11: It Takes a Pillage: Detroit

This is Chapter 11 of How to Dismantle an Empire, which begins Section FOUR: Attack of the Petrodactyls. It looks at Detroit but shows its downfall was predatory, not because of poverty. Any city, county or school district is just as vulnerable. This shows how the scam works. Borrower beware!

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What most people don’t seem to realize
is that there is just as much money to be 
made out of the wreckage of a civilization
as from the upbuilding of one . . .

Your family and my family and everyone here 
tonight made their money out of changing 
a wilderness into a civilization.
 
That’s empire building. 
There’s good money in empire building. 
But there’s more in empire wrecking.

—RHETT BUTLER IN 
GONE WITH THE WIND, MARGARET MITCHELL

. . . there’s a million of these towns that are 
like factories, breeding hate and fear 
that only the fortunate will never meet. 
And these zoomed up kids die like saints, 
for someone else’s dollar.

—VOLATALISTIC PHIL, WHITE WEDDING, 
LIES, AND DISCONTENT: AN AMERICAN LOVE STORY

Capital has periodically to break out of the constraints imposed by the world it has constructed. It is in mortal danger of becoming sclerotic. The building of a geographical landscape favorable to capital accumulation in one era becomes a fetter upon accumulation in the next. Capital has to devalue much of the fixed capital in the existing geographical landscape in order to build a wholly new landscape in a different image. This sparks intense and destructive localized crises. The most obvious contemporary example of such devaluation in the USA today is Detroit.

—DAVID HARVEY, 
SEVENTEEN CONTRADICTIONS AND THE END OF CAPITALISM

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It Takes a Pillage: Detroit

The future of US cities is being written in the stars and dust of Detroit. In Detroit the prototype is being developed for an economic neutron bomb that evaporates the people but leaves the buildings and infrastructure intact. Detroit is ground zero, the hypocenter of mortgage and property tax foreclosures, the slashing of social services, the privatization of public assets, and the gutting of pension and retirement funds. Coming soon to a theater near you!

In Days of Destruction, Days of Revolt, authors Chris Hedges and Joe Sacco refer to cities like Detroit as “America’s sacrifice zones.” Speaking to Bill Moyers, Hedges went on to explain how cities are falling prey to bankruptcy and neo feudalism. As he terms it:

The political system is bought off, the judicial system is bought off, the law enforcement system services the interests of power, they have been rendered powerless . . . There’s nothing left. There is no employment. Whole blocks are abandoned. The only thing functioning are open-air drug markets, of which there are about a hundred. And you’re talking third or fourth generation of people trapped in these internal colonies. They can’t get out.

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zoomed up kids in zombieland

Detroit is the object lesson to the US that Greece was to Europe. At 23% in 2013, Detroit had the highest unemployment of the 50 largest cities in the US. It ranked first among US cities for the percentage living below the poverty line: 36% of individuals and 31% of families. Youth unemployment was up to 30%. By comparison, the Greek youth unemployment that led to the revolution of precariats was only 23%. Community activist Yusef Shakur describes Detroit as a zombieland in which gangs and cheap drugs are the inevitable byproduct of a population stripped of all alternatives.

The eleven million people of Greece were able to channel their outrage, albeit momentarily, into the election of a new president and an economic minister who had an agenda to renegotiate everything from their debt, their relationships with the banks, and even their departure from the eurozone if need be. They had the leverage of government autonomy.

The ten million people of Michigan, half of whom reside in the Metro Detroit area, have no such clout. The inner City of Detroit and a dozen other suburban Detroit cities saw their elected officials replaced by “emergency managers” appointed by the governor, which utterly negated the power of the ballot box. Renegotiating the debt or rethinking inclusion in the dollarzone was not even under discussion.

Former city officials now introduce themselves as a “school superintendent in exile” or “city council member in exile.” Like children they’ve been trundled out of the room as the professionals roll up their sleeves to sort out the mess. Let’s look at how Detroit, the city whose mass production turbocharged the industrial revolution, was reduced to this reputation for incompetence. Readers can ask themselves what their city managers would have done differently. Or they can ask the scarier question—did they do anything differently or have the consequences not yet caught up?

