As we’ve seen in previous chapters, our lives have become increasingly beholden to the logic of debt. It can be hard to tell sometimes whether something as basic as your home is first and foremost a place to live, or a moving piece in a real-estate shell game. And if you’re considering pursuing a degree, a debt-benefit analysis might be your first consideration when selecting your area of study: will you be able to find a job in your field that pays well enough for you to survive with the amount of debt you’ll need to take on? Though you may not always lose in these risky games we’re forced to play, it’s always a safe bet that financial institutions will win.
But this new “financialized” way of living doesn’t just apply to individuals. Due to significant changes in the way we finance government, the towns, cities, counties, and states we live in are also now run according to the risky logic of debt. Banks are profiting at the expense of state and local governments to the detriment of ordinary residents. Is your city experiencing a budget crisis? Is your state laying off workers and cutting services? Are local hospitals understaffed and underfunded? Do you worry about whether your child’s school will have enough money to provide students with a quality education? If this is happening in your community, you are a debtor.
For banks, borrowing money is easy; the federal government will give you as much as you want at a near-zero interest rate. Unfortunately, borrowing money isn’t so simple for cities and states. Reduced public funding and shrinking revenues have forced municipalities everywhere to partner with Wall Street investment banks to win access to credit markets, issuing bonds to pay for everything from basic operations, like sewers, to large developments, such as sports arenas. Municipalities guarantee loans by promising that investors will be repaid with tax dollars or revenue generated by the debt-funded project. Wall Street profits from those bonds through fees, interest payments, and “securitization,” or the packaging of bonds into debt bundles, which are sold and resold on the global market.
How We Got Here
It wasn’t always this way. For decades following the Great Depression, the federal government actively invested in social services and infrastructure development, and was regarded as a lender of last resort in a pinch. But when a world recession began in the 1970s, New York City became an involuntary test case for a new way of doing things. Powerful business and real estate interests had already successfully pressured the city to lower their taxes, shrinking revenues significantly. And just as the economy worsened and expenses exploded, the federal government cut support for social services.
When a budget crisis inevitably set in, Washington withheld aid, signaling the beginning of a harsh new era. Other options to help fix New York’s budget were available—increasing the city’s low property taxes, for example (Moody 2007, 29). Instead, an aggressive coalition of city business elites who controlled access to credit forced harsh reforms. Budgets for education, health care, and social services were drastically cut. City workers were laid off or had their wages and benefits slashed. If a crisis arose, the needs of bondholders would be privileged over those of ordinary citizens.
New York quickly became the model for municipal financing everywhere. (It also served as inspiration for the brutal treatment of debtor nations in the global South at the hands of the International Monetary Fund.) From coast to coast, cities and states have become completely beholden to big banks, which have imposed predatory lending practices similar to the ones we experience as individual debtors. The result is shuttered schools and libraries, fire departments, and endless blocks of homes in foreclosure.
The federal bankruptcy code has even been revised to ensure that many municipal bonds will keep paying investors no matter the costs to communities. Bonds are supposed to be bets on the future. In most cases, however, there is no way the lender can lose, but cities can lose a great deal. According to a recent report, of 18,400 municipal bond issuers from 1970 to 2009, only 54 have dared to default.
In 2011, Jefferson County, Alabama, filed the largest bankruptcy in U.S. history to contest a $4 billion debt in the aftermath of a sewer project gone disastrously wrong. Local officials had borrowed vast sums from Wall Street to pay for a treatment plant to stop sewage from flowing into the Cahaba River in a predominantly Black community. The project was never completed because corrupt officials mishandled the funds (seventeen have since been jailed). Lenders demanded repayment anyway, doubling each household’s sewer bill in a neighborhood already reeling from poverty. The county’s financial trauma has resulted in public service cuts, mass layoffs, and overcrowded prisons.
Debt Democracy: Stadiums Versus Hospitals
In 1997, the people of Minneapolis passed a referendum specifically requiring a vote before large sums could be spent on sports facilities. Recently, even after hundreds of thousands of dollars of TV ads aired pushing subsidies for a new football stadium there, polls showed only 22% of the public thought any tax dollars should be used to build one. But Minnesota’s governor and Minneapolis’s mayor sidestepped the people, diverting city tax revenue and creating a new “stadium authority” not subject to referendum law to spend over $300 million in taxpayer money.
At the same time, Ohio’s Hamilton County—where one in seven residents now lives in poverty—has slashed education and social service budgets, and is selling off a hospital to make payments on $875 million in bond-financed debt they assumed in the 1990s to build two Cincinnati stadiums. Whose priorities do these development decisions represent?
