson commented: "I am a mostunhappy man. I have unwittingly ruined my country. Agreat industrial nation is controlled by its system ofcredit. Our system of credit is concentrated. Growth ofthe nation, and all our activities are now in hands of a fewmen. We have come to be one of the worst ruled, mostcompletely controlled and dominated governments inthe civilized world, no longer a government by freeopinion, by conviction and majority vote, but agovernment by opinion and duress of a small group of

dominant men."27

Wilson had signed the Federal ReserveAct in 1913.

Sir Josiah Stamp, president of the Bank of England andthe second richest man in Britain in the 1920's, speakingat the University of Texas in 1927 said: "The modernbanking system manufactures money out of nothing Theprocess is perhaps the most astounding piece of sleight ofhand that was ever invented. Banking was conceived ininequity and born in sin. Bankers own the earth. Take itaway from them but leave them the power to createmoney, and with a flick of a pen, they will create enoughmoney to buy it back again. Take this great power awayfrom them and all great fortunes like mine will disappear,for then this would be a better and happier world to livein. But if you want to continue to be the slaves ofbankers and pay the cost of your own slavery, then letbankers continue to create money and control credit."

Thomas Edison stated: "If the Nation can issue a dollarbond it can issue a dollar bill. The element that makesthe bond good makes the bill good also. The differencebetween the bond and the bill is that the bond lets themoney broker collect twice the amount of the bond and anadditional 20%. Whereas the currency, the honest sortprovided by the Constitution pays nobody but those who

14

contribute in some useful way. It is absurd to say ourCountry can issue bonds and cannot issue currency. Bothare promises to pay, but one fattens the usurer and theother helps the People."28

President Franklin D. Roosevelt once said:29

"For too manyof us the political equality we once had won wasmeaningless in the face of economic inequality. A smallgroup had concentrated into their own hands an almostcomplete control over other people's property, otherpeople's money, other people's labor- other people'slives. For too many of us life was no longer free; liberty nolonger real; men could no longer follow the pursuit ofhappiness. Against economic tyranny such as this, theAmerican citizen could appeal only to the organized powerof government. The collapse of 1929 showed up thedespotism for what it was. The election of 1932 was thepeople's mandate to end it. Under that mandate it isbeing ended. Economic Royalists have conceded thatpolitical freedom was government business, buteconomic slavery was nobody's business. They grantedthat government could protect citizens' right to vote, butdenied it could do anything to protect his right to work andlive. We stand committed that freedom is no half-and-halfaffair. If citizens are guaranteed equal opportunity in thepolling place, they must have equal opportunity in themarket-place."

Graham Towers, Gove rno r o f t he Bank o f Canada1935 - 1955 sa id : "Banks create money... That's whatthey are for. The manufacturing process to make moneyconsists of making an entry in a book. That is all. Each andevery time a bank makes a loan....new bank credit iscreated- brand new money. "

26 brainyquote.com/quotes/quotes/h/henryford136294.html27 en.wikiquote.org/wiki/Talk:Woodrow_Wilson

15

Robert B. Anderson, President Eisenhower's TreasurySecretary, remarked: “When a bank makes a loan, it simplyadds to borrower’s deposit account in the bank by theamount of the loan.

30 The money is not taken from anyone

else’s deposit; it was not previously paid to the bank byanyone. It’s new money, created by the bank for use of theborrower."

Presidential Adviser, Economist, and University of ChicagoProfessor, Milton Friedman said: “Most modern money iscreated by banks as bank loans

32.

”Michael Chossudovsky, Professor of Economics at theUniversity of Ottawa wrote

33: "Monetary policy is in the

hands of private creditors who have the ability to freezestate budgets, paralyze the payments process, thwart theregular disbursement of wages to millions of workers andprecipitate the collapse of production and socialprograms."sizes 34

President John F. Kennedy ordered circulation of U S SilverTreasury Notes before being killed by an assassin.According to opendemocracy.net:

"When President John Fitzgerald Kennedy - author of'Profiles in Courage' -signed this Order, it returned to thefederal government, specifically the Treasury Department,the Constitutional power to create and issue currency-money - without going through the privately-owned FederalReserve Banks.

"President Kennedy's Executive Order 11110 gave theTreasury Department the explicit authority: This means thatfor every ounce of silver in the U.S. Treasury's vault, thegovernment could introduce new money into circulationbased on the silver bullion physically held there.

"As a result, more than $4 billion in United States Notes werebrought into circulation in $2 and $5 denominations. $10and $20 United States Notes were never circulated but werebeing printed by the Treasury Department when Kennedywas assassinated.

28 hemoneymasters.com/the-money-masters/famous-quotations-on-banking/29 quoty.ru/en/det/34804/

16

"It appears obvious that President Kennedy knew FederalReserve Notes used as currency contradicted theConstitution. "United States Notes" were issued as aninterest-free, debt-free currency backed by silver reservesin the U.S. Treasury. We compared a "Federal ReserveNote" issued from the private central bank (the FederalReserve Bank a/k/a Federal Reserve System), with a"United States Note" from the U.S. Treasury issued byPresident Kennedy's Executive Order. They almost lookalike, except one says "Federal Reserve Note" on the top

while the other says"United States Note".35

Also, the FederalReserve Note has a green seal and serial number while theUnited States Note has a red seal and serial number". Theback cover of this book shows a government-issued UnitedStates note.

"President Kennedy was assassinated on November 22,1963 and the United States Notes he had issued wereimmediately taken out of circulation. Federal Reserve Notescontinued to serve as legal U. S. currency. According to theUnited States Secret Service, 99% of all U.S. paper legaltender currency circulating in 1999 were Federal ReserveNotes.."

During terms in office Presidents who defied bankers,Andrew Jackson, Abraham Lincoln, James Garfield, andJohn F. Kennedy were all shot by assassins. Of these, onlyJackson survived assassination throughout his entirePresidency. This may be coincidence or conspiracy. OtherPresidents have also been shot, including McKinley andReagan, for which banker-related motives are not evident. .

30 "U.S. News and World Report," August 31, 1959,

31 themoneymasters.com/the-money-masters/famous-quotations-on-banking/

32 themoneymasters.com/monetary-reform-act/principles-of-monetary-reform/

33 hartford-hwp.com/archives/25a/043.html

34 Op Cit, Ellen Hodgson Brown, "Web of Debt," 3d Millennium Press, Page 5

17

Since 1913, all 12 Federal Reserve Banks have beenprivately-owned by banks in Federal Reserve districts:,Atlanta, Boston, Cleveland, New York, Chicago,Philadelphia, San Francisco, St Louis, Kansas City,Richmond, Dallas, and Minneapolis. Federal Reserve Noteshave green ink on one side to imply they are government-issued, like Lincoln's original greenbacks did, even thoughFederal Reserve Notes are issued by a private ent i ty, nota government. Federal Reserve banks are owned byprivate banks in their districts, although the Federal ReserveBoard of Governors is appointed by the President of theUnited States.

On each $20 bill is a picture of President Andrew Jackson,who would probably object strongly to being on a billprofiting a private central bank similar to the one that heabolished, if he were alive today.

In 1968, a borrower, whose mortgage under foreclosure byFirst National Bank of Montgomery, MN, challenged it ongrounds that bank had not offered consideration, funds forholding his property as collateral, and therefore foreclosurewas an invalid. The court ruled in his favor, saying:

"The issues in this case were simple. There was no materialdispute on the facts for the Jury to resolve. Plaintiff admittedthat it, in combination with the Federal Reserve Bank ofMinneapolis, which are for all practical purposes because ofthere interlocking activity and practices, and both beingBanking Institutions Incorporated under the Laws of the UnitedStates, are in the Law to be treated as one and the sameBank, did create the entire $14,000 .00 in money or creditupon its own books by bookkeeping entry. That this was theconsideration used to support the Note dated May 8,1964 andthe Mortgage of the same date. The money and credit firstcame into existence when they created it. Mr. Morgan admittedthat no United States Law or Statute existed which gave himthe right to do this. A lawful consideration must exist and betendered to support the Note.. See Anheuser-Busch BrewingCo. v. ·Emma Mason, 44 Minn. 318, 46 N.W. 558. The Juryfound there was no lawful consideration and I agree. Only God

18

can created something of value. out of nothing. "1

"In law the word, "consideration," means something of value,such as money, or currency. The decision's outcome was thatDaly did not have to repay the bank's invalid mortgage orrelinquish the property. However, the bank appealed and thecourt decision was ultimately nullified on the grounds that aJustice of the Peace did not have the power to make such aruling. Another observer described this way:

"The court rejected the bank’s claim for foreclosure, and thedefendant kept his house. To Daly, the implications wereenormous. If bankers were indeed extending credit withoutconsideration – without backing their loans with money theyactually had in their vaults and were entitled to lend – adecision declaring their loans void could topple the power baseof the world. He wrote in a local news article:

"This decision, which is legally sound, has the effect ofdeclaring all private mortgages on real and personal property,and all U.S. and State bonds held by the Federal Reserve,National and State banks to be null and void. This amounts toan emancipation of this Nation from personal, national andstate debt purportedly owed to this banking system. EveryAmerican owes it to himself . . . to study this decision verycarefully . . . for upon it hangs the question of freedom orslavery.

"Needless to say, however, the decision failed to changeprevailing practice, although it was never overruled. It washeard in a Justice of the Peace Court, an autonomous courtsystem dating back to those frontier days when defendantshad trouble traveling to big cities to respond to summonses. Inthat system (which has now been phased out), judges andcourts were pretty much on their own. Justice Mahoney, whowas not dependent on campaign financing or hamstrung byprecedent, went so far as to threaten to prosecute and exposethe bank. He died less than six months after the trial, in amysterious accident that appeared to involve poisoning. Sincethat time, a number of defendants have attempted to avoid

1 mn.gov/lawlib/CreditRiver/1968-12-09judgmentanddecree.pdf

19

loan defaults using the defense Daly raised; but they have metwith only limited success2.

Nobel Prize-winning Columbia University EconomicsProfessor, Joseph Stiglitz wrote: "The banks were not theonly firms that had to be bailed out. As 2008 came to aclose, two of the Big Three automakers, GM and Chrysler,were on the edge of collapse. "Even well-managed carcompanies faced problems as a result of the precipitouscollapse of sales, and no one would claim that either ofthese two companies was well managed. The worry wasthat there would be a cascade effect: their suppliers wouldgo bankrupt, unemployment would soar, and the economicdownturn would worsen. It was remarkable how, even inpublic, some of the financiers who had run to Washington forhelp argued that it was one thing to bail out banks - theywere the lifeblood of the economy - but quite another tostart bailing out companies that actually produced things. Itwould be the end of capitalism as we know it.

"President Bush wavered - and postponed the problem to hissuccessor, extending a life line that would keep thecompanies going for a short while. The condition for moreassistance was that they develop a viable survival plan.

"The Obama administration articulated a clear doublestandard: contracts for AIG executives were sacrosanct, butwage contracts for workers in the firms needing help had tobe renegotiated. Low income workers who had worked hardall their life and had done nothing wrong would have totake a wage cut, but not the million dollar plus financiers whohad brought the world to the brink of financial ruin. Theywere so valuable that they had to be paid retention bonuses,even if there was no profit from which to pay them a bonus.

"Bank executives could continue with their high incomes; thecar company executives had to show a little less hubris.However, scaling down their hubris wasn't enough: theObama administration forced the two companies intobankruptcy. The standard rules of capitalism describedearlier applied: shareholders lost everything whilebondholders and other claimants - union health funds and

2 http://criminalbankingmonopoly.wordpress.com/montgomery-vs-daly/

20

the governments that helped save the companies - becamethe new shareholders. America had entered a new phase ofgovernment intervention in the economy. It may have oncebeen necessary, but what puzzled many was, Why thedouble standard? Why had banks been treated so differently

than car companies?37

"

In 2010 Idaho alternative currency distributor, Bernhard VonNotHaus, was pronounced guilty of "making, possessing, andselling his own currency" after an FBI and Secret Service

raid.38

Under U S criminal law (18 U.S.C. 486)39

: "Sec. 486.Uttering coins of gold, silver or other metal Whoever, exceptas authorized by law, makes or utters or passes, or attemptsto utter or pass, any coins of gold or silver or other metal,or alloys of metals, intended for use as current money,whether in resemblance of coins of United States or foreigncountries, or original design, should be fined under this title orimprisoned not more than five years, or both."."

David Graeber in "The Guardian" reported recently that:"Last week, something remarkable happened. Bank ofEngland let the cat out of the bag. In a paper called"Money Creation in the Modern Economy", co-authored bythree economists from the Bank of England 's MonetaryAnalysis Directorate, they stated outright that most commonassumptions of how banking works are simply wrong, andthat the kind of populist, heterodox positions moreordinarily associated with groups such as Occupy Wall Streetare correct. In doing so, they have effectively thrown theentire theoretical basis for austerity out of the window."40

"In other words, everything we know is not just wrong – it'sbackwards. When banks make loans, they create money. Thisis because money is really just an IOU. The role of the centralbank is to preside over a legal order that effectively grantsbanks the exclusive right to create IOU’s of a certain kind,ones that the government will recognize as legal tender by itswillingness to accept them in payment of taxes. There's reallyno limit on how much banks could create, provided they canfind someone willing to borrow it.

21

"They will never get caught short, for the simple reason thatborrowers do not, generally speaking, take the cash and putit under their mattresses; ultimately, any money a bankloans out will just end up back in some bank again. So forthe banking system as a whole, every loan just becomesanother deposit.

"What's more, insofar as banks do need to acquire fundsfrom the central bank, they can borrow as much as they like;all the latter really does is set the rate of interest, the costof money, not its quantity. Since the beginning of therecession, the US and British central banks have reducedthat cost to almost nothing. In fact, with "quantitativeeasing" they've been effectively pumping as much money asthey can into the banks, without producing any inflationary

effects. 41

"

Repurchase agreements, also known as repos, or sale andrepurchase agreements, is the sale of securities together withan agreement for the seller to buy back the securities at alater date. The repurchase price should be greater than theoriginal sale price, the difference effectively representinginterest, sometimes called the repo rate. The party thatoriginally buys the securities effectively acts as a lender.."42

Ellen Brown in "Web of Debt" wrote: “It may sound odd, butthe Fed occasionally gives money [‘permanent’ repos] to itsprimary dealers (a list of about thirty financial houses,Merrill Lynch, Morgan Stanley, etc).They never have to paythis free money back; thus the primary dealers will prettymuch do whatever the Fed asks if they want to stay in theprimary dealers ‘club.’ “The exact mechanism of repo use tosupport the Dow is simple. The primary dealers get reposin the morning issuance...and then buy Dow index futures (amarket that is far smaller than the open Dow tradingvolume). These futures prices then drive the Dow itselfbecause the larger population of investors think the ‘insider’futures buyers have access to special information and are‘ahead’ of the market. Of course they don’t have specialinformation only special money in the form of REPOs."

22

Who are these primary dealers to whom Federal ReserveBanks, which issue dollars, gives money to buy Repos tomake the stock market look healthier than it is? To findout, we looked at the Federal Reserve Bank of New York website and found that the Federal Reserve's primary dealerswere:Bank of Nova Scotia, New York Agency BMO Capital Markets CorpBNP Paribas Securities Corp. Barclays Capital Inc.Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLCDaiwa Capital Markets America Inc. Deutsche Bank Securities Inc.Goldman, Sachs & Co. HSBC Securities (USA) Inc. Jefferies LLCJ.P. Morgan Securities LLCMerrill Lynch, Pierce, Fenner & Smith Incorporated Mizuho Securities USA Inc.Morgan Stanley & Co. LLCNomura Securities International, Inc. RBC Capital Markets, LLCRBS Securities Inc.SG Americas Securities, LLC TD Securities (USA) LLC UBS Securities LLC

Since the Fed has 22 primary dealers, 14 of which areforeign, 63% of those to whom it gives money to makemarkets look better than they really are, are foreign. We havethe same foreign money control problem that ThomasJefferson saw when 72% of central bank shareholders wereforeign.

38 theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of- england-austerity?CMP=fb_gu39 Ibid40 en.wikipedia.org/wiki/Repurchase_agreement.

23

The U. S. stock market is not the only rigged market. TheU. S. also rigs the currency markets with the "ExchangeStabilization Fund" and the derivatives markets with the

"Counterparty Risk Management Policy Group".45

Ms. Brownalso stated: "While the Dow is being propped up by thePlunge Protection Team through massive buying, the goldmarket is held down by massive short selling, since gold isconsidered a key indicator of inflation. If the gold price wereto soar, the Fed would have to increase interest rates totighten the money supply, collapsing the housing bubble andforcing the government to raise inflation-adjusted paymentsfor Social Security.

"Most traders who see this manipulation going on don’t complain, because they think the Fed is rigging the market to their advantage; but unwary investors are being induced to place risky bets on a nag on its last legs. The people become complacent and accept bad leadership, bad policies and bad laws, because they think things are still “working” for them economically. Worse, there are insiders to this scheme who must find it difficult to resist the temptation to capitalize ontheir favored positions. "

As Chuck Augustin observed in a June 2006 article titled“Plunge Protection or Enormous Hidden Tax Revenues”:“Today the markets are, without doubt, manipulated on adaily basis by the PPT. Government controlled ‘frontcompanies’ such as Goldman-Sachs, J P Morgan and manyothers collect incredible revenues through marketmanipulation. Much of this money is probably returned togovernment coffers, however, enormous sums of money areundoubtedly skimmed by participating companies andindividuals.

“The operation is similar to the Mafia-controlled gamblingoperations " in Las Vegas during the 50’s and 60’s butmuch more effective and beneficial to all involved. Unlikethe Mafia, the PPT has enormous advantages.

"The operation is immune to investigation or prosecution,there [are] unlimited funds available through the Treasury and

24

Federal Reserve, it has the ultimate insider tradingadvantages, and it fully incorporates the spin anddisinformation of government controlled media to swaymarkets in the desired direction. "47

"Eurodollars" are U.S.-dollar denominated deposits at foreignbanks or foreign branches of American banks. Since theyare outside of the United States, "Eurodollars" escape U. S.Government regulation. "Petrodollars" are dollars earnedfrom the sale of oil. "Petrodollars" initially referred tomoney that "Organization of Petroleum Exporting Countries(OPEC)" members received for oil, but the definition hasbroadened.

41 webofdebt.com/articles/stepfordville.php44 newyorkfed.org/markets/pridealers_current.html

25

46 Ibid

47 Michael Bolser, Gold Antitrust Action Committee- loveforlife.com.au/content/08/12/04/all-well-stepfordville-more-pre-election- chicanery-plunge-protection-team-ellen-bro

26

An agreement between Saudi Arabia, the leading oil producer,and the United States allowed Saudi Arabia to buy advancedU S weapons with petrodollars and increase oil prices, ifSaudis required that all petrol customers pay for it in Dollars(U S ). This required petrol buyers to borrow U S dollarsfrom global banks, or run trade surpluses against the United

States to obtain petrodollars to pay for it.48

Oil-producing

states in OPEC49

were encouraged to deposit oil revenues in

dollar-denominated accounts in the largest U S banks, suchas Chase and Citibank.

Saudi Arabia used petrodollars to modernize its country,hiring U S Construction firms, such as Bechtel, and sent itsstudents to college in the United States. Shortly after the U.S.-Saudi Agreement, in protest against Israel, which was atwar with Arab countries Syria, Egypt, and Jordan OPECboycotted shipments of oil. As a result oil prices increasedover 400% during the 1970s. Since oil powers all globalgoods transportation, oil price hikes had an enormousworldwide inflationary impact. It is estimated that each100% oil price increase raised the aggregate price level10%.

The U. S. Federal Reserve's reaction to oil price-inducedinflation was a tight money policy that raised interestrates to the highest levels in U. S. history in the 1980s.This, along with other factors, resulted in the bankruptcies ofone third, 1,043 of 3,234 savings and loan associations inthe United States between 1986 and 1995, requiring U Sgovernment to bail out failed Savings and LoansAssociations at an estimated $160 billion cost to taxpayers.Deregulation and bankers' malfeasance also played roles inthe S & L crisis.

James K. Galbraith wrote: "This is the predator state. It is acoalition of relentless opponents of the regulatory frameworkon which public purpose depends, with enterprises whosemajor lines of business compete

48 See Ellen Brown's "Web of Debt" John Perkins, "Confessions of Economic Hit Man."

49 "OPEC" is the "Organization of Petroleum Exporting Countries."

27

with or encroach on the principal functions of the enduringnew deal. It is a coalition, in other words that seeks tocontrol the state partly in order to prevent the assertionof public purpose and partly to poach on the lines ofactivity that past public purpose has established.

"They are firms who have no intrinsic loyalty to anycountry. They operate as a rule on a transnational basisand naturally come to view the goals and objectives ofeach society in which they work as just another set ofbusiness conditions more or less inimical to the freepursuit of profit. It is fair to say that the very concept ofpublic purpose is alien to and denied by the leaders andoperatives of this coalition. For without the state and itseconomic interventions, they would themselves not existand could not enjoy the market power that they have cometo wield. Their reason for being rather is to make moneyoff the state-so long as they control it. And this requiresthe marriage of an economic and political organization,which is what in every single case we observe. "50

Frank Partnoy and Jesse Eisinger wrote in "AtlanticMonthly:" "According to Gallup, back in the late 1970s,three out of five Americans said they trusted big banks 'agreat deal' or 'quite a lot.' During the following decades,that trust eroded. Since the financial crisis of 2008, it hascollapsed. In June 2012, fewer than one in fourrespondents told Gallup they had faith in big banks—arecord low. And in October, Luis Aguilar, a commissionerat the Securities and Exchange Commission, cited separatedata showing that '79 percent of investors have no trust inthe financial system.' When we asked Dane Holmes, thehead of investor relations at Goldman Sachs, why so fewpeople trust big banks, he told us, 'People don’tunderstand the banks,' because 'there is a lack of

transparency51

.'52

50 James K. Galbraith, "The Predator State," Free Press, 2008, Page 131

28

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Chapter 2 Increasing Inequality

"We hold these truths to be self-evident: that all men arecreated equal." - Continental Congress, July 4, 1776, theDeclaration of Independence of The United States

The pay gap between Chief Executive Officers and workershas increased steadily. In 1965 the average CEO made 20times the average worker. In 1973 the ratio of CEO pay toworker pay was 22.1. By 1985 it had increased to 58.5. By2011 the average CEO made 231 times the average worker.One would expect that the leader of an organization wouldearn more than the average worker, but the ratio of CEO payto workers' pay should be relatively stable. In fact, CEOs'earnings have increased considerably more than workers',even though average workers' productivity has substantiallyincreased over the years.57

"The AFL-CIO puts the number even higher, saying that theaverage Fortune 500 CEO makes 354 times the averagewage of their employees. Some executives make 1,000 times

more.58

57 businessinsider.com/mckinsey-and-the-ceo-pay-gap-2013-8

58 Ibid

29

The following Economic Policy Institute chart showsthat since 1960 workers' productivity, value that workerscreate, has increased, while real wages, adjusted for

inflation, have declined.59

This partly explains why thegap between rich and poor has increased over the last50 years.

The chart a b o v e a l s o shows that real average hourly wages have declined from $!5.73 in 1973 to $14.15 in 2000. Productivity during the same period increased by about 70 percent. Where did the money go? Clearly not toworkers.

30

The graph above shows that corporate profits have

risen 800 % from 1979 to 2012.60

In this period average workers' real wages declined by about 10 %.

In his book, Tragedy and Hope, Georgetown Professor,Carroll Quigley wrote: “In addition, powers of financialcapitalism had another far-reaching aim, nothing lessthan to create a world system of financial control inprivate hands able to dominate the political system ofeach country and world... to be controlled in afeudalistic fashion by central banks, acting in concert bysecret agreements arrived at in frequent meetings andconferences. Apex of the system was to be the Bank ofInternational Settlements in Basel, Switzerland, aprivate bank owned and controlled by world's centralbanks, themselves private corporations.”

