Did you, by any chance, see the look of glee on Darling’s face when he responded to one of his (dis)honourable friends when asked about nationalising the banks?
Some Communist-leaning backbencher thought this approach would safeguard the economy. Well, the left have never safeguarding anything : only their own bank balances, and even those they cannot safeguard at the moment.
Not only, as identified by Dennis Sewell in last week’s Specator, has the credit crisis been caused by low interest rates and loose lending rules introduced by the Clinton Democrats in the US. But also the left here, albeit the Brownian interpretation of “New Labour”, made the Bank of England independent – and look where that has got us? They won’t even cut interest rates by a significant amount (i.e. by at least 1% or 100 base points) to stimulate the economy, because they are dancing round Darling’s totem pole – inflation.
And then Darling was gleeful as he told his Labour colleague that he’s already nationalised two banks. At least we will not (presumably) go down the disastrous course of guaranteeing all private bank deposits which has left not only the Republic of Ireland but also Germany – and others – open to gigantic liabilities. But then, you never know with this shower of a Government!
I know that I, and about 14 million more, will have a look of glee on our faces whenever this despicable, iniquitous, incompetent, tax-raising, spendthrift, deceitful, self-serving (et cetera) Labour Government is turfed out of power by the electorate.
Mountjoy
omgdidisaythat said
14 million? Little on the low side I think.
Privatising banks is a good idea though, possibly only trumped by giving control of all the banks to me.
curiouslyinspired said
Problem is, there seem to be possibly only 2 tools to kick-start the markets at present – slash the rate of interest; and give fresh capital to key financial players who are struggling at present. Labour or Tory government, these are still the known options. An injection of money will immediately prevent bankruptcies and prevent further market collapses, nationalising the banks in the process, whereas an interest rate cut should have a general, albeit slower, impact to the rest of the market. Both are valid tools. Nationalising banks just confirms they have tried to self-regulate over the past decade, and have been proven to be shambolically and lethally incompetent at it.
omgdidisaythat said
curiouslyinspired – We have more tools than that. I have at least 5, and contrary to popular sentiment in some quarters, I am not even a banker.
curiouslyinspired said
omgdidisaythat – Can you share your views on what the other tools are?
omgdidisaythat said
curiouslyinspired, I certainly could but they are a bit radical and not too easy to swallow, particularly if you enjoy the status quo. It will take awhile to set them down on paper, so I will post when done. If you change your mind and find somthing more interesting however, please do let me know then I can stop.
curiouslyinspired said
I’d like to see this please, take your time. All in the name of a good theoretical discussion. I don’t enjoy the status quo – (a) it’s broken already (b) the system proved itself rotten and many of its players morally or actually bankrupt. Looking forward – there is a risk of eventually reverting back to the same old once we are over the current crisis – not having learnt the lessons. History has shown people rarely learn.
omgdidisaythat said
Thank you curiouslyinspired, perhaps we can do this piece by piece. I have to say, I agree with all your points above.
I should point out that I have no political affiliations and don’t subscribe to any particular ideologies. I say this so that you know where I am coming from. I do believe the job of government is make life easier and more secure for the common man, to allow him to be as free as reasonably possible (thats another debate entirely) within society.
So, now we have that out of the way, in our current crisis, I could not care less about the city or the banks, I care that people have the opportunity to work, look after themselves and their families.
OK, so down to business.
I think our current situation is actually rather well summed up here:
http://www.youtube.com/watch?v=mzJmTCYmo9g
It is obviously a bit more complicated than that, but I think it catches the essence of the problem very well.
I have a problem both morally and practically with Fraction Reserve Banking: I understand and accept fully that this system of banking has allowed development at break neck pace for several hundred years, by allowing liquidity to be introduced as required at the point of need. But the unfettered animal that is fractional reserve banking with the accompanying money multiplier, the accompanying city markets and complete lack of desire to vaguely comprehend our financial system by our politicians has led us to this abyss which is considerably worse than is currently being portrayed in the media imho.
Once upon a time, the fractional reserve system was kept in check to a degree by laws and moral values that meant a bank would not lend to just anyone. Those laws and morals have obviously gone up in smoke.
