The government should have acted to close this scam a long time ago but they have been beholden to the financial incentives of getting their hands on cheap capital to fund public expenditure.

This can work, although I think an international approach would be better, and it is essential that we break the link between privately created capital and governments. Ideally, the people (via the government) should be the only agencies who can create, exploit or destroy money and banks should be service companies who have to pay for the privilege of lending.

Big changes are needed and it will be difficult to overcome the powerful private interests but this is a well thought out approach. Popular support is now essential…

Good luck…

And here’s to a stable, sustainable, fair and just future for finance…

Neil

I also have two reservations, more to do with the practical application than the overarching concept, one political and one economic:

Firstly, the transition to stable banking will be painful and inevitably involve recession. Why are there no transitional provisions in the Bill, for example accompanying the changeover with devaluation, or staging it such that industry is not suddenly deprived of funding?

Secondly, vesting such power with the BoE Monetary Policy Committee is as UNDEMOCRATIC as the initial ‘reform’ in taking responsibility for interest rates away from the Chancellor of the Exchequer. Note that this ‘reform’ was introduced by the man who will certainly be named by history as the worst to date (by far).

The MPC is unelected and not democratically accountable – a quango in fact. Furthermore, this has removed one of the ‘levers of power’ from the Treasury to manage the economy, leaving only fiscal policy and expenditure – similar to driving with someone else operating the gear lever! The current arrangements allow finger-pointing to happen between the Bank and the Treasury, and absolve this and subsequent chancellors of responsibility for economic mismanagement. It also denies Parliament proper scrutiny and cross-examination at the despatch box. Whilst control of the money supply is evidently important, monetarism itself died with Friedman, and it is highly doubtful that future chancellors will seek to drive the bus using only the gearstick!

So why do you not favour direct political accountability through the Chancellor?

The reformed Bank of England will be an entirely different institution than it is at present, with a completely different role. There is no way it effectively could exert any control over the banking industry other than to make sure that the legislation is adhered to. The Monetary Policy Committee will be the institution given the power to decide how much money can be created, and we intend for this to be designed in as transparent and democratic a manner as possible.

Quite simply, the banking system will not be designed in such a way as it actually can be exploitative, it’s original intention of being an intermediary between borrowers and lenders will be restores, and the right to create money by the public, for the public, will be restored to the state, kept in check by the Monetary Policy Committee.

In the decade or so, leading to the liquidity crisis it appears that commercial banks were treating derivatives and other toxic assets as “deposits” and thus exceeded their loan to deposit ratios significantly.

If a loan to deposit ratio is kept below 100% the total amount of money being loaned out is finite since it creates a diminishing cycle ending in zero. If a loan to deposit ratio exceeds 100% and cycle does not occur and instead of ending in zero, an exponential function occurs and money supply accelerates into infinity causing, as a result, a pyramid followed by a liquidity problem, which is precisely what happened when the credit crunch happened.

I strongly urge you to study a thesis by Greg Pytel by googling his blog. “It’s a pyramid stupid” or “the largest hoist in history” and then reply to me with your analysis and how this may have a bearing on the proposed new legislation with which I totally concur.

The government will naturally not endorse anything along these lines until the argument has been won among academics and other experts first. However, Mervyn King (Governor of the Bank of England) is broadly in favour of narrow banking / limited purpose banking, which has very similar results to this proposal i.e. preventing commercial banks from creating money.

This wouldn’t be a problem for the UK to implement unilaterally, the pound would still be a pound, foreign banks would have to operate under the new legislation here when operating in pounds, and our banks could still operate under foreign legislation abroad.

The effect our reform would have on the city can be found in the “The Benefits of the Reform” section of the website.

The ordinary guy would wake up to positive headlines, a renewed sense of optimism in the streets, and perhaps ask himself “What next?”
We would also predict a positive effect on the strength of the pound, as it’s transition to a stable currency would have been initiated.