Bill Totten's Weblog

Monday, August 02, 2010

The Proposed Bank of England Act - Part Four

The Benefits of the Reform

The benefits of implementing this reform are enormous. By returning the exclusive right to create money to the state, and using this newly created money to reduce taxes, clear the national debt and fund better public services (rather than simply pumping much of it into an over-inflated housing market), we get the following benefits:

Government Spending & Taxes:

* The cuts in public services proposed by the main political parties could be avoided

* There would be an alternative to implementing further tax rises

* Taxes could be reduced by up to thirty per cent - or around GBP 200 billion per year. Put another way, income tax and council tax could be canceled completely.

* The majority of the national debt could be phased out over the next fifteen years, saving up to GBP 200 million per day on interest payments, and freeing up money for public services such as schools, universities and health care.

* The government and therefore taxpayers would save up to sixty per cent on the cost of infrastructure projects such as public transport, building of hospitals and schools. There would be no need to engage in costly Private Finance Initiatives (PFI), which usually result in taxpayers paying both the cost of the original project, and up to two times the original cost in interest fees.

Economic Stability:

* The currently-inevitable cycle of boom and bust would end, creating a stable economy and one of the best environments for business in the world. The current banking system creates economic instability - our reformed system would create stability.

* There would be permanent and stable money supply. It would not grow too quickly in the boom times (fuelled by debt) and wouldn't contract in a recession (necessitating the need for the Bank of England to create billions of pounds of new money 'out of thin air' by a process known as 'Quantitative Easing', as it did during the recent global financial crisis).

* Spending on the high street would remain relatively stable from year to year, rather than skyrocketing in 'good' years and crashing through the floor in a recession.

* The Bank of England would no longer need to manipulate interest rates as a way of countering the inherent instability of the current banking system. The current system of raising interest rates to 'slow down' the economy and lowering them to 'stimulate' it is much like sharing the wheel of a car with a madman who presses the accelerator whenever you hit the brakes, and who hits the brakes when you try to accelerate. Lowering interest rates to 'boost lending' (read: increase debt) throws millions of pensioners into poverty. Raising them again when the economy is 'overheating' threatens to bankrupt the very people who started the recovery by borrowing when interest rates were low, all contributing to further economic instability.

* The banking system can be changed from being pro-cyclical (constantly accelerating until we inevitably crash) to being counter-cyclical (regulating the 'speed' of the economy to keep it stable).

Government Exposure to Banking Crises:

* The reform would completely remove the exposure of the government to banking crises. The reform would allow the removal of the state guarantee on deposits, which is effectively a state guarantee on risk-taking by banks. The risks - and costs - of bad investment strategies would fall on those who endorsed the strategy.


* The reform would lower the overall debt burden upon the UK public. Currently, 97% of money is created when loans are made. Consequently, almost all money is debt. This means that we - individuals, families and government - are paying interest to the banking sector on nearly every GBP in existence. This is the root cause of our current astronomical levels of debt. By injecting debt-free money into the economy, the reform would allow UK citizens, corporations and the government to significantly reduce their overall debt burden - something which is impossible under the current system.

Real Economy vs the Financial Sector:

* The reform would make the financial sector less of a drain on the rest of the economy. Contrary to what is commonly stated, the financial sector currently does not create much wealth - it merely extracts wealth from the rest of the economy. Our reform restores the financial sector to its proper role of facilitating the creation of wealth and value in the economy. The creation of wealth and value in the economy is primarily achieved by entrepreneurs working with engineers, scientists and salt-of-the-earth working people - who were all educated and trained by teachers and lecturers - all of whom are kept in a state of productive good mental and physical health by nurses and doctors and the health system, helped along the way by the recreation and entertainment industries. These are activities that add value to society, and a well-functioning banking system should enable (rather than hinder) these activities.

Lending & Productive Investment vs Housing Bubbles

* Lending and investment would be naturally channeled to entrepreneurs and productive businesses, rather than being used to create bubbles in the housing market and push housing costs out of reach.

* The reform would remove the root cause of the recent house price bubble - endless creation of money and debt by the banking system. The 300%+ house price inflation between 1997 and 2007 has left households with a choice of either working for an extra ten years, or accepting a significantly reduced standard of living throughout their lives.

* By phasing out the national debt and withdrawing government bonds as an investment option, investors and pension would need to direct their funds towards productive uses. As they start to lend to corporations at lower than the cost of borrowing from the bank, the banks will in turn be forced to find other borrowers, and will therefore start lending more to smaller businesses and entrepreneurs, stimulating the economy from the ground up.

* The reform would ensure that we direct more money into socially useful activities, as decided through the decisions of thousands of consumers and savers (rather than the priorities of a few bankers). Rather than pumping sixty per cent of all new money (which is presently created by the banking system through the loan-making process) directly in to the housing market (creating bubbles and pushing the cost of housing out of reach), the distribution of this new money could occur first through millions of ordinary workers, who by the law of averages will make a better decision on which businesses should be supported (with their spending)

A Better Deal for Bank Customers:

* Citizens who wished to keep their money safe and have absolutely no risk of losing their savings would have the ability to do so. There would be no more Northern Rock or IceSave-style situations.

* Post-reform, banks will have a strong commercial incentive to encourage people to save as much as possible and to look for good-quality borrowers. This is in direct contrast to the current situation, where the bank benefits most if everyone is in debt and the level of savings is not important.

* The new system will require banks to share more of their profits with their customers. At the moment they can use funds on which they pay 0.1% interest to make risky deals where they earn five to ten per cent returns. They then keep the bulk of the profit for themselves, but pass on the risks to taxpayers. However, post-reform, to attract the funds for these risky deals, the banks will need to pay more interest to their customers, meaning that if when a bank takes risks successfully, the profits are returned back to its customers.

* The reform would restore the free market in banking and give power back to the consumers, rather than providing state support for failed investments, an effective privatised monopoly on the issuance of the nation's money supply, and an almost guaranteed, risk-free 'super-normal' (that is, excessive) profit each year.


* Inflation would be far less likely when the state takes control of issuing new money into the economy than when the money supply is effectively controlled by an army of loan- and mortgage-officers whose main consideration is not the needs of the economy, but their own potential to earn commissions.


* The looming pensions crisis could be avoided. Not only are huge holes appearing in the pension funds of major corporations, we are facing demographic change that could see the stock market enter long-term declines and wipe out the value of pensions. Under the existing system, there is simply no money to deal with this issue.

The Welfare State & Benefits:

* The demand for welfare payments and 'dole' can be reduced by creating a healthier and more stable business environment, and therefore creating more jobs and making existing jobs more secure. If major recessions are no longer inevitable (as they are under the current banking system), then businesses will be more willing to hire, without the fear of needing to make redundancies in the next few years. This should lead to an overall higher level of job creation.

International Trade & Currency:

* By making the money supply stable, creating a stable economy and an excellent environment for business, we can restore the British pound as a stable currency.

All these benefits are there for the taking, simply by implementing our simple reform. Our current financial poverty is an illusion created by the flawed design of the banking system. The current banking system is economically and socially destructive and must be reformed.

Bill Totten


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