Fractional reserve banking is inherently unstable as was seen in the recent Northern Rock bank run and robs the government of the ability to control the money supply completely. Although there are mechanisms in place to control the banks creation of money, it simply does not work well enough. I also recognise the argument that we should not the government control the money in the economy, they cannot get anything else right so why would they get this right? Probably they would not, but at least they are elected and we can get rid of them. Even if it is only to elect another bunch of fools. But we never elect bankers. Bankers control the money supply, hence the economy, and of course then, the country.
If you don’t really agree with what I have said there, stop me and I can explain further, or we can agree to disagree.
Next post I will look at some facts regarding our current situation, rather than my opinion.
Mountjoy said
Thanks to you both for your contributions. It is certainly a complicated business and the politicians, never mind the public, don’t seem what to do to kickstart the banking sector and economy.
omgdidisaythat said
Hi Mountjoy,
I don’t want to kickstart the banking sector, just kick it
ok; some facts. Curiouslyinspired, if I have sent you into a coma already, let me know
The UK as a nation and also as individuals has borrowed and spent like never before. I do not want to get to political, but labour are a discrace when it comes to borrowing and spending. The truth of the matter is; we are not a productive enough nation for the government to spend as much as it has, otherwise it would not have borrowed to support it’s spending plans.
I really want to stick to personal borrowing and banking practices becasue that is what is causing us the problems at the moment , the government made problems will come later.
1)
I beleive our current level of personal debt to be somthing in the region of 1.6 trillion. An incredible amount of money, owed to banks, mortgage lenders, credit card companies and others.
2)
I believe our current levels of savings are approx 44 billion.
3)
I believe private investors have about 300 billion invested in the FTSE and AIM.
So as you can see amount owed is considerably larger than the assets we have.
Now of course in reality the markets are not worth anything like that. For example a company like wimpy construction, has a share value, even today , far above the true value of the company. The valuation of the company has been based on a massive credit expansion which has now stopped. So people are not buying houses, The real value of wimpey starts to show in the share value. There are very few if any companies that have not had hire share values because of this expansion of credit.
This is a very important point to remember.
So, other than market sentiment, we should expect to see the ftse and every other market drop in value alot.
Now because banks decided to exploit the very relaxed banking and liquidity requirments set down in law and by the government/BoE they have ended up with alot of very bad loans. which they continued to use as equity, or hide from their accounts completely with the use SIV and tricks.
Banks no longer wish to lend to each other or anyone else , becasue most of them are unable to do anything other than meet basic liquidity requirements.
So, now we are bailing out banks, injecting extra money into the system on very regular basis and nationalising banks… great!
As we enter recession, and unemployment grows and more and more people are unable to fulfil their obligations for mortgages and personal borrowing the level of bad debt the banks hold will be even greater. Their solvency will be an even bigger problem.
So why are we bailing out banks….. and , while every banker and economist and IFA would tell you otherwise (most would be unemployed) maybe we should just let them collapse. What would happen if we did just that ?
Thats my next post, a few answers.
Mountjoy said
Kicking the banking sector is not a bad idea. So much for the end of bail outs, eh?
omgdidisaythat said
What would happen if we let banks fail? In fact positively encouraged them to just give up and pack the whole thing in.
Well the first thing that would happen, is that every banker and city worker would have a stroke, then tell you that your investment/pension would go down the tubes. So what they are actually telling us is; “unless you give us more money/nationalise us, you know bail us out” your pension/investment will be worth nothing.
In case you missed that – here is the translation: If the tax payer does not pay for our mistakes you won’t have a pension.
OK, so we have to pay for pensions one way or another, the markets and banks have failed on their promise to deliver pensions in the future unless we give them the money to do it. So we don’t need to worry about their threat of falling pensions, we will be taxing to pay them anyway.
So lets have a look at the maths.
We owe 1.6 trillion, have savings of about 44 bill and investments realistically between 200-250 hundred billion, not the 300 I mentioned in my last post as we know full well the market is not worth its current postion.
So lets get cavalier about the whole thing, I do not have a calculator so will not embarss myself with my maths, needless to say, if we wrote off the 1.6 trillion, and accepted a top level of 300 billion loss of savings and investments, we would be considerably better off. Nobody in the country would have any debt. And what a fabulous start to the day that would be!
So, even if the chancellor picked up the shortfall of 300billion in savings and investments, i think it would however be alot less than this, he would no longer need to pump billions into the economy, nationalise a single bank or bail anyone out at all.
I suggest it would be less than 300 bill , because if you for example had 10k saved and no longer had a 100k mortgage to pay, you would fore go your 10k savings.
