AEP: End fractional reserve banking

[pmbug]

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.

Entitled "The Chicago Plan Revisited", it revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression.
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The IMF paper says total liabilities of the US financial system - including shadow banking - are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a "potentially a very large, buy-back of private debt", perhaps 100pc of GDP.

While Washington would issue much more fiat money, this would not be redeemable. It would be an equity of the commonwealth, not debt.

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."
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http://www.telegraph.co.uk/finance/...o-conjure-away-debt-and-dethrone-bankers.html

 

[DCFusor]

Well, it won't happen due to who owns all the governments, but if it should happen, I'd think most banks would suddenly have to get vastly increased spreads on loans to survive at all - if I understand this correctly.

How 'bout we return to Glass-Steagle on the way to this? Losing that one was when we really fell off the cliff on the slippery slope.

 

[pmbug]

The comments to the article are rather interesting too, FYI.

 

[bushi]

yep - fractional reserve banking, together with money being created as an interest-bearing debt, by very definition, they create an impossible contract(s) - into which, almost all of people, are entering unknowingly (when signing a loan). Thus IMHO, all loan contracts should be made null & void (impossible contracts are null & void, as far as I know, as soon as they made their way into a court). But that's just a side note, and I do not think it will happen

Good documentary re: fractional reserve banking and money creation, from a guy, that have spent most of his life researching it, and is trying to popularize the knowledge. Interestingly, he is against gold standard, and pro-silver instead (worked well for Chinese for two thousands years, I suppose. Until the beginning of XX century I believe, they were on a silver standard - and now the poor things are importing the Federal Reserve inflation, trying to maintain the peg to a sinking dollar...):

 

[pmbug]

My favorite comments to the article so far:

Buda_Nevey
Today 02:50 PM
Private bank-created money and State-created money is a false choice. Both the State and private banks are capable of being dishonest. Economic value is being created and destroyed all of the time and we need open pricing to see it. The challenge is to find an architecture that exposes money-creators to competitors and accurate accounting, so that honest money drives out dishonest money.

stolenfrom
Today 02:55 PM
The crappiest money is what circulates - according to Gresham's Law anyway.

Michael Matalucci
Today 03:49 PM
Only in the presence of legal tender laws or government controlled exchange ratios. Eliminate the legal tender laws, and the opposite occurs; the good money chases out the bad.

Honest money competition holla!

 

[pmbug]

BTW, not sure if you all know or not, but AEP, the author of the Telegraph piece, is considered in some circles to be a mouthpiece for TPTB in England. This is from 2010 (not that long ago as far as these things go):

...
Mervyn King, the governor of the Bank of England, has tonight made a big intervention into the debate on banking reform. In a speech at Buttonwood, New York, he[listed] much more radical proposals.

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.
2. The Volcker rule-style enforced breakup of banks into speculative and non-speculative arms.
3. The "Kotlikoff proposal", which forces banks to match each pool of risks with a requisite amount of capital, preventing losses in one spilling over into another.
4. Stunningly, Mervyn King imagines the "abolition of fractional reserve banking":

"Eliminating fractional reserve banking explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy. If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not co-exist with risky assets."

King does not advocate any of these radical plans - but the fact that he goes out of his way to list them, and to place them on the agenda of the UK's Independent Commission on Banking, means that we are not yet at the end of the debate about long-term reform of the banks.
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http://www.zerohedge.com/article/ba...oposes-eliminating-fractional-reserve-banking

 

[pmbug]

...
Also, the IMF paper "The Chicago Plan Revisited" by Jaromir Benes and Michael Kumhof has acquired a cult following. The paper takes on fractional reserve banking and, according to Steve Keen, this is the first theoretical neoclassical paper to acknowledge the actual nature of banking, and to take this into account in a mathematical model. We talk to economist Steve Keen about how the paper addresses the perception of banks as intermediaries between savers and borrowers.

Plus, the Financial Stability Board report released last Sunday found that the shadow banking industry has grown to about 67 trillion dollars, 6 trillion more than previously thought. The report also describes the 41 trillion dollar growth in the shadow banking system between 2002 and 2011. We ask Steve Keen about the sustainability of this debt and what happens when the system begins to unwind.
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Mr. Keen starts at the ~2:45 mark.

IMF paper discussion starts ~12:25 mark and again at ~17:10.

 

[Goldhedge]

 

[pmbug]

I had forgotten about this old thread! It should have been mentioned in the immorality article.