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Still think "local control" makes any sense at all in an economy controlled by poorly-regulated but extremely well-connected banks and investment institutions?
Hunh.
Dream on.
February 21, 2015
Swimming With the Sharks: Goldman Sachs, Schools, and Capital Appreciation Bonds
By Ellen Brown
Remember when Goldman Sachs - dubbed by Matt Taibbi (as) the "Vampire Squid" - sold derivatives to Greece so the government could conceal its debt, (and) then bet against that debt, driving it up? It seems that the ubiquitous investment bank has also put the squeeze on California and its school districts.
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Greed is good. by ecoopportunity.netThe fliers touted new ballfields, science labs and modern classrooms. They didn't mention the crushing debt or the investment bank that stood to make millions.- Melody Peterson, Orange County Register, February 15, 2013
Remember when Goldman Sachs - dubbed by Matt Taibbi the Vampire Squid - sold derivatives to Greece so the government could conceal its debt, then bet against that debt, driving it up? It seems that the ubiquitous investment bank has also put the squeeze on California and its school districts. Not that Goldman was alone in this; but the unscrupulous practices of the bank once called the undisputed king of the municipal bond business epitomize the culture of greed that has ensnared students and future generations in unrepayable debt.
In 2008, after collecting millions of dollars in fees to help California sell its bonds, Goldman urged its bigger clients to place investment bets against those bonds, in order to profit from a financial crisis that was sparked in the first place by irresponsible Wall Street speculation.
Alarmed California officials warned that these short sales would jeopardize the state's bond rating and drive up interest rates. But that result also served Goldman, which had sold credit default swaps on the bonds, since the price of the swaps rose along with the risk of default.
In 2009, the lenders' lobbying group than proposed and promoted AB1388, a California bill eliminating the debt ceiling requirement on long-term debt for school districts. After it passed, bankers traveled all over the state pushing something called "capital appreciation bonds" (CABs) as a tool to vault over legal debt limits. (Think Greece again.) Also called payday loans for school districts, CABs have now been issued by more than 400 California districts, some with repayment obligations of up to 20 times the principal advanced (or 2000%).
The controversial bonds came under increased scrutiny in August 2012, following a report that San Diego County's Poway Unified would have to pay $982 million for a $105 million CAB it issued. Goldman Sachs made $1.6 million on a single capital appreciation deal with the San Diego Unified School District.
Green Light to Exploit
In a September 2013 op-ed in SFGate.com called "School Bonds Are a Wall Street Scam," attorney Nanci Nishimura wrote:
. . . AB1388, signed by then-Gov. Arnold Schwarzenegger in 2009, [gave] banks the green light to lure California school boards into issuing bonds to raise quick money to build schools.
Unlike conventional bonds that have to be paid off on a regular basis, the bonds approved in AB1388 relaxed regulatory safeguards and allowed them to be paid back 25 to 40 years in the future. The problem is that from the time the bonds are issued until payment is due, interest accrues and compounds at exorbitant rates, requiring a balloon payment in the millions of dollars. . . .
Wall Street exploited the school boards' lack of business acumen and proposed the bonds as blank checks written against taxpayers' pocketbooks. One school administrator described a Wall Street meeting to discuss the system as like "swimming with the big sharks."
Wall Street has preyed on these school boards because of the millions of dollars in commissions. Banks, financial advisers and credit rating firms have billed California public entities almost $400 million since 2007. [State Treasurer] Lockyer described this as "part of the 'new' Wall Street," which "has done this kind of thing on the private investor side for years, then the housing market and now its public entities."
Gullible school districts agreed to these payday-like loans because they needed the facilities, the voters would not agree to higher taxes, and state educational funding was exhausted.
School districts wound up sporting shiny new gymnasiums and auditoriums while they were cutting back on teachers and increasing classroom sizes. (AB1388 covers only long-term capital improvements, not daily operating expenses.)
The folly of the bonds was reminiscent of those boondoggles pushed on Third World countries by the World Bank and IMF, trapping them under a mountain of debt that continued to compound decades later.
