I agree with this article.Obviously we now have a situation in Australia where the Big Four are too big to fail and also too big to offer essential banking services at a reasonable price.

In the absence of government action to control the banks effectively (who would have thought?) then it is up to citizens to vote with their wallets.May I suggest credit unions as a viable alternative.

The article is actually quite gentle.

The word "obscene" did not appear once.

Unfortunately, the Banks are simply playing the great Aussie game of "love your monopoly".

Competition is a concept more talked about than a reality, almost anywhere you care to look.

If you build a tunnel, you get the government to protect you from competition. Even the competition that exists before you built the thing - witness the blatant protectionism provided by the NSW government to the Cross-city and the Lane Cove tunnels. In both cases, existing public roads were compromised, in order to funnel traffic to the private roadways.

If you buy Sydney airport, you are allowed - even encouraged - to hold airlines, travellers and the general public alike to ransom.

And don't forget, it took many expensive attempts before the Ansett/Qantas duopoly was broken, despite the obvious stupidity - and transparent gouging - involved in flights leaving the same airport, for the same destination, at the same time, at the same inflated fare, for many years.

It must be deep in our psyche, that anyone who makes a pile of money is held in esteem, even if the process by which the riches were acquired involved massive collusion between companies to extort from the people. In everything from toll roads to cardboard boxes.

And that is what is happening with Banks. And will continue to occur until some force that currently does not exist in this country, is brought to bear.

(Footnote: In this highly-interlinked world of ours, of course, any reduction in Bank profits will have a knock-on effect in Mr & Mrs Average Australian's superannuation. Food for thought)

Most of us have strong feelings about our Banks and our experiences of the services they offer. And indeed, like many of our private health funds, that is what they are there to do - offer services in return for the opportunity to conduct their business in a businesslike way. Unlike the so called "not for profit" health funds, our banks are expected to make a profit, not just by their shareholders but by all of us. How else are we to establish a rational basis for our confidence in the system? A system upon which we all depend. Banks borrow short (term) and lend long (term). They borrow (accept deposits of) small amounts and lend large amounts. They act as a clearing house for our transactions. They are at the centre of the economic life of our community. But how much profit is appropriate ? The share market values bank shares according (mainly) to the profit capacity of the trading entity. Bank shares seem pretty expensive to most of us. But the rational basis for that valuation is that it is sustained by the probable profit and dividend stream. Thus it seems that the market views banking as a highly profitable and relatively risk free commercial environment. Unlike many / most of our other enterprise sectors, although our mining giants also enjoy similar awe and admiration from our investors. So banks and their CEOs become prisoners of the pursuit of profits, and are bound to lose sight of the "service" ethos that most of us think used to underpin the sector. But the reality is that banks have always been operated by smart people intent on making a profit. And regulation or non-regulation seems to do little to frustrate the outcome for the customers - all of us. Competition needs to be more real for that tool to be effective, but that takes political will, which is in short supply these days. And therein lies the answer ........

In explaining why banks are so profitable, David Richardson failed to mention the main reason: banks are permitted by government to manufacture money as credit, out of thin air. If you or I were permitted to do the same, we could become obscenely wealthy too!

The process by which banks manufacture money is quite complicated. The process is rarely explained in terms that the public can understand, and the matter is further complicated when some bankers deny that banks manufacture money, whilst others freely admit it. If politicians understand the process they prefer to keep quiet about it, it seems.

The best explanation I have seen is contained in a set of old web pages starting at http://www.dkd.net/oldpoliticspages/moneyapo.html If anybody knows of a better explanation I would be glad to know where it is.

The term “bank” origionally derived from an Italian term for “bench”, where money lenders in Italy would sit behind a bench, and loan out money in return for interest.

Now we see banks deriving a considerable amount of their profits from “fees”, (and not necessarily from interest), and it can cost someone money simply to have money in a bank.

When there is a productivity crisis in Australia (and many other countries), and when almost everything in Australia is now imported, it brings into question why some banks are making so much profit.

It means that money lent from banks is not greatly improving productivity, or decreasing the trade deficit.

It also means that the banks are simply eating away at the savings of the public, without greatly improving their wealth or long term ability to pay interest.

Pericles
I thought you were in favour of licences to print money? Changed your mind?

Forkes
"If countries closed their borders to foreign finance and unnecessary foreign trade, and developed workable currencies and essential industries within their borders, they would soon have more goods available at a fraction of the price and at a fraction of the cost to the environment."

How would you decide what trade was unnecessary?

If that paragraph were true at the national level, then wouldn't the same thing be true at the state level? And if it were true at the state level, wouldn't it be true at the regional level? And so on down to the town level? and then the household? And if not, why not?

The article you cite concludes that we should urge governments to provide "a realistic currency that works". What should that be, do you think?

You're confused, Peter Hume.

>>Pericles I thought you were in favour of licences to print money? Changed your mind?<<

Since I have never stated, anywhere, that I am in favour of "licences to print money", I cannot possibly have changed my mind.

My attitude to Bank profits, and their ability to pilfer thousands of dollars a year from the pocket of every Australian family, is unrelated to my views on the system within which they work.

You are, possibly deliberately, leveraging the misapprehension that Forkes posted earlier:

>>the main reason: banks are permitted by government to manufacture money as credit, out of thin air.<<

You and I both know that this is a total furphy. But one that you consistently fail to acknowledge - in public, at least.

As you have yourself observed, if this were literally true, then there would be nothing to stop the Banks creating for themselves trillions, instead of mere billions, in profit.

Why don't they? Because (of course) they are not "permitted by government to manufacture money as credit, out of thin air"

And Forkes, old chap. A word of advice.

Any article on currency/finance/credit/banks etc. that contains the phrase "New World Order" in its opening paragraphs, should be avoided like the plague. It leads to conspiracy madness. Next you'll find yourself believing all the stuff about 9/11 being a plot cooked up by the Bush family.

Incidentally, you are aware, I am sure, that the views you point us towards were created by one "Graham Ferguson... an editor of Nimbin News and an agitator for economic and social reform. He is also an artist and animal trainer living in the Nimbin area, Australia"

Even Robert Gottliebsen is a better bet than this, in terms of useful sources. Although much of his writing, also, appears to have been heavily influenced by Nimbin's favourite leisure activity.

Forkes is correct that banks create money out of nothing. You can see an explanation of the process in my book Economia, unfortunately a bit hard to find these days, but try your library. My explanation is taken from well-known economists R. Heilbroner and L. Thurow, Economics Explained, 1994, New York: Simon and Schuster.

The creation comes about through the operation of the fractional reserve system, which effectively allows banks to loan about 10 times as much as they have on deposit. However you have to follow the transactions through a series of loans and deposits to see clearly that new money is created.

The new money is not available for the banks to spend directly. However they issue it in "loans" and charge interest, and the interest is theirs to spend, even though most of the "loan" is not of previously-earned wealth but of money newly created in a computer at essentially no cost to the bank.

I will post an account of this on my blog site http://betternature.wordpress.com/ .

Regarding David Richardson's article, he is correct that banking is a critical service. However he does not isolate the most critical part: the provision of a medium of exchange. Banking should be given special status and treatment, the way courts and the military are. It should be closely regulated, and it should be non-profit and charge for the cost of services provided. It should not be thrown to the competitive markets. Competition eliminates competitors, a simple fact our ideologues are blind to. We are very foolish to allow a minority to control such a critical service.

Yes Geoff Davies ,I've been trying to expose this rort called fractional reserve for a long time.I thought is was a 9:1 ratio but in the USA some of the banks like Lehman Bros used 30:1 ratios.
It is really difficult to find out the exact mechanism.

I think it works like this.If a bank has $10.00 in deposits,it can loan out $100.00 The banks gets to keep the interest and the money depositors money in circulation,but the principal repayed by the mortagee enters oblivion.Now that does seem too extreme,however it takes a long time for the principal to be repaid and many loans are interest only.Some of this newly generated money enters bank acounts to add to the new fractional reserve thus causing inflation.

Now the average inflation rate for the USA since the instigation of the Federal Reserve has been 3.5%.The US currency and ours have devalued by 96% in since 1913.$1.00 now will only buy 4 cents of goods in 1913. This is a 2500% decrease in value,but multiply 3.5% by 96 yrs and we only get 336% decrease in value.The rub is that inflation by these banks is compounding.If you use the compound interest formula it works out to be approx 2500%.

So banks create a compounding inflation thus depreciation of our earning capacity via the fractional reserve system.

If Geoff Davies counterfeits $22 million, it is like taking $1.00 from every person in Aust.It is stealing via the dilution of our money.We call it inflation and it is Govts and more particularily banks who are the greatest offenders.

*even though most of the "loan" is not of previously-earned wealth but of money newly created in a computer at essentially no cost to the bank.*

Ah Geoff, if only that were true! I would be buying far more bank
shares with my hard earned savings. Yes, banks create money in terms
of increasing the money supply, but its the same money going around
and around. They only need to keep a % of it as reserves.

In other words, if you deposit money at the bank and I borrow it from
the bank, the bank writes you an IOU, so it is available to you and
to me as well. That does not mean that they don't have to pay
interest, or they would be pretty foolish to compete for funds
in the domestic market, or even borrow expensive money from
overseas. Before St George were taken over, they were paying
up to 8.5% for some overseas wholesale funds.

Fact is that today banks are far more competitive, then in the days
of the good old Govt owned CBA. In those days they earned spreads
of 4% on housing loans, today it is half that.

They are making lots of money for good reasons. Firstly, banks
are very much into running super funds under various names, which
is an extremely lucrative business.

Secondly, today's spend up generation seemingly just can't help
themselves max out their credit cards, or borrow even more for
an even bigger house. Australians are living it up and borrowing
at record amounts, so it only makes sense that banks should be making
record profits.

The other good news is that Super Funds in fact are the big owners
of bank shares. So really, its Australian workers who own the banks
and who benefit from their large profits. So its not a bad way
of forced saving for peoples old age, given that Aussies seemingly
prefer to blow it on the pokies or on that new dress thats on sale,
commonly booked up on the credit card, at high interest rates.

It is amazing that Pericles and Yabby back the biggest institutions on the planet who produce next to nothing.Pericles warns that super funds will suffer,but have not our financial institutions with the aid of the banksters stolen enough,with their ponzy scaming derivatives?

It is outrageous that the tax payer again is asked to bail out these criminals who instigated the GFC!

The real criminals are Wall St backed by the US Federal Reserve.
The banks that really conrol the West are based in Europe.They own the Euro and the US $.The following banks control the Govts of the West and decide who the next US president will be.They are more powerful than you can imagine.