“BIS is regarded as the apex of the structure of

31

financial capitalism whose remote origins go back to thecreation of Bank of England in 1694 and France in1803... its establishment in 1929 was an indication ofdecline in that system.” 61

As Margrit Kennedy said: "Money does not only help theexchange of goods and services but can also hinder theexchange of goods and services by being kept in thehands of those who have more than they need. Thus itcreates a private toll gate where those who have lessthan they need pay a fee to those who have moremoney than they need. This is by no means a "fairdeal." In fact, our present monetary systems could betermed "unconstitutional" in most democratic nations....

"Before going into more detail let me say that there areprobably more than just four misconceptions aboutmoney. Our beliefs about money represent a fairly exactmirror of our beliefs about the world in which we live,and those are as varied as the number of people wholive on this planet. However, the four misconceptionswhich will be discussed in the following pages are themost common hindrances to understanding why we mustchange the present money system and whatmechanisms we need in order to replace it."62

There are indeed huge differences as to who profits andwho pays in this system. Figure 1 compares interestpayments and income from interest in ten numericallyequal sections of the German population.

60 ritholtz.com/blog/2013/10/corporate-profits-after-tax/61 Georgetown University Professor Carroll Quigley, ”Tragedy and Hope” , 1966, Collier-McMillan, Page 324

32

It indicates that the first eight sections of thepopulation pay more than they receive, the ninth sectionreceives slightly more than it pays, and the tenthreceives about twice as much as it pays, i.e., the tenthreceives the interest which the first eight sections havelost. This explains graphically, in a very simple andstraight-forward way, why "the rich get richer and thepoor get poorer."

62 Margrit Kennedy; "Interest and Inflation Free Money,"1995 by Seva International, Pa

33

Margrit Kennedy's diagram is valid not only in Germany. Itapplies to the United States and other countries with so-called "financial capitalism." .

Margrit Kennedy wrote:

"We tend to believe that there is only one type of growth,that is, the growth pattern of nature, which we haveexperienced ourselves. We pay interest only when weborrow money, and, if we want to avoid payinginterest, all we need to do is avoid borrowing money.Since everybody has to pay interest when borrowingmoney or buying goods and services, we are all equallywell-off or badly-off within our present monetary system.

"Most people see inflation64

as an integral part of anymoney system, almost "natural," since there is nocapitalist country in the world with a free marketeconomy without inflation. While governmental income,Gross National Product, salaries and wages of averageincome earner "only" rose by about 400% between 1968and 1989, interest payments of the government rose by1,360%."65

In his book, "Predator State"66

, James K. Galbraithobserved: " There is in the United States a systematicpattern of rising pay inequality in bad times and fallingpay inequality in good times. Were Americans trulyliving under an" equity-efficiency tradeoff thenunemployment in the United States should have fallenwhen inequality rose in the early years of the1980s, and pay inequalities should have gone up whenunemployment fell in the 1990s, but the exact reverse is

63 Ibid, Page 9.64 Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power of money is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth or decline of prices to a minimum.65 Ibid66 James K. Galbraith, "The Predator State," Free Press, 2008, Page 95

34

the case.

"In the United States, unemployment and pay inequalityrise and fall together month by month year by year. If theiron tradeoff between efficiency and equity held, risingminimum wages would cause unemployment. But, aseconomists David Card and Alan Krueger demonstrated,they do not. California and New Jersey raised minimum

wages in the 1980s and unemployment fell.67

The samehappened when the national minimum wage was raised inthe 1990s. With better pay quit rates declined, job tenureincreased and vacancies fell.

"Inequality produces unemployment. Unemploymentproduces inequality. Measures that reduce inequality alsoreduce unemployment and measures that reduceunemployment also reduce inequality. equality is good foremployment and vice versa. Reductions in both inequalityand unemployment reduce waste and increase economicefficiency and improve general living standards."68

The Occupy movement was a protest movement againsteconomic inequality. I ts primary goal w a s to make theeconomy fair. Local groups had different focuses, butamong the movement's prime concerns are how largeglobal financial corporations disproportionately benefit aminority, and undermine democracy.

Occupy Wall Street in New York City's69

Zuccotti Park,began on September 17, 2011. By October 9, Occupyprotests were ongoing in over 951 cities across 82countries, and over 600 communities in the UnitedStates. By October, 2012, Occupy protests andoccupations had occurred in dozens of other countries

67 http://davidcard.berkeley.edu/papers/njmin-aer.pdf68 Ibid.69 en.wikipedia.org/wiki/Occupy_movement

35

across every continent. For its first two months, authoritiesadopted a tolerant approach toward the movement, butthis began to change in November, 2011, when they beganforcibly removing protest camps. By the end of 2011authorities had cleared most of the camps, the lastremaining sites, in Washington, D.C. and London, had beenevicted by February, 2012.

The Occupy movement was partly inspired by "ArabSpring," Portuguese and Spanish "Indignados" movementsand the "Tea Party" movement. Protestors commonlyused the slogan, "We are the 99%", #Occupy hash tag ,and organized through websites, such as "OccupyTogether." According to The Washington Post, themovement, which was described as a "democraticawakening" by Cornell West, is difficult to distill. OnOctober 12, 2011, Los Angeles City Council became one ofthe first governmental bodies to adopt a resolutionstating its informal support of the Occupy movement. InOctober, 2012, the Executive Director of Financial Stabilityat the Bank of England stated that protesters were rightto criticize and had persuaded bankers and politicians "tobehave in a more moral way".70

The Spanish "Indignados" movement began in mid-May2011, with camps a Madrid and elsewhere. According tosociologist, Manuel Castells, by the end of the monththere were already hundreds of camps around Spain andacross the world. For some journalists and commentatorsthe camping in Spain marked the start of the global"Occupy" movement, On 30 May 2011, a leader of theIndignados, inspired by Arab Spring, Movement of 1980,and June Democracy Movement of 1987 called forworldwide protest on October 15.

In mid-2011, Canadian-based Adbusters Media Foundation,best known for its advertisement-free anti-consumerist

70 ibid

36

magazine, proposed a peaceful occupation of Wall Street toprotest corporate influence on democracy, address a growingdisparity in wealth, and absence of legal repercussionsbehind the 2008 global financial crisis. Adbusters co-founderKalle Lasn registered the OccupyWallStreet.org web addresson June 9, 2011.

According to Micah White, senior editor of Adbusters, "webasically floated the idea in mid-July into our email list andit was spontaneously taken up by the people of the world,it just kind of snowballed from there." One of theinspirations for the movement was the Democracy Villageset up in 2010, outside British Parliament in London. Theprotest received additional attention when the internethacker group "Anonymous" encouraged its followers to takepart in protests, calling protesters to "flood lower Manhattan,set up tents, kitchens, peaceful barricades and Occupy WallStreet."

They promoted the protest with a poster featuring a danceratop Wall Street's iconic Charging Bull. The first protest washeld at Zuccotti Park in New York City on September 17,2011, the tenth anniversary of the re- opening of WallStreet trading after the 11 September 2001 attacks. Theprotests were preceded by an Occupy Dataran movement inKuala Lumpur in July, seven weeks before Occupy Wall Street.71

Adbusters was founded in 1989 by Kalle Lasn and BillSchmalz, a duo of award-winning documentary filmmakersliving in Vancouver. Since the early 1980s, Lasn had beenmaking films that explored spiritual and cultural lessons theWest could learn from Japanese experience with capitalism.In 1988, the British Columbia Council of Forest Industries,the "voice" of the logging industry, was facing tremendouspublic pressure from a growing environmentalist movement.

71 ibid

37

The logging industry fought back with a television adcampaign called "Forests Forever." It was an early exampleof "greenwashing:" shots of happy children, workers andanimals with a kindly, trustworthy sounding narrator whoassured the public that the logging industry was protecting theforest.

Lasn and Shmalz were outraged by use of public airwaves todeliver deceptive anti-environmentalist propaganda. And theyresponded by producing the "Talking Rainforest" anti-ad inwhich an old-growth tree explains to a sapling that "a treefarm is not a forest." But the duo wasn't able to buy airtimeon the stations that had aired the forest- industry ad.According to a former Adbusters employee, "CBC's reaction toproposed television commercial established the flash point forMedia Foundation. Lasn and Schmaltz's commercial was toocontroversial to air on Canadian Broadcasting Corporation.

An environmental message that challenged the large forestrycompanies was considered 'advocacy advertising' and wasdisallowed, even though the 'informational' messages thatglorified clear-cutting was OK.

The foundation was born out of their belief that citizens donot have access to the same information flows ascorporations. One of the foundation's key campaigns

continues to be Media Carta72

, a "movement to enshrine TheRight to Communicate in the constitutions of all free nations,and in the Universal Declaration of Human Rights." MediaCarta states: we have lost confidence in what we are seeing,hearing and reading: too much infotainment and not enoughnews; too many outlets telling the same stories; too muchcommercialism and too much hype. every day, this commercialinformation system distorts our view of the world. It alsosays:

72 Media Carta Manifesto, adbusters.org/campaigns/mediacarta

38

"We have lost faith in the institutions of mass media. A handfulof corporations now control more than half the informationnetworks around the world. At a time when people worldwideface hunger, social disruption, war and ecological collapse,only those who know how to walk the walk, talk the talk orpay big bucks are getting their message across.

"We have lost hope that our national media regulators willact in the public interest. Essential rules limiting mediaownership and concentration are being scrapped, while rulesprotecting local content and access are diluted.

"We have lost patience waiting for reform.

"We imagine a different system – a media democracy. We seegreat promise in the open communications of the internetand want that openness expanded into every form of media.We envision a global system of communications that has asits foundation the direct, democratic participation of citizens.To this end, we demand the timely transfer of key mediasources back to the people "

The foundation noted that concern over flow of informationgoes beyond the desire to protect democratic transparency,freedom of speech or the public's access to airwaves.Although it supports these causes, the foundation, insteadplaces the battle for the mind at the center of its agenda.Fighting to counter pro-consumerist advertising is not done asa means to an end, but as the end, itself. Kalle Lasn is anEstonian-Canadian film maker, author, magazine editor,activist. Near the end of World War II his family fled Estoniaand spent time in a refugee camp. Micah M. White is formereditor at Adbusters magazine. Micah is credited with being theco- creator of the original idea for the Occupy Wall Streetprotests .

The Inflation Vs Interest Rate chart below shows howinflation was triggered in 1973 following the Israeli-Arab YomKippur war and its Arab counteraction, the Arab Oil Embargo,which preceded OPEC's quadrupling of crude oil prices, which

39

devolved into all transported worldwide commodity prices.73

In 1973-1974 price levels, as shown by the red line, shot up.

Also called the price of credit, the interest rate is the cost ofborrowing money. Interest rates followed inflation rates upthis steep hill, as they commonly do, but when recessionsoccurred, unemployment increased, inflation declined andinterest rates followed prices down due to the drop ininflation, from central bank policies to reduce inflation.

During the 1970s and 1980s the academic community andmedia were offering many other alternative, but incorrect,hypotheses for high inflation and slow growth which theycalled "stagflation," because inflation was combined with highunemployment, analyzing data unaware of the secret U S oildeal with OPEC.

Margrit Kennedy showed how high interest rates raiseinequality. The Prime interest rate exceeded 20%, thehighest in U S history at the 1981 peak, primarily due to

OPEC74

price hikes. The OPEC cartel violated under-

enforced U. S. antitrust laws75

. U S law may be hard toenforce globally but not when the product, is sold to thebiggest world oil market, the United States.

If it were a priority to enforce United States antitrust law inthe global crude oil industry it could be enforced. Failure toenforce has given enormous power to a very few enormousglobal corporations and has instigated catastrophes;environmental pollution, peak oil, global climate change, andnatural resource depletion, which mankind is now facing.

73 Details of this meeting between U S and Saudi Arabia officials were revealed in the book by John Perkins, "Confessions of an Economic Hit Man."74 OPEC is the "Organization of Petroleum Exporting Countries"75 Antitrust Laws include the Sherman Act, Clayton Act, and Robinson-Patman Act.

40

Antitrust laws are laws that try to preserve economiccompetition and prevent markets from being monopolized.If antitrust laws were properly enforced, severe spikes anddrops in inflation and interest rates since 1970, the 1980sSavings and Loan Crises, and the 2008 financial panic andaftermath might never had happened, which would havegreatly reduced surges in income inequality, wealthinequality, economic hardship, and middle class incomeplunge over the past half century.

Thousands of banks have continually consolidated,successively becoming larger and larger until they becameunstable, too-big-to-fail monopolistic behemoths that we havetoday. To decide whether to enforce merger laws in bankingthe Justice Department and the FTC looked to the FederalReserve, who looked the other way.

Huge amounts of wealth equal to trillions of U S dollars havebeen accumulated by sovereign private oil-producingcountries' wealth funds in large international banks, formingthe top of the global wealth pyramid in which a very fewpeople own most of the wealth on earth. And inequalitycontinues to grow.

Catherine Austin Fitts, managing director of a Wall Streetinvestment bank and Assistant Secretary of Housing andUrban Development under Republican President GeorgeH. W. Bush, indicated that inequality has been increasedintentionally: "The first plan is the “American Tapeworm”model. Under the leadership of the (second) BushAdministration (and before that, the Clinton Administration)and with the support of Congress and the Supreme Court,the American Tapeworm model is to simply finance thefederal deficit through warfare, currency exports, Treasury andfederal credit borrowing and cutbacks in domestic“discretionary” spending.

"Resulting state and local deficits will then be financed withstate and local tax and user fee increases, cutbacks,employee layoffs and increased borrowing. This will thenplace local municipalities and local leadership in a highlyvulnerable position – one that will allow them to be

41

persuaded with bogus but high-minded sounding argumentsto further cut resources. Then, to “preserve bond ratings andthe rights of creditors,” our leaders can be persuaded to sellour water, natural resources and infrastructure assets atsignificant discounts of their true value to global investors.This process of persuasion will be with a carrot and stick,the carrot taking the form of a piece of the action and thestick taking the form of the threat of targeting by smearcampaigns and covert operations.76

Deficit Myths

Mythology is alive and well in the economics that themedia presents the public. One myth that many believe tobe true is the myth that federal government must borrowmoney if government revenues are exceeded by spending, acondition known as "deficit."

The truth is that if the federal government has insufficientrevenues to spend its obligations, Congress has legal powerto establish new money, without borrowing an equivalentfrom the public, but since the Federal Reserve Act wasenacted in 1913, it has not done so. What the federalgovernment has done is to issue and sell treasury bonds toinvestors, which removes money from the economy, whichtheoretically prevents dramatic money supply increases,which is thought to cause hyperinflation. Since the 2008panic, the Federal Reserve has created over $17 Trillion innew money, including the GAO audit-revealed $16 Trillion,and "quantitative easing," without hyperinflation.

Hyperinflation shouldn't occur in an economy without a large,monopolistic concentration of sellers, or buyers, when theunemployment is high, production facilities are underused,t he e conomy is dep re s s ed , and large inventories ofgoods are for sale. Concentration is a situation with a few,very large sellers with market power, and many buyers,called oligopoly. Government could simply issue more moneyto pay deficits or reduce the debt which would be no moreinflationary than issuing bonds.

42

Furthermore, at Congress's request, U S Treasury could,under Article I of the Constitution, mint high value legaltender coins valued at $1 Billion or $10 Billion, eachdeposited in private banks, and retire all outstandingTreasury bonds with checks backed by the new coins. Thiswould reduce debt service costs that U. S. pays to bondholders each year and would not be inflationary because itwould simply exchange one form of debt, Treasury bills foranother, money backed by coins. Without debt there would beno money, so care must be taken how much debt is retired,otherwise money supply may be reduced too much andinstigate another liquidity crisis. Care must also be taken thatimpacts on currency markets do not create imbalances thatcause other unintended consequences.

No reason exists to capitulate to the irresponsible threats bypoliticians to default on national debt because the U SConstitution's 14th amendment legally prevents governmentfrom defaulting on its public debts for doctors, unemployedworkers, or whatever needs have been identified byCongress. The 14th amendment says that "the value of thepublic debt shall not be questioned." Periodic assertionsthat politicians would default on the debt if they don't gettheir way is an empty threat. Unconstitutional laws are null,void and invalid. If the law says that the debt could bedefaulted on, it is a void, null and invalid law, that contradictsthe Constitution, which should be ignored.

Unfortunately, the U S Supreme Court does not alwayssupport, preserve, protect and defend the Constitution, as ithas sworn to do, nor do the members of Congress who havealso taken this oath, which is one reason why we have acrisis.

Inflation Myths

Conventional wisdom holds that inflation results fromgovernments issuing their own money. Myths sometimesrepeated by financial talking heads in the media say thatbankers must be in charge of the money, otherwisehyperinflation will result. However, if you look at the run- up inU S dollar inflation since the 1970s you will see that it can

43

mostly be explained by the "oil shocks" of the Arab oilembargoes in 1974 and 1979, bank policies, andinternational speculation. Ellen H. Brown wrote in Web ofDebt: "The runaway inflation suffered by third worldcountries has been blamed on irresponsible governmentsrunning the money printing presses, when in fact thesedisasters have usually been caused by speculative attacks onthe national currency. Devaluing the currency forces prices toshoot up overnight. "Creeping inflation." like that seen in theUnited States is also blamed on the governments printingmoney when it is actually caused by private banks inflating themoney supply with debt. Banks advance new money withloans that must be repaid with interest but banks don'tcreate the interest necessary to service the loans. New loansmust be continually taken out to obtain the money to pay theinterest, forcing prices up in an attempt to pay the new cost,spiraling the economy into perpetual price inflation."77

U. S. Tax Policy is also a major cause of inequality. Whenpeople work for wages and salaries, a large fraction ofmoney is withheld from their pay checks. Pay checks arereduced by Federal Income Tax withholding, FederalInsurance Contributions Act, FICA, and WorkersCompensation. Maine withholds its state income tax,unemployment insurance tax, which is matched by anemployer tax. After this is taken from workers pay, little isleft for food, shelter, clothing, medicine, and transportation.If workers live after age 62, they may be able to collect partof their FICA payments as Social Security retirementincome, if injured on the job they may collect disability,and if laid off they may collect unemploymentcompensation for a limited time while they are seeking newwork.

FICA is the Federal Income Contributions Act, whosedeductions from workers pay are added to the Social SecurityTrust Fund. When workers grow old these contributed taxfunds are returned as retirement benefits. FICA is a majorcontributor to inequality, since the real fraction of paydeducted from payrolls is highest for lowest income workers,and lowest for highest income workers. This is because of a"cap" on income subject to FICA tax.

44

The higher their real income above that "cap", currently about$100,000 the lower the contribution fraction of pay deducted.So a person earning $1 million per year only pays the FICA taxon the first $100,000. The $1 million per year worker pays thesame tax as the worker who earns $100,000 a year; so hereffective FICA tax rate is only 10% of the $100,000 per yearworker (one tenth) though she earns ten times as much pay.

Social Security increases inequality after workers retire; theamount of their pension varies with their incomes whenthey worked. If they had higher incomes, they get higherpensions and vice versa.

Hedge fund managers avoid paying taxes, because of hedgefund loopholes mentioned previously. Years ago, billionaireinvestor, Warren Buffet, said that he paid a lower tax ratethan his secretary. Later efforts to correct it failed. JohnPaulson made $5 Billion in one year and paid no income tax.

In "Agenda for New Economy: From Phantom Wealth toreal wealth," David Korten wrote: "Efforts to fix Wall Streetmiss an important point. It can't be fixed. It is corruptbeyond repair, and we cannot afford to fix it. Moreoverbecause the essential functions it does perform are servedbetter in less costly ways, we do not need it."78

Wall Street can be reformed if not fixed. But if we creategovernment-owned local public banks i n a l l s t a te s wecan make major gains that reduce inequality and feudalismfrom global corporate rule, and inoculate ourselves somefrom the economic disease. Dr. Korten is right that the systemtends to increase inequality, taking wealth from lower incomeearners and redistributing it to richer people and it isdysfunctional.

76 Op Cit, Ellen Hodgson Brown, "Web of Debt,", Third Millennium Press, 2012, Page 451.77 Op Cit. David C. Korten, "Agenda for new economy: From phantom wealth to real wealth," Bennett-Koehler Publishers, 2009 Page 4578 scoop.co.nz/stories/HL0305/S00002.ht

45

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Chapter 3 The Maine Banking Landscape

"Gross Domestic Product, GDP, might be described as ameasure of the rate at which we are turning our naturalresources into garbage."

- - David G. Korten

A report by Maine People's Alliance said: "The bankinglandscape in Maine is heavily consolidated, with over 56%of bank deposits controlled by three Wall Street andmultinational banks that do scant small business, familyfarm, or marine resource lending in Maine. BecauseToronto-Dominion (TD), Key Bank, and Bank of Americadominate such a large portion of Maine’s banking system,many loans (and profits made from the interest Maine

residents pay) leak out of state.80

Meanwhile, the majority ofMaine public funds are invested out of state, where non-Maine financial institutions use them to maximize their ownprofits. It is not sufficient, or even possible, to simply pullthese deposits back into Maine without also addressingways to safely increase lending"

Maine, and most other states without publicly-owned banks,has been suffering from a money shortage, because the"quantitative easing" that the Federal Reserve System (andother central banks) engineered to restore the worldeconomy, never got from Wall Street banks down to MainStreet, nor up to Maine.

Gardner wrote: "Huge banks controlled 80% of bank assetsin the U.S. in 2012, yet held only 46% of small businessloans. Meanwhile, small and medium banks held 21% ofbanking assets and 54% of small business loans

81.

79 "When Corporations Rule the World,"David G. Korten, 2001, Kumerian Press Inc.80 "The Maine state-owned bank," Jared Gardner, Maine Peoples Alliance, Alliance for a Just Society, March 201381 Ibid

46

Maine describes itself as: "A capital-short state, with lackof long-term debt and equity capital. Existing interestrates and existing pattern of lending to agricultural,forestry and fishing industries are constraining optimaleconomic use of resources. The State, in the past, hasbeen overly reliant on Federal Government financingprograms, particularly Farmers Home Administration.Ordinary operations of private enterprise in the Statehave not corrected this condition, leaving Mainevulnerable to changes in federal policy. Farm debt hasrisen much faster than gross income, with the cost ofborrowing money rising more rapidly than any otherproduction cost. Similar financing difficulties confrontother natural resource enterprises, particularly wood-processing and other value-added enterprises;"82

Despite not being incorporated as a bank, Mainegovernment performs many bank-like functions.Municipal bonds, technology capital, commercial lending,and agricultural loans are state operations. Maine cannotdo one critical thing that banks do, however, createmoney when they lend

83.

Publicly-owned banks, which are owned by states,counties, municipalities, or countries, are a type of bankownership. Partnership banks participate with otherbanks in lending, expanding capital availability for otherbanks, and sharing risks, making participating communitybanks more profitable and stable.

Inspired by enlightened thinkers,84

Maine Legislators

82 Maine Revised Statutes, Title 10: Commerce and Trade, Chapter 110 Finance Authority of Maine, p 981 Legislative Findings. 1. Existing conditions.83 Banks do not loan their existing funds when they lend, they create, by accounting entry, an increase in both assets and liabilities of the loan amount. To the bank a promissory note receivable asset is created and to the borrowers account a credit liability. This has been standard practice sincebefore 1865. It is done this way in foreign countries as well as in the U. S. A bank has ability to produce credit when it makes a loan which becomes money. When a loan is repaid, money is extinguished like it was formed. (See "Modern Money Mechanics', Federal Reserve Bank Chicago; www.frbchi.org , for more information about how banks create money.)84 "Web of Debt" and "Public Bank Solution" author, Ellen Brown, Public Banking Institute,

47

sponsored state-owned bank bills in 2013, which werereferred to the "Joint Insurance and Financial ServicesCommittee" of the Maine Legislature for public hearings andrecommendation. Despite Maine's 14th highest tax burdenof the 50 United States, after the Joint Insurance andFinancial Services Committee voted to designate these bills;"ought not to pass"; Maine's legislature decided"temporarily" to increase the sales, meals and lodging taxrates, again, to close Maine's budget gap. By law Maine isrequired to balance its budget, although these taxincreases did not succeed in doing that, so debatecontinued.

