In our earlier article “Can Banks really Create Money When they Want?” we looked at how we are part of a system where privatised bodies – i.e. the banks – are the main ones creating the money for our society. And we also came to the conclusion that money is all illusory.
We learnt that it is not the democratically elected bodies that create much of the money; in fact, the money these bodies do create is less than 5% of total money.
Here we ask: Does this make sense?
Well, we are going to sit on the fence here. Especially as it is up to the banks to decide when to create money. And equally, when to destroy it.
There are two problems:
The creation (and equally the destruction) of money rests almost exclusively on the whim of our bankers – you could even say it is down to which side of bed they got out of that morning!
The short term nature of how the (privatised) banks are incentivised drives perverse behaviour – short term gains driving bonuses
This has three consequences:
The creation of money lies outside our democratically elected institutions
Instability in the banking system generates uncertainty and therefore the economy suffers. Banks create new money when the economy is booming – when we do not need it. Conversely, they destroy money – calling in debt – when we are in recession just – when we really do need it.
It is unjust and unfair; it is easy to borrow money when you have money/assets. Impossible if you don’t.
Tectona tip – I love the analogy of the umbrella shop owner who will happily sell you as many umbrellas as you want when it is sunny, but closes the doors when it is raining!
But there are achievable improvements:
- Provide robust regulation – and with teeth
- A lengthy period of lock-up of remuneration for senior bankers (to mitigate short-term-itis)
And to be fair to our banking colleagues, they are not clairvoyant – we rarely meet a business that didn’t think it was a sound credit risk. Do you?
I think the current system is the worst possible – except for the alternatives! But there are some achievable improvements (see above) that could be implemented quite simply and cheaply – were there the appetite.
So, some serious fence sitting going on here!
That is our take on whether the current approach with banks being able to create money when they want is a good way to run our economy and provides a backdrop for when you read our related articles:
- Are there any Checks and Balances on the ability of Banks to Create Money?
- Is this a Good Way to run our Economy?
What is QE2 and do we really have to Pay it Back?
Note: A large chunk of the inspiration for this synopsis is drawn from the excellent Economic Updates produced by Roger Martin-Fagg