Chris Cook • www.heraldscotland.com • March 10, 2013
It lies at the heart of the world’s financial crisis and threatens to derail every solution we try … but the global debt problem won’t be solved by a traditional view of economics.
…THE clearing banks of course have their own power to create money, for the purposes of lending. They are responsible for most new money in the modern system, accounting for about 97% compared to 3% from the Bank of England.
They, too, are the subject of a well-peddled myth, which is that deposits are first collected by banks and then spent or loaned into circulation on the basis of requiring a certain reserve level of deposits to be maintained. In fact, there is no constraint on UK credit/money creation of reserves: the constraint on modern money creation by private banks is the capital required to cover losses on loans. Private banks first lend or spend what are essentially “lookalikes” of central bank money and then fund their dated interest-bearing loans (assets) with dated interest-bearing deposits (liabilities).
Putting most money creation into the hands of organisations whose raison d’etre is to make money from lending (and more recently, from speculation) is behind much of what has gone wrong with the financial system. As with all historic bubbles, the profit motive drove excessive credit creation.
…FROM these observations, I reach two conclusions. First, the clearing banks cannot be trusted to freely create the credit which is modern money. If money is to be created by a middleman or intermediary then it should be either the central bank or the Treasury itself.
…MY second conclusion is that we must revisit the concept of the national debt itself and recognise it for the national equity it is in reality. We have only saddled ourselves with this debt delusion because we have forgotten what the true relationship actually is between public spending and taxation.
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