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There is a major misconception, as I said here.

Bank Of England Unplugged

The "Government" has not lent a penny, and the "tax-payer" is not risking a penny.

As Tim Congdon said in the FT (so it must be true!)

The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.

Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate.

That is what leads to the <head explosion> in fact. People literally cannot comprehend the truth of fiat money.

The facts of the matter are - as Congdon explains -that the Bank's (base rate) income of 5.75% on its lending to Northern Rock is a wind-fall to the UK tax payer. The "penal" amount of 1.25% on top of this is not in fact being paid to the Bank of England but is being allowed to roll up as a "subordinated loan" by the Treasury to Northern Rock.

ie the Bank of England is essentially gifting this "investment" to the Treasury on behalf of "tax-payers".

What happens if it all goes "pear-shaped"?  

Well, the first people to take the hit are Northern Rock shareholders. Then it's the Treasury, but they would only be losing money they have been "gifted" by the Bank of England.

What about the billions upon billions of tax-payers' money exercising the politicians and the press?

Well actually it's as though the Bank Of England took back a few more skip-loads of time-expired bank notes and burnt them in the usual way. ie the tax payer loses NOTHING in the event of a default.

It is rare indeed that the mask slips in relation to the truly surreal nature of the vacuum at the heart of a fractional reserve banking system. The truth is that the longer this goes on, the better off the tax-payer will be, and if the tax-payer can lose, then I can't see how.

My proposed solution would be for existing Northern Rock shareholders to transfer their shares to the Northern Rock Foundation (who already own 15%) as a "Custodian".

These shareholders, the Bank of England, and any oither creditors who wished to join in would then all exchange their debt for "quasi Equity" by being allocated units/ proportional "Equity Shares" in Northern Rock revenues.

Northern Rock PLC would become an employee Co-op, a la John Lewis, receiving an agreed share of revenues for operating the business as an "Operating Partner"

A Northern Rock LLP would serve as a framework for this process.

And my fees are very reasonable!

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 21st, 2007 at 09:06:06 AM EST
You've made you opinion clear many times on "fiat" money over a series of postings and comments.

If you have proposed an alternative, I'd appreciate a citation, I've probably missed it.

Even if you have an alternate (and let's assume it's better) there is no chance of the current system being altered. So what do you suggest as a program that can get adopted?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Nov 21st, 2007 at 11:41:48 AM EST
[ Parent ]
...there is no chance of the current system being altered

The "current system" is not static: it has evolved over time and will continue to do so. In a sense it is altering itself and there are two "Telluric" (thanks Migeru) forces moving the earth under our feet:

Firstly: the pervasive spread of direct "Peer to Peer" connectivity of the Internet.

Credit intermediaries are no different from any other. They are obsolescent, and the only question is what services would the current intermediaries be providing once they cease to be "middlemen". I am sure that the music industry saw "no chance of the current system being altered" before Napster came and blew their certainties apart.

Secondly: there is the current confrontation of deficit finance driven economic growth with finite resources generally and oil in particular. Here again, altering the system is not in doubt, the only question is what will be the outcome of Bretton Woods Round 2?

I advocate two financing mechanisms with global application, which need neither changes in legislation nor global institutions.

They are simply consensual legal protocols defining the relationships between and amongst individuals and enterprises of all types (public, private; charitable, social or commercial in aims; of whatever legal form).

(a) Mutualised Credit - risk sharing - through a "Guarantee Society" protocol (a mutual guarantee of bilateral "trade" credit, backed by a "default fund or "pool");

(b) Mutualised investment - revenue/production sharing - through a "Capital Partnership" protocol.

Both - I believe - give rise to optimal outcomes, and those who do not use them will therefore be at a disadvantage to those that do. Which is why they are "emerging".

Embryonic Capital Partnerships are already in use (but only minimally "unitised") in the UK in transactions >£1bn. The entire Canadian capital market consists - through Income Trusts - of exactly the same unitised "pre-distribution" of revenues as I advocate using partnership instead of trust law. This is because Income Trusts  are hugely attractive to pension investors interested in getting their hands on a listed Corporation's revenues before the management does.

Moreover, the ability of a "Capital Partnership" to finance public investment without borrowing is both a "killer application" politically and a complete debunking of the convention that the Public Sector must borrow to invest.

Funding infrastructure with this model IMHO wipes the floor with any other form of finance.

The "Private" sector is defined as ownership by a "Corporation": I merely point out that there are more ways of investing than through Corporations.

I advocate not just the "Energising" of America but the "Equitising" of America not just through new public investment using such Capital Partnerships LLC's but also through the widespread adoption of "Energy Partnerships" and "Land Partnerships".