The large-scale debt-financing of our municipal infrastructure and public institutions provides bankers with hefty profits at citizens’ expense and means a smaller voice for the communities that those institutions are meant to serve. Taxpayers are given few opportunities for input as to which bonds are issued and how, and often they find themselves stuck with the tab for debt-funded projects that have no accountability to voters. City officials broker deals with private partners through backdoor channels, zoning off “development districts” or declaring parcels of land “blighted” so they can be seized and sold under eminent domain. Priorities regarding vital public services from schools to hospitals to fire departments are increasingly being made behind closed doors, according to the logic of profits.
In New York, large-scale development financed with public funds and minimal public input is a favorite pastime of billionaire Mayor Bloomberg. In 2004, the rezoning of downtown Brooklyn was approved with virtually no opportunity for direct input from community members. One neighborhood in the crosshairs was the Fulton Street Mall—then the third most profitable retail district in the city and home to a wide array of small businesses, largely owned and frequented for generations by nearby immigrant communities and communities of color.The developer who won the contract to replace the mall with mostly luxury housing and upscale stores received $20 million of federal funds intended to help distressed neighborhoods, as well as additional city subsidies. Meanwhile, hospitals across the city (especially in low-income communities) are closing at an alarming rate.
States everywhere used to finance prison construction either directly through tax revenues or with bonds that could only be issued with direct taxpayer approval. Since the racist war on drugs kicked off in the 1980s, however, prisoner populations across the nation have exploded. The U.S. prison population increased 500% since 1980 (Nolan 2011, 22), and despite the fact that Black and Latino/a crime rates haven’t risen for decades, incarceration rates for drug offenses increased 1,311% for Blacks and 1,600% for Latino/as between 1980 and 2000. Legislators have been unable to win citizens’ approval to spend massive amounts of taxpayer money on constructing prisons. But with one in a hundred adults in the United States now incarcerated, prison construction and maintenance has become big business.
Encouraged by eager investment bankers and construction companies, state governments have concocted a variety of backdoor schemes, borrowing hundreds of millions of dollars to fund the rapid expansion of prisons with little public oversight. As with sports arenas, a favorite scheme for undemocratically funding prisons is to create separate “bond-issuing authorities” that aren’t beholden to voter approval. Though such bonds aren’t legally backed with taxpayer money, the state’s credit rating is still on the line, and defaulting can have disastrous consequences.
When legislators finally decided to close a notoriously abusive and poorly run debt-financed prison in Tallulah, Louisiana, they received a letter from a rating agency notifying them that breaking the prison’s lease could damage the state’s credit, cutting it off from much-needed funding. Residents demanded the site be turned into a learning center. Instead, Louisiana continued to pay $3.2 million annually, and prisoners continued to suffer more than they might have elsewhere. The perverse incentives of debt have overridden the will of communities time and time again. Many states now spend more on prisons than on higher education. Since 1967, California has reduced funding for higher education by two-thirds while tripling spending on prisons.
Interest rate nightmares
The bonds that municipalities issue require them to make regular payments to bondholders. Often, payment amounts vary based on current interest rates, which can strain municipal budgets when rates suddenly jump up. But sometime in the 1990s, banks came up with a fancy way to convert municipalities’ fluctuating interest rates to more predictable fixed rates—all for a fee, of course. These deals were called “interest rate swaps,” and they sold like hotcakes—$500 billion worth of hotcakes.
With a swap, the municipality was guaranteed that if interest rates exceeded a fixed percentage, the bank would pay the excess, while if rates dipped below this percentage, the municipality owed the bank. This was all fine when interest rates actually fluctuated, but since the 2008 crash, rates for bonds have remained incredibly low, hovering around 2%. And banks are still demanding that towns, states, school districts, utilities, and other bond issuers pay them back at the much higher rates set by swaps before the crash. The only way out for cities is costly “termination payments.” So far, our communities have paid over $4 billion to banks like Citigroup, JP Morgan Chase, Morgan Stanley, and Bank of America to get out of these lousy deals. Not long ago, when these same banks were teetering on the brink, the government bailed them out with taxpayers’ money to the tune of over $15 trillion.
Public transit agencies from Boston to Los Angeles have been hit especially hard by poisonous swaps. In NYC, the Metropolitan Transportation Authority (MTA) has so far lost $600 million. Rather than refuse payment, the MTA has cut service and laid off thousands of workers. Most people who rely on the subway are working class New Yorkers, including many people of color, immigrants, and disabled folks. The MTA passes these illegitimate debts onto riders through recurring fare hikes.
