7 Nov 2011

Can someone explain Fractional Reserve Banking to Angela Merkel?

Here's my latest comment in the Guardian where a number of reports imply that the main obstacle to using the European Central Bank to get Greece (and now Italy) off the hook is Germany's refusal to accept any form of Quantitative Easing. Here's a comment I just posted on the Guardian that I hope explains why this refusal is not justified.

A couple of days ago, I made the suggestion that the ECB should indulge in a spot of Quantitative Easing, and lend Greece the 329 billion euros needed to pay off all the money it owes to the financial markets and get them to pay the money back over 10 years with interest at its key interest rate of 1.25%. That way, they would no longer be having to pay the banks 17.78% in interest - a rate that is totally ridiculous.

It's important to realize that this use of Quantitive Easing is totally unlike the sort of Quantitative Easing being done by George Osborne and his chums at the Bank of England. That is a total disaster, because it just puts even more money into the banks, hedge funds, pension funds, etc with absolutely no requirement for them to do anything useful with the funds (they may decide to pay themselves big bonuses, or move it to the Cayman Islands, or buy Credit Default Swaps - I'm sure they'll find something to do with the 75 billion they have been promised).

No, the sort of Quantitative Easing that I am proposing is very different, because the money that is "printed" can only be used to pay off the debts to the banks who are charging the outrageous 17.78% interest rates. The Greeks would have to pay the money back, but under controlled conditions.

Importantly, since a very substantial proportion of the money that was lent to the Greek government was probably the result of using Fractional Reserve Banking to generate the money out of thin air, it is highly probable that the money "printed" by the ECB would just disappear into thin air too.

Someone should force Angela Merkel to read the positive money website, which explains very clearly the real reason why the total government debt for the 27 EU countries currently stands at nearly 10 trillion euros, of which more than 2 trillion is owed by - guess who? - the German government. If she did, she, and the other Germans who think that any use of the ECB to print some extra euros, might realise that the result will not be the sort of hyperinflation that Germany saw in the 1920s. It appears that this extreme caution is probably the main reason why this real solution is being ignored.

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