By borrowing from their own publicly-owned banks, governments could eliminate their interest burden altogether. This has been demonstrated elsewhere with stellar results, including in Canada, Australia, and Argentina among other countries.
In 2011, the U.S. federal government paid $454 billion in interest on the federal debt--nearly one-third the total $1,100 billion paid in personal income taxes that year. If the government had been borrowing directly from the Federal Reserve--which has the power to create credit on its books and now rebates its profits directly to the government--personal income taxes could have been cut by a third.
Borrowing from its own central bank interest-free might even allow a government to eliminate its national debt altogether. In Money and Sustainability: The Missing Link (at page 126), Bernard Lietaer and Christian Asperger, et al., cite the example of France. The Treasury borrowed interest-free from the nationalized Banque de France from 1946 to 1973. The law then changed to forbid this practice, requiring the Treasury to borrow instead from the private sector. The authors include a chart showing what would have happened if the French government had continued to borrow interest-free versus what did happen. Rather than dropping from 21% to 8.6% of GDP, the debt shot up from 21% to 78% of GDP.
"No "spendthrift government' can be blamed in this case," write the authors. "Compound interest explains it all!"
France Debt by France Debt
More than Just a Federal Solution
It is not just federal governments that could eliminate their interest charges in this way. State and local governments could do it too.
Consider California. At the end of 2010, it had general obligation and revenue bond debt of $158 billion. Of this, $70 billion, or 44%, was owed for interest. If the state had incurred that debt to its own bank--which then returned the profits to the state--California could be $70 billion richer today. Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.
The only U.S. state to own its own depository bank today is North Dakota. North Dakota is also the only state to have escaped the 2008 banking crisis, sporting a sizable budget surplus every year since then. It has the lowest unemployment rate in the country, the lowest foreclosure rate, and the lowest default rate on credit card debt.
Globally, 40% of banks are publicly owned, and they are concentrated in countries that also escaped the 2008 banking crisis. These are the BRIC countries--Brazil, Russia, India, and China--which are home to 40% of the global population. The BRICs grew economically by 92% in the last decade, while Western economies were floundering.
Cities and counties could also set up their own banks; but in the U.S., this model has yet to be developed. In North Dakota, meanwhile, the Bank of North Dakota underwrites the bond issues of municipal governments, saving them from the vagaries of the "bond vigilantes" and speculators, as well as from the high fees of Wall Street underwriters and the risk of coming out on the wrong side of interest rate swaps required by the underwriters as "insurance."
One of many cities crushed by this Wall Street "insurance" scheme is Philadelphia, which has lost $500 million on interest swaps alone. (How the swaps work and their link to the LIBOR scandal was explained in an earlier article here.) Last week, the Philadelphia City Council held hearings on what to do about these lost revenues. In an October 30th article titled "Can Public Banks End Wall Street Hegemony?", Willie Osterweil discussed a solution presented at the hearings in a fiery speech by Mike Krauss, a director of the Public Banking Institute.
Krauss' solution was to do as Iceland did: just walk away. He proposed "a strategic default until the bank negotiates at better terms." Osterweil called it "radical," since the city would lose it favorable credit rating and might have trouble borrowing. But Krauss had a solution to that problem: the city could form its own bank and use it to generate credit for the city from public revenues, just as Wall Street banks generate credit from those revenues now.
A Radical Solution Whose Time Has Come
Public banking may be a radical solution, but it is also an obvious one. This is not rocket science. By developing a public banking system, governments can keep the interest and reinvest it locally. According to Kennedy and Creutz, that means public savings of 35% to 40%. Costs can be reduced across the board; taxes can be cut or services can be increased; and market stability can be created for governments, borrowers and consumers. Banking and credit can become public utilities, feeding the economy rather than feeding off it.
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