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Banking 2020: An Incomplete Vision for the Future

June 16, 2013

This is a commentary on the paper just published by the New Economics Foundation (NEF) entitled ‘Banking 2020: A Vision for the Future’. The paper is a collection of essays mostly by politicians, and any incompleteness in the overall vision is clearly not the fault of NEF or the editor.

 

There are some interesting proposals, which are often complementary. One particular idea that seems good is to follow the German example of setting up a government-owned development bank.

 

However there is one yawning gap in their thinking. The principal reason for the banking crash of 2008 was excessive debt, largely incurred in the financing of speculation in existing assets, helped on by excessive interbank lending (often using complex derivative securities). Ring fencing will not address this, because individual banks cannot evaluate systemic risk adequately.

 

The obvious remedy is the one proposed by Prof. Richard Werner, but ignored by the Vickers commission and subsequently, namely restraints on the volume of credit created to finance speculation in existing assets. Such controls were in use in Britain between 1944 and the early 1970s, and are still in use in some successful Asian economies.

 

Some argue that monetary reform would reduce debt, and it would to some extent. Steve Baker’s contribution addresses this subject. He mentions two very different proposals, the Chicago Plan reviewed in an IMF paper last year, and a very different proposal for 100% reserve banking free banking, with no central bank. If is far from clear to me how the latter proposal would reduce debt. He fails to mention explicitly the plan devised by Joseph Huber and James Robertson in 2000, and now promoted by Positive Money, which is more similar to the Chicago Plan but still significantly different. This proposal would prevent commercial banks creating money, but would not prevent them creating credit; the two would be distinct for the first time, see: https://moneyversusdemocracy.files.wordpress.com/2013/06/moneybankingdebtinequality.doc

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