Rothschild of London and Berlin.
Lazard Bros Paris.
Israel Moses Seif Italy.
Kuhn Loeb & Warburg Germany.
Goldman Sachs.
Rothschild controlled Rockerfeller NY.

Govts in the West, dare not cross them .We live in an oligarchy that have over the last 250 yrs been made all powerful by the fractional reserve system of banking.They presently have destroyed real productivity in the West and made China the engine room of the world.

They were going for global dominance at Copenhagen with the Western Carbon taxes and the carbon derivatives .World Govt exposed by Christoper Monckton was in the treaty and even conservaties like Janet Albrechsten & Alan Jones rang the alarm bells.

Was it all just and illusion? Was Kevin about to sign a treaty of no consequence? Not likely.It would have been a tax that would have crushed the last essence of freedom and spirit in the West.
All the taxes and derivatives were going to the share market and the banks and the polluters would please themselves since these very banks have shares in the major energy sources on the planet.

*The following banks control the Govts of the West and decide who the next US president will be.*

Sheesh Arjay, there was silly old me, thinking that Americans actually
vote for their president! You are a mine of information, you really
are.

*It is amazing that Pericles and Yabby back the biggest institutions on the planet who produce next to nothing*

Arjay, today services are in fact something. How long would you
survive, if your ATM did not work?

The problem is that you are so naive, that you don't even understand
the role that derivatives play in our economy. Have you ever sold
a million $ worth of goods offshore? Would you like to hedge your
currency?

Arjay, you might make a living from fixing peoples broken taps or
whatever, but I can can assure you, that derivatives are an important
part of the financial cycle, of most exporting companies of any
substance.

The ABC TV, Inside Business program, on 31st May last year, reported Mike Smith, CEO of ANZ, conceding; “we’ve now got two pillars and two stumps,” referring to exposure to liability from the Global Financial Crisis [GFC].

It reported Queensland’s Suncorp declaring competition was dead.

It further reported, in the first quarter of last year, 23 of the 25 billion dollars of residential lending were accounted for by CBA and Westpac, including their effective takeover merger entities, Bankwest, and St George, respectively. These figures represented more than 90% of residential lending effectively controlled by CBA and Westpac.

The ACCC Chairman was reported as expressing regret about CBA’s takeover of Bankwest.

It reported Brett Le Mesurier, Banking Analyst for Wilson HTM, referring to the Federal Govt guarantee the Four Pillars enjoyed during the onset of the GFC, and its affect on the three remaining regionals, Bendigo and Adelaide, Bank of Queensland, and Suncorp, that; “they are effectively paying on the wholesale markets for term funding a hundred points or more than the major banks.”

Bank of Queensland Chief, David Liddy was reported as observing; “Clearly you know, when elephants dance ants tend to die.”

It reported the Four Pillars were enjoying 9-10% growth compared with the regionals 2-3%, significant of the Four Pillars failure to pass on the discount they were receiving from the wholesale markets relevant to the Govt guarantee.

[Ostensibly the Four Pillars were not passing this saving on for the purpose of hastening redeeming of their exposure to the GFC.]

In response to the comments;

“some force that currently does not exist in this country”
- Pericles

“prisoners of the pursuit of profits…service ethos” - DRW

I contend there is a practice that exists not only in this country, the known science of management. That it may be increasingly harder to discern within the banking sector in Australia, is demonstrated not as consequence of the failure of the science, but its application. - Cont.

As parents are not required to retain accreditation for parenthood, nor are politicians required accreditation for management, nor leadership. However, as differentiated from parenthood, leaders in public office may readily attain a level of management training that would assist them significantly in navigating the intricacies developed in this field, that may translate to more astute policy.

For as commented;

“The process is rarely explained in terms that the public can understand” - Forkes

I observe the record of the GFC that realised CDO’s for internationally accessible packaged loans, found the financial institutions responsible for them, unable to readily identify the loan contents of those packages, compounding the impact upon the credit freeze generated by the crisis.

The excessive practice demonstrated by this aberration observes the extent of its prudential failure as nothing less than contempt by an industry that retains prudence as its benchmark for confidence in its markets.

Therefore it appears to me, it is the culture within this field that requires redress, for the practice may be observed a paradigm and dimension differentiated from the core principles of the science, such as, proficient servicing of the market, distribution of wealth, ethical integrity and transparency.

Market leaders outside closed monopoly advantage, demonstrate as consistent, the rigour of discipline attending these principles. Consequently they are valued such that their brands generate increased and relative value.

Management case studies demonstrate, the market inevitably demands myopic performers obsessed with their own vested interest, are replaced, often realising opportunity for a new dynamic. In the Australian banking sector that change is required now, however, the flawed and aberrant ideology of the current Federal Liberal party, is observed even less likely to deliver it.

Two things happened in this country to shift the balance to the banks. First there was the sale of the Commonwealth Bank. This was a huge mistake and should be fixed by Government asap. Second, under Keating, was the move to compulsory banking for all Australians. Cash was taken out of pay offices and social security and everyone had to have a bank account or you simply didn’t get paid. These two events alone gave the banks a virtual license to control money. Remedy, for the Government to re-establish and control a bank with no day-to-day changes on bank accounts, and loans at very low interest: <3% and support loans for low income households. Competition will not serve the public interest only a non-profit operation can curtail the banker’s greed.

Underlying this whole issue is the broad move by Government to extensive Privatisation of essential public services. This should NEVER be allowed to happen. Competition: no problem. If another service wants to operate in an area that Government provides for – say Water for example – then they should be allowed to do so. But the Government should be preserving and supplying this service to everyone. Two issues exist in relation to Privatisation. Firstly it means that profit becomes a motive. Therefore, any service provision which holds no profit would not be provided. It would logically not be in a company’s interest to supply a product if the cost was greater than the return. This makes sense. When it comes to essential services there are many places where it is not profitable to deliver.
Secondly, it brings a third element to the cost of a good or service. Under public hands you have the cost of the product plus the wages to deliver. In private hands you then have to add in the profit side of the equation. This tends to add at least 10 percent to the cost of most items. In many cases even this small amount makes the service provision untenable. Therefore the private operator reduces maintenance or the quality of the service to maintain profit. This works until the infrastructure breaks down and there is not enough money to fix the problem. This has occurred already in SA with ETSA and SA Water.
To finalise the issue it should be carefully noted that Privatisation has not deliver better, cheaper service in any country anywhere in the world. In fact, in the US and the UK has been total failure providing a massive profit to business while draining the tax payer. The shift to Privatisation is a massive failure and plunges the tax payer into dept in order to maintain key services. Government should preserve all essential service in public hands and stop financing corporate profits.

Pericles
So are you in favour of fractional reserve banking, or against it?

Sometimes you have to choose between the lesser of two evils. Which is preferable:

Obscenely profitable banks that don't fail? Or

Marginally profitable banks that do fail and need bailouts?

Perhaps we should regard the extra 10% return on equity our banks earn as a sort of insurance premium we pay to prevent a Lehman Brothers type collapse in Australia.

I have posted an explanation of how banks create money out of nothing at
http://betternature.wordpress.com/2010/03/15/how-banks-create-money-out-of-nothing/

Kevin Cox has posted a useful comment there explaining how things have become even worse than the text-book process.

A couple of commenters have noted that super funds hold bank shares, thus benefitting Aussie workers. True, but only those workers who have significant super. It would be better for all Aussie workers if the financial system were more stable and if the financial cowboys weren't parasitically siphoning wealth into their own pockets.

Yabby,
"That does not mean that they don't have to pay interest"
I didn't say they have no costs, so this remark is irrelevant. I said charging interest on money created out of nothing is unearned income.

It would be legitimate to charge a fee for the service of providing a medium of exchange, and that can be done in a way that is transparent, that doesn't concentrate wealth to bank shareholders, and that doesn't mess up the dynamics of the economy, creating booms and busts among other things.

Arjay, it's nice to know we can agree about something, even if I find some of your claims a bit lurid. :-)

For it, of course Peter Hume.

>>Pericles So are you in favour of fractional reserve banking, or against it?<<

Why do you ask?

*I said charging interest on money created out of nothing is unearned income.*

Well that is exactly where I think that you still have your wires
crossed. We went through all this before on OLO, but all the
URLs are stored on my old computer, not this one.

But if you go to the Westpac website, they are a public company
and their financials are all online. Deep in the bowels of the
Westpac annual accounts, you can see how much they earned in interest
and how much they paid in interest.

What it comes down to is that if Westpac borrow 100 $, they can't
lend out 900$, more like 92$. That does not mean that the money
supply is not increased, due to bank lending and borrowing.

Sir,

In your academic dissertation on the power and monopoly of our banking magnates, you ask, “What can we do about it?” I would have asked; “What do we wish to do about it?”

As everybody knows, though very few are still alive to remember, the High Court of Australia ‘upheld’ the opinion of the combine - private Banks and non Labor Governments of Victoria, South Australia and Western Australia- to defeat Chifley’s attempt (Banking Act 1947) to nationalize the banking service.

Hence, now we are experiencing the consequences of a decision of a Court of Law and it is to that Court and more cogently, to the very Constitution that has oppressed this Nation of ours for one hundred and ten years, that we should direct our attention.

Attention that immediately would reveal a contrast.

Democracy, we are told, is the Government of the people, by the people and for the people.

In our Democracy, we have a Constitution, written by Squatters-Lawyers, understood by Lawyers and, ultimately, of benefit to Lawyers.

Armies of lawyers crowd the High Court, Supreme Courts, County Courts, Magistrate Courts and Family Courts, and perform rituals obscure to the ordinary person.

Does anybody see in them a Corporation of sort?

Does anyone see bankers monopolizing money as Lawyers monopolize Legality and call it Justice?

It all looks like a hopeless inbreeding.

Pericle
>Why do you ask?

To see whether you are in favour of licences to print money substitutes.

Yabby, read the my post at the link carefully. The first loan made against $100 deposited (not borrowed) can be $92. But that can be deposited at another bank and a second loan made against it of $83. And so on until up to $1250 is loaned (with the 8% reserve requirement you seem to have assumed).

KinkyChristian, you are accepting the false dichotomy of conventional economics. We don't have to have either kind of bank. We can have banks that are stable and do not extract obscene profits.

But Peter Hume, they are not one and the same thing, are they?

>>are you in favour of fractional reserve banking, or against it?... [so] you are in favour of licences to print money substitutes<<

But you knew that anyway. You're just trying to wind me up.

Silly boy.

Earlier in this discussion I asked for a better explanation of the process by which banks create money out of nothing. Geoff Davies offered his explanation at http://betternature.wordpress.com/2010/03/15/how-banks-create-money-out-of-nothing/#more-231 and I have to say it IS better than others I have seen. Highly recommended to anyone wondering who to believe!

