The Keynesian business model of the UK government should be criminalised.

While USA president-elect Barack Obama told an audience at George Mason University near Washington on Thursday that the USA economy will become “dramatically worse”, wrecking the dreams of a generation of Americans, if Congress does not act quickly to drive through huge fiscal stimulus plans (1),

UK chancellor of the exchequer Alistair Darling was writing on Wednesday in his letter to all members of the Group of 20 advanced and emerging economies (G20), which he copied to the Managing Director of the IMF and the President of the World Bank, that prudential regulation should allow supervisors to prevent firms using business models or practices which increase systemic risk, even if they might be profitable for the firms themselves. (2)

Darling’s argument forms part of his third objective for the April G20 summit in London, following the November 2008 meeting of G20 Leaders and Finance Ministers in Washington trying to determine how to address the global financial and economic crisis affecting us all.

Darling outlines the seven objectives of the London summit as follows:
ONE, to return trust and confidence to financial markets.
TWO, to retain and build on the benefits that open financial markets bring to the world economy, the key to retaining faith in financial markets being to establish and maintain a consensus within the G20 and elsewhere as to the importance of open capital markets.
THREE, to reduce the likelihood of systemic failures in the financial services industry by  improving governance of financial institutions, by ensuring that the scope and reach of regulation is appropriate making sure that offshore jurisdictions do not permit firms to behave in ways that jeopardise financial stability and by enacting prudential regulation allowing supervisors to prevent firms using business models or practices which increase systemic risk, even if they might be profitable for the firms themselves.
FOUR, to prepare better for failure within financial markets ensuring that we have the mechanisms in place to protect depositors; to ensure the orderly wind-up of failed institutions; and to make sure that there are the appropriate international mechanisms to coordinate the management of failed institutions.
FIVE, to increase efficiency in the operation of financial markets, so that they perform the tasks of capital allocation, risk management and facilitating transactions more efficiently
SIX, to conclude better, more reliable arrangements to protect consumers when problems emerge including a more coordinated approach to compensation arrangements and firms themselves need to have robust contingency plans in place.
SEVEN, to reduce systemic risks and to put in place systems to address future failures carry inherent risks.

The second objective is thus to establish and maintain a CONSENSUS within the G20 and elsewhere as to the importance of open capital markets, thereby achieving the key to retaining faith in financial markets. The third objective is then the regulation of business models.

For Darling, it is the banks’ business models which cause banks not to want to lend any more.

A business model is a framework for creating economic, social, and/or other forms of value. The term business model is thus used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.
In the most basic sense, a business model is the method of doing business by which a company can sustain itself — that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain. (3)

The company, here the bank, will do this in accordance with the prerequisites and conditions which the environment imposes. (4)

The problem is that those prerequisites and conditions which the environment imposes are not the real prerequisites and conditions to succeed as a bank.

On the contrary, those prerequisites and conditions are the prerequisites and conditions over/about which there is a CONSENSUS that they are admissible for a bank.

The consensual view considers worthless paper money and fractional-reserve banking as being perfectly admissible practices for a bank.

But that’s of course not what Darling wants to regulate when he’s mumbling about business models having to be regulated.

Or does he want to regulate the business model of his government which is hoping to print its way out of the Greater Depression?

Yes, the printing of unbacked paper money by the Bank of England, conspiring with the UK Treasury, should immediately and retroactively be outlawed.

This outlawing of the printing of unbacked paper money is the way to address the global financial and economic crisis affecting us all.

Ivo Cerckel
ivocerckel@siquijor.ws

NOTES

(1)
http://www.ft.com/cms/s/0/d74ca4d2-dd8e-11dd-930e-000077b07658.html ,

(2)
http://uk.reuters.com/article/businessNews/idUKTRE5065XS20090107

(3)
http://en.wikipedia.org/wiki/Business_model

(4)
Leo Sleuwaegen,  Platel & Partners, and Thinkthank Center of Entrepreneurship, “Het Ondernemingsplan – Aandachtspunten bij het starten van een onderneming – uitgave voor Vlaanderen”, Schoonhoven,The Netherlands,  Academic Service, 1997. p. 21

Maybe Islamic banking and the Church’s social teaching have some lessons to … teach.

We are living not through a banking crisis, but through a crisis of the banking system.

We still don’t know “what” we don’t know about the banking system.
We still don’t know why banks no longer want to lend money, which they can create out of thin air, to each other. (As will appear later in this article, the creation of money out of thin air is indeed what fractional-reserve banking is about.)
This is fortunate because otherwise the present salami-crash in slices would immediately and abruptly come to a halt and become a real crash into the unknown.