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profits of doom

It started in another city-within-a-city. The City of London, also known as The Square Mile, is an independent jurisdiction containing the financial and trading services for England and much of the world. The City is incorporated with its own police authority and Lord Mayor as CEO. Since the eighteenth century it’s been the top center of monetary commerce globally, with one district for insurances and one for lawyers.

Every evening the bankers of the City of London set the London InterBank Offered Rate, or LIBOR, by reporting the rate at which they offered loans to other banks that day. The LIBOR controls nearly $350 trillion in the financial instruments called derivatives, including 75% of the derivative market in the US. Derivatives, described by Warren Buffet as “financial weapons of mass destruction,” can be considered an insurance, a hedge, or a speculative bet around the cash flow generated by a debt asset. One form of derivative particularly used by governments and public services is the interest-rate swap, which makes up 82% of all derivatives.

An interest-rate swap is like buying mortgage insurance on your city infrastructure. Let’s say that you need to rebuild a bridge, or three, like my hometown of Cumberland, MD. Variable interest rates are 3% but could go as high as 10%, while fixed interest rates are 6%. You need the lower rate to get the bond passed but can’t take the risk of the variable rate going up. So the banks connect you with a friendly investment fund that, for a fee, will keep your payments stable.

More than one derivative can cover the same debt asset, so that a mortgage could be worth more dead than alive to a bank. In 2007 there were $62 trillion of credit default swaps with a total value on all US residential real estate of only $20 trillion. The same year there was a notional value of $587 trillion on all financial swaps but a global GDP of only $60 trillion. By 2013 the Bank of International Settlements put the derivative sum at a literally earth-shattering $700 trillion. The global GDP for 2017, however, was a nominal $78 trillion.

A notional value is the face amount of an asset that isn’t owned. An interest-rate swap has a notional value of the principal even though the derivative is based around the interest. Therefore $700 trillion of notional value isn’t money that’s being exchanged. However, a nearly 10:1 ratio of notional values to global GDP indicates that for every unit of goods and services exchanged, each unit is covered ten times by unproductive bets. While a flood or drought might cripple a country’s economy, the shift in food future derivatives will set off seismic shocks that traverse oceans. In our world, notions are bigger than nations.

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i.o.u. the world

To put this in perspective, a $70 trillion global GDP is as if seven billion people in the world made $10,000 per year. But by controlling the loans to their governments and public agencies, a handful of bankers and investment managers, in cahoots, could control the labor of every person on the planet for the next ten years. This $700 trillion as the object of speculation isn’t play money, it’s work money that has to be earned by ordinary people serving the interests of the financial elite.

Before going on, let’s examine three basic tenets of the existing system that put cities into this vulnerable position. The first assumption is that interest rates must change rather than hold stable. If the Federal Reserve always offered loans to banks at the same rate, their members could compete with one another to offer the best returns on long-term deposits and the lowest rates on loans. The Fed’s rationale for a shifting interest rate is that they control inflation by raising rates when the economy is flush and lowering the rates to generate more money when it’s tight. From our previous examples, they do control inflation but only to accelerate it for their benefit.

The second assumption is that a city’s labor, which is the highest cost of any municipal project, needs to be borrowed from a bank. The central point of this book is that communities own their labor by right. They also own the land, resources, buildings, infrastructure, and services that exist because of their previous labor. Debt is a transfer of wealth, in housing or knowledge, from one generation to another. This debt can only be issued by the community along with the credit to repay it, in the form of money for the jobs it wants done. Bankers have put none of their own labor into the houses and are owed no labor back.

This leads to the third tenet: that the “Federal Reserve,” as a cartel of private investors, has the right to authorize the issuing of credit. And do they own the money—representing stored labor—that they invest? At the beginning of the book, we talked about the commodification of gold leading to the commodification of people. Slave ships left Africa packed with horrifically contained labor and returned with a few lumps of metal ore for the financiers. Credit issued against this gold gave control over labor to build the ships and reward the slavers. Is the investors’ control over past slave labor theirs to use to control future labor?

