{"id":8753,"date":"2018-05-27T11:37:35","date_gmt":"2018-05-27T18:37:35","guid":{"rendered":"http:\/\/occupysf.net\/?p=8753"},"modified":"2018-05-27T11:37:35","modified_gmt":"2018-05-27T18:37:35","slug":"blackstone-blackrock-or-a-public-bank-putting-californias-funds-to-work","status":"publish","type":"post","link":"https:\/\/occupysf.net\/index.php\/2018\/05\/27\/blackstone-blackrock-or-a-public-bank-putting-californias-funds-to-work\/","title":{"rendered":"Blackstone, BlackRock or a Public Bank? Putting California\u2019s Funds to\u00a0Work"},"content":{"rendered":"
Posted on\u00a0May 26, 2018<\/span>\u00a0by Ellen Brown (ellenbrown.com)<\/div>\n
\n

California has over $700 billion parked in private banks earning minimal interest, private equity funds that contributed to the affordable housing crisis, or shadow banks of the sort that caused the banking collapse of 2008. These funds, or some of them, could be transferred to an infrastructure bank that generated credit for the state \u2013 while the funds remained safely on deposit in the bank.<\/em><\/p>\n

California needs over\u00a0$700 billion in infrastructure<\/a>\u00a0during the next decade. Where will this money come from? The\u00a0$1.5 trillion infrastructure initiative<\/a>\u00a0unveiled by President Trump in February 2018 includes only $200 billion in federal funding, and less than that after factoring in the billions in tax cuts in infrastructure-related projects. The rest is to come from cities, states, private investors and public-private partnerships (PPPs) one. And since city and state coffers are depleted, that chiefly means private investors and PPPs, which have a shady history at best.<\/span><\/p>\n

A\u00a02011 report<\/a>\u00a0by the Brookings Institution found that \u201cin practice [PPPs] have been dogged by contract design problems, waste, and unrealistic expectations.\u201d In their 2015 report \u201cWhy Public-Private Partnerships Don\u2019t Work<\/a>,\u201d Public Services International stated that \u201cexperience over the last 15 years shows that PPPs are an expensive and inefficient way of financing infrastructure and divert government spending away from other public services. They conceal public borrowing, while providing long-term state guarantees for profits to private companies.\u201d They also divert public money away from the neediest infrastructure projects, which may not deliver sizable returns, in favor of those big-ticket items that will deliver hefty profits to investors. A March 2017 report by the Economic Policy Institute titled \u201cNo Free Bridge\u201d also highlighted the substantial costs and risks involved in public-private partnerships and other \u201cinnovative\u201d financing of infrastructure.<\/p>\n

Meanwhile, California is far from broke. It has over well over $700 billion in funds of various sorts tucked around the state, including $500 billion in CalPERS and CalSTRS, the state\u2019s massive public pension funds. These pools of money are restricted in how they can be spent and are either sitting in banks drawing a modest interest or invested with Wall Street asset managers and private equity funds that are not obligated to invest the money in California and are not safe. For fiscal year 2009, CalPERS and CalSTRS reported almost\u00a0$100 billion in losses<\/a>\u00a0from investments gone awry.<\/p>\n

In 2017,\u00a0CalSTRS allocated $6.1 billion to private equity funds<\/a>, real estate managers, and co-investments, including $400 million to a real estate fund managed by Blackstone Group, the world\u2019s largest private equity firm, and $200 million to BlackRock, the world\u2019s largest \u201cshadow bank.\u201d CalPERS is now in talks with BlackRock over\u00a0management of its $26 billion private equity fund<\/a>, with discretion to invest that money as it sees fit.<\/p>\n

\u201cPrivate equity\u201d is a rebranding of the term \u201cleveraged buyout,\u201d the purchase of companies with loans which then must be paid back by the company, typically at the expense of jobs and pensions. Private equity investments may include real estate, energy, and investment in\u00a0public infrastructure projects as part of a privatization initiative<\/a>. Blackstone is notorious for buying up distressed properties after the housing market collapsed. It is now the largest owner of single-family rental homes in the US. Its rental practices have\u00a0drawn fire from tenant advocates<\/a>\u00a0in San Francisco and elsewhere, who have called it a Wall Street absentee slumlord that charges excessive rents, contributing to the affordable housing crisis; and pension funds largely contributed the money for Blackstone\u2019s purchases.<\/p>\n

