Killing the politico-housing complex

Over the last 25 years Australia and the rest of the world has witnessed the rise of the TBTF financial institution accompanied by the greatest misallocation of resources in the period since the industrial revolution. These institutions and the people employed by them have ensured that all but the rich in both the western and developing worlds have been manacled into a world of servitude to repay an unprecedented level of debt that permanently benefited only a few, but sadly, many only temporarily. This was the bribe that fuelled the explosion.

Asset bubbles and the baggage of huge liabilities are the direct consequences of the TBTF. Officially now known as Systemically Important Financial Institutions, SIFIs, or those of global importance G-SIFI, cannot be allowed to continue in their current form.

G-SIFIs are the topic de joure with the global banking regulators in Basel. Recommendations under Basel III are that G-SIFIs will carry more capital than other banks to compensate for the inherent government guarantees which support these institutions. Overnight the Basel-based Financial Stability Board endorsed a 2.5% capital buffer.

As no Australian bank has yet been defined as a G-SIFI some commentators have expressed the belief that Australian banks should not be subject to excess capital. That is simply not correct. The Basel III recommendations are that regional SIFIs should also be recognised by the local regulators and treated accordingly. Australia’s 4 major banks certainly fit within the local SIFI and TBTF categories and their damaging activities must be curtailed before the system is even further distorted condemning even more of the populace to a life of debt servitude.

I have given a lot of deep thought over the last month on solutions for APRA on TBTF banks and whilst I have posted on this topic before I now believe that the measures required need to be more extensive than just increasing capital requirements. However, before outlining my approach I’ll take some of your time to point out the massive misallocation of resources our major banks have been a party to.

MB has coined the expression Politico-Housing complex to which governments at all levels, banks and the real estate industry are a party to. Although banks are a critical part of this cabal, I have met very few individual bankers in any of the major banks that understand that the Politico-Housing complex even exists. Of course in the minds of the banksters such ignorance justifies the debt servitude of the populace with a clear conscience. I however, am not about to accept such ignorance as either an excuse or absence of culpability. The leaders within our major banks accept unacknowledged government support in order to continue to expand the Politico-Housing complex and pay themselves huge amounts for this privilege.

H&Hs and other bloggers on MB have consistently pointed out that the mining industry (but not the Futureboom) has saved Australia from a disastrous economy over the last 3 years since the financial crisis. On the face of things that’s correct but it ignores alternative scenarios. It follows that an economy that relies excessively on houses and holes will be fine if one or both are booming but the risk to all Australians is when they’re not firing. Although I also doubt Futureboom will save us from a collapses in house prices.

Australians are well educated with many innovators and budding entrepreneurs. Given the resources and the need, what business, technologies or services could we be providing to the world besides the rocks and farm products which dominate our exports? The Politico-Housing complex is not interested the answers to this question now or in the future. Our big 4 banks would rather lend to over stressed first home buyers with little deposits in the delusion that its low risk than lend to and support small innovative businesses. The banks whole capital structures and operations now dictate that this can only be the case. This is both irresponsible and unforgiveable.

In my almost half a century on this planet I must admit that I have seen my standard of living increase but through technology and innovation not the everyday things we need to live in this country. I can expect to live longer with less illness and pain than my parents who incidentally, are still alive and well. Medical advances have been life changing for every Australian in the last 50 years. Although my observation is that the greatest improvement in medicine is the knowledge of what to consume and the need for exercise. However, none of this improvement would be achieved without good science which costs and has risks.

Let’s not forget computers and the internet which when used for good and not evil have made my life so much richer than my parents or grandparents.

But what has the Politico-Housing complex added to the standard of living. Maybe a lot for those who’ve been able to cash out but what about the others? My observation is that my son lives in accommodation at best inferior to that which I lived at the same age. Its a good comparison as my son works in a field closely related to what I did at the time. He earns on a real basis considerably more than what I did at his age. Yet I could afford to live in a newer and larger apartment about the same distance from the city. Whilst innovation in many areas has delivered on quality of life for my son, the Politico-Housing complex has done the opposite. Why? Because technical and medical innovation is all about putting in, whilst the banks and their cohorts are all about taking out!

