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Kitty and the banks - By Kitty Miv, Editor

Kitty Miv, Editor
22 December, 2011

The year of the banks, this could be called, since they have starred (ill-starred, some would say) in countless episodes of the great sovereign soap which has been titillating and terrifying us throughout the year.

Isn't this rather strange? I mean, what have banks got to do with anything? They're just money shops, kind of like upmarket pawnbrokers (the Italian government is currently lending them lots of its assets which it will then buy back so that the banks can invest the money in state bonds - work that one out!). How did we reach a point where their survival is judged to be essential to the existence of a modern state?

Once upon a time, banks were private, entrepreneurial businesses which issued their own money (coins or notes), paying the profits of money creation to the government of the time (called seigniorage). They could and did go bust occasionally, like any other business, but not too often, because their owners were careful business people who wanted to survive, and didn't relish the idea of being tarred and feathered by angry depositors. The idea that the insolvency of a bank could threaten the existence of a currency, let alone a government, would have been risible.

So what went wrong? In a word, the state. Or in another two words, state debt. Kings and queens used to borrow from bankers, of course, from way back, sometimes having to pledge their crowns, their palaces or their tax privileges, and sometimes the bankers took unwise risks with a king who was imminently about to lose his head; but by and large the system worked.

Since roughly three or four hundred years ago, as the modern state came into being (yes, it's that recent) and started to arrogate to itself the full panoply of governmental powers which we now take for granted, certainly including the issuance of money, the idea of a sustainable level of national debt has gradually gained currency (sorry!). But it's important to remember that this fatal embrace between governments and banks is not inevitable. Hong Kong, for instance, has no national currency, no national (central) bank, and surprise, surprise, no debt.

Could other countries get back to this pre-modern paradisial condition of financial probity and innocence?

I will be greeted with a chorus of derisive 'No!'s, it is certain. But I will persist.

The first barrier to clear away is the idea that a modern state has to have its own banks. I'm not even talking here about central banks (a tougher but not impossible nut to crack), I am asking why the Irish have to have Irish banks, the Italians, Italian banks, and so on? When the Irish banks got into trouble a few years back (and they are still in trouble), instead of spending EUR80bn of taxpayers' money to bail them out, why didn't the government just sell them and get rid of the whole problem?

There are answers to these questions, and they are not nice: because of national pride and arrogance; because politicians' friends had enormous property loans which were going bad, and which any sane bank would write off; because ministers treasure their powers of financial patronage. You can think of some more, even nastier ones, no doubt. But can you think of a good reason to keep those banks alive?

The stock answer is that depositors (= electors) have to be protected. But that is nonsense: creating moral hazard is a mug's game; and anyway it is child's play to protect retail depositors without protecting commercial borrowers, if that's what you want to do (you shouldn't).

Many of the countries of Europe have now reached a point at which they are forced to protect their banks (as they see it) because they have enormous holdings of sovereign debt, and if it was released onto the market during the banks' insolvency, it would be revealed to be worth: nothing! What insanity caused these banks, which have shareholders (you and me) to take on such debt in the first place? Back to the answers given above! Of course they wouldn't have done it if they had been acting as independent business-people; they did it as part of a self-serving conspiracy between the great and good of each of these countries which results in the defrauding of taxpayers and shareholders.

It makes me angry, as perhaps you can tell. And what is the answer? By now you know it as well as I do: make it unlawful for a government to buy bank shares or to lend them money; mark all bank assets to market once a month, publicly; privatize the issuance of money; and abolish all central banks.

Of course, on each one of these necessary changes, the rulers of Europe are going in exactly in the wrong direction, hammering nails into the coffin of Europe's financial sector and its currency with great energy and enthusiasm. I am looking forward to 2012 in a perverse kind of way, as the enormous turkeys come home to roost.

Meawhile, I wish you all a happy holiday, and especially the poor bankers. Well, they soon will be, at least.

Ciao, Kitty


About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net



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