The word “speculative” is also deceptive because it implies a gamble, a game of chance in which an “investor” could win or lose, and therefore deserves the big payoff if the chips fall their way. But in the speculative economy, the game is rigged and luck has nothing to do with it. The global finance cartel makes arbitrary decisions that can reduce a whole country’s value to junk status overnight. The labor of its citizens, which is on loan to them, may be called in as an unsecured debt.

Governments may have to pledge cuts in social services that are the equivalent of pledging their resources, land, houses, workers, and the future labor of their children in order to secure the loan, so that it can be insured by the same people who put them in this bind. The banks will control the interest rate at which their labor is loaned back so that they’ll have to pay dearly or gamble on a fluctuating rate, which the banks will again insure and control. For individual or community savings, if they have any, they’ll get nothing in return unless they put them into the gambling pot too. In the long run, they can only lose, and it’s not a very long run.

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hedge hogs

The interest-rate swaps for the municipal bond market enabled cities on tight budgets to build desperately needed upgrades to their infrastructure using lower variable interest rates instead of higher fixed rates. Banks presented the swaps as a type of insurance to contain the risk of rising interest. For a monthly premium, the bank would locate a counterparty to cover any rise in interest so the city’s cost would remain the same. However, if the rate went down, the city would pay the counterparty an additional fee, which would be offset by their savings on the interest, still keeping their costs stable. These counterparties, called hedge funds because they hedged the bets covered by derivatives, might be the bank owners themselves or high-roller investment firms.

For the cities, variable interest rates were already so low in 2005 that they couldn’t go much lower without the banks losing money. Fixed rates were much higher, but a potential rise in the variable rate could be disastrous. The deal was promoted as a win-win that would save taxpayers money but not gamble with public funds.

And, besides all these other attractions, the derivative instruments were sold by the same banks that bought the cities’ municipal bonds, with whom they already had a relationship. After the demise of Glass-Steagall, the banks doubled as a depository and a hub for speculative investments, shaking hands with city managers and hedge fund managers alike. Through this position of trust, banks sold these derivatives to thousands of public agencies around the country—transit authorities, state infrastructure departments, pension funds, school districts, and municipalities.

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water woes and the swaps swamp

Detroit’s specific problems started with water. And sewage, to be precise. The flight to suburbia back in the 1950s caused Detroit’s water chief to decree that he would no longer irrigate the exodus: no new cities could be added to the forty-two already served by Detroit’s water system. But the ’burbs concluded that only the City had the economic base to finance their expansion. So the water chief was sent on his own exodus and throughout the next decades Detroit built a regional system and new water treatment plant to allow more development.

Suburban politicians introduced bill after bill to regionalize the water system, but their voters concluded that it was cheaper to buy it from Detroit. In the ’90s the City upgraded the system, taking out nearly $6 billion in debt. Yet in 2002 politicians were still arguing that the suburbs were being gouged and their fees for past services should give them free title to the infrastructure. This was despite Detroit having the fifth-lowest rates for water and sewage, which the outlying areas tripled or quadrupled in price to their customers.

In one heated water dispute, vitriolic opponents even threatened to put the newly elected mayor in jail. In retrospect, this would have saved Detroit a lot of trouble. Seduced by Wall Street bankers, Mayor Kwame Kilpatrick had bought into derivative swaps, not only on the water debt but also on city pensions, borrowing against future contributions. A smiling Kilpatrick can be seen accepting an award at the Bond Buyers Deal of the Year Event in 2005. But when Kilpatrick was later sentenced to 28 years behind bars for racketeering and corruption, colluding with Wall Street bankers would not be among the charges.

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death by derivative

When the economy tanked in 2008, interest rates dropped to nearly zero, showing the swaps to have been “a bad gamble” for cities because the actual variable rate would have been lower. But city managers had bought interest-swaps in order to not gamble, and have a predictable fixed rate. So what put Detroit into its downward tailspin?