So … we have no more bailouts …. but … there are going to be some big consequences of this action, I will deal with them next.
omgdidisaythat said
Do you want me to stop?
Mountjoy said
Not at all – I see there is a bailout scheme to be announced tomorrow!
curiouslyinspired said
Just caught up on the commentary from last night, thank you both omgdidisaythat and mountjoy. I’ll catch up with you in the evening UK time – am not ignoring you.
Well, we can see the UK bailout has now been announced as the market expected.
The biggest issue with writing off UK debt that I see is that it creates a precedent for thoughtless borrowing in the future and encourages further behaviour of the same sort surely?! All those tax consumers living off benefits and / or taking out endless consumer loans they could never afford in the first place. Get a job instead and try and earn some! We’d create a nice solution for everyone which would last.. oh a few months until we clock up some other problems.
I don’t like bailouts – I wrote a post on this a few days ago (on the US one). http://curiouslyinspired.wordpress.com/2008/10/02/us-bailout-damned-if-you-do-and-damned-if-you-dont/
I am still unconvinced that we have any viable alternatives – apart from recapitalising healthy banks, central banks acting as lender of last resort, and reducing the interest rate to relight credit markets, kick off inflation and reduce the real value of outstanding debt. We can fight inflation later as this has been done counless times before. I am uncomfortable with the latter, given that it triggered off the lending boom which led us here in the first place. So, not having practiced my economics for over a decade, I am not sure where we go from here.
I like omgdidisaythat’s comment “we are not a productive enough nation for the government to spend as much as it has, otherwise it would not have borrowed to support it’s spending plans”. We have been a self-proclaimed “financial service-driven” economy for the past decade and a bit, and it was all one big great soap bubble against we borrowed right up to the hilt.
The nanny state government has created a situation where lots of people are not creating wealth at all, but are just freerider tax consumers (see above) – whilst others are stuffing their pockets with money from banking bonuses and the state could not care less in either case. This incredible situation has got to change. But I am getting political.
Speak later…
omgdidisaythat said
Hi Curiouslyinspired and Mountjoy, goodmoring to you both,
By writing of debts and with that credits and investments we have solved one problem but created quite a few more which I will try and deal with, including those you raised curiouslyinspired.
Just to recap though, the problems I think we have done away with are:
1) A truly unfair banking system for the individual based on FRB
2) The inherent instability of the FRB system
3) The huge and unnecessary amount of debt that is personally held in the uk and threatens to drag us into a depression.
4) The need for the taxpayer to ‘bailout’ a corrupt system, only to leave that system in place. (the current proposal)
5) That we have paved the way for a better society by laying the way for government control of money creation, rather than money creation by banks.
Great as all that is, it creates some substantial problems, both morally and practically.
I must confess, that I am less bothered about punishment than getting a fair system and stable economy in place, but I will try to cover all in so far as practically possible.
The newly created problems I see are:
1) The removal of banks from the system means the removal of immediate money availability, much of which is required by business – In short this must be addressed or most businesses will collapse.
2) Under this proposal, those who had mismanaged their finances and borrowed excessively would seem to benefit the most while those who had saved and managed their finances well would seem to be penalised.
3) The asset – liquidity match provided by FRB would no longer be in place, to avoid this we would need to address this to stop the economy becoming stagnant.
4) We would need to either reintergrate banks or find another way to provide the services they have provided other than that of FRB lending, such as safe holding of money, transactions for cards etc.
5) As banks have disappeard the source of personal borrowing would also have gone, this would again need to be addressed.
6) Decent, reputable, fair and well run financial institutions would be penalised for the bad practices of others- quite unfairly.
Some of these issues somewhat overlap, particularly when considering solutions, but I have tried to break it down into logical areas. I also have a point 7. I will leave that until later due to its very difficult nature.
I will start with point 6 as it is the easiest.
Sadly some lending businesses which have been run well be out of business. This is because the FRB system would no longer be allowed, and in reality, why well run in terms of our current rules, the fact is that, that they don’t actually have any money or assets that are fair and tangible. In essence, if everyone wanted their money, they would be bankrupt too. There is a place for these people who run their business with decency in a future, stable british banking system.
Point 2 is probably the next easiest to deal with. My suggestion is not about rewarding or punishing anyone, simply about introducing a fair system and fixing our current depression bound economy. I would however think it quite possible to allow for a system of tax breaks which would even things up a little.
