The threat of bankruptcy overhangs local government across the nation. In Northern California, Vallejo declared bankruptcy last year, impoverished for a generation by the closing of the Mare Island Naval Base. Stockton recently declared bankruptcy, impoverished for a generation because it is the home of Developer Grupe and Builder Spanos.
The California story is simple: people, at the urging of finance, insurance and real estate (FIRE) special interests, bought the idea that they could have contemporary, upscale public services without paying adequate property taxes to fund these services they believed they deserved. They voted for Prop; 13 in 1978 and continued to demand the same level of service. Local governments borrowed to provide the services but the quality inevitably eroded because the jurisdictions are legally required to balance their budgets and because of the interest on the loans. California, once a national leader in public K-12 education, now ranks 47th and falling. Rural county roads are reverting to their pre-pavement origins. Libraries are closed. On and on -- it is our daily experience.
The solution for the deterioration of public finance is also simple: the Fed should print the money to support the cities and counties, as is done in civilized nations. But our Federal Reserve is not a government controlled central bank; it is controlled by a consortium of private banks. Private banks make money off government loans; they have no incentive to bail out the local and state governments of the nation even though the Fed bailed the largest private banks out to the tune of $13 trillion. FIRE is the largest contributor to the members of Congress, which means there is no concerted opposition from Congress. In fact the most vocal advocate for the privatization of public education in the country, Arne Duncan, former head of the Chicago public school system, is now Secretary of Education.
Anyone who has observed any legislative body from city to state in California will have a hard time blaming bankers for not wanting to print money to bail out jurisdictions whose leaders have all the fiscal prudence of 20-something real estate sales persons. But, wait -- wasn't these same bankers whose reckless lending put those same realtors in their Hummers and Beamers a few years ago?
"The problem is that the financial system itself is rotten. This has turned today’s class war into a financial war, with the major tactic being to shape how voters perceive the problem. The trick is to make them think that cutting taxes will lower
their living costs and make housing cheaper, rather than enabling banks to take what the tax collector used to take. That is the key perception that needs to be spread: cutting taxes leaves more “free lunch” income available for banks to lend
against, loading the economy deeper into debt.
"Here’s why the present track can’t possibly work. State and local pension funds are $3 trillion behind because they are only making 1% returns these days (the only safe return), not the 8+% that they were told to make in order to pay pensions by “capital” gains (that is, the bank-financed free lunch). The Fed is keeping interest rates low in an attempt to re-inflate real estate and other asset prices back to the happy decade of Bubblemeister Greenspan. If interest rates rise – by enough to enable California, Chicago and other localities to obtain enough interest to pay retirees what they promised – then banks will see the collateral for their mortgage loans fall." -- Michael Hudson, August 13, 2012.
Badlands Journal editorial board