The former gives rise to streams of (potentially internationally) fungible energy "Value Units", and the latter to a stream of (nationally) fungible land  rental "Value Units".

The latter are to all intents and purposes a simpler form of "Real Estate Investment Trust" or REIT, and I believe actually offer the basis of a "Debt/Equity" swap which would both minimise the current losses of the financial system, and essentially replace a large part of the "National Debt" with a "National Equity".

There is no chance of such an initiative being implemented "top down". But having said that, I believe optimal solutions, once appreciated and understood, will spread virally.

I'm working in Scotland and Norway in respect to the "Hanseatic Microfinance Initiative", with Norwegian government support.

This comprises both of the partnership-based  mechanisms mentioned above, but of course the application of these is not limited to "micro" businesses: it's just that such businesses have effectively been abandoned by the financial system.

(Having said that, there is a big move into "helping" the global poor by putting them into high cost debt aka "Micro-credit".)

There is no reason why anyone in the US should not use LLC's to implement partnership-based financial solutions from the ground up.

That is the alternative I advocate, and it is based upon the ongoing reinvention and evolution of "enterprise models".

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 21st, 2007 at 01:14:44 PM EST
[ Parent ]
I thought your principle complaint was that the government could print money. I don't see this being addressed in your reply.

What you seem to suggesting, at least in part, is financing new enterprises in a way similar to venture capitalists. I have the brains (or idea) and they have the money. We each get a share of the stock.

The Muslim banking system requires that banks share the risk so that the money provided is not a "loan". I don't know if they really share the risk or this is just a subterfuge to get around Islamic prohibitions on charging interest.

I hope you'll continue to provide prescriptions in future comments as well as criticisms of current practices.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Nov 21st, 2007 at 07:51:32 PM EST
[ Parent ]
I'm not complaining at all about the Bank of England printing money. I merely question the need for the Bank's existence.

I am pointing out - as did Mr Congdon (uniquely, in my experience, in a mainstream paper, never mind the FT) -that money can, and should, be issued interest-free, (but not necessarily, as we see below, "cost -free")

We have been bamboozled by the complexity, and smoke and mirrors of the system, into believing that interest-bearing money is necessary. Clearly, since such money is more expensive than non interest-bearing money, it must, all else being equal, be more inflationary.

There is no need for a Central Bank, and Hong Kong has never had one. In Hong Kong, private Banks issue notes and interest-bearing "Money as Debt" under the supervision of a Monetary Authority.

Putting to one side the "Peer to Peer" solutions I described up-thread (which essentially bypass and dis-intermediate Government altogether), a more conventional mechanism would be for Interest-free Credit to be issued directly by the Treasury, under the supervision of a Monetary Authority.

ie Money would be "Treasury Notes" not Bank Notes.

That is what US Treasury Greenbacks were, and until quite recently (being finally phased out in 1971).

That is pretty much what the Social Credit movement advocated, but they aimed to keep a handle on inflation using technocratic Government price controls.

In post Napoleonic times Guernsey had a very successful direct government issue of money, which lasted a good while until conventional bankers brought the wonders of debt money to Guernsey.

I would advocate the issue by the Treasury of interest-free Treasury Credits directly (ie without bank intermediation, and therefore without banks needing to put Capital at risk at all) to borrowers under the management of Banks as service providers.

Although there would be no interest, such credit would have both system costs and default costs. The users of credits would make a payment into a default fund, part of which would go to Banks as service providers.

Such a system is what I propose, in essence, in my "LLP solution" for Northern Rock, above, and is not a million miles from the situation the Banlk Of England has been forced into.

Re Islamic Banking, the "Capital Partnership" I advocate is in fact practically identical to the Islamic financing technique known as "musharakah" and this is universally agreed to be genuinely Islamically sound.

Some Banks use other techniques (eg "Mudabarah") in ways which some scholars are prepared to approve, but others are not. These Banks pay large amounts for "fatwa's" to the complaisant scholars: the purchase of indulgences is an apt comparison.

However, the mechanism used has a bearing only on the amount of Capital Islamic Banks must commit to backing the finance. The source of the money which they advance is still "deficit-based" and "Islamic" Banks like all the rest, create credit on the basis of an amount of capital set by the BIS.

To sum up:

(a) Credit, in fact, has no cost other than system costs and default costs.

(b)  Productive Capital has a "market price" = "cost" based upon the expected likelihood of rewards over time from the Capital assets in which investment is made.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 21st, 2007 at 09:13:15 PM EST
[ Parent ]
And of course neither the true cost of Capital nor that of Credit has anything to do with the arbitrary "Cost of Money" aka "Interest Rate" set by Central Banks.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Nov 21st, 2007 at 09:18:19 PM EST
[ Parent ]

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