As if all that weren’t enough, we’ve recently learned that many of the world’s largest banks have been manipulating a key interest rate known as Libor (The London Interbank Offered Rate). Calculated daily, Libor is based on how much interest banks charge when loaning money to each other. It is then in turn used to set rates for over $800 trillion of investments around the world, including many forms of consumer credit and—you guessed it—municipal interest rate swaps. It turns out banks have been reporting false data, intentionally pushing Libor up or down to capitalize on particular trades. It’s anyone’s guess as to how many billions of dollars have been stolen, but anyone with a pension or a home or auto loan was likely affected. It’s estimated that municipalities in the United States have paid over $6 billion in fraudulent interest and fees due to artificially lowered Libor data, including cities like Baltimore, where more than 80% of school children are poor enough to qualify for free or reduced-price lunch.
Wall Street’s criminality reveals that there is no such thing as a free market and never was. In his exposé on municipal bond rigging (which he calls “the scam Wall Street learned from the mafia”), Matt Taibbi explained that Wall Street “skimmed untold billions” from hundreds of municipalities. After they were caught, banks continued investing in city bonds. “Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again,” Taibbi wrote. “Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.”
How Can We Resist Municipal and State Debt?
With a problem as structural and deeply ingrained as municipal or state debt, it’s hard to imagine changing the system by yourself. The good news is that people across the planet have begun organizing in myriad ways to demand that their towns, cities, and states are no longer run according to the logic of debt, but for the benefit of the people who live there. Tactics run the gamut from local direct actions to completely reimagining the banking system. Strike Debt is proud to be part of this global movement.
Just after the financial crisis set in here in New York, a group called the People’s Transportation Program, inspired by the community “survival programs” of the Black Panthers, set out to buy subway fare cards in bulk and give away as many free rides as they could swipe through in a day. By their math, for every $75 spent on one-day passes, they could give away over $1,000 worth of rides, keeping money in their communities that might otherwise have gone to banks as payment on MTA debt. Similar actions were planned as MTA rates rose once again in March 2013. In July 2012, Boston activists held subway turnstiles open to protest Wall Street’s vise grip on their city’s transportation budget. Is the transit system in your community being sucked dry by Wall Street? Maybe a fare strike is in order!
Many communities are organizing lawsuits and legislation to push back against the banks. After their pay was cut to minimum wage, Scranton’s municipal unions sued the city, and their wages were restored. Baltimore sued big banks for manipulating Libor. Oakland, California, is trying to take the dramatic step of severing its relationship with Goldman Sachs for good!
Other approaches are aimed at changing the very nature of finance. Many have looked to public banking as a way to fund our municipalities without relying on Wall Street. North Dakota, the only state in the union with a public banking system, has posted budget surpluses every year since the 2008 crisis began and boasts the nation’s lowest unemployment rate. Their bank was established in 1919 to empower farmers against big banks and make sure tax revenues were reinvested locally.
The idea is relatively simple: All state revenues are deposited in the bank and interest on loans is returned to the community rather than handed to a far-away lender. North Dakota’s bank makes stable, low-interest credit available for infrastructure projects and emergency aid, enabling municipalities to avoid the municipal bond trap. It’s also further strengthened the local economy by providing credit for small businesses and green energy projects. Bills have been introduced in seventeen states to start public banks, but it’s an uphill battle: The banking industry is doing its best to prevent public banking from catching on.
It’s certainly possible that different financial and legal structures could help fix our budgets, but the only way to truly defend ourselves against a system that values profits over people is to have real democratic control over our towns, cities, states, and lives. And maybe it’s time to start imagining what a world without profits could look like. At the very least, we must insist that banks no longer write the laws dictating how our communities are financed, and that the public has not just a review or an “input,” but the power to decide how public resources are used. Over thirty years ago, the city of Porto Allegre in Brazil pioneered a process called “participatory budgeting” that directly involves citizens in determining priorities for municipal spending. It’s since been used in over three hundred cities across the world, though only two small districts in New York and Chicago have begun the process here in the United States.
But the idea that some debts can and should be refused is a sentiment that’s spreading. In Europe, the rallying cry of the anti-austerity movement has become “we won’t pay for your crisis!” Groups from Spain to Tunisia are performing “citizen’s audits” of their governments and financial institutions, deciding for themselves which debts are legitimate, and which should be abolished. Have you ever looked at your town budget? Do you know how your elected and non-elected officials fund public works? Who benefits? Who really ends up paying for what? Simply posing these questions in your community is an important first step toward striking debt!
- “Citizen Debt Audit Platform: ‘We Don’t Owe! We Won’t Pay!’” Committee for the Abolition of Third World Debt, May 14, 2012.
- Amy Goodman, “Matt Taibbi on the Unfolding Libor Scandal and What Senator DeMint’s Departure Means for Fractured GOP,” Democracy Now!, December 13, 2012.
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