As supporters would have pointed out before 2008 if you had asked them: 'the system might seem perverse but it works, and it works well!' Although a lot of objections to that view could have been raised before 2008 (and indeed were by Steve Keen and others), after the crash of 2008 and the immense damage that it did and is still doing to the entire world (see chapter 50) that view is completely untenable, though there is still a very strong and very wealthy opposition to any change. But if it doesn't change then we are certainly in for more - quite possibly fatal - economic and environmental damage in the future.
A very disturbing fact is that 85% of UK money is held by just five banks, and in creating that money the directors of those banks set the policy for where it is allocated. The result is that investment in the UK largely reflects the interests of those banks rather than government or public interest. Gross bank lending in 2011 was over 5 times GDP, exceeding government spending by more than ten times, so that small group of bank decision makers commands very much more spending power - directed at serving themselves - than the whole of government (Meacher 3013 pp165-166)
The banking system demands radical change, the only questions are when and how.
So far the debate has centred on increasing the regulation of unchanged banks, requiring amongst other things higher capital adequacy ratios so that the risks taken are smaller than before. This is just tinkering. One thing that banks are really good at is staying one or more often several steps ahead of regulators. The current incentives guarantee it:
· bankers are rewarded in £millions for finding profitable and clever ways round regulations;
· they develop and implement innovations before regulators are even aware of them; and
· they employ the best lawyers and lobbyists to plead their case.
In contrast regulators:
· are rewarded only by drawing their normal salaries;
· have to react to banks' innovations after they are in place;
· have much poorer weapons to fight banks' innovations if they don't like them; and even worse
· have access to well-paying jobs in banks and other financial companies provided that relations with those companies remain good.[204] This is one of the revolving doors that link public bodies to the private sector, in this case government, regulation and finance, through which senior members of those bodies and their advisers move freely. (Meacher 2013 p247, Reich 2016 Chapter 12, Crouch 2016 pp105-107)
Nothing less than a radical overhaul is required.
Relatively speaking this is probably the easiest (perhaps least difficult would be a better description) to implement. Nevertheless it would still encounter strong opposition from the banking and financial community. This system would retain banks largely as they are now except that they would be publicly owned and required to operate in the public interest rather than for their own benefit. Lending policies would be re-aligned to serve the economy better, by increasing the proportion of loans to businesses for start-up and expansion of economically beneficial products and services. Although money would still be created by banks in return for loan agreements it wouldn't be pretend money because the government would explicitly guarantee its value so it would have the same status as cash and reserves.
Perhaps the major disadvantage with this system is that as now new money only comes into existence along with new debt. We still have to have debt to have money, and we still can't rid ourselves of debt without also ridding ourselves of money. The quantity of money in the economy remains practically the same as the totality of bank debt, so it grows when new debt take-up exceeds debt repayment and vice versa. Therefore the money supply is still dependent on the vagaries of people's willingness to take on debt so we would still be subject to booms and busts as we cycle between optimism and pessimism about the future. This, as now, is traditional banking's major flaw; it couples together two completely separate factors - willingness to borrow and quantity of desired transactions.
Bank nationalisation has become a hotly debated topic since the 2008 crash, with arguments for and against it. Three websites that address the matter are referenced here.[205]
This is my strongly preferred option and is that proposed by Positive Money. At a stroke it gets rid of all the paradoxes, limitations and moral hazard of the current banking system and provides a strong and sound basis for the economy. The big problem is that whenever it is suggested it brings on apoplexy amongst all the aforementioned supporters of the status quo. Therefore to establish this system would require a bitter fight with very strong and well-provisioned opponents, and the longer we leave it the stronger and better provisioned they become. But it is a fight well worth having nonetheless.
The proposals are set out in great detail in Jackson and Dyson 2012 Part 2, Huber and Robertson 2000, and on the Positive Money website[206], so I shall merely summarise the main points here.
Banks' power to create money would no longer exist. They would only be able to lend (genuine lending in this system) money that was real in the sense that all money would be real money - created by the BoE in the form of cash or electronically - but now instead of only banks and a few others having access to BoE electronic money in the form of reserves everyone would have access to it. Banks would operate in the way that most people think they operate now - as true intermediaries between savers and borrowers. When they lent money in return for a loan agreement that money would exist before the loan was made, and, more importantly, it would continue to exist when it was repaid.
Therefore the money supply would be entirely divorced from people's willingness to take on debt, which of course it should be because money and debt serve completely different purposes. As a result booms and busts would at worst be very much smaller than they are now, and quite possibly might become no more than periodic undulations in a smoothly running economy.
Money would be created by a new committee of the BoE - the Money Creation Committee (MCC) - working independently of government and as now targeting a consumer price inflation rate of 2%. This would be much easier to achieve than it is now because the quantity of money would be designed to track much more accurately that needed for all legitimate transactions, rather than chasing bank profits. The only variable outside control would be the velocity of circulation (see chapter 23), but with inflation under much better control that would stay reasonably constant because people don't change their spending habits greatly over time. Newly created money would be handed to the government of the day to use as it deemed fit, which would largely consist of spending in the economy. Initially the money supply wouldn't change. All existing bank money would become state-issued electronic currency owned by the customers who formerly held bank money, though banks would continue to administer transactions on behalf of customers.
The imperative for people to keep taking on debt would no longer exist. Debts would be available to those who wanted them, but without any of the taxpayer subsidies to banks there would be more money circulating in the wealth-creating economy and much less need for debts. Also the government (and therefore society) would enjoy the seigniorage (profit from creating money consisting of its face value) of newly created MCC money. This would be worth in excess of £50 billion per year[207] - almost half the cost of the NHS. People saving money would take it out of circulation as they do now, but if the extent threatened to damage transactions the MCC would compensate by putting an equivalent amount back into circulation so the circulating money wouldn't change. Conversely if many people drew down their savings for spending at the same time then the MCC would create correspondingly less money in order to offset it.
Private banks would continue to exist and to provide the same services that they do now, though without all the massive subsidies. Some say that banks wouldn't take on this function because they wouldn't be profitable, but it’s the degree of integration and insurance against the massive risks currently taken by taxpayers on banks' behalf that make them unprofitable now without subsidies. There is no reason why much simpler banks couldn't be profitable, lending to good quality borrowers with little default risk. Perhaps the big banks would move their businesses abroad to where they could avoid all the restrictions, but others would soon take their place. The services provided to current account holders would attract fees, as they used to do and still do for business account holders, but these fees would be negligible in comparison with the current hidden fees that everyone pays to banks. It might even be that competition - genuine competition this time - between new banks would allow some to offer current accounts free, or perhaps on condition that some money is tied up in investment products - time will tell.
No bank would be too big to fail, a failed bank would go bankrupt just like any other business, but customers' money, unless it is invested in the bank, would remain safe because it couldn't be accessed by the bank for its own purposes. Former savings accounts would become investment accounts, where interest would be paid and the money lent to borrowers, and that money would then be at risk from the bank failing just like money invested in any other business. Banks would continue to operate the payments system as they do now in conjunction with settlement systems, but there would be provision for the state to take over all payment and settlement functions at short notice in the event of several banks ceasing to function at the same time.
There would be no need for any international repercussions because from outside pounds sterling would look exactly the same as they do now. The currency would very probably be more stable than currently as this reform would remove many sources of instability.
Positive Money has also dealt with all the common criticisms of these proposals, and these are set out on their website.[208]