PowerSwitch

http://www.telegraph.co.uk/finance/comm ... nkers.html

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world.

[continues]

Well, well, well....

Wow and triple wow. Where did this one come from? Quite an incredible piece, really, very brave.

The key of the Chicago Plan was to separate the "monetary and credit functions" of the banking system. "The quantity of money and the quantity of credit would become completely independent of each other."
Private lenders would no longer be able to create new deposits "ex nihilo". New bank credit would have to be financed by retained earnings.
"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.
"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."
The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.

No chance of it happening though.

Historically speaking, kings and emporers have been not better at controlling the money supply than bankers. No worse, either. The temptation has always been to print (or debase) your way out of debt. Of course you get spendthrift kings and profligate emperors, but financial acumen has never been on the job description.

End Fractional Reserve Banking. Wow indeed

I'll vote for that

RalphW wrote:Historically speaking, kings and emporers have been not better at controlling the money supply than bankers. No worse, either. The temptation has always been to print (or debase) your way out of debt. Of course you get spendthrift kings and profligate emperors, but financial acumen has never been on the job description.

Yes. Not what we need though and I'm not sure anyone is suggesting that we revert to 'kings and emperors'.

Money issue controlled by a government that's controlled by the people, that would be completely different. It's worked in the past.

I posted in the books, films section a couple of years ago, a short film about the central theme of the wizard of oz being the withdrawal of the silver dollar.
Watch the film and the telegraph article will fall into place.

stumuzz wrote:I posted in the books, films section a couple of years ago, a short film about the central theme of the wizard of oz being the withdrawal of the silver dollar.
Watch the film and the telegraph article will fall into place.

That's right. Bill Still has it nailed. In the final few minutes his The Secret of Oz (not a short film by the way, so maybe yours is a different work), Still posits precisely the solution reported by the DT.

I have thought for quite some time that Ireland (this applies to most other countries) should have its own internal trading currency, totally separate from capital flows. We've sold that particular soul to the ECB and the EU, sadly.

I've been trying to get my MP to acknowledge that the government could do this for quite some time now but with no response. I've sent this article off to him and suggested that they get onto the idea before the Labour Party does!!

Public housing paid for by printed money would be the way to get the economy going together, of course, with a FREE National Insulation scheme!!

I think the governments of the world have finally figured out that private banks must have growth to survive. Peak oil puts a stop to growth so the bank inevitably will have to return to public hands.

If lenders have to put up 100% backing then your average bank and building society will be unable to offer overdrafts, short term loans or mortgages.

100% cash deposit backed banking simply sucks more money into the banking system as dead money. The national wealth piled high in vaults doing nothing but proving its existence.

Investment returns would plummet to zero, pensions would evaporate and those without houses would never, ever get a chance to buy one.

The recession and banking debacle was caused by an oil price spike and the greed of ordinary everyday people.

FRB is like a locked door: great for keeping burglars out but deadly if you're on the wrong side of it in a fire.

JavaScriptDonkey wrote:If lenders have to put up 100% backing then your average bank and building society will be unable to offer overdrafts, short term loans or mortgages.

100% cash deposit backed banking simply sucks more money into the banking system as dead money. The national wealth piled high in vaults doing nothing but proving its existence.

You 've got the wrong JSD. The banks can only lone what comes in so an efficient banks will have nothing in it's coffers most of the time as they will have lent it all out. In the present situation they have say 10% of what they lend out in the form of a cash guarantee against 90% of money that they have invented.

The problem they have at the moment, as I understand it, is that their books go kaput if they get a lot of bad loans as they have no income to put against debit side of their books and they thus show a loss. The loss is only really nominal as the money never really existed: it's not as if they had borrowed it from anyone.

At the moment banks are having to hold more money to show that they can cover their losses as borrowers default on their loan agreements. That is what is making them loan less. The interest they are getting in on current loans is being retained to cover losses instead of being used as collateral to loan out about nine times what they receive.

It just shows how surreal our monetary system is!

But surely they have to have 100% of the money I have deposited in my current account available for me to withdraw AND have 100% of the value of your overdraft available for you before you can get money out of the cash machine.

Ergo they need more money than they actually have and you don't get that £20 for a late night Chinese.

Fractional reserve allows them to reasonably posit that a large majority of their depositors won't withdraw all the money today (a run) and so they can lend you some of it and only keep a fraction of their liabilities (my account balance) in reserve.

JavaScriptDonkey wrote:But surely they have to have 100% of the money I have deposited in my current account available for me to withdraw AND have 100% of the value of your overdraft available for you before you can get money out of the cash machine.

Ergo they need more money than they actually have and you don't get that £20 for a late night Chinese.