What do we do about the Politico-Housing complex by disincentivisng the banks to continue to pump up the credit to over stressed borrowers? I strongly endorse our 4 SIFIs following Basel requirements as per G-SIFIs with increased capital but with a different approach to what is proposed by the Basel committee. After reading about the many differing opinions on the effect of the new capital rules, including Myron Scholes who opined that the rules would increase systemic risk, I believe that they will have no effect on the behaviour of SIFIs. It’s actually likely that the markets would end up pricing the weighted average cost of capital for SIFIs with extra capital at the about the same rate as other banks. Why, because the implied government guarantee is still in place and the market would readjust the cost of risk of both debt and equity to reflect that.

I suggest that the SIFIs extra capital should not come from the market but should come from the taxpayer explicitly through a capital guarantee. But this capital should rank senior to other equity/capital and be subject to an annual return of 25%. An organisation that managed to put itself in liquidation under that structure must be explicitly let go down. This type of capital structure will indeed increase the average weighted cost of funds for a SIFi as it grows or takes on more risk.

Secondly, SIFIs are government supported and reward structures cannot be the same or anything like organisations without such support. Shareholders can agree whatever remuneration packages they like but only when taxpayers are not going to foot the bill on failure. Executive salaries of SIFIs must be limited to a multiple of the lowest paid worker. I’ve read some studies and commentary around a 25 times multiple of highest to lowest paid worker. I’m not suggesting what the number should be only that it is reasonable and much lower than could be earned in organisations which are responsible for all their own risk.

My next suggestion for SIFIs, is related to the capital requirements as previously outlined. The problem with the Basel capital requirements is that the calculations are based on risk weighted assets, not actual assets. In theory I agree with this approach. However, in practice this is the area that SIFIs are great at arbitraging. The solution to this is that all SIFI’s must be required to disclose all the information necessary for any bank investor or regulator to understand and replicate the risk weightings of all SIFI assets. Now here’s a regulatory failure for all those interested in the detail of how the system operates. Under the Pillar 3 requirements of the Basel rules all banks must provide the information on the calculation of risk weightings as I described. It’s just that they pay lip service to the requirement and provide some information but not nearly enough. Clearly this is just too hard for APRA to understand or enforce.

This brings me to my last suggestion to solve the SIFI problem. We need a SIFI policeman. This cannot be the regulator who makes the rules. The SIFI policemen would have powers to both prosecute where relevant laws are broken but more importantly be able to name and shame where rules and regulations are broken but would not constitute criminal or court enforcement. The consequences of organisations and individual within those organisations not following or flouting rules must be able to be made public by an independent policeman who can also name and shame regulators.

If we want to weaken the Politico-Housing complex by making our SIFIs less able to use taxpayer support to prop it up then the above suggestions perhaps could have the effect of being able to reallocate resources into areas which will be of more benefit Australia.

Comments

  1. Wow. This kind of debate is really ratcheting up the anti. I actually think that the problems are more fundamental and can be asked quite simply:

    1.) How can we define society as being materially and financially better off now than compared to the past when more share of income is being used for basic shelter needs? Of course, the politico-housing complex can explain that away with data showing larger homes, labor and material constraints, and affordability smoke and mirrors. More effort is spent by the politico-housing complex protecting itself than improving society and lives. Plenty of bones can be thrown to the masses to shut them up.

    2.) Why does a society need a technology/manufacturing base when our comparative advantage in resources can be exchanged for these needs and wants?

    3.) If housing is a “productive good,” why does the politico-housing complex interfere in the market to the extent that it does? Surely the benefits of production would far outweigh any externalities. Once again, the politico-housing complex can easily explain this away in populist terms. And ultimately the core reason will have its roots soaked in paternalism.

  2. Fantastic – the very reason the MSM does not get the first click in the morning. This level of analysis and debate is massively overdue. Listening to the anecdotal stories about Ireland on Radio Nat. this morning just bangs this home.

  3. Sandgroper Sceptic

    Ante, tanmedia

    Why do we have to have SIFIs? Could we devise a structure where they did not exist?
    I can accept a few electricity generators being systemically important but banks?

