28 Sep 2011

A New Way to solve the Debt Problem!

I think I may just have come up with an idea that could solve the debt problem. I've already mentioned the positivemoney web site that explains how banks have been given the right to produce "money" out of thin air thanks to the wonders of Fractional Reserve Banking. This is the totally mind blowing idea that when a bank receives say £1000 as a deposit, they are able to lend anything up to 30 times that amount of money. They just need to keep a small amount present in a central bank such as the Bank of England to allow day-to-day transactions to be performed.

It seems completely crazy - and it is. It means that if a bank can get someone (an individual, a company or a country) to sign up for debt, they can create money from nothing. It's hardly surprising that they make huge profits. If they can get people to "borrow" money on their credit cards and pay back interest at 20% or more, even when the bank didn't actually have the money to lend in the first place, you can see why personal debt in the UK is now something like 3 times total GDP and why bankers bonuses are so obscene. They literally have a licence to print money.

So, what's the solution that I would like to propose? Well, right now, Greece is crippled with debts and being forced into imposing draconian measures to cut spending just to pay the interest on the loans that it has taken out. There have been suggestions of a possible rescue plan in which the Greek government would be allowed to cancel about 50% of its debts, and the other EU nations would step in with yet another bailout.

How about another alternative? Why doesn't the Greek government say that it will only repay money that it owes to banks and other financial institutions that those banks actually had to lend in the first place - and not money that was created out of thin air in the form of debt. I understand that (for example) French banks have "lent" billions to Greece over the last decade or so. Now, obviously, if a bank had a billion in deposits that they lent on to the Greek government, then this money needs to be repaid - it's the money that French savers have deposited in the bank. But what about the other 30 billion that the bank created out of thin air? Why does that need to be repaid?

Suppose then that a bank lent 31 billion euros to the Greek Government, but that they could only justify 1 billion of that on the basis of actual deposits. In that case, it seems to me that it is reasonable that the Greek government should only be forced to pay back the 1 billion. This could lead to a really interesting situation where the banks would have to demonstrate what proportion of the money they lent corresponded to real deposits, and how much resulted from money creation. I would say that if they can't prove that they had the money originally, then tough. They would have to forget about it. It would be an interesting test to see whether the bank's accounting systems actually keeps track of this sort of activity. What percentage of the money lent to Greece corresponds to real money? Maybe the amount is not 50%, but a much smalller proportion. Hey, it might only be 3%. It will certainly be interesting to find out.

Given that the vast majority of people have no idea that banks can lend money that they do not have, I think there could be a real legal argument here of deceit. After all, it is obviously the case that  if I was to sell you something that I did not possess, then this would be illegal. Why is the situation different with money that the banks lend us?

Unless I'm mistaken, starting such a process in which we force banks to admit to the money creation trick could literally solve the entire debt problem. We would only owe money to banks if they actually had the money to lend us in the first place. So, we could start with Greece (for which a solution needs to be found very rapidly if the entire Eurozone is not to collapse), but obviously, if the technique works, then all governments could write off a substantial proportion of their debts.

It almost sounds too good to be true... But maybe it would work. Comments please!

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