Virgin Islands has the “Virgin Islands Public Finance Authority.” It is possible, that there could be tweaks made to it that could make it more advantageous to the population of Virgin Islands. USVI has a population about 1/5 that of North Dakota, and equivalent to a small US City. The question is how to leverage the taxation power of the USVI legislature to benefit its population.
Some of the Bank of North Dakota highlights are here The differences between the USVI PFA and BND should be noted, and perhaps ways to strengthen the USVI PFA could emerge.
last I saw the bank of nd doesn’t actually leverage anything.
it just acts like a ‘consolidated account’for the political subdivisions.
looks to me like all the success can be attributed to the resource royalties, revenues, etc.
Not if you look at the BND historically. It has always, even in the depths of the Great Depression, weathered tough times better than other states. It does much more than act as a “consolidated account.” Some historical context and the Bank’s FAQ’s
Oil is certainly a factor, but it is not what has put North Dakota over the top. Alaska has roughly the same population as North Dakota and produces nearly twice as much oil, yet unemployment in Alaska is running at 7.7 percent. Montana, South Dakota, and Wyoming have all benefited from a boom in energy prices, with Montana and Wyoming extracting much more gas than North Dakota has. The Bakken oil field stretches across Montana as well as North Dakota, with the greatest Bakken oil production coming from Elm Coulee Oil Field in Montana. Yet Montana’s unemployment rate, like Alaska’s, is 7.7% percent.
A number of other mineral-rich states were initially not affected by the economic downturn, but they lost revenues with the later decline in oil prices. North Dakota is the only state to be in continuous budget surplus since the banking crisis of 2008. Its balance sheet is so strong that it recently reduced individual income taxes and property taxes by a combined $400 million, and is debating further cuts. It also has the lowest foreclosure rate and lowest credit card default rate in the country, and it has had NO bank failures in at least the last decade.
yes, i’ve been throught it all with her and the public banking people as well.
they make a point of the fact that the bnd doesn’t borrow to lend, it just uses balances from the contributing municipalities
and, as a point of logic, the only reason the bnd would make a loan the ‘normal’ banks won’t is because at some level the bnd is willing to
take more risk than either the banks want to and/or the FDIC allows.
you could say the bnd can operate with narrower net interest margins, but with commercial bank profits less than 1% of assets there just isn’t that much room,
and you could say a public bank can operate with lower expenses than a private bank but on the surface that doesn’t make much sense unless the private bank
has compliance costs the public bank doesn’t have.
that leaves the idea that govt. employees can do a better job than private sector employees, which on the surface is a can of worms as well.
so the question is,
what would a public bank down here be able to do that the private banks aren’t already doing,
and with bank profits as low as they are due to competitive pressures I don’t see a lot of cost savings.
now if you ask if I, personally, could do a better job of running any of the local banks than current management,
or by running a public bank, that’s another story…
“and, as a point of logic, the only reason the bnd would make a loan the ‘normal’ banks won’t is because at some level the bnd is willing to
take more risk than either the banks want to and/or the FDIC allows”
That I think makes the point why public banks could be useful: they could fund activities and enterprises that are not that profitable, yet essential.
Like student loans, or some public infrastructure.
right, and to do that they either lend out ‘tax payer funds’ or they borrow via bonds, etc. whether there’s a public bank or not.
and as a govt. they can borrow with tax free bonds, something a bank can’t do.
or even better than student loans: public colleges
“and as a govt. they can borrow with tax free bonds, something a bank can’t do.”
do you mean something like bonds, that can be used for to pay taxes? (like the bonds you proposed for Greece)
I was thinking of public bank providing cheap loans, that can be sort of “rolled over” if needed – something like China’s banks.
Of course those would be provided for the agreed public purpose of the state.
yes, govts can just do it directly with the same ‘tax payer funds’
which is what china’s banks do- they are agents for what is functionally govt deficit spending.
that is, the lend/spend as agents of the issuer of the currency.
The USVI doesn’t have that ‘conduit’ to the issuer.
I understand that USVI is not an issuer of currency.
But I thought the public banking idea was to create public bank, which would create loans/deposits just like private banks, except that it would be backed not with private capital but with credit of the state.
So the difference between it and private bank would be that it would not have to be profit oriented, and could create loans for public purpose.
The difference between creating money using public bank, and just using taxpayer funds – is that creating money using the public banks does not require tax increase.
So USVI could fund some public projects without the need to increase taxes.
And the loans that public banks made could be kept on the books of that bank – for a very long time.
So what am I missing? Is there a requirement that every loan should bring in a profit?
if the bank doesn’t lend public funds it needs to borrow in one form or another, such as taking in deposits from depositors.
in that case the gov is taking risk of loss and also has to comply with all banking regs to get fdic insurance to attract depositors.
unless people will make deposits without deposit insurance, and at low rates as well.
and with fidc insurance comes capital requirements.
yes, a state bank like bnd probably could raise private deposits without fdic insurance as people would thing the state insurance would be fine.
“if the bank doesn’t lend public funds it needs to borrow in one form or another, such as taking in deposits from depositors”
ok, so I am definitely missing something here.
