The Keiser Report is running a series on solutions to the global financial condition. Max and Stacy, here is one for you: Solutions for a progressive economy.
The current economic system incentivises speculative bubbles in fixed assets. This benefits money creators (banks) and those who are already asset rich (the rich), over the workers who produce and serve (and are poor in comparison).
Assuming the system remains as it currently is: that banking retains the power to create money at will and divert it to whatever it chooses, banks will pick the easiest way to make money; speculative bubbles in fixed assets like land.
On the other side of the debt equation is the borrower, who must also take some responsibility for his actions. The banks need the borrowers to make their money, and as long as banks can create unlimited (debt) money at will, as long as they can find someone to take that money, they can continue to blow up asset bubbles in fixed assets. House buyers who borrow from the bank are leveraged speculators, using bank issued debt. They must also be discouraged from such behaviour.
The premise here is that banks retain their power to create money. I am not suggesting we get rid of banks, just make them more accountable. The following assumes that there is little in the way of legislation or regulation. Banks can continue to use derivatives and the like to carry out their business activities. In an ideal world, banks would be the intermediaries between depositors and savers, would have the power to create money taken away from them, and money would be a positive rather than a negative entry.
The following will discourage both creditors and debtors from investing in speculative bubbles.
1. Allow Banks to go Bankrupt.
We must allow banks to fail just the same as any other private business. Why does this work?: At present there is no incentive for banks to behave prudently because they never have to face the consequences of their actions. The lender of last resort creates moral hazard. Under a system where banks are responsible for their actions, as businesses start to go pop, people will start to take notice of the behaviour of banks, rather than letting the government do it on their behalf.
Customers of banks care little about their activities, as they have no requirement to be. They are apathetic about banking, monetary policy, and the ways finance impacts their lives, because they are insured. If they were subject to risk, this national socialist apathy towards finance would rapidly disappear as people were asked to take responsibility for their actions. All of them.
2. Scrap the FSCS
The FSCS, like a great deal of subsidies, creates moral hazard, and removes the requirement for due diligence, and the effect of market forces. If all deposits are guaranteed, and bear in mind those deposits are made up largely of debt which has been created out of nothing by banks, then the government and the taxpayers who fund it are guarantor for bank issued debt.
In scrapping the FSCS, the government would introduce a scheme where individuals can insure their banks account deposits, removing the moral hazard of a blanket subsidy, and making people accountable. As well as giving insurance companies an income, it would provide a means of performing due diligence on the activities of the banking sector. A bank which is perceived to be extremely risky would cost more to insure against loss, whereas one which was less risky would attract a lower premium. This would help customers, who weren’t capable of performing due diligence themselves, to seek out (via market forces) the best deal of where to keep their money, or perhaps avoid banking altogether. Insurance companies are paid to assess risk, let them do it, and let the people know the situation for what it truly is.
The guaranteed bail out (on behalf of the people, of course) having been removed, banks would be free to fail, and would receive no further subsidies from the government.
3. Land Value Tax:
If you want to allow society to progress, you must incentivise the flowing of capital (whether labour, or money) towards productive, progressive activities. This means that you would disincentivise those activities which are unproductive, eg. rent-seeking.
In the UK, a tiny fraction of the population own most of the fixed assets, and receive money for doing nothing, and the vast majority own no assets and are taxed for working (being productive). This is the opposite of a system designed to make society productive and progressive. By introducing a land value tax in lieu of income taxes and consumption taxes, the single biggest cause of the rent-seeking activities beloved of the UK would disappear.
- If someone wanted to ‘flip’ a piece of land, they would raise its value and end up paying more in tax to the government.
- Government could spend taxpayer money on infrastructure, and the inevitable increase in the rental value of the land would be recouped by the government rather than by the private individuals owning land.
- If someone owned lots of land in a prime location and was sitting on it waiting for the price to rise – they would be taxed for doing nothing.
- Large amounts of inner city land ripe for development would go to the individual best suited to make it profitable, abandoned houses and brownfield sites would be developed.
- We would get more effective use of the country’s natural resources, as land would pass to the individual best placed to make it work.
In dis-incentivising asset speculation, capital & labour would be freed up to focus upon advancing society. At present we have trillions of pounds of new (debt) money created by banks, most of which is tied up in old houses which are falling apart, waiting for the prices to rise due to unlimited debt creation capacity from the banks.
Might need to wait for the asset rich baby boomers to die off before rolling this one out.
This is about removing subsidies, and putting market forces to work. If we are going to allow banks to create unlimited debt money, they must be allowed to fail, to make them more responsible in their actions. FSCS subsidy should be removed, to engage the public in the process of money, banking and finance, and to let them see beyond the glossy advertising campaigns of banks. Society in general should be encouraged to be progressive, not rent-seeking, and LVT is a good way of achieving this, encouraging more effective use of labour and capital, and removing land subsidies.