Why Western Banks Are Being Destabilized
By Staff News & Analysis - March 28, 2013

In a previous post, I explained that banks are inherently fragile. One way to make them more robust is to increase equity capital requirements … A genuinely radical approach would be to kill banking as we know it. Rip all banks, large or small, in two – separate deposit-taking from credit-creation. Back the deposits one-for-one with reserves at the central bank. Then fund loans not with deposits or other money-like liabilities but by tapping investors who understand they've put their savings at risk. This approach, unfamiliar as it sounds, has a long and distinguished academic lineage. Luminaries such as Irving Fisher, Milton Friedman and James Tobin have all advocated it. – BusinessWeek

Dominant Social Theme: Get rid of these pesky banks.

Free-Market Analysis: Gradually the liniments of banking reform are becoming clearer. It began as a low drum roll with the resurgence of Greenbackerism and has continued to expand. We've tracked these ideas and have been regularly attacked for pointing out the "campaign-like" nature of what is now in the works.

This article in BusinessWeek is just another example of this spreading meme. It discusses a "Chicago Plan" developed in the 1930s by Irving Fisher and Henry Simons that was re-presented in a recent International Monetary Fund proposal. We wrote about it here: Rediscovering IMF Working Papers.

In simplest terms, the Chicago Plan is a kind of Greenbackerism. The idea basically is to give the government alone the power to print money. In modern finance, central banks that are putatively independent of the government seemingly have that right.

Government central banks include those in India, China and Brazil. In reality there is no difference between the performance of government printing and private/public central bank printing of money. In either case, those doing the printing have absolutely no idea how much currency to print and will almost always print too much, giving rise to euphoric booms and then terrible busts.

Here's more from the article:

Tobin explained the essence of the idea in 1987 at the Federal Reserve's annual economic symposium in Jackson Hole:

"To diminish the reliance of the payments system on deposit insurance, I have proposed making available to the public what I call 'deposited currency.' Currency — today virtually exclusively Federal Reserve notes — and coin are the basic money and legal tender of the United States. They are generally acceptable in transactions without question. But they have obvious inconveniences — insecurity against loss or theft, indivisibilities of denomination — that limit their use except in small transactions (or in illegal or tax-evading transactions.) These disadvantages, along with zero nominal interest, lead to the substitution of bank deposits for currency. But deposits suffer from their own insecurity, unless guaranteed by the government; and the guarantees of deposit insurance are subject to the abuses discussed above.

"I think the government should make available to the public a medium with the convenience of deposits and the safety of currency, essentially currency on deposit, transferable in any amount by check or other order…The Federal Reserve banks themselves could offer such deposits, a species of 'Federal Funds.'"

More recently, Boston University economist Larry Kotlikoff has argued that we need to completely separate money from credit by introducing what he calls "limited purpose banking." It's basically the same idea.

In this new world, banks would essentially be payments companies competing to offer the most convenient services without putting anyone's savings at risk. How would they make money? By paying a lower interest rate than they receive from their reserves at the central bank, or by charging fees, or both. There would be no need for deposit insurance and regulation of this very simple business would be straightforward.

What about the lending side of today's banking industry? There would be lending companies instead — funded exclusively by equity investors, who consciously choose to put their savings at risk rather than hold them as deposits or other money-like bank liabilities. These new credit vehicles could take a variety of forms. Some might resemble bond mutual funds. Others could operate more like venture capital funds, complete with long lockup periods.

The article concludes by acknowledging, "Abolishing banking isn't a small step … but the strangeness of the idea shouldn't rule it out … Radical-seeming alternatives should be part of the conversation."

Again, there is nothing radical about these ideas. Greenbackerism is an old infection and dressing it up in new phraseology doesn't make it a better palliative. One needs to return to free-market concepts to understand the reality of this conversation and what REALLY works.

Competitive currencies within a free-market framework would work. So would gold and silver.

What won't work are fancy schemes to separate lending from saving, hoarding from monetary circulation, etc. All of these proposals presuppose that human beings can impose a money-system that is better than the one that has evolved via a free-market evolution.

It is clear, nonetheless, that it will likely be tried. Banks are being attacked and destabilized throughout the Western world. Increasingly arguments are being made for full-on public banking.

After Thoughts

This is the way the globalists hope to maintain their lucrative stranglehold over central banking – by transferring the franchise from the "private" sector to the "public" one. It will make no difference, of course, but when did common sense ever interfere with monetary schemes?

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