The present monetary system powered by the fractional reserve system of banking distorts and perverts the real economy.The richest institutions on the planet produce nothing.To make money by diluting other people's wealth through the fractional reserve system,is not a constructive nor ethically fair way of making money.

After WW2 they could have made the poor countries wealthy and secure,by letting them generate their own currency as well as borrowing from the West for machinery and technology.Instead the World Bank aided by the IMF loaned money to corrpt Govts not caring where the money went.Corporations could then get,energy,resources and labour for a song,since the debt had to be paid.

Aust is moving to a similar scenario presently.We sell off Govt assets for a song to pay for debt and now there is almost nothing left to sell.Victoria power stations owned by the British interests are making record profits while business/individuals here,feel the greedy squeeze.

If the West did the right thing after WW2 and respected the sovereignity of other countries,living standards around the planet would have risen,and the population pressures and pollution of today would not be an issue.

Instead of spending money on arms and economically enslaving people via debt,it could have been so much better for everyone.
Greed and the lust for power rules the planet.Reap what you sew

*But that can be deposited at another bank and a second loan made against it of $83. And so on until up to $1250 is loaned (with the 8% reserve requirement you seem to have assumed).*

Geoff, absolutaly, but when that 83$ is deposited at another bank,
that bank once again has to pay interest. And so on. So the money
supply increases, in that sense money is created, but it is the
same money going in and out of banks. They pay interest on it,
they don't have it for free, unless you leave it sitting in
your cheque account doing nothing.

If you examine the Westpac figures you'll find that the banks overall
work on a spread (diff between the cost of money and interest
received), of a little over 2%.

In fact for some loans they pay more then what they charge for
housing loans, such as loans to business etc. There they can charge
10% or similar. About 40% to half of all money lent out by banks,
comes from overseas loans, which cost them more then domestic
deposits.

*True, but only those workers who have significant super*

Geoff, combined workers have something over 1 trillion $ worth of
super, which is about the value of the ASX. In other words, workers
basically own Australian industry, including banks, to a large
extent.

Yabby, your explanations are cohesive. I would be interested in your assessment of why then, Westpac failed its fiduciary duty of integrity, to pass on the discount it received from the international wholesale markets, to its consumers, as reflected by the statistics I quoted in my post on Page 3 of this thread?

Does it retain a fluid policy relating to such transactions? Or was it just being greedy and dishonest, when the significant competitive advantage it realised from the discount it received from those wholesale markets, owing to the Govt guarantee, effectively allowed it, and the CBA, to squeeze the regional banks out of the market?

Ngarmada, I think that is an interesting question, but frankly I
don't think that the big 4 did anything wrong. What you saw when the
GFC crisis hit, was a massive flight to quality, by investors and
mum and dad deposit holders alike.

Westpac was commonly referred to, among the financial community,
as the safest bank, due to its previous CEO, David Morgan. Morgan
had seen hard times and remembered the early 90s, so he kept warning
about the chance of a crisis. The result was that Westpac took less
risks when it came to loans, then did some other banks. Short term
that may have cost them in profitability, but long term it paid off.

The first thing that the big 4 did when the GFC hit, was cut their
dividends to shareholders, by around 30% or so, IIRC. Next they put
their hand out to shareholders, to raise billions of extra tier 1
capital, so that they had reserves to handle any problems.

The Govt guarantee did not make overseas funds any cheaper then
they had been in the past, it helped the banks raise their continuing
need for more rollover funds, at lower rates then the crazy rates
being quoted without it. Banks paid a fee, I gather that the Govt
earned a billion$ from those, without paying out anything. The
Govt charged AA rated banks less then BB rated banks, so small banks
would have suffered from the higher cost of the guarantee.

When overseas banks, mortgage brokers etc, abandoned the lending
market, as their overseas funding was cut off, those seeking loans
went to those who had money available and those who had it available
were CBA and WBC, as they both benefitted hugely from the flight to
quality.

“The Govt guarantee did not make overseas funds any cheaper then they had been in the past, it helped the banks raise their continuing need for more rollover funds, at lower rates then the crazy rates being quoted without it. Banks paid a fee, I gather that the Govt earned a billion$ from those, without paying out anything. The Govt charged AA rated banks less then BB rated banks, so small banks would have suffered from the higher cost of the guarantee.”

As eloquent in terms of economic speak as that explanation is Yabby, I would still be interested in how you could not interpret such significant competitive advantage effectively as a cost ‘discount,’ as identified by the reputable market leaders and analysts I quoted.

Further, if it was a ‘discount,’ why may it not be observed as ’double dipping’ as quoted by Bank of Queensland Chief, David Liddy, in the report I refer to, and why was it not passed on to its considerable number of residential home lenders at that time?

If you retain a vested interest in Westpac Yabby, it is your ethical obligation to declare it in this debate.

Yabby won't debate the real issues of bank fractional reserve rorting and their exorbitant profits because he like other interest groups hold their shares.

The present system is destroying real productivity by over inflating assets and destroying the purchasing power of workers.Investment money
ends up in institutions that have little or no productivity.

The present Keynesian system is stuffed and pumping more money into it,will not revive it's dead carcass.

Banks do increase the money supply. The mechanism that the text books teach and commentators like Yabby and Pericles believe is that banks lend a fraction of their deposits. This in turn creates a new smaller deposit and then the banks lend a fraction of that new smaller deposit. This is an interesting explanation of how things work but in real life it does not work that way.

Banks make a loan then they look for money to cover the loan. The end result in terms of the number of loans created is exactly the same as having a deposit and then lending but the implications are profound.

What matters for economic growth is the willingness of the banks to make loans not the supply or cost of money from the Reserve Bank. In other words the Reserve Bank has a marginal influence on the money supply.

Banks make more profits the more loans they give so they are always trying to sell more of their products. This inevitably leads to asset bubbles that sooner or later burst.

Evidence for the creation of loans before deposits was published by two neoclassical economists Kydland and Prescott in 1990. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=225

This further expanded and explained by Steve Keen.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Ngarmada, the Govt gave nothing away for free, but
basically undertook a commercial insurance transaction. They charged a higher
premium to those whose risk of default was higher. Given that
banks were paying higher interest on overseas funds then they
were charging you for a housing loan, what did you want them to
pass on? Most of that overseas money goes to business lending,
where its higher interest can be justified by extra interest charged
to business.

Yes, I run my own super fund and have shares in Westpac and NAB.
So I've taken the trouble to learn a bit about the truth regards
banking and not the hysteria which people like Arjay and others
spread.

Which leads to the question of what can be called excessive profit?

Westpac for instance, have loans outstanding of well over 400 billion $.

Their net profit is a bit less then 1% of that. In other words,
if they charged their clients 1% less interest or paid an extra
1% for their money, they would effectively be losing money.

I really don't think that 1% is excessive.

There is also a dependency issue here.

In the same way that we depend on the Banks to keep our Super funds healthy, the government relies on them to deliver tax dollars to support the Federal Budget.

$10bn would be a big hole to fill.

The question is, of course, whether that ten billion would be better off in our pockets than theirs.

While I have no difficulty in answering that specific question, it leads to a whole other discussion on why are we taxed the way we are.

Changing that system, and in doing so releasing the government from its dependency, is not just a matter of bashing the Banks.

Yabby - OK, I take your point. Although new money is being created, as each deposit is made it appears to be "old" money, or rather there is nothing to distinguish whether it is new or old. Given that, a bank pays interest in return for the deposit, and therefore charges higher interest on loans made from that deposit. So there's an intrinsic cost in the money-creation process. I think that's what you're saying. Correct? I'll consider the implications, but it may be moot given the comments below.

Regarding super, "workers" may in principle "own" Australian industry through super funds, but they have no control. They don't even have the minimal control direct share-holders have in theory. And you gloss over the fact that many people have little or no super. In a stabilised system, direct ownership would be less risky, and would then permit more control by workers. (You could even have employees owning the enterprise they work for - it already exists, but on a tiny scale.) By eliminating financial cowboys, more wealth would flow to workers and the present obscene extremes of wealth (and power) would be reduced. Please note - this would not be socialism, it would be a more equitable market system.

Fickle - Steve Keen argued to me some time ago that loans precede deposits but I couldn't get why he thought it was important. I missed the article you linked to from last year, and that makes it clear.

Forkes - thanks for the complement. I see Steve Keen gives another good account of "the money multiplier" mechanism - and argues convincingly that it's not the dominant mechanism in our system. I commend the link supplied by Fickle Pickle.

All - The result of Steve's analysis is that banks (and others) at present can create credit almost without limit, and at great profit, and this produces debt bubbles and crashes. Different mechanism, similar end result.

*So there's an intrinsic cost in the money-creation process. I think that's what you're saying. Correct?*

Absolutaly. For each time that money goes around, back into another
account, it is lent back to the bank and they have to pay interest.
The money supply still grows.

*"workers" may in principle "own" Australian industry through super funds, but they have no control.*

Not so Geoff. Fact is that most workers simply arn't interested.
They look at the bottom line on their slip and the more profit
it has made for them, the happier they are. But they can choose
their super fund, many are union run. They can even run their
own fund, we have a few hundred thousand of them now. I quite
agree however, workers should take more interest in how their
super is managed. Most are more interested in how their footy team
is doing.

* And you gloss over the fact that many people have little or no super.*

Hang on, 9% plus of all wages are paid into super funds. Anyone who
works, would have super.

*and this produces debt bubbles and crashes.*

Geoff, it is the role of the reserve bank to regulate things, so
that booms and busts don't occur. They have lots of power and can
do so. Personally I agree that we have a housing bubble in Australia.

Banks focus on safety, to make sure that they are repaid. But we
saw what happened, when American banks, mortgage brokers etc moved
in, who sourced money directly from overseas. Banks lost a big chunk
of their business, low doc loans and hardly a deposit became common,
which left the banks in a sticky situation. Now that most of those
have fallen over, the big 4 are tightening up again, in terms of
the deposit required, to buy a home. To me that is a good thing.

At the moment, our economy depends very much on China. If things
go wrong in China, and they pull the pin for a while, then you are
going to see lots of tears.

Yabby -

It is not practical for me to monitor the firms my super fund invests in, and then to monitor those firms' behaviour. So my control is not "in practice", it is only "in principle", which is what I said.

Yes, a lot of wages money goes into super funds, but a lot of people don't earn wages, or have only earned wages for part of their lives (many women especially). So they have little or no super, as I said.

