The banks are not the cause of the Global Financial Crisis but are the solution. They can now, if they choose, solve the problem as they have been given the tool to do so with the government guarantee of deposits. In fact banks have, through their diligence, prevented the crisis from being much worse than it could have been.

Banks are given the responsibility of creating credit money. They are permitted to give loans of up to 90% of money that is on deposit. They are also required to accept deposits and money from other banks. If loans they give are not repaid then banks have to “make up the money” from their own reserves or seize the assets against which the money was created and sell those assets. Banks have done this job very well and will continue to do so.
The difficulty is that banks prefer NOT to take on the risk of lending money against risky future assets because that is a very great responsibility and one bank that goes bust can bring all the others down. The reason is that most money is not loaned out with assets as a backing but with other money as the backing. The system has an inbuilt bias towards the creation of more and more credit money to cover the risk of loans. Unfortunately if enough loans backed by other loans default the whole system could collapse because money is created and backed by risky defaulting loans.
The solution to the problem is for the government to take on the responsibility of having enough money in the system so banks only lend money they have on deposit. Governments have inadvertently given the banks the way to do this with the government guarantee of bank deposits. What this means is that banks can now loan out money and if they lend too much and one of the banks falls over then the others will not go as well. This is what nearly happened when Lehman Brothers could not pay all its debts. There is no doubt that if one of the major banks went broke in Australia all the others would as well.
The banks now have the opportunity, through the loan system, to build up enough “non credit money” in the system so that they have little need to create credit money. How can we do this and where does money come from anyway? Non credit money comes from enterprises that produce more goods and services than it costs to produce. That is, the profit that is left over is extra money that can be lent. However, it is “expensive” money because it has been hard earned and people want to get a better return on the money than through just renting out existing assets. Money from savings from profitable enterprises then tends to be used to buy equity in new ventures that may or may not be profitable but if they are profitable will give a very high return. So money to build new assets costs a lot more to the asset builder than money to buy old assets because old assets are less risky and so banks will create credit money for those purposes but not for new assets.
Here is how the banks can build up non credit money but encouraging the building of more new assets.
Banks can give zero interest loans to anyone who says they will either purchase a new money saving asset or invest in a new money generating asset. The critical factor is that it must be a new asset that did not previously exist. So banks could give zero interest loans to anyone who promised to use it to buy an new asset – like a house – or build a new house – or put on an extension – or build a new factory – put up a solar array – put money into a solar thermal power plant. So that the banks get something for administering the loans then the banks could require a zero interest deposit for the loan which reverts to the bank when the loan is paid back. Banks risk is zero if the government guarantees that the bank does not have to make up the money if the loan defaults. This then spreads the risk of new asset building throughout the whole community.
The right to get such a loan is valuable so we encourage people to pay back loans because once they default on a loan then they will never get another one.
Everyone will want these loans – whether to build a house or to invest in a wind farm. As the government is the one guaranteeing the money – not the loan – the government has the right to determine where the money should be invested.
As a starting point it could give everyone in Australia the right to take out loans for $1500 each year provided the money is invested in ways to reduce greenhouse gases. This will immediately pump $30 billion into the economy to create new assets that will reduce emissions. But this is what emissions trading is meant to do? So giving everyone in Australia the right to a zero interest loan will not only stimulate the economy but it will cost the government nothing and it will reduce emissions. The government will be able to remove the need to guarantee all deposits and only guarantee deposits made from the money created for zero interest loans. The price of energy will drop because without interest on capital renewable energy is cheaper than burning fossil fuels from existing plants.
If people do not want to take up their zero interest loans they can sell their right to a zero interest loan to the highest bidder – and there will be plenty of those.

3 thoughts on “Banks not the cause of the GFC but the solution

  1. Non-credit money is the best idea of the world which can solve both national and world economic crisis. Non-credit money is not debt than gift which is created from the growth of economic rationality. Non-credit money is the necessary additional quantity of money in circulation (dM) as percentage (k) of existing quantity of money in circulation (M). dM = kM ;
    k = (supply – demand)/demand ; If non-credit money is emitted according to the cited formula, inflation cannot exist. Also, taxes are annulled for the amount of non-credit money. The consumers pay less and producers get more than today, in the order of credit money. All get the gift from non-credit money.


    1. stojan,

      I agree with you that non credit money is a good idea. It is the aim of all my proposals to gradually eliminate the need for credit money. We still need credit but we want to have plenty of money available to service our credit needs.

      The issue is how to create non credit money. All my proposals are fundamentally ways to increase the money supply without having credit. A zero interest loan with repayments when the asset created earns money will create non credit money when the loan is not repaid and when the asset earns more than it cost. You will find in other parts of my work places where we pay people “Rewards” just for not consuming very much. This money would be printed not created as a loan.

      Zero interest loans is the idea that is most likely to gain acceptance but it is critical to make sure that the zero interest loans are used to create new productive assets which ultimately create the non credit money.

      The reason that zero interest loans is a good idea is that they will become the preferred method of funding new asset creation and it will become more profitable to use zero interest loans for creation of assets than to use credit money. If we do this then we will see credit money rapidly replaced by non credit money and we will see the pyramid loan positions rapidly unwind and most credit money disappear. It is my belief that once speculators in money see that governments have a way of increasing the supply of non credit money they will realise that the odds in the gamble of currency and bond trading will be against them whereas at the moment the odds are in their favour.

      It is a rule of “evolution” that you change a system be it a species by changing one of the characteristics of the system in a small way and that will lead to big changes. If you try to change a system too quickly then the mutation is likely to die out.

      If you change the system in a very small way but it has big effect then it will work. Introducing zero interest loans as proposed is a “small” mutation of the existing system but it will have a major impact.


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