Iceland To Reform Banking

The powers that be could care less about any given system, they are pragmatic, and want whatever keeps them in power.  Capitalism is over, and now they are looking for alternatives:

“Of all the many ways of organising banking, the worst is the one we have today. ... Change is, I believe, inevitable. The question is only whether we can think our way through to a better outcome before the next generation is damaged by a future and bigger crisis. This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too.” – Lord Mervyn King, Governor of the Bank of England 2003-2013 1 

When Euro-trash banks demanded Iceland enslave itself to pay back bad loans from bondholders, Iceland said "no" and their economy has quickly recovered.  Ireland said yes, and it limps along.

Now Iceland is going further, and redesigning its banking system. Although it has one crucial point correct, the rest of this plan is a hash (it opens as a .pdf.)  The good part is no more fractional reserve,  the bad part is the government is to run the new system.  Here in the abstract:

There is also indication that the fractional reserve system may have been a long term contributing factor to various monetary problems in Iceland, including: hyperinflation in the 1980s, chronic inflation, devaluations of the Icelandic Krona (ISK), high interest rates, the government foregoes income from money creation, and growing debt of private and public sectors. 

Ya think?  This must be there to guide along the economic illiterates, who have no idea.  But then to the solution:

Economists have long been aware of the problematic nature of the fractional reserve system and proposed various reforms. A program for monetary reform by Fisher et al in 1939 received the support of 235 economists from 157 universities and colleges but was not imple-mented. This report reviews some of the more frequently mentioned proposals for monetary reform: 100% Reserves, Narrow Banking, Limited Purpose Banking and describes in detail the Sovereign Money proposal. 

Ungh!  Well, no fractional reserve is an improvement, but the rest of all that is still disaster, just not as bad.  The problem starts with, as usual, wrong definitions:

Commercial banks create money when they make loans and delete money when loans are repaid. The Central Bank of Iceland must provide banks with reserves (money in accounts at the CBI) as needed, in order not to lose control of interest rates or even trigger a liquidity crisis between banks. The Central Bank of Iceland therefore had to create and provide new central bank reserves to accommodate banks as they expanded the money supply nineteen fold between 1994 and 2008. 

No, that process does not create money.  It is extending credit out of thin air.  And when that credit is extinguished, banks end up with assets on the books, interest streams, out of thin air, money for nothing.  they charge humans rent for being alive.

You can read the 110 page whole thing, but the argument is (and this is correct) the state can make that money. And since only angelic beings get elected or appointed in government, bliss will follow this new system.  Well, not so.  The system is inherently destructive, no matter who runs it.

One large concern is "enough money" (credit) for industry.  Well, no industry needs state credit, or asset-less backed credit.  As long as it is asset-backed, there is no need for state provision.  Unless it is asset backed, there will be disaster.  So for the State to involve itself, necessarily leads to disaster.

The disastrous credit in capitalism originates in the patterns and practice of law in capitalist regimes.   IN the USA, the legal fiction is private companies issue the currency, and the mint issues money (gold and silver coins.)  The USTreasury also once issued currency, and that is warehouse receipts for gold and silver in storage.  Private banks could do this too, for the gold and silver they had in storage.  This was banking long ago.  Fraud is possible here, as some bank might issue more receipts (currency) than their warehoused stocks of gold and silver warranted.  We had bank runs when banks got caught, and the owners were wiped out.  This is like what happens when a restaurant is caught making veal piccata with rat meat.  It is run out of business.  Customers shut it down.

Whereas we all want bad restaurants shut down by customer demand, capitalists never want banks shut down.  so they formed a cartel to watch each other, and gave the central umpire role to uncle Sam, our Fed Reserve system.    So now that could get away with fractional reserve on their gold holdings.  But by the 1970s, they figured out they could get away with fractional reserve on nothing.  Ka-ching!  And when the system faled, Uncle Sam would oblige the taxpayers to bail them out.

This is the Zombie system we are no in.  And people are trying to figure out how to kill.  Icelands plan will not work.

Instead they should look to Hong Kong.  Where only private companies, competing with each other, issue currency.  Now this system is not perfect, it is currently trimmed to take advantage of the bad economic policies of the USA.  As they say, the conditions are "tradeable."  The whole thing is deleterious, but that does not mean you cannot make money off it.

If Iceland's government were to extract itself from banking and money, and allow the free market to emerge, then they would truly reform their monetary system, and be able to ride out any economic storm.  iceland has about 200 years of anarchy, peace and prosperity, long ago... they ought to rediscover anarchy.

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