Tuesday, 21 September 2010

Will the UK end fractional reserve banking?

This law would go a long way towards preventing the problem of economic bubbles appearing and bursting.
“Mr Douglas Carswell (Clacton) (Con): I beg to move,

“That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder; and for connected purposes.
I don't hold out much hope it will pass in the United Kingdom, nor do I think the politicians of New Zealand likely to pass such a wise law. Nevertheless, the end of fractional reserve banking would stop the non-productive class extracting wealth from the productive class while they simultaneously retard economic growth.

Clayton makes an eminently sensible observation in his speech
Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.

The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.
The politicians continue to listen to economists who did not see this coming, yet suggest a solution that costs obscene amounts of money, and the failure of the solution is already being seen. It would seem wiser to pay attention to those who predicted the collapse, especially when they are all singing a similar tune.

6 comments:

  1. Governments are addicted to printing money and debt servicing. Their major strategy to make a gain from this is inflation which devalues the debt. How is inflation caused? By printing money.

    Why all this printing money? Because you can buy elections!

    ReplyDelete
  2. It shouldn't surprise anyone that they listen to economists who didn't see this coming. Such "experts" can be used as an excuse for when the politicians fail. If the experts didn't see it coming, how could the politician, a layman of economics, see it either? They're extremely useful in that respect.

    The worst possible scenario for them is to listen to economists who actually have good predictions because those predictions will be politically dangerous.

    ReplyDelete
  3. Barclay, the issue that others have noted is that most money is no longer mainly printed, it is electronic, thus governments cannot print enough, they have to borrow (ie. debt funded inflation). But what happens when no one wants to lend?

    MikeT, yes, though we can point out that politicians are currently listening to those with a poor track record.

    ReplyDelete
  4. Hi
    I just found this via
    http://theology.geek.nz
    & you might know how to contact people there - or maybe that site is just on autopilot?
    Certainly - the contact system doesn't work. Or doesn't for me!
    I think I might run NZ's most-visited Christian site: www.liturgy.co.nz/blog
    & would be happy to link or collaborate with other kiwis. Which I thought was the goal of http://theology.geek.nz I'm also @liturgy if you are into twitter.

    Blessings

    Bosco
    www.liturgy.co.nz

    ReplyDelete
  5. Printed in the figurative sense. They are still printing money. Do you know how much money is in circulation today as opposed to 10 years ago?

    I don't but I would be interested to know

    ReplyDelete
  6. BA, no I don't know how much.

    But the point is that one has to think how money is created, not in a figurative sense, but in an actual sense.

    Fractional reserve banking allows money to be created without printing, especially when most transactions are electronic.

    And there is a difference between money created by printing, and created by borrowing. The first is limited by paper supply, the latter by lenders. The first will lead to (hyper)inflation, the latter is less certain. Deflation becomes a real possibility.

    ReplyDelete

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