Read

Search form

Why Californians Are Paying Double – In Interest to the Banks

Why Californians Are Paying Double – In Interest to the Banks
Fri, 6/6/2014 - by Ellen Brown
This article originally appeared on Web of Debt

“The numbers are big. There is sticker shock,” said Jason Peltier, deputy manager of the Westlands Water District, describing Governor Jerry Brown’s plan to build two massive water tunnels through the California Delta. “But consider your other scenarios. How much more groundwater can we pump?”

Whether the tunnels are the best way to get water to the Delta is controversial, but the issue here is the cost. The tunnels were billed to voters as a $25 billion project. That estimate, however, omitted interest and fees. Construction itself is estimated at a relatively modest $18 billion. But financing through bonds issued at 5% for 30 years adds $24 - $40 billion to the tab. Another $9 billion will go to wetlands restoration, monitoring and other costs, bringing the grand total to $51-67 billion – three or four times the cost of construction.

A general rule for government bonds is that they double the cost of projects, once interest has been paid.

The San Francisco Bay Bridge earthquake retrofit was originally slated to cost $6.3 billion, but that was just for salaries and physical materials. With interest and fees, the cost to taxpayers and toll-payers will be over $12 billion.

The bullet train from San Francisco to Los Angeles, another pet project of Jerry Brown and his administration, involves a bond issueapproved in 2008 for $10 billion. But when interest and fees are added, $19.5 billion will have to be paid back on this bond, doubling the cost.

And those heavy charges pale in comparison to the financing of “capital appreciation bonds.” As with the “no interest” loans that became notorious in the subprime mortgage crisis, the borrower pays only the principal for the first few years. But interest continues to compound; and after several decades, it can amount to ten times principal or more.

San Diego County taxpayers will pay $1 billion after 40 years for $105 million raised for the Poway Unified School District.

Folsom Cordova used capital appreciation bonds to finance $514,000. The sticker price after interest and fees will be $9.1 million.

In 2013, state lawmakers restricted debt service on capital appreciation bonds to four times principal and limited their term to 25 years. But that still means that financiers receive four times the cost of the project itself – the sort of return considered usurious when we had anti-usury laws with teeth.

Escaping the Interest Trap: The Models of China and North Dakota

California needs $700 billion in infrastructure over the next decade, and the state doesn’t have that sort of money in its general fund. Where will the money come from? Proposals include more private investment, but that means the privatization of what should have been public assets. Infrastructure is touted to investors as the next “fixed income.” But fixed income to investors means perpetual payments by taxpayers and rate-payers for something that should have been public property.

There is another alternative. In the last five years, China has managed to build an impressive 4,000 miles of high-speed rail. Where did it get the money? The Chinese government has a hidden funding source: It owns its own banks. That means it gets its financing effectively interest-free.

All banks actually have a hidden funding source. The Bank of England just admitted in its quarterly bulletin that banks don’t lend their deposits. They simply advance credit created on their books. If someone is going to be creating our national money supply and collecting interest on it, it should be we the people, through our own publicly-owned banks.

Models for this approach are not limited to China and other Asian “economic miracles.” The U.S. has its own stellar model, in the state-owned Bank of North Dakota (BND). By law, all of North Dakota’s revenues are deposited in the BND, which is set up as a DBA of the state (“North Dakota doing business as the Bank of North Dakota”). That means all of the state’s capital is technically the bank’s capital. The bank uses its copious capital and deposit pool to generate credit for local purposes.

The BND is a major money-maker for the state, returning a sizable dividend annually to the state treasury. Every year since the 2008 banking crisis, it has reported a return on investment of between 17 percent and 26 percent. While California and other states have been slashing services and raising taxes in order to balance their budgets, North Dakota has actually been lowering taxes, something it has done twice in the last five years.

The BND partners with local banks rather than competing with them, strengthening their capital and deposit bases and allowing them to keep loans on their books rather than having to sell them off to investors or farm the loans out to Wall Street. This practice allowed North Dakota to avoid the subprime crisis that destroyed the housing market in other states.

North Dakota has the lowest unemployment rate in the country, the lowest default rate on credit card debt, one of the lowest foreclosure rates, and the most local banks per capita of any state. It is also the only state to escape the credit crisis altogether, boasting a budget surplus every year since 2008.

Consider the Possibilities

The potential of this public banking model for other states is huge. California’s population is more than 50 times that of North Dakota. California has over $200 billion stashed in a variety of funds identified in its 2012 Comprehensive Annual Financial Reportincluding $58 billion managed by the Treasurer in a Pooled Money Investment Account earning a meager 0.264% annually. California also hasover $400 billion in its pension funds (CalPERS and CalSTRS).

This money is earmarked for specific purposes and cannot be spent on the state budget, but it can be invested. A portion could be invested as equity in a state-owned bank, and a larger portion could be deposited in the bank as interest-bearing certificates of deposit. This huge capital and deposit base could then be leveraged by the bank into credit, something all banks do. Since the state would own the bank, the interest would return to the state. Infrastructure could be had interest-free, knocking 50% or more off the sticker price.

