The expected move to reduce interest rates further has come from the Bank Of England Rate Setting Committee. The bank rate has been reduce again by 0.25% to 5%

The move will be welcomed by many but there is a growing grumbling that the full rate cuts are not passed on by mortgage lenders who are trying to rebuild their capital reserves having allowed their greed to overcome common sense and poured their reserves down the toilet on mad investments in the sub-prime housing debacle in the US.

There does seem to be growing resentment at the banks who for the last 10 to 15 years have effectively driven the economy with their lending and who could now cripple the economy due to their greed and stupidity. Banks are no longer the glorious bringers of prosperity they claimed to be and are now seen for what they are. Greedy businesses that have no interest in either country or customers. Their prime focus is on profit and they seem to have no allegience whatsowever to either their customers or the country.

Business is indeed business and banks should act as they choose. It does seem to demonstrate that the banks need to be brought under control enough that they cannot cause such problems as the credit crisis. Banks hold a special place in the economy. If a brewer or a car maker makes stupid decisions which cause it to fail the economy carries on regardless. Banks are different and they cannot be allowed to lend money carelessly in their greedy attempts swallow more and more money.

Something radical is required. My suggestion is that:

1) Banks should only be allowed to borrow from their government.

2) Banks should only be allowed to lend and amount equal too their reserves and loans agreed from government.

3) Banks can only borrow as much as the government are prepared to release for lending.

4) If there is a run on a bank the government has first call on the bank. It takes over the loan book and gets the profits on the loans and if it came to it would foreclose on the bank and take it over if somehow it got into difficulties. However, if the banks were only lending money they had in reserves or had borrowed from government it is unlikely they would ever face such a run and people would be reassured that the bank was effectively guaranteed by government.

This gives us all better protection as the banks will only be able to lend against reserves and agreed loans from government and would have to be more careful with their money. It would prevent the current situation, which has got us all in this mess, where a bank can lend nine times the amount of money it actually has in it’s reserves and owed to it.

The government would actually start to benefit from all the financial loans made throughout the country. Yes that is us the taxpayers. We could see enormous reductions in tax as the profits arrived at the treasury from loans made to the banks. It would be tax by another name and arguably a much fairer system of tax.

It is a simple concept. Banks can only lend money they actually have available. It would have prevented the sub prime crisis, the government and consequently the people would benefit and it would give contol of money back to the government where it belongs. Remember, you heard it here first.

I am sure there must be all sorts of reasons why this could not work, though I can’t see them. It seems to simple but maybe simple is what we need instead of the complicated mess that banking is currently. Comments would be very welcome.

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Filed under: Banking

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