Private banks make loans/deposits by creating credit, and then satisfying reserve requirements later. It can satisfy reserve requirements by borrowing reserves from other banks, or from the Fed. Banks are not reserve constrained.
Banks are capital constrained. But capital requirements are definitely not 100%, are they? I think I read here (maybe I misunderstood?) that banks could easily operate without any capital.
So – then in essence private banks create money by creating loans/deposits – and their rates could be as low as the rate at which they get money from the Fed (if there was no need for profit).
So why that would be different for the public bank? Also, the capital for the public bank would be taxpayer assets/funds.
So, in essence public state bank could provide cheap financing for the public matters.
Why is there a need for deposits?
I am sure that I must be mistaken somewhere, since I know about banking only what I understand here.
So what am I missing?
so a bank makes a loan and creates a bank deposit on it’s books as well.
that leaves the bank with a loan and a deposit
if the person with the deposit then spends it and the funds go to another bank,
the first bank is short/overdrawn in his Fed account, which is a loan from the fed.
so if nothing more happens, the first bank has on its books ‘deposit’ in the form of a loan from the fed,
and a loan to the initial borrower.
if it replace the fed loan with a deposit from someone else it has the initial loan to the initial borrower and a deposit from a new guy.
It’s different for the public bank only if the public bank isn’t a fed member so can’t borrow from the fed when it loses deposits.
and if it’s not an fdic member it doesn’t have the advantage of fdic insurance to attract deposits.
so for the public bank
say it makes a loan for infrastructure.
that creates a deposit for the borrower to use to pay for the infrastructure.
if that payment goes to a new depositor who uses a account at a different bank
the public bank has to ‘replace’ that deposit or it won’t be able to transfer funds to the different bank.
so yes, the loan creates a deposit, but any given bank can be short deposits if another bank has extral
if I understand it correctly – then I think this means, that public bank can either loan state’s taxpayer money or deposited money (if it is not member of fed), or fed money (if it is a member).
So let’s say it chooses to be fed member and get loans from the fed (so it also keeps the fdic insurance) – then it can lend fed money at pretty much fed rates.
I assume if can keep rolling over fed’s loans for a long time?
It could also satisfy capital requirements with public money.
So that state having such a bank should be able to get very cheap loans for its projects.
yes, as would any commercial bank
so i don’t see much of an advantage except in cases when taking more risk is required?
yes, essentially it would be like commercial bank, except that its foremost mission would NOT be profit for the shareholders.
So, yes – it would be involved with high(er) risk (risk = lack of profit, possible loss) projects, because its objective would not be profit, but sponsoring essential services for the state’s residents.
I am not sure what state is allowed to do. I guess it could not offer $8 job for everyone willing?
But I bet people would appreciate, if they could get jobs, public affordable child care, public affordable colleges, public affordable healthcare, maybe even transportation?
So they would likely be high risk. But I bet the state that would do that would become first on the “best place to live” in no time.
However, that would be high risk from the point of profit/solvency for sure.
Also, I am quite certain, that anybody who would try to bring ideas like that would be immediately removed from any posts even close to government – so it would be high risk form that point as well.
So if it’s ‘high risk’ the losses would be higher and hence negative profit margins if it charged lower rates as well.
A good bank only makes maybe 1% of loans as profits, and most a lot less. So there isn’t much room there.
And while it’s possible for govt to have lower expenses than a private business it isn’t necessarily so, and in fact expenses could be higher, which takes away scope as well.
So best I can tell the efficient way for a state to do it is to borrow tax free in the muni market to keep costs down, and then fund as suits public purpose.
OK, so let’s say public bank would not be more efficient than private one (although if its only function would be to borrow from the Fed – maybe it could be?).
Also, since bank profits are so small – there could not be anything saved by forgoing profits.
It seems it would come down to – which creditor is easier to deal with: the Fed, or the private investors (banks?) which would be buying the municipal bonds.
Is it difficult for private banks to get loans form the Fed at minimal Fed rate, and then keep refinancing them also from the Fed?
ok, but this all started as a discussion about whether it would make sense for me to set up a public bank down here in the USVI and why to me it didn’t seem worth the trouble, at least for now.
I am comparing two options: one is borrowing using municipal bonds, and another is setting up public bank which is member of the Fed, and acquiring loans directly from he Fed through that bank.
So what I was wondering – is which creditor would be easier to deal with: the Fed, or the private banks and investors – which would be creditors if state gov is to borrow using municipal bonds.
I assume that Fed’s rates to its bank would be lower, than borrowing using municipal bonds.
Also, if the loans were obtained from the Fed (at the rate that Fed loans to its member banks), can they be refinanced continually? (thus basically keeping them on the books for as long as needed)
makes sense. though with being a fed member banks comes all the fdic restrictions, requirements, and costs
I guess I should add this:
I am not arguing this from position of knowledge. I am just trying to understand why it is as you say.
I mean – it is one of the most often repeated statements in MMT blogs: that banks are not limited by reserves, but by capital.
I understand from your explanation, that if bank is a member of Fed – it is able to get loan from the Fed to cover the loan that it made (for infrastructure for example). That loan I guess would be at the Fed’s minimal rate (0.25%)?
I cannot imagine lower rate – even if it from “muni market”.