The whole point of Steve Keen's post is that most money creation is beyond the control of central banks. They do not have the power you attribute to them. If they still have any power, evidently they're not using it well. Banks' behaviour is creating booms and busts, because they profit most from creating more credit, then stop lending when it all goes pear shaped.

Banks used to pretend they focussed on safety, then they started gambling in the financial markets. OK, perhaps ours did it a bit less than others, but it's naive to think their focus has been on safety.

I've conceded your point about the cost of money creation, but I think you're still quite uncritical about a lot of what banks are doing, and the consequences.

I agree about China. I think we ought to be investing in much more of our own self-sufficiency. This whole free trade thing is very naive, like so much of mainstream economcs.

*It is not practical for me to monitor the firms my super fund invests in, and then to monitor those firms' behaviour.*

Fair enough Geoff, like most people, you most likely lead a busy
life and have other priorities. The point is, you do have a say
in how your super fund invests and how those companies behave.
Rest assured, your super fund would have a good chunk of its assets
in Australian bank shares. Part of your annual bottom line, would
depend on them for profits.

Your super fund managers would be doing what they do, ie benchmarking
banks against each other and any CEO not generating increasing profits
through more lending, would soon be out on his or her ear. For super
fund managers are of course highly paid and they compete with each
other for ever better figures, to impress you, the customer. Then
they can charge you a big fat fee and obtain a pay rise.

*They do not have the power you attribute to them. If they still have any power, evidently they're not using it well.*

I would have to disagree there Geoff. Central banks can increase
interest rates. Central banks can change the level of reserves that
banks need to keep. The effect on lending, would be quite dramatic.
Just how much power Central banks have, has been demonstrated by
the US Fed, when a crisis hit the US. Bernanke has used his powers
but he also avoided a global depression in the process. Besides,
if the RBA did not have enough power, the Govt could give it to them
at any time.

Yes, many women have less super then men, but these days most women
do in fact have a career and AFAIK women also have the right to tap
into hubby's super. These days, if only one partner works, then
you are doing ok. Its just about a luxury.

Geoff it seems presently that out RBA has less control over monetary policy or the banks.Recently they have not passed rate reductions on and now are putting up rates independently of the RBA.The RBA's board is mainly made up of corporate interests.People like Frank Lowy should not be there since they can influence markets to suit themselves by acting or not acting when they should.John Howard gave the RBA too much power.

After WW2 with the Bretton Woods agreement countries were beholding to the USA via the IMF and World bank.They were not allowed to create much of their own credit so they had to borrow from the world central
banks.When we went off the gold standard in the early 70's banks went into overdrive in the production of money that fed share and property markets thus over inflating their values.Today two people have to work just to pay the bills and survive.

The GFC will not go away with more of the same ie creating more debt to service derivaties and hedge funds.Dick Smith has been warning for decades now that we need to support our own industries but no one listened.The greed of the minority ruled and thus we have an oligarchy,whereby both the major parties are controlled by the corporate elites.

The Murdoch and Fairfax press can make or break a party,so all pollies have to toe the line.Keeping the bastards honest was too big a task.

Any new parties will suffer the fate of One Nation.The electoral office has just tried to de-register the Citizens Electoral Council.They said they rang up a number of its listed members and could not reach them.You have to 500 listed members.When confronted with a list of thousands,they would not say which members they tried to contact thus their decision still holds and now will try to de-register this party.This is how dirty the game has become.

I'm not optimistic about our future since the oligarchs have too much power.

Arjay, you overlook the fact that the Keynesian model policy instruments that avoided severe impacts from the GFC, he developed from the events of the Great Depression.

Yabby, thank you for your contributions. I would note the US regulatory authority with jurisdiction over derivatives, warned Bernanke as far back as 1997-98 of the potential threat inevitably realised as the GFC, and the recommendations of that authority were denied by Bernanke and the US Govt instrument responsible for oversighting such issues.

Of macro economic perspective, I would observe the following;

[1] resolution of the energy crisis being a key to future global prosperity. Since man discovered the ability to make fire, the harnessing of energy has been key to our progress. We now realise linear energy sources are unsustainable and inefficient, therefore there is no alternative than to move to renewables.

[2] I agree with your assessment of the influence of China, they took the hit of the GFC, and it hardly dented them. It was a lot of their money driving the boom, yet with the onset of the GFC, the GDP growth of China only halved to 4%, a rate any country would be very happy with at any time.

The economic ascendency of the Asian tigers may be observed with comparative analysis of current US debt. For currently, if the US did nothing with its GDP but pay its debt, it would take four years for it to break even.

China is facing inflationary pressures owing ostensibly to creeping global recession, to date a hangover of the GFC. Very recently reported, it has determined slowing its rate of growth, however, currently it is a decision of which it retains the privilege of implementing the time frame and settings.

[3] that the global western economy is reliably predicted to enter into gradual decline over an extended indeterminate period, until GDP growth rates [and effectively standard of living rates] between the West and Asian tigers comes into balance. The reliable factor qualifying this prediction is the expenditure multiplier ratio.

Yabby,

Banks ONLY increase the money supply by collateralising existing assets. Banks enable a person with an asset to "monetize" an asset by buying partial ownership of the asset. The bank can sell the asset if the loan is not repaid. Most assets that are used as collateral can also be rented. Hence it is reasonable for a bank that monetizes an asset to also collect rent on its "share" in the asset. Hence it is reasonable for a loan to attract interest. It is a historical accident that we only create money that earns interest.

For most of our transactions we do not need money that attracts interest. If I purchase something from you with cash then I do not pay interest on the money. Why should I use interest paying money when I buy something from you when I use money from a bank account and not cash?

When I get money from an investor who wants to buy equity in a future asset I am about to build why should I use money on which interest is paid?

The problem with our banking system is that ALL money attracts interest whereas for the majority of purposes we need a banking system where the only money that attracts interest is savings or money created by monetising an existing asset (which is also savings). This also implies that we should only use interest bearing money when we buy existing productive assets.

We can solve the banking crisis and get rid of the business cycle by judicious creation of a small amount of interest free money through interest free loans. This money is then used for purposes where we do not require interest bearing money. An outline of the use of interest free loans that also "solves" the ghg problem can be found at http://cscoxk.wordpress.com/2010/02/24/zero-interest-loans-for-ghg-mitigation/

We only need to create a small amount of interest free loans because once such money is created it can be continually reused for all transactions until the loan is repaid.

macro economics - continued

[4] With further potential impacts of climate change, the moot question in the west must be, which reliable instrument do we use to turn our position around? For as the GFC potentially demonstrated, economics as a comprehensive science retains a few bugs at the least, and is why it is not yet generally accepted as confirmed.

The instrument most obvious to deliver resolution to this issue is the science of management, constant of observation of its applied principles, to deal with, and deliver on such issue. The reason it did not save us from the GFC, is simply because it was benched by the abject contempt demonstrated by those responsible for its application, political and market leaders inclusive.

Most people are ignorant of the science of management, and many who are not, myopically disregard its applied principles for reasons of the expedience and convenience of their vested interest, as the GFC again reminded us.

[5] that we require new paradigm and dynamics for developments such as renewable resources, and for balanced market regulation, we may readily observe management science comprehensively capable of delivering such outcomes when applied with propriety.

Summary
The Levitt paper, Marketing Myopia, produced from Harvard in the mid 1980’s, has not diminished of its credibility and relevance to the successive events that share in common their economic malaise observed of recent economic eras.

For it is myopia, of vested interest, greed and indifference, its aspiration and associated self adulation, that is observed to continually fail and beset us, that further, the principles of scientific management are also able to assist with remedy. We need to get with the program, for lesser consideration is observed incomprehensive.

We've been here before, Fickle Pickle.

>>We can solve the banking crisis and get rid of the business cycle by judicious creation of a small amount of interest free money through interest free loans.<<

It was thoroughly thrashed out last year in the posts following one of your articles.

http://forum.onlineopinion.com.au/thread.asp?article=9319

Back then we ended up talking about building an airline reservation system for $2m, which is still about as feasible as delivering the world from climate change through interest-free loans.

At no point did you fully address the issue of "where does this money come from", and ran a mile when asked "what happens if the project fails".

Has anything changed since then?

The point of disagreement to which we kept returning was that there is absolutely no justification for anyone, governments included, to allocate risk money (i.e. project funding) without an appropriate compensation for doing so.

Underneath which is the unassailable reality that money (currency, exchange medium, whatever you like to call it) has absolutely no measurable value unless and until it is being used. If you put it in a cupboard and lock the door, it has no value. Only when you unlock that door, take it out and use it for something - even if that is simply lending it to a Bank - does its value become apparent.

Applying this to the concept of interest-free project finance, we find that the use of these funds is actually costing you money - the opportunity cost of getting interest elsewhere.

So either you ban interest altogether, in which case any available funds will be directed towards no-risk ventures only, or you live with the fact that a hybrid system is essentially unworkable.

Pericles,

You did not understand my responses last time. Hopefully I can do a better job this time - but please try to understand what I am saying not what you think I am saying.

First the proposals do not change the existing system but add different loan types. The existing system continues as it is so why ask me anything about allocating risk money? That does NOT change and certainly what I propose does not affect the ability of people to risk their savings or assets and get adequately rewarded.

The unassailable reality as you say is that money has no measurable value. So why do you insist that it all has to earn interest? Why does it suddenly become something of value when it is used. It is NOT money that has value it is the loan or the investment that has value.

We have invented the idea of monetizing assets and charging interest on the money as a way to ensure that loans get repaid. We can charge interest on the loan but we do not have to do it via the money. However, it is convenient for the amalgamation of small lots of savings and small amounts of money created by monetising many small assets to pay interest on large loans via interest on money.

There are uses of money where this is not necessary and it is those uses of money that I am addressing. That is, we can have different loan types where we ensure loans are repaid by means other than seizing assets if the loan is not repaid.

This matters. If we use interest free money for normal trading it will drop the cost of short term credit to zero for people with good credit ratings.

If we get rid of the cost of money to build new community infrastructure we will eliminate much of the debt burden of governments. It is madness that a government pays interest on money to build community infrastructure because we can use interest free money since the loan repayments are guaranteed by the government.

Fickle
If we can get rid of the cost of money to build new community infrastructure, why not get rid of it for everything? That way we could access unlimited capital at no cost.

Pericles
You can have a license to print money substitutes without fractional reserve banking, but you can't have FRB without a license to print money substitutes.

If you run a shop, and someone comes in to buy something, how can you tell whether he's funding his purchase with money or with money substitutes?

Peter,

That is a good question. Yes I believe we should use interest free credit to finance new productive assets and I have a market based approach that will limit the amount interest free credit we need to create in each sector of the economy - and a way of allocating the credit across society.

