Last week I posted that there are two particular proposals from Positive Money that I like. So now to the bad news.

Positive Money propose that the lending banks are not allowed to generate money at all. All necessary funds should instead be generated by the Central Bank (Bank of England). This would elevate electronic money, which is the vast majority of money  – to the same status as bank notes and coins which have had to be centrally controlled in the UK since 1844. This sounds a good idea. Certainly it would prevent the unstable creation of new money, secure the taxpayer from failing banks, separate payment and investment, ensure transparency, remove (in theory) the power from politicians and bankers and in some way ‘democratise’ the creation of money.

I know this is a central plank in Positive Money’s agenda but – and it is an enormous ‘but’ IMHO – this process would almost certainly become very bureaucratic and therefore slow to respond to the market. If the economy post-centralisation is to be as fluid and responsive as it was before the Great Debacle (yet of course more responsible), the BoE would have to replace or mirror the management and decision processes of all lending banks. It would become an enormous institution with hundreds of thousands of public servants either rubber stamping or duplicating work. The lending banks would just become agents without the profit or ability to maintain the financial system of clearing, payment and ATMs . So to simplify such a bureaucracy, lending limits would need to be imposed per bank which means a return to credit controls where the people who would lose out are the individuals and small businesses without the contact, clout, reputation or golf club membership.

Secondly, while the BoE in the PM proposals would have its independence ‘enshrined’ by Parliament , this is no guarantee of real independence and there are questions of accountability. But more seriously, consider this.

If a private bank fails, that is just one of many banks. If necessary we can shoot the Chairman and Board of Directors.  At least we can impose penalties so they don’t do it (again). They have made a big mess but with reform this should be fixable and we are learning.

But if the only source of money is the BoE and that messes up, then we really are in the deep and smelly. A complete collapse of a currency is on the cards. The Board of the Bank of England is only a group of people who, while no doubt very clever, are still fallible. Putting all your eggs such a basket is a single-mode failure problem. If it can fail, at some stage it will.  Any such system is therefore going to be very conservative, hesitant at creation of new money and deflationary.

Thirdly, we have to consider the international dimension. All countries exists in a global economy. Banks from all countries are here and British banks are everywhere as well. There are so many issues that I really don’t know where to begin. Do the restrictions placed on British banks apply to their overseas branches working in other currencies? And vice versa for foreign banks working in sterling? What about foreign exchange? Can I get a loan created in dollars and exchange those for pounds? If so, where does that money come from? Will exchange controls have to be reintroduced?

Other countries would be very unlikely to follow. So if the money supply were restricted because of policy or inefficiency, the effect on the economy compared to our competitors would be disastrous. Unrestricted growth is not a good thing but stagnation, deflation and recession can be even more dangerous.

My last objection to the nationalisation of money creation is pragmatic. We have to persuade the politicians and some bankers of the merits. Politics is the art of the possible and practicable. Proposals that are so radical, merit though they may have, are very unlikely ever to see the light of day – at least not without a revolution.  It is not that politicians and bankers are necessarily corrupt or greedy. Some may be but I don’t believe all are. And if they all are, this means that there is even less chance of a radical solution. We have to understand and act with the world as it is.  What about any compensation that the lending banks may demand?  Could there be a legal challenge?  Is there any contractual obligation to allow the banks free reign at the party?  Because if there is the slightest hint, be sure that the banks will employ the finest lawyers to tie the government up in knots for years, delaying things while exporting as much business as they can to more profitable regimes.  What about the effect on bank share prices which would surely collapse as banks would become much less profitable?  I think investors would have a lot to say and do about this.

We need to get everyone on the side of reform in more than the knee-jerk way currently seen in the UK with the Vickers’ report.  At the moment, the UK government seems to think that if all we do is to slash and burn and follow Vickers’ with some bells and whistles, all will be well, the UK economy will recover, people will find work from somewhere, manufacturing will flourish and Christmas will occur every week. Poo. But if we put forward proposals that are both difficult to implement and potentially damaging to the economy, no government will put them to the electorate or Parliament. So there is very little point in policies which may cripple an economy, however much theoretical benefit there is to them.

The Three Taxes is I believe the best way forward although I am currently considering the implications of the Financial Transactions Tax which is quite a complex tax to administer.  I add to these the principle of (of course, taxable) Yield Sharing accounts alongside the Custodial accounts and repairing the regulatory framework, as detailed on the Positive Money website.  Legislators should note that the tax income from these various sources would be considerable so the current scorched-earth policy could be abandoned in favour of promoting employment, investment and growth while reducing the national debt.  In effect, some of the enormous profits made by banks would be released to the benefit of society either in the public purse, in better returns for savers or by reducing the costs to borrowers.  In generating a more healthy economy, business would invest and we would all be better off – paradoxically including the banks.

Obscene though some may be, I have no particular issue with high salaries in any industry including bank bonuses – where merited. Legislating to restrict bonuses in one particular industry will either drive such experts abroad or get the bonuses paid out of sight.  It is an example of control freak politics.  By all means give shareholders a say over remuneration although I don’t think that will have much effect as they are all scratching each others’ backs.

But I do have a problem where a company – be it a bank or any other – clearly places not only the company but also the nation in peril. I therefore couple these proposals with draconian penalties for Bank Boards and senior executives who flout the rules and lead to banking failure. This includes the ability to declare contracts and agreements on salaries, bonuses and pensions null and void – even retrospectively.