Those who were net gainers after the wiping out of debt would be expected to pay a higher tax rate for a specified length of time or amount while those who were net losers could expect tax breaks or even tax free years. This way the economy as a whole does not lose out and the punishment and rewarding of good monetary practice or poor practice is not too excessive.
I do not suggest that figures should match exactly, only that good personal finance should not be penalised too much.
This suggestion is fine for the younger adult who still has time to work and make the most of any tax free years, but what about the OAP and their pension and savings? This problem can also be corrected i believe. As i mentioned earlier, the markets are not actually at their real value levels, they are debt driven values which suggest a higher value that actually exists. After these reforms billions and billions would be wiped off the value of the ftse for example. So anyone coming to cash in their pension today would have alot less than they originally hoped for. Still , when we dive into a depression in the current system, they will also have alot less than they currently hope for. The fall is not because of actions closing banks but rather a ‘market ajustment’ while they find their real non-debt fuled value.
There would be no real alternative other than to ensure that pensions were where necessary topped up to a level that allowed sustainable living. I do not believe that OAP who were tricked into buying pensions funded by the market place should be left to die below the poverty line. Anyone under 40 has enough time to make new arrangements. Anyone who is over 40 could expect some help to ensure minimal standards of living were achieved, much like our state pension now. In 25 years time, I would abolish the state pension as we know it.
hopefully that has taken care of two of the morally difficult problems that have been created.
back later to do the others.
omgdidisaythat said
Ok, I will try and tackle problem 1).
While for us as individuals, if our debt was wiped out we could get through to our next payday by eating what was in the cupboard and going around to a friends for dinner, sharing a lift etc, a business that relies on a bank overdraft to fund it’s day to day operations would find itself unable to continue to run for more than a day or two. This would mean redundancies and lead to an economic collapse that we are trying to avoid, permenantly.
Hence the government would need to step in here to replace the overdraft facilities that had previously been available to business through the banks. I stress that this financing should be temporary and for immediate cash flow only, with an agreed time frame of reducing this overdraft to zero. Alot of businesses run continually in overdraft, cashflow for example ranging from – £30k to £1 credit. This company exists without making profit as such but does meet its obligations of wages, taxes and histroically interest payments. This company would be given a time frame in which to change this to a postitive situation of a range between £ 0 and £30k. So the operation of the business would be the same, and no profit made, but an cash positive operational business would not exist. Tax breaks could be used as incentives for businesses to come out of debt quicker than the agreed timescale.
Businesses that did not reduce the government overdraft facility to zero in the agreed timeframe, would end up being closed to repay the debt.
This has a couple of advantages. Business and the economy can carry on as it had before with the confidence that 0% interest is being charged, and a goal of no debt is in place. Business mentality would change from that of debt is normal to >> debt free and profitable is normal. This would in real terms cost the tax payer almost nothing as all money would be repaid by the business, only a inflationary loss would occur as well as a small number of businesses going out of business. Of course being debt free would reduce inflationary pressure considerably.
Next I will try and tackle all the other points in one go.
curiouslyinspired said
Omgdidisaythat, thank you for continuing to take the time to write on this. It’s very interesting to read a comprehensive alternative viewpoint such as yours.
Would you agree that with your proposal to deal with point (2), the government would acquire a greater role than presently in defining parameters such as “fair” and “sufficient to live on” – and then administering this complex system to make it “fairer” after the reforms you envisage? Feels to to me there is a parallel with a communist-type system somewhere here. My biggest problem with this approach is that it might be an administrative nightmare.
It might also probably be open to abuse, but then again the current system is already open to abuse, so no change here.
omgdidisaythat said
ok issues 3, 4 and 5.
So now that we have cleared the landscape of FRB and banks as a result, we have to deal with the problems I outlined earlier.
I would like to try solve the issues with a combination of government management and private banking.
We would still need banks to facilitate the payments systems, merchant credit/debit systems, savings institutions in fact almost every endevour they currently undertake, without FRB.
Because the profits from lending money would be no longer be avialable to banks in the way they previously were using FRB we should fairly expect to lose free banking. This offers a far fairer system where you can choose your banking services on what you are charged, it will also offer specialist financial businsess to come into existence , like money storage/vaults, payment systems and collections systems. As banks would no longer be able to loan money that they did not have, i.e. they are expected to 100% ordinary reserve, new partnerships between depositers and banks would have to the normal practice where depositers would, where looking for growth deposit money with a bank for a specific term and for a specific % return at the end of that term. The bank could then use it’s experince in business to invest this money, taking a % for their efforts, they could also lend their own money. I would envisage the market for this service to be one where greater risks are taken. In the even of failure, the depositer and bank would lose money. This would partially , and I accept, only take up a little of the funding gap left by the loss of FRB.