We can be selective and as a society we will probably decide it is better to build new hospitals than it is build new cigarette factories or breweries so we will encourage the things we want as a society to encourage by only giving projects in those areas of the economy interest free credit.

The most pressing ones at the moment are investments to reduce ghg levels and investments to increase the utility of the water. We do not need to encourage the building of more fossil burning power plants.

The principle of interest free credit can be applied to other areas and it turns out it is good way of funding health care and turn it into a true market. It would solve Mr Rudds Health Funding problems.

It has great potential for making us all very wealthy because it uses market approaches to ensure the best allocation of our resources for productive purposes.

The interest bearing money approach to the creation of credit encourages asset inflation and non productive uses of finance and does a poor job of allocating resources for wealth generation.

We do seem to be talking at cross purposes much of the time, Fickle Pickle, I'm not sure why.

>>First the proposals do not change the existing system but add different loan types. The existing system continues as it is so why ask me anything about allocating risk money?<<

I was pointing out that they would have enormous difficulty operating simultaneously, given that one provides a return on investment that is tangible and calculable, while the interest-free loan provides neither a calculable return on investment nor an assurance that the principal will be repaid.

Given that sort of choice. money is unlikely to flow from the known to the unknown. Nor, I suspect, would governments be thanked for allocating taxpayer funds in that manner.

>>Why does [money] suddenly become something of value when it is used. It is NOT money that has value it is the loan or the investment that has value.<<

That's my point, exactly.

Money's value only becomes measurable when it is used.

And that measurement - as you point out - is the value of the investment. In this sense, money is simply a sophisticated form of information, which changes dynamically according to its use, and with time and volume also contributing parameters.

>>we can have different loan types where we ensure loans are repaid by means other than seizing assets if the loan is not repaid.<<

In this scenario, what substitutes for security?

>>If we use interest free money for normal trading it will drop the cost of short term credit to zero for people with good credit ratings<<

In an interest-free world, how would I achieve a "good credit rating"?

>>It is madness that a government pays interest on money to build community infrastructure because we can use interest free money since the loan repayments are guaranteed by the government.<<

What is the source of "interest-free money" in this scenario? Presumably, the taxpayer?

I still must be missing a step in your logic, and apologize if the questions seem rather basic.

So do you think we could dispense with interest altogether then?

I'm sure these questions are leading somewhere, Peter Hume. Most intriguing.

First, the riddle.

>>Pericles You can have a license to print money substitutes without fractional reserve banking, but you can't have FRB without a license to print money substitutes.<<

Ye-e-e-e-e-es.

I have also found that you can have a driver's license without driving a car, but you can't drive a car without a license.

Does this help us, I wonder?

Now the question.

>>If you run a shop, and someone comes in to buy something, how can you tell whether he's funding his purchase with money or with money substitutes?<<

If it is in physical form, I would generally hold it up to the light, then compare it to the list taped to the side of the till. If it is in the form of plastic, I'd simply rely on the message "Approved" that comes back from the Bank.

That works in almost every case, and the rest is covered by insurance.

Ok, I'm ready for the next one.

Fascinating.

You can drive a car without a licence, you're just not allowed to. But you can't practise fractional reserve banking without multiplying money substitutes. So if you're in favour of fractional reserve banking, you are necessarily in favour of multiplying money substitutes.

Okay, next one.

If you held it up to the light, and determined that it is a bona fide Australian government-issue 'banknote', so you decided correctly that it was truly money and not a money substitute: still, how would you know that he hadn't withdrawn the cash from a credit account comprised entirely of money substitutes unbacked by money or any asset?

Poor analogy, Peter Hume.

>>You can drive a car without a licence, you're just not allowed to. But you can't practise fractional reserve banking without multiplying money substitutes.<<

You're getting a little carried away with this "money substitute" malarkey, and are getting a little tangled up.

>>so you decided correctly that it was truly money and not a money substitute<<

Indeed I did.

>>, how would you know that he hadn't withdrawn the cash from a credit account comprised entirely of money substitutes unbacked by money or any asset?<<

He may well have done. But it is irrelevant.

Because the fact remains that when he handed it across the counter, it acted in exactly the same way as any other money, in that it was translated into goods. When I take it to the Bank tomorrow, they are going to give it exactly the same treatment as all the other notes in the pay-in envelope.

If I had accepted plastic, those slips of paper that we used to generate from the card imprint machine acted in the same way. Despite the fact they clearly weren't actually banknotes themselves.

Even the zeroes and ones that are exchanged when the machine reads the chip on the card, behave in exactly the same way as any other form of money.

If I had been of a mind to accept cowrie shells, despite their fine history, they would be something of a challenge to turn into money, thanks to the lack of a freely available exchange mechanism. But, if that was all the customer had to offer, I could well be sentimental enough to turn back the clock a little for him.

All of these are money.

Or "money substitutes", as you call them.

And they all perform precisely the same function.

I am sensing, however, that you see some kind of problem with this?.

If we put a tax on the amount of inflation created by the fractional reserve system,then we can limit the inflation and thus the dilution of people's wealth via the creation of too much money.This would also help reduce income taxes.Why not a fractional reserve inflation tax?

Most of the money created by the banks is done so as debt.With the computer age very little cash is created by the RBA and thus debt rather than savings calls the tune.I'm sure our own RBA could create a lot of our credit instead of borrowing OS.Kevin's borrowing from China has created a lot of inflation and we are paying interest on worthless ,wasted money.The stimulus money could have been created by the RBA and inflation controlled by Govts not putting up taxes,power bills etc.

If the economy gets overheated then rates could be raised.I see no reason for rates to raised at the moment.

Pericles and David,

Interest is useful if it is used appropriately. In the changes suggested most loans will continue to be interest bearing because they will be made with existing money.

It is the increase in the total money supply that need not bear interest and it is the use of money for trading that need not bear interest.

Where money represents savings then we want some method of paying people for making those savings and interest is appropriate and we all understand it.

Where money does not represent savings but represents credit for new assets or value for trading purposes it is inappropriate for the money to earn interest because the money does not represent savings. When we start thinking this way many of the suggestions for monetary reform make sense. Things such as Chris Cook's peer to peer credit and Rodney Shakespeare's Binary economics, Paul Grignon's electronic money, calls for community currencies, and calls for alternative currencies based on measures such as kilowatt hours make sense.

I must emphasise again. What I propose leaves the existing system intact. It introduces new ways of increasing the money supply without interest for purposes where interest on money is inappropriate. To understand it it is necessary to imagine the system with these new ways of money creation in place.

It would be easy to try out the ideas on small scale and observe what happens and see if the system will adjust itself as predicted. We can talk about this until blue in the face and we will be none the wiser. If we experiment then we can see what happens.

One such experiment could be the ACT government funding the building of the Cotter Dam with interest free credit that the community guarantees. The residents of the ACT could have a new dam without an increase in the price of water and paid for from the increase in the supply of water rather than savings.

Pericles
By money substitutes I mean any token standing for money but not backed by money in specie. So for example, in a fractional reserve system, where the reserve requirement is 8%, the 92% are money substitutes.

So if money and money substitutes perform the same function, then being in favour of a licence to print money substitutes, is economically the same thing as being in favour of a licence to print money?

Fickle
The idea that we should try it in practice and see what happens depends on the assumption that the underlying theory about interest is correct: that we can dispense with interest on loans of money substitutes. It also depends on the assumption - correct me if I'm wrong, that the original problem we are trying to remedy is money that 'represents credit for new assets or value for trading purposes', and that we should fix the problem by passing a law making it illegal for the lenders to receive interest on loans of such money substitutes. But if the original problem is the creation of money substitutes unbacked by money in specie, then surely the root of the problem is the creation of money substitutes unbacked by money in specie, rather than interest thereon? If the interest can't be justified, what is the justification for the money substitute on which it is based?

Arjay
If the original problem is the amount of inflation created by the fractional reserve system, and the fractional reserve system is in effect made compulsory for the whole population by the governmental granting of licences to print money substitutes, then there's no need to put a tax on fractional reserve-generated inflation: all that’s necessary is to stop doing what’s causing the problem in the first place: granting licences to print money substitutes.

I'm not sure you are right, Fickle Pickle.

>>We can talk about this until blue in the face and we will be none the wiser<<

The discipline of writing down ideas as part of testing their resilience is actually a very important one. You will be able to see any flaws or gaps far more clearly.

Because the devil is, as always, in the detail. Not in the concept, which can be as bright-and-shiny as you like. It's the detail that determines – always and forever – whether a scheme/business/enterprise will work

You mention Chris Cook's peer-to-peer credit.

Lovely theory.

But closer examination shows it slightly less bright-and-shiny.

“Let's consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.”

http://www.policyinnovations.org/ideas/innovations/data/000085

The essential ingredients are: “a neutral custodian”, “agreed upon affordable rental”, “investors” and “management consortium”.

These are each brand-new entities that need to be created for this system to function.

But each of these already exists in our present environment.

Banks are neutral custodians. The market sets a price. Investors exist, where there is income to be earned. And there is a wealth of property companies around the place to do the job of a management consortium.

Inventing an entirely new system might look good on the whiteboard, but each element needs to operate better than the existing processes for it to be anything more than a two-dimensional idea.

It occurs to me looking through the others you mention, that they are all attempting the same thing as Chris Cook. To replace one form of financial exchange medium with another. They each seem fixated on the need for “something different”, without making it clear why money itself, rather than how we use it, is the problem.

But I still may be missing something?

Peter,

Money is a measure of value. It can also be a store of value. When it is a store of value it attracts interest. When it is used as a measure it should not attract interest.

There are no laws that need to be passed. These are agreements we make between participating parties and there is plenty of contract law to cover what is needed.

We use money to compare things. So we say that this basket of goods is of value X and then we say that this different basket of goods is also of value X and so we agree to swap the two baskets.

There is NO justification for charging interest on the money used to facilitate this exchange - but that is what we do. There is no need to charge interest on the money used for trading.

The more difficult one to understand is money to create new assets. We can create money to build a new asset and get the asset to repay the money. Before the asset is built it has zero value so there is no justification to charge interest on the money that it represents - and in fact we don't. When you invest in shares you do not expect interest plus dividends yet that is what is asked when we invest in building new assets.

This is why we get so little investment in new assets and so much churn of people buying old assets.

The existing system of money creation favours buying old assets over building new ones. I am proposing that we favour building new assets over old assets by changing the way we create money for new asset investment and we start with new assets that are public infrastructure assets.

Again there is no need for any new laws. We can do it with existing contract law.

