Steve Baker

Via British banks highly vulnerable to future shocks, Bank of England warns - Telegraph:

Britain’s banks remain over-indebted, highly vulnerable and harbour growing funding gaps which leave them susceptible to future shocks, the Bank of England has said.

…

In a sign of the strain facing nations’ public finances – including the UK’s – the report also revealed that the threat of a sovereign debt default has become one of the biggest concerns for investors. A survey put together for the report identified sovereign risk as a financial stability concern for the first time.

The report also laid out a number of key criteria banks will have to fulfil in the future – reforms which could transform the structure of the financial system. Among its recommendations were that in future banks should “face a credible threat of closure or wind down”, should have a “risk-based, pre-funded deposit insurance system”, should increase their levels of capital and liquidity, depending on their size, and should provide a “will” which explains how to dismantle them in the event of insolvency.

The Bank of England’s Financial Stability Report is available here. The summary is quite accessible.

However, to answer the underlying “why?” one must look elsewhere. It may also be worth considering this speech by the Earl of Caithness:

The Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. … the fault that really needs correcting is our whole banking system.

The debate which must be reopened and made contemporary is that between the Banking and Currency Schools of the nineteenth century. At the time of the 1844 Bank Charter Act, the Currency School committed three errors which haunt us today. More to follow at The Cobden Centre.

I am delighted to report that I have become a co-founder of The Cobden Centre, an educational charity for honest money and social progress. You can find out more at our web site. The Cobden Centre provided this site’s previously-published reading list, Rethinking Economics.

Over the coming months, The Cobden Centre will provide a number of insight articles drawing on our extensive base of literature and covering, as a beginning, the scope of de Soto’s Money, Bank Credit and Economic Cycles:

• The legal nature of the monetary irregular deposit contract. Types of deposit contract including the deposit of fungible goods, such as money. The economic and social function of irregular deposits. The essential differences between the irregular deposit contract and the monetary loan contract. The emergence of general legal principles governing the irregular deposit contract.
• Historical violations of the legal principles governing the monetary irregular deposit contract. Greece and Rome. The late Middle Ages: the Mediterranean, Florence, Medici and Catalonia. Banking under Charles V and the doctrine of the school of Salamanca. A new attempt at legitimate banking: the Bank of Amsterdam, David Hume, Adam Smith, the Banks of Sweden and Amsterdam, John Law and Richard Cantillon.
• Attempts to legally justify fractional-reserve banking. The error of equating irregular deposit and loan contracts. Redefining the concept of availability. Deposits, repurchases and life insurance.
• The credit expansion process. The bank’s role as a true intermediary in the loan contract. The bank’s role in the monetary bank-deposit contract. The effects produced by bankers’ use of demand deposits: individual banks of various sizes and the entire banking system. Simultaneous credit expansion by all banks. Deposit creation compared to unbacked bank notes. Credit tightening.
• Bank credit expansion and its effects on the economic system. Capital theory. Effects on the productive structure of an increase in credit unbacked by voluntary saving. The circulation credit theory of the business cycle.
• Additional considerations on the theory of the business cycle. Crises and real saving. Postponing crises. Consumer credit. The self-destructive nature of artificial booms and forced saving. Squandering capital. Credit expansion as the cause of massive unemployment. The inadequacies of national income accounting. Avoiding business cycles. The manic-depressive economy. Marx, Hayek and the view that economic crises are intrinsic to market economies. Empirical evidence for the theory of the business cycle.
• A critique of monetarist and Keynesian theories. The mythical concept of capital. The mechanistic quantity theory of money. Rational expectations. Say’s law of markets. Keynes’ arguments on credit expansion. The marginal efficiency of capital. The Marxist tradition.
• Central and free banking theory. A critical analysis of the Banking School. The Currency School and the Banking School. Central banking vs free banking. The impossibility of socialism and its application to the central bank. The failure of banking legislation. The concept of saving and the demand for money. The false debate between supporters of central banking and defenders of fractional-reserve free banking.
• A proposal for banking reform.

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