I also understand the argument, that private banks have very low profits (1%), and are quite efficient, so public bank would not be able to do much better.
But what if public bank only functions as intermediary between the Fed and the state – without any additional operations. That would be quite efficient.
So the state could get the funds at pretty much Fed rate?
Also – what I do not know – is if the conditions for the Fed’s loan. Is it easy for the private banks to roll over Fed’s loans? I assume it would be the same for the public bank?
So – if it is easy – then the public bank could keep the liability to the Fed for a long time?
yes, a state could form an fdic insured bank, get a line to the Fed, the home loan bank, fed funds, etc.
and remember you have to match maturities- so if the loan is 5 years fixed you fund with 5 year fixed rate borrowings
“though with being a fed member banks comes all the fdic restrictions, requirements, and costs”
So let’s say USVI has 5000 unemployed people. To employ them all (let’s say growing organic bananas for export) at $20,000 per year it would need $100 million.
So let’s say USVI sets up public bank which is a member of Fed, and that bank lend the state 100 million. To cover reserves it gets a loan from the Fed at 0.25% rate (would it get that rate?).
So USVI has to return $100.25 million next year?
Can it then borrow from the Fed $100.25 to cover that loan next year? Or is that against the rules?
Would fdic requirements and costs be substantial for something like that?
the limit to borrowings of any type is a function of equity capital
and remember you have to match maturities- so if the loan is 5 years fixed you fund with 5 year fixed rate borrowings
Is that possible? When a bank makes a 5 year loan, it creates a deposit that will end up in several accounts that are unlikely to lend the money for 5 years.
So, starting with a system in equilibrium where maturities match, how could a bank issue a loan?
the term structure of rates offered by the banks goes to levels where enough of those with overnight deposits switch to term deposits, directly or indirectly
Congratulations Warren!!!!!
They couldn’t get a better Financial Advisor even if they paid for it!!
Warren,
Here is an interesting article examining Chairmen Chris Dodd’s take on the subprime mortgage crisis… dated 2012 err rather 2010.
In any case, the Dodd-Frank Act is still considered the bible for financial reform. It appears he is UNDER Tim Johnson and Richard Shelby in Banking Housing and Urban affairs.
-NYSTOCKGURU
DODD STATEMENT ON PROBLEMS WITH MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE PART II
Hearing Explores Role of Regulators in Foreclosure Crisis and Response
December 1, 2010
WASHINGTON – Today Senator Chris Dodd (D-CT) chaired his last Banking Committee hearing. It was the second in a series of oversight hearings investigating widespread problems in the mortgage servicing industry. The Committee heard testimony from regulators, industry experts, and executives from Fannie Mae and Freddie Mac. The hearing explored what steps the regulators have taken to supervise mortgage servicers, and the steps they are now taking to correct the problems and protect borrowers and investors.
“At the last hearing, we learned that many servicers have not been doing their jobs,” said Chairman Dodd. “These servicers, including many of the nation’s biggest banks, have failed to maintain proper records, failed to properly administer the Home Affordable Modification Program (HAMP), hired so-called “robosigners” who submitted thousands of false and possibly fraudulent affidavits, and in some cases even foreclosed unfairly on people who should not have lost their homes.”
“It’s important also to remember that while it was servicers who caused this problem, it is borrowers who are paying the price. Confusion over sloppy and incomplete documentation has slowed the mortgage modification process for countless homeowners. Conflicts of interest in the industry may be incentivizing 3rd party servicers to actively seek to block modifications that would prevent foreclosures but cut into their profits. These problems may have resulted in problems for borrowers who otherwise may have been able to pay their mortgages, or in pushing troubled borrowers to foreclosure who otherwise may have been able to save their homes through reasonable modification efforts.
“This is a problem that the servicers should have seen coming. They got plenty of warnings, from Congress, from Sheila Bair of the FDIC who is here with us today – but whether it was out of greed or ignorance, they failed to recognize the disaster on the horizon. Now we are left to pick up the pieces, to try to help the homeowners caught up in forces beyond their control, and to do everything in our power to fix the system and prevent these problems in the future.”
Below is Chairman Dodd’s statement as prepared for delivery:
“Good morning. Before we begin, I want to note that this is likely my last time chairing a meeting of the Banking Committee. It has been a distinct privilege, and a pleasure, to work with all my fellow Committee members over the years. Senator Shelby, you have been a good friend and colleague.
“I want to welcome and thank the witnesses for appearing today, and for their testimony about problems in mortgage servicing. This is a continuation of a hearing we held last month, at which we heard from witnesses within the servicing industry and others. Today we will hear from some of the regulators responsible for overseeing the industry.
“First, let me explain what we mean by mortgage servicing. Individual mortgages are often bundled into pools of similar mortgages and sold in the secondary market as a mortgage backed security (MBS). After the origination, all processing related to the loan is managed by a mortgage servicing company. The nation’s four largest banks – JPMorganChase, Wells Fargo, Bank of America, and Citi – are also the largest mortgage servicers. Mortgage servicers have a long list of administrative responsibilities, from collecting monthly payments, maintaining detailed accounting records, paying taxes and insurance premiums, and distributing payments to the holders of the mortgage security. For this work, they receive a servicing fee.