In 2012, London bankers were discovered to have been conspiring to manipulate LIBOR. According to insiders, this was a long-time practice and not news to anyone in the business. As leaked emails showed bankers to have popped open Dom Perignon to celebrate the reported (not actual) lower rate, it raised questions. Wouldn’t lower interest be bad for the banks but good for those with variable rate loans? And wouldn’t they be neutral for governments and public agencies with interest-rate swaps, since the lower interest would offset the fees?

But—surprise!—it turned out that the bond rates and the swaps were each tied to different indices. The swaps were tied to LIBOR, so that its drop triggered billions of dollars in fees from cities to speculators and hedge funds. The Muni bonds, however, were linked to the SIFMA index: the Securities Industry and Financial Markets Association. While LIBOR was manipulated to go down, the SIFMA stayed the same. Therefore the public agencies had no savings on their bond payments to pay for the millions in reverse-interest fees.

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collateral damage

To make matters worse, when the cities tried to get out of the rigged deals, they found that millions more were owed to terminate the swap agreements. This prompted cities like Baltimore and Philadelphia and counties like San Diego and Sacramento to sue over LIBOR manipulation. Birmingham blamed their bankruptcy on interest-rate swaps for which JP Morgan had bribed public officials. The former mayor is serving 15 years but JP Morgan paid a $75 million fine, which neither hurt the perpetrators nor helped the victims.

On the World Socialist Web Site (WSWS), Thomas Gaist writes that California’s water resource department paid $305 million to Morgan Stanley to terminate a swap, North Carolina paid $60 million—equal to 1400 full-time employees—and Reading, PA, paid a full year of real estate tax revenue.

Gaist quotes Mike Elk of the Huffington Post who reports that, after interest rates were set at zero, banks were still collecting 4-6% fixed rates while paying governments as little as a tenth of one-percent on bonds. Elk describes the banks as making a windfall profit off of the suffering of local economies. Gaist concludes:

Entire cities are being used as collateral, opening the way for wholesale plunder of municipal assets by the same institutions whose criminal activities crashed the economy. The Federal Reserve’s policy of lowering interest rates has provided a windfall for the banks while driving cities and states over the financial cliff. This manufactured crisis has, in turn, been exploited by the Obama administration and both big business parties to hand over trillions in pension funds and other public assets to the financial kleptocracy that rules America.

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in the car with the czar

In another parallel to Greece, it was a Moody’s rating downgrade that sunk Detroit. In 2009 their pension bond credit rating was dropped three levels in one day, triggering a clause that allowed the banks to demand payment of $400 million in full. Imagine that power over homeowners where a mortgage could come due in full, without a missed payment, simply because the future ability to pay was called into question.

The sudden liability would have led to immediate bankruptcy but Mayor Cockrel pledged the casino revenues as backing for the pension bonds, turning them into secured debt. Because assets could now be seized in a bankruptcy, the banks could insure the bonds using the casino revenues as collateral. This was a last ditch maneuver that might be compared to getting in the car with a gun-wielding rapist in the hopes of being in a better position to escape later.

But escape Detroit did not. In 2013 Michigan’s governor appointed Kevyn Orr as emergency manager under a public act that had been rejected by voters months previous. Orr had a reputation as a turnaround czar and top bankruptcy lawyer, who had formerly been in charge of downsizing Chrysler. Four short months later he filed for Detroit’s bankruptcy, bringing in his former law firm at a rate of up to $1000 an hour, despite the fact that they also represented some of Detroit’s creditors such as USB and Bank of America. And remember that in our previous exercise—imagining an equal world based on the current GDP—$1000 means that the lawyer earns in an hour a year’s worth of income in the global economy.