In May, 2013, hearings on publicly-owned bank bills, NeriaDouglas, Maine Treasurer

86 said: "The General Fund has

been negative, or in the red, for much of the last fewyears. We operate by internal borrowing from manydedicated funds. and sometimes from funds belonging tocomponent units.

87 For the last seven years we have not had

to borrow for daily cash needs because we are able to utilizeinternal borrowing. The Treasurer’s Cash Pool is used foroperations and has no reserves.

"For example, On January 9, 2013, just after I was sworn in,

our General Fund88

balance was negative ($230M). On thatdate we were borrowing from Fund 014 Other SpecialRevenue in the amount of $270M. There is little to noopportunity to extend cash for more than a 6 monthperiod due to ongoing negative general fund cash balancesthat occur each year leading up to April 15.

"On April 30, 2013, after better than anticipated income taxreceipts during the week of April 14"‘, we required internalborrowing to meet cash needs of $133M, and the GeneralFund was negative ($114.5M).Maine Peoples Alliance, Center for State Innovation, Demos, Institute for Self Reliance, Alliance for Just Society, and New Economy Working Group.85 usatoday.com/story/money/personalfinance/2013/03/02/state-local-tax- burden/1937757/86 Maine State Treasurer, Neria Douglas, JD, CIA, at May 2013 Hearing by Joint Insurance Finance Committee hearing on bills for Maine Partnership Bank.87 Component units, also called instrumentalities include University of Maine System, Maine Community College System and other independent units.88 "GF" is an abbreviation for the "General Fund."

48

Obviously, we need to pay cash for payroll, payments tovendors, and many other bills of the State in significant sums

every day.89

""

Maine Bureau of the Budget forecasted a budget gap of $755Million in the General Fund and a $330 Million shortfall inthe Highway Fund for an aggregate $1.085 Billion deficit

for 2014-2015.90

Something needed to be done about fiscalimbalances, but available options were unpopular.- Taxincreases jeopardize incomes, commerce and jobs, Budgetcuts deny services and create hardship, Selling state assets denycommon property use to citizens.

While writing this, Maine news media were reporting that theLegislature, and Governor, have resolved the budget gap,the issue becoming hot, partisan, and political, withconferences, threats, a n d vetoes generating lots of heat,but little light. In the end they cut budgets heavily and raisedtax rates.

Despite talk about renewable energy, the bulk of the UnitedStates still mainly transports and heats itself on fossilfuels. If the world continues on this trajectory, fossil fuelswill eventually become depleted, or the planet will cease tosupport life, or both.

The end may occur suddenly. Indication of planning have yetto appear. without planning global disaster may result.Efforts to plan are fought tooth and nail by big

89 Neria Douglass, Maine State Treasurer, Augusta, ME Testimony to Joint Insurance Financial Affairs Committee, May 9, 2013, LD 150890 "Report on the forecast of revenues and expenditures for the General Fund and the Highway Fund for the 2012-2013 biennium and the 2014-2015 biennium," Maine Bureau of Budget, September, 2012, Sherrin Blaisdell, Acting Budget Officer.

49

energy, which is earning big federal subsidies to provideharmful and limited fossil fuels, increasing atmosphericcarbon and aggravating climate change. Increasing Carbonlevels in the atmosphere may cause an environmentaldisaster, according to scientists. Spinning, lying and fraud bycorporate lobbyists and public relations spokesmen arekeeping many people confused about the truth, but many inthe general public realize that fossil energy is notsustainable.

Meanwhile, fossil fuel dependence has been creatingenvironmental catastrophes, which may never fully becleaned up. The British Petroleum Gulf of Mexico disaster,Exxon-Valdez Alaskan disaster, and Torrey Canyon UK disasterought to teach mankind that to preserve itself, the planetneeds to switch from fossil fuel to renewable energy.

Some say that North Dakota's success is due to energyproduction not its public bank. North Dakota has fossil fuel,oil and gas production, but other oil and gas stateseconomies are shrinking, with budget gaps. California,Texas, Louisiana, Alaska, Oklahoma, and Pennsylvania are alsooil and gas states, but they have economic declines andbudget gaps. Fossil fuel production is not the reason NorthDakota is growing, while other states are declining. Publicbanking is the reason.

The number of homes sold in Maine dropped 20% since2005, from 14,472 to 11,521 [2013.] Median prices of Mainefamilies' major asset, their home, fell 11% to $170,000in 2013 from $191,000 in 200591.

In her latest book,"The Public Bank Solution", Ellen Brownwrote: "Bank of North Dakota's (BND) revenues have been ait contributed over $300 million to state coffers, a substantialsum for a major boost to the state budget. In the first decadeof this century ngeles county. In April, 2011, BND reportedannual profits of $62 million, setting a record for theseventh straight year. These profits belong to citizens, andthey are generated without taxation. " 92

50

In 2010, Maine's per person taxes ($981) were 32% abovethe average state ($662), 46% above North Dakota ($454),and 1557% more than New Hampshire ($63).

93

Bank ofNorth Dakota returns over 20% on equity to the generalfund and saves debt service costs. Since Maine has over$100 Million in debt service costs, Maine has to confiscateits citizens money with high taxation to pay debt serviceto private bankers. Reducing costs through publicly-ownedbanking could be the first step in reducing taxes, whichimpoverish its citizens, many of which are barelysubsisting.

With a State Bank, North Dakota has

Higher Economic Activity94

,

Higher per capita income,95

Lower loan delinquency rates,96

Higher loan to deposit ratios97

,

Lower Unemployment98

,

Lower property taxes99

,

Higher upward mobility100, Higher bank profitability,101

Increasing education spending per student,102

Greater budget surpluses103

, and Lower property value declines than Maine. 104

92 "The Public Bank Solution", Ellen Brown, 2013, Page 36593 best-state-taxes.247wallst.com/l/794 Source Federal Reserve Bank of Philadelphia. [www.phil.frb.org].95 Source: U S Census, [www.census.gov], See Page 3396 See Page 29 [www.calculatedriskblog.com/]97 Source: At end of this document.98 Bureau of Labor Statistics [www.bls.gov, www.floatingpath.com] Page 3699 See Page 34 U S Census Bureau100 See Page 35 /www.nytimes.com/2013/07/22/business/in-climbing-income- ladder-location-matters.html?101 Source: Federal Deposit Insurance Corporation, [www.fdic.gov] Page 32. 102 Center on Budget and Policy Priorities, [www.cbpp.org] page 38 103 Center on Budget and Policy Priorities, [www.cbpp.org] page 35

51

State Economic Expansion

In the most conservative of 3 simulations' of theenvisioned North Dakota-style Maine state-owned bankloaning 70% of state-owned cash it was found that aMaine state-owned bank could increase aggregate lending

$7.284 Billion, raise financial services profits $728.461million, generate 117,494 new jobs, increase totalpersonal income by $4.499 billion, add $285.744 Million toMaine tax revenue and eliminate debt service costs, whichare now over $100 Million per year

105 after 51 stages of

money expansion.

New jobs could be provided to the young people entering theworkforce for the first time, the 47,300 now unemployed,those who have stopped looking for work and Mainers whohave left the state because there were no jobs in Maine.Unemployment reduction should lower unemploymentinsurance business tax premiums and strengthen localbusiness bottom lines.

The study is described in more detail below. Establishing astate bank could solve many economic problems, including:

providing capital when revenues fall, private banks reducelending,

reduce loan default rates and delinquency rates, cut state agency and instrumentality financing costs, increase local community bank and credit union revenues, allow banks to originate more loans, generate more fees, earn more income,

104 See Page 35 - Federal Reserve Bank of New York [www.ny.frb.org] 105 Source: Budget Office Report to Legislature: https://drive.google.com/file/d/0B9OaLAqY5WzqdGdvUzZoZEppRlE/edit? usp=sharing

52

return operational surpluses to the state treasury, lower check clearing services costs, lessen local government credit cost, cut capital outflows and retain more assets, reduce savers' losses from reckless speculation,

protect state funds from risky mega-banks 106

offset pressures for tax increases reduce correspondent bank services costs, lower concentrated financial power, reduce income inequality, increase economic justice.

Maine's financial institutions in 2012 included 51 federal-chartered credit unions, 14 Maine-chartered savings banks,12 Maine-chartered credit unions, 10 Maine-chartered [non-deposit] trust companies, 5 Maine- chartered commercialbanks, 5 federal-chartered commercial banks, 4 federal-chartered savings banks, 3 federal-chartered savings andloan associations, 1 Maine- chartered savings and loanassociation, 1 Maine- chartered merchant bank, and 1federal-chartered trust company.

106 GSIFIs are "Globally Systemically Important Financial Institutions" (i.e. too-big- to-fail banks) the term originated in the Dodd-Frank Act which was supposed to correct the problem but made it worse by shifting responsibility for malevolence of wealthy from malefactors to governments.100 mainerealtors.com/image_upload/StateofMaine01-12Data2.pdf

53

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Chapter 4 The Empire Strikes Back

"Is there anyone I'd never take as a client? Well, I'dnever represent a banker" -G. Spence

The Joint Insurance and Financial Services Committeehearings offered proponents no opportunity to rebut thetestimony of witnesses who testified against bills, givingopponents of the bills the final word. in May, 2013, aSavings Bank officer testified against the public bank bills asfollows:

"We are opposed to the proposed creation of a state bankfor three basic reasons:

There is no need or demonstrated demand. Maine bankshave ample deposits to loan to eligible borrowers. In 2012,Maine banks made $3.0 billion in loans to Maine companiesand $2.5 billion in loans for residential real estate. At (our)bank we made 320 new commercial loans in 2012 worth$75.0 million.

The proposal to place at risk the funds of this state is tomisunderstand the role and responsibilities of the statetreasury. A bank lending money accepts a certain amountof risk that the loan may not be repaid, and there may bea loss of principal. This risk of losing principal from theTreasury's cash pool is an unacceptable risk as this money isheld for a specific purpose.

The proposal lacks any rigid, regulatory oversight (the statebank is only to be examined against the rules their boardestablishes for themselves). This would potentially jeopardizethe competitiveness of the 31 banks currently operating inthe state by permitting an unregulated entity to compete inthe marketplace with highly regulated, tax-paying Mainefinancial institutions. You have heard reference to the Bankof North Dakota (BND) as the only state-owned bank in thenation. A 2011 Federal Reserve Bank of Boston studyindicates that the BND was established in 1919 with $2 million

54

in capital from state bonding. This is not 1919 andMaine banks have an infrastructure to assist them withaccepting deposits and making loans to Maine citizens.Maine banks are adequately capitalized and routinelypartner with FAME and the Small Business Administration tomeet the needs of Maine’s citizens and businesses. We alsofrequently partner with each other on loans above a certainsize or where there are reasons to share the risk. Currently(our bank) participates with several Maine Based banks inorder to accommodate large borrower needs and effectivelymanage credit risk. You have heard how successful the BNDhas been. However, the initial capitalization of the BNDproved inadequate, the state later withdrew funds frombanks in western North Dakota, leading to 18 bank failures inthe following three weeks. Maine does not need a state-owned bank! This bill is a bad idea for Maine. 107

Testimony of Savings Bank Vice President:

At the May, 2013, Joint Insurance and Financial ServicesPartnership Bank hearing, the Executive Vice President, ofanother Maine savings bank testified against the StatePartnership Bank Bill. His testified: "Our industry has 9,000employees, 510 branches and $28 billion in assetsdeployed to serve Maine families, businesses, municipalitiesand even to the State. importantly, all Maine banks areinsured by the FDIC which protects depositors without theuse of any taxpayer money, and we are highly regulated byboth the state and the federal government as to the types ofloans we can make, the risks we can take and theprotection we assure with your deposits. While LD 1078purports to be a study resolve, and LD 1508 containsspecific legislation to establish a State Bank — in fact bothseek exactly the same policy determination from thisCommittee. They both assume that a State Bank run by thegovernment is necessary and beneficial public policy. Theyare both fundamentally wrong and are built on afundamental lack of

107 Testimony of Patricia Wiegel, President of Norway Savings Bank, Norway, Maine

55

appreciation for the current banking and lending landscapein Maine; the currently available federal and state programs;and the complexities and risks involved in banking. AState-run Bank is not necessary to support a healthy localbanking landscape for Maine people and businesses.Moreover, LD 1508 despite its own language, sets up agovernment entity that by its very design competes withcommunity banks. And l think these proposals underestimatethe risk involved in bank lending.

First, the Maine marketplace is dominated today bylocal banks and credit unions. The preamble of LD 1078suggests that large banks control the majority of Maine bankdeposits. In fact, as of the most recent FDIC data (June2012), deposits held by 27 Maine headquartered banks are61% ($13.94B) of the state's total bank deposits of$22.85B. When you add in our brethren at Maine creditunions, local banks and credit unions account for about2/3 of all Maine deposits. This situation in Maine is nearlythe inverse of the picture in America, where the largestbanks hold a majority of all deposits. Significantly, 19 ofthe 27 Maine banks are mutuals —-that means they wereformed for the mutual benefit of the depositors, have noshareholders, are accountable to customers and reinvestprofits back into the bank and the community. Notably, 70%of Maine banks are mutuals versus only 8% of banksnationally. The Maine banking landscape is fundamentallydifferent than the rhetoric l often hear from State Bankproponents. Local banking in Maine is quite healthy withouta State Bank.

Second, Maine banks are lending - and have ampledeposits to back up that lending activity; During thischallenging economic cycle, undisclosed savings bank alonehas originated about $3 billion in loans since early 2008 —-nearly half of that total in business loans of all sizes.Deposit growth at most Maine banks has been substantialover the past few years and more than adequate to supportloan growth, as the financial crisis and uncertainty hasbrought a new appreciation for households and businessesalike for reducing debt, increasing savings, and valuing thesecurity and stability of local financial institutions.Moreover, Maine banks have access to the Federal Home Loan

56

Bank of Boston, the Federal Reserve, brokered deposits, andother resources for additional sources of funds to lend; andhave access to the secondary market to sell loans in orderto balance loan demand and funding sources. Maine banksdo not need the deposits or loan participations from a StateBank to support vigorous lending activity.

Third, a number of effective federal and stateprograms already exist to provide loan guarantees and otheropportunities for banks to expand lending capacity; Thefederal Small Business Administration operates a number ofsubstantial loan guarantee programs and other creditenhancements; the Finance Authority of Maine provides anumber of other important guarantee programs, as do RuralDevelopment, MaineHousing, and other federal and stateagencies. Many CAP agencies and other developmentcorporations provide subsidized lending and subordinateddebt products. undisclosed savings bank has been the toplender to first-time home-buyers for MaineHousing for sixyears running. We have been the top SBA lender in Maine forthe last two years.

We are involved in the lion's share of Low-income HousingTax Credit developments in Maine. We are innovative inusing the federal tax credit programs. it is not very clear inmy discussions with State Bank proponents over the pastcouple of years, what the need is that the State Bank will fillthat SBA and FAME do not already seek to fill. However, itis quite possible that thoughtful policymakers couldconclude that programs such as loan guarantees orincentive programs operated by FAME or MaineHousingrequire enhancement or expansion. But that is not these twobills and as l understand it, nor are those agencies overseenby this Committee. We don't need a new government bankto compete with Maine community banks or play roulettewith taxpayer money to address any real or perceivedopportunities to build on the good programs at FAME, ifthere is such a need. In short, LD 1078 and LD 1508 are asolution in search of a problem. Solutions conceived bynational think tanks without any understanding or regardfor the situation locally here in Maine. Indeed, theMassachusetts Legislature concluded recently in studyingsuch proposals, that there was ”no compelling rationale.”

57

That is even more true here in Maine. l would like to turn toa few specifics about LD 1508 that are troubling. LD 1508establishes a State Bank that by its design competes withlocal Maine banks. LD 508 indicates the new State Bankshould not compete with local banks yet its very designapparently contemplates and authorizes just suchcompetition with Maine's local banks. The State Bank isauthorized to accept the deposit of public funds. Localcommunity banks today hold significant public deposits--state, local, and quasi- public. undisclosed savings bankalone holds public sector deposits of more than $170 million— and we use these funds to make loans to Maine people,companies, and public sector borrowers. And when wecompete for municipal deposits, it is usually other localMaine banks we are competing against. We serve as bondtrustee for the Maine Turnpike Authority — a capacity weinvested to create to serve the State when a larger banksent this business out of state. The State Bank is authorizedto make loans to instrumentalities of the State.undisclosed savings bank alone has over $58 million in loancommitments outstanding to public sector entities. TheState Bank could loan directly to these entities incompetition with us and other local banks. The State Bankis authorized to lend into participations underwritten byprivate banks. undisclosed savings bank participates inapproximately $28 million in lending led by other banks ~and we have lead participations in which other Maine bankslend nearly $50 million. The State Bank is authorized tocompete with and for this lending business.

lt is impossible to adequately address here in shortthe complexity of sound banking and the areas in whichserious issues are posed by the design principles for a StateBank contained in these two bills, so l will only touch on acouple of issues here. Both LD 1078 and LD 1508 evince littleawareness of the risk inherent in bank lending — and neitherproposes any credible mechanism to capitalize the StateBank. LD 1078 proposes a bank without deposit insurance,with a politically appointed board that sets its own rulesand that has as a source of unlimited deposits, namely thestate's funds. Even more noteworthy, the lending expectedof this bank is likely those loans that highly regulated and

58

properly managed financial institutions are prohibited frommaking because the risk profile of these loans often fall intothe category of unsafe and unsound banking. Capital wouldbe an at-risk equity investment by the State, not a deposit.And any state funds used to capitalize the Bank —- as well asdeposited within a State Bank — appear intended tosupport additional, riskier lending (whether direct orindirectly) that is not being done today — including lendingnot being done today even with the benefit of loanguarantees, incentives, or subsidies available via SBA,FAME, MaineHousing, and Rural Development?! The numberone cause of bank failures is making risky loans that gosour. Even with loan guarantees and participations, a bankmust make loans that the borrower has a high likelihoodand demonstrated capacity to repay. Otherwise, it is not aloan -- it is venture capital. Both of these bills areunnecessary and ill-advised for Maine. l urge you to votethem both unanimously Ought Not to Pass.10

59

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Chapter 5 Riposte

"The important thing is not to stop questioning. " - Albert Einstein

Since banker-witnesses continually repeated erroneous fablesin their testimony, we organized the response to theirfallacious statements into myths and fallacies to minimizeany redundancy in correcting them.

The Fallacy that There's No Need or demonstrateddemand for a Public Bank

What are Maine's needs? Six years after the largestpostwar U. S. recession, Maine's economy and budget lookbleak. Maine is undergoing an unsustainable financialshortfall, like many other states. Maine's economy is farunder its potential. State revenues for the recent past andforeseeable future have been far below costs.

Our entire country is facing financial ruin from thewrongdoing of global bankers and deregulation bygovernment. Publicly-owned banking in Maine could helpcorrect it, at least here in our state.

The Fallacy that Maine has a Healthy BankingSector

Although large multinational banks received over $16trillion in federal bailouts after the 2008 collapse, theyhoarded the money, gave excessive bonuses to their officerswith it, and provided no bailouts for state

108 sott.net/article/250592-Audit-of-the-Federal-Reserve-Reveals-16-Trillion-in- Secret-Bailouts

60

governments.110 Public banking offers a solution thatwould shield Maine from future financial disasters like2008. A banking landscape cannot be healthy when theunderlying economy is dysfunctional.

Maine has had a budget gap for several years, like mostother depressed states without publicly-owned banks. Loandemand is weak because Maine is still in decline. Withoutopportunity and reasonable expectations for success inenterprise, people will seldom borrow. Capital demand isnot static. Publicly-owned banking can instigate economicgrowth and improve credit reliability.

A state-owned bank would increase loan demand as well assupply. Many underlying global financial system causes ofthe 2008 panic remain uncorrected. Reducing debt is notthe solution to the depressed economy, it is the problem.

To quote Marriner Eccles, Federal Reserve Chairman andBanker whose name is on the headquarters building of theFederal Reserve in Washington, DC, "If there were no debtthere would be no money.

111" Money is created when banks

issue loans and is extinguished when loans are repaid.

John Kenneth Galbraith once stated that: "In numerous yearsfollowing the [ civil] War, the Federal government ran aheavy surplus. It could not, however, pay off its debt, retireits securities, because to do so meant there would be nobonds to back the national bank notes. To pay off the debt

was to destroy the money supply.112

"

Maine State-owned bank creation would not change accessto Federal Home Loan Bank of Boston, Federal Reserve,brokered deposits, secondary markets, or additional sourcesof funds to lend by local Maine community banks. LikeBank of North Dakota, envisioned Maine state-owned bankwould be a member of the Federal Home Loan Bank, and theFederal Reserve.

109 webofdebt.com/articles/why_banks.php110 truth11.com/2009/02/10/quote-if-there-were-no-debt-marriner-eccles/111 izquotes.com/quote/230972

61

The Fallacy that Public Banking puts State Funds atRisk

The statement that public banking: "Place at risk funds ofthis state" is false. A state-owned bank would not placestate funds at a higher risk. Publicly-owned banks do notincrease risk of losses of state funds. The banker implies thatMaine has never taken risks before nor lent money before,which is not true. Public Bank benefits have been proven inNorth Dakota, and in 40% of the world, which wereunscathed by the 2008 global shadow banking systemcrash, before Maine and other states started seeing budgetgaps. Organizing Maine as a state bank would reduce, notincrease, risk of loss of funds.

Roulette is a good metaphor for the so-ca l led "banking"done on Wall Street, today, but it is an erroneous andcompletely inappropriate metaphor for publicly-ownedbanks. If a Maine state-owned bank, modeled on Bank ofNorth Dakota, held all state cash, the risk to Maine'seconomy and government would be substantially lowered,not increased. National events have substantially raisedrisk in private banking. This will be discussed in the nextsection.

Bank of North Dakota operated conservatively andsuccessfully for over 94 years, earning up to 25 percentannually without excessive risk. Never has a major economicloss resulted from the state-owned Bank of North Dakota.When North Dakota was faced with major flooding onespring it was Bank of North Dakota acting in the publicinterest by financing flood recovery projects that restoredits economy. When dust storms and crop failures during adepression threatened to destroy North epartment ofFinancial Institutions.

Maine state-owned bank, modeled on North Dakota, wouldbe regulated like the Bank of North Dakota, by the MaineBureau of Financial Institutions, Office of Comptroller ofCurrency, Federal Reserve Bank of Boston, and the ConsumerFinancial Protection Bureau created under the Dodd-FrankAct. A Maine s ta te -owned Bank, modeled on Bank ofNorth Dakota, would be regulated and overseen better than

62

private Maine banks, because it would be would be underconstant public scrutiny, carefully examined, analyzed, andaudited.

Bank Profitability

North Dakota's banking sector, ranks the 4th most profitableof 50 states, while the Maine banking sector ranks 46th of50 states in profits. North Dakota's state- owned bankprovides liquidity to its region. Without a state-ownedbank, Maine suffers from poor liquidity, stagnation, andrecession. Maine is 6th up from the bottom on the rightside. North Dakota is 4th down from the top on the left sidein the following chart

115.

Bank profitability is far far better in the only state with astate owned bank than it is in Maine. This is the opposite ofwhat the bankers testified in the hearings on the Public BankBill. North Dakota private banking sector is 4th mostprofitable of 50 states. Maine's banks are 46th from themost profitable out of 50 states. Maine community banksare in the bottom 8% in profitability. North Dakotacommunity banks are in the top 8% in profitability.

112 industrialbankers.org/where-is-banking-most-profitable-in-the-united-states/

63

.

64

The Unfair Competition Fallacy

Contrary to banker-witness' statements, that becausecommunity banks do not have the deep pockets of astate- owned bank, it could capture customers that wouldjeopardize community bank viability, the truth is that itwould do just the opposite. The state-owned bank doesnot compete with community banks. It hasn't in NorthDakota; it won't in Maine.

If private community banks were harmed by unfaircompetition with state publicly-owned banks, privatecommunity banks would have lower profits in state-owned bank states, like North Dakota, than in stateswithout state-owned banks. If private banks wereharmed by unfair competition with state-owned banks,private banks loan delinquencies would be higher inpublic-owned bank states, than in states without state-owned banks.

