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.