This is the most constructive, least acrimonious discussion that I've encountered on OLO - thank you. However it is struggling because of poorly-defined terms and some unclear concepts.

Can I suggest adjourning to a web site that Fickle and I set up last year, but which I haven’t used much. The following link is to a basic discussion of money as a medium of exchange, with terms clearly defined.
http://stableproductivemoney.wordpress.com/2009/03/18/properties-of-token-money/
Perhaps you could have posting privileges if you want to put your ideas into a short essay – and Fickle agreed.

Most of our money is token money, having little or no intrinsic value. Effectively, neither is it backed by a commodity. A key point is that unbacked token money is implicitly a contract between the issuer and society (I undertake to return real value to the market, to redeem the value-less token I just issued). In effect, token money is backed by a society’s mutual trust.

Another key point is that charging interest on loans entangles the money supply with the investment process. This, it seems to me, is the underlying reason why a problem on Wall Street has such a dire effect on Main Street. In essence, if investments fail the money supply shrinks, and that chokes off legitimate commerce.

I think the solution is to stop supplying new money as “loans”, and to supply it as a service, with appropriate fees. This has been done in various ways at various times, but has never become general. Essentially it can work like a line of credit or a credit/debit card

Investment of existing wealth can proceed as usual, with investors gaining a return, either in the form of dividends or as interest. (There is a separate problem with charging interest, which is that the lender does not take on any risk. This is a market failure, because proper pricing requires that risk is accounted for. It is also a moral failure.)

If the money supply is independent of investment, then the failure of investments will affect only those directly involved, instead of dragging everyone into a recession.

And my last post crossed with Pericles' and Fickle's.

Fickle, I don't think money is a store of value. It can be a measure of stored value, but the value is usually stored as an investment in a thing (diamonds under the matress) or an enterprise. Fundamentally money is, or should be, a medium of exchange. As part of that function it measures relative values. Prices are only established during exchange (which is why the biosphere has no definable monetary value, because there's nothing to exchange it with).

Fickle I also have reservations about using new money to invest in new assets, because that makes the money supply vulnerable to the failure of the investment. It could be done in carefully restricted circumstances (with which you probably agree) and with, in effect, insurance against failure. Such things are done, and grossly abused, on Wall Street, but stricter regulation should limit the abuse.

Pericles, I'm not sure I got your point. Do you mean we should not trial new ideas? Or just that we should thoroughly debate them first? I would certainly agree with that, and also with Fickle, because only a real-world test will turn up all the connections and unexpected consequences the idea might involve.

No Pericles, you are on the money [excuse the pun]. In fact the movement instruments you indicate, and as reinvention, you extrapolate, may be observed consideration of the same elements underpinning realisation of the event of the GFC.

The fixation you identify is exactly that I refer to in my previous posts of myopic syndrome attending such consideration. The instrument required for such resolution, is the science of management, however economists, synonomous with current observation of IT practitioners, ostensibly believe that as they are at the cutting edge of progress, they are too clever to retain such need for fundamentals of a known science [self adulation]. Therefore they consider such requirement beneath them [arrogance].

That is required is application of fundamental principles of management, currently the most obvious of which is balanced regulation and distribution of wealth, and associated with the core principle of consolidation of resources relevant to development of renewable energy sources. These achievements will drive economic resurgence in the west according to the readily observed current macro economic settings and position. It is the focus which is required to be attended.

Fundamental scientific principles are differentiated from generalised ‘mission statements,’ or notions or initiatives of interest, as they are proven. Therefore, if practitioners are not able to apply themselves to such critical analysis, they are simply observed not competent.

Geoff Davies is right; the discussion will flounder without agreeing to definitions of terms. In particular, the relation between money, the goods it exchanges for, and credit, is clouded in confusion, which then affects the discussion of interest, inflation, and the wider economic and systemic effects.

I propose that:
1. money, in the broader sense, comprises three components: money in specie; money certificates (money substitutes backed by money on deposit) and fiduciary media (money substitutes not backed by money on deposit)
2. money in specie i.e. money properly so-called, comprises commodity money or fiat money.
3. commodity money is for example shells where shells are money, and gold where gold is money.
4. The value of commodity money comes from the market value of the underlying non-monetary use of that particular commodity, for example, the market value of shells as decoration or of gold for industrial and jewellery uses.
5. The value of fiat money comes from the stamp impressed on it by the issuing authority, not from the commodity value of the underlying medium. (If the metal value of fiat coin exceeds its stamped value, the coins will be melted down and sold for their commodity value.)
6. The primary function of money is as a medium of exchange. People get it in order to exchange it later for consumption or production goods, not as a consumption nor as a production good in itself (- except Scrooge McDuck, who gets it for swimming in in his money bin).
7. Money evolved from market transactions because of the disadvantages of barter ie direct exchange– oranges for armchairs. Better to first convert one’s product into the most generally acceptable commodity, and then later exchange that for what one wants. Thus the reason money arises, is because it is the most generally acceptable medium of exchange, the most marketable commodity.
8. No money in history ever originated by fiat. (In theory it is impossible as government would need to specify the structure of prices on the day of creation.) Fiat money always originates by piggy-backing on a pre-existing market-originating money.

Geoff,

I don't disagree with you in the abstract about money not being a store of value BUT that is the way it works in the minds of almost everyone and hence that is what we have to work with. People believe, and it is true, that if you put money in a bank it will earn interest. Hence it does have value. We cannot change this way of viewing things, nor is it necessary.

Peter,

I have debated with others over the past year or so about the definition of money and it rarely leads to much enlightenment. I think it is more productive to concentrate on observing what happens in the financial system and try to describe the "natural world of finance" much as a naturalist observes and documents what happens. The main thing about finance that has been observed but is not being acted upon is that loans are created first then money is created. This is an empirical observable fact and has profound implications. It means that the Reserve Bank has little control over the supply of money and it means that "to fix" the financial system we have to fix the way we create loans.

Pericles

My interest in all this is to get investments in renewable energy and ways of reducing the level of green house gases. The current financial system will not succeed in directing enough investment to this purpose to stop catastrophic climate change. I think there is a good chance that we can do something about it - but the first step is to fix the financial system so we direct investment (loans) in the appropriate direction.

I will put up a draft of a submission I am making to a Senate Enquiry later this evening. It will be at the URL geoff mentioned above http://stableproductivemoney.wordpress.com

I will let you know when it goes up.

The latter, Geoff Davies.

>>Do you mean we should not trial new ideas? Or just that we should thoroughly debate them first?<<

"Trialling" new ideas is fine. Except that when they don't work out.

The concept of peer-to-peer credit is attractive, for example, until someone defaults. It is not really enough to say "read the rules", when the process you propose is supposed to be somehow better than that which it replaces.

Peter Hume's suggestion is too narrow to be of any assistance.

>>I propose that... money, in the broader sense, comprises three components: money in specie; money certificates (money substitutes backed by money on deposit) and fiduciary media etc.<<

The piece missing is any justification. Why do we need to identify the forms separately? And having done so, what impact does the existence of any difference in labelling have on the use to which it is put?

Fickle Pickle, I'm with Geoff Davies on this one:

>>Money is a measure of value. It can also be a store of value. When it is a store of value it attracts interest<<

That simply does not work.

In order for the "stored" funds to earn interest, they need to be put to productive use. Lent to someone to start a business, for instance. So they aren't actually "stored", merely transformed into another transactional instrument. If they do in fact lie inert in a vault, only a selfless philanthropist would pay interest on it.

>>When you invest in shares you do not expect interest plus dividends yet that is what is asked when we invest in building new assets.<<

There are already many different ways to invest. If I issue the right sort of convertible bonds to my backers, for example, I give them a rate of interest, and an opportunity for capital appreciation, and an opportunity to receive dividends.

All in the same instrument.

I will certainly have alook at the site, Geoff Davies. I notice it talks of the Cotter Dam project, which was on my list of questions to ask Fickle Pickle when the moment was right.

A QUESTION FOR GEOFF DAVIES:

We agree that banks manufacture money as credit, out of thin air, but I don't understand how they hide all the profits they must make from that process. Sure, lots of people think banks are excessively profitable, but others such as pericles can produce figures to show that the profits declared by banks are not excessive compared with things like the capital they have invested and loans they have on their books. So, how do banks hide the super profits they must make from interest charged on their manufactured money as those profits are smuggled to the vaults of Rothschild or wherever they end up? I would really like to know.

*My interest in all this is to get investments in renewable energy and ways of reducing the level of green house gases. The current financial system will not succeed in directing enough investment to this purpose to stop catastrophic climate change.*

You could well be very wrong there, Fickle Pickle.

Green energy is in fact the new big venture capital baby in Silicon
Valley and they are throwing huge amounts of money and brains at it,
all interest free too.

But you do need to have solid ideas Fickle Pickle, they are pretty
good at weeding out those whose dreams have no substance.

The US venture capital industy has enough runs on the board, to show
that they can achieve most things, by bringing together enough brains
with enough money. Do not underestimate their abilities and
innovation.

With the imminent collapse of the US Fed dollar,Ron Paul the Congressman for Texas wants Congress to issue a new competing currency to the Fed fiat money.His new currency he wants to be backed by precious metals but there is not enough gold or silver to back it.I've suggested that they back a new currency by the total wealth of the US economy ie national parks,roads ,Govt infrastrusture etc that are redeemable by shares in public property.This will mean that the new currency is backed by substance and thus the currency can actually appreciate in value as GDP increases.

Perhaps our currency could also be backed by public assets and is redeemable in shares in these assets.Obiviously you cannot sell part of a national park but it stops the production of inflationary money.

The other issues Peter and Geoff is Pericles' concern of available capital for real productive ventures.We have to strike a balance between too much money or not enough.Not enough money goes into R&D particularily in this country.Too much goes into the inflation of share and house prices.

I'm glad to see also Geoff that we can have constructive discussions.
One thing is certain in my mind is that our present financial system is dysfunctional and I will listen to any constructive comment even from Yabby and Pericles my favourite foe.So Pericles within the confines of a non fiat currency,how do we address the possible short falls in available capital for real productive enterprises?

We have to develop a system that is fair and progressive.Presently we live in an oligarchy,where both major parties are toady boys to the large corporates.When too much power aggregates to too few hands,then we have decay.This is what globalisation is doing to us at the moment.There is more strength in sovereignity and diversity.Global mono-cultures are a disaster.

I must be particularly thick today, Fickle Pickle, for which I apologize.

Re: Cotter dam.

You are selling "right to a kilolitre of water for the next 40 years".

"These water rights can be traded independently and can be used as currency."

For which there would need to be an open market, both spot and future?

I also assume you would simply trade in the certificates against your standard water bill in order for them to realize value?

