Money & Banking: The Root Cause of Debt, Crisis and Poverty ...?

Does the fundamental design of the banking system automatically lead to an unstable, unproductive, unfair and unsustainable economy and society ...?

If the answer to the above question is yes, then the logical next question to ask is will society take the opportunity to truly fix the problem now...? or will it resort to superficial changes and start saving up for the next bailout ...?

If the best minds in the world were to get together to design a new banking system now ... could they create something better than what we've got ...? could they create something fair (the current system throws millions into debt unnecessarily) ...? could they create something stable? (the current system triggers a recession every few years) ...? could they create something sustainable (the current system requires infinite economic growth) ...? could they create something productive (the financial crisis is throwing millions of people into unemployment) ...?

More and more people are starting to believe money & banking is the root of most of our social and economic problems.  For instance, due to outdated/flawed banking laws, Fractional Reserve Banking currently allows private banks to legally generate 'money out of thin air' from debt, and use it to drive individuals, economies and nations further into debt (and debt slavery).  Is this true? ... Can this be right ...?  Is there a better way ...?  

Well the latest Zeitgeist movie starts to address such issues, and there are many groups now also demanding change ... e.g. one such group, Positive Money, is holding a conference next month in London (entitled "Banking Shapes the World"), on the 13th and 14th November 2010. 

Damned if they do, damned if they don't?

Stephanie Flanders recently posted the following blog - "... In many ways, the argument over the right way to support the global recovery here at the G20 summit in Toronto is the mirror image of the debate at the London Summit last year.

Back then the argument was that governments needed to act together to prevent another Great Depression. Now the worry is that they will hurt the recovery if they withdraw that support all at the same time.

But there is one crucial difference. In April 2009, any student of economic history could tell you which policies would maximise the chance of recovery - or at least minimise the chance of economic catastrophe.

The hard truth about today's situation may be that there is no perfect mix of policies that can guarantee a strong recovery after a financial crisis this severe, and a run-up in sovereign borrowing this large.

Put it another way: we could be damned if governments do cut borrowing rapidly - with the global economy still fragile - but we could also be damned if they don't ..."

I replied by saying ... "Countries need to acknowledge that traditional 'economics' has failed, was far to narrow in scope (and effectively a toxic mixture of Poweromics* and Ignoromics) and is now effectively dead ...


... and a new positive and broader form of 'economics' is now required (e.g. Leanomics - based on 'adding real value', as well as values such as trust, honor, responsibility, respect) if we are going to come 'Out of the Crisis' and realize true prosperity and (sustainable) growth.  

Dr W. Edwards Deming predicted this over 20 years ago, writing two books entitled "Out of the Crisis", and "The New Economics: For Industry, Government, Education".  His foresight was incredible ... and my work (including my own book ' Lean World'), and Leanomics, build upon his profound insight ... and there's a great deal to do if we are to going to not only survive ... but prosper.

Why the Prime Minister hasn't learnt a thing

Gordon Brown said today he is "appalled" that some financial firms are continuing, and even extending, their bonus culture ... so why did he present an open-cheque book to them, bail them out with £100's billions of taxpayers money, and put nothing in place to stop this from happening again? ... for instance why has he not pushed for the introduction of a new Glass-Steagall type act to separate commercial banking (supporting wealth creation) from investment banking (supporting wealth manipulation) again, given the removal of this was a key factor in the financial crisis in the first place?

Mr Brown also refused to blame Britons for their level of rising personal debt during his time as chancellor and prime minister, saying the vast majority of debt had been the result of the "legitimate aim" of people trying to buy a home ... a "legitimate aim" to have a roof over ones head - yes ... but to have to take on huge personal debts to do this - no! ... and this would not have happened if the Government had ensured a steady & sufficient supply of housing (ideally driven by a Land Value Tax too), rather than 'promoting' self interest/greed and house price inflation/speculation.

The problem is the Government do not know how to create real wealth ... they only know how to manipulate wealth, and letting landowners profit from land whilst bankers profit from loans ... and what's even more worrying is that the Prime Minister's comments today show he hasn't learnt anything from this crisis! ... so how could we ever believe he is the right man to fix it?

"The City" - 'socially useless' and needs be 'taxed more'

In a recent post I pointed out the need to tax wealth manipulation far more (e.g. many investment banking transactions), and ideally in a similar way to 'gambling' ... and it's interesting to now hear Lord Turner, chairman of the Financial Services Authority (i.e. the FSA - the UK's financial watchdog), say he also backs a new tax on banks (e.g. speculative transactions) ... as a means to prevent excess bonus payments in the industry. It was also even more profound to hear Lord Turner say that much of the activities in the City of London are "socially useless"!

However Lord Turner's comments do not set out a new policy, because as a government spokesman has been quick to point out, "tax policy" is a matter for the Chancellor! Lord Turner's comments do however put far more pressure on the Chancellor, Gordon Brown, and the Government, to show their true colours now ... and to show us whether all their 'talk' to date of fixing the problems are 'real', or all 'rhetoric' and 'spin' ...

To date it has been mostly rhetoric and spin, as they have handed bankers an open cheque (i.e. taxpayers' money on a plate), and given they created much of the UK banking crisis themselves (e.g. by allowing the re-integration of investment banking with commercial banking here in the UK) ... I think it's unlikely they'll admit their mistakes or fundamentally change tax policy here anytime soon, despite the fact that it's desperately needed ... they'll probably simply rely on fear and confusion created by others (e.g. groups like the CBI, the Voice of Banks, for instance) who will predictably speak out about the 'damaging effects' of such a move.

What Lord Turner has successfully done is to raise the 'stakes' and to highlight where 'responsibility' actually lies ...

Referred to on Stephanomics recent blog (on QE and banking). Take a look at Paul Mason's blog too - he's Newsnight's economics editor, and unlike Stephanie, he took time to blog about this specific subject himself.