In fact, private North Dakota community banks have farhigher average profitability, and lower loan delinquency,than Maine community banks.

116 North Dakota has the

lowest loan delinquency rate of all states and NorthDakota bank profitability is much higher than Maine.Maine delinquency rate ranks 35th of 50 states.Therefore, the unfair competition charge is erroneous.This is shown on the following graph. 117

65

113 See Page 57 Profitability of Banks by State114 calculatedriskblog.com/

66

State-owned banks are banker's-banks that provideservices not available to community banks. Partnering withstate-owned banks, community banks can capture feesfrom services like loan origination, without the costs andliabilities required to service loans. Therefore, a Mainestate-owned bank, modeled on Bank of North Dakota,would not compete with local private banks, but just theopposite, partner with them. Bank of North Dakota does notcompete with, but partners with local banks, making localbanks stronger and more successful. North Dakota privatelocal bankers strongly support the state-owned Bank ofNorth Dakota.

Even if a publicly-owned bank did compete, competition i sa good thing, not a bad thing. Competition disciplinescompetitors to provide better customer service lower costs,increases innovation, raises economic activity, and providesgreater choices for consumers.

The Capitalization Fallacy

A national recession resulted from the 1918 World War IArmistice, when war spending contracted, farm prices fell, andNorth Dakota farms were foreclosed by banks. Banks failureswere heightened by runs on banks and loss of manyfarmers' savings. Outrage at private out of state bankersin North Dakota triggered formation of the state- owned Bankof North Dakota.

Today, banks runs are much less frequent, because depositsare insured, up to $250K, raising small depositors'confidence that their money is safe in the bank, but theyweren't insured at all then. In early Bank of North Dakotayears, when alleged withdrawals from banks causingprivate bank failures, mentioned by banker-witness,occurred, runs were easily triggered by rumors becausedepositors savings were unprotected.

67

What the witness did not mention was that the MaineState Treasurer could withdraw money from private bankstoday, without the state being organized as a bank. Ifwithdrawing funds creates bank failures, being a state-owned bank is not required for a state to create bankfailures. How much harm BND fund withdrawal had oncommunity bank stability is unclear. If it made a difference,then community banks that failed may have had otheroperational problems that made them vulnerable to failure.

I remember being in line at a bank a few years ago whenelectronic signs in the lobby were flashing messages tocustomers as they were withdrawing money. The messageswere saying that the bank was well capitalized andcustomers did not have to worry about the security of theirfunds. The signs said the rumors were not true that thebank was unstable. A few weeks later the FDIC declaredthe bank insolvent and the Federal Reserve arranged arescue by a larger bank, which now owns it. Whendepositors hear bankers saying they have nothing to worryabout, people should worry.

Regarding the charge that BND removed their depositsand banks failed as a result, to banks deposits are liabilities,not assets. Deposits payable may give banks a base forexpanding loans, but, deposits payable are not beneficial tobank profitability. Fees from services provide more profits forprivate community banks than deposits.

A partnership with a state-owned bank, can earncommunity banks loan origination fees, and other incomethat increase profits, while letting a state-owned partnershipbank hold deposit liabilities. Banks must retain enoughreserves to satisfy regulators that they could providereserves to depositors needs for that cash at any time.

Capitalization of local private community banks or creditDakota's agriculture industry. Bank of North Dakota put amoratorium on farm foreclosures until the crisis had ended.

Many economic problems, poverty, low income, high taxes, unemployment, budget deficits, low bank profitability, high delinquency rates, low economic activity, low confidence, andlow education need to be corrected in Maine. A state-owned

68

bank could help in a major way to resolve them in Maine asit has in North Dakota.

The fallacy that State-owned Banks are more risky

Two Maine savings bank officers' statements that investingMaine cash in a state-owned bank would be riskier thaninvesting it in private banks were fallacious.

A big direct risk to Maine, and smaller banks, into whichMaine now invests, which hold correspondence accounts inGSIFI mega-banks is derivatives threat. U S Bank, forexample holds a large portion of the Treasurer's cash pool.Their derivatives position looks better than larger banks,but who knows where their funds are deposited?

Depositors in private banks, investments and financialinstruments, such as Maine government, are now riskingfunds to the possibility o f private banks failure, or financialinstruments' devaluation. Maine state deposits of $3.1 Billioncash and equivalents are at risk in private banks. Nationalbank failures have been increasing since 2000. 113

If another big bank fails, almost every other non-bank state,may also have funds at risk, and the private financialeconomy, could crash like it did in 2008, except North Dakota.Maine state government has accepted local lending risks toMaine businesses and municipalities for many years throught h e Finance Authority of Maine (FAME), Maine HousingAuthority, Maine Municipal Bond Bank, and otherinstrumentalities.

115 fdic.gov/bank/individual/failed/banklist.html

69

Depositing public state funds in a state-owned bank,modeled on Bank of North Dakota, would be l e s s riskyt h a n in private banks and repositories where state fundsnow reside.

114 I t would significantly reduce hazard of loss

of state monies, not increase it as bankers claimed.

The Fallacy that Proponents Misunderstand MaineTreasury's Role

Contrary to bankers' statements, publicly-owned bankproponents do not misunderstand State Treasury roles andresponsibilities. If Maine were organized as: "The State ofMaine doing Business as [Maine state-owned bank]" with$2.7 Billion of added credit available, the State Treasurerwould not have to constantly juggle funds in order to keepMaine operating as she, and her predecessor, have beendoing for six years since the 2008 collapse.

The Maine Treasurer would continue to have a majordecision-making role after Maine is organized as a publicly-owned bank. Publicly-owned banks reduce, not increase,chances of loss of state funds, in repositories where statefunds are deposited.

State-owned Banks are Unregulated Fallacy

Bankers' statement, "state bank is only to be examinedagainst rules their board establishes for themselves," isalso false.

Bank of North Dakota is regulated by Office o f Comptrollerof Currency, Federal Reserve, Consumer Financial ProtectionBureau, and t h e North Dakota Department of FinancialInstitutions. During the 2 0 0 8 economic collapse the U S Treasury Department devised "stress tests" to predictwhat would happen to banks under difficult economicconditions. This was supposed to reassure "markets,"people who question whether their money is safe in thebank.

Local community banks may continue to participatefinancially after a state bank is established. Participating

70

with a state-owned bank provides local lenders with greateraccess to capital at lower interest rates, reducing communitybank risks by sharing risks with the state- owned bank.

Finance Authority Maine, FAME, is a state instrumentality118

,which could be part of the new state- owned bank. Banker-witnesses statements that they don't need any moreparticipation partners misses the state-owned bankjustification point.

The Deposit Insurance Fallacy

"Without deposit insurance" criticizes publicly-owned bankssaying they have no way to insure their funds. Implyingpublicly-owned banking is too risky because it is uninsuredcontradicts bankers asserting that it is unfair because it hasunlimited funds. With unlimited funds why would it needdeposit insurance? Predictions that state-owned bankwould make unsafe, unsound loans is fa l lac ious.Being backed by the state is far better insurancethan any other insurer could provide, including FDIC.The two cr i t ic isms contradict each other and areb o t h erroneous.

It would not make sense to insure only $250,000,which is about 8 percent, of Maine's $3.1 Billion in cashand give the insurer author ity to shut Maine stategovernment down as FDIC

1 1 9

does with failingmember banks. A state-owned bank couldimplement pr ivate insurance if avai lable. Noth ingprevents that but FDIC is a bad idea

18 Instrumentality: A subsidiary branch, of a government, by means of which functions or policies are carried out for budget purposes also called a component www.thefreedictionary.com/instrumentality

71

If a state bank has a "source of unlimited deposits,namely the state's funds," why would a state-owned bankneed deposit insurance, since an unlimited source of fundscould correct any problem? What private insurer couldhave more capital than the state? State-owned bankopponents' criticism: "That has as a source of unlimiteddeposits" criticizes state government for being too creditworthy, as if it having unlimited funds were a bad thing. Theopposite of their criticism that state banks "put state funds atrisk."

State and federal agencies that examine and regulateprivate banks will regulate the envisioned state-ownedbank, except FDIC, an association that only protectsdeposits up to $250,000. Since most Maine state deposits inprivate banks exceed $250,000, if Maine were an FDICmember, FDIC does not protect most of Maine deposits.State funds would be at lower risk with a publicly-ownedbank. In the long run to remain viable, private banks mustbe able to persist without government subsidies, orgovernment deposits. A state-owned bank would makeexisting local banks less failure-prone, not more.

119 "FDIC" is "Federal Deposit Insurance Corporation."

72

Being backed by the full faith, credit and resources of Maineis far better security from risk of loss than FDIC insurance.FDIC funds are smaller than t h e capacity of a state, suchas Maine, to guarantee its own deposits.

FDIC insurance for a State-owned Bank would also giveauthority to a Federal-chartered Association to shut downState Government and place State Government inreceivership. Saying "Maine banks are insured by the FDIC" isfalse and highly misleading. All deposits in all private bankswith FDIC insurance are not now safe from confiscation bycreditors under the GSIFI provisions of the Dodd-Frank Act.

A state bank which didn't invest money in private WallStreet banks would reduce risk of Maine taxpayers funds, notraise it. Failed banks declared "Global Systemically- ImportantFinancial institutions" can confiscate deposits of failed banksto pay debts under the new Dodd-Frank Law, even if depositsare insured and under $250,000.

Need for a state-owned bank is not due to t he requirementfor more lending authority, nor the necessity for greaterbank capitalization. It is due to the needs for sustainablelivelihoods, economic independence, economic justice, andeconomic sovereignty for people. A state- owned bank wouldcollaterally benefit local Maine community banks and creditunions, but existing banks aren't the main goal of publicly-owned banking.

Contrary to banker-witnesses' statements, public bankproponents policies ARE built on a fundamental appreciationfor the banking and lending landscape in Maine, availablefederal and state programs, and t he complexities and risksinvolved in banking. However, this criticism is a subjective, notan objective, statement.

The fact that Maine's current finance capability isinadequate has even been expressed in the law books of Maine.Legislative findings in Title 10, Chapter 110, section 981 part 4of the Maine Revised Statutes, which says:

73

"The lack of affordable financing options and marketingand other technical assistance jeopardizes maintenance ofagricultural, forestry and fishery operations at present levelsand makes expansion and diversification of these enterprisesmore difficult. The lack of appropriate financing andtechnical assistance is contributing to abandonment ofagricultural lands in the State. Inability to continueagricultural, forestry and fishery operations at current orexpanded levels jeopardizes the continued existence offamily-owned natural resource enterprises and lessens thesupply of locally produced food and fiber available to fulfillthe needs of the citizens of this State. Constraints onoperation and expansion of natural resource enterprisesdecrease the available employment, particularly in ruralareas and result in the problems attendant onunemployment. Threats to viability of family farms and othernatural resource enterprises directly threatens the essenceof the rural values and the rural way of life, to thedetriment of the welfare of all the people of the State."120

As stated in the Maine Revised Statutes: "New natural resourceenterprises face particular problems in obtaining adequatefinancing. There are more full-time farmers going out ofbusiness than entering farming, a problem which is caused,in part, because loans for new farmers for agricultural land,improvements and operations are either unavailable orunaffordable through the conventional credit markets. Thereare increasing numbers of new, small and part-timefarmers whose needs are not adequately served by anyexisting financing or technical assistance programs;" 121

Public banks are for citizens, not banks, although banksthat participate will profit from publicly-owned bankbenefits. Our analysis, below, estimates aggregate profitincreases of up to $2.7 Billion for local Maine banks fromcreation of a state-owned bank. Money is created bybanks when they lend it. A state-owned bank that lendsmoney in M aine will create a new state money supply

120 Maine Revised Statutes Title 10, Chapter 110, 981 Sec 4: Legislative Findings

121 Ibid

74

that will improve the economic prospects of all citizens.

The envisioned Maine publicly-owned bank would lift allsectors of its economy, like a rising tide that lifts all boats.Since 2008 numerous incidents have been reported of businessesbeing unable to obtain bank financing. A State-owned bankwill reduce or eliminate this condition.

The Banks already Partner with FAME, SBA, CAPs,MaineHousing now, Fallacy

State instrumentalities, including Finance Authority of Maine(FAME) and MaineHousing would probably be part of the newstate-owned-bank and continue successful programs. SmallBusiness Administration (SBA) and Community Action Program(CAP) agencies could continue to operate and provide outreachand loan origination for a new state-owned bank (SOB.) Otherguarantee programs could continue, after an SOB was operating.Borrowers could still utilize multiple sources to structureprojects. They would simply have one very effective, new tool.

It is probably true that 2013 publicly-owned bank billswere referred to the wrong committee, since Insurance andFinancial Service oversees existing finance and insuranceregulation, while creating an SOB is economic development.Labor, Commerce, and Economic Development committeeprobably should have heard testimony and would have madebetter decisions on it.

Since Finance Authority of Maine (FAME) and Maine HousingAuthority (MaineHousing) would be part of an SOB, talkingabout them as if they would be independent entitiesmisunderstands public banking. Many citizens unserved byexisting Maine programs, FAME and Mainehousing, could beserved by a new state-owned bank. For instance, oneexisting program exempts farm working capital. Why?

75

Farmers are in dire need of working capital when plantingseason arrives. I t s h o u l d n o t b e d e n i e dt h e m . A new bank could fill holes, such as this, inexisting state programs that reduce expansion of a greenereconomy.

The Massachusetts spurned it, so Maine should, Fallacy

Massachusetts and Maine are very different states.. NeitherMassachusetts' nor Maine's Legislature has always done theright thing. Maine should consider proposals on its own meritsnot follow in another state's footsteps, especially one asdifferent from it as Massachusetts. Like Maine, Massachusettshas been facing budget shortfalls. Boston is a financial centerthat attracts funds from smaller New England states likeMaine. What is good for Massachusetts is not necessarilygood for Maine.

T o the Federal Reserve Bank of Boston study thatcriticized public banking in Massachusetts, Ellen Brownreplied: " While it may be true that large Wall Street-basedbanks are available to take on complex local lending projects,the fact is that they are not doing this adequately. They arereported to be more interested in using today’s extremely lowFed Funds rate to speculate, invest abroad, or invest in risk-free government bonds, and profiting from the spread.Moreover, they are leveraging the states’ revenues and assetsfor these investments. State-owned banks could recapturethis spread for their own local needs. Out-of-state moneycenter banks are now dominating the banking business in ourmajor cities, squeezing out local banks that would beinterested in undertaking complex local projects if they hadthe capital and other resources to do it. A state- owned bankcan provide those resources, just as the BND does for localbanks in North Dakota.

"As for the private bankers’ banks in the state, we quotefrom an earlier response by the Center for StateInnovation: “Quarterly aggregated financial data compiled bythe Bankers’ Bank Council estimates that banker's' banks

76

provide services to 58% of the banks intheir respectivemarkets. But this leaves a little over 40% of the bankingmarket not being served by the very small number of bankersbanks out there.

"Also, the bankers’ bank market is dominated by one bank:about 30% of the market (in terms of deposits and assets)is controlled by TIB: The Independent Bankers Bank,headquartered in Texas [obviously not a Massachusetts bank].“Public institutions compete productively with private ones in amultitude of sectors: education, energy, mail service, studentlending, library services. The Federal Reserve systemprovides services that private bankers’ banks might alsoprovide, but most agree that its existence is indispensable forthe banking sector."122

Borrowing by state instrumentalities from private banks,costing hundreds of millions of dollars of debt service costs,when Maine could have enough credit to finance itself as abank, c o u l d b e c o n s i d e r e d financial corporatewelfare. What justification do private banks have forcollecting these high profits from taxpayers, if a state-ownedbank could self-finance its own investment for nothing?

Banker-witnesses could have justifiably argued that someexisting state instrumentalities already compete with privatebanks, but they didn't. Finance Authority of Maine, MaineHousing Authority and Maine Municipal Bond Bank nowprovide loans that private local community banks might beable to provide, which could also be considered to"compete with private community banks." But they chose toignore this and say that a new state-owned bank wouldcompete with community banks, which erroneously twists thefacts.

A state-owned bank will strengthen, not destroy localcommunity banks. Creating a publicly-owned bank won'tworsen public-private lending competition. What maychange is that a publicly-owned bank, modeled on NorthDakota, would participate with local banks more often tomake community banks more successful. It is not in thepublic's interest to destroy Maine's local community banks.

77

The SOB would benefit private banks and credit unions inMaine more if local banks participated with it in loans toMaine enterprises. It is not a "solution in search of aproblem" as the critic stated. What are the problems that astate bank can help solve?

The State of Maine has an unsustainable budget gap,increasing poverty, high unemployment rate, falling homevalues, high taxes, declining economic activity, collegestudent debt burdens, increasing income inequality andrising wealth inequality. Maine cannot afford to continue onthis current path. With a Public Bank, North Dakota has hadthe highest economic activity of all states because its state-owned bank lifts its entire state economy. Maine shouldfollow its example.

The "Politically-Appointed Board" Myth

Maine now has over 25 Maine components governed by"politically-appointed boards of directors", the most similarone being Maine Municipal Bond Bank. "Political" is definedas "of, relating to, or dealing with the structure or affairs ,of

government, or the state"123 If politically-appointed boardsof directors, or commissioners are a bad thing, then Maine'sentire government itself is in deep trouble, as is everyother state government. The truth is that "politically-appointed boards" are common in Maine and every otherstate and not any more problematic than any other methodof governance.

122 ellenbrown.com/responses/%E2%80%9Cthe-bank-of-north-dakota-a-model- for-massachusetts-and-other-states%E2%80%9D-%E2%80%94-response-to- the-may-2011-report-by-the-federal-reserve-bank-of-boston/123 Shown in Treasurer's Cash Pool Report (2013) Listed on Page 39.

78

The words, describing Maine as having an "unlimitedsource of funds" are not true. Bank of North Dakota, onwhich the envisioned Maine SOB would be modeled, hasn'tmade unsafe, unsound loans. When 2008 internationalfinancial collapse threatened to engulf the world, 40% of theplanet served by publicly-owned banks [China, India, Russia,Brazil, North Dakota et al] was unscathed by the collapse.Public banks saved the world from a far worse disaster. Ifventure capital is needed to provide livelihoods forthreatened Maine workers and families then venture capitalwould be good for Maine citizens. What is wrong with venturecapital?

How much taxation Maine people are willing to tolerate islimited. With the 14th highest tax burden of the 50 UnitedStates, prior

124

to the latest 2013 Maine tax increase, it maynow be at its tax tolerance limit.

123 thefreedictionary.com/politically

79

According to on-line financial reports, total Mainegovernment and components' assets exceed $31 Billion, ofwhich $3.1 Billion is in Cash or equivalent, which is shown inTable 1.

Table 1 Maine Instrumentalities' Balance Sheet Summaries

Instrumentality Assets Liabilities DifferenceChild Development Service $2,473,000 $4,668,000 ($2,195,000)Community College System $257,954,000 $42,878,000 $215,076,000ConnectME Authority $3,867,000 $345,000 $3,522,000Education Center for Deaf $7,116,000 $2,028,000 $5,088,000Me Educational Loan Authority $215,131,105 $210,421,987 $4,709,118Efficiency Maine Trust $44,082,299 $3,872,218 $40,210,081Public Employee RetirementSystem $11,144,085,786 $303,416,449 $10,840,669,337FAME $44,620,000 $16,630,000 $27,990,000Loring Development Authority $68,361,000 $5,712,000 $62,649,000Maritime Academy $58,536,000 $7,018,000 $51,518,000Midcoast Regional RedevelopAuthority $137,943,000 $18,579 $137,924,421Municipal Bond Bank $2,308,394,405 $1,689,070,350 $619,324,055New England Passenger RailAuthority $9,839,469 $3,635,348 $6,204,121Nextgen College Investing Plan $6,029,973,192 $16,303,440 $6,013,669,752Small Enterprise Growth Fund $8,124,000 $26,000 $8,098,000State Housing Authority $1,875,000,000 $1,582,500,000 $292,500,000Technology Institute $32,028,000 $30,967,000 $1,061,000Turnpike Authority $661,551,771 $507,923,802 $153,627,969Univ of Maine System $1,180,000,000 $355,000,000 $825,000,000Lottery $20,191,000 $19,879,000 $312,000Maine Military Authority $9,083,000 $1,088 $9,081,912Marine Ports $12,725,000 $0 $12,725,000Ferry Service $39,883,000 $1,373,000 $38,510,000Prison Industries $892,000 $98,000 $794,000Dirigo Health $18,454,000 $1,814,000 $16,640,000Transit Aviation Rail $103,436,000 $31,000 $103,405,000Cons Emerg Comm Fund $2,190,000 $1,030,000 $1,160,000Other Enterprise Funds $206,855,000 $52,941 $206,802,059Baxter Park $58,814,000 $0 $58,814,000Total $24,561,603,027 $4,806,713,202 $19,754,889,825Maine - General Fund $6,997,101,000 $2,705,422,000 $4,291,679,000Grand Total $31,558,704,027.10 $7,512,135,202.00 $24,046,568,825.10

124 taxfoundation.org/article/annual-state-local-tax-burden-ranking-fy-2011125 Ibid.

80

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Chapter 6 Maine and North Dakota

"Economics is half psychology and half grade threearithmetic, and the U.S. does not now have either halfright." -Conrad Black

In the following chart, created by the Federal ReserveBank of Philadelphia, showing economic activity growth bystate, North Dakota, on the far right, is increasing. As youcan see, while North Dakota grew, all other state economiessince 2007 shrank.

Since 2007 Maine's Economic Activity declined over 5%, to31st of 50 states but, with a publicly-owned bank, the onlystate whose economic activity grew, North Dakota had thebest economic performance of all states.

125

New York,Michigan, and Oregon dropped by over 20%

It is not coincidental that only North Dakota grew andonly it had a publicly-owned bank. its economy grew becauseNorth Dakota had a state-owned bank; t h e other stateeconomies shrank, because they didn't.

This chart shows how a state bank improves the entirestate economy by creating new money when they loan it tolocal enterprises which create new jobs.

126 Federal Reserve Bank of Philadelphia - philadelphiafed.org/research-and-data/

81

82

Since market dynamics are complex, why North Dakotagrew while other states shrank, is n o t e a s y t oe x p l a i n . Like Maine, North Dakota i s on theCanadian border. Like Maine, North Dakota is rural.Because its state-owned bank stabilized its economy,revenue shortfall-induced budget gaps that other states,including Maine, faced were absent in North Dakota. It isreasonable to expect that similar benefits can be realized inMaine, if it creates a state-owned bank like North Dakotahas.

The envisioned SOB could lower Maine loan default ratesand provide state, county, municipal, Housing Authority,Finance Authority, and other government agency funds atlower costs, reduce out-of-state banks fees, cut capitaloutflows and retain more local money locally.

Per Capita Income

According to a Bangor Daily News article Maine personalincome ranks 30th

126 of t h e 50 states. Factoring in Maine

prices, consumers in Maine rank 36th in per capitapurchasing power of the 50 states. Income is low in Mainebecause unemployment is high, because the state has goneinto a recession caused by the 2008 financial panic.

127 Bangordailynews.com/2014/04/25/business/maine-personal-income-growth- ranks-30th-purchasing-power-36th-since-recession/128 North Dakota ranked 7th of 50 states in per capita income in 2011, Maine's per capita income

was $37,101; less than U S Average per capita income was $40,069; North Dakota per capitaincome was $41,910; New Hampshire per capita income was $45,864; and Vermont percapita income was $41,081.127

129 Unemployment Rate130 North Dakota, on the far right in the diagram, below, has the lowest unemployment rate of 50 states, while Maine, is 27th. High unemployment rate causes low per capita income and poverty. 15,000 fewer people were employed in 2013 in Maine than 8 years ago. Maine employment fell from 677,000 in 2005 to 662,000 in 2013.131 Maine's civilian work force declined by 3,900 workers since 2005 from 712,000 to 709,900.

Many, who are not counted as unemployed after being unable to find jobs in previousoccupations, dropped out of the work force. Many Maine workers are underemployed andoverqualified.

