It’s not just the economy, stupid.
It’s everything, stupid.

The Institute of Economic Affairs critiques New Lib Dem proposals – tax prudent banks to shore up risky ones:

I welcome Vince Cable’s repudiation of the Tobin tax but, instead, he has proposed a tax on bank profits to help provide a sort of insurance premium to pay for the losses banks impose on the taxpayer when they go bust. It would be better to have other reforms to ensure that a “no bail out” pledge can be made credible, but let’s assume that we are starting from here, what is wrong with Vince Cable’s proposal?

Read more.

My Cobden Centre colleague and Chief Executive of Tyler Capital, James Tyler, explains how we came close to financial collapse and what to do about it:

Fractional Reserve Banking (FRB) is an inherently unstable complex system.

Each and every bubble and crisis has some kind of link to FRB, going back thousands of years.

Even where financial crises are caused by natural disasters (the San Francisco earthquake of 1906 being a prime example), the financial crisis only followed because banks did not have enough reserves to pay out worried depositors – due to fractional reserves.

In a nutshell, depositors wanted what they thought was their property back, only to find it did not exist.

Over 70% of people in the UK believe that money placed in an instant access account remains their property.  This is not the case.

Read more: How to avoid future encounters with financial meltdown » The Cobden Centre.

A stunningly good article by my Cobden Centre colleague Dr Anthony J Evans which is now being picked up in the blogosphere:

Barack Obama’s speech on Monday to Wall Street outlines an overhaul of the regulatory regime. On the anniversary of the bankruptcy of Lehman Brothers, politicians from both sides of the Atlantic are looking to remodel capitalism. The thirst for greater regulation is strong, united around Gordon Brown’s judgment that “laissez-faire has had its day … the old idea that the markets were efficient and could work themselves out by themselves are gone”.

The notion that the present financial system is “laissez-faire” is, of course, ludicrous. At present, we have a nationalised organisation that holds a state-granted monopoly on the issuance of currency. If this were any industry other than finance, the Bank of England would be seen as the Soviet-style planning board that it is.

Defending laissez-faire is therefore not a defence of the status quo; it is a positive prescription for a totally new regime.

Read the rest of the article: Don’t regulate banking – liberalise it.

Further reading here: Insight.

I have been busy with my colleagues at our new educational charity for honest money: Steve’s posts at The Cobden Centre.

See also:

• What is money?
• Irving Fisher, 100% Money, 1935
• The Problem with GDP
• The kindness of geniuses
• Henry John “Harry” Patch (17 June 1898 – 25 July 2009)
• FT.com – “Beware of errors in output gap data”
• FT.com — “Wall St profits from Fed role”

Via FT.com / Companies / Financial Services – Nomura has Lehman’s old crown in sight:

Ten months ago when Lehman Brothers collapsed, it would have been a stretch to suggest that the former investment bank might reclaim its crown as the biggest broker on the London Stock Exchange.

But on Monday the new owner of its European equities trading business, Nomura of Japan, said its newly constituted European equities arm was now the LSE’s third-largest broker, behind Credit Suisse and top-ranked Merrill Lynch.

I am delighted to report that I have established The Cobden Centre, an educational charity for honest money and social progress, together with founder Toby Baxendale. 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.

Please follow me, subscribe to new articles and keep an eye on the Cobden Centre site.

A couple of quotes from De Soto, pp 456-474.

From “Effects the business cycle exerts on the banking sector”:

Hence we can conclude that an inherent trend in the privileged exercise of fractional-reserve banking leads to bank consolidation and encourages bankers to develop and maintain close relations with the central bank as the only institution capable of guaranteeing banks’ survival in moments of crisis, situations banks themselves create regularly. Furthermore the central bank directs, orchestrates, and organizes credit expansion, making sure that banks expand more or less in unison and that none stray far from the established pace.

Eerily familiar… and for fun, from “Marx, Hayek and the view that economic crises are intrinsic to market economies”:

To contend that an economy of real socialism offers the advantage of eliminating economic crises is tantamount to affirming that the advantage of being dead is immunity to disease.

De Soto goes on to provide a clear and detailed solution which he claims could provide stable and gently growing constant prosperity.

Present economic circumstances seem perilously close to those described by scholars of the monetary theory of the trade cycle:

The Bank of England has pledged to pump another £50bn into the economy as it steps up efforts to haul the UK from its worst recession in at least two decades.

via Bank of England to pump another £50bn into economy as it steps up recession fight – Telegraph.

China has given its clearest warning to date that emergency monetary stimulus by Western governments risks setting off worldwide inflation and undermining global bond markets.

via China fears bond crisis as it slams quantitative easing – Telegraph.

Unfortunately:

Continuously injecting additional amounts of money where it creates temporary demand, together with an expectation of continuously rising prices, draws labour and resources into use in areas which will last only as long as the supply of new money.

Read more posts on economics.

Lloyds Banking Group, which is 44 per cent owned by the UK taxpayer, today warned that soaring bad debt from legacy HBOS customers will contribute to a 50 per cent rise in loan book write-offs in 2009 compared to last year.

…

Mr Daniels pointed out that its bad debts would be largely taken on by the taxpayer after Lloyds last month outlined an agreement to join the Government Asset Protection Scheme.

Under the scheme, Lloyds will transfer £260 billion worth of its most high risk loans to the Government. Lloyds will bear the first losses on loans up to £25 billion, with any further writedowns being taken by the taxpayer.

via Lloyds bad debts to soar 50% on HBOS loans – Times Online .

Bankers have always seen it as their job to invest as much of their depositors’ money as they prudently can, in order to earn income for themselves while, at the same time, maintaining sufficient cash flow to be able to honour depositors’ cheques when presented and to meet withdrawals when demanded. If new deposits fail to materialise in sufficient strength or if borrowers fail to repay on time or at all, banks need to be rescued or they will fail. Historically, bank failures then led to a demand for central banks to act as lenders of last resort to save imprudent bankers who got caught short.

…

Banks must not be allowed to continue to lend depositors’ money without the consent of the depositor. This will immediately stop the issuance of two receipts against the same money. Depositors would have to pay for the storage and distribution of their money in accounts and banks would have to compete and earn their income through storage and distribution charges.

via My Lords, the Banking Bill which we…: 5 Feb 2009: House of Lords debates (TheyWorkForYou.com).