There’s two ways to view the financial meltdown that occurred in 2008. The first is that it was a rare and unfortunate blip that can be remedied with calm and enlightened improvements in the regulatory framework. The second is that it exposed a serious flaw in the entire monetary system, and is likely to be repeated unless a radical transition takes place.
It’s no surprise that politicians, bankers and regulators – the architects of the banking industry – favour the first idea. This is why their response has skirted around the edges instead of dealing with the core. Even supposedly extreme measures such as nationalising banks are in fact attempts to preserve the status quo.
For those of us who favour the second idea, 2008 provided a golden opportunity to join the public debate and present a credible alternative. Perhaps we missed it. But if indeed another crisis is coming, this article attempts to outline a 14-point plan that could be implemented quickly and genuinely reform the institutions that create financial instability.
The key aspects of this proposal have been made previously, notably by economists Kevin Dowd and Richard Salsman. It could be implemented in three phases:
Over 2 days the aim is to ensure that all operating banks are solvent
- Deposit insurance is removed – banks will not be able to rely on government support to gain the public’s confidence
- The Bank of England closes its discount window
- Any company can freely enter the UK banking industry
- Banks will be able to merge and consolidate as desired
- Bankruptcy proceedings will be undertaken on all insolvent banks
- Suspend withdrawals to prevent a run
- Ensure deposits up to £50,000 are ring fenced
- Write down bank’s assets
- Perform a debt-for-equity swap on remaining deposits
- Reopen with an exemption on capital gains tax
Over 2 weeks the aim is to monitor the emergence of free banking
- Permanently freeze the current monetary base
- Allow private banks to issue their own notes (similar to commercial paper)
- Mandate that banks allow depositors to opt into 100% reserve accounts free of charge
- Mandate that banks offering fractional-reserve accounts make public key information (these include: (i) reserve rates; (ii) asset classes being used to back deposits; (iii) compensation offered in the event of a suspension of payment)
- Government sells all gold reserves and allows banks to issue notes backed by gold (or any other commodity)
- Government rescinds all taxes on the use of gold as a medium of exchange
- Repeal legal tender laws so people can choose which currencies to accept as payment
Over 2 months the aim is the end of central banking
- The Bank of England ceases its open-market operations and no longer finances government debt
- The Bank of England is privatised (it may well remain as a central clearing house)
You can download a copy of the plan in pamphlet form here.
Let’s dream for a moment that politicians and bankers accept this reform without a serious fight. Do you think that the UK can go alone with it or any sort of international agreement would be needed for all countries to adopt the same kind reform?
Cheers, and let’s keep good dreams alive.
I think this is much more sensible than Toby’s plan, though I don’t think it could be done so quickly.
Regarding the international markets, as Apolinar says I think this is where the problems may be. We will still get monetary stimulus from the central banks in the US and Eurozone. ABCT will probably continue, though it may be attenuated.
I think both plans can work together. In any case, this is the direction: remove State intervention from the banking sector
Toby’s plan had great big gaping holes in it, given that it basically entailed printing money.
This plan could happen, but it would have lots of unintended consequences – the main being that 100% reserve requirements would make it very difficult for banks to lend, and on the back of that harder for people to invest.
((Why would a bank give a depositor interest if it ca’t lend that money? ))
Contracting the money supply so dramatically coudl also lead to stagflation rather than low or zero inflation as intended.
Unlike Toby, Anthony isn’t proposing 100% reserve requirements.
Dear Tyler, some quick reactions:
Toby’s entails printing money, but as long as you require a 100% reserve requirement, it is not inflationary (not deflationary either, so there is no contraction of the money supply)
A 100% reserve requirements would make more difficult for banks to lend. So they will have to better assess borrowers’ creditworthiness and find real savings to fund new projects. This is a change for a more sustainable credit growth, and a financial system less prone to asset price bubble collapses.
With a 100% reserve requirements banks will not give a depositor interest. On the contrary, they will charge fees for money custody and payment services. There is not such a thing in economy as a free lunch. So if today banks pay you interests for your “deposits”, you may assume that this is not an on-site deposit, but something different. Maybe something riskier than you suppose. Ask Norther Rock clients whether they had on-site deposits or something riskier.
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Central Banks would continue monitoring the process for years Evans. It is not 2 days, 2 weeks, 2 month.
Why?
Who ensures that all operating banks are solvent?
Central Banks.
When free banking would control the process?
At the long run, yes. Between, Central Banks continue the control of process.
Best, Jose
Step 1 – remove deposits insurance
argh … panic … bank runs … bank closures … all banks insolvent! Joy :)