Government introduction of capital: the government should always control the amount of money in the economy, this failure leads inevitably to bankrupcy. The goverment must show a great deal of prudence and only engage in capital spending for projects that can bring an increase in economic prosperity, for example, laying fibre optic cable across the country may bring added prosperity by attracting more jobs to the UK. Giving nurses or teachers a pay rise, no matter how deserving is not good use of capital and almost certianly inflationary. Payrises often outstrip inflation.
When capital spending is for economic growth, there is no need for a government to borrow this money, particularly for project that can be delivered using UK resources, skills and knowledge.
Increasing the money supply for such capital projects i would argue is far better than borrowing the money, which probably is only someone elses increased money supply, atm, probably Americas
Any other government spending should come only from taxation. If we are not producing enough as an economy we should not be spending. This is going back to Maggie, but it’s all about good housekeeping.
We still need to address the shortfall of liquiditity left by abolishing FRB.
I would suggest to cover the greater deal of this shortfall, we allow 2 parts to the solution.
Government:
Capital expenditure for business could be borrowed directly from the government without interest for business use within the UK, subject to necessary checks and validation of business plans and models, this would attract business and employment to the UK, all loans would be fully repayable and the country would also benefit from increased tax revenue, which may in turn allow for less and lower rates of taxation.
The governement would also provide for mortgages directly, based on the earning capacity of the applicant, again interest free. While this seems like a complete gimme, it instantly allows for an extra 7% approx directly in to the economy, and banks no longer making money via FRB.
Private:
The private sector will still be encouraged to enter in to the market place for loans. I would expect banks to lend only agreed term deposits on behalf of depositers who wished to lend into ventures. The bank could also lend its own funds.
This change in banking practice would ensure that banks took a very active and positive interest in the businesses it loaned to rather than a purely, can you make the payments basis.
This would see banks become genuine business partners and investors rather than simply money lenders and may take a considerable amount of lending away from the government due to the extra support and help banks would make available, even becoming long term partners in some businesses.
I would also expect businesses who wished to compete, would make HP more widely available. Thus any consumer borrowing would be against real assets for real goods. The accumulation of debt on assets (house) and remortgaging through the government mortgage scheme would not be allowed. Personal loans and credit cards would become considerably harder to obtain and limits where obtained would be considerably lower, as lending would be undertaken at risk, with little possibilty of monetary recovery in the event of non-payment.
I reject the idea that this lack of credit to the consumer would damage the economy, rather it would help it. I accpet completely that the economy would slow down, but this would only be short term, as recessions and depressions could in the system I have outlined be removed completely from an economy not in debt.
Credit would be less, the economy would grow slower, inflation would be small, security, jobs, prosperity would be more constant, and individuals free follow their dreams and goals within society.
Before you kick the S*** out of this idea, please bear in mind that it is an outline only. Even so, it is profoundly better for the everyday guy/girl on the street than the current system where we are at the whims of markets/banks who do not care remotely about UK people/business/economy, the stupid illusion of a bank of last resort (yep, thats you and me) and FRB, that leaves control of the money supply in nobodies hands and banks making a profit of money, that in effect, does not exist. (yes yes, I know it exists, buy you know what I mean)
omgdidisaythat said
Hi curiouslyinspired,
Yes I have to agree, it would be a bit tricky. The initial balancing of investments to debts for each individual would be a bueracratic nightmare. But it would be one time only. After that the tax benefits for handicaps would be adminsitered using are current system of different tax codes to give the correct tax% for paye.
The pension scheme would be harder to manage, but again , has a finite life of 25 years, after which people would have to have their own arrangements made. The costs and complexities of adminsitering would decrease over that period, if for example you have 20 years until retirement, you would get alot less help from the government than you would if you were retiring this year.
I can see the communist comparison too, although the main difference here is that government intervention of these changes is predominantly over a fixed period of time simply so that huge social upheaveal and economic hardship is prevented during the transition from being in debt to banks to not being so. After 25 years the tax codes could easily be unified and the pension from the state abolished.
omgdidisaythat said
I think it is also worth pointing out that because of fractional reserve banking and the accompanying money multiplier, lending money is quite unlike any other business and should not be considered part of a free market, but rather a special exception. What other industry creates a resource out of nothing and charges for the use of it.
