Monday, 30 May 2016
Our bank system is subsidised in three ways.
The existing bank system (sometimes called “fractional reserve banking”) is subsidised in three ways, as follows.
1. Unlike private insurance companies which do not provide a 100% guarantee that claims will be met (because those companies can go bust), STATE backed (i.e. taxpayer backed) deposit insurance CAN provide a 100% sure guarantee because almost any amount of money can be grabbed off taxpayers to back the guarantee. Alternatively, the state can get its central bank to print near limitless amounts of money to rescue banks and depositors: exactly what happened in the recent crisis. That’s a subsidy – never mind the fact that loans to banks in trouble were made at near zero rates of interest, rather than Walter Bagehot’s “penalty” rate.
2. A popular argument for deposit insurance is that it means more deposits & thus more lending and investment and hence, allegedly, more growth. But exactly the same argument applies to ALL OTHER forms of loan: e.g. bonds issued by corporations (bank and non-bank corporations, and indeed cities – you name it). Thus deposit insurance constitutes preferential treatment for (i.e. a subsidy of) a PARTICULAR form of lending: lending done via bank deposits.
3. Any expansion in the fractional reserve bank system (i.e. increased loans made by such banks) boosts demand. Assuming the economy is at capacity, that extra demand is not allowable because it would cause excess inflation, thus the state has to compensate by imposing some sort of deflationary measure. The latter invariably amounts to confiscating financial assets from the private sector. To take a simple example, one form of deflationary measure is to increase taxes and “unprint” the money collected (i.e. a negative helicopter drop). That confiscation amounts to a subsidy of fractional reserve banking funded by the “confiscatees”.