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Some thoughts on the banking crisis, ctd Tory MP Douglas Carswell, who is one of the relatively few good guys in that party, in my view, has this blog post about a recent proposal on how to make the banking system more robust, as made by the “Austrian”-leaning organisation, the Cobden Centre. I am not entirely sure about the use of the word “democratise” here in relation to banking; however, I guess this is how Mr Carswell is trying to popularise the basic idea of making banking more solid.
Truth be told, if your average citizen really reflected on what a controlled fiction fractional reserve banking really is, his or her hair would turn white in seconds.
Thanks to my old Libertarian Alliance mate, Tim Evans, for the pointer.
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Henry Ford said much the same thing J.P. – although he said that the public would lynch the bankers (and the government) if they knew what was going on.
However, Ford was no hard money man – he supported (or sort of supported) handing out money to people directly (rather than via fractional reserve banking) – in short he was infected with the same “under consumption causes slumps” fallacy that so many people were (and are) infected by.
“When you deposit 100 Pounds in a bank the bank may lend out 97 Pounds of it – thus there is now 197 Pounds”.
No the Bank has 3 Pounds and the person (or persons) who borrowed money have 97 Pounds – and 3 plus 97 equals 100.
However, sadly Mr Carswell is correct – people think and (act) as if money “on deposit” is actually in the bank (rather than lent out).
This is the central fallacy – and like all basic economic fallacies it is a LOGICAL fallacy.
Sorry but money that is lent out is NOT THERE ANY MORE.
If people really want money to be “on deposit” (i.e. to be there when they need it) then this money can not be lent out – and, indeed, they would have to pay the bank to look after the money for them (just as with a safe DEPOSIT establishment now).
If people want the bank to pay them interest then they must accept that money lent out is not “on deposit” (it is lent out).
In short that they NO LONGER HAVE THIS MONEY and will only have the money back WHEN AND IF the borrower or borrowers pays it back.
If someone wants interest they must accept that they are a MONEY LENDER – with the risks (of non repayment) that this implies.
Presently the public seem to think that they put there money in a big safe called a “bank” and that the interest payments they demand are produced by a magic spell.
This is insane – it is not a rational belief.
Paul, agreed – that is basically what I posted in my comment to Douglas’ article.
FRB gives the impression that there is more money out there but at the end of each day all the intra and inter bank transactions are netted off, some are up a little, some are down and those who are too far down borrow from those who are a little up.
If people try to push T+1 further, though, to immediate settlement, then this will be an issue. If it happens and they still stick, behind the scenes, to end of day, that really worries me.
IIRC There is a nice para or two about interbank settlement in the book Cryponomicon, discussing how the Shanghai banks operated.
I actually prefer Ford’s idea as the lesser of two evils – at least it is more honest.
I like the Cobden Centre and I have a lot of time for their proposal, but it represents only the first baby-step in the right direction. From their proposal:
“This one off act would not be inflationary, as the money (strictly speaking the money substitute or “credit”) already exists on deposit. Our proposal merely provides real cash to stand behind existing accounting entries.”
What “real” cash would that be? The next critical step is the establishment of a commodity backing for the pound, but even this is essentially little more than a legal barrier – I cannot see how serious monetary reform could be consolidated in the absence of power-reducing reforms to the executive and Parliament.
“Government from hence forth could be rule based. Rule 1: government must live within its means.”
And where exactly would the political support come from to ensure that – even over a period of say just two parliaments? From the likes of Carswell? With his toilet-duck rhetorical flourishing of the electorate:
“Perhaps when all other solutions have been exhausted, we could do worse than try to democratise banking?”
The stench of that word “democratise”.. and after all his other bleaches have been tried? Has he even read Baxendale’s piece? The Coden Centre are going to need better “friends” than Mr Carswell.
Yes Alisa – Ford (or rather Major Douglas) brings it all out into the open.
However, when government just prints money and hands it out to everyone (Social Credit style) people think it is crazy.
Actually it is crazy – but (as you say) no more crazy than the current system. The crazyness is just out in the open.
If Paul Marks were to refer to his e-mail of June 29 2009 he would see that he was then calling Major Douglas scum .And me personally for even suggesting that the existing monetary system was weird.
Quantitative easing shows the Guv can issue credit without debt,which is all Douglas was saying.I don’t see the sky falling as predicted by the von Miserabilists.
DBC Reed – I have been attacking the credit bubble financial system for several DECADES.
As for Major Douglas – printing money and handing it out to people may not be the action of someone who is “scum”, but it is an absurd (and criminal) action.
As for “quantitative easing” – well DBC Reed, if you still support it (after all you have read on this blog – and over on the Von Mises Institute blob), written by various peope, stuff that Major Douglas did not have access to) then you certainly are “scum”.