Saturday, April 07, 2012

Big Society 'bank' is a Small Sham Bank: Sherlock Holmes

The UK Coalition Government has now officially launched a 'Big Society Capital' thingy to get investment money to social causes, charities, et al. Clearly we needed detective work to find out just what sort of financial animal this is so we tentatively approached Mr Sherlock Holmes to check it out. His colleague Dr Watson has been trying to interest Mr Holmes in the recent calamitous failings of the economic system for some time. We also have tried to approach Sherlock through his 'three brains' brother Mycroft on the subject (see this blog for 17 June 2011) 
But Sherlock has continued to expel from his mind anything that might prevent him from retaining facts more important to his work and that, up to now, has meant that economics is outside the Sherlockian planetary orbit. But now, suddenly Mr Holmes is interested in the subject. It may have been the recent 'granny tax' (he is after all 158 years old and the annuity bought nearly 100 years ago for his pension now yields a paltry sum), or it may be that the ever increasing tobacco tax is affecting his spending  habits and he has made the economics connection. Perhaps having been passed over for so long with regards to the Honours List, even Sherlock is showing a little of the human need for recognition from the great and good - solving the intractable economics mess might raise his celeb rating? 

We are delighted that Sherlock responded to our enquiry about BSC and whether it might help the economic situation? His findings can be summarised:

1.  The Times (April 5) says that £600m is not enough 'in relation to the need for innovative approached to social problems'. So BSC is likely to have only a small effect on its targeted beneficiaries.  
2. The money to be lent out is already existing as dormant accounts within the financial system so there is no new money and no clear evidence that any new credit creation will happen. But some social causes may now have access to these re-cycled funds and be helped a little. 
3.  An expansion of economic growth more generally, requires new money into the system as Richard Werner, Tim Congdon and others hold.  For growth the money supply must grow ( it isn't at the moment).
4.  Werner argues that it is necessary to create credit and actively allocate the new money into productive areas rather than into assets such as property, in order to bring sustainable growth. So Mr Holmes concludes that 'Society ' in the BSC name will not really benefit much economically. 
5. Is the BSC a bank? At its core, a bank is an institution that creates credit out of nothing but very minimal reserves, through the 'fractional reserve banking' method. BSC seems not to be set up for this, so it is not a bank. So the Financial Times caption (April 4): 'Dormant accounts to be tapped for Big Society bank'  is incorrect.  This strapline  surprised Sherlock who thought the FT would guide its readers about these things.
6. So what is BSC? The Times April 5, Editorial: 'Capital Idea' seems to get it right and calls it a 'new fund'. (Guardian = 'fund' ; Mail = 'bank'). A fund being a sum of money that is limited. A bank which is fully able to create credit is not limited in the same way at all. 
7. Sherlock's conclusion is that Big Society Capital is a sham bank in its present form and the word bank should not be attached to BSC. He also thinks the use of the word 'Big' is politicospeak for 'Small and unlikely to achieve, although sounding grand'. 
Mr Holmes concluded his investigations with a note asking to be paid in kind: 'please leave a sealed tin of Perique tobacco behind the front door boot scraper as Mrs Hudson has banned me from smoking inside the lodgings at 221b.' 

We hear that he also wishes to avoid cash payments as he is concerned that if he is put forward for the Queen's Birthday Honours List his income may be publicised. This may be a sign of him becoming muddled and is confused with the imminent London Mayoral elections. But it could merely be a Holmesian eccentricity as his understanding of banking and credit creation has great clarity. 
posted by Charles Bazlinton with acknowledgements to A. Conan Doyle.
The Free Lunch - Fairness with Freedom (Credit creation, banking, property cycles, citizen empowerment, et al) is available on Amazon
Full banking and credit creation interviews with Prof Richard Werner on YouTube

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