Tuesday, May 05, 2015

the creation of money and credit is a sovereign power

I've been taking note of posts from the Public Banking Institute on Facebook regarding the benefits of public banking. But one particular set of posts are unnerving, and they discuss the way private banks create credit with loans or debt. You can learn more about this from the Public Banking Institute website. The concept that I speak of is more generally known as fractional reserve banking.

Most people are under the impression that banks only loan out money they have on deposit. Actually, most banks rely upon a privilege to create money from nothing. Banks are required to have a 10% reserve relative to loans outstanding. To put it differently, banks can only leverage loans to deposits by 10-1. Each time they create debt, they are creating money. That is a privilege granted to them under law, by the Federal Reserve.

I saw an interesting video with Ellen Brown, one of the leaders of the public banking movement and the Public Banking Institute. In the video, she shows a chart that shows how the creation of private credit has exploded over the last 30 years. You can see that chart here, at about 3:30.

So I guess I have a question. When conservatives wring their hands about inflation, about government debt, are they even thinking about credit created by private banks? Or do private banks get a pass?

It's an interesting question because I think anyone who is concerned about inflation might want to be looking at Iceland. In the aftermath of the collapse of the economy worldwide, the government of Iceland went after the bankers. They let the banks fail. They arrested, charged and imprisoned anyone and everyone they could find that was responsible for the collapse of the banks. They let the investors and the creditors shoulder the losses, not the consumers - you know, the people who generate demand. They did it right.

Seems like anyone who wants a strong dollar would be in favor of strictly regulating the power to create money. Why permit that power to be used by bankers who helped to crash the economy in 2008? Why not restrict that power to government banks like the Federal Reserve and the Bank of North Dakota? That is exactly what Iceland is considering right now. They are actively considering a law that would reserve the power to create money to the central bank. No one else would be able to create money.

I think that is a very interesting proposition. Proponents claim that such action would take away the power of private banks to create and profit from the boom and bust periods we go through. It would eliminate the banking crises that we seem to have at regular intervals, like buses. Hey, there is an old saying, "Investment opportunities are like buses, there always another one coming". If I were a cynic, I'd say that these crises are planned, they are not accidents.

So why would a country, any country, delegate a power reserved to the sovereign government to a cabal of private banks? Probably because such a government is not working for the people of the country it serves. Rather, it serves the bankers.
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