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pennies from kevyn

There were many ways in which Kevyn Orr could have challenged the swaps and even the entire debt obligations: the banks had failed to inform the city of the risks, the mayor had set up illegal departments in order to not exceed the state’s borrowing limits, and the gaming revenues were restricted for social causes. Even though Orr admitted in court that the swaps were likely illegal, he reached a sweetheart deal with the banks, which included giving them the future casino revenues two days before he declared Detroit bankrupt.

Detroit had already paid the banks an entire year of city revenues just in fees to refinance the loan and for “negative-interest payments,” which included neither the interest nor the principal. By the time they bought their way out of the swap, they had paid another 15% of annual revenue.

Because the debt was settled before the city declared bankruptcy, the bank had super-priority in claiming city assets, which were sold off at fire sale prices. The auction house Christie’s evaluated the most valuable pieces in Detroit’s world-class art collection at $2 billion, disappointing creditors who’d hoped it would sell for more. However, private foundations like Ford “saved” the museum by putting up $330 million for pension obligations and transferring ownership from one of the greatest city-owned museums to a nonprofit. Other cities were advised to “protect” their assets by privatizing them now.

The bankruptcy released Detroit from its pension obligations, giving Orr legal license to pay pennies on the dollar for city retirement and health plans. While retirees of private companies that go bankrupt are backstopped by Social Security and a Federal guaranty program, public employees don’t pay into Social Security and are ineligible for the Federal safety net. In addition, Orr proposed transferring medical benefits onto Medicare, shifting part of Detroit’s $11.5 billion debt onto the stooped shoulders of Uncle Sam. In other words, the banks were to be bailed out once again at the expense of the taxpayers.

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feeding frenzy of the lords of capital

The demographics on race are dramatic: the City of Detroit is less than 8% white and 85% black or mixed. Of the 185 cities and townships in the larger area of Metro Detroit, 115 are more than 95% white, with Michigan overall at 77% white. But racism doesn’t show the whole picture—capitalism is a systemic parasite that’s consistently omnivorous, but with different methods and roles for each group. The danger of defining the issue as racism is that it divides people into us vs. them, rather than all of us vs. a handful of bankers.

In Black Agenda Report, the formidable Glen Ford elucidates how racism was used as a means rather than an end, to distract attention from the banks and turn it into someone else’s fault, someone else’s problem:

Derivatives are creatures of Wall Street, designed by the bankers that market them for sale to other bankers or to whatever non-banking fools that can be lured into the instruments’ deadly coils, where the victims marinate. The Lords of Capital are preparing for a feast, such as the nation has never seen. But the feeding frenzy cannot begin in earnest until the supporting political narrative is firmly in place. This being America, the justification is ready-made: The irresponsible, profligate, corruption-prone Blacks, with their ghetto pathologies, are the problem. Austerity is the answer—especially in those localities where African Americans are too tightly concentrated—under the firm fiscal management of Wall Street.

A specially selected Negro corporate lawyer, Kevyn Orr—who craves the good life as much as Kwame Kilpatrick and lives in a $5,100 a month penthouse; a gift, he claims, of a rich admirer—will submit to a bankruptcy judge a proposal to restructure Detroit’s debt. The $350 million scheme, financed by Britain’s giant Barclay’s bank, would pay off the Wall Street banks that ensnared (a very willing) Mr. Kilpatrick and other Detroit leaders in a web of derivatives and loans. With the original corporate conspirators now made whole, the Brits would then “move to the head of the line,” as people’s lawyer Tom Stephens explains, as Detroit’s super-priority creditor—meaning, Barclays gets paid first when the city’s assets are liquidated or otherwise dispensed.

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downstream from the sewage plant

And who won the water wars that started this debt spiral? Despite being secured by future revenues, Standard & Poor’s dropped the water bonds nine levels to CCC junk status because Orr might offer investors less than promised. Just a year prior they had been A+/Ba1, while General Obligation bonds backed by the full faith and credit of Detroit were ranked as an unsecured CC, which was unprecedented for this type of bond. This rating had eliminated the city’s ability to finance termination of the swaps by issuing new muni bonds.