BlackRock, an offshoot of Blackstone, now has\u00a0$6 trillion<\/em>\u00a0in assets under management, making it larger than the world\u2019s largest bank (which is in China).\u00a0Die Zeit<\/em>\u00a0journalist\u00a0Heike Buchter<\/a>, who has written a book in German on it, calls BlackRock the \u201cmost powerful institution in the financial system\u201d and \u201cthe most powerful company in the world\u201d \u2013 the \u201csecret power.\u201d Yet despite its size and global power, BlackRock, along with Blackstone and other shadow banking institutions, managed to escape regulation under the Dodd-Frank Act. Blackstone CEO Larry Fink, who has cozy relationships with government officials\u00a0according to journalist David Dayen<\/a>, pushed hard to successfully\u00a0resist the designation<\/a>\u00a0of asset managers as systemically important financial institutions, which would have subjected them to additional regulation such as larger capital requirements.<\/p>\n

The proposed move to hand CalPERS\u2019 private equity fund to BlackRock is highly controversial, since it would cost the state substantial sums in fees (management fees took 14%<\/a>\u00a0of private equity profits in 2016), and BlackRock gives no guarantees. In 2009, it defaulted on a New York real estate project that left CalPERS\u00a0$500 million in the hole<\/a>. There are also potential conflicts of interest, since BlackRock or its managers have controlling interests in companies that could be steered into deals with the state. In 2015, the company was\u00a0fined $12 million<\/a>\u00a0by the SEC for that sort of conflict; and in 2015, it was\u00a0fined $3.5 million<\/a>\u00a0for providing flawed data to German regulators. BlackRock also puts clients\u2019 money into equities, investing it in companies like oil company Exxon and food and beverage company Nestle, companies which have been criticized for not serving California\u2019s interests and exploiting state resources.<\/p>\n

California public entities also have\u00a0$2.8 billion in CalTRUST<\/a>, a fund managed by BlackRock. The CalTRUST government fund is a money market fund, of the sort that triggered the 2008 market collapse when the Reserve Primary Fund \u201cbroke the buck\u201d on September 15, 2008. The\u00a0CalTRUST website<\/a>\u00a0states:<\/p>\n

You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund\u2019s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.<\/p><\/blockquote>\n

CalTRUST is billed<\/a>\u00a0as providing local agencies with \u201ca safe, convenient means of maintaining liquidity,\u201d but billionaire investor Carl Icahn says this liquidity is a myth. In\u00a0a July 2015 debate<\/a>\u00a0with Larry Fink on FOX Business Network, Icahn called BlackRock \u201can extremely dangerous company\u201d because of the prevalence of its exchange-traded fund (ETF) products, which Icahn deemed illiquid. \u201cThey sell liquidity,\u201d he said. \u201cThere is no liquidity. . . . And that\u2019s what\u2019s going to blow this up.\u201d His concern was the amount of money BlackRock had invested in high-yield ETFs, which he called overpriced. When the Federal Reserve hikes interest rates, investors are likely to rush to sell these ETFs; but there will be no market for them, he said. The result could be a run\u00a0like that triggering the 2008 market collapse<\/a>.<\/p>\n

The Infrastructure Bank Option<\/strong><\/p>\n

There is another alternative. California\u2019s pools of idle funds cannot be spent on infrastructure, but they could be deposited or invested in a publicly-owned bank, where they could form the deposit base for infrastructure loans. California is now the\u00a0fifth largest economy<\/a>\u00a0in the world, trailing only Germany, Japan, China and the United States. Germany, China and other Asian countries are addressing their infrastructure challenges through public infrastructure banks that leverage pools of funds into loans for needed construction.<\/p>\n

Besides the China Infrastructure Bank, China has established the Asian Infrastructure Investment Bank (AIIB), whose members include many Asian and Middle Eastern countries, including Australia, New Zealand, and Saudi Arabia. Both banks are helping to fund China\u2019s trillion dollar \u201cOne Belt One Road<\/a>\u201d infrastructure initiative.<\/p>\n

