Santa Fe Toward City-Owned Public Bank

Study Results Move Santa Fe Toward City-Owned Public Bank

posted by Matt Stannard | 159.60gb
January 19, 2016

For Immediate Release

Contact: Walt McRee, walt@publicbankinginstitute.org / Matt Stannard, matt@publicbankinginstitute.org

Interviews available with those quoted or mentioned in the release 

 http://www.publicbankinginstitute.org/study_results_move_santa_fe_toward_city_owned_public_bank

Significant savings of taxpayer dollars and sizable predicted profits were just two of the positive results of a 10 month study undertaken by the City of Santa Fe, NM, moving the city one step closer toward creating America’s first new publicly-owned bank in almost 100 years.
The study concludes that a public bank for the city is both feasible and would have a positive impact financial impact of over $24 million on the city over a seven-year period.
“While the findings are impressive, they don’t surprise us – publicly-owned banks are inherently more efficient and profitable” said Walt McRee, Chair of the Public Banking Institute, “and this study adds powerful new evidence that civic policy makers across the country should be paying attention to.”
Santa Fe’s study was initiated to investigate an alternative to lagging city finances, a common reality of municipal managements around the country. The US’s only public bank, the Bank of North Dakota, “has demonstrated in numerous ways that a public bank can help local governments greatly improve the financial climate of their communities,” McRee added.
Lead consultant Katie Updike, a former manager for the U.S. Farm Credit System and the Bank for Cooperatives, headed up the study with the assistance of Dr. Christopher A. Erickson, a professor of economics, applied statistics, and international business at New Mexico State University and an analyst at Arrowhead Center, a business development organization in the state. The authors write that a public bank in Santa Fe “has the potential to provide enhanced fiscal management, improved net interest rate margins, and a more robust local lending climate.”
"The projected fiscal and economic impact to the City exceeds $24 million in the first seven years, based upon assumptions of how much of the City’s deposits are deployed in self-funding and reduced collateral programs," the authors conclude.
Mike Krauss, Chair of the Pennsylvania Project, a statewide public banking initiative, said the study results are very important because the findings can reasonably be expected to apply to larger cities.
"It shows there are big benefits of a public bank for even small cities," Krauss said. "The benefits to larger cities, like Philadelphia or San Francisco, will be exponentially larger."
Nichoe Lichen, of Santa Fe's We Are People Here, agreed with Krauss. "It is Santa Fe specific but there is a lot of thinking that applies to other areas as well," she said.
Among the study’s most significant findings, McRee said, is that a city-owned public bank could allow Santa Fe to fund its own debt rather than relying on Wall Street lenders. “All across America, cities, counties and states are beset by costly and destructive lending practices by Wall Street banks,” McRee said, “and these interest costs and fees have seriously undermined municipal financial and civic stability.”
As the Santa Fe New Mexican reported last week, the city “estimates it could have saved $10 million since 2009 on its $80 million of current debt had the government been able to borrow from its own community instead of Wall Street.” The study concludes that by Santa Fe funding its own debt the “City could fund some of its own construction on capital projects, and manage its liquidity in more than one way. This would save the City money which could be used to fund City activities or mitigate taxes."
The study’s authors emphasize that creating a public bank in New Mexico’s small capital city would be a significant change in the financial structure of the region. Because of this, “it is critical that the City build the trust and capacity [in a public bank] steadily and professionally. This also has the added advantage of building the tools and the relationships with the community banks to enhance their ability to contribute to the well-being of the City and the community."
This prudent cautiousness is accompanied by widespread public support for Santa Fe to “use its cash deposits actively to fund at least the design and construction phase of infrastructure projects.” A Santa Fe Public Bank "promise[s] to reduce the current deficit projected by City management," they conclude.
“This is a benchmark moment in the growing national movement of cities and states who are asking the same questions as Santa Fe:” says McRee, “Can our communities benefit by investing our money locally rather than borrowing from private Wall Street banks?”
The Santa Fe initiative is one of dozens of other similar processes now underway around the country. The Public Banking Institute, a non-profit, non-partisan consulting and educational organization dedicated to the creation of new publicly-owned banks in the United States, provides support for these efforts.

Iceland Sentences 26 Corrupt Bankers To 74 Years In Prison

by Maurice Bedard | Jan 8, 2016 | News - LoanSafe.org

http://www.loansafe.org/iceland-sentences-26-corrupt-bankers-to-74-years-in-prison

(Source: AmericanNewsx) – Iceland just sentenced their 26th banker to prison for his part in the 2008 economic collapse. The charges ranged from breach of fiduciary duties to market manipulation to embezzlement.
When most people think of Iceland, they envision fire and ice. Major volcanoes and vast ice fields are abundant due to its position on the northern part of the Mid-Atlantic Ridge. (A hot July day in Reykjavik is around 55 degrees.) However, Iceland is also noted for being one of the Nordic Socialist countries, complete with universal health care, free education and a lot other Tea Potty nightmares. Therefore, as you might imagine, they tend to view and react to economic situations slightly differently than the U.S.
When the banking induced “Great Recession of ’08” struck, Iceland’s economic hit was among the hardest. However, instead of rewarding fraudulent banking procedures with tons of bailout money, they took a different path.
Prior to the recession, Iceland had one of the more thriving economies in the world, in spite of the fact that their total population (327,000) wouldn’t even fill a mid-sized American city. When the recession struck, they were among the earliest and hardest hit. However, instead of running to the vaults to shower the banks with money, they let the banks fail. They also resisted traveling down the European/Republican austerity road. Instead, they kept their social programs intact at a time when they were most needed.
And, they sent fraudulent bankers to jail.
When Iceland’s three major banks collapsed, it resulted in defaults totaling $114 billion in a country with agross domestic product (GDP) of only $19 billion. In October, 2008 the parliament passed emergency legislation to take over the domestic operations of the major banks and established new banks to handle them. They did not, however, take over any of the foreign assets or obligations. Those stayed with the original banks, right into bankruptcy.
They then brought charges against several banking executives for fraud and market manipulation, resulting in sentences ranging from four to five and a half years. As the special prosecutor said,

Why should we have a part of our society that is not being policed or without responsibility?