    A few stray ideas:
    (1) Limit LVRs period. If you are lending to a homeowner they need x% deposit. If x% was 50% then you stop dead a lot of the risk to the system if property prices fall. Obviously do not allow equity account withdrawals to affect this LVR.
    (2) No government assistance to the housing sector. I agree with your thrust we should be supporting other industries that are of lasting benefit. Medical, reduced fossil fuel use, water, transport etc.
    (3)Inflation target of 0-0.5%. Try to align nominal and real prices to increase transparency.
    (4) Senator Bob Brown has harped on the executive salary situation in Australia but he gets shot down regularly. The tax system is your best bet.
    (5) Limit bank sizes, if they fail they are easier to deal with. They also should know their market a lot better which shoudl reduce failures. Yves Smith did some articles on bank size, beyond a certain limit (much smaller than we might expect) there appears to be no returns to scale and only increased systemic risk.
    (6) Force banks to keep a lot of their loans on their books. This means they retain a stake in the game and cannot hand off some forthcoming bad loans to someone else. Securitization is one of the evils of the recent/ongoing GFC, it allowed a lot of gaming of capital rules.
    (7) Glass Steagall back – no commercial/investment bank crossover. Investment banks should be partnerships not corporations – partners need to bear some risk to force them to give good advice and increase deal integrity.

    • SS

      I can’t say I agree with all your suggestions but all are worth consideration.

      My suggestions re cost of capital and salary limitations for SIFIs must lead to smaller and more efficient banks. It may also lead banks to providing more innovative services rather than simply providing credit

    • It’s actually unbelievable to contemplate that the banks can run investment bank divisions on the side.

      These things should come with a cigarette like warnings – “will attempt to make easy money at any cost with significant risk to investors, shareholders, clients, … community … grazing sheep”

  4. I would like to be the first to say that is an awesome picture. Love it!! Now, to go read the article.

  5. Great article, plenty of food for thought.
    You might like to fix the opening of the 7th paragraph, which currently reads “H&Hs and other boggers on MB”…

  6. Great article Deep T.

    Can I suggest a possible reform?

    Instead of guaranteeing bank debt, have a provision that in the case of a “systemic” crisis (i.e debts that cannot be paid will never be repaid, i.e mass default), instead of any liquidity backups or debt facilities etc:

    1. that the government will automatically nationalise the bank (i.e take a 51% stake for $1 AUD, the remaining shareholders take a haircut)

    2. all debt owned by the bank will be immediately converted into equity (i.e forgiven) e.g a home mortgage that was “worth” $300K and paying 6% in interest, and the home was worth say $350K, is then converted into a $300K equity stake in that property (with the remainder owned by the homeowner, but has seniority), that has ZERO cashflow – i.e no interest and no rent payable, until sold later on a secondary market (at the homeowner’s discretion – could be 20 years later….)

    Those two provisions would go some way in re-rating the risk of banks (by shareholders) and their practices – i.e they know that if they write bad debt, they won’t get bailed out, it will just turn into a lien on someone’s house or business that they may never get back.

    • Prince

      Its probable that we’ll have another crisis soon and under your scenario every major and regional bank would be owned by the government. How do we get out of that situation and how do the banks continue with business with virtually no capital or other backing?

      I think we need to do a lot more now and assume that a systemic crisis is going to occur

    • True Deep T – the reform I was mentioning is one that needs to be done before the build up of systemic debt, i.e an ideal situation.

      All banks and financial institutions need to shrink in size by about 50 to 75% and become utilities with ROE averaging 5 to 9%

      I dont see a problem in every bank majority owned by the government temporarily. Fix the debt, return to sound lending practices, instigate reforms.

      After the debt clearance and stabilisation of the economy, re-float the government’s share of the banks (I would prefer they remain unlisted and turn into building societies or unlisted partnerships).

      How to get this done BEFORE a crisis is indeed the more relevant question: I would suggest vastly increased capital ratios (at least doubling, preferably tripling) and some good old fashioned forced splitting of banks into smaller entities (via APRA or other legislation) again with hugely increased capital ratios.

      I would also suggest creation of new agency now that would oversee any foreclosures/defaults to make them as streamlined and efficient as possible, as going by US experience I don’t think the banks will handle it well at all.

      • “All banks and financial institutions need to shrink in size by about 50 to 75% and become utilities with ROE averaging 5 to 9%”

        I agree

    • I have been considering those lines myself.

      It would be ben Chifley’s dream come true.

      I would legislate that the government would acquire a failed bank for $1, not just 51%. All debt will be repudiated, bar Australian deposits up to the value of 15 times the average wage.

      Anything in excess, gone.
      Anything foreign, gone.

      That leaves the government with all the assets. (i.e. loans)

      MMT demonstrates a government can capitalise to any amount.

      Once stablised, the government sells the bank to the highest bidder, hopefully getting a good return on its $1.

      I answer to your Q Deep T, we avoid it because someone with capital with no secured debt will be the owner of a shiny, brand new bank and will not (or should not) want that capital at risk.

