Sunday 26 April 2015

BRITAIN'S CONSERVATIVES BANKROLLED BY HEDGE FUNDS




SIXTEEN OF EUROPE’S 50 MOST PROLIFIC VULTURE FUNDS - HEDGE FUNDS ARE FINANCING THE CONSERVATIVE PARTY IN BRITAIN

VULTURE FUNDS AND THEIR INFLUENCE IN WORLD POLITICS

Via RT.com

CONSERVATIVE PARTY candidates are bankrolled by hedge fund donations siphoned to Westminster from lucrative tax havens including the CAYMAN ISLANDS, new analysis suggests. 
Figures released by the ELECTORAL COMMISSION detail donations received by BRITAIN’S political parties since the general election campaign began. Sixteen of EUROPE’S 50 most prolific hedge funds are financing the Conservatives. Each of these funds is nestled in a far-flung offshore tax haven, the data reveals. Critics suggest the Conservative Party’s outward opposition to tax avoidance is politically motivated lip service, with no firm basis in policy.

TORIES BANKROLLED BY HEDGE FUNDS IN OFFSHORE TAX HAVENS, NEW ANALYSIS SHOWS

The LABOUR PARTY said the data is evidence of the CONSERVATIVE PARTY’S intimate relationship with wealthy financiers.
The party’s Shadow Cabinet Office minister JON ASHWORTH said it is unsurprising the CONSERVATIVES are failing to tackle tax avoidance when their most lucrative donors own hedge funds situated in tax havens.
“The Tory campaign is bankrolled by big money donors from hedge funds because the Tory membership is hemorrhaging,” he added.

DAVID CAMERON ANNOUNCED PLANS IN 2013 TO TACKLE FINANCIAL SECRECY

HUGH SLOANE and GEORGE ROBINSON, co-founders of hedge fund SLOANE ROBINSON, have collectively handed almost £950,000 to the CONSERVATIVE PARTY. A number of their funds are strategically located in the CAYMAN ISLANDS. Both financiers were hit by allegations of tax dodging in 2012 after investing in a tax avoidance scheme used by City banks and footballers.
A judge said at the time the GUERNSEY-based trust was purely “cosmetic,” and ordered them to pay back millions.

Speaking to the GUARDIAN, SLOANE said LABOUR’S critique of the CONSERVATIVES financial backing shows the party misunderstands the hedge fund industry.
“They are barking up the wrong tree. We have done nothing wrong, and we are paying taxes in the UK,” he said.

YET HEDGE FUNDS LOCATED IN TAX HAVENS SUPPORT THE CONSERVATIVES

Another leading hedge fund donor who has given generously to the Conservatives is MICHAEL PLATT of BLUECREST MANAGEMENT.
PLATT, who founded the JERSEY-based firm, has reportedly offered £125,000 in total to the CONSERVATIVES. Additionally, PAUL RUDDOCK and DAVID CRAIGEN, from hedge fund LANSDOWNE PARTNERS, have given more than £900,000 to the Tories. The firm has funds in both the CAYMAN ISLANDS and DELAWARE. Although RUDDOCK officially stepped down from LANSDOWNE PARTNERS in 2013, he remains a CONSERVATIVE PARTY donor.

Twelve of the 16 hedge funds bankrolling the Conservatives have at least one fund in a CAYMAN ISLAND tax haven. The CARIBBEAN ISLANDS are a leading global financial center, and are particularly popular with the international hedge fund industry.
Prime Minister and Conservative Party leader DAVID CAMERON announced plans in 2013 to tackle financial secrecy, clamp down on tax avoidance and make tax havens linked to BRITAIN more transparent.

However, despite his assurance BRITAIN’S crown dependencies and overseas territories would create registers to identify the owners of secretive shell companies and trusts based in these tax havens, no progress was ever made.


Most of the relevant tax havens – including the CAYMAN ISLANDS and JERSEY – later confirmed they would not be implementing CAMERON’S proposed reforms.

Saturday 25 April 2015

GREECE BEWARE OF THE VULTURE FUNDS




GREECE, BRACE YOURSELF: HERE COME THE VULTURE FUNDS


Financial ‘investors’ have already made a killing on GREEK debt, but this activity isn’t inevitable – such vultures can be challenged

NOT EVERYONE IS UNHAPPY ABOUT THE DESPERATE STRAITS OF THE GREEK ECONOMY.

A group of financial «investors» made a killing on GREEK debt recently – purely by being the most unscrupulous players in the market.
DART MANAGEMENT is an investment fund based in the CAYMAN ISLANDS, a BRITISH territory notorious for its tax haven status. DART’S business model has earned it the title «vulture fund».

