- The problems with our current banking system are huge. So how do we start to look for solutions?
The problems with our current banking system are huge. So how do we start to look for solutions?
Firstly, there's no shortage of ideas. Every book or blog on the financial crisis has a proposal to prevent it happening again, and there are a lot of experts with brilliant ideas on how to fix specific problems with the financial system. What we need now is a way to judge those ideas so that we know which ideas are a step in the right direction, and which ideas actually create more problems than they solve.
To help us, let's put the technical details aside for a minute and just think about what the system of banking and money should actually be and do. Also, what should it not do?
We've thought this one through, and this is what we came up with...
A positive system of money and banking must be:
Let's look at those in more detail.
It's pretty inconvenient to have a financial system that collapses every 7-10 years. The current banking system is inherently unstable and actually creates the recessions that throw thousands out of work and destroys otherwise-sound businesses.
So, a positive system of money and banking must be inherently stable. Rather than being pro-cyclical, a positive system should be either neutral or counter-cyclical.
Our system of banking and money can be designed to be self-regulating and self-stabilising. In a positive money system, rising debt would cause people to slow down - rather than accelerate - their borrowing. This is the exact opposite of the current system.
There are numerous other 'pro-cyclical feedback loops' within finance that also need to be addressed (see George Cooper's The Origin of Financial Crises for more details), but the greatest of all these feedback loops is the creation of money as debt by commercial banks, and therefore this is what should be addressed first of all.
The current system relies on ever-increasing debt to avoid a complete economic meltdown - even though ever-increasing debt will eventually lead to complete economic meltdown. This is a completely unsustainable system. In a positive money system, the fundamental design of the system should not be so flawed that it makes its collapse inevitable.
So a positive money system must be able to function for decades or centuries without building up unpayable debts or huge financial imbalances. This requires different reforms at both a domestic (within each country) and international level. For now, the Positive Money campaign is only focused on domestic reform.
Another huge aspect of sustainability is environmental sustainability. The money system must not be a driver for ever-growing depletion of natural resources. A debt-based monetary system demands continual growth in a world of finite natural resources.
A positive money system should unlock creative and productive capacity in the economy, rather than hold it back. If there are people willing to work, raw materials, and people who want things to be done, but nothing can happen thanks to a lack of digital numbers in a computer system, then something is wrong with the money system - rather than the real world.
A positive money system also needs to channel investment to the uses that add the greatest value to society, rather than pumping up the prices of the necessities of life (such as housing).
Finally, the cost of providing a medium of exchange (i.e. money, and the payment systems that it flows through) should be as low as possible, and falling as a percentage of GDP. With our advanced technology, a truly efficient payments system would just work, and wouldn't require an army of people to make it function. If the banking sector is growing year after year as a percentage of GDP and employment, then something is wrong - it is likely that the sector is extracting wealth rather than contributing value. In a positive money system, the banking sector would first decline as a percentage of GDP before stabilising at a much lower level.
Banks should operate on the same grounds as normal businesses and workers. Any small business owner knows that if he or she messes up their financial management of the business, they'll go out of business. They have to compete in a free market. Banks on the other hand are sheltered from the consequences of their poor decisions by potential taxpayer-funded bailouts and deposit insurance.
The NZ government’s deposit guarantee scheme in 2008 effectively underwrote the risky borrowing of overseas banks and exposed the New Zealand taxpayer to a potential liability of $150,000,000,000.
There is no good economic reason why ordinary people should protect the banking sector, and asking them to do so is unfair.
The banking sector should be rewarded in line with the real value that they contribute to society, and not benefit from ‘free lunches’ conferred upon them through the structure of the money system.
The process of creating money should not simultaneously create debt. This is one of the most unfair aspects of the current system - since almost all money is created by banks when they make loans, this means that for every $1 of money, there is $1 of debt.
A positive money system would not necessitate that people take on $168bn of debt in order for the economy to have $168bn of money to trade with.