“At the last hearing, we learned that many servicers have not been doing their jobs. These servicers, including many of the nation’s biggest banks, have failed to maintain proper records, failed to properly administer the Home Affordable Modification Program (HAMP), hired so-called “robosigners” who submitted thousands of false and possibly fraudulent affidavits, and in some cases even foreclosed unfairly on people who should not have lost their homes.
“Since our last hearing, news reports have suggested the problem may actually be bigger than previously thought. An employee of Bank of America testified in court that the bank’s standard mortgage servicing practices failed to meet basic loan documentation requirements, a failure that could call a huge number of loans into question. If there are more revelations of that nature, this situation could ultimately have ramifications for the safety and soundness of our whole financial system.
“Investors in the mortgage securities market, including the New York Federal Reserve Bank and Freddie Mac, are pushing banks to repurchase loans that may not have been originated as represented.
“Last month, the Congressional Oversight Panel estimated that these lawsuits and repurchases would ultimately cost banks about $52 billion. Subsequent to that report, Barron’s magazine used data from a research firm called CompassPoint and estimated that the losses to banks could be as high as $164 billion. Other estimates are higher still. Even for Wall Street, that’s a lot of money.
“It’s important also to remember that while it was servicers who caused this problem, it is borrowers who are paying the price. Confusion over sloppy and incomplete documentation has slowed the mortgage modification process for countless homeowners. Conflicts of interest in the industry may be incentivizing 3rd party servicers to actively seek to block modifications that would prevent foreclosures but cut into their profits. These problems may have resulted in problems for borrowers who otherwise may have been able to pay their mortgages, or in pushing troubled borrowers to foreclosure who otherwise may have been able to save their homes through reasonable modification efforts.
“This is a problem that the servicers should have seen coming. They got plenty of warnings, from Congress, from Sheila Bair of the FDIC who is here with us today – but whether it was out of greed or ignorance, they failed to recognize the disaster on the horizon. Now we are left to pick up the pieces, to try to help the homeowners caught up in forces beyond their control, and to do everything in our power to fix the system and prevent these problems in the future.
“Today we are going to hear from the regulators about what they did, or did not do, to prevent this crisis from occurring. We want to know what they believe they should have done better, what needs to be done to strengthen oversight of this process, and what other changes may be necessary to restore the integrity of the system.”
“The medical team complains that Chavez is a very ‘bad patient,’ ” the memo states. “He doesn’t listen to his doctors, he ceases treatment when he has to make a public appearance.”
The doctors themselves squabbled over Chavez’ consultations with a Chinese physician who advocated natural treatments and, the memo states, “the Russians are saying this is horse shit treatment.”
The memo adds, with sardonic humor: “Only Chavez can get the most politicized medical team in the world.”
1. At least in Hugo’s mind – a lot. Whether he is sane – I don’t know.
“(Reuters) – Venezuelan President Hugo Chavez speculated on Wednesday that the United States might have developed a way to give Latin American leaders cancer, after Argentina’s Cristina Fernandez joined the list of presidents diagnosed with the disease.” http://www.reuters.com/article/2011/12/29/us-venezuela-usa-cancer-idUSTRE7BR14I20111229
2. The way he is treated for the disease suggests that nothing has changed in the communist camp. “Only Chavez can get the most politicized medical team in the world.”
3. What is really relevant is the fate of the refinery which in my opinion depends on global politics. Chavez is siding with Iran and trying to show defiance to the US. If Chavez is dead, another leader may suddenly discover that the refinery is profitable. At least the American ambassador may convince him that it could be…
@Adam (ak), and it turned out Cristina Kirchner didn’t have cancer. Paranoia must be the common denominator of all these “socialist” leaders.
I would not be surprised if he was given cancer.
Assassination of political leaders or figures is nothing new.
By the way – it is curious that the few states that try to do something different than the accepted ways – and which end up on an enemy list – they are all lead by strong political leaders – which are easy to target.
I am sure Chavez is quite popular in Venezuela, just like Belorussian leader in his country, so it is not a matter of “tyrants”. So what makes it so that once the leader is removed – that the country is easy to turn around in “accepted” ways (think Honduras). Maybe oligarchy sells out easier than some single individuals?
How would you suggest he should be treated? I am sure money is not an issue there. If he paid those Russian and Cuban doctors (which he very well may have done) – does that make it different?
is that a riddle?
😉
🙂
Warren,
Congrats! Its about time our elected officials acknowledge that finance is not their forte. Lets hope they share your input with the others involved…All the best to you!
Warren,
What about starting a Virgin Island government owned bank a la Ellen Brown and Bank of North Dakota? See Public Banking Institute
I would if I could see any public purpose to it.
@WARREN MOSLER,
Virgin Islands has the “Virgin Islands Public Finance Authority.” It is possible, that there could be tweaks made to it that could make it more advantageous to the population of Virgin Islands. USVI has a population about 1/5 that of North Dakota, and equivalent to a small US City. The question is how to leverage the taxation power of the USVI legislature to benefit its population.