132 A publicly-owned bank could increase employment and reduce poverty. Our estimate putjob growth at 117,000 if 70% of state cash is lent to Maine businesses by a state-ownedbank127 best-state-taxes.247wallst.com

133 Property Taxes134 As seen in the below diagram, Maine is in the highest percentage of revenue obtained from property taxes category, while North Dakota is in the lowest category.

83

84

Home Values

Home prices have been increasing in North Dakota, anddecreasing in Maine since 2008. On the below graph on a countybasis, Green indicates increases while orange indicatesdeclines. White indicates no change. North Dakota is greenwhile Maine is orange and white. Unfortunately the graphicsin this book are all in black and white, so the effect of thisgraph and the following one is not evident, but if you examinethe source which is on the internet you can see a color version ofthis map by county.128

135 Home Price since 2008 shows North Dakota with more stable property136 128 newyorkfed.org/home-price-index/images/gallery/HPI_O601large.jpg values (Federal Reserve Bank of New York) Maine129

85

Upward Mobility in North Dakota and Maine

A recent New York Times upward mobility study indicated thatthe North Dakota region economy showed substantialopportunities for people to rise to higher income levels. A map

from this study is shown in the chart below.130

Educationhas a broad impact on the public. Education invests in people,and pays off in the long run. Education spending declines arenot a good signs. North Dakota did not need to cut educationand human services budgets because its publicly-owned bankshielded it from recessionary budget deficits.

The color-coded "Upward Mobility by County" chart shows thatNorth Dakota counties have much higher upward mobilitythan Maine, Upwardly mobile counties are color- coded inblue. We realize the the charts herein are in black-grayscale. The color original can be seen on the New York

Times web site.131

.

131 nytimes.com/2013/07/22/business/in-climbing-income-ladder-location- matters.html?_r=0

86

Upward mobility measures the likelihood that a child brought up in the lower 20% of the population will rise to the upper 20% in his or her lifetime. Areas in North Dakota averaged 22.8%. Areas in Maine averaged 9.1%. Data is shown in this table:

Table Upward Mobility.

State Section LikelihoodMaine North 9.8%Maine Northeast 8.8%Maine 8.7%Maine Average 9.1%

North Dakota 33.1%North Dakota Dickinson 31.7%North Dakota 29.8%North Dakota Linton 29.7%North Dakota Bowman 29.5%North Dakota Lisbon 22.3%North Dakota Grafton 21.7%North Dakota Bismark 20.3%North Dakota Jamestown 20.0%North Dakota Minot 18.9%North Dakota Sidney 22.3%North Dakota Turtle Mountain 10.0%North Dakota Devils Lake 12.3%North Dakota Grand Forks 13.9%North Dakota Fargo 13.4%

North Dakota Average 22.8%

SouthWest

Williston

Lemmon

87

Education Spending Growth

A well-educated public is better able to compete in today'scomplex world. Education also offers upward mobility andsuccess. Solving budget gaps by cutting education reduceslong term achievement of students who will be teachers andleaders tomorrow.

Maine's educational spending per student declined by 8.8%since 2008132, while North Dakota educational spending perstudent increased 28.2%. This is shown in the following graph:

132 cbpp.org/images/cms/9-4-12sfp-f1.jpg

88

Before the 2013 Maine tax increase was passed, Maine's2011 tax burden was 14th highest of 50 states (10.2%). Itwas higher than North Dakota, 8.8%, New Hampshire, 8.0%,and the national average 9.8%

133 It will probably increase

again after the 2013 Maine tax increase, to eliminate thebudget gap, takes effect.

133 taxfoundation.org/article/annual-state-local-tax-burden-ranking-fy

89

North Dakota has the lowest unemployment rate of 50 states - far right. Maine unemployment rate is 28th of 50 states - from right - below.

North Dakota has the 7th highest per capita income of 50 states -from left. Maine per capita income is 32d highest out of 50 states - from left - Below.

In its report, "Modern Money Mechanics," U. S. FederalReserve B ank of Chicago stated: "The process of moneycreation takes place primarily in banks. Banks with excessreserves do not really pay out loans from the money theyreceive as deposits. What they do is accept promissory notesin exchange for credits to the borrowers accounts. In otherwords, they are creating money."136

If organized as a bank, like North Dakota, Maine cashdeposits could create credit invested in Maine. Increasingliquidity from a state-owned bank will create highereconomic activity, lifting Maine's economy.

A state-owned bank could be a "banker's bank," like theBank of North Dakota, or a correspondent bank for smallercommunity banks, which is now being done by larger WallStreet Banks, some with risky portfolios that do not benefitthe Maine economy. Private North Dakota bankers stronglysupport the Bank of North Dakota because it hasstrengthened bank profitability, improved livelihoods, andcustomers' credit-worthiness.

Bank of North Dakota participates in loans originated bylocal banks, reducing risk to local banks, allowing localbanks to capture origination fees, and other fees, withless exposure to risk than if local banks had lent themoney alone with no public support. Smaller communitybanks can originate loans and sell them to the state-owned bank as North Dakota community banks have.

136 Federal Reserve Bank of Chicago, "Modern Money Mechanics."

91

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Chapter 7 Treasurer's Cash Pool Risk

"Only those who will risk going too far can possibly find outhow far it is possible to go." -- T.S. Eliot

According to a report provided by Neria Douglas, MaineState Treasurer, the Treasurer's Cash Pool contained thefunds, and accounts shown on the next page.

Little local benefit is gained from depositing Mainers' funds inforeign banks. Foreign accounts subject to currency risksand other international risks. Canadian banks: TorontoDominion [TD] Bank, Bank of Nova Scotia; Toyota, Japanese'Bank of Tokyo bank hold accounts in Maine's Treasurers cashpool.

Ten percent of the Treasurers Cash pool is invested inunspecified commercial paper, which is subject to marketrisks. Commercial paper is less secure than uninsured bankdeposits, and insured bank deposits. To be transparent, MaineState Treasurer should specify exactly what commercial paperthe Maine Treasury holds, rather than aggregating allcommercial paper into one line item.

Unnamed, unknown, u n s p e c i f i e d bank Certificates ofDeposit, which should also be specified in the Treasurer'sReport, comprised 1.1% of the Treasurer's cash pool.

As mentioned before, Citigroup, holds derivatives with anotional value of $62,247,698 Million equal to 46.2 timesits total assets, with $1,346,747 Million in assets. Its assetsare only 2% of the notional value of its derivatives in whichMaine deposits funds. A relatively small derivatives notional

value loss could wipe out the bank137

.

92

93

Goldman Sachs, into which the Maine state treasurydeposits, assets equal $105,616 Million, only .2% of itsderivatives' $48,611,684 Million notional value.138

Bank of America in which Maine funds are deposited, hasassets of $1,433,716 Million, which are only 3.6% of its

derivatives' $38,850,900 Million notional value139

.

The Maine Treasurer's cash pool has accounts in 3 too- big-to-fail banks: Citigroup, Goldman Sachs, and Bank ofAmerica. Three accounts in the Treasurers cash pool, Bank of

America, Goldman Sachs, and Citigroup,140

are GSIFIs141

,whi ch hold over 90% of unregulated global derivatives, amajor cause of the 2008 financial collapse Accounts in theTreasurers cash pool include companies who have committed,were indicted, convicted, or accepted plea bargains forfraud, illegal foreclosures, and other wrongdoing during the2008 collapse.

Bank of America, Goldman Sachs, and Citigroup received"Troubled Assets Relief Program" (TARP)

142) payments after

being designated "too big to fail" by U. S. Secretary ofTreasury. SEC

143 charged that Citigroup and Goldman Sachs

concealed risks, terms, and improper pricing in CDOs andother complex structured products from investors

144:

The proposed settlement requires a payment of $285 millionby Citigroup that would be returned to harmed investors. Anews report recently stated that Citigroup had failed stresstests given it by the Federal Reserve

145.

Maine has an account in GE Capital, a multinationalcorporation that obtained reverse income tax from the U Scorporate tax code and TARP

146, bailout during the 2008

panic.

137 occ.gov/topics/capital-markets/financial- markets/trading/derivatives/dq413.pdf138 ibid139 ibid140 www.ffiec.gov/nicpubweb/nicweb/top50form.aspx141 GSIFI: Global-systemically-important-financial-institutions from the Dodd- Frank Law means deposits in them can be confiscated by "bail-in" if bank fails.

94

Also receiving TARP147

funds was U S Bank, into which muchof the treasurers cash pool is deposited.

In 2007 John Paulson, CEO of Paulson & Co, designed afund intentionally to fail along with Goldman Sachs CEO,Lloyd Blankfein. Paulson invested $20 Million, GoldmanSachs recruited other investors & Paulson bet against thefund buying “credit default swaps” from Royal Bank ofScotland. The default busted Royal Bank of Scotland, whichhad sold it the credit default swaps. After the planned fundfailure, RBS paid $840.9 Million to Goldman Sachs, whichwas given to Paulson & Co. Bank of England took over RBS.British taxpayers covered losses

148.

The U. S. Government brought charges against GoldmanSachs trader, Fabrice “Fabulous Fab” Tourre, who createdthe "flip book" and sold shares to unwary investors, but theswindle's instigators, John Paulson and Lloyd Blankfein, wereunpunished. A jury found former Goldman Sachs VicePresident Fabrice Tourre liable for fraud relating to his role.Goldman Sachs was only fined 5 % of its TARP bail-out.Goldman Sachs CEO, LLoyd Blankfein’s bonus was thehighest on Wall Street in 2007. Due to tax loopholes,John Paulson, reportedly, paid no income taxes on $5Billion in income in a subsequent year.

149 The affair was

featured in "Inside Job", a film about the 2008 Meltdownthat was shown later to a wide public audience.

142 "TARP": "Troubled Asset Relief Program", Initiated by Treasury Secretary Paulson to give big banks confidence in each other(and protect his own $60 Million investment in Goldman-Sachs.) it went to biggest banks in the U S, which have large shadow economy investments.

143 SEC is Securities Exchange Commission." A federal U S agency regulating financial securities.

144 sec.gov/spotlight/enf-actions-fc.shtml

145 dealbook.nytimes.com/2014/03/27/failing-stress-test-is-another-stumble-for- citigroup/?_php=true&_type=blogs&_r=0146 Ibid147 Ibid

95

The Securities Exchange Commission charged Goldman Sachswith defrauding investors by misstating and omitting keyfacts about a financial product tied to subprime mortgagesas the U.S. housing market was beginning to falter.Goldman Sachs agreed to pay a record penalty in $550million settlement and reform its business practices.

The Dodd-Frank Act gives receivers of failing banks ifdefined as a "Global Systemically Important FinancialInstitution," GSIFI, power to confiscate deposits. Thisincreases risk for Maine of depositing state funds into certainprivate banks, as it now does. The 2005 Bankruptcy Actgave derivatives higher priority than depositors whencharacterizing failed banks' creditors importance.

148 opednews.com/articles/The-Frog-Who-Crushed-The-P-by-Greg-Palast-130723- 660.html149 statspotting.com/billionaire-john-paulson-paid-zero-taxes-for-9-billion-fee- income/

96

150 This increases taxpayers' risk of depositing Maine state

funds in private banks or other repositories. Some Mainestate funds have been deposited in "Global Systemically

Important Financial Institutions."151

Many of these bankshave derivatives holdings exceeding their deposits by hugefactors.

In "Slipping on Banana Peels, Michael Edwards said: " Let meput this in plain English for those of us who don't speak"financese": Banks and bank regulators (government) are notreporting the truth about bank Derivative losses ("a dauntinglack of transparency in reporting"), and banks and bankingregulators (government) are not disclosing their derivativerisks (losses) or how much risk (losses) they have ("it is notreadily apparent who holds the risk or what concentrations ofrisk exist").

"I really don't know any other word to describe this type ofscenario other than the word; "fraud." Perhaps "scam" mightbe a better choice, or perhaps "financial con" might be aneven better description.

"Actually, derivatives are quite simple for us non-financialpeople to understand. Anyone who has been to Las Vegasor at the casino on a cruise ship can understand itperfectly. A bank gambles and bets on certain pre-determined odds, like playing the casino dealer in a game ofpoker (banks call this 'hedging their risks with derivativecontracts'.) When they have to show their cards at the endof the play, they either win or loose their bet; either thebank wins or the house wins (this is the end of thederivative contract term.) For us small-time players, wemight lose $10 or $20, but the big-time banks are bettinghundreds of $Millions on each card hand. The worst part isthat they have a gambling addiction and can't stop bettingmoney that isn't theirs to150 truthdig.com/report/item/winner_takes_all_the_super_priority_status_of_derivatives_20130410151 The term, "Global Systemically Important Financial Institution' [GSIFI] ,was created in the Dodd-Frank Law to avert financial meltdown. But it allowed the banks to take depositors money to pay off casino-type gambling bets in the derivatives market with the life savings of depositors if banks fail. This was a very dangerous Act by Congress, accompliced by the President who signed it

97

bet with. I guess no-one has told these gambling banks thatthe odds are not in their favor or that in gambling, therisk odds are always stacked against the gambler-player.

"What the above survey is telling us is that banks are notrevealing their gambling losses and no-one knows howmuch they've gambled and lost to date. Common sensetells you that sooner or later, they have to leave the pokertable. Winners always leave the gambling table with a bigsmile and you can see the chips in their hand to know theywon more than they had bet. But losers always walk awayquietly and don't talk about how much they lost. If a bankmakes a good profit (won their bet), they would be tellingeveryone that their derivative contracts have paid off andthey're sitting pretty. In reality, the big-time gambling banksare not talking and won't tell anyone how much theygambled or how much they lost. We've been hoodwinkedand the game is pretty much over. "152

The Securities Exchange Commission was involved in$3.02 Billion in disgorgement, penalties, and other

monetary relief from major Wall Street Banks in 2013 . hree

Banks receiving disgorgement, penalties, and other monetaryrelief are on the Maine Treasurer's Pool list: Citigroup,Goldman-Sachs, and Bank of America.

Six out-of-state banks in Maine held $9,939,794 indeposits, providing $6,720,308 in loans in 2012. One wasa Canadian Bank, Toronto Dominion (TD) and one wasBank of America, the 2d largest U. S. bank, measured byassets.155 Bank of America,156 was fined for many illegalactivities

157 including illegal foreclosures and fraud, during

and after the 2008 financial collapse.

152 apfn.net/messageboard/02-10-04/discussion.cgi.43.html153 Disgorgement is the forced giving up of profits obtained by illegal or unethical acts. Black's Law Dictionary defines disgorgement as "the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion". A court may order wrongdoers to pay back illegal profits, with interest, to prevent unjust enrichment. Disgorgement is a remedy and not punishment.154 sec.gov/spotlight/enf-actions-fc.shtml155 ffiec.gov/nicpubweb/nicweb/top50form.aspx156 money.cnn.com/2014/01/30/news/companies/bank-of-america-fine/

98

Toronto Dominion bank is a big investor in the Alberta, Canadatar sands, which has been a major disaster and a target ofclimate change activists, due to its enormous environmentaldestruction and harmful effects on earth's atmosphere, living,wildlife and future generations.158

"TD Bank has more than 15 billion dollars invested in theexpansion of the Alberta tar sands project. A group of peopleclosed their TD accounts in protest and shared their concernsabout the bank’s well- documented involvement with tarsands corporations Enbridge and TransCanada. “I will notallow TD Bank to use my money to fund the most massivelydestructive climate crimes on the planet!,” said one climateactivist as she closed her TD account. "159

in 2012 108 financial bank institutions in 711 offices werelocated throughout Maine with assets totaling$24,965,335, loans totaling $24,048,439, and deposits, or

shares, of $28,905,293. .160

These banks, chartered by Maine,other States, U S or foreign governments, includedcommercial, merchant, savings banks, savings and loanassociations, trust companies, and credit unions. The MaineTreasurer's Cash Pool is not a risk-free portfolio, either inmonetary risk, or risk of global climate change effects, r i s ko f extinction of species, and r i s k o f destruction fromincreasing storm intensity. Some of the banks in which theins t rumenta l i t ies o f the State of Maine keeps fundsinvest in fossil fuel projects that are destructive to humansand to Planet Earth.

157 marketwatch.com/story/bank-of-america-fined-32-million-for-robocalls-2013-09-30158 tarsandsblockade.org/rtphilly-aug12/159 vtdigger.org/2013/03/20/tar-sands-opponents-target-td-bank/160 Maine Annual report to Legislature, Maine Bureau of Financial Institutions, January, 2013

99

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Chapter 8 Money Expansion

"A bank is a place that will only lend you money if you canprove that you don't need it." - Bob Hope

The Maine State-owned Bank could reduce debt servicingcosts and save taxpayers money. As stated in the report ofthe Budget Office: "General Fund debt service requirementswere $95.1 million in FY 2012

161 and are projected at $100.6

million for FY2013. General Fund debt service requirementsare projected at $79.7 million for FY14 and $71.4 million forFY2015 based on currently authorized bonds.

In FY2012

Maine's Transportation debt service costs were $21.7 Millionand Treasury debt service costs were $95.1 Million. ForFY2013 Treasury debt service is expected to increase to$100.6 Million and Transportation debt service is expectedto be $21.5 Million. Maine's total debt service is expectedto increase from $116.8 Million in FY 2012 to $122.1 Million inFY 2013.163

"

Maine's budget crisis resulted from the global 2008 financialcollapse, which was caused by derivative mortgagesecuritization, "off-balance-sheet" toxic assets, speculationderegulated by "Commodities Futures Modernization Act" of1999, bank concentration, mergers, and acquisitions,nationwide branch banking deregulation, and Glass-SteagalAct repeal, fraud, deceit, and corruption which combinedinvestment trading with deposit bankin

161 FY 2012 stands for Fiscal Year 2012.162 "Report on forecast of revenues and expenditures for General Fund and Highway Fund for 2012-2013 biennium and 2014-2015 biennium", Maine Bureau of Budget, September, 2012,Sherrin Blaisdell, Acting Budget Officer.163 Ibid

100

The envisioned Maine state-owned Bank should not b ea l l o w e d t o speculate in instruments that caused the2008 financial collapse, whose aftermath Mainers havesuffered through during these past 6 years, includingsecuritized derivatives, collateralized debt obligations,credit default swaps, interest rate swaps, structuredinvestment vehicles, or asset-backed securityspeculation to safeguard Maine taxpayers funds.

Although state and federal laws prohibited mergers, whichmay substantially reduce competition, 40 years ofunchallenged mergers, financed by investment banks,such as Lehman Brothers, Goldman Sachs, and J. P.Morgan created extreme bank concentration, whichcontributed to the 2008 financial meltdown, whichresulted in Maine's budget gap and shortfalls in 48 otherstates.

Mergers, especially between banks, degrade competition,increase vulnerability to recession and other harmfulglobal economic events. For these reasons, Maine state-owned bank should not finance mergers or acquisitions,nor should Maine state-owned bank should be allowed tomerge with other entities, especially non-governmentalprivate corporations. By refusing to finance industry-ruining mergers, state-owned banks could better maintainbusiness competition, prevent price increases, increaseinnovation and minimize inflation.

A Maine state-owned bank should avoid investing inglobal transnational corporations without national or localloyalty, b u t maintain local economic sovereignty,investing in local businesses maximizing economicreturns w i t h i n Maine. A Maine state-owned bankshould act in the public interest, not the private interest.It should not duplicate services offered by existing stateinstrumentalities, such as FAME, MMBB, or MaineHousing.It should integrate with these instrumentalities asmuch as feasible, issue credit at lower rates, andobtain funds from its new cash credit pool at lower costs.

101

In studies by t h e Center for State Innovation and Demos,5700 jobs, $1.1 Billion in new loans, $220 million in smallbusiness loans, were predicted by establishment of a state-owned bank, but authors of these studies were not specifichow these estimates were derived. None of these forecastsclearly explained their methodologies. We believe theyunderstated the impact of a state-owned bank on theeconomy.

How much cash and equivalents exist in Maine StateGovernment with its instrumentalities? Our proposed state-owned bank assumed that all cash in State hands will bedeposited in the new Maine state-owned bank, as it is inNorth Dakota. Maine state agencies and instrumentalities' on-line annual financial reports reveal that Maine 's currentcash and equivalents total about $3.1 Billion. 2012 wasthe last year when data was available when this study wasundertaken.

Table 3 State Owned Cash

State Cash $ Amount Source

Primary Current Assets $2,041,042,000 cafr2012.pdfComponent Group 1 $154,373,000 cafr2012combiningComponent Group 2 $47,254,000 cafr2012combiningUniversity System $315,000,000 U Me System annrpt12PERS Cash 2012 $61,167,651 PERS CAFR12.pdfMaineHousing $422,700,000 MSHA 12-31-2012-audited-financials

FAME $80,441,000 Fame Audited_Financial_Statements 2012

Cash & Equivalent $3,121,977,651

If the Maine state-owned bank loans money only in Maine,by the rules that it will establish, most of its benefits willbe in Maine. Depositing state cash, which is now in manyaccounts of many different types in many different statesand countries and securities into one publicly-owned bankshould simulate injecting cash into the state economy

102

as described in "Modern Money Mechanics." A difference isthat most of the money injected into global mega-banks todaydoes not trickle back to state and local economies. With aMaine publicly-owned bank money will be created in Mainerecycle in Maine be spent in Maine and will be of greaterbenefit to Mainers.

The Money Expansion diagram, below, is excerpted fromFederal Reserve Bank of Chicago book: "Modern MoneyMechanics." Vertical bars are stages of money growth whenbanks loan money. Money originates with banks when bankslend money to borrowers. When lendees purchase goods orservices with the money, expansion transitions to the nextstage.

Banks cannot loan 100% of deposits, because by law theymust keep some in reserve in case depositors withdrawmore funds on any given day than have been deposited.The reserve requirement, which is normally 10%, is set bythe Federal Reserve System. However, as has beenmentioned previously, banks do not loan out the samemoney that depositors deposited in banks. Banks create newmoney with bookkeeping entries to lend out, and whenborrower pays it back, they extinguish the money frombooks with bookkeeping entries, as when they created it. Itis a sleight of hand.

The b e l o w d i a g r a m f r o m F e d e r a l R e s e r v eB a n k o f C h i c a g o b o o k l e t , M o d e r n M o n e yM e c h a n i c s , shows 20 stages of money growth. Inreality, the number of money growth stages does not end.The process can go on, until no significant money is left toloan. When a party buys or sells something, writes acheck, makes credit card or debit card transactions, movingmoney from a buyer's bank account to a sellers' bankaccount, expansion moves to the next stage.

103

But the new money usually lands in a bank account in thesame or in a different bank. The new money in anotheraccount allows the new bank to lend it, which expandsmoney again. 10% of new deposits must also be kept asrequired reserve by the bank in the next stage. 90 % of thisdeposit, can be lent out again. The process in which themoney supply is expanded by loaning out is calledfractional reserve lending.

We assumed that 1 job will be created in Maine for each$93,000 in credit issued

164. This e s t i m a t e from a study

by "Vermonters for a New Economy" rounded down to thenearest thousand.

165

Income that these jobs create wasestimated by multiplying the number of new jobs by Maineper capita annual personal income, which is $38,299. Ifbetter assumptions than these are found, this simulation canbe

164 Estimate derived from a 11/2013 study by Vermonters for a New Economy,"Exploring Public Banking in Vermont".165 Ibid

104

tried with those assumptions. This proposal can beconsidered a "straw man," rather than cast in stone. Wehope that in the future others will be re-examine andfine-tune it.

The "multiplier effect" says that, if an outside stimulusadds new incomes to households, the new income willgenerate indirect jobs servicing the households who earn thenew income. Increased demand for goods and servicescaused by the fiscal multiplier will increase sales at eachstage of money expansion. Each new job will generate a"fiscal multiplier."

Based on an empirical IMF study an approximately 0.5fiscal multiplier coefficient was assumed. This means thateach dollar of added investment will increase jobs andsales an additional 50 cents.

166 For example the multiplier

effect may include jobs like grocery clerks, electricians,plumbers, baby sitters, landscapers, and so forth.