This might be a little hazardous. Since it is unlikely that the spot market for water will fluctuate in the same way as e.g. electricity in Victoria (as there are alternative supplies not under your regime), the price of the certificates would almost invariably trade permanently at a tiny discount to the open market rate.

"This investment would be most attractive to superannuation and pension funds who have a need to preserve their assets and to have an asset whose value keeps up with inflation"

Only if the price of water is lifted in line with inflation, surely?

And with the additional supply available, I suspect there may be some political difficulty in achieving this.

Also, the funds would have to continually trade their certificates, in order to avoid the situation where they ended up with more water rights than the people of Canberra could absorb (sorry!).

I have not touched on some other tricky areas, such as the price behaviour of the rights in drought conditions, the limitation of those rights to Canberrans (or do you have cross-border trading with Victoria in mind also?) and so on.

But what puzzles me most is that there is so little difference between this scheme, as I read it, and the total privatization of Canberra's water supply. Instead of "water rights", read "shares".

Write prospectus, issue shares, build dam.

This would overcome many, if not all, of the likely supply/demand fluctuations at the point of consumption, while maintaining a stable, long-term, appreciating asset that is traded on the stock exchange.

But I'm reasonably certain that is not what you had in mind.

See the latest debate between Ron Paul and Ben Bernanke about monetary policy. http://www.ronpaul.com/

The debate centres around keeping rates too for too long,yet the Bernanke solution is to keep rates low for even longer.You cannot solve a problem of debt by creating more of it.This is what Kevin Rudd is doing with his stimulus packages.To borrow from China just to create more inflation here,is insanity of the grandest magnitude.

What must happen is the worthless derivatives be isolated from real productive assets.The worthless derivatives must be put into bankruptcy and thus the real productive economy will save your super assets.

All,

I have put up a draft of a submission I wish to make to the Senate Committee looking into Access of small business to Finance.

http://stableproductivemoney.wordpress.com/2010/03/19/submission-to-senate-inquiry-on-small-business-access-to-finance/

Please see if it makes sense and try to pull it to pieces. Hopefully it is reasonably "concrete" in that it makes suggestions on what to do but without going into too many of the details. I am working on some diagrams to go with it so that people can visualise it better but not sure if I will have them done by the 30th.

Pericles the kilolitres as a substitute for money was something I tried to explain but it only makes matters more difficult as shown by your comments. So I have gone away from trying to use substitutes for dollars and gone back to the idea of "tagging" money for special purposes.

The criticism of peer to peer that no one bears the loss is not correct. The lender is the one who bears the loss that is why it is called peer to peer. It does work as evidence by the swiss system that has been going since 1934.

Compliance with the systems I have proposed is achieved by excluding people who break the rules. People can get back into the system if they pay back their loans or make adequate compensation in some way or other.

I am floating this with the banks because this is a potentially huge new market on which the banks can do very well without any risk to them.

Many of the ideas have come from my participation in an online forum with a group in the USA who are attempting to get public banks introduced into their States. The banking system in the USA is in dreadful trouble and I am hoping something along these lines - particularly the state infrastructure proposals may get a trial.

*You cannot solve a problem of debt by creating more of it.*

Arjay, Ron Paul is a republican. He should have done something when
his leader, George W, was borrowing money like crazy and driving
the US economy into a ditch. Sorry, but his party is to blame
for the GFC, nobody else. Shame on him.

It is pure politics to now come forward and complain about debt,
when it was his party which created it.

Obama inherited a country that was heading for a depression. All
he can do is his best, to try and dig them out of the disaster that
Ron Paul's party created.

At such a moment, you need to consider many things, from various
perspectives, which is what Bernanke is doing. Fair enough.

Frankly, right now, another trillion $ hardly matters. All it might
do is help solve the US problem, plus get through to the Chinese,
that rigging their currency, is not going to work, for they will
be the ultimate losers.

But I doubt if you are smart enough to understand all that. You
tend to focus on one little thing, rather then look at the big
picture here. That is why Bernanke is where he is and you are
where you are. Perhaps you will learn one day, we'll see.

For me Yabby is the only one making any sense. Fundamental management perspective realises, if you don’t have the macro parameters identified, how are you going to comprehensively define the problem? Common sense. For if your initiatives are observed at such formulative stage, their extrapolation is a minefield, exactly what parameters, if any, are defined?

Although I admire the initiatives demonstrated within this discourse, it appears to me they are defined reasonably as tinkering with existing infrastructure, which renders them micro consideration, even if they are linked to a ’big’ development initiative.

Arjay, alike Pericles before him, touches on some moot points;

“Not enough money goes into R&D particularly in this country”

Next to nothing comparative of GDP, and not likely to, unless new paradigm and dynamics drives its integration.

“concern of available capital for real productive ventures”

“address the possible short falls in available capital for real productive enterprises?”

Not realistic within present practice, it is required to be generated, therefore new paradigm, dynamics, and ideas must be developed.

“our present financial system is dysfunctional”

“Global mono-cultures are a disaster.”

The former is a product of the latter, we need to find other ways of knowing, that are inclusive, as opposed to our present culture of exclusivity.

A hypothetical example: Until GDP rates between the eastern tigers and the west, balance, the west is reliably predicted to be in decline. We cannot compete in manufacturing owing to the advantage in labour costs in the east [a problem of our own making when we set in stone a cultural refusal to balance distribution of wealth]

If we cannot compete with the east in trade, we cannot compete with them in their own markets, right? Wrong.

Continued

The GDP rate = standard of living rate. The majority [per capita] of people in the east still retain a much lower standard of living comparative to the west. Therefore, if we are able to find commodities we may produce and export for prices people of the east can afford, such initiative will not only assist sustainable GDP growth, it will supercharge that requirement for GDP rate balance. Of course we will need to kiss goodbye our aspiration for profiteering.

e.g. an enterprising Australian is about to commence exporting cane toads to Asia, they utilise for food, skins, and medicines from fluids such as toxins [and it doesn’t have to be a ‘think big’ scheme].

Arjay,

In my wanderings over the internet I came across "The Capitalist Manifesto" by Louis Kelso. To me he makes a great deal of sense and explains the problem with the current system.

http://www.kelsoinstitute.org/downloadable-books.html

He - like I - is a great believer in the power of open markets to allocate resources most efficiently.

He - like I - believes that most of our wealth comes from the application and use of social capital and physical capital not labour.

He - like I - believes that our current system is unfair in its allocation of physical capital and so erodes social capital. It is unfair because the money system only allocates new credit (new money) to the existing owners of physical capital. If you do not have capital you can only get new capital through the application of your labour while owners of capital double dip.

Pericles

In answer to your puzzle about why not turn the Canberra water supply into a public company the answer is YES. However, not with the current method of creating money. Privatising public assets is bad for the public because equity finance is supplied from savings or from money created by monetizing both real and ponzi assets. Equity finance includes paying interest on the money and paying profits to the owners of the dam and paying for the risk of the dam failing.

It is NOT necessary to fund public infrastructure with interest bearing money and it is not necessary to pay any profit to owners if the owners are the users of the resource. They can take the profits from lower water prices. In the event of the dam failing water users will pay through higher prices no matter who owns the dam.

By giving ownership of the dam to the users of the water, through the creation and wide distribution of interest free loans that must be used to build the dam, we overcome the problems of equity finance and we give ownership to the users of the resource.

Yabby; says that Ron Paul was a Republican during the Bush era and should have done something then.Yabby ,it is the US Fed a private group of banks that make monetary policy.Congress has little or no power over the money supply.Ron has been on record for decades about his economic views,but he does not have the power to instigate them.
Ron is a true believer in free markets and as he says, the Fed through its policy of fixing rates is not allowing this market to operate.Bernanke puts a lot of the blame on the lack of regulation.The regulation was there but they ignored regulation like the Glass Stegall Act which defined the role of the various banks and kept them honest.Both the Democrats and Republicans along with the Fed are responsible.Greed for the want of a better word,was not good.

At some time in the future the market correction will have to happen and this will mean high inflation, unemployment and very high interest rates with a devalued dollar.All they are doing is delaying the crisis and actually making it worse.

Fickle.
Thanks for the references.All us need to examine this disaster and look at new economic models not purely driven by money aggregates.We have to get back to sound currency and break up many of these global cartels who want to eliminate competition.

Perhaps there needs to international rules put into place like paying workers in poor countries a fair wage so they have the time for education and money to save.Your wealth is in your people and keep them poor does not increase wealth or keep population under control.

Hang on Arjay, it was Bush/Cheney/Republicans who dished out large
tax cuts, then went on a massive spending trip, year after year.
In their last year, their budget deficit was close to 1 trillion.

It was Bush/Cheney/Republicans who appointed Cox as head of the
SEC and turned it into a toothless tiger, as they felt that no
regulation was required.

This was all economic policy of the party to which Ron Paul belongs.
He clearly carries his share of responsibility for that.

It would hardly be sound policy for Obama to turn a recession into
a depression, which is what you are suggesting.

Its not only the Americans who borrowed to much. The British Pound
is in trouble, the Euro has huge problems, the Japanese Govt is in
debt to the tune of 200% of GDP

On the mark again Yabby. For there is no need for extreme of a revolution that would unrecognisably change current regimes, and potentially lead to another protracted ‘cold war.’ Not at all. All that is required is observed balance, and the basis for cultivation of constructively creative vision, and associated competent leadership. However, that is where my professional observation of the stewardship of those former BHP chiefs you identify Yabby, diverges from yours.

Scientific management is observed a profoundly admirable resource and asset, significant of its developmental contribution from the west, when its not ignored.

I recommend observing the Levitt paper, Marketing Myopia, produced from Harvard in the mid 1980’s, for its resonance in the issues posters are attempting to grapple with in this debate, may be enlightening. This paper never achieved international acclaim for simply appealing to everyones sentiments.

The analogy I would draw to the ignoring of scientific management, is the one line joke from the ABC series, The Library; “our country, our rules.” For the parallel may be observed of current attitudes within political and commercial leadership; ‘we will make all the noises that appears to demonstrate our accord with the science of management, however, in fact we will not allow it to interfere with pursuit of our vested interest.’ Perpetuation of GFC culture?

Our leaders are the key to such balanced reformation, and I am aware, of our political leaders awareness especially, that if they don’t get on the timeline soon, they will be inevitably embracing the future as a train crash.

Ngarmda,Yabby is not on the mark again.It was Bill Clinton who destroyed the Glass Steagall Act.It was Clinton's socialists policies that gave housing loans to people who had not the capacity nor job security to repay them.Hence we saw a housing bubble that sold mortage trash to Super funds around the world.It was a giant pyramid ponzy scheme based on fraud.

