From this statement flows the justification, in a democracy, for the most important action needed, according to Professor Richard Werner from Southampton University, to prevent a repetition of the current economic instability. His studies of economic history bring him to the conclusion that for sustainable economic growth, all credit creation - new money - should be directed only to productive purposes. The use of credit should be banned for financial and speculative transactions. 'Productive purposes' is traditionally defined as the gross domestic product (GDP), which includes capital investment, goods, services and consumption, but excludes financial transactions. When newly created credit is thus directed into the real productive economy alone, it would revive quickly and become far more sustainable. Under the present paradigm banks put credit to use wherever they think it best for their own profits, as the above 'law' states.
October seminar of the Centre for Banking, Finance and Sustainable Development in SouthamptonTo a packed auditorium where the main speaker was Dr Rolf E Breuer ex-chief at Deutsche Bank, Dr Werner used his studies over the past 20 years to illustrate his findings. He stated that only 2% of new money (notes and coins) comes from the Bank of England with the other 98% created by commercial banks. Having been created it then goes into two streams, with more than half going to non-GDP transactions. This has fuelled the speculation in commodities, assets generally and financial instruments, produced the ensuing bubbles, which on bursting have required massive central bank and government intervention. This now requires a long term cost commitment from tax payers.
Relating to the conventional remedies for the crisis being banded about the media, Werner said that if his recommendations were followed, it would not be necessary to directly intervene to stop speculation, nor to ban hedge funds, nor to levy a Tobin tax, nor to enforce reductions of banker's bonuses, nor to multiply banking regulations, nor to introduce drastic changes in capital requirements for banks. For example, and speaking from his own past experience in working for a hedge fund, he said all that was necessary for aiding financial stability was to prevent hedge funds from using credit to increase their investment pot. They currently use credit as a multiplier - of maybe ten times - of the quite small gains they would make using their client's funds alone. No, let hedge funds continue to speculate if they want to with pre-existing money, and see what difference it makes to profitability without such credit. The fruits of credit creation must be for the public good and not private gain.
The ultimate solution not mentioned by Werner at the seminar, would be that commercial banks should be banned from creating any credit at all. The banking monopoly would return to government control, as in historical times. Banks would merely receive newly created funds from the central bank, the Bank of England, which they then would retail to customers. This would be a completely democratic outcome of the 'law' as the new self-interest would be that of all of us, not of the Bank of England, nor of the Commercial Banks.
Read: The Free Lunch – Fairness with Freedom for the gains this could bring. You can now browse the book online.