In the U.S., we simply tapped a few wrists with small fines, that ended up being paid by their respective banks.(Can you say “got off scot free?”)
Sending the bank executives off to play rock hockey for a few years didn’t solve the problem, but it did send a message not to do that again.
At its worst, Icelandic currency, the Icelandic krona (ISK) was trading at around 250 ISK per Euro. In order to qualify for an IMF (International Monetary Fund) loan, Iceland raised interest rates to 18%, which, of course, attracted bank deposits. Iceland also received a $2.5 billion loan from Europe’s Nordic countries.
To power its recovery, Iceland utilized its natural advantages such as its clean, cheap geothermal energy to attract the tech industry. Icelandic commercial fishing remained strong and as the general world economy picked up, the tourist industry bloomed. The deeply depreciated krona also helped make Iceland and Icelandic products very attractive, economically.  On the banking front, they facilitated domestic debt restructuring and fiscal adjustments as conditions changed.
As to how it has all turned out, here’s what the International Monetary Fund Survey has to say about it:

Iceland has rebounded after the 2008/9 crisis and will soon surpass pre-crisis output levels with strong performance in tourism and fisheries. Debt ratios are on a downward path and balance sheets have broadly been restored. The financial sector is back on track though with some important items remaining on the docket.

As the above survey also states, Iceland is “the first 2008-10 crisis country in Europe to surpass its pre-crisis peak of economic output.”
The krona is now running 142 ISK per Euro. (up from 290/1 in 2008) The 2014 inflation rate was 2.05%.(down from 12.59% in 2008) The wage index is running at 190.9. (up from 132.8 in 2008)
Btw, they did all this while keeping their social welfare intact. (There goes another bagger day-dream.)
Iceland’s President, Olafur Ragnar Grimmson explained how the country managed to recover from the global financial disaster,

We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.

When asked whether or not other countries, Europe in particular, would succeed with Iceland’s “let the banks fail” policy, President Grimmson gave his answer,

Why are the banks considered to be the holy churches of the modern economy? Why are private banks not like airlines and telecommunication companies and allowed to go bankrupt if they have been run in an irresponsible way? The theory that you have to bail out banks is a theory that you allow bankers enjoy for their own profit, their success, and then let ordinary people bear their failure through taxes and austerity. 
People in enlightened democracies are not going to accept that in the long run.

(Source: AmericanNewsx)

Confessions of a Former Credit Suisse Swiss Banker

BoE official oversaw FCA retreat from inquiry into banking

Last updated: January 12, 2016 9:15 pm

BoE official oversaw FCA retreat from inquiry into banking culture

Emma Dunkley and Caroline Binham

http://www.ft.com/intl/cms/s/0/414f6e0c-b918-11e5-b151-8e15c9a029fb.html

©FT Montage/Dreamstime

A Bank of England official oversaw the move by the City regulator to scrap a review into Britain’s banks, it emerged on Tuesday, just a day after the Financial Conduct Authority insisted external pressure had not influenced its decision.

Podcast

Whose decision was it to drop UK bank culture review?

There’s a deepening row over why the UK financial watchdog decided to drop a review into bank culture. Patrick Jenkins, FT financial editor, discusses the controversy with Emma Dunkley, the FT’s retail banking correspondent and John Mann, opposition Labour MP and member of the influential Treasury select committee.

Megan Butler, an executive director at the BoE’s Prudential Regulation Authority (PRA), was a key figure overseeing the plans to drop the FCA’s inquiry into whether banks had changed their working culture since the financial crisis, according to documents seen by the Financial Times. She was parachuted in to the City regulator at the start of September on secondment.

The revelation of her involvement threatens to fuel political concerns that the regulator came under outside influence to drop the probe. John Mann, a Labour MP on the Treasury select committee, called for Ms Butler to appear as part of a special hearing the committee is holding next week over the shelving of the review.

Ms Butler arrived at the FCA shortly before Martin Wheatley was forced out of his role as the regulator’s chief executive; the decision to drop the inquiry was made two weeks after his departure.

• 
  
• 
  
• 
  
• 
  

More

IN UK Politics & Policy

• Tories move to centre-ground on pensions
• Pension tax perks for high earners to go
• Ministers fear surge in Eurosceptic MPs
• Khan woos businesses in mayoral battle

Follow the twists and turns with UK Politics- our free email briefing on each day's main political developments.

