"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
I think Henry Ford said it best back in the 1930's:
What strikes me about the Barclays ring-fencing example is that govts/regulators assume a crash will occur again, and are just enforcing measures to mitigate the inherent risk to one within national competence given the speed and breadth of globalisation. UBS Switzerland AG was also split from UBS AG recently.
In the end two issues remain, moral hazard within banking for profit, and that all banking and insurance regulatory compliance is predicated upon incomplete risk management principles (look at the 100k/£75k compensation limits as an example of partial risk mitigation).
So, whereas the vollgeld initiative might remove scope for risk, it would also restrict other credit possibilities available, given credit expansion can lead to economic growth, within exuberance limits (however defined).
What isn’t addressed in the initiave materials thus far is the existing underpinning of central bank purchases of equities, bonds etc in existing markets. I’ve been tracking the ticker SNBN.SW and it’s currently at 8100 up from 1649 a year ago.
If the SNB were to start deleveraging its considerable position in the markets in line with the initiative surely that would also prove quite detrimental to the economy, as buying debt instruments is also a form of credit issuance, and surely the SNB being more interventionist is not really the answer if you believe in the inherent primacy or legitimacy of markets?
That's the question that is up for debate though. When it comes to such a key plank of the economy, should we let the free market dictate itself (possibly leading to more financial crises) or should we keep it in check and allow it to flourish within defined limits?
So, if I understand this correctly, in a full reserve banking system, a commercial bank would have to borrow money from the central bank in order to lend money to customers? (btw currently SNB pays you if you borrow money from it, right?)
So this means the SNB would have to control how much money it is creating and which bank is it lending to. Otherwise, irresponsible lending by SNB employees to reckless banks could end up with them not being able to pay back. At which point it would force SNB to allow the bank to go bankrupt, or to bail it out by writing off the debt. Or am I misunderstanding something?
You've got the jist of it, but with one missing aspect.
Currently, the banks are not answerable to anyone when they create money, and they are generally only answerable to shareholders. Their business model pretty much demands that risks are taken. So, its very easy to start lending irresponsibly when the performance of the bank is questioned by shareholders (which is regularly the case, for all banks and shareholderrs). The issue is that this risk taking exposes the national bank (and, by extension, taxpayers) more than it exposes the bank in question. Risks can be taken because the bank knows that it is too big to fail and the SNB will prop them up. This is a raw deal for the SNB, and by extension, taxpayers.
Under a full reserve system, a bank that borrows too much would not be able to keep issuing credit, as it could do before. It would be forced to reduce its own debts to the SNB before it could issue more debt to people.
In practice, this would mean certain (irresponsible/unlucky) banks, at certain times, might not be able to afford to lend money out, but it is not really possible that all banks would be unable to do so at the same time, so there should maintain a safe level of liquidity in the system. This breaks the link between badly-performing banks and the following damage to the economy.
So the banks are required to lend responsibly because otherwise they cant continue operating as normal, in much the same way as you have to live responsibly when you take out a mortgage.
The SNB is answerable to the cantons and the federal government, so as long as they are run effectively (which by and large, they are) they can mirror government policy (changing interest rates as required).
And, through all this, banks and directors become personally accountable for the borrowing and lending decisions made by their organisations.
Its worth adding that responsible borrowers would likely be able to borrow money from responsible banks at low interest rates, since the SB would be able to offer lower interest rates to the bank in the first place (since risk would be low). Competition theory would suggest that these banks will pass on the savings to prospective borrowers. The SNB would even be able to enforce this somewhat, since it is indirectly answerable to the borrowers.
That's a great clarification of the topic, thanks @j2488 . So it looks to me you are rather in favor of the proposal?
But I guess, to be a bit skeptical, this would shift the responsibility to the SNB, which would gain competence and would be able to decide which bank gets the money, and which isn't, right? And if the SNB started being too lenient towards a big bank, like UBS or CS, then a market crash would cause the people not being able to pay back loans to UBS, then UBS would not be able to pay the loan back to SNB.
In the situation you describe, the economic fallout would be limited to UBS. If UBS had been borrowing and lending responsibly previous to the crash, the SNB would not have any qualms about lending more, since it could be confident that UBS are a responsible bank. The SNB would take into account that there was a market crash, much like they do already. The process as a whole, though, makes a crash less likely.
To be honest, I'm neither for or against (yet). I dont think i know enough to change so drastically, such an important part of the swiss economy. Theres an equal chance that ill be in favour or against. I need to read and understand the proposed legislation in more detail.
I should also point out that the theory is that since the SNB would be answerable to the public it would be more responsible with lending then a commercial bank. Their focus would be on maintaining economic stability rather then economic profit. Whether that would truly be the case would be a matter for the cantons to decide together.
And isn't it a bit absurd, that such a complex matter is put to vote by the people who, on average, know much less than you or me about the topic? The whole referendum system is kind of nice, but also kind of ridiculous.