Some of the Bank of North Dakota highlights are here The differences between the USVI PFA and BND should be noted, and perhaps ways to strengthen the USVI PFA could emerge.
last I saw the bank of nd doesn’t actually leverage anything.
it just acts like a ‘consolidated account’for the political subdivisions.
looks to me like all the success can be attributed to the resource royalties, revenues, etc.
@Clonal Antibody,
Warren,
Not if you look at the BND historically. It has always, even in the depths of the Great Depression, weathered tough times better than other states. It does much more than act as a “consolidated account.” Some historical context and the Bank’s FAQ’s
On the oil issue, I think Ellen Brown answered that quite well in North Dakota’s Economic “miracle”—it’s Not Oil
yes, i’ve been throught it all with her and the public banking people as well.
they make a point of the fact that the bnd doesn’t borrow to lend, it just uses balances from the contributing municipalities
and, as a point of logic, the only reason the bnd would make a loan the ‘normal’ banks won’t is because at some level the bnd is willing to
take more risk than either the banks want to and/or the FDIC allows.
you could say the bnd can operate with narrower net interest margins, but with commercial bank profits less than 1% of assets there just isn’t that much room,
and you could say a public bank can operate with lower expenses than a private bank but on the surface that doesn’t make much sense unless the private bank
has compliance costs the public bank doesn’t have.
that leaves the idea that govt. employees can do a better job than private sector employees, which on the surface is a can of worms as well.
so the question is,
what would a public bank down here be able to do that the private banks aren’t already doing,
and with bank profits as low as they are due to competitive pressures I don’t see a lot of cost savings.
now if you ask if I, personally, could do a better job of running any of the local banks than current management,
or by running a public bank, that’s another story…
😉
@WARREN MOSLER,
“and, as a point of logic, the only reason the bnd would make a loan the ‘normal’ banks won’t is because at some level the bnd is willing to
take more risk than either the banks want to and/or the FDIC allows”
That I think makes the point why public banks could be useful: they could fund activities and enterprises that are not that profitable, yet essential.
Like student loans, or some public infrastructure.
right, and to do that they either lend out ‘tax payer funds’ or they borrow via bonds, etc. whether there’s a public bank or not.
and as a govt. they can borrow with tax free bonds, something a bank can’t do.
or even better than student loans: public colleges
🙂
@WARREN MOSLER,
“and as a govt. they can borrow with tax free bonds, something a bank can’t do.”
do you mean something like bonds, that can be used for to pay taxes? (like the bonds you proposed for Greece)
I was thinking of public bank providing cheap loans, that can be sort of “rolled over” if needed – something like China’s banks.
Of course those would be provided for the agreed public purpose of the state.
yes, govts can just do it directly with the same ‘tax payer funds’
which is what china’s banks do- they are agents for what is functionally govt deficit spending.
that is, the lend/spend as agents of the issuer of the currency.
The USVI doesn’t have that ‘conduit’ to the issuer.
@WARREN MOSLER ,
sorry, I still do not understand it.
I understand that USVI is not an issuer of currency.
But I thought the public banking idea was to create public bank, which would create loans/deposits just like private banks, except that it would be backed not with private capital but with credit of the state.
So the difference between it and private bank would be that it would not have to be profit oriented, and could create loans for public purpose.
The difference between creating money using public bank, and just using taxpayer funds – is that creating money using the public banks does not require tax increase.
So USVI could fund some public projects without the need to increase taxes.
And the loans that public banks made could be kept on the books of that bank – for a very long time.
So what am I missing? Is there a requirement that every loan should bring in a profit?
if the bank doesn’t lend public funds it needs to borrow in one form or another, such as taking in deposits from depositors.
in that case the gov is taking risk of loss and also has to comply with all banking regs to get fdic insurance to attract depositors.
unless people will make deposits without deposit insurance, and at low rates as well.
and with fidc insurance comes capital requirements.
yes, a state bank like bnd probably could raise private deposits without fdic insurance as people would thing the state insurance would be fine.
but probably not down here.
@WARREN MOSLER,
“if the bank doesn’t lend public funds it needs to borrow in one form or another, such as taking in deposits from depositors”
ok, so I am definitely missing something here.
Private banks make loans/deposits by creating credit, and then satisfying reserve requirements later. It can satisfy reserve requirements by borrowing reserves from other banks, or from the Fed. Banks are not reserve constrained.
Banks are capital constrained. But capital requirements are definitely not 100%, are they? I think I read here (maybe I misunderstood?) that banks could easily operate without any capital.
So – then in essence private banks create money by creating loans/deposits – and their rates could be as low as the rate at which they get money from the Fed (if there was no need for profit).
So why that would be different for the public bank? Also, the capital for the public bank would be taxpayer assets/funds.
So, in essence public state bank could provide cheap financing for the public matters.
Why is there a need for deposits?
I am sure that I must be mistaken somewhere, since I know about banking only what I understand here.
So what am I missing?
so a bank makes a loan and creates a bank deposit on it’s books as well.
that leaves the bank with a loan and a deposit
if the person with the deposit then spends it and the funds go to another bank,
the first bank is short/overdrawn in his Fed account, which is a loan from the fed.
so if nothing more happens, the first bank has on its books ‘deposit’ in the form of a loan from the fed,
and a loan to the initial borrower.
if it replace the fed loan with a deposit from someone else it has the initial loan to the initial borrower and a deposit from a new guy.