Sign up now

The FCA said in a statement that as Tracey McDermott, the acting head, “has previously said, the FCA decision to not continue with the thematic review on culture was taken by her. To suggest there has been any PRA/BoE influence on this decision is simply untrue.”
A Bank of England spokesperson said the central bank had no influence or role in the FCA decision and it would be wrong to suggest otherwise. “The Bank of England has consistently raised issues around banking culture and over the last year has completed its review into fair and effective markets and introduced rules on the senior managers regime and bankers bonuses which aim to improve accountability across the sector.”
The PRA and FCA were created when the old City regulator, the Financial Services Authority, was split in two in 2013; a plan that had been part of the Conservative manifesto in 2010, essentially reversing a move by Labour more than a decade earlier to strip the Bank of England of banking supervisory powers.
The PRA, part of the BoE, is in charge of ensuring the safety and soundness of lenders’ and insurers’ balance sheets, while the FCA takes the lead on conduct and consumer protection across the financial sector.
Since the Conservatives’ outright victory in last May’s election, the government has sought to take a less confrontational stance towards the City — a shift echoed by regulators.
The FCA’s decision to drop the review caused a political uproar and sparked accusations that it stemmed from pressure from the Treasury. The FCA said on Monday it had not held “any discussions” with the BoE, the PRA or the Treasury “about not continuing with the project”.

In response to a Freedom of Information request, the FCA said it had first informed the PRA of its decision not to continue with the probe on December 17.

Ms Butler was a key figure at the Bank, playing a “major role in shaping the PRA” as a “highly valued member of the senior management team”, said Andrew Bailey, chief executive of the authority, when her secondment was announced.
Regulatory insiders stressed that her secondment to the FCA did not equate to her being the PRA’s eyes and ears within its sister regulator.

©Bank of England

Megan Butler arrived at the FCA just before Martin Wheatley was forced out

The first senior executive at the PRA to be seconded to another organisation, she replaced Ms McDermott as head of supervision after the latter was promoted to FCA acting chief executive after Mr Wheatley’s departure.
Ms McDermott, who was widely tipped to take the chief executive role full-time, pulled out of the race to succeed him, in a move announced by George Osborne, the chancellor, last week.
City executives tend to see the PRA as a more approachable regulator than the FCA, while Mr Bailey has won plaudits in Whitehall and among bankers and his fellow BoE officials for his measured style.

The regulator originally planned its review to focus on how the “tone from the top” of banks was reflected in middle management appraisals, pay and promotions, and how concerns were raised and acted on at retail and wholesale banks.

But in its internal paper from September, devised by a number of people at the FCA, the watchdog proposed it should no longer be involved in assessing how banks treated staff who raised concerns internally, because this could be better examined by other means, including by the Banking Standards Board.
The FCA said it would not publicise “good” and “poor” practices at banks because it was not perceived as being the expert on working culture. Instead, it said the onus was on the industry to identify and measure good practices.

It said there should be “no further ‘testing’ of firm practices” because assessing whether consumer outcomes were influencing banks’ pay decisions “will be challenging”.
The paper also noted that obstacles to cultural change at middle-management level were a key risk for the retail banking sector only, rather than wholesale banks. But it admitted the success of this approach would be “dependent on the willingness of firms to participate”.

A Loophole Allows Banks – But Not Other Companies – to Create Money

A Loophole Allows Banks – But Not Other Companies – to Create Money Out of Thin Air

Posted on January 15, 2016 by WashingtonsBlog

One of the Main Causes of Our Economic Problems

The central banks of the United States, England, and German – as well as 2 Nobel-prize winning economists – have all shown that banks create money out of thin air … even if they have no deposits on hand.
The failure of most governments and most mainstream economists to understand this fact – they instead believe the myth that people make deposits at their bank, and these deposits are then lent out to new borrowers – is the main cause of our rampant inequality and economic problems.
But how do banks actually make loans before they have sufficient deposits on hand?
Economics professor Richard Werner – the creator of quantitative easing – noted in September that the field of economics has been lost in the woods for an entire century because it has failed to understand how banks actually create money.
Professor wrote an academic paper in 2014 concluding:

What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank.
***
The ‘lending’ bank records a new ‘customer deposit’ and informs the ‘borrower’ that funds have been‘deposited’ in the borrower’s account.  Since neither the borrower nor the bank actually made a deposit at the bank—nor, in connection with this transaction, anyone else for that matter, it remains necessary to analyse the legal aspects of bank operations. In particular, the legality of the act of reclassifying bank liabilities (accounts payable) as fictitious customer deposits requires further, separate analysis. This is all the more so, since no law, statute or bank regulation actually grants banks the right (usually considered a sovereign prerogative) to create and allocate the money supply. Further, the regulation that allows only banks to conduct such creative accounting (namely the exemption from the Client Money Rules) is potentially being abused through the act of‘renaming’ the bank’s own accounts payable liabilities as ‘customer deposits’ when no deposits had been made, since this is also not explicitly referred to in the banks’ exemption from the Client Money Rules, or in any other statutes, laws or regulations, for that matter.