This could generate more business revenues and employmore people, create more Maine government tax revenue,and reduce, possibly eliminate, state shortfalls. With costsavings and enhanced revenues, wage and salary income taxrates and general sales tax rates could be lowered,reducing impoverishment of Mainers by state government.Tax revenues generated by new jobs was approximated bymultiplying average taxes per worker, $2,482, by thenumber of new jobs created by money expansion..

Reasons that customers may not borrow all 90% of availablebank reserves include: skepticism by small businessmen,after years of scarcity, whether they can repay theirdebts; jobs created may exceed the

166 Fiscal Multipliers and the State of the Economy; Anja Baum, Marcos Poplawski-Ribeiro, and Anke Weber, Dec 2012 Working paper IMF, International Monetary Fund.

105

workforce's capacity to fill them; labor import may exceedcapacity to house them; natural barriers may preventmoney expansion from reaching its limit; countervailingeffects may prevent money expansion impacts from beingrealized.

More than 51 stages of money expansion could occur asmoney changes hands, but to be conservative, only 51were included, stage 0 through stage 50. Lending 70% ofreserves, our simulation estimated current state cashdeposited in state-owned bank with fiscal and moneymultipliers generated 117,494 new jobs after stage 50.These jobs increased total personal income by $4.499Billion and generated $285.744 Million in new taxrevenue. Aggregate lending under this model was $7.284Billion. Assuming 10% of new lending would profit thefinancial sector, it estimated that bank revenues wouldincrease by $728.4 Million.

With 80% of reserves completely loaned out this estimatecalculated current state cash of $3.1 billion deposited in thestate bank with fiscal and money multipliers will generate188,525 new jobs after stage 50. These jobs could increasetotal personal income by $7.22 Billion and generate$458.4 Million in total new tax revenue. Aggregate newlending in Maine using this assumption would total $11.68Billion. Assuming 10% of new lending would profit thefinancial services sector, whose revenues would increase$1.16 Billion. We did not include the spreadsheet for the80% simulation.

Effect on Unemployment and Deficit

The Maine Labor Force was estimated to be 709,900 in2013. Of these, 662,600 were employed, 47,300 wereunemployed, the unemployment rate was 6.7%, and Mainepopulation was 1.329 million. Each of these 3 scenarios:70%, 80%, and 90% lending from a State Bank reducesor eliminates current Maine unemployment and budget gaps

106

in theory.

Maine's projected current two year budget shortfall of

$755,518,709 was $377,759,354.5 per year. New workopportunities might bring workers out of early retirement,attract immigrants from other states and countries, andraise worker incomes as jobs compete for workers.

Excess tax revenues could enable Maine to eliminate broad-based sales and income tax rates, which impoverishworkers and retard growth. Unemployment reduction couldlower unemployment insurance compensation premiums onbusinesses, which could expand enterprises.

Farming, Forestry, Fishing, and RecreationFinancing

Lower cost agricultural loans could be provided by a newMaine state-owned bank as they are in North Dakota.Working capital loans should not be prohibited becauseworking capital to pay workers, purchase supplies andequipment is one of farmers' biggest needs.

Farming is dependent on many uncontrollable factors,especially weather, and farmers must risk their moneyeach planting season and yield to uncertainties of volatileeconomy and changing weather. Under a state-owned Bank,FAME could obtain funds from credit derived from lendingcash assets, substantially reducing capital costs andreturning cost savings to people.

The state-owned bank could provide financing for manypurposes in addition to those stated above. Fishing,farming, forestry, and recreation are sustainable,renewable Maine industries in which public bank financingcan provide livelihoods and economic stability. A publicbank would be able to assist any enterprise with a feasiblebusiness model and good prospects, which meets publicgoals for long term sustainability. State ownership of hisbank can help ensure that the goals of the enterprise are

107

socially responsible, and are not part of the "PredatorState," identified by James Galbraith.

By making farming, forestry, fishing and recreation moreprofitable with help from a more enlightened business sector,a state-owned bank could help reduce chaotic urban sprawldestroying wildlife habitats, converting forest into housingdestroying plant and animal species. Rural lifestyles couldpersist if livelihoods from natural resource industries wereadequate for rural living. A side benefit would be morenatural cleansing of air, removal of carbon dioxide andoxygen creation that green chlorophyll plant photosynthesisprovides, which asphalt parking lots and highways don't.

108

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Chapter 9 Maine Budget Forecast

"A budget tells us what we can't afford, but it doesn't keep us from buying it."- William Feather

Maine revenue and expenditure projection General and highway funds; fiscal years 2012 -15

FY 12 FY 13 TOTAL FY 14 FY 15 TOTALBALANCE 24,019,140 24,019,140 383,394 383,394ADJUSTMENTS 158,058,867 (95,327,707) 62,731,160REVENUE 2,995,444,736 3,056,234,628 6,051,679,364 2,972,636,157 3,078,473,951 6,051,110,108TOTAL RESOURCES 3,177,522,743 2,960,906,921 6,138,429,664 2,973,019,551 3,078,473,95 16,051,493,502ADJUSTMENTS 16,552,303 (48,832,707) -32,280,404APPROPRIATIONS 3,118,657,591 3,051,669,083 6,170,326,674 3,373,542,778 3,433,469,433 6,807,012,211PROJECTED (SHORTFALL) 42,312,849 (41,929,455) 383,394 (400,523,227) (354,995,482) (755,518,709)

The acting budget officer in his report to the legislature said:

"The General Fund adjusted fund balance was $42,312,849for FY 12 and is projected to be ($41,929,455) at end of FY13, including adjustments enacted through the SecondRegular Session of 125th Legislature. Revenue ForecastingCommittee (RFC) in its December 2011 report re-projectedrevenues downward by ($91.8) million for 2014-2015biennium, in March 2012 RFC decreased its revenueprojections by ($31.4) million and in April 2012 SpecialForecast, increased its revenue projections by $52.4 millionresulting in net overall revenue decrease of ($70.8) millionfor 2014-2015 biennium.

"This revenue decrease was primarily in Sales and Use Tax,Individual Income Tax, Corporate Income Tax and Fines,Forfeits and Penalties. Revenue projections also includerevisions made in miscellaneous laws enacted throughSecond Regular Session of 125th Legislature. Currentprojections for 2014-2015 biennium include General Fundrevenues

167 Maine Bureau of the Budget, Sherrin L. Blaisdell, Acting State Budget Officer: "Report on the forecast of revenues and expenditures for the General Fund and the Highway Fund for the 2012-2013 biennium and the 2014-2015 biennium"; September 28, 2012

109

of $6,051,110,108. Projected General Fund appropriationsfor biennium are $6,807,012,211 which results in abudget gap of $755,518,709."

A state-owned-bank could cut this budget gap in manyways, including eliminating debt service costs by borrowingfrom itself for capital requirements, expanding jobs, and taxrevenues, increasing profits, and business tax revenues.

110

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

~ Chapter 10 Transition

"If you aren't part of the solution, you're part of theproblem." - E Cleaver

Governments tend to respond to problems by creatingnew agencies and rules, increasing bureaucracy andcomplicating life for the public. Healthy public skepticismmight arise from creation of a new state-owned bank.

This may be overcome by reorganizing governmentorganizations, minimizing agency expansion, retaskinggovernment components to make changes which may beneeded. A state bank effort in Vermont, from which wehave borrowed ideas, advocated this approach. 168

Maine Municipal Bond Bank sells exempt bonds to thepublic and lends funds for infrastructure projects to Mainemunicipalities from it. Administration of MMBB involvesbanking and finance skills, risk evaluation, and functionssimilar to a state-owned bank. Maine Municipal BondBank has an organizational structure, Board ofCommissioners, and independent incorporation.

Maine Finance Authority, also known as FAME, lends forcommercial and industrial projects in partnership with localbanks and financial organizations. It performs state loanfunctionality without the advantage of a state-owned bank.

MMBB may be able to transition to an SOB easier thanbuilding the SOB separately resulting in two coexistingstate banks. Creating a SOB would require agreeing on agovernance plan that determining how it would bemanaged, administered, audited, and supervised. Alteringan existing MMBB governance structure could be doneeasier.

168 We are talking about "Vermonters for a New Economy," which we referenced previously.

111

Starting with an existing bank, such as MMBB, renaming it,widening its goals and merging it with other stateentities, such as FAME, should be easier than beginning acompletely new corporate entity overlapping MMBB, FAME,and other instrumentalities. Reorganizing agencies is moreefficient, economical and acceptable to taxpayers thancreating another redundant instrumentality.

112

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Chapter 11 State-Owned Banks

“If not us, then who? If not now, then when?” - John E Lewis

In 2006, social entrepreneur, banker, economist MohammedYunus and the Grameen Bank were jointly awarded theNobel Peace Prize for using Micro-credit to create economicand social development in Bangladesh. The NobelCommittee noted that lasting peace cannot be achievedunless large population groups find ways to break out ofpoverty. The Grameen Bank, which Yunus created,succeeded in raising many, very poor people out of povertyinto success through Micro-credit: lending small amounts ofmoney at low interest rates to very small enterprises.

A state-owned bank in Maine could be an opportunity toutilize principles that Mohammed Yunus innovated to raiseliving standards of Mainers like many Bengaladeshresidents, who were mired in d e s t i t u t i o n . While a l lMainers are not i n want, m a n y a r e . Maine's incomelevels are among the lowest in the U. S.

According to a recent report "the number of children living inpoverty in Maine continues to increase, as does the numberwho are getting social services such as food stamps. Nearlyone in four Maine children younger than 5 and 19.3 percentof all children younger 18 were living in poverty in 2011."170

Our simulation assumes that money expansion ends atstage 51, but in reality expansion should continue beyond.We stopped at 51 because post-51 stage sizes are minisculeand expectations need to be minimized.

169 compressional/news/Maine_Children_s_Alliance_report_assesses_well- being_of_state_s_children_.html170 Ibid.

113

State-owned banks lend at lower interest rates becausethey can lend their cash credit pool using the moneymultiplier and borrow at reduced interest rates.

Maine could lend up to 90% of its $3.1 Billion in cashassets without really touching it if it were a state banklike North Dakota.

Bank of North Dakota is run by a Chief Executive Officer,CEO, selected by and reporting to the North DakotaIndustrial Commission, which is the bank's governingbody. The North Dakota Industrial Commission iscomprised of the Governor, Commissioner of Agricultureand Attorney General. In North Dakota, the Bank CEO isa professional banker with many years of experience inplanning, staffing, operating, and controlling financialorganizations.

Since the name, "Bank of Maine", has been taken by aprivate Maine institution, this Bank of North Dakotaattribute may not be copied to a Maine State-ownedBank. The name used by legislators in legislative publicbank bills, "Maine Partnership Bank", is acceptable to thiswriter but others may find a better name. In the overallpicture the name matters little.

But names do matter. Some Mainers may find the nameindustrial commission, which supervises Bank of NorthDakota, offensive, since "industrial" connotes activitieslike mountaintop removal, explosive fossil fuels,chemicals, and mining. "Economic Development" maybe accepted better by Mainers than "IndustrialDevelopment". To avoid getting involved in a side issuewe will call the governing body the "state-owned bankgoverning body."

Maine Statutes explain why a state-owned bank isneeded:

114

"Lack of affordable financing options, marketing andtechnical assistance jeopardizes agricultural, forestry andfishery operations and makes expansion anddiversification more difficult. Lack of appropriate financingand technical assistance is contributing to abandonmentof agricultural lands.

"Inability to continue agricultural, forestry and fisheryoperations at current or expanded levels jeopardizescontinued existence of family- owned natural resourceenterprises and lessens supply of locally- produced foodand fiber available to fulfill citizens needs. Constraints onthe operation and expansion of natural resourceenterprises decrease employment, particularly in ruralareas and result in other problems attendant onunemployment, poverty, sickness, disease, andhomelessness.

"Threats to family farms and natural resource enterprises'viability threatens rural values and way of life, degradingits citizens' welfare. It is in the public interest to fosterlocal government borrowing to finance public improvementsand other municipal purposes from proceeds of bonds,notes, other form of debt, help local government needs,reduce indebtedness costs to taxpayers and residents,encourage continued investor interest in purchase soundpreferred governmental investment securities, encouragegovernmental units to make public improvements, andassist them by making funds available at reducedfinancing costs during periods of restricted privatecredit.171 To encourage and promote agriculture andcommerce, Maine should engage in and maintain a systemof banking owned, controlled, and operated by it."

New enterprises face problems obtaining adequatefinancing. More full-time farmers have been leaving thanentering farming, partly because loans for new farmersfor agricultural land, improvements and operations are

171 Excerpted from Maine Revised Statutes Title 30A, Municipalities and Counties, Maine Municipal Bond Bank with synthesis.

unavailable or unaffordable through conventional credit

115

markets. New, small and part-time farmers needs areinadequately served by existing financing and technicalassistance programs.

These problems will not be relieved or improved throughprivate enterprise alone. Authorizinga stateinstrumentality, with power to lend, borrow, issuesecurities, and implement policies that improve livesshould stimulate economic activity, increase governmentrevenues, reduce unemployment, maintain propertyvalues, strengthen community banks, increase upwardmobility, education spending per student, small businesslending, reduce tax rates, and reduce loan delinquencies.

Low cost financing to help farmers, foresters, foodprocessors, fishermen, recreation, and aquacultureoperations operate and succeed, would be primary goals ofa Maine state-owned bank. Farming, Forestry, Recreation,and Fisheries industries have huge impacts on the Maineeconomy. Loan funding should be provided by it forbeginning farmers, fishermen, lobstermen, foresters,aquaculturists, recreation, and other natural renewableresource enterprises within Maine.

To assure adequate food, fiber, and energy supply andimprove health, safety and welfare are state-owned bankgoals. The governing body should operate, manage,control it, locate its place of business, which must bewithin the state of Maine, create, enforce orders, rules,regulations, and bylaws for business transactions.

An advisory board could assist the governing body solvecritical problems, perform audit and financial control.Because their agencies also administer state loans,MMBB, FAME, DHHS, Maine Housing and Maine ForestService Directors are advisory board candidates.

The SOB Governing body, with advice and consent of its

116

advisory board, should appoint a Chief Executive Officer andsubordinate officers, employees, and agents. They shoulddefine duties, designate titles, and fix compensation of itspersonnel. The governing body should select and direct itsCEO, to identify vision, mission, goals, objectives, staff,organize and control it. The SOB governing body with adviceand consent of its advisory board, may designate its CEO, orother officers, or employees, as its agents, subject tosupervision, limitation, and control.

To enlist help from private enterprise, encourage purposesfor which Maine state-owned bank was created, the Governor,Treasurer, Auditor, Attorney General and Maine Legislaturecould each appoint or serve as members of state-ownedbank governing body and advisory board Members should beeducated and experienced in accountancy, law, banking,economics or be officers of local banks, or financialinstitutions. Term of directors could be four overlappingyears, so that one director's term will end each year.

The SOB advisory board's primary duty should be to oversee,audit, and review bank operations. The advisory boardshould meet regularly with its management and SOBgoverning body. Recommendations could be made toimprove performance, customer service, internal methods,procedures, and operating policies. It could establishobjectives, rules, and policies for operations, appointment,and removal of officers. The governing body may alsodefine additional duties for the advisory board.

The CEO must be knowledgeable and experienced in a widevariety of banking areas: lending, investing, accounting andauditing. The CEO must know how to weigh risk and returnon equity.The State Treasurer and Auditor could be helpful in CEOcandidate evaluation and selection because of theirknowledge about state operations, governance, and finance.The CEO should be responsible for communication withregulatory bodies, and report to the governing body andadvisory board.

The CEO should be an honest, experienced, competent,

117

professional banker who is knowledgeable in a variety ofbanking areas, lending, investing, accounting and auditing.

Committees of the Legislature and of Maine state-ownedbank should examine, oversee, and advise bank operations.The bank should report its operations to the public at leastonce annually.

The CEO's performance should be evaluated by governingbody and advisory boards, by advancement of social goals,like income equality, standard of living, employment,education, nutrition, poverty reduction, and on itsmanagement of the bank.

Compensation of appointees, employees, and other bankexpenditures, should remain reasonable, withinappropriation, revenues, and capital lawfully available.

The governing body may remove officers and employees appointed in exercise of powers of the Maine State-owned bank.

All funds of all Maine state instrumentalities must bedeposited in the SOB. This includes: Maine ChildDevelopment Service, Maine Community College System,ConnectME Authority, Maine Education Center for Deaf,Maine Educational Loan Authority, Efficiency Maine Trust,Maine Public Employee Retirement System, FinanceAuthority of Maine, Loring Development Authority, MaineMaritime Academy, Nextgen College Investing Plan, MaineSmall Enterprise Growth Fund, Maine State HousingAuthority, Maine Technology Institute, Maine TurnpikeAuthority, University of Maine System, Maine Lottery, MaineMilitary Authority, Maine Marine Ports, Maine Ferry Service,Maine Prison Industries, Dirigo Health, MidcoastRedevelopment Authority, Maine Municipal Bond Bank172, NewEngland Passenger Rail Authority, Midcoast Aviation, and BaxterState Park.

All income earned by the SOB should become Maine revenue.Net Income from bank operations, if any, should bereturned to reduce tax revenues, lower personal incometax rates, cut general sales tax rates, lessen meals tax

118

rates and reduce lodging tax rates to benefit the people ofMaine.

The SOB should not lend to current members of itsgoverning body or advisory board. Each member of thegoverning body and advisory board should certify thatthey have no personal business with the SOB before joining.All SOB business should be conducted under the moniker:"State of Maine, doing business as Maine 'state-ownedbank'"

173. In any legal actions connected with it, it should

be designated as: "The State of Maine, doing business asMaine 'state-owned bank

174".

Maine State Auditor, State Treasurer, and other appropriateofficials should contract with independent certified publicaccounting firms for annual state-owned bank audits inaccordance with generally accepted government auditingand accounting principals.

The governing body should contract with a certified publicaccounting firm to audit it whenever necessary. Auditcosts, and other costs incurred on behalf of it foraccountancy and audit, should be paid by the SOB. TheState Auditor should prepare audited financial statements

172 mainebondbank.com

173 Or whatever other name is chosen for the bank.

174 Ibid

119

for inclusion into comprehensive annual financial reports. TheState Auditor may conduct performance reviews and audits ofSOB, including programs and funds administered or managedby it.

The auditor should report audit conclusions to thegoverning body, advisory board, and legislatures' oversightcommittee.

The Maine Department of Financial Institutions shouldexamine it at least once each 12 months, conductinvestigations whenever necessary, and report investigationsresults to the governing body, advisory board, legislativeoversight committees and other identified state officials withjurisdiction.

It could establish a system to provide fund transfer servicesto customers and other financial institutions.

It may buy, sell, lease, securitize, assign, exchange, transfer,convey, grant, pledge, acquire, mortgage federal funds,property rights, real property, and personal property.

It should be the only financing source for Maine stateagencies, institutions and instrumentalities, because it shouldbe able to obtain funds at lower cost than private financingbodies.

If Maine instrumentalities can obtain better terms throughother sources, they should report it to the governing body oradvisory board, which should investigate why it is notoffering the best competitive terms to taxpayer-fundedagencies and instrumentalities.

Deposits in SOB should be guaranteed by the full faith andresources of the State of Maine. Deposits should beexempt from state, county, and municipal taxes of allkinds.

120

For banks, which make it a reserve depository, it mayperform functions and render services of a clearinghouse,including facilities for providing domestic and foreignexchange, and rediscounting paper, on terms that thegoverning body provides.

A Maine publicly-owned bank could allow local communityprivate banks to initiate more loans at lower rates withgreater success, generating more fees, and increasingprofits for community banks partnering with it.

The state-owned bank could have borrowed from the Federal

Reserve at the discount rate175

( .75%) or from the

repurchase176

market ( 09%)177

. Non-bank states, such asMaine, now borrow from banks and bond issues at about 2%or more per year.178

Providing capital, when revenues fall, and private banksaren't lending, it could offset asset-selling pressures, taxincreases, bond issues and spending cuts to balance itsbudget which it is required to do by law.

New state technology enterprise development instrumentalities, including Maine Technology Institute and University of Maine Innovation, have been established to incentivize business innovation A Maine State-Owned bank modeled on Bank of North Dakota would have new capital to invest to implement innovative energy technologies that could become net zero or carbon-positive by capturing abundant natural energy

175 frbdiscountwindow.org/currentdiscountrates.cfm?hdrID=20&dtlID=176 Repurchase is also known as "repo"177 wsj.com/mdc/public/page/2_3020-moneyrate.html178 Interest rates vary widely based on economic conditions and state credit rating. In an email from State Treasurer's office: "The following rates are the blended (taxable and tax-exempt) average rate for our most recent bond sales. These borrowings are amortized over a ten year period. 2012 – 1.37%; 2011 – 2.05%; 2010 – 3.05% We haven’t bonded since 2012 but will bond this June.. We won’t know what the rate will be until after the sale is complete.." Tim Rodriguez; Director of Internal Operations;Office of Maine State Treasurer,

121

such as solar, wind, and tidal energy to reduce or eliminateenvironment-threatening fossil and nuclear energydependence.

Maine needs to create renewable energy transportationsystems using solar, wind, electrical energy to power fishingboats, farming vehicles, and commercial trucks. Maineneeds stable local enterprises that will not abandon localcommunities by relocating elsewhere seeking higher profitsas transnational companies did after U S federalgovernment free trade policies such as WTO, NAFTA, andCAFTA were implemented.

Cooperative customer-worker stakeholder-owned businessmodels, which could be supported by a new state-ownedbank, would be stabler and more democratic thantraditional for-profit transnational corporations and limitedliability companies offering advantages in increasing localself-reliance rooted in the community.

Partnership between people and society-friendly technologiescan progress against global multinational fossil energycorporate domination. Mainers have pioneered solar-poweredfarm tractors and entrepreneurs have created electrically-powered hybrid vehicles with stand-alone plug-inrechargeable batteries.

Over 30 Companies, 179

including Tesla, Toyota, GeneralMotors, Chrysler, Ford, Honda, Tango, ElBil Norge, Fly Bo,GEM, Modec, Myers, Reva, Smith, Twike, Venturi, Zap,Zenn, Lightning, Spark, Think, Phoenix, Moteur, UEV, Aptera,Obvio, Fisker, VentureOne, Miles, Eliica, Velozzi, andWrightspeed offer electric battery powered land vehiclestoday.

Fishing and recreation boats could also be powered byadvanced solar or vertical axis wind turbines recharging

179 http://venturebeat.com/2008/01/10/27-electric-cars-companies-ready-to-take- over-the-road/

122

electric batteries that power electric motors.

Assembling elements into products and deploying them tomake progress in sustainable living could be assisted with astate-owned bank. As well as reducing carbon emissionsinto atmosphere, electric-powered boats reduce diesel orgasoline effluent fuel pollution in fresh water lakes, saltwater bays, and harbors.

Electrical energy can be obtained from renewable sourcesfor recharging electric vessel battery banks. Solar panelscan be deployed on yachts and fishing boats. Mainschargers will charge electric boats from shore-side powerwhile boats are at port.

Green electricity can operate electric boats at sea, inrivers and fresh water lakes. Solar panels can be built intoboats' decks, cabin roofs and awnings. Photovoltaic arraysare flexible enough to fit to slightly curved surfaces andcan be constructed in different shapes and sizes.

Masts on sailboats and fishing boats are excellentlocations to mount vertical axis wind generators torecharge electric batteries during operation. Propellershafts from electric boats can double as alternator shaftstransferring the circular motion of the propeller intoelectrical energy to recharge batteries.

With a state-owned bank Maine could act as anenterprise incubator providing a market and a financingtool for net zero or carbon positive energy transition.Maine state government has carbon-positive technologymarkets and opportunities for partnering in ventures toimplement them. Many fleets of yearly-renewed Mainevehicles and vessels for multiple purposes could helprenewable energy enterprises succeed over hurdles facedwhen new businesses start up.

An SOB could supply check-clearing services, more

123

affordable credit, and reduced public-bond issueunderwriting costs, like Bank of North Dakota.

It could give citizens a risk-free, derivative-free fiduciaryalternative, isolated from risk of GSIFI banks.