It’s different for the public bank only if the public bank isn’t a fed member so can’t borrow from the fed when it loses deposits.
and if it’s not an fdic member it doesn’t have the advantage of fdic insurance to attract deposits.
so for the public bank
say it makes a loan for infrastructure.
that creates a deposit for the borrower to use to pay for the infrastructure.
if that payment goes to a new depositor who uses a account at a different bank
the public bank has to ‘replace’ that deposit or it won’t be able to transfer funds to the different bank.
so yes, the loan creates a deposit, but any given bank can be short deposits if another bank has extral
@WARREN MOSLER,
if I understand it correctly – then I think this means, that public bank can either loan state’s taxpayer money or deposited money (if it is not member of fed), or fed money (if it is a member).
So let’s say it chooses to be fed member and get loans from the fed (so it also keeps the fdic insurance) – then it can lend fed money at pretty much fed rates.
I assume if can keep rolling over fed’s loans for a long time?
It could also satisfy capital requirements with public money.
So that state having such a bank should be able to get very cheap loans for its projects.
yes, as would any commercial bank
so i don’t see much of an advantage except in cases when taking more risk is required?
@WARREN MOSLER,
yes, essentially it would be like commercial bank, except that its foremost mission would NOT be profit for the shareholders.
So, yes – it would be involved with high(er) risk (risk = lack of profit, possible loss) projects, because its objective would not be profit, but sponsoring essential services for the state’s residents.
I am not sure what state is allowed to do. I guess it could not offer $8 job for everyone willing?
But I bet people would appreciate, if they could get jobs, public affordable child care, public affordable colleges, public affordable healthcare, maybe even transportation?
So they would likely be high risk. But I bet the state that would do that would become first on the “best place to live” in no time.
However, that would be high risk from the point of profit/solvency for sure.
Also, I am quite certain, that anybody who would try to bring ideas like that would be immediately removed from any posts even close to government – so it would be high risk form that point as well.
So if it’s ‘high risk’ the losses would be higher and hence negative profit margins if it charged lower rates as well.
A good bank only makes maybe 1% of loans as profits, and most a lot less. So there isn’t much room there.
And while it’s possible for govt to have lower expenses than a private business it isn’t necessarily so, and in fact expenses could be higher, which takes away scope as well.
So best I can tell the efficient way for a state to do it is to borrow tax free in the muni market to keep costs down, and then fund as suits public purpose.
@WARREN MOSLER,
OK, so let’s say public bank would not be more efficient than private one (although if its only function would be to borrow from the Fed – maybe it could be?).
Also, since bank profits are so small – there could not be anything saved by forgoing profits.
It seems it would come down to – which creditor is easier to deal with: the Fed, or the private investors (banks?) which would be buying the municipal bonds.
Is it difficult for private banks to get loans form the Fed at minimal Fed rate, and then keep refinancing them also from the Fed?
ok, but this all started as a discussion about whether it would make sense for me to set up a public bank down here in the USVI and why to me it didn’t seem worth the trouble, at least for now.
@WARREN MOSLER,
it still is 🙂
I am comparing two options: one is borrowing using municipal bonds, and another is setting up public bank which is member of the Fed, and acquiring loans directly from he Fed through that bank.
So what I was wondering – is which creditor would be easier to deal with: the Fed, or the private banks and investors – which would be creditors if state gov is to borrow using municipal bonds.
I assume that Fed’s rates to its bank would be lower, than borrowing using municipal bonds.
Also, if the loans were obtained from the Fed (at the rate that Fed loans to its member banks), can they be refinanced continually? (thus basically keeping them on the books for as long as needed)
makes sense. though with being a fed member banks comes all the fdic restrictions, requirements, and costs
@WARREN MOSLER,
I guess I should add this:
I am not arguing this from position of knowledge. I am just trying to understand why it is as you say.
I mean – it is one of the most often repeated statements in MMT blogs: that banks are not limited by reserves, but by capital.
I understand from your explanation, that if bank is a member of Fed – it is able to get loan from the Fed to cover the loan that it made (for infrastructure for example). That loan I guess would be at the Fed’s minimal rate (0.25%)?
I cannot imagine lower rate – even if it from “muni market”.
I also understand the argument, that private banks have very low profits (1%), and are quite efficient, so public bank would not be able to do much better.
But what if public bank only functions as intermediary between the Fed and the state – without any additional operations. That would be quite efficient.
So the state could get the funds at pretty much Fed rate?
Also – what I do not know – is if the conditions for the Fed’s loan. Is it easy for the private banks to roll over Fed’s loans? I assume it would be the same for the public bank?
So – if it is easy – then the public bank could keep the liability to the Fed for a long time?
yes, a state could form an fdic insured bank, get a line to the Fed, the home loan bank, fed funds, etc.
and remember you have to match maturities- so if the loan is 5 years fixed you fund with 5 year fixed rate borrowings
@WARREN MOSLER,
“though with being a fed member banks comes all the fdic restrictions, requirements, and costs”
So let’s say USVI has 5000 unemployed people. To employ them all (let’s say growing organic bananas for export) at $20,000 per year it would need $100 million.