Professor Werner explained:

Although the implementation of banking services relies heavily on accounting, hardly any scholarly literature exists that explains in detail the accounting mechanics of bank credit creation and precisely how bank accounting differs from corporate accounting of non-bank firms.
***
It can be deduced that this ability of banks is likely derived from the operational, that is, accounting conventions and regulations of banking. These either differ from those of non-banks, so that only banks are able to create money, or else non-banks have missed out on the significant opportunities money creation may afford.
In order to identify the difference in accounting treatment of the lending operation by banks, we adopt a comparative accounting analysis perspective.
***
When the non-financial corporation, such as a manufacturer, grants a loan to another firm, the loan contract is shown as an increase in assets: the firm now has an additional claim on debtors — this is the borrower’s promise to repay the loan. The lender purchases the loan contract, treated as a promissory note. Meanwhile, when the firm disburses the loan (and hence discharges its obligation to make the money available to the borrower), it is drawing down its cash reserves or monetary deposits with its banks. As a result, one gross asset increase is matched by an equally-sized gross asset decrease, leaving net total assets unchanged.
In the second case, of a non-bank financial institution, such as a stock broker engaging in margin lending, the loan contract is the claim on the borrower that is added as an asset to the balance sheet, while the disbursement of the loan – for instance by transferring it to the client or the stock exchange to settle the margin trade conducted by its client – reduces the firm’s monetary balances (likely held with a bank). As a result, total assets and total liabilities remain unchanged.
While the balance sheet total is not affected by the granting and disbursement of the loan in the case of firms other than banks, the picture looks very different in the case of a bank. While the loan contract shows up as an increase in assets with all types of corporations, in the case of a bank the disbursement of the loan …  appears as a positive entry on the liability side of the balance sheet, as opposed to being a negative entry on the asset side, as in the case of non-banks. As a result, it does not counter-balance the increased gross assets. Instead, both assets and liabilities expand. The bank’s balance sheet lengthens on both sides by the amount of the loan (see the empirical evidence in Werner, 2014a and Werner, 2014c). Thus it is clear that banks conduct their accounting operations differently from others, even differently from their near-relatives, the non-bank financial institutions.
***
Surprisingly, we find that unlike the other firms whose balance sheets shrank back in Step 2, the bank’s accounts seem in standstill, unchanged from Step 1. The total balance sheet remains lengthened. No balance is drawn down to make a payment to the borrower.
So how is it that the borrower feels that the bank’s obligation to make funds available are being met? (If indeed they are being met). This is done through the one, small but crucial accounting change that does take place on the liability side of the bank balance sheet in Step 2: the bank reduces its ‘account payable’ item by the loan amount, acting as if the money had been disbursed to the customer, and at the same time it presents the customer with a statement that identifies this same obligation of the bank to the borrower, but now simply re-classified as a ‘customer deposit’ of the borrower with the bank.
The bank, having ‘disbursed’ the loan, remains in a position where it still owes the money. In other words, the bank does not actually make any money available to the borrower: No transfer of funds from anywhere to the customer or indeed the customer’s account takes place. There is no equal reduction in the balance of another account to defray the borrower. Instead, the bank simply re-classified its liabilities, changing the ‘accounts payable’ obligation arising from the bank loan contract to another liability category called ‘customer deposits’.
While the borrower is given the impression that the bank had transferred money from its capital, reserves or other accounts to the borrower’s account (as indeed major theories of banking, the financial intermediation and fractional reserve theories, erroneously claim), in reality this is not the case. Neither the bank nor the customer deposited any money, nor were any funds from anywhere outside the bank utilised to make the deposit in the borrower’s account. Indeed, there was no depositing of any funds.
In Step 1 the bank had a liability — an obligation to pay someone. How can it discharge this liability? A law dictionary states:

“The most common way to be discharged from liability … is through payment.” ¹

And yet, no payment takes place in Step 2 (and hence in the entire ‘lending’ process), which is why the bank’s balance sheet in total remains stuck in Step 1, when all lenders still owe the money to their respective borrowers. The bank’s liability is simply re-named a ‘bank deposit’. However, bank deposits are defined by central banks as being part of the official money supply (as measured in such official ‘money supply’ aggregates as M1, M2, M3 or M4). This confirms that banks create money when they grant a loan: they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks. Thus banks do not just grant credit, they create credit, and simultaneously they create money.
***
Instead of discharging their liability to pay out loans, the banks merely reclassify their liabilities originating from loan contracts from what should be an ‘accounts payable’ item to ‘customer deposit’ (in practise of course skipping Step 1 entirely and thus neglecting to record the accounts payable item). The bank issues a statement of its liability to the borrower, which records its liability as a ‘deposit’ of the borrower at the bank.
***
What enables banks to create credit and hence money is their exemption from the Client Money Rules. Thanks to this exemption they are allowed to keep customer deposits on their own balance sheet. This means that depositors who deposit their money with a bank are no longer the legal owners of this money. Instead, they are just one of the general creditors of the bank whom it owes money to. It also means that the bank is able to access the records of the customer deposits held with it and invent a new ‘customer deposit’ that had not actually been paid in, but instead is a re-classified accounts payable liability of the bank arising from a loan contract.
***
What makes banks unique and explains the combination of lending and deposit-taking under one roof is the more fundamental fact that they do not have to segregate client accounts, and thus are able to engage in an exercise of ‘re-labelling’ and mixing different liabilities, specifically by re-assigning their accounts payable liabilities incurred when entering into loan agreements, to another category of liability called ‘customer deposits’.
What distinguishes banks from non-banks is their ability to create credit and money through lending, which is accomplished by booking what actually are accounts payable liabilities as imaginary customer deposits, and this is in turn made possible by a particular regulation that renders banks unique: their exemption from the Client Money Rules. [Werner gives a concrete example on British law for banking and non-banking institutions.]
***
It would appear that those who argue that bank regulations should be liberalised in order to create a level playing field with non-banks have neglected to demand that the banks’ unique exemption from the Client Money Rules – a regulation benefitting only banks – needs to be deregulated as well, so that banks must also conform to the Client Money Rules.
***
Alternatively, one could argue that it would level the playing field, if the banks’ current exemption from the Client Money Rules was also granted to all other firms — in other words, if the Client Money Rules themselves were abolished. This would allow all firms to also engage in the kind of creative accounting that has become an established practise among banks. It would certainly ensure that competition between banks and non-bank financial institutions would become more meaningful, since the exemption from the Client Money Rules, together with the banks’ deployment of this exemption for the purpose of re-labelling their liabilities, has given significant competitive advantages to banks over all other types of firms: banks have been able to create and allocate money – virtually the entire money supply in the economy – while no other firm is able to do the same.
***
Basel rules were doomed to failure, since they consider banks as financial intermediaries, when in actual fact they are the creators of the money supply. Since banks invent money as fictitious deposits, it can be readily shown that capital adequacy based bank regulation does not have to restrict bank activity: banks can create money and hence can arrange for money to be made available to purchase newly issued shares that increase their bank capital. In other words, banks could simply invent the money that is then used to increase their capital. This is what Barclays Bank did in 2008, in order to avoid the use of tax money to shore up the bank’s capital: Barclays ‘raised’ £5.8 bn in new equity from Gulf sovereign wealth investors — by, it has transpired, lending them the money! As is explained in Werner (2014a), Barclays implemented a standard loan operation, thus inventing the £5.8 bn deposit ‘lent’ to the investor. This deposit was then used to ‘purchase’ the newly issued Barclays shares. Thus in this case the bank liability originating from the bank loan to the Gulf investor transmuted from (1) an accounts payable liability to (2) a customer deposit liability, to finally end up as (3) equity — another category on the liability side of the bank’s balance sheet. Effectively, Barclays invented its own capital. This certainly was cheaper for the UK tax payer than using tax money. As publicly listed companies in general are not allowed to lend money to firms for the purpose of buying their stocks, it was not in conformity with the Companies Act 2006 (Section 678, Prohibition of assistance for acquisition of shares in public company). But regulators were willing to overlook this. As Werner (2014b) argues, using central bank or bank credit creation is in principle the most cost-effective way to clean up the banking system and ensure that bank credit growth recovers quickly. The Barclays case is however evidence that stricter capital requirements do not necessary prevent banks from expanding credit and money creation, since their creation of deposits generates more purchasing power with which increased bank capital can also be funded.

In other words, banks have been granted a loophole – not available to other businesses – to use a fiction that the banks’ liabilities are really assets -which has given them a huge competitive advantage over everyone else.
No wonder banks now literally own the country … including the entire political system.
But why don’t mainstream economists understand how banks actually create money?
Economics professor Steve Keen explained last week in Forbes:

In any genuine science, empirical data like this would have forced the orthodoxy to rethink its position. But in economics, the profession has sailed on, blithely unaware of how their model of “banks as intermediaries between savers and investors” is seriously wrong, and now blinds them to the remedy for the crisis as it previously blinded them to the possibility of a crisis occurring.
A wit once defined an economist as someone who, when shown that something works in practice, replies “Ah! But does it work in theory?”

Mainstream economic models are fundamentally wrong.  The theories taught in economics programs are riddled with errors.  For example, they don’t take into account such basic factors as private debt.
That’s why the 2008 crash happened … and that’s why the economy is heading south now.
So things are going to get worse and worse until the actual manner in which money and credit are created is taken into account.

Interview with Muhammad bin Salman, Saudi Arabia's deputy crown prince

Transcript: Interview with Muhammad bin Salman

The Economist meets Saudi Arabia's deputy crown prince, the man who wields power behind the throne of his father, King Salman