Background Information: 

VULTURE FUNDS VERSUS ARGENTINA

VULTURE FUNDS HAVE RAISED GREED TO A NEW LEVEL


Vultures «invest» in the sovereign debt of countries facing crisis – meaning they can buy debt cheap. They then «hold out» against any form of write-down on this debt. By doing this, they hope to get paid out in full. Given they paid a fraction of the value of the debt, getting full repayment represents an enormous profit.

ELLIOTT MANAGEMENT, HEADED BY THE BILLIONAIRE PAUL E. SINGER WHO VERSUS ARGENTINA OWN ALSO SOME OF GREECE’S DEBT

Vulture funds honed their skills against developing countries: ELLIOTT ASSOCIATES, a US hedge fund, pioneered the model back in the 1990s, winning a case against PERU which earned it 400% what it paid for the debts. ELLIOTT is also believed to own some of GREECE’S debt. Dart meanwhile took $600m from BRAZIL following its 1993 crisis.



In recent years, vulture funds have targeted some of the world’s most impoverished countries. LIBERIA and ZAMBIA have both been hauled before BRITISH courts and told to pay out to funds which have bought up very old debts, run up by dictatorial regimes, very cheaply.

When countries refuse to pay up, the vultures chase them around the world, attempting to seize the overseas assets of the country in question. In one case, a particularly noxious vulture fund tried to seize aid money headed for the Republic of CONGO. To this day, DEMOCRATIC REPUBLIC OF CONGO is being pursued by another fund called FG HEMISPHERE and is currently in legal dispute over assets based on JERSEY. The final appeal will be heard in LONDON on 28 May, but under JERSEY law.

ARGENTINA GIVES SOME CLUE OF WHAT MAY BE IN STORE FOR GREECE IN YEARS TO COME

A law passed in the dying days of the last parliament now prevents vulture funds profiteering on the old debts of very low income countries in BRITISH courts – a huge step forward. But this law does not apply to other countries – from NIGERIA to GREECE – or to new debts.

ARGENTINA gives some clue of what may be in store for GREECE in years to come. Since that country defaulted back in 2001, after years of unjust debt burdens brought it to its knees, it was swamped with lawsuits from vulture funds that refused to accept ARGENTINA’S write-down. These funds include both DART and ELLIOTT, and an umbrella group known as the AMERICAN TASK FORCE ARGENTINA which has attempted to capture US foreign policy as a means of forcing ARGENTINA to pay up on these debts.

Background Information:

THE GEOPOLITICS OF INTERNATIONAL MONETARY AND FINANCIAL SYSTEMS

ELLIOT CAPITAL HEDGE FUNDS, A CLIENT AND SHAREHOLDER OF FITCH RATING AGENCY?

US COURT RULING ON ARGENTINE BOND DEFAULT- THE PARIS CLUB, USA AGRICULTURE COMPANIES, AND INTERNATIONAL FINANCIAL SPECULATORS “GRAB” FOR ARGENTINA

FOR VULTURE FUNDS A CRISIS AS BIG AS GREECE’S IS MOUTH-WATERING

For such companies, a crisis as big as GREECE’S is mouth-watering. For months vulture funds have been working out the best way to pursue vulture strategies against GREECE. Vultures have been buying up foreign-law GREEK bonds because bonds controlled by GREEK law were forced by a majority to accept the write-down.




The GREEK write-down was a very good deal for bondholders who were paid 50% of the face value at a time when those same bonds were actually trading for around 35% value – and they got a cash incentive. But that was not good enough for the vultures. AMERICAN law firm BINGHAM MCCUTCHEN was reported to be trying to organize a group of such funds in order to take legal action to get paid the full value of their bonds.

For some of those funds, Tuesday was payday. Rather than risk legal action, GREECE decided to make a repayment of €436m on its foreign-governed debts. Of this total, 90% reportedly went to DART MANAGEMENT. While the GREEK welfare state collapses and society suffers rises in rates of suicide, murder and HIV, KENNETH DART can sit back on his 220ft yacht in the CAYMAN ISLANDS and count his winnings.

PEOPLE OF GREECE ARE UNAWARE WHO OWNS THEIR DEBT

Holders of over €6bn refused to swap GREEK debt – so this will not be the end of such scandals. But we are not powerless to stop them. One vulture fund chief told the Financial Times: «We thrive on people being misinformed. » Step one is to introduce transparency into bond trading. It is shocking that the people of GREECE do not even know who owns their debt, when they bought it or how much they paid for it.

DAVID CAMERON and GEORGE OSBORNE have been clear that the EU needs to sort out its problems – but they have done nothing to stop the vulture funds whose debt is governed by BRITISH law. The government can force all BRITISH-law creditors to accept the write-down already agreed.