It could reduce capital outflows, reduce savers', investors',and pensioners' losses from reckless speculation and retainmore assets locally.

It could protect community banking, enabling smaller banksto persist, and reduce concentrated large institutionsfinancial power. A state-owned bank would expand the capitalbase available to enable community banks to providefinancing in partnership with the state-owned bank. It wouldalso increase the money supply in Maine as has been shownby Federal Reserve Bank of Chicago "Modern MoneyMechanics" money expansion explanation. Providingmicrolending to the 99% not just the 1% it could increase theused capacity of the state economy.

It could increase earnings in Maine, because more smallbusinesses could substantially increase employment.raising financial opportunities for people to succeed locally,without out-migrating.

It could increase local bank profitability. As the chart in thisdocument shows, North Dakota has a much moreprofitable banking sector than Maine.

It could issue interest-bearing bonds, provide citizens withlonger-term, lower-risk, asset repositories.

It could raise business activity, reduce loan default and delinquency rates, cut state financing costs, and increase profits for community banks and credit unions.

It could lessen income inequality, increase economic justiceby reducing interest rates and raise earning opportunitiesfor workers, lessening poverty, hunger, starvation, andhomelessness; reduce demands for government programs tomitigate these problems.

Since increased liquidity would strengthen Maine's economy,

124

new jobs and income should result from a state-owned bank.

After t h e SOB has been established, Maine will be lessdependent on global economic expansions and contractions,raising Maine's credit-worthiness and producing a stronger,more stable and efficient Maine economy.

125

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Chapter 12 Corporatocracy

"Slavery is the legal fiction that a person is property; Corporate Personhood is the legal fiction that property is aperson." - Womens' International League of Peace and Freedom

Power to create money when banks lend it gives the moniedinterests that control commercial banks a high degree ofautocratic control over democratic nations. A series ofirresponsible court cases in the United States has alsoimmunized corporations from regulation under erroneous courtprecedents known as corporate personhood.

Corporations date back to pre-colonization when Hudson Baycompany, East India Tea Company and other corporationswere formed to provide resources for the British Empire andother private European interests..

Human beings are mortal. At some point in time each one ofus dies. "In the long run we are all dead." said Lord MaynardKeynes, father of the Keynesian School of Economics. But if the99% of the voting public tolerate their existence, corporationscould live forever. Human beings are responsible for theconsequences of their actions. Human beings' liability isunlimited. Corporations have limited liability. Corporationowners are not fully responsible for the actions of theircorporations.

Most of the financial fraud, conspiracy and corruption that ledto the 2008 financial collapse, which destroyed 40% of theworld's wealth, resulted in zero indictments of any of guiltycorporation CEOs. Fines charged were insufficient to alterbehavior, and government regulators were members of thesame class of corporate scofflaws that they regulated.

Corporations were not mentioned in the Declaration ofIndependence, the Articles of Confederation, or theConstitution of The United States.

Trustees of Dartmouth College v. Woodward established

126

standing of a corporation, Dartmouth College, to file legalclaims against a human appointed by a state, New Hampshire,in an action that sought to void nullification of 1679 DartmouthCollege corporation charter contract of King George III thatwould have transformed Dartmouth into a public state college.Corporations obtained a right after this court precedent to filecourt claims as a legal entity, like humans, and recognized thatpowers of states were limited against corporations by theConstitution's contracts clause which says: "No State shallenter into any Treaty, Alliance, or Confederation; grant Lettersof Marque and Reprisal; coin Money; emit Bills of Credit; makeany Thing but gold and silver Coin a Tender in Payment ofDebts; pass any Bill of Attainder, ex post facto Law, or Lawimpairing the Obligation of Contracts, or grant any Title ofNobility." 3

In the 1886 Santa Clara County v Southern Pacific Railroadcase a headnote issued by Supreme Court Reporter, J. BancroftDavis, claimed that equal protection clause of the 14thAmendment applies to corporations, although the SupremeCourt issued no such opinion on it. This was the first time thatthe Supreme Court reportedly decided that the 14thAmendment's equal protection clause applied to corporatepersons. The claim that corporations were people was insertedinto the headnotes by the Supreme Court Reporter without theissue being discussed or voted on.4 Nevertheless, over 300cases before the Supreme Court have used the Santa Claracase as a precedent to enable corporations to avoid regulationon grounds that corporate "persons" had constitutional rights.

Since then the use of the corporate personhood defenseexpanded from the 14th Amendment, to the 1st, 4th, 5th, 6th,and 7th amendments.

This opened a Pandora;s Box of corporate activities that cannotbe controlled by governments, including fracking, strip mining,mountaintop removal, explosive fuel tank farms, and pipelineconstruction.

3Article I, section 10, clause 1.

4 Unequal Protection, Thom Hartmann, thomhartmann.com/unequal-protection/excerpt-theft

127

In Buckley Vs. Valeo and First National Bank Boston vs.Bellotti, 1976, Money was wrongly defined to be speech and,combined with the erroneous ruling that corporations werepeople, the court concluded that corporations spending moneyin politics is the same thing as human people speaking and wasthus prohibiting it was unconstitutional. This banned lawsrestricting campaign donations by corporations.

Corporate political donations and corporate lobbying are legalbecause “corporate persons” are now protected from regulationby citizens under the 1st Amendment. “Corporate persons” areentitled to free speech under the 1st Amendment, with“commercial speech” increasingly protected by federal courtsoverturning restrictions on advertising dangerous product.Requiring genetically modified food labeling is preventedbecause the 1st Amendment protects the right of “corporatepersons” not to speak.

Regulating mergers and prohibiting corporations from owningstock in other corporations was overturned because “corporatepersons” are protected under the due process clause of the14th Amendment. The 14th Amendment prevents “corporatepersons” from "discrimination" in taxes or restrictingcorporation size. Revoking corporate charters by popularreferendum is unconstitutional because “corporate persons” areentitled to equal protection and due process under the 14thAmendment. Civil rights law and the 14th Amendment ensurethat “corporate persons” have equal opportunity preventinggovernment from prohibiting cell phone tower erection andchain store building and other activities.

The 4th Amendment protects “corporate persons” fromsearches and seizures without a under probable cause warrantpreventing government from inspecting corporations forenvironmental or health violations without prior notice.

Thomas Jefferson once said: "I hope we shall crush in itsbirth the aristocracy of our monied corporations whichdare already to challenge our government to a trial bystrength, and bid defiance to the laws of our country."

128

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Chapter 13 Maine Multiplier Simulation

"The most reliable way to forecast the future is to tryunderstand the present." - John Naisbett

Previous Demos and CSI studies predicted that a Maine PublicBank could create 5700 jobs, $1.1 Billion in new loans, $220million in small business loans, without specifying details ofstudy.

It appears that these estimates didn't utilize the approach of"Modern Money Mechanics" , written by the Federal ReserveBank of Chicago.

The money multiplier occurs when borrowers use bank lentfunds to start new enterprises employing workers, depositingfunds in other banks in multiple stages as described in thatdocument, creating new money when those banks advance it toother borrowers.

.Assuming that all other factors remain equal for purpose ofsimulation, and that one job will be created for each $93,000 incredit lent, income can be estimated by multiplying number ofnewly-created jobs from lending state cash by $38,299. whichis Maine per capita income, Tax revenues generated wasestimated by multiplying average taxes per worker, $2482, byestimated number of new jobs. Spending increases will causesecondary increases, called "fiscal multiplier" to differentiate itfrom "money multiplier.". An empirical study estimated that the"fiscal" multiplier is about +0.5. This means that every 2 jobscreated by the money multiplier would generate 1 other job tomeet added economic demand created by initial jobs.

How much cash and equivalents exist within Maine StateGovernment and its major and minor components? In ourmodel, all cash in State hands will be deposited in the newMaine Public bank as in North Dakota, and the public bank willbe a DBA of the state. Since in the model, the new Maine Public

129

Bank will loan money only within Maine, most benefits will belocal. From on-line annual financial reports of state agenciesand components, current asset cash and equivalents totalabout $3 Billion. We assumed that 90% of cash would beexcess reserves that would be lent. A second simulationassumed only 80% of reserves would be loaned. A third runassumed only 70% would be advanced. All 3 used 50 stagesplus the initial phase which we called stage 0. What were theresults of this projection? With 90% excess reservescompletely lent our model calculated current $3 billion statecash deposited in public bank with fiscal and money multiplierswill generate aggregate 451,000 new jobs after stage 50.These jobs could increase total personal income after 50 stagesby $17.276 Billion and generate $1.046 Billion in total new taxrevenue. This should be of interest to Maine voters whose statebudget has been bleeding red ink for years. Aggregate newlending in Maine using this model would total $17.967 Billion,mostly by private banks operating in Maine.

If Maine banks made 10% per year in fees and profits from thismoney bank profits would increase $1.7 Billion per year.Lending 80% of reserves will generate 188,525 new jobs afterstage 50. These new jobs would increase total personal incomeafter 50 stages by $7.22 Billion and generate $458 Million intotal new tax revenue. Aggregate lending under this modelwould increase by $11.688 Billion. If Maine banks made 10%per year in fees and profits on this money bank profits wouldincrease $1.1 Billion per year.

Lending 70% of reserves will generate 151,063 new jobs afterstage 50. These new jobs would increase total personal incomeafter 50 stages by $5.785 Billion and generate $387.36 Millionin total new tax revenue. Aggregate lending under this modelwould increase by $5.7 Billion. If Maine banks made 10% peryear in fees and profits on this money their profits wouldincrease $570 million per year.

All 3 simulations yield greater benefits than by CSI and Demosstudies. All three simulations eliminate unemployment andcreate a substantial long run budget surplus. DebtUnlike otherbusinesses, when loaning money, banks establish it on theirbooks, enabling state-owned banks, like Bank of NorthDakota, to raise its state's economic activity on a tide of

130

liquidity, independent of Wall Street mega-banks.

"Modern Money Mechanics," describes money multiplierprocess that expands credit:5 Stage 0 occurs when excessreserves are lent to local projects by a bank. Table 4illustrates this. Stage 1 is when banks of sellers of goods andservices to borrowers in Stage 0 lend new money against thedeposits of their vendors to other customers. Stage 2 is whenbanks of vendors of Stage 1 borrowers lend. Since less than90% can be lent at each stage, at some point no more moneycan be loaned, no more money produced.

We estimate that a state-owned bank, modeled on Bank ofNorth Dakota, could generate 117,494 new jobs in Maine,$4,499,894 in new income, $285 M tax revenue, and $728.4M bank sector revenue after 51 stages of money expansionif all state cash were deposited in it and 70% of reserves instate deposits were lent out to Maine enterprises at eachstage using a "Modern Money Mechanics" multiplier model.

Table 4 shows how investing Maine's cash in a state-owned bank and locally lending 70% of it can produce117,494 new jobs (column 4.) In Table 4, the amount lent bythe SOB is in the first row, second column, assuming thestate will move all $3.1 B cash holdings into the new statebank, which will produce $3.1 B in new credit.

Assuming 70% of new credit will be lent, 20% will remain asexcess reserves, and 10% will be required reserves

184 under

previously mentioned assumptions. Column 1 containsmoney expansion stage numbers.

5

180 Federal Reserve Bank of Chicago, "Modern Money Mechanics"

131

Table 4 Economy Expansion with a State-owned Bank $ New $ New

New 1.5 x $ Tax Personal BankStage $ Loans Jobs Jobs Revenue Income Income0 $2,185,384,356 23,499 35,248 $85,723,464 $1,349,968,314 $218,538,4361 $1,529,769,049 16,449 24,674 $60,006,425 $944,977,819 $152,976,9052 $1,070,838,334 11,514 17,272 $42,004,497 $661,484,474 $107,083,8333 $749,586,834 8,060 12,090 $29,403,148 $463,039,132 $74,958,6834 $524,710,784 5,642 8,463 $20,582,204 $324,127,392 $52,471,0785 $367,297,549 3,949 5,924 $14,407,543 $226,889,174 $36,729,7556 $257,108,284 2,765 4,147 $10,085,280 $158,822,422 $25,710,8287 $179,975,799 1,935 2,903 $7,059,696 $111,175,695 $17,997,5808 $125,983,059 1,355 2,032 $4,941,787 $77,822,987 $12,598,3069 $88,188,141 948 1,422 $3,459,251 $54,476,091 $8,818,81410 $61,731,699 664 996 $2,421,476 $38,133,264 $6,173,17011 $43,212,189 465 697 $1,695,033 $26,693,284 $4,321,21912 $30,248,533 325 488 $1,186,523 $18,685,299 $3,024,85313 $21,173,973 228 342 $830,566 $13,079,709 $2,117,39714 $14,821,781 159 239 $581,396 $9,155,797 $1,482,17815 $10,375,247 112 167 $406,977 $6,409,058 $1,037,52516 $7,262,673 78 117 $284,884 $4,486,340 $726,26717 $5,083,871 55 82 $199,419 $3,140,438 $508,38718 $3,558,710 38 57 $139,593 $2,198,307 $355,87119 $2,491,097 27 40 $97,715 $1,538,815 $249,11020 $1,743,768 19 28 $68,401 $1,077,170 $174,37721 $1,220,637 13 20 $47,880 $754,019 $122,06422 $854,446 9 14 $33,516 $527,813 $85,44523 $598,112 6 10 $23,461 $369,469 $59,81124 $418,679 5 7 $16,423 $258,629 $41,86825 $293,075 3 5 $11,496 $181,040 $29,30826 $205,153 2 3 $8,047 $126,728 $20,51527 $143,607 2 2 $5,633 $88,710 $14,36128 $100,525 1 2 $3,943 $62,097 $10,05229 $70,367 1 1 $2,760 $43,468 $7,03730 $49,257 1 1 $1,932 $30,427 $4,92631 $34,480 0 1 $1,353 $21,299 $3,44832 $24,136 0 0 $631 $14,909 $2,41433 $16,895 0 0 $442 $10,437 $1,69034 $11,827 0 0 $309 $7,306 $1,18335 $8,279 0 0 $216 $5,114 $82836 $5,795 0 0 $152 $3,580 $58037 $4,057 0 0 $106 $2,506 $40638 $2,840 0 0 $74 $1,754 $28439 $1,988 0 0 $52 $1,228 $19940 $1,391 0 0 $36 $859 $13941 $974 0 0 $25 $602 $9742 $682 0 0 $18 $421 $6843 $477 0 0 $12 $295 $4844 $334 0 0 $9 $206 $3345 $234 0 0 $6 $144 $2346 $164 0 0 $4 $101 $1647 $115 0 0 $3 $71 $1148 $80 0 0 $2 $50 $849 $56 0 0 $1 $35 $650 $39 0 0 $1 $24 $4Totals $7,284,614,427 78329 117494 $285,743,825 $4,499,894,322 $728,461,443.00Stage Loaned Jobs 1.5^job Tax Revs Income Bank Income

132

An explanation of Table 4:

The second column, first row, is the amount ofstage 0 lending, 70% x $3.1 B, = $2.185384356Billion in loans, which will be lent by the SOB inMaine.

Third column, first row, is the estimated initialnumber of jobs produced by new loans. We assumethat each $93,000 in lending creates 1 job. Resultin Stage 0: 23,499 jobs are created by $2.185384356B of new lending = ($2.185384356 B divided by$93,000.)

Fourth column, first row, is the number of jobsafter fiscal multiplier effect is added in. New jobs areexpected to create a third job for each 2 new jobs.Number of jobs, after the fiscal multiplier effect, iscolumn 2, row 1 multiplied by 1.5. In Stage 023,499 jobs x 1.5 = 35,248 jobs will be created afterthe multiplier effect is factored.

The fifth column, first row, contains expected addedtax revenue generated by new jobs. (It is assumedthat each worker will have only 1 job.) Stage 0 Taxrevenue is approximated by multiplying averagetaxes per worker, $2,482, by number of jobs createdin the fourth column. (35,248 jobs x $2,482taxes/worker = $85,723,464 in tax revenue in Stage0.

The first row of the sixth column contains annualincome that new jobs generate. This is estimated bymultiplying the new jobs (Column 4) by per capitaannual personal income, which is $38,299 in Maine.In Stage 0: 35,248 jobs x $38,299 is$1,349,968,314, the personal income increase.

Column 7 contains profits from fees and otherrevenues obtained by Maine financial andcommunity banks. We assume financial profits willequal 10% of total lending, thus column 7 is 10percent of column 2 ($218,338,456).

Under our assumption sellers of goods and servicesto Stage 0 borrowers will have accounts in banks thatreside in the state. These banks will see their

133

deposits rise at the end of Stage 0 by the amount inColumn 2. This includes workers hired for new jobscreated in Stage 0. Stage 1 is the money expansionoccurring as a result of Stage 0. We assume thatStage 1 banks will be able to create 70% of thecredit created by Stage 0, therefore Column 2, Row 2will be 70% of Column 2, Row 1. We assumed 10%will be required reserves and 20% will be excess

reserves185

. The money expansion in Stage 1 willfollow the same pattern as Stage 0. (70% x $2.1 B is$1.529 B)

The third column in the second row is theestimated number of initial jobs created by newprivate bank lending in stage 1. We assumed roughly$93,000 in lending creates 1 job. The second columnis lending, Row 2, Column 2, divided by $93,000. Itestimates the jobs created by lending $1.529 B is16,449.

The multiplier effect occurs at each stage. The IMFstudy indicated that the multiplier is about +0.5.The fourth column is the number of jobs createdafter the fiscal multiplier effect is actuated, whichstipulates that each 2 new jobs create a third newjob. The 4th column is column 3 multiplied by

1.5. 24,674 jobs are created in stage 1 after the multiplier effect occurs.

The fifth column contains tax revenue resultingfrom new jobs. Tax revenue is approximated bymultiplying average taxes per worker, $2482, bynumber of jobs - column 4. The result for stage 1 is$944,977,819 in new tax revenue.

The sixth column contains income that these jobscreate, estimated by multiplying number of newjobs in Column 4 by Maine per capita annual personalincome, which is $38,299.

The seventh column contains profits from fees andother charges obtained by the financial sector. Weassume that financial profits will equal 10% of totallending. Column 7 is therefore 10 percent of column 2.

The first stage generates a second stage, which creates a

134

3d stage, and so on, until all 50 stages have been reached.

To avoid excessive expectations we assumed money expansionstops at stage 50. It reality it keeps going - at dwindlingnumbers.

181 Bank Reserves that are kept to satisfy operational needs are required reserves, which are about10% of total reserves, the required percent is set by the central bank, the Federal Reserve. Reserves beyond the required reserves are excess reserves

135

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Chapter 14 Occupying a New Economy

"We are witnessing the financial and physical consequencesof the end of a governing creed.. If regulation fails, trustfails, and markets will collapse... There is no such thing asa free market.. There is no such thing as free trade.. Whatshould be done? We must have a capacity to plan.. Makeincome distribution a social, not a market decision.. and beprepared for a another crisis." 180 --James K. Galbraith

Money is like fire. When fuel and oxygen are raised toignition temperature, a flame starts and continues burninguntil either the temperature cools, oxygen is depleted, or fuelis consumed, and it is extinguished. Ingredients for moneycreation are a borrower, a bank which creates moneywhen lending it, and accounting entries that debitpromissory notes receivable and credit the loan account.When a bank issues loans, money is born, and continues toexist until the loan is repaid. When borrowed money isrepaid, like a flame, money is extinguished.

We need to end rede f in i t i on o f per son byco rpo ra t ion and speech by money by cour ts toend co rpo ra te ru le . Some have advocated creatingalternative currencies to increase local liquidity, but underFBI and Secret Service-enforced federal law today onlyFederal Reserve Notes may be legal tender for public andprivate debts. Public acceptance of alternative currenciesmay be insufficient because Fe d e r a l R e s e r v e N o t e shave been U S currency for a very long time. What practicalreason exists to give Federal Reserve notes a monopoly? Ithink alternate currencies should be allowed by law. TheFederal Reserve, established in 1913, has acted as aprivately-owned financial cartel and failed as a regulatoryagency. Like many, I think it should be nationalized butchange is improbable.

Ellen Brown wrote: "The theory that businesses in Americaprosper or fail due to free market forces is a myth. Whilesmaller corporations and individuals who miscalculate their

136

risks may be left to their fate in the market, mega-banksand corporations considered too big to fail are protected bya form of federal welfare only available to the rich andpowerful. Other distortions in free market forces result fromthe covert manipulations of a variety of powerful entities.Virtually every market is now manipulated, whether byfederal mandate or by institutional speculators, hedgefunds, and large multinational banks colluding on trades."181

Maine has historically had lower economic activity higherunemployment, lower per capita income, more loandelinquencies, greater tax rates, and lesser bankprofitability than other states. It has seldom offeredenough career opportunities to retain its young people, whohave outmigrated in large numbers. I t s historically weakergrowth has resulted l a r g e l y from inadequate liquidity,especially in renewable natural resource industries, whichdominate its economy.

State government-owned-banks could solve many of oureconomic problems from the bottom-up by creating newlocal money. Enterprises must at least break even tosurvive in the long run. Lower interest rates r e d u c ecapital costs, which increase start-up enterprises' successchances. To break even, or make a profit, lower costs mustbe covered by enterprises when interest rates have beendropped.

Lendees are more likely to borrow when success expectationsare higher. Cutting interest rates increases loan demand,reduces costs, and raises entrepreneurs' confidence to risknew enterprise formation. With less mega-bank dependence,underwriting state bond issues with a state-owned bankcould lower costs, allowing lawmakers to reduce Maine'sexorbitant tax burden, which has been in the top 28% of 50states and climbing.

Trends of farmers, foresters, and fishermen leaving theirfields at higher rates than j o i n ing cou l d be reversed bylower cost financing f r o m m o r e socially-responsiblepu b l i c banks, producing more stewards for land and sea tohelp postpone its rapid conversion into highways, parkinglots, and waste dumps. Grea ter State-Owned Bankcommunity lending could provide higher community bank

137

profits as it has in North Dakota. Added jobs and privateinvestment could raise tax revenues and enable cuts inMaine's exorbitant tax rates on working families. Lower taxrates could increase private investment and job growth,returning state treasury surpluses, f u r t h e r reducingbudget gaps and tax rates.

During public hearings bank officials e r r o n e o u s l yimplied that local banks are n o w making adequatecapital available to l o c a l e n t e r p r i s e s . Bankersinferred that some loan applicants weren't credit-worthyenough t o bo r r ow and that loaning to them would be"unsafe."

Before and during the 2008 Crash their banker colleaguespaid credit rating agencies to k i t e credit ratings ondangerous derivatives of mortgage-backed securitieswhose value was so deficient that buyers could not be foundto acquire them. This led to collapse of the largest banksand traders, including Bear Stearns, Lehman Brothers,Merrill Lynch, AIG, Fannie Mae, Freddie Mac and manyothers at home and abroad. Unregulated credit-ratingagencies rebutted critics by saying that it was not theirfault that they fallaciously rated "toxic" securities as gilt-edged, because their ratings were protected by freedom ofspeech.

Eventually, many toxic assets were bought by the FederalReserve as part of the program called "Quantitative Easing."Compared to this, bankers calling Maine s t a t e b a n kloan cand ida te s "unsafe" wa s hypocritical a n dmalicious. International megabanks got at least $16 Trillion inbailouts from the U S Federal Reserve and trillions more as partof "Quantitative Easing" because of their wrongdoing. They alsogot huge bailouts from foreign central banks, such as theEuropean Central Bank and Bank of England.

Post-recession lending demand is suppressed by borrowers'fears that banks are unprotected from financial p a n i c slike 2008, which could prevent them from repaying loans.Maine loan demand could be higher if lenders offered loanpayment rates that were uninflated by exorbitant executivebonuses and costs of speculation. Demand for loans wouldbe higher if expectations were higher, or if interest rates, prices

138

of credit, were lower.

Loan demand is a l s o restrained by inequality from wealthredistribution to the upper 1% of the population from thelower 99%, and from Federal Reserve bailouts, corporatewelfare, unnecessary executive bonuses, and tax breaks forthe rich.