Jan 6th 2016 | Diriya | Middle East and Africa

http://www.economist.com/saudi_interview 

Muhammad bin Salman, Saudi Arabia’s deputy crown prince and the country's defence minister, spoke to The Economist on January 4th. As part of a five-hour conversation, he gave his first on-the-record interview, which we have transcribed below. Our briefing includes quotations from both this and the broader discussion. Our cover leader is available here and more analysis on a possible Aramco listing is here.
The Economist: Let’s focus first on the recent executions. Why did they take place now, so many years after the terrorist attacks in Saudi Arabia? And why did you include a prominent shia cleric?Muhammad bin Salman: First of all, these were sentenced in a court of law with charges related to terrorism and they went through three layers of judicial proceedings. They had the right to hire an attorney and they had attorneys present throughout each layer of the proceedings. The court doors were also open for any media people and journalists, and all the proceedings and the judicial texts were made public. And the court did not, at all, make any distinction between whether or not a person is Shi’ite or Sunni. They are reviewing a crime, and a procedure, and a trial, and a sentence, and carrying out the sentence.
But these executions have provoked violent reactions in Iran. Your embassy was attacked, you’ve broken off diplomatic relations, as have Bahrain and Sudan. What will be the consequence of this escalation of regional tensions?We view them as a strange thing, that there are demonstrations against Saudi Arabia in Iran. What is the relationship between a Saudi citizen who committed a crime in Saudi Arabia, and a decision made by a Saudi court. What has this to do with Iran? If this proves anything it proves that Iran is keen on extending its influence over the countries of the region.
Did you not unfairly escalate tensions by breaking off diplomatic relations?On the contrary, we fear that they will be further escalated. Imagine if any Saudi diplomat, or one of their families or children are attacked in Iran. Iran’s position then will be much more difficult. So we prevented Iran from having to undergo such an embarrassment. The Saudi mission was set ablaze and the Iranian government is watching. If a child, or a diplomat, or their families are attacked, what could happen? Then we will have the real conflict and the real escalation.
Are you suggesting conflict between Iran and Saudi Arabia, outright conflict, is a possibility?Because of this procedure?
And the consequences thereof.If it’s because of this procedure I don’t believe that this could be a cause to further any tension between Saudi Arabia and Iran. Because Iranian escalation has already reached very high levels and we try as hard as we can to not escalate anything further, we only deal with the procedures and steps taken against us.
Is war between your two countries, direct war, possible?It is something that we do not foresee at all, and whoever is pushing towards that is somebody who is not in their right mind. Because a war between Saudi Arabia and Iran is the beginning of a major catastrophe in the region, and it will reflect very strongly on the rest of the world. For sure we will not allow any such thing.
Do you consider Iran to be your biggest enemy?We hope not.
One area where there might be considered to be what you might call proxy conflict between you is Yemen. You are the architect of the war in Yemen; when will it end?First of all I’m not the architect of the Yemen operation. We are a country of institutions. The decision to proceed with the operation in Yemen, this is a decision to do with the Ministry of Foreign Affairs, the Ministry of Defence, with the intelligence, the council of ministers, and the council of security and political affairs, and then all recommendations are submitted to His Majesty, and the decision to go forward is with His Majesty. My job as the minister of defence is to implement whatever decision his majesty has ordered. And I will submit any threats that I see. And to make preparations for any threats.
The decision was taken soon after you became defence minister. When do you expect the operation to finish?Regarding the fact that the decision was made after I became minister of defence, why did we forget the fact that Houthis usurped power in the capital, Sana’a, after His Majesty became king? This has nothing to do with the fact that I became minister. It has everything to do with what the Houthis did. I have surface-to-surface missiles right now on my borders, only 30-50 km away from my borders, the range of these missiles could reach 550km, owned by militia, and militia carrying out exercises on my borders, and militia in control of warplanes, for the first time in history, right on my borders, and these war planes that are controlled by the militia carry out activities against their own people in Aden. Is there any country in the world who would accept the fact that a militia with this kind of armament should be on their borders? Especially that they dealt with total disregard of UN Security Council resolutions, and posed a direct threat to our national interests. And we had a previous experience, a bad experience with them back in 2009. The operations carried out were supported and upheld by the UN Security Council, without any opposition.
When the operations began, many expected it to be quick. Now, ten months on, are you in a military quagmire?No, there were different objectives. The first objective of the Decisive Storm was to disable the main capabilities of this militia. The air capabilities, their air defence capabilities, to destroy 90% of their missile arsenal. And then we started the process of a political solution in Yemen, which is a whole different stage. All of our efforts are to push for the political solution. But this does not mean we will allow for the militia to expand on the ground, they must realise that every day they do not get closer to the political solution, they lose on the ground.
How long will it take?Nobody can predict that in a war, not from the greatest of generals to the smallest of generals. We could see Daesh today and nobody could predict when they’re going to be defeated. But what I could say was ten months ago half of Aden was not in control of government, and now over 80% of Yemeni lands are under the control of the legitimate government. And I want to emphasise that the world today has uncovered the games played by the Houthis, especially the games that they’ve been using regarding humanitarian aid.