In regards to the water system, Orr proposed to create a new entity, the Metropolitan Area Water and Sewage Authority, which would lease the infrastructure to the suburbs for a set price. According to James Brewer, Orr sought to monetize the revenue through privatization but leave pensions and healthcare costs as Detroit’s responsibility. Symbolically as well as literally, sewage would still flow one-way, making Detroit the cesspool for the masses.

The suburbs, however, balked at the $70 million annual price, even though at that rate it would have taken 84 years just for Detroit to pay off its $6 billion in water bonds. Failing that, Orr replaced the municipal board with corporate directors who hired the aptly named contracting company Homrich Wrecking to implement shutoffs. They turned off water for 3000 households a week for the 150,000 late residential accounts—but not delinquent businesses or golf courses. Utility bills rose precipitously, with half of every payment going towards debt servicing. Plans were also made to lay off 80% of the water utility’s staff, going from nearly 2000 employees to under 400.

Extensive public outcry, including the United Nations, resulted in a pause in the shutoffs, only to resume in April of 2015. While the Lords of Capital, as Ford puts it, have equal opportunity schemes for whites—including predatory mortgages and student loans—the targeting of Negro cities seems particularly designed to hollow out the population, not just to bleed them dry.

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muni munitions

Ominously, this formula sets the template for what may be to come for other highly leveraged cities across the US. Cities raise money by selling municipal bonds, which is already a way of borrowing their own labor back at interest. But in late 2014 the Fed and FDIC removed Muni bonds from their list of High Quality Liquid Assets (HQLA). Even though large banks have been required to hold an increased percentage of HQLA as collateral, Muni bonds no longer qualify. However, riskier and less liquid corporate bonds and stocks now do.

As banks divest Muni bonds, cities will need to guarantee higher interest in order to attract buyers for any new bonds that they issue. Again, there’s a parallel to Greece, where the interest rate for state-backed bonds went up to an extortionist 30%. In order to make their payments they were forced to sell off national assets at bargain basement prices, and ended up insolvent all the same.

Why would the Fed and FDIC saddle schools, cities, and states with overpriced debt? Historically, General Obligation bonds backed by taxpayer funds have been considered safe loans for the most conservative investors. Why push the banks to divest their bonds and instead gamble in the stock market?

Commercial bank credit, backed by the houses built by the community, could foster the activities that support community goals. But this paradigm has been turned around; now cities and towns labor to feed the banking meter before their infrastructure gets towed away. The houses, and the people who live in them, exist to generate profits for the privately owned banks.

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a clawback for money creation

This deep confusion about whether banks serve the government or government serves the banks is reflected in the statements of elected officials. It was evident in the sycophantic welcome Senator Jim DeMint gave JP Morgan CEO Jamie Dimon when the latter was called before Congress to answer for a $2 billion hedge fund loss:

Thank you, Mr. Dimon ... We can hardly sit in judgment of your losing $2 billion. We lose twice that every day here in Washington and plan to continue to do that every day. And it’s comforting to know that even with the $2 million ... er, $2 billion loss in a trade last year, your company still, I think, had a $19 billion profit. During that same period, we lost over a trillion dollars. So if we had a clawback provision, none of us would be getting paid here.

While DeMint found it “comforting” that JP Morgan had a $19 billion profit, that sum was transferred from the public into the pockets of the wealthiest people in the world. He implies that Wall Street should tutor the government in how to make money. What he hints at is certainly true, even if inadvertently so on his part. If the government created money in the way they’ve allowed the banks, the government would run at a surplus, money would fund what society values, and the bankers would have to gamble among themselves.

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bailing in the sinking ship

The trifecta of austerity, asset grabs and plundered pensions has been enacted from Greece to Cyprus to Detroit. The formula for this winning ticket was established by the Bankruptcy Reform Act of 2005 in which derivative counter-parties were given priority over any other creditor or depositor, including FDIC-insured accounts, in the event of a bank failure.