That’s the environment in which China is experimenting with trade settlement in yuan. Maybe the yuan does not have the “what”, maybe the yuan does not have the bad characteristic we don’t know. (1)

As this blogger wrote in September 2003:
In Russia, the Middle East and India, there is an increasing aversion against the dollar and is a search for a replacement under way. The present gold fever in China where individuals are since early 2003 again allowed to possess gold implies that in order to be an economic world power by 2012, China could well accede to this world standard, FreeGold. At that moment only physical gold will be traded as the natural vehicle to incorporate one’s wealth, the value of paper gold [contracts embodying wagers concerning the future gold price] will be reduced to nothing, and the value of the euro will increase quarterly upon the marking to market of its gold reserves.
The [European Central Bank] ECB will not define the euro like the old gold standard as a certain quantity of gold, but will use it as a free-trading financial reserve so that each increase in the price of gold will bring about an increase in the value of the euro’s reserves and thus an increase in the value of the euro itself. (2)

That’s also the environment in which the Arab Economic Summit is to be held in Kuwait on 19-20 January 2009.

The Summit’s aim is to find a comprehensive joint Arab vision to face the economic challenges, by accelerating the Arab joint market establishment. (4)  It is indeed unacceptable that the Arab world still lacks a clear view and assessment of the current financial crisis which is affecting it in all areas. (5)

In order to obtain a clear view and assessment of the current financial crisis which is affecting the Arab world in all areas, we should start with the assessment that Islamic banking is a system which incorporates adherence to the principle of riba, usury. It is an important Islamic principle that there should be equality of risk. From a banking point of view this means that the risks and rewards should be shared between borrower, bank and depositor. (6)

Banks used to be allowed to deliver receipts for gold deposited with them. This right was taken away from them by the institution of central banks which now have a monopoly for issuing “money”. The central bank is now ONLY the supervisor of the transaction between depositor, bank, and borrower. The central bank does not, cannot possibly, share in the risk.

After that we should remind ourselves that fractional-reserve banking is the banking practice in which banks are required to keep only a fraction of their deposits in reserve with the choice of lending out the remainder while maintaining the obligation to redeem all deposits upon demand. This practice is universal in modern banking. (7)

Some critics of fractional reserve banking and the related monetary system do however refer to it by the political term debt-based monetary system. Critics of fractional reserve usually note that the banking system “creates money out of nothing”. The insight that banks “create money by extending loans” is not new, and the subject is covered in most introductory economics textbooks and many popular reference works. (8)

We are living not through a banking crisis, but through a crisis of the banking system.

We still don’t know “what” we don’t know about the banking system. (Maybe it’s about the sharing of risk. “Everyone should put his hand to the work which falls to his share, at once and immediately”, wrote Pope Leo XIII in 1891, Pope Benedict reminded us this week in the New Year message of His Holiness.(9))

This is fortunate because otherwise the present salami-crash in slices would immediately and abruptly come to a halt and become a real crash into the unknown.

Maybe the yuan does not have the “what”, maybe the yuan does not have the bad characteristic we don’t know.

Maybe Islamic banking and the Church’s social teaching have some lessons to … teach.

Ivo Cerckel
Siquijor, 02 January 2009

NOTES

(1)
China to experiment with trade settlement in yuan
http://ph.news.yahoo.com/rtrs/20081224/tbs-china-economy-exports-21231dd.html
SNIP
BEIJING, Dec 24 - China on Wednesday took a baby step on the road to making the yuan an international currency when it promised to allow its use in trade between a few provinces and neighbouring states.
The State Council, or cabinet, said the yuan could be used for the settlement of trade between the factory-rich Pearl River and Yangtze River Deltas and the Chinese territories of Hong Kong and Macau.
It also said that members of the Association of Southeast Asian Nations would be permitted to use yuan in their trade with China’s southeastern provinces of Guangxi and Yunnan.

(2)
With Chinese Freegold from a reserve currency to a world standard
Tuesday, 2 September 2003
http://www.free-europe.org/english/2003/09/with-chinese-freegold-from-a-reserve-currency-to-a-world-standard/

(4)
Determined to make Kuwait economic summit a success - official …
Dec 21, 2008
http://www.menafn.com/qn_news_story_s.asp?StoryId=1093225534

(5)
Kuwait summit timing critical – Economists
Published Date: January 01, 2009 http://www.kuwaittimes.net/read_news.php?newsid=MTM3NTE0NjE5Ng==
SNIP
[Board Chairman of the Damascus bourse and Chairman of the Union of Syrian Trade Chambers Ratib Al-Shallah] cautioned that it is unacceptable that the Arab world still lacks a clear view and assessment of the current financial crisis which is affecting it in all areas. The summit should take serious strides in correcting this situation, he remarked.

(6)
Ruqaiyyah Waris Maqsood, “A Basic Dictionary of Islam”, New Delhi, Goodword Books, 1998 (2002 reprint),  verbo “Islamic banking”

(7)
Fractional-reserve banking
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Fractional-reserve_banking

(8)
Criticism of fractional-reserve banking
From Wikipedia, the free encyclopedia
(Redirected from Debt-based monetary system)
http://en.wikipedia.org/wiki/Debt-based_monetary_system

(9)
Pope Benedict XVI: A message from God: people have a duty to feed the poor, too
Thursday, 1 January 2009
http://www.independent.co.uk/opinion/commentators/pope-benedict-xvi-a-message-from-god-people-have-a-duty-to-feed-the-poor-too-1220001.html