      The incompetent managers will be replaced, and apathetic owners have lost everything.

      This only has to happen once. After the catastophic loss borne by equity holders, this will ensure no other group of equity holders will expose their cash to this level of risk.

      And this will be policed by boards. Boards are not meant to be on the same side as agents (executives), they are meant to act on behalf of shareholders to scrutinise agents.

  7. “Given the resources and the need, what business, technologies or services could we be providing to the world besides the rocks and farm products which dominate our exports?”
    .
    You forgot the education-immigration visa complex, which is our third largest complex. This industry also links up with the politico-housing complex to deliver some warm bodies (me included) aka cashed up immigrants to keep the housing ponzi scheme running for some more time.
    .
    Suggestions on how to reform the system are alright, but only go so far – we need some leadership to deliver those reforms.
    .
    Frankly, vested interests have engulfed and gobbled both sides of the political divide. To expect any reform, any time soon, is foolish.

    • Leadership is certainly what we need. Perhaps only the looming crisis when it occurs will provide that but the leadership in 2008 was woeful and only worsened the situation out of ignorance. Will next time be different?

      Perhaps MB is part of the process of awareness and pressure on the politicians. Spread the word!

      • Macrobusiness really needs to get a better presence on social media. Registering a twitter account is all it takes and then it can spread from there.

        Twitter is such a refreshing way to get your media fix, this is how more people are choosing to find news commentary.

  8. Interesting thoughts DT. By extension do you consider (over) borrowers also “too big to fail”?

    • Yes and old fashioned risk management would recognise this point Andy. The Basel rules have seriously underestimated this point because risk weighted assets are calculated on credit ratings. Distorting lending into highly rated and low capital requirements securities.

      Its the AAA rated borrowers that cause systemic risk not small business

  9. You forgot the education-immigration visa complex, which is our third largest complex. This industry also links up with the politico-housing complex to deliver some warm bodies (me included) aka cashed up immigrants to keep the housing ponzi scheme running for some more time

    Exactly like my thinking. The current politicians just play “kicking the can down the road” for their future counterparts to fix the mess they created. My prediction is Australia will become a country with too expensive cost of living, not much variety of industries to sustain it and much too polarized and culturally-divided population to try fixing the big problems in the future…which is much like what USA has currently. Migration and multi-culturism are good to certain extent but like everything else in the world, it can be abused and over-used to become problems in the society and this is coming from me which is quite recent migrant myself (been here just from 2003).

    Eventually within a decade or two probably the standard of living enjoyed by Australian population would be downgraded enough that even the population of the current suppliers of “skill-migration” like China, India and other developing countries would think twice to choose Australia as their migration target. Unfortunately, by that time we (the Australians) would be screwed big times.

    • I have heard some evidence that this is already happening. Not only is Australia becoming less desirable as a destination (Too expensive, poor services, lousy public transport etc) but living standards and opportunities in their home country are rapidly improving. Certainly food for thought.

  10. Since the ‘SIFI’ controls nearly all of the mortgage market now, they will counter any reform with threats of interest rate rising. Unfortunately, that means Australia must experience a serious systematic failure before any reform can take place in the banking system.

    What is needed in the system is some kind of ‘price signal; which acts as negative feedback as the level of debt increases. The almost unlimited amount of money from Asia and the Middle East have distorted the ‘cost of money’. Either the government must punish the banks for debt (tax rate, capital requirement, limiting guarantee, etc), or the Reserve Bank of Australia have to monitor debt level as well as inflation. Raising interest rate to reduce debt level are not on the Central Bank’s charter, but it should be.

    • I like these comments. The “price signaling” mechanism is a very important addition to the system

  11. There is no such thing as a SIFI. If all financial institutions fail, governments can create money out of nothing and lend it or spend it, counteracting the deflationary effect of the private financial failures. “Recapitalizing” financial institutions is an inferior response because it doesn’t force anyone to lend or spend.

    Belief in SIFIs arises out of the rent-seeking dogma that the privilege of creating credit must be privatized.

        • It only means that the TBTF can be allowed to fail and the government has incredible deficit spending machinery to buffer from the fallout from those institutions. Thereby debunking the idea that TBTF actually exists.

    • Stole my thunder, Gav. If the tax system provided better signals, a la recommendations of Ken Henry’s panel, a lid would be put on property ‘investment’. Banks would then be unable to feed land price bubbles to nosebleed heights, collecting incredible economic rent via mortgage repayments, then cry poormouth when the bubble bursts.