The Federal Reserve could have made virtually-interest-free loans available to local governments, as it did for banks. But the Fed (whose twelve branches are 100% owned by private banks) declined. As noted by Cate Long on Reuters:
The Fed has said that it will not buy muni bonds or lend directly to states or municipal issuers. But be sure if yields rise high enough (that) Merrill Lynch, Goldman Sachs and JP Morgan will be standing ready to "save" these issuers. There is no "lender of last resort" for muniland.
Debt for the Next Generation
Among the hundreds of California school districts signing up for CABs were fifteen in Orange County. The Anaheim-based Savanna School District took on the costliest of these bonds, issuing $239,721 in CABs in 2009 for which it will have to repay $3.6 million by the final maturity date in 2034. That works out to $15 for every $1 borrowed.
Santa Ana Unified issued $34.8 million in CABs in 2011. It will have to repay $305.5 million by the maturity date in 2047, or $9.76 for every dollar borrowed.
Placentia-Yorba Linda Unified issued $22.1 million in capital appreciation bonds in 2011. It will have to repay $281 million by the maturity date in 2049, or $12.73 for every dollar borrowed.
In 2013, California finally passed a law limiting debt service on CABs to four times principal, and limiting their maturity to a maximum of 25 years. But the bill is not retroactive.
In several decades, the 400 cities that have been drawn into these shark-infested waters could be facing municipal bankruptcy - for capital "improvements" that will by then be obsolete and need to be replaced.
Then-State Treasurer Bill Lockyer called the bonds "debt for the next generation." But some economists argue that it is a transfer of wealth, not between generations, but between classes - from the poor to the rich.
Capital investments were once funded with property taxes, particularly those paid by wealthy homeowners and corporations. But California's property tax receipts were slashed by Proposition 13 and the housing crisis, forcing school costs to be borne by middle-class households and the students themselves.
The same kind of funding shift has occurred in college education nationally. Tuition at public universities and colleges was at one time free. But in successive economic downturns, states have made up for shortfalls in educational budgets by raising tuition. By 2012, tuition was covering 44% of the operating expenses of public higher education. According to a March 2014 report by Demos, 7 out of 10 college seniors now borrow, and their average debt on graduation is over $29,000. The result nationally is a student debt that has grown to $1.5 trillion.
The State that Escaped: North Dakota
According to Demos, per-student funding has been slashed since 2008 in every state but one - the indomitable North Dakota. What is so different about that state? Some commentators credit the oil boom, but other states with oil have not fared so well. And the boom did not actually hit in North Dakota until 2010. The budget of every state but North Dakota had already slipped into the red by the spring of 2009.
One thing that does single the state out is that North Dakota alone has its own depository bank. The state-owned Bank of North Dakota (BND) was making 1% loans to school districts even in December 2014, when global oil prices had dropped by half. That month, the BND granted a $10 million construction loan to McKenzie County Public School No. 1, at an interest rate of 1% payable over 20 years. Over the life of the loan, that works out to $.20 in simple interest or $.22 in compound interest for every $1 borrowed. Compare that to the $15 owed for every dollar borrowed by Anaheim's Savanna School District or the $10 owed for every dollar borrowed by Santa Ana Unified.
How can the BND afford to make these very low interest loans and still turn a profit? The answer is that its costs are very low. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; pays no dividends to private shareholders; and has low borrowing costs.
It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesale bank that partners with local banks, which find the borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives. Unlike the vampire squids of Wall Street, it is not motivated to maximize its bottom line in a predatory way. Its mandate is simply to serve the public interest.
North Dakota currently has a population of about 740,000, or the size of Santa Ana and Anaheim combined. If a coalition of several such cities were to form a municipally-owned bank, they too could have their own low-cost capital funding mechanism, allowing them to escape the budget-sucking tentacles of Wall Street's vampire squids.
(Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://EllenBrown.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.)
PCR asks the obvious questions (and you aren't going to like the answers, I promise).
Funny how no other economists are doing this so well (or disturbingly).
Could it be that it only really matters to those of us at the bottom of the pyre? Because, after all, the stock market is soaring and the economy is advertised/propagandized to come back some day if we can only hang on long enough.
To infinity (and beyond).
February 23, 2015
Whatever Became of Economists and the American Economy?
Paul Craig Roberts
According to the official economic fairy tale, the US economy has been in recovery since June 2009.