It isn’t even necessary for a city to go bankrupt in order for speculators to hit the jackpot. If the bank itself loses a gamble and goes bankrupt, speculators still win. Pension plans, states, and local governments certainly have accounts over the $250,000 maximum of FDIC insurance. Using their super-priority status, the derivative counter-parties would be first in line to attach the assets, leaving government accounts emptied out. The FDIC would be required to cover deposits under the limit, in an end-run around the Dodd-Frank bill that prohibited taxpayer bailouts of the banks. In addition, the Bankruptcy Reform Act authorizes banks to confiscate funds directly from their depositors for a Cyprus-style bail-in.

In 2011, Bank of America transferred up to $53 trillion of its $75 trillion in derivative holdings from its Merrill Lynch operation into its depository bank. To put this in perspective, all US mortgage debt put together is only $11 trillion. The FDIC opposed the move on the grounds that, if Merrill’s credit default swaps went into a tailspin or another city defaulted, it would bankrupt B of A. This would, in turn, bankrupt the FDIC, which had less than $14 billion by the end of 2009. But the Federal government overruled this objection.

Ellen Brown writes:

In 2009, when the FDIC fund went $8.2 billion in the hole, Chairwoman Sheila Bair assured depositors that their money was protected by a hefty credit line with the Treasury. But the FDIC is funded with premiums from its member banks, which had to replenish the fund. The special assessment required to do it was crippling for the smaller banks, and that was just to recover $8.2 billion. What happens when Bank of America or JPMorganChase, which have commingled their massive derivatives casinos with their depositary arms, is propelled into bankruptcy by a major derivatives fiasco? These two banks both have deposits exceeding $1 trillion, and they both have derivatives books with notional values exceeding the GDP of the world.

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on the virg

In another of Ellen Brown’s articles, “The Detroit Bail-In Template: Fleecing Pensioners to Save the Banks,” she shows that Detroit could have been a harbinger of hope if the other candidate had won the election for Michigan’s governor:

Interestingly, Lansing Mayor Virg Bernero, Snyder’s Democratic opponent in the last gubernatorial race, proposed a solution that could have avoided either robbing the pensioners or scaring off the bondholders: a state-owned bank. If the state or the city had its own bank, it would not need to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the deposits created by the government’s own revenues, and return the interest to the government as a dividend, following the ground-breaking model of the state-owned Bank of North Dakota.

In the March 9, 2010 Detroit News, candidate Bernero stated:

Hundreds of job-creating projects are still on hold because Michigan businesses and entrepreneurs cannot get bank financing. We can break the credit crunch and beat Wall Street at their own game by keeping our money right here in Michigan and investing it to retool our economy and create jobs.

We’ll never know what might have happened for Detroit in an alternate universe if Bernero had been voted in.

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dessert included

The late and beloved historian, Eduardo Galeano, writes of September 15th in Children of the Days:

In the year 2008, the New York Stock Exchange tanked. Hysterical days, historical days: the bankers, those cleverest of bank robbers, had sucked their businesses dry, though none of them was ever caught on security camera and no alarm was ever tripped. By then a widespread crash was unavoidable.

The collapse ricocheted around the world; even the moon was afraid of being laid off and having to relocate to another sky. The magicians of Wall Street, experts at selling castles in the air, stole millions of homes and jobs, but only one of them went to prison. And when they hollered at the top of their lungs for help, for the love of God, their zeal was honored with the largest reward ever paid in human history.

That mountain of money would have fed all the hungry people in the world, dessert included, from here to eternity. The idea did not occur to anyone.

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CHAPTER 11 EXERCISES

Using examples from the book, or from your own research, logic, and experience, comment on the following and what it means today:

Paradigm Shift #11

Communities are the natural owners of their own labor and assets. Money is a means of organizing their own labor and assets. Communities should be able to organize their own labor without debt to any outside entity or risk of losing their assets.

When communities issue their own credit, they own their labor. When communities issue their own credit, they protect their assets.

