It may be prescient that among the brands GM chose to kill was the Pontiac Firebird, a classic car from the 1960s that sported the legendary Phoenix on its hood. In Egyptian mythology, the phoenix was a colorful bird that burned itself in its nest and then rose from the ashes as its own offspring. GM too, says Michael Moore, could be reborn as something else. In a June 1 eulogy in the Huffington Post, he wrote:
“So here we are on the deathbed of General Motors. The body of the company has not yet cooled down, and I find myself filled with, dare I say it, joy. It’s not the joy of revenge against a corporation that ruined my hometown. . . Obviously, I also don’t mean to be happy to learn that 21,000 more GM workers will be told that they, too, are out of a job. But you and I and the rest of America now own a car company!”
What would we want from a car company? Moore suggests that the bankrupt mega-builder of obsolete gas guzzlers can be transformed into a mega-builder of something we need more of: public transportation vehicles and alternative energy devices, including bullet trains, light rail mass transit lines, clean, fuel-efficient buses, and more. energy, hybrid or fully electric cars and batteries, windmills, solar panels and other alternative energy devices. The factories that built the cars that helped destroy the environment can become tools to clean it up. This, of course, would require some investment; but Moore suggests that to pay for it all, the government could impose a tax of two dollars on every gallon of gasoline.
Even the gas tax sounds good, a regressive tax that would hit the wallets of the poor hardest and ring alarm bells for politicians, the oil lobby and voters. Isn’t there some way to finance the plan without increasing the tax burden or the national debt? In fact, there is. . . .
TO PUT OUR NEW CAR COMPANY TO GOOD USE, WE JUST NEED TO HAVE A BANK.
The federal government could create its own credit with its own government-owned loan facility, modeled on the Reconstruction Finance Corporation used by President Roosevelt to finance the New Deal; But instead of simply recycling borrowed money as Roosevelt did, the new facility could actually create credit on his books. Its capital base could be leveraged many times that amount in loans, in the same way that private banks routinely create money (or “credit”) today. Assuming a 10% reserve requirement, if the remaining approximately $300 billion of TARP money were deposited in the new bank, this money could be leveraged into $3 trillion in loans. If the money were counted as principal, with an 8% capital requirement it could be converted into $3.75 trillion in loans, or 12.5 times the original amount.
In fact, it is the sovereign right of governments to create the national money supply, but few governments exercise that right today. The only money the US government issues now are coins, which make up only about one ten-thousandth of the US money supply (M3). The rest are created by private banking institutions when they make loans. This includes the privately owned Federal Reserve, which creates the Federal Reserve Notes (dollar bills) and lends them to government and commercial banks. Federal Reserve notes make up only 3% of the money supply. All the rest consists merely of credit created on the books of private banks.
Many authorities have attested that banks simply create the money they lend as accounting entries in their books. The Federal Reserve Bank of Dallas states on its website:
“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and deposited into their checking accounts. Because the loan becomes a new deposit, Just like a paycheck, the bank…holds a small percentage of that new amount in reserve and again lends the rest to someone else, repeating the process of creating money many times.”
This was recently confirmed by President Obama himself. In a recent speech at Georgetown University on April 14, he said:
“[A]Although there are many Americans who understandably think that government money would be better spent going directly to families and businesses rather than to banks – ‘where’s our bailout?’ they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster rate of economic growth.
The money generated by banks through the multiplier effect has a high interest cost. One advantage of a government-owned bank is that it could finance public projects interest-free or near-interest-free, dramatically lowering production costs. Interest comprised up to 77% of the cost of goods and services that required large amounts of capital, such as public housing. Interest cost is lowest for labour-based services such as garbage collection, for which it represents only about 12% of the cost. Averaging all together, it has been estimated that the total cost of interest is about half the cost of everything we buy. If money for infrastructure development were issued interest-free, projects that are currently considered unsustainable due to the interest burden could become not only self-sufficient but actually profitable for the government.
In March of this year, Congressman Chris Van Hollen introduced a bill to establish a Green Bank to catalyze clean energy and energy efficiency projects. The proposed bank would be a wholly owned, tax-exempt, independent United States corporation with the sole mission of providing a broad range of financial support to qualified clean energy and energy efficiency projects in the US. If this Bank Green was operated on the fractional reserve system, its initial capital base could be leveraged many times over as loans. The loans could then be repaid with the income generated by the projects, avoiding inflation and allowing additional loans to be made. Unlike bank bailouts that have eaten up much of government revenue, green projects create real goods and services and real profits; and the projects could be particularly profitable if they were created without the interest burden.
The government needs to ditch its old Tin Lizzie model credit machine and create a shiny new public Firebird model; and the first things the new credit engine could be tested against are green energy projects of the type proposed by Moore. From the ashes of a failed GM could rise not only a clean new way to ride, but also a new way to fund the government and the services we expect from it.