This fairy tale supports America’s image as the safe haven, an image that keeps the dollar up, the stock market up, and interest rates down. It is an image that causes the massive numbers of unemployed Americans to blame themselves and not the mishandled economy.
This fairy tale survives despite the fact that there is no economic information whatsoever that supports it.
Real median household income has not grown for years and is below the levels of the early 1970s.
There has been no growth in real retail sales for six years.
How does an economy dependent on consumer demand grow when real consumer incomes and real retail sales do not grow?
Not from business investment. Why invest when there is no sales growth? Industrial production, properly deflated, remains well below the pre-recession level.
Not from construction. The real value of total construction put in place declined sharply from 2006 through 2011 and has bounced around the 2011 bottom for the past three years.
How does an economy grow when the labor force is shrinking? The labor force participation rate has declined since 2007 as has the civilian employment to population ratio.
How can there be a recovery when nothing has recovered?
Do economists believe that the entire corpus of macroeconomics taught since the 1940s is simply incorrect? If not, how can economists possibly support the recovery fairy tale?
We see the same absence of economics in the policy response to the sovereign debt crisis in Europe. First of all, the only reason that there is a crisis is because instead of writing off that part of the debt that cannot be paid, as in the past, so that the rest of the debt could be paid, creditors have demanded the impossible–that all the debt be paid.
In an attempt to achieve the impossible, heavily indebted countries, such as Greece, have been forced to reduce old age pensions, fire government employees, reduce social services such as health care and education, reduce wages, and sell-off public property such as ports, municipal water companies, and the state lottery. These austerity packages deprive the government of revenues and the population of spending power. Consequently, consumption, investment, and government spending all fall, and the economy sinks lower.
As the economy sinks, the existing debt becomes a larger percentage of the GDP and becomes even more unserviceable.
Economists have known this ever since John Maynard Keynes taught it to them in the 1930s. Yet there is no sign of this foundational economics in the policy approach to the sovereign debt crisis.
Economists it appears have simply vanished from the earth. Or, if some are still present, they have lost their voices and do not speak.
Consider “globalism.” Every country has been convinced that globalism is imperative and that not to be part of the “global economy” means economic death. In fact, to be part of the global economy means death.
Understand the economic destruction that globalism has wreaked on the United States.
Millions of middle class factory jobs and professional skill jobs such as software engineering and Information Technology have been taken away from the American middle class and given to people in Asia. In the short-run this drops labor costs and benefits the profits of the US corporations that offshore the jobs, but the consequence is to destroy the domestic consumer market as jobs that permit the formation of households are replaced with lowly paid part-time jobs that do not.
If households cannot form, the demand for housing, home appliances and furnishings declines. College graduates return home to live with their parents.
Part-time jobs hurt the ability to save. People are only able to purchase cars because they can get 100 percent financing, and more in order to pay off an existing car loan that exceeds the vehicle’s trade-in value, in a six-year loan.
These loans are possible, because those who make the loans sell them.
The loans are then securitized and sold as investments to those desperate for yield in a zero interest rate world. Derivatives are spun off these “investments,” and a new bubble is put in place.
When manufacturing jobs are offshored, the US plants are closed, and the tax base of state and local governments declines.
When the governments have trouble servicing their accumulated debt, the tendency is not to meet their pension obligations.
This reduces retiree incomes, incomes already reduced by zero or negative interest rates.
This unraveling of consumer demand, the basis for our economy, was entirely obvious at the very beginning. Yet junk economists or hired corporate mouthpieces promised Americans a “New Economy” that would provide them with better, higher paying, cleaner jobs to take the place of the jobs moved abroad.
As I have pointed out for more than a decade, there is no sign of these jobs anywhere in the economy.
Why did economists make no protest as the US economy was shipped abroad and deep-sixed at home?
Globalism also devastates “emerging economies.” Self-sufficient agricultural communities are destroyed by the introduction of large-scale monoculture agriculture. The uprooted peoples relocate to cities where they become a drain on social services and a source of political instability.
Globalism, like neoliberal economics, is an instrument of economic imperialism. Labor is exploited, while peoples, cultures, and environments are destroyed. Yet the propaganda is so powerful that people partake of their own destruction.
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