Robbing Main Street to Prop Up Wall Street: Why Jerry Brown’s Rainy Day Fund Is a Bad Idea for California

There is no reason to hold back the money that Main Street needs right away to pay for Wall Street’s bad behavior. With a state-owned bank, Californians can have their cake and eat it too.

In preparation for the next economic crisis, Governor Jerry Brown is pushing hard for a change to the California state constitution that would require budget surpluses to be used to pay down municipal debt and start a “rainy day” fund.

At first glance, it seems like a good idea. As long as Wall Street is in charge of America’s finances and economy, there is a good chance of another huge bust.

But a rainy day fund takes money off the table and sets aside the money we need right now to fix the damage caused by the last Wall Street crash. The harsh cuts of 2008 and 2009 made the middle class smaller, and California now has the highest rate of poverty in the country.

The people who lose the most from Wall Street gambling have to pay for it. We can either bring back much-needed services or keep austerity measures in place to pay Wall Street when it crashes the economy again.

There is another option, which California was almost going to use in 2011 before Jerry Brown vetoed the bill. The state legislature passed AB750, which would have done a feasibility study for a state-owned bank, but the governor did not sign it. He said that the Assembly and Senate Banking Committees could do the study themselves, but 2-1/2 years later, nothing has been done about it.

Having a bank that is owned by the government can be like having a rainy-day fund. Banks don’t need rainy-day funds because they can borrow money from other banks at low rates. Today, these credit lines are at the very low 0.25 percent Fed funds rate. A state that has its own bank can use this almost-interest-free credit line not only for emergencies but also to cut in half its long-term financing costs.

That’s not just dreaming of California. There is already a very successful example of this method being used. North Dakota is the only state with its own state-owned bank and the only state to have completely avoided the credit crisis. Since 2008, it has had a budget surplus every year, and at 2.6%, it has the lowest unemployment rate in the country. Compare that to one of the highest in California.

In an interview in 2009, Eric Hardmeyer, the president of the Bank of North Dakota, said that when the dot-com bust made North Dakota go over budget in 2001-2002, the bank did act as a “rainy day fund” for the state. To make up for the budget shortfall, the bank gave the state, which owned it, an extra dividend. The budget was back on track the following year. No huge amounts of debt, no bid-rigging on Wall Street, no fraudulent interest-rate swaps, no bond vigilantes, and no bonds with interest rates of 300 percent.

California already has a lot of extra money that can be found in Comprehensive Annual Financial Reports from the state and local governments (CAFRs). Clint Richardson has spent a lot of time studying California’s Comprehensive Annual Financial Report (CAFR). He writes that he has found nearly $600 billion in these funds. Some of California’s extra money is in a Pooled Money Investment Account, which is run by the state treasurer and holds $54 billion earning 0.24 percent interest, which is almost nothing.

The money in these surplus funds is set aside for specific things, so it can’t be used to help pay for the state budget. But it can be put to work. A small amount could be put into the state’s own bank as capital, where it could earn a much better return than it does now. Since 2008, the Bank of North Dakota has had a return on equity that was between 17% and 26% every year.

California has a huge amount of capital and deposits that could be used to get credit, just like any other bank. In its quarterly bulletin, the Bank of England just said for the first time that banks don’t lend their deposits. They just give out credit that was made on their books. The deposits stay in demand accounts, so the depositors can use them whenever they want (in this case, the state).

The huge credit power of the Wall Street megabanks where California invests and deposits its money is not being used to grow California’s economy. Instead, they use it to make short-term profits for their own accounts. Many of these profits are very short-term and are “earned” by skimming profits through high-frequency program trading. At the same time, Wall Street is moving huge amounts of interest, fees, and payments from interest rate swap out of California and into tax havens in other countries.

Instead of saving our hard-earned surplus to pay the piper when he asks, we could use it to build the credit we need to become financially independent. California has the world’s ninth largest economy, and other countries look to us for creative leadership.

“As California goes, so goes the rest of the country.” We can lead the states down the path of being slaves to debt, or we can show them how to get their own economic power back.


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