More importantly, it is vital for a nation to control it’s own money supply, the reasons for this are a discussion for another day, with fractional reserve banking this does not happen.
I am all in favour of a free market money lending system where fractional reserve banking is not in play. This however leads to liquidity shortfalls that should be addressed, if fractional reserve banking is not in play then this really only leaves the liquidity to be filled by the government and to a lesser extent, due to lack of funds, the private sector.
curiouslyinspired said
Good morning Omgdidisaythat, Mountjoy
Can I recap (as lots of detailed arguments have been put forwards recently) that the cornerstone of Omgdidisaythat’s proposal is the abolition of fractional reserve banking?
It’s not been something I have really thought about before, it is now clear that it is a fairly hot topic of debate especially in the US. I can see the attractiveness in abandoning it at least on the surface. What I am lacking at present is the full understanding of the impact of doing so, apart from creating deflation in an economy. Having said that, inflation or deflation is something the world has seen before, and successfully overcome, so at least it is not a new thing, and if the goal justified it, could be something to consider.
I also thought that some of the other measures suggested (e.g. the cancellation of debts which I have the most problem with) are “extras” alongside the abolition of the FRD system in your proposal, Omgdidisaythat? Ie they might, or might not, be done in parallel. Is this a fair summary or did I miss your point?
I support your idea of making credit less widely available and much more difficult to obtain. This is probably one of the lessons of the current crisis which I daresay might be learnt at least for a short while even in the current status quo remains.
Regarding increasing liquidity under your proposal: what would worry me most is asking the government to lend to businesses for capital expenditure. I don’t believe it is the role of the government to do so – they should focus on policymaking and not meddle with low-level finance. I can’t think of examples of what they currently do or don’t do in respect of the latter already, you might object with exampes – pls feel free. But getting into capital expenditure lending seems (a) too low-level for a government to administer (b) very bureacratic – imagine an extra swelling of the ranks administering this scheme (c) expensive.. where will all this money come from for the government to lend to businesses? Taxation?
Support your ideas on private sector lending though, and getting banks to return to their old role of being geniune business partners with businesses with greater involvement and scrutiny.
omgdidisaythat said
Hi Curiouslyinspired,
Yes, you certainly have the main gist of what I am getting at. Some of the points are perhaps more closely associated than I suggested initially.
I am not sure what you know about FRB so here is a link to it. Most people fall into one of two camps, they see FRB as the work of the devil, or the great driving force of prosperity in the western world. I concur with both views to some degree.
Here is a anti FRB video.
http://video.google.com/videoplay?docid=-9050474362583451279
and a shorter one here:
http://www.chrismartenson.com/money_creation
If something like FRB were practiced in any other area of life, the practioner would soon be in jail or hung. You just would not be allowed to get away with it.
Now in reality it is even worse than this, with banks making deposits to central banks they can lend even more money, they do not own or , in the view of many does not exist. how can a £1000 deposit, become £10,000 in loans.
My dislike of this is that it is essentially a dishonest way of doing business, if you default on a loan and lose your house to the bank, you are losing your house for money the bank never actually had in the first place.
So our 1.6 trillion personal debt, is more fairly a 10th of this. An economist reading this would want to kill me, but that does not make it untrue.
So I am against FRB because
a: The whole process is, in my opinion morally wrong. How can you lose your house from ‘thin air’ money.
b:Clearly with FRB the government cannot control how much money is in the economy. If you cannot control that, you cannot control the economy, and being able to control the economy is essential in giving people the opportunity of economic freedom. If your savings are wiped out because the £ is considered worthless , you have worked and saved for nothing, you have nothing, there is no freedom in that. It is a governments duty to ensure a stable currency.
C: It is inherntly unstable, if everyone wants their money the banks cannot meet the liquidity requirement – our current banking crisis.
I am inclined to wipe out debts because the other alternative is to let the banks collect on debts that will hamper the economic growth of the country, and I cannot honestly say i believe are fair or deserved.
It is also quite clear, once you realise how money is created, why we have boom and bust, it is simply the expansion and contraction of credit from banks. FRB debt accounts for approx 90% of all money in the UK economy. That is very very bad news.