    • Banks are capital constrained. The only constraint on private bank lending is the ratio of their self owned assets to their loan book. This ratio is regulated.

      Banks habitually increase their own assets by sucking rent from mortgage drones. They also run a sweet little gaming operation on the side to milk the drones retirement savings.

      The banking complex imposes an unfair tax on society. They have cornered the credit market. They manipulate our basic needs to secure land for shelter, to save against incapacity and old age. This tax is imposed by unelected officials. Americans might call it tax without representation.

      We (the people) can instruct our Governments at any time to end the Banks non-productive rent seeking activities. We can nationalize the banks or just let them implode through their greed. There is no real systemic risk to the productive elements of our capitalist society such as manufacturing and retail. The Government as the currency issuer can always meet any capital requirements.

      A State provident fund and LVT would strike at the heart of the beast.

  12. More bunting for the Titanic.TBTF (SIFI) are not too big to fail, nor too big to exist. More shameless weasel semantics from the BIS (or is it the BEZZ).

    Killing the Politico- Housing Complex? There is no such thing. Nice try but no cigar.It is really the Banking-Mortgage-Politico Complex (in that order). You are not bankers, you are debt merchants posing as bankers.

    Who demanded the repeal of Laws and Regulations put in place to prevent the exact same conduct that your 1930’s predecessors were guilty of? You did!

    An Act of Parliament does not make a man honest.

    The entire banking complex has shown to be bankrupt-morally bankrupt. This includes the Central Banks as well as the rest. Your credit and debt creations were utilised to morally corrupt everything and everyone it touched, including politics.

    What was your bon mot? “It is better to seek forgiveness than to ask permission.” This only proves that it was morally bankrupt and premeditated.

    You and you alone are guilty of the global economic downward spiral and its continuation. Nothing has been fixed. Until the root cause is acknowleged, nothing can be fixed.

    I see by the above quotations in the article that we are still in the wrong “Q” land. Quantity Vs Quality. We all know what quantity is-it’s what you lot deal in. E.g. Derivatives.-steroids are forbidden in sports but when it comes to capital markets, they are very much accepted.(hat tip ZH last sentence).

    Quality. That’s you.
    Economics for educated fools & poltroons in public service.
    A virtuous economic cycle is based in and on trust.
    A vicious economic cycle is based in and on mistrust.
    No trust = bust.

    What about the 3C’s of Credit. One of which is Character. That alone would make just about most modern bankers/debt merchants unfit to walk through the doors of his own bank, let alone be on the other side of the counter.

    So morally bankrupted (what moral hazard?). Untrustworthy. Disreputable of Character. Unfit for office.

    Any wonder why another word “Confidence” is nowhere to be found.

    SIFI Policeman my arse. Quis custodiet ipsos custodies – Who watches the watchers?

    Economics tells us what we could get.
    Culture tells us if it acceptable.
    Politics tells us why we won’t be getting it.

    Politicians holds sway in the political arena. Bankers/Fin. hold sway in the economic arena.

    Only the public can and do exercise power in the cultural arena. This is where you will all be tried for your intransigences against society.

    Notice that R. Murdoch is now being tried in the “cultural courts” of public opinion? How fast have the politicians thrown him under the bus? When does an asset become a liability?

    This is the bankers fate. Politicians make policy. They know only too well about “cultural divide”, the power of the mob and its capricious and fickle nature. Cross the line and your gone.

    You lot blew a bubble in TRUST. Trust us. We know what we are doing. Good at reflating bubbles?-No one has ever pulled it off yet. Wait until this bubble in trust overshoots to the downside. For both the bankers and politicians.

    The veneer of civilisation is very thin. You lot have taken to it with an industrial grade belt sander. What comes out will surprise or even terrify you.

    The Law and bankers. In the bubble era preceding the GFC, the bankers corruption bought them immunity with impunity.

    For We the people in the “cultural courts”: For our friends we interpret the law and for our enemies we prosecute the law.

    The politicians have proven to not be our friends.
    The bankers have proven to not be our friends.
    For our enemies, we prosecute the law.

    This is not about balance sheet reccessions, liquidity vs solvency, tri sectoral balancing acts,reserves, etc. It is about cause and effect. It is about unbalanced people. Who are the cause.

    Nice try on papering over the effects side, but still no cigar.

    Long may we say “God save the Queen” for nothing will save the bankers from the GG. Gulags or the gallows.