Fractional reserve allows them to reasonably posit that a large majority of their depositors won't withdraw all the money today (a run) and so they can lend you some of it and only keep a fraction of their liabilities (my account balance) in reserve.

We've had similar conversations about this before I think. Your £100 is used to 'borrow' say £1000 if they work on a typical 10% leverage. The rules also allow the unused portion of the, for example, £100 overdraft to be used as an asset to 'borrow' another £1000.

So they reinvest £1600 of the £2000 they've created can cover your £100 and the overdraft and still show a profit of £200, which then can create another £2000 and so on and on....

Everything is fine as long as more and more money is magicked into being and the level of defaults remains well below the leverage ratio. But that isn't what happened.

Get rid of FRB and bank's profits will fall, so will their turnover, and so will the damage they can do if they fail. The last point togeather with the reduced bonuses is why it'll never happen until the whole system collapses togeather.

The beautiful part is that all the money that's been creamed off will evaporate at the same time due to the massive asset devaluations as overheated markets correct themselves.

You have that reasoned backwards.

First I deposit £1000 then the bank can loan out £900 and just keep £100 to cover their liability to me. 10% fractional reserve banking. They keep a FRACTION of the RESERVES they need to cover their liabilities.

The clue is in the name.

So long as their accounts show that should they should be able to cover their positions then the BoE allow them to carry on trading.

If banks could just magic up 100x the money on deposit then there would never have been a banking crisis as the debt would have self inflated to fill the void.

The banking crisis was a crisis of cash flow. There was too much money tied up in buying oil and servicing debt and not enough left sloshing around to do everything else money has to do.

JavaScriptDonkey wrote:You have that reasoned backwards.

First I deposit £1000 then the bank can loan out £900 and just keep £100 to cover their liability to me. 10% fractional reserve banking. They keep a FRACTION of the RESERVES they need to cover their liabilities.

The clue is in the name.

So long as their accounts show that should they should be able to cover their positions then the BoE allow them to carry on trading.

If banks could just magic up 100x the money on deposit then there would never have been a banking crisis as the debt would have self inflated to fill the void.

The banking crisis was a crisis of cash flow. There was too much money tied up in buying oil and servicing debt and not enough left sloshing around to do everything else money has to do.

That is wrong. Or at least, it's only partially right about the wrong thing.

You are correct in arguing that UK domestic banks cannot lend simply money into existence because of fractional-reserve-ratio regulations. However, only a part of the "money" they lend out comes from actual deposits of their customers. A significant proportion of it comes from money they have borrowed from commercial banks. The commercial banks do not have such fractional reserve ratio regulation placed upon them and so they really can lend money into existence. Given that a commercial bank and a domestic bank are, in many instance simply different arms of the same overarching international financial organisation, this means that it can essentially circumvent and make a mockery of fractional reserve ratio regulations.

Now, of course it is true that the commercial banks must ultimately go to their central banks and make their books balance after-the-fact by borrowing it of the central bank overnight. Thus, the central bank, after the fact, lends such credit into existence (I refer to it as credit here because, in truth, that's what it really is). The central bank covers these lending by issuing bonds that they must repay in the future. Often these bonds are paid for on maturity by the issuance of even more bonds and so the ponzi-scheme grow on a global scale.

It was all bound to end in tears, The central banks could have put a stop to all of this nonsense, of course, by letting the commercial banks know, in advance, that they were going to begin to limit the amount of credit they were going to lend out into the banking system. Given that they didn't, this meant that if any one of the commercial banks had unilaterally refused the cheap and easy credit, their competitors, who did take the funny money, would have gained significant commercial advantage and so their shareholders would have booted them out and replaced them with board members who did take the cheap credit.

The central banks, in lending this money into existence at interest, did so on the back of an expectation that tomorrow's economy would be bigger than today's. It has to be bigger, of course, to allow both the repayment of the capital plus the repayment of the interest. The problem is that tomorrow’s economy is not going to be bigger than today's. In fact, it is going to be smaller. Thus, the debt's embodied in a massive proportion of our credit based money supply can never be repaid.

There are essentially only two ways out of this crisis;

Either

1) the debts must be allowed to be defaulted on, in which case, a significant proportion of our "money" supply goes up in a poof of smoke with all of the deflationary consequences that follow.

Or

2) they print the money, push it out into the economy and make good on all of the debts. In which case, the money supply is trashed into inflationary oblivion.

Or

3) Issue loads of bonds, and rack up massive sovereign debt in the hope that somebody will figure out how to pay them back at some point long after they have retired form politics (otherwise known as "kicking the can down the road")

What our illustrious leaders appearing to be attempting to implement is a slow motion version (2) with a significant dollop of (3) thrown in for good measure. All of which is designed to avoid (1).

If they "succeed", they will fail and I think it likely they won't even succeed. Gravity will have it's way, in the end.