Eureka 2 : The UK solution

At 4 o'clock this morning, I woke up with an idea already fully formed in my head. It was a solution for the UK's debt problem, that, if you think about it, seems blindingly obvious. I'd presumably been dreaming about it. It felt a bit like Paul McCartney waking up with the tune to "Yesterday" fully formed in his head. Interesting phenonomon.... but I digress. So, what is the idea?

Well, if you have been following the story so far, you know that the number one problem in the Eurozone is that governments are forced to pay ridiculous amounts of money in interest on their sovereign debt, because of the refusal of the ECB to lend them money directly. Mario Draghi, the head of the ECB, and previously the European Director of Goldman Sachs, will only lend money to his friends in the banking sector, claiming that he can't lend to governments because of the Lisbon treaty. But as Michel Rocard and Pierre Larrouturou noted, and I as had already pointed out, paragraph 2 of article 123 of the treaty specifically says that Central Banks can lend to "publicly owned credit institutions". So, for example, the Caisse des Dépôts in France could use the next bank handout organised by Mario Draghi on the 29th February to borrow the 1.59 trillion euros needed to wipe out the entire French government's debts to the banks. Instead of paying 3.41% interest to the banks (54.25 billion euros per year, or 2.81% of French GDP), they would pay just 1%, thus saving around €38 billion of interest payments per year for the French tax-payers.

But the solution in the UK is 1000 times simpler - and would be an even better deal for taxpayers.  The official value for the  UK's national debt in 2010 was £1,164 billion, 79.9% of GDP. In 2010, the government paid £49 billion in interest payments on this debt - 2.9% of GDP. The latest figures for long term interest rates show that, despite the massive cuts, and the Government's valiant attempts to appease the markets and maintain its triple A status, it was still paying 2.29% interest to the banks, meaning that they will still be paying £31 billion. The entire cuts program is supposed to be justified by this reduction in interest payments. We are told that we should be eternally grateful for the government's sound economic policy, because it allows them to avoid the excessive interest charges that get charged on government debt in the Eurozone.

This entire story is a total sham. The Bank of England could perfectly well print the £1,164 billion needed to pay off the entire national debt, lend it at 0.01% to a "publicly-owned credit institution" as permitted by paragraph 2 of article 123, who could lend it to the government at 0.02%, who could immediately pay off the outstanding debt. Why 0.01%? Well, it turns out that this is the rate used by the US Federal Reserve for  secretly lending $1200 billion to the US banks - so clearly, these sort of numbers for central bank lending are perfectly okay.

Which "publicly owned credit institution"? Well, the Royal Bank of Scotland is 84% owned by the UK taxpayer. That should do. But if they refuse to play ball, and insist on a mark-up of more that 100% when they hand on the money to the government, it may be necessary to invent a new one. That should not require too much skill on the part of Osborne and Co.

The operation would do two main things. First, it would mean that the UK taxpayer would only need to pay interest charges at 0.02% instead of the 2.29% that it currently pays the banks. That would cost just £233 million, down from the 2010 value of £49 billion - over 100 times less.

Secondly, it would mean that the banks that lent the money to finance the UK's national debt would get their £1,164 billion back. They should be super happy right? After all, they keep complaining that they don't have any money to lend to businesses, that they need £75 billion in quantitative easing from the Bank of England (in addition to the £200 billion they were handed out in 2009-2010).

Wrong. The banks, and their collaborators in the government will never propose such a solution, despite the fact that it seems to be blindingly obvious. Why on earth not?  There are two reasons.

Firstly, the banks know perfectly well that if the debts are paid off, they won't actually get the money. The vast majority of the money that the banks have been lending is money that they didn't actually have to lend. It is money that was created out of thin air by the magic of fractional reserve banking. When that sort of debt is paid off, it simply disappears in a puff of smoke. Of course the banks don't want that sort of money back.

But secondly, if they allowed the government to pay off its debts, it would kill the goose that has been laying the golden eggs for decades.  The goose that allowed the banking sector to siphon off £444.6 billion from the UK economy for the period between 1995 and 2010 (2.59% of UK GDP). The goose that is supposed to provide them with another £31 billion this year. After all, they've got their bonuses to pay.

And of course, no-one has ever questioned this God-given right of banks to rip everyone off. Why not? Well, I suppose that it could just be because I am the first person to ever think about the possibility of the Bank of England providing the money directly to the Government to pay off its debts. But I seriously doubt it. It's essentially exactly what the people running the Positive Money site have been saying for ages - money creation is for central banks only - not for commercial banks.

No. I think the main reason is that nearly all the media is controlled by financial groups that are determined to keep the money machine running as long as they can. And the UK's politicians also seem to have been completely muzzled. Some of them may simply consider that the City is perfectly entitled to cream off 2.5% of GDP in interest charges every year. I suspect that Cameron and Osborne may be sufficiently blinkered to believe it. But what about Ed Balls? What about Vince  Cable? Why on earth have they said nothing? Maybe Murdoch's media empire has enough compromising phone calls that he can trot out to blackmail them all.

But he can't blackmail 99% of the population. It is time for citizens to break this insane system. We need to cut out the middle man in the City and force Central Banks to provide Governments with the money they need to write off debts to the commercial banking sector.