    • Wow, glad you got that off your chest. Maybe its rhetoric like this that will get many more of the victims and perhaps the perpetrators to take notice!

      • Thanks DT. We know our “power governance” laws too. We will drive the bus between the politicians and bankers. E.g.If you (the politician) do not do something about the bankers (individuals) you are out on your ear. Political immunity will be past history, for both former and existing politicians and bankers.

        Divide and conquer. Prisoners dilemma.

        He who takes the moral high ground on the publics behalf-(which is/will be neither existing major political party) and takes on the banks will be swept into office.

        The existing political and banking classes have forfeited any moral ground, let alone the commanding heights of the moral high ground.

        You are fighting the last war, mon General. And from a hole, not the high ground. You cannot defend the indefensible and expect to win/get out of jail free.

        The action arena is shifting. It is shifting in ways that are both out of your area of expertise and control. The political arena is breaking down. The economic/banking arena has broken down. The social arena is off limits to you. This is where the battle will be fought. Where you and your supporters/allies are weakest.

        2008 was only the fat lady gargling. The whole shebang is FUBAR.

        Sooner or later everyone sits down to a banquet of consequences.

        Reap the whirlwind.

    • ‘Politicians holds sway in the political arena. Bankers/Fin. hold sway in the economic arena.’

      I would suggest that financial interests hold considerable sway over politicians and hence the political arena!

      Love your polemic pieces – get me thinking.

    • What a great rant! Especially like this part:
      .
      “The veneer of civilisation is very thin. You lot have taken to it with an industrial grade belt sander. What comes out will surprise or even terrify you.”

      • heh, reminds me of the quote

        “Civilization is only 24 hours and two meals away from barbarism…”

  13. My simple solution. Give the banks a choice
    1) govt guarantees and 65% corporate tax
    2) no govt guarantee and normal corporate rates.
    Banks will submit in the short term to this game of chicken – most importantly it will encourage them to get their capital to such a level that they no longer require a govt guarantee.

  14. Deep T great article, just another point re the complex, the way in which it has structured the dependence of all three layers of government for property related taxes.
    The issue with how local government in Switzerland and Germany are rewarded for GDP growth and these nations are also creditor nations.

  15. Deep T

    The problem with the banks is more fundamental than inadequate capital requirement.

    Imagine a cloak room where people deposit their umbrellas and are given a chit in return.

    An enterprising banker decides that if he lends chits, he can lend people umbrellas while their original owners do not need them.

    Then we have an even more enterprising banker who decides that they can lend chits, regardless of the number of umbrellas left in the cloak room. Even when there are no umbrellas, if he issues chits, the cloak room with have to borrow umbrellas from elsewhere to meet their commitment to honour the chits.

    In response, the establishment has banned the cloak room from issuing new chits. Meanwhile the bankers continue to do business.

    This is the situation in western economies. We have banks issuing chits that are driving cloak room countries deep into debt to honour the chits that the banks have issued. The legitimate issue of chits in exchange for umbrellas such as exports) has been banned (the dollar floated).

    Raising the capital requirement of the banks is not going to restore order to a system that has been largely emasculated.

    • Leigh

      I don’t disagree. My post is written in the context of a system which will discourage issuing the chits when there are no umbrellas as the cost would be high or at least transparent.

      The necessary deleveraging of Australia’s populace and banks must still be paid for. My view on how I’ll leave for another day

      • Deep T

        I agree that SIFIs and G-SIFI cannot be allowed to continue in their current form. However, what I am wondering is whether banking can be allowed to continue in its current form?

        Can the cloak room continue to carry the burden of the banker’s lending? In the environment of floating exchange rates, the cloak room is not allowed to issue new chits in return for umbrellas.

        That is, the foreign exchange part of the banking system cannot provide additional money in exchange for foreign reserves. Foreign reserves represent a current obligation to supply goods.

        However, the lending part of the banking system can issue additional money in return for a domestic debt. This debt represents a future obligation to supply goods.

        Money represents a current entitlement to goods. So the banking rules:

        – prevent banks form issuing a current entitlements in exchange for a current obligations; but

        – they allow banks to issue current entitlements against a future obligations.

        This is not a viable or sustainable business. It is a recipe for monetary and economic disaster.

  16. I think a reasonable start would be to implement a bank super profits tax.  Preferably pegged to a particular amount rather than a ratio. Simple, understandable and powerful. Feel free to pick it apart…..