The Banks Have Shown Irresponsibility. Now They Must Do What They Are Told. But They Must Also Loose The Right To Create Money

This leader in the Observer is a good start in saying how the banks should be treated following the 500 billion pound bailout. The main points are as follows:

"Amid all the reckless gambling of recent years, British banks did make one sound bet: they guessed that they were so vital to the economy that politicians would never let them fail.

"While the US Treasury was faster to act in a manner appropriate to the scale of the crisis, the British response is smarter. The American plan, worth $700bn, was essentially to purchase toxic debt from failing banks - turning the taxpayer into the buyer of last resort for assets that the market had rejected. The UK approach puts money closer to the heart of the problem, pouring capital directly on to bank balance sheets and taking part ownership in return. Instead of bailing water out of the leaky vessel,

"Bankers resist government involvement in their affairs with something like religious zealotry and the Brown-Darling rescue plan contains no clear strategy for bringing them to heel.

"It is asking too much of taxpayers to put their money up front without explaining what they will get in return. Some concessions should be non-negotiable.

"First, the banks should accept the presence of a government official or civil servant on their boards of directors and remunerations committees.

"Second, the banks should not treat the government's equity stake like a simple loan. Having part-nationalised the banks, the state must manage its shareholding to yield the best return for the taxpayer.

"Third, the banks must not hoard their new capital. That means lending on the High Street again.

"Having stabilised the banking sector, the government will have to embark on wider reform of the City.

"That means, for example, curtailing the anonymous trade in complex securities and derivatives. Those arcane instruments are at the heart of the current crisis because they were used to disguise liability for debt defaults - spreading hidden risk across the global system.

"The rating agencies, which failed to identify how risky many widely traded assets were, must also be reformed.

"If the bankers will not volunteer to give an account of themselves, they must be compelled to do so before a public inquiry.

"With £500bn of taxpayers' money keeping them afloat, the banks are in no position to be giving orders, nor to be paying themselves exorbitant sums. With public money must come public accountability."

This is fine as far as it goes. But a major reform is also needed in the way we supply money to the economy.

Until now the money supply increase has been left almost entirely to the private banks and until the meltdown is has been at an annual level of about 12%.

And how has this massive increase been injected into the economy? Through lending to industry to increase the country's productivity? In the climate created by successive governments that would be a joke. Of course, it has gone into inflating asset values, a great part being house prices.

The banks should never again be trusted with providing the money supply. That function must be returned to the people, that is, the state, where it belongs.

Key points of euro nations' financial crisis plan

Associated Press

Sun Oct 12

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