Tuesday, February 03, 2009

Let banks fail, says Nobel economist Joseph Stiglitz

Let banks fail, says Nobel economist Joseph Stiglitz - Telegraph: "Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks."

Hmmm. Food for thought here.

According to the Telegraph, Stiglitz said "the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure...City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said".

The challenging aim of this exercise is to separate "good" money - the bank savings of families, public services and pension funds - from the "bad money" - notional figures that have been thrown recklessly into the casino economy, the global derivatives market. Stiglitz is saying that the UK Governments present position, of offering to insure the banks against bad debt, is hopeless, given the black hole of debt that the banksters have created in the Ponzi style derivatives.

He says let them go hang. This is what happens when a Ponzi scheme collapses - the scammees come out of it with nothing but a learning experience.

So - GB insurance scheme no good.

What about the Bad Bank, or Toxic Asset Dump, advocated months ago by Prof Wilem Buiter, and still under consideration by Darling where the so called "assets" created in the casino economy can be corralled up? Stiglitz calls it "cash for trash", and George Soros (same link) doubts it would work.

It depends how much cash you give for the trash. Given that nobody knows how to put a price on the Toxic Assets, "not a lot", would be my answer. The Bad Bank should be modeled on the amnesty model, where people can hand in knives and guns to their local police station, no questions asked, but certainly no money paid out. In the Bad Bank, the "assets" can at least be studied. Some may prove to have some positive value, which might pay for the administration costs at least, or even provide a windfall for the public purse. Some will prove to be pure Ponzi scams, and the originators could be taken to court, and repay their debt to society by doing 20 years' community service in the Bad Bank itself. Wearing orange jump-suits and tied to the desk in case they try to jump out of the window.

So the Bad Bank might still be the way to go, if the price is right. Chances are that if they go down this route, Alistair ad Gordon will pay out too much cash for the trash.

If not the Bad Bank, then we have the Stiglitz plan - pull out the people's money, and let the banking system collapse under the weight of its own internal contradictions (as the Marxists should say, but don't, because, amazingly, they do not support Monetary Reform, preferring to leave the creation of money in the hands of the private corporations).

The devil is in the detail. We need to pull good money out of the building before it falls. Savings, and loans to ecologically useful concerns that have a reasonable chance of being paid back.

The rest of the financial "services "can go hang. This will include many mega-capitalist Transnational Corporations, who are heavily exposed to toxic assets. Arms companies will be threatened, so politicians will have to be screened off from their desperate lobbying for World War III as a way of stimulating demand for their goods.

But what about the pension funds? Most of these are up to their necks in the swirling cauldron of decaying putridity that constitutes the stock market. Is there some way of rescuing them? I have no idea. Suggestions welcome.

Having drawn a line between good money and hopeless trash, we nationalise at least some banks, and use them to fulfil the old core banking services, and furnish the system with new, clean money issued by Government on behalf of the people.

What will this new money be based on?
Gold is a bit retro.
Greed has been shown to be not a good backer of global finance.
Gaia is the ultimate guarantor of our human life, so the money should be based on some valuation of the aggregate ecological capital in any region.
What income does the nation have from the sun - direct, in insolation (jargon for sunshine, not a typo for insulation), and indirect solar income - wind, wave tide, hydro?
What potential is there for agriculture, if water resources are properly spread around?
What human capital - knowledge, skills - is there in the nation?
This is the natural capital of a nation, and the challenge for economists is how to create an internationally accepted currency unit that reflects Gaian values. Richard Douthwaite has made an outline with his Energy Based Currency Unit - the ebcu.

To design a new currency that reflects ecological reality is not an easy task, but it is a necessary task if the banks fail, whether the failure be due to the failure of world leaders' attempts to save the banks, or whether we accept Joseph Stiglitz advice, and leave the global bankers to experience the consequences of their global folly.

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