The reason being clear: 
BRIBERY? - HEDGE FUNDS TARGET POLITICIANS 

BRITISH Tories bankrolled by hedge funds in offshore tax havens new analysis shows

Conservative Party candidates are bankrolled by hedge fund donations siphoned to WESTMINSTER from lucrative tax havens including the CAYMAN ISLANDS, new analysis suggests.
(Read entire article at: 
SIXTEEN OF EUROPE’S 50 MOST PROLIFIC VULTURE FUNDS - HEDGE FUNDS ARE FINANCING THE CONSERVATIVE PARTY IN BRITAIN
http://geopoliticsrst.blogspot.com.ar/2015/04/britains-conservatives-bankrolled-by.html)  

GREECE IS IN THE FRONT LINE OF A BATTLE BETWEEN UNSCRUPULOUS INVESTORS AND PEOPLE WHO WANT THEIR ECONOMY TO WORK IN THE PUBLIC INTEREST

Or it could go further and legislate to prevent exorbitant gains being made on debts purchased on the secondary market – such a law has already been floated in the US Congress.


GREECE is in the front-line of a battle between unscrupulous investors and people who want their economy to work in the public interest. It is not good enough for governments to simply sit back and declare «that’s just how things are».

Editor’s Note: This article has been adapt by Geopolitical Analysis and Monitoring  from the original article written by  Nick Dearden 


Friday 24 April 2015

YEMEN, USA and IRAN



YEMEN’S SHIITE REBELS ARE NOT IRAN PROXIES

AMERICAN intelligence officials have cautioned against the popular narrative that YEMEN’S SHIITE rebels are proxies or IRAN, noting that TEHRAN actually counseled them against conquering YEMENI capital SANA’A last year. Known as HOUTHIS, the group formally calls itself ANSAR ALLAH (Supporters of God) and consists almost exclusively of ZAIDI tribesmen, who follow an obscure form of SHIA ISLAM. Their denomination, which distinguishes them from YEMEN’S SUNNI majority, shapes their ethnic identity and has helped fuel their 20-year insurgency against the YEMENI state. In September of last year, HOUTHI rebels, taking advantage of the chaos caused by the spillover of the Arab Spring into YEMEN, marched into SANA’A, which had been virtually abandoned by the government’s security forces, and took it over.

ARE US LAWMAKERS – NOT IRAN – TO BLAME IN HOUTHI UPRISING?

The surprising move caused many in the MIDDLE EAST to accuse IRAN, whose SHIITE government maintains strong religious and ideological connections with YEMEN’S ZAIDI community, of using the HOUTHIS as a proxy army in order to destabilize SAUDI ARABIA’S southern regions. The latter are also populated by SHIITE tribes, who are ethnically affiliated with the HOUTHIS and view IRAN as a kind of spiritual homeland. In WASHINGTON, the alleged IRANIAN link to the HOUTHI insurgency has been pointed to repeatedly by lawmakers opposed to the recent agreement between the Islamic Republic and a group of nations that have come to be known as P5+1, representing the five permanent members of the UNITED NATIONS SECURITY COUNCIL plus GERMANY. The lawmakers argue that, while nominally agreeing to end its nuclear program, TEHRAN has been secretly conspiring to destabilize the entire ARABIAN PENINSULA.

US INTELLIGENCE COMMUNITY ARE FAR FROM CONVINCED OF IRAN’S INVOLVEMENT IN HOUTHI INSURGENCY

However, a report in online news agency THE HUFFINGTON POST said that AMERICAN intelligence officials are far from convinced that IRAN is actually directing the HOUTHI insurgency. Citing “AMERICAN officials familiar with intelligence” operations in YEMEN, the NEW YORK-based news agency said IRAN actively opposed the HOUTHIS’ advance on the YEMENI capital in September of last year, and tried to prevent it. The HOUTHIS, however, simply ignored TEHRAN’S advice and took over SANA’A. THE HUFFINGTON POST quotes one unnamed AMERICAN intelligence official who says that “it is wrong to think of the HOUTHIS as a proxy force of IRAN”. The article also quotes BERNADETTE MEEHAN, spokeswoman for the UNITED STATES NATIONAL SECURITY COUNCIL, who says that “it remains [the NSC’s] assessment that IRAN does not exert command and control over the HOUTHIS in YEMEN”.

SECULAR OBJECTIVES RATHER THAN RELIGIOUS ONES

Imam Yahya Hamiduddin Al-Mutawakili, 
Founder of Mutawakilite Kingdom of Yemen 
and The Imams of Yemen Religion Islam 
Shia Zaidi.
If it is accurate, the US intelligence assessment would mean that TEHRAN is far more interested in promoting its agreement with the P5+1 than commandeering a proxy war in YEMEN. Additionally, those who suggest that YEMEN’S HOUTHIS are guided by IRAN appear to ignore the fact that the ZAIDIS follow a branch of SHIITE ISLAM that differs markedly from IRAN’S. Knowledgeable observers have pointed out that the HOUTHI insurgency is far more concerned with combatting local government corruption and having a say in the country’s internal power struggles than promoting SHIITE ISLAM in YEMEN and beyond.


