Its not rocket science

space rocket

A little while ago I tried to understand quantum mechanics and realised that atomic physicists talk in a different language.  There are fermions and bosons and all sorts of other exotic names for the different types of particles.  And when we talk about particles we are really talking about waves.  Except not all of the time, because sometimes… (this is where I stop talking about things I don’t really understand)

And I wondered if that could be a problem in what I am proposing. Continue reading

Bank accounts for bankrupts


I have tried to find the help promised by the insolvency service on what accounts are available for bankrupts, but cannot.  There is a document on bank accounts which has a link through to the money advice service, but I could not find the promised list of bankers prepared to open accounts for those who are insolvent.

The insolvency service suggests that “basic bank accounts” which do not have overdraft facilities may be suitable for bankrupts.  The banks may see it differently.  Here are some references to bankruptcy which I could find:

Halifax – easycash

Even if you’ve been bankrupt in the past, you may still be able to open an Easycash account. Just show us the original bankruptcy discharge letter with its original seal

What this means is that bankrupts cannot have this account – they need to be discharged first

TSB – cash account

When you apply for an account with us, we’ll carry out some standard credit checks. We can still open an account for you if you have a poor credit history. But, if your credit reference agency file shows that you have a history of fraud or are an undischarged bankrupt, we won’t be able to accept your application.


I did look at various other bank accounts, but could not find any reference to bankruptcy except to say that if you become bankrupt the account may well be frozen.


Diversity not specialisation

Now here’s a thought.  New research suggests that a strong industrial economy does not want to specialise in one thing but have lots of companies that specialise in related complex things.  So, for example,  the F1 industry in the UK should be a good thing for us and not just a “nice to have” add-on to our financial services sector.

Steve Keen’s post even has a pretty diagram to demonstrate the point, although I would like to know what all the green lines mean and why the UK comes so low when it produces so many products.  Look forward to the published research

IMF warns of Swedish housing bubble

Since looking at debt, I have always thought that working out how to replace mortgage lending on houses was going to be the most difficult issue. But it looks as though it is one of the most important issues to sort out otherwise, as with Sweden, we risk another crisis just because we can borrow to buy our own houses.


A new IMF report warns of rising financial instability and unsustainabe household indebtedness in Sweden:

Financial instability is an increasing concern. House price increases have picked up again, exceeding 71⁄2 percent annual growth for single-family homes and 121⁄2 percent for tenant-owned apartments in April. Household credit growth also remained strong, pushing household indebtedness to almost 175 percent of disposable income in 2013, and over 190 percent if debt from tenant- owned housing associations is included. Recent data indicate that household debt ratios are high across all income groups, but particularly so for indebted lower-income households who are especially vulnerable to income, interest rate, and house price shocks. The aggregate net asset position of households is solid, but a large share of assets is illiquid and has limited value as a buffer. As a consequence, a large and sudden drop in house prices would lower consumption, employment, and growth, and ultimately…

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Economics 101

Because I do not have any formal economics training (beyond an introduction when I studied to become an accountant in the 1980s), there are some economic ideas which are quite difficult to get to grips with.

One of these is the idea of “value.”

If I have £1,000 in the bank where does it get its value from?

Back in the day, every penny in the bank was backed by gold (rather like Harry Potter’s  vault filled with bullion).  And before that larger amounts of money were actually gold coins.  But wars and economic failure put paid to all that.  After the second world war an agreement was reached called the Bretton Woods agreement which fixed exchange rates between countries and allowed central banks to convert US currency into gold at $35 per ounce.

The ability to convert was withdrawn in 1971 (partly because France kept using it and converting its US dollars into actual gold) and the fixed rates of exchange were terminated at the same time (initially the plan was for this to be temporary and for everything to fix again, but that has not yet happened).

So if I cannot convert my money into a lump of valuable metal, is it worth anything?

There are at least two ways of looking at this:

Exchange value

What can I get for £1,000?  I can exchange it for a large variety of different goods and services.  So it is worth at least this much.

Banking value

Another way of looking at it is that my money in the bank is money owed me by the bank.  In turn my bank has money owed to it by the bank of England.

But if we outlaw commercial debt, will my money suddenly lose its value?  Will I have to go and spend it on something (perhaps a lump of gold) which I will be able to sell later when I want to go and buy some more groceries?

The common view

Even if we know we still have the same “exchange value” how will we perceive a major change in the banking system?  Will something of the “banking value” leak into our thinking and make us more cautious?

Or am I missing something important here about how value is perceived so that abolishing bank lending (along with other commercial debt) will affect value?



Business investment

At the moment, the first place that businesses seem to go to for finance is to a bank, to borrow money.  If my idea of outlawing commercial lending is followed through, what will businesses do instead?

There are lots of possible answers to this question.  And some of the answers depend on what the money is for.

Let’s set out a few possibilities:

Money for? Instead of borrowing
Finance for a piece of equipment (eg van) Hire it, rather than buy it
Finance for a property Rent rather than buy
Outside investors
Working capital (to buy stock or cover
production costs before sales money comes in)
Debt factoring (ie sell your sales debtors)
Outside investors
Money to develop a new product Outside investors

There are already a lot of ways of sorting out money which do not need to involve borrowing.  Please let me know of any other situations where you think businesses might need money and alternatives to borrowing.  And are there any situations where there is no real alternative?

I have suggested that “outside investors” might provide the funding – particularly where there is no other obvious source available.  Who are these people and where do you find them?

  • The answer is that we already have Dragons Den for those who not only want to find outside investors, but also want a few minutes of TV fame.
  • There are also other “dragons” around or perhaps it would be better to use their preferred name of business angels.
  • I am also hopeful that banks will see a new role available to them.  Or rather new investment businesses, separate from the trustee banks I envisage, will be set up using the expertise of bankers to invest their own money into other businesses.
  • And investment bankers may continue to act as brokers for introducing businesses to stock markets to raise money from them

A big difference between “outside investors” and “bank lending” as I see it is that investors will need to look at the business and decide whether it is worth backing whereas bankers have often looked at the assets of the person running the business and secured the debts against the assets.  In other words bankers are often not looking at businesses for viability but are looking at assets for saleablility.  By changing the rules we may end up with more business-conscious investors – or we may end up with a lot of business failures costing investors money.

Will this have a significant effect on the economy?

One concern which I have is that businesses are often geared up with debt finance.  What this means is that a company can have significant assets (buildings, equipment, intellectual knowledge) but also significant amounts of debt.  If this business ceases, it will not make much difference to the investors as the net value of the business (after debts) is low – or possibly even negative if debts exceed assets.  If the business succeeds, the investors make a killing.  If I were to put some numbers to this the effect of gearing becomes clearer:

Assets £1.1m
Liabilities £1m
Net investment £100k

If this business collapses, the investors lose £100k

If the assets double in value, the company then looks like:

Assets £2.2m
Liabilities £1m
Net investment £1.2m

And the investors have made a £1.1m return on a £100k investment – increasing the value of their investment by 1,000 times.

By removing the possibility of commercial debt, some businesses may not get off the ground because the risks are much higher and the rewards are much lower.  In this example a risk of losing £1.1m or doubling your money.

Is my concern justified or, taking the economy as a whole, will we end up with just as much investment.  Or is my concern unjustified and will we actually be better off because speculators will not be able to play with bank money, and we will instead have investors who look at businesses not for a quick killing but for its lifetime potential?

What are banks good for

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?