By doing its own financing in-house, the state can massively expand its infrastructure without imposing massive debts on future generations. The Golden State can display the innovation and prosperity that makes it worthy of the name once again.

Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling "Web of Debt" and her latest book, "The Public Bank Solution," which explores successful public banking models historically and globally.

Sign Up

Article Tabs

Twenty states, backed by Donald Trump’s Department of Justice, are trying in the courts to dismantle the law by attacking what they see as its Achilles heel: the individual mandate.

occupy, creative activism, activism, act out e165

A backlog that's symptomatic of a patriarchal system that not only devalues women but devalues survivors of sexual assault.

E.U. trade, U.S. trade war, aluminium tariffs, steel tariffs

“These tariffs aren’t even legal under U.S. law, let alone World Trade Organization laws. It seems rather odd to be citing national security and targeting countries including your closest allies.”

public banking, public banks, Bank of North Dakota, public financing, financing infrastructure, Wall Street influence, private-public investments

Private interests’ influence over banking consumes, rather than sustains, the public good.

Dodd-Frank act, Volcker Rule, bank deregulation, Wall Street lobby, proprietary trading, SEC

By revising the Volcker Rule, a centerpiece of the 2010 Dodd-Frank act, the feds are pushing financial regulation in a direction that should worry everyone.

The Trump administration has backtracked on its policy but offered no immediate plan for reuniting families. Photograph: Guillermo Arias/AFP/Getty Images

NGOs say bringing parents and children back together is an enormous puzzle with no clear system from the administration.

EPA, pollution deaths, pollution risks, Donald Trump, Scott Pruitt, respiratory illness

The authors used EPA’s own risk assessments to estimate the number of illnesses and early deaths prevented by clean air and water rules Trump is now trying to erase.

The Associated Press reports that young migrant children forcibly separated from their parents are being sent to facilities that critics described as "prisons for babies." (Photo: @NIJC/Twitter)

Those who have visited the facilites describe "play rooms of crying preschool-age children in crisis."

Twenty states, backed by Donald Trump’s Department of Justice, are trying in the courts to dismantle the law by attacking what they see as its Achilles heel: the individual mandate.

wage theft, corporate crimes, CEO pay,

An eye-opening new report has documented billions of dollars of corporate theft from workers. The government is turning a blind eye.

public banking, public banks, Bank of North Dakota, public financing, financing infrastructure, Wall Street influence, private-public investments

Private interests’ influence over banking consumes, rather than sustains, the public good.

Posted 5 days 17 hours ago
E.U. trade, U.S. trade war, aluminium tariffs, steel tariffs

“These tariffs aren’t even legal under U.S. law, let alone World Trade Organization laws. It seems rather odd to be citing national security and targeting countries including your closest allies.”

Posted 4 days 13 hours ago
U.S. Border Patrol agents take into custody a father and son from Honduras near the U.S.-Mexico border on June 12, 2018, near Mission, Texas. The asylum seekers were then sent to a processing center for possible separation. Photo: John Moore/Getty Images

A new report confirms that Trump and his advisers had been considering the brutal policy of separating migrant children from their parents at the border for as long as they’ve been in power.

Posted 5 days 18 hours ago
family separations, ICE, immigrant deportations,

The size and brutality of this particular raid in Ohio, along with the use of military tactics, have shocked even the most seasoned immigrants’ rights activists.

Posted 4 days 18 hours ago
occupy, creative activism, activism, act out e165

A backlog that's symptomatic of a patriarchal system that not only devalues women but devalues survivors of sexual assault.

Posted 3 days 11 hours ago
U.S. Border Patrol agents take into custody a father and son from Honduras near the U.S.-Mexico border on June 12, 2018, near Mission, Texas. The asylum seekers were then sent to a processing center for possible separation. Photo: John Moore/Getty Images

A new report confirms that Trump and his advisers had been considering the brutal policy of separating migrant children from their parents at the border for as long as they’ve been in power.

occupy, creative activism, activism, act out e165

A backlog that's symptomatic of a patriarchal system that not only devalues women but devalues survivors of sexual assault.

The Associated Press reports that young migrant children forcibly separated from their parents are being sent to facilities that critics described as "prisons for babies." (Photo: @NIJC/Twitter)

Those who have visited the facilites describe "play rooms of crying preschool-age children in crisis."

public banking, public banks, Bank of North Dakota, public financing, financing infrastructure, Wall Street influence, private-public investments

Private interests’ influence over banking consumes, rather than sustains, the public good.

The Trump administration has backtracked on its policy but offered no immediate plan for reuniting families. Photograph: Guillermo Arias/AFP/Getty Images

NGOs say bringing parents and children back together is an enormous puzzle with no clear system from the administration.