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Lexicon

Explain how the following definitions change the dialogue around social problems. What are examples to which the term might be relevant? Is this definition of the term used in discussion of these examples? If not, how does this affect our understanding of the potential solutions?

sacrifice zones: areas from which all profitable labor and assets have been extracted, leaving crumbs and corruption.

the City of London: an independent jurisdiction within London, contained in one square mile, that is the center of global monetary commerce and banking.

London InterBank Offered Rate (LIBOR): the average overnight bank-to-bank interest rate, as self-reported every evening by the top London banks. It’s the index to which 75% of derivatives are tied.

derivatives: for buyers, an insurance or hedge in an arbitrarily unpredictable lending market. For investors, who profit from that unpredictability, a speculative and often manipulated bet around the cash flow generated by a debt asset.

interest-rate swap: a form of financial derivative that exchanges an adjustable rate loan for fixed payments plus a premium to speculators who pay the extra if the interest rate goes up but are paid an additional fee, hypothetically offset by the saving, if the interest rate goes down.

notional value: the face amount of an asset that isn’t owned but may be recovered in a bankruptcy if a loan can’t be repaid.

hedge funds: the counterparties, made up of bank owners or investment firms, who cover the bets of derivatives and reap the profits from public loans or appropriate the collateral assets.

Securities Industry and Financial Markets Association (SIFMA): an index to which municipal bonds are tied that determines their rate of interest.

municipal bonds or General Obligation (GO) bonds: a means for the public to borrow its own labor back from private creditors by pledging future taxes in exchange for loans.

bond credit rating: similar to the national credit rating, an arbitrary assessment by Moody’s or Standard & Poor’s or another agency on whether a public entity will be able to repay their debts. If low, it triggers the bonds to be due and payable immediately in full.

emergency manager: an appointed position that displaces all of the elected officials, usually for the purpose of liquidating assets in a bankruptcy and imposing austerity measures.

super-priority creditor: the first in line to collect in a bankruptcy, ahead of depositors.

High Quality Liquid Assets (HQLA): a set of financial instruments determined by the Fed and FDIC in which banks are required to invest a percentage of their holdings because they are deemed both safe and quickly exchangeable for cash.

Bankruptcy Reform Act of 2005: Gives the private creditors and hedge funds who are the counterparties to derivative bets super-priority to collect ahead of depositors, including pensions and public funds, in the event of a bank failure. Also known as the “bail-in”.

Federal Deposit Insurance Corporation (FDIC): a national program funded by premiums charged to member banks that promises to reimburse all deposits up to $250,000 in the event of a bank failure, even though the FDIC’s holdings are less than 2% of the deposits in just two of the many banks covered.

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Questions for Reflection and Discussion

What are other sacrifice zones besides Detroit? Do you know if your state, your city, or your college owns interest-rate swap derivatives? Bonds are repaid through additional assessments to the property tax. How does this affect cash flow for the community and secure tenure on the land? What are some of the projects for which bond bills have been passed in your county or city? Could they have been done with local labor, if supplemented with materials and equipment? What are local projects that still need to be done?

What are the factors that gave Greece more autonomy than Detroit to fight back, albeit unsuccessfully? If Detroit had been a state, or at least had the backing of its governor, would things have been different? What are the tools available to a nation and could these tools be applied to a community?

Does the FDIC protect depositors, large or small? Does it give a false sense of security that works against repossessing the banks? Does it discourage small banks or state-owned banks not controlled by the Fed? Would it be needed if banks were not allowed to speculate with their capital or deposits?

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Using the trojan horse of 'affordable housing,' 15-minute cities are really preparation for the Asian invasion—our cities have been hijacked for the Treasury debt to China. WEFfie YGL Gavin Newsom has mandated high-rises on whole downtown blocks and every neighborhood. In Santa Cruz, 26 acres between downtown and the boardwalk are commandeered to fund a stadium no one wants. Here's the question we should be asking.

Responds to Matt Taibbi's "Magic Monetary Theory Goes Primetime." He looks at the film Finding the Money with Stephanie Kelton and says, "Run!" From my book, How to Dismantle an Empire, I show how deficits do turn into someone's assets—and we need to make sure that someone is local communities.