So let’s say USVI sets up public bank which is a member of Fed, and that bank lend the state 100 million. To cover reserves it gets a loan from the Fed at 0.25% rate (would it get that rate?).
So USVI has to return $100.25 million next year?
Can it then borrow from the Fed $100.25 to cover that loan next year? Or is that against the rules?
Would fdic requirements and costs be substantial for something like that?
the limit to borrowings of any type is a function of equity capital
@WARREN MOSLER,
“the limit to borrowings of any type is a function of equity capital”
Capital requirement is small enough to allow to leverage state funds more than 10 times it seems.
However, in the end, state will end up like Greece – because it cannot “print” its own money.
If state would issue bonds acceptable for tax payments (Mosler bonds) – that would be almost like issuing its own currency? Can USVI do that?
@WARREN MOSLER,
and remember you have to match maturities- so if the loan is 5 years fixed you fund with 5 year fixed rate borrowings
Is that possible? When a bank makes a 5 year loan, it creates a deposit that will end up in several accounts that are unlikely to lend the money for 5 years.
So, starting with a system in equilibrium where maturities match, how could a bank issue a loan?
the term structure of rates offered by the banks goes to levels where enough of those with overnight deposits switch to term deposits, directly or indirectly
Congratulations Warren!!!!!
They couldn’t get a better Financial Advisor even if they paid for it!!
Is the Senator a believer?
Great. They will get the best. Now how are we going to get you in congress?
Congratulations! Lucky USVI 😉
Congrats and good luck!
I’m trying to read it on an IPad.
It’s impossible to get it right way up.
Any help would be appreciated
on the right edge is a lever that ‘locks’ the screen so it won’t rotate
@WARREN MOSLER,
Now Apple has outsourced tech support to USVI!!!
Warren — Congratulations! And best of Luck!
Warren,
Here is an interesting article examining Chairmen Chris Dodd’s take on the subprime mortgage crisis… dated 2012 err rather 2010.
In any case, the Dodd-Frank Act is still considered the bible for financial reform. It appears he is UNDER Tim Johnson and Richard Shelby in Banking Housing and Urban affairs.
-NYSTOCKGURU
DODD STATEMENT ON PROBLEMS WITH MORTGAGE SERVICING FROM MODIFICATION TO FORECLOSURE PART II
Hearing Explores Role of Regulators in Foreclosure Crisis and Response
December 1, 2010
WASHINGTON – Today Senator Chris Dodd (D-CT) chaired his last Banking Committee hearing. It was the second in a series of oversight hearings investigating widespread problems in the mortgage servicing industry. The Committee heard testimony from regulators, industry experts, and executives from Fannie Mae and Freddie Mac. The hearing explored what steps the regulators have taken to supervise mortgage servicers, and the steps they are now taking to correct the problems and protect borrowers and investors.
“At the last hearing, we learned that many servicers have not been doing their jobs,” said Chairman Dodd. “These servicers, including many of the nation’s biggest banks, have failed to maintain proper records, failed to properly administer the Home Affordable Modification Program (HAMP), hired so-called “robosigners” who submitted thousands of false and possibly fraudulent affidavits, and in some cases even foreclosed unfairly on people who should not have lost their homes.”
“It’s important also to remember that while it was servicers who caused this problem, it is borrowers who are paying the price. Confusion over sloppy and incomplete documentation has slowed the mortgage modification process for countless homeowners. Conflicts of interest in the industry may be incentivizing 3rd party servicers to actively seek to block modifications that would prevent foreclosures but cut into their profits. These problems may have resulted in problems for borrowers who otherwise may have been able to pay their mortgages, or in pushing troubled borrowers to foreclosure who otherwise may have been able to save their homes through reasonable modification efforts.
“This is a problem that the servicers should have seen coming. They got plenty of warnings, from Congress, from Sheila Bair of the FDIC who is here with us today – but whether it was out of greed or ignorance, they failed to recognize the disaster on the horizon. Now we are left to pick up the pieces, to try to help the homeowners caught up in forces beyond their control, and to do everything in our power to fix the system and prevent these problems in the future.”
Below is Chairman Dodd’s statement as prepared for delivery:
“Good morning. Before we begin, I want to note that this is likely my last time chairing a meeting of the Banking Committee. It has been a distinct privilege, and a pleasure, to work with all my fellow Committee members over the years. Senator Shelby, you have been a good friend and colleague.
“I want to welcome and thank the witnesses for appearing today, and for their testimony about problems in mortgage servicing. This is a continuation of a hearing we held last month, at which we heard from witnesses within the servicing industry and others. Today we will hear from some of the regulators responsible for overseeing the industry.
“First, let me explain what we mean by mortgage servicing. Individual mortgages are often bundled into pools of similar mortgages and sold in the secondary market as a mortgage backed security (MBS). After the origination, all processing related to the loan is managed by a mortgage servicing company. The nation’s four largest banks – JPMorganChase, Wells Fargo, Bank of America, and Citi – are also the largest mortgage servicers. Mortgage servicers have a long list of administrative responsibilities, from collecting monthly payments, maintaining detailed accounting records, paying taxes and insurance premiums, and distributing payments to the holders of the mortgage security. For this work, they receive a servicing fee.