You’re also in charge of the economy. Let’s now turn to the budget. The price of oil is $35 a barrel, your deficit last year, 2015, was 15% of GDP. Does Saudi Arabia face an economic crisis?
We’re too far from it. We are further than the ’80s and the ’90s. We have the third-largest reserve in the world. We were able to increase our non-oil revenues this year alone by 29%. We were able to come out with more positive things than what most people thought about the economy of Saudi Arabia, regarding deficit and regarding spending. And we have clear programmes over the next five years. We announced some of them, and the rest we will announce in the near future. In addition to this, my debt-to-GDP is only 5%. So I have all points of strength, and I have the opportunities to increase our non-oil revenues in many sectors, and I have a global economic network.
How will you increase non-oil revenues? Will you introduce VAT? Will you introduce income taxes?
There are going to be no income taxes, and no wealth taxes. We’re talking about taxes or fees that are supported by the citizen, including the VAT and the sin tax. They will create good revenues, but not the only revenues. We have many opportunities in mining, we have more than 6% of world reserves of uranium, we have many unutilised assets. We have four million square metres in Mecca alone of unutilised state-owned lands. The value in the market is very high; we have many assets that could be transformed into investment assets. We believe we could reach a point of non-oil revenues reaching $100 billion over the next five years.
When will you introduce the VAT?
We’ll try to do that by the end of 2016 or 2017, and we’ll try to expedite it.
And what will you privatise to raise revenues?
Health care, educational sector, some military sectors such as military industries and some state-owned companies. It will decrease some of the pressure that the government has, and some of them may create good profit.
Can you imagine selling shares in Saudi Aramco?
This is something that is being reviewed, and we believe a decision will be made over the next few months. Personally I’m enthusiastic about this step. I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco.
You have said that one of the challenges is to diversify the Saudi Arabian economy away from oil. What sectors will be priority sectors in that diversification?
Mining, subsidy reforms. We have only 20% of those middle classes and lower who benefit from subsidies. We target the 80% and we try to keep the interests of the middle classes and lower; they will generate good revenues. And as I told you there are unutilised assets: expanding religious tourism, like increasing the numbers of tourists and pilgrims to Mecca and Medina will give more value to state-owned lands in both cities.
You have done some price increases in this budget—electricity, gasoline—but you still have many subsidies. Do you aim to get rid of subsidies completely?We want to reach free energy markets, but with subsidy programmes for those with low income, and not to have the subsidy in the form of lowering the energy prices, but through other programmes. And also some of the most important assets that we’re working on: We have a very magnificent area north of Jeddah, between the cities of Umluj and Wuj, there are almost 100 islands there, in one atoll. The temperature is ideal, five to seven degrees cooler than Jeddah. It’s virgin land, I spent the last eight holidays there. I was shocked to discover something like this in Saudi Arabia, and there were steps taken to preserve this land, 300km by 200km. This is one of the assets that we target, and we believe it has an added value other than generating income for state funds. So we have many unutilised assets. In Mecca, Medina, in rural areas and in urban areas. Jeddah for example: there is a land, total area about five million square metres, right on the beach front, in the heart of Jeddah, it’s owned by the air defence. The value of the land itself is about $10bn. The cost of transferring all the structures and buildings is about $300m. So this is a big waste. So to utilise the unutilised assets will create profit and generate development, this is massive work that we’re addressing. We are targeting to introduce new assets into the state-owned funds that are equivalent to $400bn, over the next few years.
Assets that you will privatise?These will go to the funds, and then will turn into projects, and into companies, and then will be offered on IPOs to the public.
This is a Thatcher revolution for Saudi Arabia?
Most certainly. We have many great, unutilised assets. And we have also special sectors that can grow very quickly. I’ll give you one example. We are one of the poorest countries when it comes to water. There’s one Saudi company that’s an example among many companies, like Amarai dairy company, their share in the Omani market is 80%. Their share in the Kuwaiti market is more than 20%. Their share in the Emirati market than 40%. In Egypt, where there is the Nile, their share is 10%. One Saudi company. We have other dairy, agricultural companies, and you can also do the same with the banking sector. The mining sector. The oil and petrochemical sector. There are many enormous opportunities to expand and develop.
This will require tremendous investment. One estimate I read said $4 trillion between now and 2030. Where will this money come from?
This is a report from McKinsey, not from the Saudi government. We try to be optimistic in some parts even more, and in some parts we try to be conservative. Anyway, McKinsey participates with us in many studies, but these investments we’ll try to attract from many sources: the Saudi investor, the state-owned funds, the GCC [Gulf Cooperation Council] funds, and the international funds.
Why would a foreign investor want to invest in Saudi Arabia now?
Profitability is the question, and this is what we’re trying to offer in order to attract investment. And this happens at the same time while having good regulations, and that could guarantee the safety of their investments. And we’re not a country new to foreign investment. The largest of international companies are present in the Saudi market: Boeing, Airbus, GE, GM, Sony, Siemens; all the large players are in the Saudi market. And all the major and key banks are opening branches in Saudi Arabia. So I’m not just opening up to the world; I’m already open to the world. I’m only giving out opportunities.
One challenge we haven’t discussed yet is the youth of the Saudi population: 70% of your country’s population is aged 30 and under. How will you create jobs for these people?We have great opportunities to create jobs in the private sector. The mining sector will help us a great deal in creating jobs, the programme addressing the pilgrims and the visitors will also generate many jobs, the investments will also create jobs. We do not expect that our unemployment will grow, we believe it will decline over the next few years, to a good extent. At the same time I have reserves now, ten million jobs that are being occupied by non-Saudi employees that I can resort to at any time of my choosing. But I don’t want to pressure the private sector, unless this is the last resort.
You would prevent the hiring of foreigners?
We’re trying to resort to creating jobs, if we cannot cover all, then we’re forced to exert pressure on the private sector, like what was done, the Saudisation programme.
The shift you’re describing: introduction of non-oil tax revenue, reduction of subsidies, move towards private sector employment; it suggests the remaking, in many ways, of the Saudi economy and the Saudi social contract. Won’t that force broader change in what is still a very conservative society?
This one thing is not at all related to the other. We have our values: it is important to us, the participation in decision making; it is important to us to have our freedom of expression; it is important to us to have human rights. We have our own factors and values and principles as the Saudi society and we try to make progress according to our own needs. Our situation today is not the same as it was 50 years ago. Fifty years ago we did not even have a legislative body. Today we have women with good representation at the parliament, and women do vote and nominate themselves for elections, and today we are making progress. According to our own needs, according to our own pace, and not as a response to any other model.
But you believe you can have more taxation without more representation?
There are no taxes.
But you are introducing taxes.
We’re talking about different forms of taxes. We’re talking about VAT, it will not be applied to any of the basic products; it will be on accessories.
The VAT will not be on basic products.Such as water, dairy, milk…
They will be excluded?No doubt. If they will influence the price.
I see. But you can have that kind of taxation without an increase in representation?
Again, one thing is not related to the other. This is not a decision from the government against the people. This is the decision of Saudi Arabia. With the government that represents the people. Before any decision to reform, we work on many workshops that represent many people.
What about broader social reform? How can you create a high-productivity modern economy with a vibrant tourist industry, a vibrant health-care sector, a vibrant education industry, if women can’t drive, if women can’t travel without permission.
Women today can travel. They work in the business sector…
But with the permission of their family members.
This is different. When you’re talking about permission, you’re talking about women who do not reach a certain age. Not a woman who’s responsible for herself. This has its own social criteria and religious criteria. Some of them are things we can change, and some things even if we want to change we cannot do that. But I guarantee to you that there are no obstacles in the way of women furthering their participation and working in the…
So why is Saudi Arabia’s rate of women in the workforce, 18%, one of the lowest in the world?Culture of women in Saudi Arabia; the woman herself. She’s not used to working. She needs more time to accustom herself to the idea of work. A large percentage of Saudi women are used to the fact of staying at home. They’re not used to being working women. It just takes time.
Do you think having a greater proportion of women in the workforce would be good for Saudi Arabia?
No doubt. A large portion of my productive factors are unutilised. And I have population growth reaching very scary figures. Women’s work will help in both of these issues.