In 2013, a State-owned bank could have saved at least$122.244 Million in debt service cost to meet budgetrequirements by borrowing from its own credit pool, insteadof increasing tax rates and cutting programs for the needy.Fewer mortgages would be delinquent and foreclosureswould fall if interest rates were lower. Greater lendingstimulates the economy. A rising tide lifts all boats.Lower banker's bank, and correspondent-bank service costscould be obtained for community banks with a state-owned-bank than with Wall Street mega-banks. Businesses could bemore profitable and successful and hire more workers withhigher economic activity c rea ted by a state-owned bank.Future national recessions would damage Maine workers andbusinesses l e s s with a state bank t h a t shields them fromperiodic downturns

"The State of North Dakota Doing Business as Bank ofNorth Dakota" emerged unscathed from the 2008 panic-recession without budget deficits that Maine and otherstates have been struggling to resolve for six years. Localbanks in areas with publicly-owned banks loan more moneyand have fewer delinquencies and higher profits than inareas without publicly-owned banks.

Recession-depressed real estate, building and constructionsector could turn around with lower interest rates. Newearnings increase consumer spending, increase jobs and pay.

Establishing a state-owned bank is a legal way to increaseMaine's money supply without changing federal law. Sincemoney is produced when banks lend, Maine could generateits own money for its economy by loaning to local enterpriseswith the state-owned bank it establishes.

It may be easier to establish a state-owned bank by

139

reorganizing existing financial instrumentalities, such asMaine Municipal Bond Bank (MMBB) and Finance Authority ofMaine (FAME), modeling the new organization on the Bankof North Dakota. BND is proof of the state-owned bankconcept and has been successful for nearly a century. FAMEand MMBB, which function, and are governed like state-owned banks, have operated for years. Establishing theminto a bona-fide state-owned bank is an opportunity toconsolidate duplicate financial programs. Mainers wouldgive a leaner state-owned bank much more support thancreating another semi-redundant state agency.

At 2013 Insurance & Financial Services hearings, neithercommittee majority, nor bank-associated witnesses, seemedto understand purposes, reasons, or benefits of state-ownedbanking. This indicates a need to improve legislatorsfinancial education and communication. Referring state-owned bank bills to Insurance & Financial ServicesCommittee appeared to make sense at first glance, but itturned out to be impractical, since state-owned banksinvolve less about bank regulation than economicdevelopment, Joint Labor, Commerce, and EconomicDevelopment Committee would probably be a much betterforum. When hearings are held on bills, rebuttal time shouldbe provided to challenge all statements made to thecommittee, so that false statements cannot be leftunchallenged because no chance was allowed to discussthem. When witnesses have no chance to questiontestimony, some may assume unchallenged statements aretrue. In committee hearings people testifying against thebills had the last word, whether true or false.

Robert F. Kennedy once stated that the Gross NationalProduct "counts air pollution and cigarette advertising, andambulances to clear our highways of carnage. It countsspecial locks for our doors and the jails for the people whobreak them. It counts the destruction of the redwood andthe loss of our natural wonder in chaotic sprawl. It countsnapalm and nuclear warheads and armored cars for thepolice to fight the riots in our cities. It counts the televisionprograms which glorify violence in order to sell toys to ourchildren. Yet the gross national product does not allow forthe health of our children, the quality of their education orthe joy of their play. It does not include the beauty of our

140

poetry or the strength of our marriages, the intelligence ofour public debate or the integrity of our public officials. Itmeasures neither our wit, nor our courage, neither ourwisdom nor our learning, neither our compassion, nor ourdevotion to our country, it measures everything, in short,except that which makes life worthwhile. And it can tell useverything about America, except why we are proud that weare Americans. "183

Liquidity from a state government-owned bank patterned onBank of North Dakota could provide greater local self-reliance,prosperity, and economic sovereignty so that Maine could occupya new economy on Main Street and no longer depend onscraps from Wall Street. Once i t has been established, peoplec ould have greater hope, opportunity, income, employment, andprosperity.

It has been said that money is the "root of all evil." Maybethat's what ancient Greeks were thinking when they used thesame word for money that they use for the Devil.

182 Op. Cit James Galbraith, "Predator State."

183 Ellen Brown, "Web of Debt" Page 449, 3d Millenium Press, 2012

141

Table of Figures

Figures Page

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Graph 2 29Graph 3 30Graph 4 31Graph 5 39Graph 5 38

CEO-Worker Pay 186$ Dollars/Hour vs Productivity 187 Corporate Profits 1979-2012 188Interest Paid and Gained 2012 189Inflation Rates Vs Interest Rates 1946-2013 190 Bank Profitability by State 2012 191

Graph 6 64Graph 7 66Delinquent Loans by State 2010 192

Maine Agencies Balance Sheet Summaries 193 Table 1 80

Economic Activity Since 2007

194 Graph 8 90Graph 9 83

Graph 10 85Graph 8 82Graph 12 87Graph 13 89Graph 14

91Graph 15

92

Table 2

96

Income per capita Unemployment by State 196

Property Taxes by State 197 Home Price since 2008 by State 198

Upward Mobility by County 199

Education Spending Growth 200

Tax Burden of Governments 201 Treasurers Cash Pool 202 State Owned Cash 203

Table 3

105

Graph 16

104

Graph 17 109Money Expansion 204

Maine Revenue & Expenditure Projection 205 70% Expansion; 206 Table 4 132

184 businessinsider.com/mckinsey-and-the-ceo-pay-gap-2013-8

185 itp.briancliftonstudio.com/1-fall-2013/introduction-to-computational- media/icm_01-static-image-

graph/

186 ritholtz.com/blog/2013/10/corporate-profits-after-tax/ 189 outersite.org/interest-and-inflation-free-

money-extracts/ 190 data360.org191 industrialbankers.org/where-is-banking-most-profitable-in-the-united-states/ 192 calculatedriskblog.com/193 compiled from www.Maine.gov and other sites. 194 philadelphiafed.org/research-and-data/195 bangordailynews.com/2014/04/25/business/maine-personal-income-growth-ranks-30th- purchasing-power-36th-since-recession196 floatingpath.com197 census.gov198 ny.frb.org/data-and-statistics/

199 www.nytimes.com/2013/07/22/business/in-climbing-income-ladder-location-matters.html?

_r=0

200 cbpp.org/images/cms/9-4-12sfp-f1.jpg

201 taxfoundation.org/burdens

2 02 Maine.gov/legis/house/jt_com/ifs.htm203 Compiled from many sources including mainemaritime.edu; MainePERS.org; famemaine.com; Maine.gov; maine.edu/system/oft/AnnualFinancialReports.php; and others 204 chicagofed.org/webpages/research/papers & maine.gov205 70% Loaned; 51 Stages Spreadsheet simulation.

142

Glossary

Acquisition is a combination of two companies where onecorporation is completely absorbed by another. The less importantcompany often loses its identity and becomes part of the other,which retains its identity. Mergers extinguish a prior corporation,and the survivor assumes the rights, privileges, and liabilities of theresulting company. A merger is different from a consolidation, inwhich two companies lose identities and unite to form a newcorporation.

Adaptive Market Hypothesis, as proposed by Andrew Lo, is aframework that reconciles theories that imply that markets areefficient with behavioral alternatives, applying the principles ofevolution - competition, adaptation, and natural selection - tofinancial interactions. Adaptive Markets Hypothesis can be viewed asa variation of efficient market hypothesis, derived from evolution."Prices reflect as much information as dictated by the combination ofenvironmental conditions and the number and nature of "species" inthe economy." By species, he means distinct groups of marketparticipants, behaving in a common manner such as pension funds,retail investors, market makers, and hedge-fund managers. If multiplemembers of a single group are competing for scarce resources in asingle market, a market is likely to be highly efficient, such as 10-YearUS Treasury Notes market, which reflects relevant information veryquickly. If a small number of species are competing for ratherabundant resources in a given market, that market will be lessefficient, such as the market for oil paintings from the ItalianRenaissance. Market efficiency it is context-dependent and dynamic.The degree of market efficiency is related to number of competitors,magnitude of profit opportunities, and participants' adaptability.

Alt-A mortgage, short for Alternative A-paper, is a type of U.S.mortgage considered riskier than A-paper, or "prime", and less riskythan "subprime," the riskiest category. Alt-A interest rates, which aredetermined by credit risk, therefore tend to be between those ofprime and subprime home loans. Typically Alt-A mortgages arecharacterized by borrowers with less than full documentation,lower credit scores, higher loan-to-values, and more investmentproperties. A-minus is related to Alt-A, with some lenderscategorizing them the same, but A-minus is traditionally defined asmortgage borrowers with a FICO score ofbelow 680 while Alt-A is traditionally defined as loans lacking fulldocumentation. Alt-A mortgages may have excellent credit but maynot meet underwriting criteria for other reasons. Also known asliar loans, because information used to give them credit-

143

worthiness are often fallacious or erroneous.

Aggregate total:[aggregate sales in that market] A totalconsidered with reference to its constituent parts; a gross amount:An empire is the aggregate of many states under one commonhead.

Arbitrage - is the practice of taking advantage of price differentialbetween two or more markets: striking combinations of matchingdeals that capitalize upon imbalances, profiting from the differencebetween market prices. When used by academics, an arbitrage is atransaction that involves no negative cash flow a risk-free profit. Aperson engaging in arbitrage is called an arbitrageur. The term isapplied to trading in financial instruments, such as bonds, stocks,derivatives, commodities and currencies. If market prices do not allowfor profitable arbitrage, prices are said to constitute an arbitrageequilibrium or arbitrage- free market. An arbitrage equilibrium is aprecondition for general economic equilibrium.

Bankers' Banks: Larger banks at which smaller banks deposit fundsin order to obtain services that are not available to them or to theircustomers and for other purposes.

Bear raid: a type of stock market strategy, where a trader, or groupof traders, attempts to force down price of stock to cover a shortposition. This can be done by spreading negative rumors about thetarget firm, which lowers share prices. This may be a form ofsecurities fraud. Alternatively, traders could take on large shortpositions themselves, with large selling volume reducing prices makingthe strategy self-perpetuating.

Bubble: Sometimes referred to as a speculative bubble, marketbubble, price bubble, financial bubble, or speculative mania is a tradein high volumes at prices that are considerably at variance withintrinsic values. Trade in products or assets with inflated values.While many explanations have been suggested, it has been shownthat bubbles appear without uncertainty, speculation, or boundedrationality. It has been suggested that bubbles might ultimately becaused by processes of price coordination or emerging norms.Because it is often difficult to observe intrinsic values in real-lifemarkets, bubbles are often conclusively identified only in retrospect,when a sudden drop in prices appears. Such a drop is known as acrash or a collapse. Both boom and bust phases of bubbles areexamples of positive feedback. Prices in an economic bubble canfluctuate erratically, and become impossible to predict from supplyand demand alone.

144

Collateralized Debt Obligations [CDOs] are sophisticated financialderivatives that repackage loans into a product that can be sold onthe secondary market. These packages may consist of auto loans,credit card debt, or corporate debt. They are called collateralizedbecause they have collateral behind them. CDOs are called asset-backed commercial paper if the package consists of corporate debt,and mortgage-backed securities if the loans are mortgages. If themortgages are made to those with a less than prime credit history,they are called subprime mortgages. CDOs were created to providemore liquidity in the economy. It allows banks and corporations tosell off debt, which frees up more capital to invest or loan. CDOsallows originators of loans to avoid having to collect them when theybecome due, since they have been sold to other investors, Whichmay reduce lending standards.

Consideration A legal term for money, or something of value, offeredin a business transaction such as in Daly v First national bank ofMontgomery.

Counter-party: a party to a contract with whom one negotiates onan agreement, either party or both, depending on context. Anylegal entity can be a counter-party. Examples of legal entities are aperson, a married couple, corporation, limited partnership, city.

Credit default swap A specific kind of counterparty derivativeagreement which allows transfer of third party credit risk from oneparty to the other. One party in the swap is a lender and facescredit risk from a third party, and counterparty in a credit defaultswap agrees to insure this risk in exchange of regular periodicpayments, like an insurance premium. If the third party defaults, theparty providing insurance will have to purchase the defaulted assetfrom the insured party, and the insurer pays the insured theremaining interest and the principal on the debt.Efficient-market hypothesis (EMH) asserts that financial markets are"informationally efficient", or that prices on traded assets alreadyreflect all known information, and instantly change to reflect newinformation. Therefore, according to theory, it is impossible toconsistently outperform the market by using any information thatthe market already knows, except through luck. Information or newsin the EMH is defined as anything that may affect prices that isunknowable in the present and thus appears randomly in the future.The hypothesis has been attacked lately by critics who blame beliefin rational markets for much of the current financial crisis, withnoted financial journalist Roger Lowenstein recently declaring "Theupside of the current Great Recession is that it could drive a stake

145

through the heart of the academic nostrum known as the 'efficient-market hypothesis.'"

Excess Reserves Excess Reserves are defined as the Total Reservesminus the required reserves for banks holding deposits.

Equilibrium is a state where economic forces are balanced .Market equilibrium, for example, refers to a condition where amarket price is established through competition in which goods orservices sought by buyers equals supplied goods or services,Equilibrium prices tend to be stable..

FDIC - Federal Deposit Insurance Corporation - Created during theGreat Depression, FDIC protects depositors against unlimited runs onAmerica's banks by guaranteeing up to $250,000 of each deposit frompossibility that banks fail. The funds are provided by banks which pay afee to monetize the fund.

Fiscal policy is the use of government spending and revenuecollection to influence the economy. Fiscal policy can be contrastedwith monetary policy, which attempts to stabilize the economy bycontrolling interest rates and the supply of money.

Global Systemically Important Financial Institution [GSIFI]"too-big-to-fail" banks, the term originated in the Dodd-Frank Actwhich shifting responsibility for irresponsibility and malevolence ofwealthy from malefactors to governments and thus to society. It wassupposed to correct the problem but made it worse.

Instrumentality - An entity, agency or component of stategovernment which is incorporated separately usually to provide onefunction or service. .

Legal Tender - Bills or coins, which, if offered in payment of debt,must be accepted by creditors as money.

Liquidity is the extent to which a person or firm has cash, orability to quickly obtain it to meet immediate and short-termobligations. Ability of current assets to meet liabilities. Ability toquickly convert investments to cash with little or no loss in value,amount of capital, or money, available for investment. High liquiditymeans a lot of money is available, credit is loose, capital is easilyavailable.

Market is a place where sellers can meet with the buyers tonegotiate sale of goods or services at specific prices. A free

146

market is a market without economic intervention and regulation bygovernment except to regulate against force or fraud. The theoryholds that within a free market, property rights are voluntarilyexchanged at a price arranged solely by mutual consent of sellers andbuyers. Free markets contrast sharply with controlled markets orregulated markets, in which governments directly or indirectlyregulate prices or supplies, which according to free market theory,causes markets to be less efficient.. Where government interventionexists, the market is a mixed economy. James Galbraith said thereis no such thing as a free market.

Monetary policy is the process a government, central bank, ormonetary authority of a country uses to control money supply ,availability and cost to attain objectives.

Monoline insurers, also called "monoline insurance companies" orsimply "monolines" are companies specializing in a single type offinancial service, such as consumer credit, home mortgages, or a soleclass of insurance guarantee, timely repayment of bond principal.

Monopoly exists when a specific individual or enterprise sufficientcontrol over a particular product or service to determinesignificantly the terms on which other individuals access it. Monopoliesare characterized by lack of economic competition for goods orservices that they provide and lack of viable substitute goods. Theverb "monopolize" refers to the process by which a firm gainspersistently greater market share than expected under perfectcompetition, which doesn't exist is reality..

Opacity - The degree to which an impartial observer is unable todetermine what the operations and conditions of a business are byexamining publicly available documents

Paradigm - the generally accepted perspective of a particulardiscipline ,the prototype: a standard or typical example; themethodology; conventional wisdom.

PPT - Plunge Protection Team, A group of Presidentially-appointedpeople with authority power to avert major stock market downwardchanges using special powers.

Reflexivity, where the biases of individuals enter into markettransactions, potentially changing the perception of fundamentals ofthe economy has been cited by George. Soros, who argues thattransitions in perceptions of fundamentals of the economy aremarked by disequilibrium rather than equilibrium, and that

147

conventional 'efficient market hypothesis' economic theory does notapply in these situations. Soros has popularized concepts of dynamicdisequilibrium, static disequilibrium, and near- equilibriumconditions. Reflexivity is based on three main ideas. Reflexivity isobserved under conditions where investor bias grows and spreadsthroughout the investment arena. Examples of factors that may giverise to this bias include equity leveraging or trend-following habitsof speculators. Reflexivity appears intermittently since it is mostlikely to be revealed under certain conditions; equilibrium characteris best considered in terms of probabilities. Investors' observation ofand participation in the capital markets may at times influencevaluations and fundamental conditions or outcomes. An example ofreflexivity in the debt and equity of housing markets. Lendersbegan to make more money available to more people in the 1990s tobuy houses. More people bought houses with this money, increasingprices of houses. Lenders looked at balance sheets which not onlyshowed that they had made more loans, but that their equitybacking the loans— house values, had increased because moremoney was chasing the same amount of housing. They lent out moremoney because balance sheets looked good, and prices increasedmore. This was further amplified by public policy. Governments sawhome ownership as positive outcomes. Prices increased rapidly,lending standards were relaxed. Reflexivity explains why marketsgyrate over time, and do not remain in equilibrium, but tend toovershoot or undershoot. He argues that the current system offinancial speculation undermines healthy economic development inmany underdeveloped countries. Soros blames many of the world'sproblems on failures of market fundamentalism.

Required Reserves. For banks holding deposit, the requiredreserves are a fraction of deposits that are not loaned but held inevent that depositors demand payment. In is usually set at about10% of deposits.

Securitization is a structured finance process that distributes risk byaggregating debt instruments in a pool, then issues newsecurities backed by the pool. The term "Securitization" is derivedfrom the fact that the financial instruments used to obtain fundsfrom investors are called "securities." As a portfolio risk backed byamortizing cash flows, unlike general corporate debt, securitizeddebt credit quality is non-stationary, due to time- and structure-dependent volatility. If the transaction is properly structured andthe pool performs as expected, credit risk of all tranches ofstructured debt improves; if improperly structured, affectedtranches will experience dramatic credit deterioration and loss. Allassets associated with cash flow can be securitized. Securities which

148

are created by of securitization are "asset-backed securities".Securitization is also defined as a financial process leading to anissue of asset-backed securities which often utilizes a special purposevehicle , alternatively known as a special purpose entity, or specialpurpose company, reducing risk of bankruptcy, thereby obtaininglower interest rates from potential lenders. A credit derivative isalso sometimes used to change credit quality of the underlyingportfolio so that it will be acceptable to final investors. It has beenalleged that securitization hides real risk and contributed to 2008 panic.

Short selling is the practice of selling assets, usually securities, thathave been borrowed from a third party intending to buy assetsback at a later date to return to lender. The short seller hopes toprofit from a price decline of the assets between sale andrepurchase, paying less to buy the assets than received sellingthem. The short seller will lose if asset price rises. Other shortingcosts may include a borrowing fee and payment of dividends paidon borrowed assets.

SOB - State-owned Bank A Public Bank, which is incorporated as aninstrumentality of a state, such as the only SOB in the United State,the Bank of North Dakota [BND]. BND is incorporated as the State ofNorth Dakota doing business as the Bank of North Dakota. All statefunds are deposited in it and it loans money though local communityowned banks to people and projects within the state. As a result of itsSOB North Dakota has a far more prosperous economy than all theother states.

Structuring, also known as smurfing in banking industry jargon, isthe issue of transactions structured to avoid certain record-keeping and reporting requirements mandated by law, such as theUnited States's Bank Secrecy Act (BSA) and/or 26 USC 6050IForm 8300. Structured finance is a term used to describe a sector offinance that was created to help transfer risk using complex legaland corporate entities. This risk transfer as applied to securitization ofvarious financial assets:. mortgages, credit card receivables, andauto loans, has helped to open up new sources of financing toconsumers. However, it arguably contributed to degradation inunderwriting standards for financial assets, which helped create thecredit bubble of the mid-2000s, the credit crash and financial crisis of2007-2009. Structured off balance sheet debt contributed to the2008 panic according to many analysts.

Subprime lending (near-prime, non-prime, or second-chancelending) in finance means making loans that are the riskiestcategory of consumer loans and are typically sold in a separate

149

market from prime loans. The standards for determining riskcategories refer to loan size, "traditional" or "nontraditional" loanstructure, borrower credit rating, ratio of borrower debt to income orassets, ratio of loan to value or collateral, documentation provided onloans which don't meet Fannie Mae or Freddie Mac underwritingprime mortgages guidelines, are non-conforming. Although nostandard definition exists, subprime loans are usually classified asthose where the borrower has a FICO score below 640. Subprimelending encompasses a variety of credit types, including mortgages,auto loans, and credit cards. The term was popularized by mediaduring the 2007 credit crunch. Subprime could also refer to asecurity for which a return above prime rate is adhered, alsoknown as C-paper. Subprime borrowers show data on their creditreports associated with higher default rates, including limited debtexperience, excessive debt, a history of missed payments, failures topay debts, and recorded bankruptcies. The Wall Street Journalreported in 2006 that 61% of all borrowers receiving subprimemortgages had credit scores high enough to qualify for primeconventional loans. Proponents of subprime lending maintain thatthe practice extends credit to people who would otherwise not haveaccess to the credit market.

Tranche a portion or installment, esp of loan or share issue. Instructured finance, tranche is one of a set of classes, or riskmaturities which comprise a multiple-class security, such as CMO orREMIC; a class of bonds; collateralized mortgage obligations arestructured with several tranches of bonds that have variousmaturities, slice, traunch - To slice a sturgeon.

Transparency In finance transparency is the degree to whichobservers can understand the condition and operations of a businessby looking at documents available to the public. The opposite ofopacity.

Warrant A certificate, usually issued with a bond or preferredstock, entitling holder to buy a specific quantity of securitiesusually above market price at issuance time, for an extendedperiod from a few years to many years. If security price risesabove warrant's exercise price, the investor can buy it at theexercise price and resell it for a profit, otherwise, the warrant willexpire or remain unused. Warrants are listed on options exchangesand trade independently of security with which it is issued, alsocalled a "subscription warrant."

150

About the Author

Randall A. Parr was born in Camden, Maine andattended the University of New Hampshire at Durham.After working in the private sector he joined the U SNavy and rose to Lieutenant Junior Grade beforeattending graduate school at University ofMassachusetts, Amherst, receiving a Masters inEconomics.

After working as a Labor Economist he received asecond Masters degree in Computer InformationSystems, M.Sc, at Bentley College, Waltham, MA, andworked at Digital Equipment Corporation, ElectronicData Systems and other corporations. He has beenworking, since then, as an independent dataarchitecture consultant.

In 2014, Randall filed papers to run for House Representative in Maine's Legislature for District 95. If elected, his primary goal will be creating a Maine state-owned bank.

151

About the Covers

Lighthouses dot the U. S. coastline warning boats at night ofapproaching land. Fog horns sound in poor visibility night and day.Lighthouses help all mariners. Lighthouses are public goods, erectedas common efforts for all who sail the seas needing guidance inperilous times.

Initially the five dollar bill on the back cover seems ordinary, but ifyou look over the President's picture you will see that it says "UnitedStates Note." This bill was issued by the U. S. TreasuryDepartment, not the private central banking consortium called the"Federal Reserve."

The Federal Reserve is a private "central" bank organization thatmanages and regulates U S currency, guided by presidentially-appointed governors, comprised of twelve regional banks, whichare privately-owned by the largest banks in each district, which theyserve.

In the past money has been issued by government, not bycentral banks, and the "United States Note" on the back cover isevidence of that.

If money that is vital to our economy is created by banks, publicbanks are needed to create it. Perhaps Maine can live up to itsquotation "As Maine goes so goes the nation" and be the firststate, since North Dakota, to create a state-owned public bank.Other states may then see Maine's wisdom and then follow itslead.

The lighthouse on the Front Cover is Owls Head Light at the mouth ofPenobscot Bay in the town of Owls Head, Maine. The cover photowas taken on June 9, 2014 by the author.

Charts and figures in this book reprinted with permission.

152