Germany has an infrastructure bank called KfW which is larger than the World Bank, with\u00a0assets of $600 billion<\/a>\u00a0in 2016. Along with the public Sparkassen banks, KfW has\u00a0funded Germany\u2019s green energy revolution<\/a>. Renewables generated 41% of the country\u2019s electricity in 2017, up from 6% in 2000, earning the country the title \u201cthe world\u2019s first major green energy economy.\u201d\u00a0Public banks provided over 72%<\/a>\u00a0of the financing for this transition.<\/p>\n

As for California, it already has an infrastructure bank \u2013 the California Infrastructure and Development Bank (IBank), established in 1994. But the IBank is a \u201cbank\u201d in name only. It cannot take deposits or leverage capital into loans. It is also seriously underfunded, since the California Department of Finance\u00a0returned over half of its allotted funds<\/a>\u00a0to the General Fund to repair the state\u2019s budget after the\u00a0dot.com<\/em>\u00a0market collapse. However, the IBank has 20 years\u2019 experience in making prudent infrastructure loans at below municipal bond rates, and its clients are limited to municipal governments and other public entities, making them safe bets underwritten by their local tax bases. The IBank could be expanded to address California\u2019s infrastructure needs, drawing deposits and capital from its many pools of idle funds across the state.<\/p>\n

A Better Use for Pension Money<\/strong><\/p>\n

In an illuminating 2017 paper for UC Berkeley\u2019s Haas Institute titled \u201cFunding Public Pensions<\/a>,\u201d policy consultant Tom Sgouros showed that the push to put pension fund money into risky high-yield investments comes from a misguided application of the accounting rules. The error results from treating governments like private companies that can be liquidated out of existence. He argues that public pension funds can be safely operated on a pay-as-you-go basis,\u00a0just as they were for 50 years before the 1980s<\/em>. That accounting change would take the pressure off the pension boards and free up hundreds of billions of dollars in taxpayer funds. Some portion of that money could then be deposited in publicly-owned banks, which in turn could generate the low-cost credit needed to fund the infrastructure and services that taxpayers expect from their governments.<\/p>\n

Note that these deposits\u00a0would not be spent<\/em>. Pension funds, rainy day funds and other pools of government money can provide the liquidity for loans\u00a0while remaining on deposit in the bank<\/em>, available for withdrawal on demand by the government depositor.\u00a0Even mainstream economists now acknowledge<\/a>\u00a0that banks do not lend their deposits but actually create deposits when they make loans. The bank borrows as needed to cover withdrawals, but not all funds are withdrawn at once; and a government bank can borrow its own deposits much more cheaply than local governments can borrow on the bond market. Through their own public banks, government entities can thus effectively borrow at bankers\u2019 rates plus operating costs, cutting out middlemen. And unlike borrowing through bonds, which merely recirculate existing funds, borrowing from banks creates new money, which will stimulate economic growth and come back to the state in the form of new taxes and pension premiums. A\u00a0working paper published by the San Francisco Federal Reserve<\/a>\u00a0in 2012 found that one dollar invested in infrastructure generates at least two dollars in GSP (state GDP), and roughly four times more than average during economic downturns.<\/p>\n

___________<\/em><\/p>\n

This article was originally published on\u00a0Truthdig.com<\/a>. Ellen Brown is an attorney, chairman of the\u00a0<\/em>Public Banking Institute<\/em><\/a>, and author of twelve books including\u00a0<\/em>Web of Debt<\/em><\/a>\u00a0and\u00a0<\/em>The Public Bank Solution<\/em><\/a>. Her 300+ blog articles are posted at\u00a0<\/em>EllenBrown.com<\/em><\/a>.<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Posted on\u00a0May 26, 2018\u00a0by Ellen Brown (ellenbrown.com) California has over $700 billion parked in private banks earning minimal interest, private equity funds that contributed to the affordable housing crisis, or shadow banks of the sort that caused the banking collapse of 2008. These funds, or some of them, could be… Continue reading → <\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/8753"}],"collection":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/comments?post=8753"}],"version-history":[{"count":1,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/8753\/revisions"}],"predecessor-version":[{"id":8754,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/8753\/revisions\/8754"}],"wp:attachment":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/media?parent=8753"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/categories?post=8753"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/tags?post=8753"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}