There are lots of people who should be in gaol but they got off scott free.

Both of you won't face the fact that the creation of money via the fractional reserve system is theft by stealth.The easy money days are over and we need to evolve a better system from the ashes.

The precious free market is still there and all we need to do is rid ourselves of these international cartels who not only want to fix the price of money but own the very currency which represents our creative and productive capacity.Now that is slavery which destroys all our aspirations & potential.

Arjay, your promotion of your ’idea’ may only be observed in reality as a gross oversimplification in one perspective, and an obsessive distortion in another. For what is the grand plan you suggest, how will its viability be demonstrated, what proofs will substantiate its foundation, and what instruments will drive it? Anyone can stand on a roof and shout revolution, change requires to be measured.

Oops Arjay, this is what you will find, if you search Wiki for
information about the Glass Steagal Act:-

*The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate*

So it was the republicans, who controlled both houses as they hounded
Clinton about a blow job, who pushed it through Govt.

But that was not the cause of the GFC. Banks like Wells Fargo and
other serious US banks, were not involved in the subprime scandal,
investment banks certainly were. So were ratings agencies. They
turned lead into gold, all under the noses of the regulators, who
did not give a hoot, as Bush/Cheney thought that they would
regulate themselves. HA!

Your hero was part of the republican team which can be blamed for the scandal.

Please, Yabby, don't confuse Arjay with facts.

>>The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate<<

You know how it upsets him.

I was enjoying his side-trip into the mystical hinterland of Ron Paul's gonzo politics.

As well as Ron's desire to turn back the clock to the halcyon days of the gold standard, he wants us to believe in a young earth.

"I think that there, it's a theory. It's 'the theory of evolution.' And I don't accept it, you know, as a theory... I think that the Creator that I know created us and every one of us, and created the universe, and the precise time and manner"

http://liberalvaluesblog.com/2007/12/22/ron-paul-backs-creationism-denies-evolution/

I particularly enjoyed the blogger's comment that:

"There are two general characteristics of the group which spams the internet supporting Paul: 1) they tend to follow their leader and lack the ability to think for themselves and 2) they are intolerant of the views of others and will spread their beliefs regardless of how absurd they are."

Ron Paul is an illusionist, with his most successful illusion being that he understands finance. He doesn't, at the most fundamental level, which is why his ideas attract those who are convinced that a cabal of elites is guiding our lives.

It simply strengthens my theory that deists and conspiracy theorists have more in common than they realize.

>>Both of you won't face the fact that the creation of money via the fractional reserve system is theft by stealth.<<

Arjay, when a system such as the fractional reserve system is not secret, how can its activities be described as "theft".

Let alone "theft by stealth".

Nothing "stealthy" about it, I'd say.

Peter Hume - Abe LIncoln issued fiat money during the civil war. The notes were called "greenbacks", and carried no burden of interest. Lincoln thought it is a government's duty to provide citizens with a stable medium of exchange. He did not have to specify the structure of prices, only the face value of the money. He was about to embark on banking reform when he was assassinated. Idiots then withdrew all the greenbacks and triggered a post-war depression. Fiat money is perhaps not the best way to introduce non-interest-bearing money, but it's one way and better than what we have.

Also, I could have said we need not only clear definitions but plain English as much as possible, not jargon like specie and fiduciary media.

Forkes - I don't know where banks "hide" all their profit. I don't think they do. They are regularly among the biggest "earners" in the economy. The financial sector as a whole accounts for 30-40% of profits. If it were simply the service sector it ought to be, those profits should be more like 5% of all profits.

Fickle - just because many people confuse money with the value it stands for doesn't mean we can or should fail to make the distinction. I often have trouble following your arguments, and it's because I'm not sure what your words mean or which concepts you refer to.

Arjay – I agree with your general sentiments but not your particular ideas. Ron Paul and many others don’t understand that money doesn’t need to be backed by a commodity. Even if it did, why would you choose gold, whose price is unrelated to practical use, and fluctuates according to whims of fashion and speculation?

Yabby, Pericles - debt involves risk and massive debt involves massive risk, so another $trillion of debt does matter. Pericles has persuaded me that banks make less profit than I implied from money created out of nothing, but fractional reserve still creates fundamental problems:

First - the incentive is to maximise debt, as Steve Keen argues. There are sensible proposals for monetary systems that minimise debt.

Second - the fractional reserve requirement acts as a magifier of fluctuations. If defaults cut into reserves, then the money supply shrinks by $10 or more for every $1 of reserves used. In other words fractional reserve is highly destabilising.

Third, and most fundamental – it entangles the money supply with investment. This is why a Wall Street crash has such a devastating effect on the whole economy, instead of just affecting those directly involved in the stock market. Why should the failure of someone’s “investment” interfere with everyone else’s business as usual?

And, in Arjay’s defence, Clinton had to sign the Glass-Steagall act for it to come into effect. And that act certainly encouraged the blowout in obscure debt instruments that led to the crash. So he certainly had a hand in creating the mess.

Fickle – Louis Kelso is also the developer of ESOPs – employee stock ownership plans – in the US. There were, some years ago about 1500 employee-owned companies in the US, including United Airlines. J. R. Gates, The Ownership Solution, 1998.

I don't believe that it is the norm to blame the car, for a car crash, Geoff Davies.

>>... but fractional reserve still creates fundamental problems<<

Sure, there are occasions when the car itself has a fault that causes the problem, but the vast majority of accidents are caused by people.

So it is with our financial system.

Sometimes the system itself will exacerbate problems. Much as when a car cannot stop in time because the brakes are not designed for the speed the vehicle was travelling. Speed was the primary cause, but the inadequacy of the system (brakes) in that particular situation made the problem worse.

But to blame everything on the system itself is to confuse cause and effect.

One cause of the financial chaos was fundamental abuse of the financial system by whiz-kid PhD mathematicians, who thought they had discovered a surefire way to create a win-win financial scenario, using sophisticated risk-management tools.

The problems came when the classification of the underlying risk was found to be somewhat, ah, optimistic.

Once the baseline assets were exposed, the entire edifice of structured financial instruments related to those assets crumbled.

Which is, actually, the system being true to itself. You cannot over-gear, without incurring penalty.

>>the incentive is to maximise debt, as Steve Keen argues<<

"Maximise" is a misleading term in this context. It could be read to mean that the more debt you create, the better, when clearly there will always be a point at which extending more credit is intrinsically hazardous.

>>it [the fractional reserve requirement] entangles the money supply with investment<<

How so?

If you are suggesting that one should never borrow in order to invest, that would be prudent - if perhaps excessively cautious - advice.

But the two systems are not joined at the hip.

Incidentally, the tax man in Australia loves ESOPs. It enables him to tax early, and tax often, which he loves.

Employees, on the other hand, can find themselves saddled with a tax bill for gains they have not been able to realise.

Tough love, courtesy of your ATO.

Geoff Davies, your contribution identifies a number of salient points. For perspective, it is significant the US is the only western economy that may successfully apply ‘quantative easing,’ [QE] relevant to value of the greenback still the constant exchange rate benchmark. Although implementation of QE, relevant to the expenditure multiplier factor, may only be observed to exascerbate the problem especially in risk analysis of the long term.

As you accurately articulate, the clear potential risk from fractional reserves is both their default rate impacts, magnifying fluctuations, and their entanglement with the money supply of investment.

[Pericles, the default rate impact is the unacceptable risk factor attendant of this issue, consistent of that risk factor exemplified of your further example]

The Clinton era is recorded of an economy marked by fully funded policy that focused upon avoidance of debt. It may be observed then, he may have signed Glass-Steagall, but he hardly encouraged the blowout of obscure debt instruments that led to the crash. A chicken and egg argument perhaps, for perspective is required.

As of the example Yabby articulated earlier, 1% profit observed by Westpac, may on the face of it not be observed excessive, however within context, when such profits significantly accumulate to representation of 30 - 40% of the financial sector, and a Westpac share is trading around $40, those factors need to be given due consideration of their weight.

Leaning on that sector will not achieve the desired result, it will simply take its kings ransom and move elsewhere. However, hypothetically, policy instruments may be implemented to apply leveraged pressure on its shareholders, toward their more astute and prudent consideration of their responsibilities as corporate citizens, relevant to their long term vested interests. Such policy may coincidentally provide more stability to the market as a positive corporate example.

Continued

That such suggestion is obvious as being resisted intransigently within current known corporate culture, I would also hypothesise, if such intransigence is met, invite participation by international competition which demonstrates such desired corporate acumen.

For currently there are many investors concerned of the present volatility in the markets, seeking stability for their investment. If they don’t have an invitation to stable Asian markets, relatively, the value of risk, outside short term factors, may be observed comparable to such hypothesis.

The negative issues associated with opening such markets to investment with priorities elsewhere, is balanced with these current observations, analogous of having ‘the shop run by your brother in law‘. Especially when a handful of such owners demand domination of the markets, and associated avarice attributable to the cliché of a ‘diva.’

If they wont cooperate, such initiative as this hypothesis may be observed a calculated short term risk until desirable entities develop as market leaders. This hypothesis does not suggest or demand such entities need ‘sing with the choir,’ it just asks for refrain from the conduct of a ‘diva.’

If attracting reputably astute investors is required, surely its short term value is potentially ahead of that analogous to; ‘lying down with dogs and attracting fleas.’

With those figures currently apparent of entities such as CBA and Westpac, that include their profit achievements to date, and the current identification of Australian financial competence, their potential as vanguard for such change is observed extensive.

Geoff,

Whereabouts in the draft submission http://stableproductivemoney.wordpress.com/2010/03/19/submission-to-senate-inquiry-on-small-business-access-to-finance/ does the argument become incomprehensible? I really would like to know from you or anyone else what parts do not make sense.

I have tried to use terms as they are understood by the audience. The audience for the draft submission are "people" where people is a typical member of the public.

People understand money as something you can deposit in a bank and get interest payments while ever it is in the bank. Money is also something you can use to buy things with and it is what you get when you sell something.

People understand loans as getting some money which you have to repay at some time in the future. People understand that you can get a loan provided you have ways of ensuring the money is paid back.

People understand equity as giving people money in return for a share in the profits resulting from the investment.

People understand fractional reserve as being the amount of ready cash a bank has to have available in case there is a "run on the bank".

People understand interest as something you have to pay because the depositor whose money you are borrowing gets interest for putting in a deposit.

I use all these meanings.

The arguments that are present can be boiled down to what will happen if we have SOME loans and hence the corresponding deposits that do not earn interest. What changes have to be made to the system for the system not to fall into a chaotic state.