By Noel T. Braymer
With the outbreak of the COVID-19 virus this spring came major reductions in ridership and revenues for transit and rail passenger services. Many of the limited number of current riders are considered “essential workers.” These essential workers are often blue collar workers. While there was service to get these folks to work and back home. The reality was many people stayed home, couldn’t get to work or were told not to go to work to avoid getting sick. Since summer road traffic is much higher now than a few months ago. But buses and trains are often running with plenty of empty seats. The revenue production is so low that services are running out of money for operations. An economy is run with money circulating to pay for goods and services. When that process is disrupted, the economy slows down and people have less money and more debt they likely won’t be able to pay off. A healthy economy is based on spending which in turn expands the economy. But if spending declines, the economy shrinks.
Because of the spread of the COVID-19 virus, people are spending less money and often staying at home. We have also seen many cases of people ignoring medical advice to maintain social distance and wear masks to reduce the spread of the COVID-19 virus. There have been many news stories of people ignoring this advice which in turn causes many of these people to get sick and sometimes to die. While this should be under control hopefully before winter. In the meantime businesses and government agencies will be running deficits. What can the government do to keep businesses running and get the economy to start growing? This all comes down to money. How do you “make” money? That boils down to credit.
When you go to a bank to borrow money, the bank doesn’t have cash in its vaults to give you. What you get is a check for a sum of money. What a loan is, is an IOU ( from the bank) for the borrower to pay them back with interest. When you take out a loan the bank doesn’t give you money. It allows you to spend the money from the loan which you pay off in installments. The bank’s favorite customers are often the ones with the worst credit scores. As long as people keep paying on their debts, the bank is making money. Private Banks and other financial organizations don’t want people to pay off their loans. They prefer to have people keep paying them.
Are there alternatives to this system? The Federal Government has the power to borrow large sums of money particularly in a crisis like wars or natural disasters. The way most economic recessions are handled is for the Federal Reserve to “make money” by buying up bad debt or make very cheap interest rate loans for housing or start up companies like Uber or Shale Oil wildcatters. In the case of Uber and the Shale Oil wildcatters even with borrowed cheap money they have failed to become profitable.
Another alternative is for private banks to make loans to create more money. This is explained with a post on the website “Next City” titled “Could a State-Owned Bank Help California’s Recovery Efforts?” In the article an expert on money Paul Pryde, read “It was not long after that Pryde came across a paper from the Bank of England, that country’s central bank. Published in 2014, the paper explained how the majority of money in the modern economy isn’t created by central banks, it’s created by private commercial banks making loans. It was an epiphany for Pryde, even after a long career around banking and finance.”
“Today, Pryde is a member of the California Public Banking Alliance, and has been contributing his wealth of experience dealing with the public sector and with banks to help craft AB 310, a bill to convert the existing California Infrastructure and Economic Development Bank from just a revolving loan fund into a proper, deposit-taking, money-creating, state-owned bank. California legislators introduced the bill this month, hoping to get it passed by Labor Day as part of the state’s pandemic response and recovery efforts.”
This reminds me of the recent funding for Virgin Trains USA between Las Vegas and Victorville. Hundreds of millions of dollars was raised with bonds issued by California and Nevada to fund construction of High Speed Rail in the median of the I-15 freeway. By 2023 the initial rail service is expected to be running. After that there are plans to extend Virgin Trains USA south of Victorville on the I-15 to the Rancho Cucamonga Metrolink Station for connections to San Bernardino and Los Angeles.
“In the long-term, the California Public Banking Alliance — consisting of environmental justice advocates, racial justice advocates, tenant advocates, labor organizers and, yes, some banking and financial professionals and institutions — believe a state-owned bank could help meet a laundry list of public policy needs like affordable housing, homeownership, small business lending, or environmental sustainability. Rather than just negotiating with private banks to use their money-creation powers, they want a public bank that can utilize some of that money-creation power directly on behalf of the public itself…”
“AB 310 allocates no new budget dollars. Instead, the bill directs the California State Treasurer to move $9 billion from a $100 billion state-managed investment portfolio into a new investment in the California Infrastructure and Economic Development Bank, to essentially serve as working capital for the state-owned bank. Currently, about half of the state-managed investment portfolio is invested in U.S. Treasury bonds. The new state-owned bank would have to repay that investment eventually, and supporters say it would offer better returns to the state than plain old Treasury bonds….”
“Supporters intend to build upon the governance model of the only state-owned bank in operation, the 101 year-old Bank of North Dakota. (The Territory of American Samoa also recently opened its own bank, by the way.) In North Dakota’s case, the Governor, Agriculture Commissioner and Attorney General (all statewide elected officials) serve as the state-owned bank’s board of directors, known as the North Dakota Industrial Commission. The state of North Dakota deposits all of its revenues into its state-owned bank, which does not carry federal deposit insurance but is instead guaranteed directly by the state.”