Wiping out debt will be a major economic advantage for the UK, meaning we can better fund public inititives that will result in more growth and tax people less.
If as a business I borrow 30,000 at 15% APR over 3 years, I have really added approx 10,000 to my costs, in total 25% of my project cost is interest. I think you can see how bad that hurts an economy in the light of FRB.
Now, there is somthing very very good about FRB which will help to explain why I think government should lend money.
FRB allows for money to be created at the point of need in the moment of need, and this has argulably allowed the western world to advance, while other parts of the world have not.
Here is an example of a world without FRB:
You are a clever chap and invent a new paint. The great thing about this paint, is that once you paint, a house for example it never needs to be painted again, no flaking, no falling off, no matter what. All your friends and family hail you as a genius and predict “this time next year” you will be a millionaire, the whole paint industry will be revolutionised. All you need is £300,000 to get the whole thing rolling. Sadly you do not have 300k nor does anyone you know. So, with plan in hand, you go to the bank. They think you are idea is good too, but sadly they do not have enough money to lend for such ideas. So, your great idea will never see the light of day, probably over the years you will forget about your idea, and so will everyone else. Your great idea never became reality, because there was not enough money. Without FRB, or a realistic alternative, there would be very little progress in society.
FRB does not create money out of thin air, it simply matches assets with liquidity. So for example, you want to borrow £10k for a new car, there are two assets, one is the car, the other is your promise to pay (your future labour) now, you could wait and save and buy the car in the future, all we are doing by using FRB is allowing you to have the car today, against the asset that is your promise to pay from your future labour. It is even more obvious the benefits in the example of the new paint. By lending 300k the bank is matching the liqidity of the asset which is the knowledge and shortly should become a product that will become worth far more than 300k.
In the example of buying a car, after a few years you have paid back the loan, with interest of course, and the money that was created ‘out of thin air’ simply disappears ‘into thin air’.
Hopefully without FRB you can see how many things would never come to pass. If we remove FRB, we should replace it with a system that allows for the creation at the point of need and time of need. This is why I suggest only a government can do this, the creation of money must stay with a government, this way the government can control the economic direction of the nation and truly take responsibility for it, rather than this excuse of, the markets/it’s a world economy.
The government in its lending would not need to tax much at all for this, again like , capital projects for the nation , this money lent to business would be lent for the creation of wealth within the UK economy. A £100,000 loan would be paid back directly to the government, so the money can simply be printed and then destroyed on repayment. In much the same way banks do now, but the amound of money in the economy, which is a very important thing will be under tighter control, at the moment there is almost none. Of course there will be loan defaults, the same practice of forclosure would happen, nothing new there, and that may have some cost to the tax payer, but it would be very minor.
I hope here I have answered point c, regarding a, I think it is essential that the government manages the supply of money vis a vis point a. Point b, I fully concede could become a bureacratic nightmare, and would require good management to stop it becoming one of those awful government depts like social security or whatever it is calling itself now.
I hope this helps to solidify my suggestion and shows a little more how all the options are deeply connected.
Mountjoy said
Nice discussion.
I have posted my disgust at the bailout and the Tories’ attitude below:
http://thewiltedrose.wordpress.com/2008/10/09/browns-thatcher-moment-and-cams-non-enterprise-culture-moment/
curiouslyinspired said
Omgdidisaythat thank you for taking the time to explain your points so well. It certainly gives a lot food for thought although still not convinced about writing off debt. Will watch the vid on FRD when have a moment. Do you have a blog where I can read your posts? omgdidisaythat.wordpress.com is not you, is it?
Mountjoy – thanks for hosting this intensely involving exchange. Look forward to catching up with you some time in future!
With respect to the whole bailout – hate it, loathe our money spent or wasted more like, not sure it’s even going to work (as today FTSE still crashing..) – yet still not sure anyone has got / sees / is prepared to consider any alternatives to it. I’ve not seen anything that really truly captures my support. We are stuffed, aren’t we, with who is running the show and the economics knowledge they have or haven’t got?! How painful.
omgdidisaythat said
“We are stuffed, aren’t we, with who is running the show and the economics knowledge they have or haven’t got?! How painful.”
you have just perfectly summed up the situation.
I think once you have a good handle on FRB curiouslyinspired the thought of cancelling debt will not seem so bad.
If it is any comfort at all, somebody is making alot of money out of this, and quite pleased with the whole thing.