Well, it kind of reminds me of centralized planning, communist stuff. Just look how government budgets all over Europe look like. They are all deep in debt, but they still plan budgets with deficit every year. If a typical goverment would be a person, it would earn 30'000 EUR per year but spend 31'000, already having a debt of 30'000. How is that responsible? It's all about getting reelected and not taking away benefits from angry voters.
People are about as qualified to vote on this as they are to vote on the myriad policies which guide their nations over the next 4 or 5 years, that is to say, not very. But thats just the way things are here.
That said, swiss people do, by and large, tend to have a better understanding of 1-issue referendums then people in other countries do. Consider brexit and the mess that unleashed. Many Swiss people do try to understand the issues in some depth before voting.
Government finance is, i think, far too complicated to be boiled down to a simple analogy about spending more than one earns, but i see your point. many governments do spend more then they have, but this is usually the only way to manage large scale infrastructure projects.
The referendum here is not really seeking to centralise the planning of the economy, its more just to keep it within pre-defined limits. Runaway credit creation is a real hazard and steps should be taken to ensure a crisis like the one 10 years ago doesn't happen again. Its more a way to break the boom/bust cycle of credit generation that we've experienced a few times.
That's an aspect I'm still struggling with, but at this point I think the anwser is a clear No.
The Initiative stipulates that commercial banks no longer use leverage, they lend not more than what gets deposited. But that doesn't mean there's no risk, debt can still go bad. And of course operations must be financed somehow. Where does that money come from?
The Initiative stipulates that customer deposits would be safe, so the situation would be the same as with today's securities accounts. Well, today securities can't be lent without your consent but they also don't earn interest just by sitting in your account alone. Yes the securities earn interest or dividends, but that comes from the company (divi) or the debtor (interest), not from the bank itself. A stock that doesn't pay dividends, say, doesn't generate any cash flor just by sitting in your deposit. Likewise money itself doesn't generate any cash flows thus under the new regime your money would simply sit in the account twiddling its thumbs.
In order to earn interest you'd need to agree to lend your money to someone, just as securities can be lent (see "securities lending"). Et voilà, say hello to creditor risk!
As shown above the banks will need to finance operations and operational risks. Until the financial crisis their margin was 2-3% between money lent and money borrowed, not sure what it is today. I bet my right arm that the interest you'd earn would be at least 2-3% less than the interest paid by the debtor on the money you agree to be lent. I have zero doubt that someting to that end would come to pass.
The elephant in the room though is balance sheet mechanics.
[to be continued]
This site "The Saker" explains why it would be a good idea to vote "Yes".
Switzerland – A Once-in-a-Lifetime Chance to spreading Positive Banking News to the World
Funny, UBS-boss doesn't know about "Buchgeld"? (bank money - funny that the english word for it even states it, LOL).
That might explain a few things about all the problems UBS keeps causing us?
I could not care less. As long as my pockets are full of bucks
No. It doesn't. It's pure propaganda from a clearly biased, anti-capitalist, source. Nothing more, nothing less.
I don't pretend any understanding of the economics of the issues under discussion here, but this article is full of black and white statements, not reasoned debate, and is clearly rooted in some particular dogma.
The many pseudo-religious articles and quotes elsewhere on the site also hint at a far from neutral position.
Edit: anyone using terms such as " the AngloZionist Empire " is not to be taken seriously, in my view.
I didn't read the article, I only watched the viedo it linked to.
Isn't that how one does it these days?
The main problem is that the sponsors obviously have no clue about balance sheet mechanics. That raises considerable doubts whether they have even a slight understanding of the issue altogether.
They say the money created by the Swiss national bank (SNB) under the proposed regime is to be (or at least, can be) distributed debt-freee, meaning to be handed out to the government without getting anything back in return.
Simple balance sheet mechanics dictate that in such a case the SNB would have to book losses in the amount they just handed out. So what the federal government (or some equivalent entity) would get for free would have to be booked as losses by the SNB. In effect the value represented by the money would merely be shifted from the left pocket to the right.
I'm in agreement with the majority on this thread that the possibility of a global return to sound money is extremely unlikely as these concepts are largely alien to the vast majority of politicians and voters not only in Switzerland but worldwide, who have been reared for generations to understand government control of money (and much more) as necessary for the functioning of society.
It's hard to take this referendum seriously, since it's so obviously a barmy idea that would never be voted-in in a million years. But then again, that's what I thought about Brexit...
I think you overestimate society as a whole. Broadly speaking, populations don't have a clue, and care about the same amount, about how their money is controlled. It's only things they notice, like availability of loans, interest rates, inflation and exchanges rates, that concern them.
So I suspect that this initiative will fail, not because the current system is viewed as good, but because most people can't see a problem, so will prefer to stick with the status quo.