In earlier posts (my white paper) and (lets blame the bankers) I have put a lot of blame for the 2008 economic collapse on bankers and other lenders. In my white paper I suggest that commercial lending should be outlawed.
Does this mean that we should get rid of the banks?
But surely that is what banks do?
Yes, they do lend money, but a large part of the banking system is not geared around lending, but around money transactions. Put it another way, if I want to buy groceries, I can pay cash at the till or I can pull out one of my plastic cards and put the bill onto one of my accounts. Using a plastic card means using the banking system. (We used to use cheques as well, but banks are trying to get us to stop because they don’t like the paperwork involved).
Can we live without this banking system? Whilst we could in theory use cash for everything locally, going on holiday could become a problem – taking all that loose cash with us to pay for meals and nights out in a foreign country would take a lot of space up in the suitcase – we would have to pay higher air fares just to cover the weight of the money we take with us! And what would we do at home? Where would we keep all our crisp £10 notes? The vase over the fire-place in the front room isn’t big enough (assuming you still have a front room with a fire-place).
So we need banks as somewhere to keep our cash and also as a place to do the complicated transactions that are now part of life (such as taking cash out of a hole-in-the-wall machine in Spain or buying our latest electronic gadgets from China).
Would banks look the same as they do now? The high street buildings may look very familiar, but behind the scenes I would expect everything to have changed.
What does a bank’s accounts look like at the moment? In simple terms,
- liabilities – they owe customers a lot of money (those customers who have money deposited with the bank) and
- assets – they are owed lots of money (by customers they have lent money to and also the central bank and other “secure” sources) which allow them to demonstrate that they have assets that are more than enough to cover the amounts they owe to customers.
The amounts they are owed exceed the amounts they owe – otherwise the bank is insolvent.
But if we get rid of commercial lending, then a bank’s accounts would have to look very different. There would be almost no “assets” as most of these (apart from the cash in the safe) are commercial lending and there would be no “liabilities” for the same reason.
I suggest that what we could have instead would be a trust company. In other words whilst we would still have bank accounts, the money would be ours and not a bank liability. The bank would not need to have matching assets. Its only assets would be what it needed to operate – so buildings and equipment – but not loans.
This in turn would mean that “central banks” would cease to have a lending function (they are the banks that lend to high street banks). But there would still be a regulatory role to fulfill which could be the future responsibility of the Bank of England and other central banks.
What about the rest of what banks do? More in a future post. And what about national debt – this is commercial debt and so would go and this could create problems for government.
And finally what about safe investments for savers? At the moment banks pay interest on deposits (but not always), but only because of a commercial agreement between bank and customer. If the money in the bank is being held on trust, there will be no interest payable. Is this a problem for savers and, if so, what alternatives could we come up with?