You are one of the 70% of Saudi Arabians who are aged thirty and under. You are in charge of the country’s defence and its economy, you epitomise in many ways the new generation of Saudi Arabia. What kind of Saudi Arabia do you want to create?
The Saudi Arabia that I hope for, as well as the other 70%: a Saudi Arabia that is not dependent on oil; a Saudi Arabia with a growing economy; a Saudi Arabia with transparent laws; a Saudi Arabia with a very strong position in the world; a Saudi Arabia that can fulfil the dream of any Saudi, or his ambition, through creating enticing incentives, the right environment; a Saudi Arabia with sustainability; a Saudi Arabia that guarantees the participation of everyone in decision-making; a Saudi Arabia that is an important addition to the world and participates in the production of the world, and participates in facing the obstacles or the challenges that face the world. My dream as a young man in Saudi Arabia, and the dreams of men in Saudi Arabia are so many, and I try to compete with them and their dreams, and they compete with mine, to create a better Saudi Arabia.
You lay out a very positive vision for Saudi Arabia, yet we are living in a time, one of the most dangerous times in the region for many, many years. How do you juxtapose those two visions?
You’re from Britain, and I am a fan of Churchill. And Churchill said that opportunities come during crises. And I recall Churchill’s statement whenever I see the obstacles or the crises in the region. So this is how I view the challenges or the crises in the region.
And has the crisis in the region become more difficult with the United States’ disengagement from the region?
We understand the work carried out by the United States. America is carrying out many efforts. We try to assist with all the efforts carried out by the United States. We try to express our point of view and I can tell you that work between us and the United States is very strong and very magnificent. But the United States must realise that they are the number one in the world and they have to act like it.
Have they not been acting like it?
We are concerned that something like this may happen.
Do you feel let down by them?We understand. We realise that we are part of the problem of not putting our own perspective through to them. We did not put enough efforts in order to get our point across. We believe that this will change in the future.
Is Saudi Arabia stepping up to a new kind of leadership role in the region?
In the region we are dealing with all of our allies on an equal footing. And we’re all dealing with facing the challenges of the region. We and the GCC countries, Egypt, Turkey, Sudan, the countries in the Horn of Africa, the countries of north Africa, west African countries, east Asian countries, Malaysia, Indonesia, etc., Pakistan. We try to collectively face these challenges. Because these challenges pose threats to us all, and we must face them as one team. And we try to do positive work.
Five years ago, the Arab spring began. It’s been a pretty grim five years in many ways in the region. Will the next five years be better or worse?First of all I can say that the Arab spring was the real test that put to the test the authoritative form of government and non-authoritative form of government, and the regime that represents its people versus the regime that does not represent its people. Any regime that did not represent its people collapsed in the Arab spring, and the other regimes we saw what happened to them.
The House of Saud represents its people?
We are part of a national process; we are part of the local tribes of the country; we are part of the regions in the country; we have been working together for the past three hundred years.
Your Royal Highness, thank you very much.
Thank you. I’m very glad to have you here today, I’m happy to receive these questions. We always take criticism from our friends. If we are wrong, we need to hear that we are wrong. But if we are not wrong, we need to hear support from our friends. What I request is that the thing you actually believe, to say it.
We always do. Thank you.

The “truth bomb” that is about to explode: cash flaw accounting...

The “truth bomb” that is about to explode: cash flaw accounting...


One has to understand that money loaned out is not coming from "speculators" clients of the banks, but out from nothing. I.e. In their lending, banks create credit ‘ex nihilo’, and new money ‘ab initio’ with cash made ‘out of thin air’, because the loan amount is added onto the borrower’s account immediately after signing a loan contract. The loan is ADDED onto the borrower's account, not TRANSFERRED from any existing cash account ! And this is the point: when the bank creates this new money, she don't write it in existence directly to her cash flow account as a newly created asset, but on the borrower account ! So, the banks have always what appears as an impossible NEGATIVE CASH FLOW ACCOUNT, but it is just not a real loss !
It's all a make-believe game of mirrors... 

Further reading: Cash Flow Accounting in Banks— A study of practice, Ásgeir B. Torfason, 2014
https://www.scribd.com/doc/294880212/Cash-Flow-Accounting-in-Banks-A-study-of-practice 

And: Werner, R.A., A lost century in economics: Three theories of banking and the conclusive evidence, International Review of Financial Analysis (2015) http://www.sciencedirect.com/science/article/pii/S1057521915001477