“At the last hearing, we learned that many servicers have not been doing their jobs. These servicers, including many of the nation’s biggest banks, have failed to maintain proper records, failed to properly administer the Home Affordable Modification Program (HAMP), hired so-called “robosigners” who submitted thousands of false and possibly fraudulent affidavits, and in some cases even foreclosed unfairly on people who should not have lost their homes.
“Since our last hearing, news reports have suggested the problem may actually be bigger than previously thought. An employee of Bank of America testified in court that the bank’s standard mortgage servicing practices failed to meet basic loan documentation requirements, a failure that could call a huge number of loans into question. If there are more revelations of that nature, this situation could ultimately have ramifications for the safety and soundness of our whole financial system.
“Investors in the mortgage securities market, including the New York Federal Reserve Bank and Freddie Mac, are pushing banks to repurchase loans that may not have been originated as represented.
“Last month, the Congressional Oversight Panel estimated that these lawsuits and repurchases would ultimately cost banks about $52 billion. Subsequent to that report, Barron’s magazine used data from a research firm called CompassPoint and estimated that the losses to banks could be as high as $164 billion. Other estimates are higher still. Even for Wall Street, that’s a lot of money.
“It’s important also to remember that while it was servicers who caused this problem, it is borrowers who are paying the price. Confusion over sloppy and incomplete documentation has slowed the mortgage modification process for countless homeowners. Conflicts of interest in the industry may be incentivizing 3rd party servicers to actively seek to block modifications that would prevent foreclosures but cut into their profits. These problems may have resulted in problems for borrowers who otherwise may have been able to pay their mortgages, or in pushing troubled borrowers to foreclosure who otherwise may have been able to save their homes through reasonable modification efforts.
“This is a problem that the servicers should have seen coming. They got plenty of warnings, from Congress, from Sheila Bair of the FDIC who is here with us today – but whether it was out of greed or ignorance, they failed to recognize the disaster on the horizon. Now we are left to pick up the pieces, to try to help the homeowners caught up in forces beyond their control, and to do everything in our power to fix the system and prevent these problems in the future.
“Today we are going to hear from the regulators about what they did, or did not do, to prevent this crisis from occurring. We want to know what they believe they should have done better, what needs to be done to strengthen oversight of this process, and what other changes may be necessary to restore the integrity of the system.”
Copied & Pasted from:
http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=A364947C-05A9-5869-31DA-E58972DD90B3
Won’t the PDVSA (HOVENSA) refinery be reopened if Chavez is replaced by Radonski.
Maybe capitalism is immoral but socialism does not work any better.
http://fcir.org/2012/02/27/private-intelligence-firm-hugo-chavezs-cancer-very-serious/
“The medical team complains that Chavez is a very ‘bad patient,’ ” the memo states. “He doesn’t listen to his doctors, he ceases treatment when he has to make a public appearance.”
The doctors themselves squabbled over Chavez’ consultations with a Chinese physician who advocated natural treatments and, the memo states, “the Russians are saying this is horse shit treatment.”
The memo adds, with sardonic humor: “Only Chavez can get the most politicized medical team in the world.”
@Adam (ak),
“Maybe capitalism is immoral but socialism does not work any better.”
Both run by mammals with burning desire. The outcome is certain.
@Adam (ak),
what does Chavez’s cancer have to do with capitalism or socialism?
@Gary,
1. At least in Hugo’s mind – a lot. Whether he is sane – I don’t know.
“(Reuters) – Venezuelan President Hugo Chavez speculated on Wednesday that the United States might have developed a way to give Latin American leaders cancer, after Argentina’s Cristina Fernandez joined the list of presidents diagnosed with the disease.”
http://www.reuters.com/article/2011/12/29/us-venezuela-usa-cancer-idUSTRE7BR14I20111229
2. The way he is treated for the disease suggests that nothing has changed in the communist camp. “Only Chavez can get the most politicized medical team in the world.”
3. What is really relevant is the fate of the refinery which in my opinion depends on global politics. Chavez is siding with Iran and trying to show defiance to the US. If Chavez is dead, another leader may suddenly discover that the refinery is profitable. At least the American ambassador may convince him that it could be…
@Adam (ak), and it turned out Cristina Kirchner didn’t have cancer. Paranoia must be the common denominator of all these “socialist” leaders.
@Adam (ak),
I would not be surprised if he was given cancer.
Assassination of political leaders or figures is nothing new.
By the way – it is curious that the few states that try to do something different than the accepted ways – and which end up on an enemy list – they are all lead by strong political leaders – which are easy to target.
I am sure Chavez is quite popular in Venezuela, just like Belorussian leader in his country, so it is not a matter of “tyrants”. So what makes it so that once the leader is removed – that the country is easy to turn around in “accepted” ways (think Honduras). Maybe oligarchy sells out easier than some single individuals?
How would you suggest he should be treated? I am sure money is not an issue there. If he paid those Russian and Cuban doctors (which he very well may have done) – does that make it different?
is that a riddle?
😉
🙂
Warren,
Congrats! Its about time our elected officials acknowledge that finance is not their forte. Lets hope they share your input with the others involved…All the best to you!