Editor’s Note: This article is adapt from JOSEPH FITSANAKIS who wrote the article in intelNews.org

Thursday 23 April 2015

INTERNATIONAL FINANCIAL INSTITUTIONS VERSUS ARGENTINA



WHERE THE ARGENTINE DEBT CASE STANDS NOW, AND WHY IT STILL MATTERS

The vulture funds vs ARGENTINA issue roots on political reasons rather than on a financial or technical one, with the clear aim at tearing down the successful debt restructuring of 2005 and 2010, a process that became a serious danger for a big part of the International banking community (a country that restructures its debt without falling into further indebtment ). - Geopolitical Analysis and Monitoring  

Allowing a U.S. court ruling to determine the process for international debt repayments sets a dangerous precedent, and exposes gray areas in international legal jurisdiction.

By Aldo Caliari

U.S. JUDGE GOING ROGUE ON THE LAW

In NML v ARGENTINA, the world continues to witness a rare and surreal spectacle: the unpredictable consequences unleashed by a U.S. judge going rogue on the law. Last June, the U.S. Supreme Court validated a lower court ruling that granted investment group NML Capital the right to obtain payment of 100% of its claims against the ARGENTINE government, setting a legal precedent whose impact is just beginning to become clear.

NML’s actions against ARGENTINA demonstrate why the firm is frequently described as a “vulture fund.” After initially acquiring ARGENTINE sovereign debt bonds following the country’s 2002 default, the investment group refused to accept the terms of the agreement that ARGENTINA reached with over 92% of bondholders, in 2005 and 2010. Then, NML sued in U.S. courts for payment of 100% of its bonds’ value, plus interest, aiming to get what amounts to a 1600% return on its original investment.

NML’s lawsuit was part of a carefully thought-out script during ARGENTINA’S long debt restructuring process, a strategy that vulture funds have exploited in the past. First, buy the debt of a country in trouble, on the cheap. Second, systematically reject any offer of a deal worth less than the whole claim. Third, wait until the country’s circumstances improve, aided by a mix of debt relief granted by other creditors and the normal healthy impacts that such debt cancellation, if timely and sufficient, will have on the debtor country’s economy. Then, sue for the whole amount of the claim plus interest.


It is easy to see that if all creditors followed this playbook—waiting for the debtor to get better without sacrificing any part of their credit—the strategy would not work.

Unfortunately, at the international level and for nations issuing sovereign debt, there is no recourse to anything like bankruptcy, so they are exposed to rulings – even divergent ones – made by judges with jurisdiction over particular bonds.

ANOMALY OR ABSURDITY:  A COUNTRY COMPLYING WITH ITS DEBT OBLIGATIONS FALLING INTO DEFAULT DUE TO A FOREIGN COURT PREVENTING PAYMENT FROM BEING DISBURSED

In this particular case, U.S. Judge THOMAS GRIESA decided to depart from the traditionally accepted interpretation of the pari passu clause typically inserted in sovereign bonds. Whereas the standard pari passu clause is normally understood to grant equality of rank and treatment, GRIESA extended the interpretation to forbid ARGENTINA from making payments on its restructured debt without also paying the holdout bondholders.

Background Information:

THE GEOPOLITICS OF INTERNATIONAL MONETARY AND FINANCIAL SYSTEMS

ELLIOT CAPITAL HEDGE FUNDS, A CLIENT AND SHAREHOLDER OF FITCH RATING AGENCY?


ARGENTINA went ahead and deposited the payment for its restructured bondholders with the banks the instruments designate as fiduciaries – in charge of collecting the payment and giving it to the bondholders. Since the banks took the judge’s order to mean they could not disburse those funds, an anomaly has emerged: a country complying with its debt obligations falling into default due to a foreign court preventing payment from being disbursed. Amazingly, the unusual nature of the ruling was only the beginning of a sui generis scenario that continues to unfold.

JUDGE GRIESA HAD OVERSTEPPED HIS JURISDICTION

Holders of bonds that were restructured under EUROPEAN or ARGENTINEAN jurisdiction filed claims arguing that by blocking payment on their credits—even when made by U.S. banks—Judge GRIESA had overstepped his jurisdiction. In fact, the judge has already granted several “one-and-only-time” exceptions so the fiduciary banks could make payments to certain non-U.S. bondholders. When one of the banks, CITI, requested that the injunction be lifted for those payments, to avoid requesting an exception every time interest payments came due, the judge denied the request, only to later backtrack on his own decision. But while agreeing to give CITI this maneuvering room, the judge expanded the initial order – and the jurisdiction overstep – by ruling that future debt under ARGENTINE law, if it will or can be paid in U.S. dollars, qualifies as external debt. So, financial entities helping ARGENTINA make any such payments would be prevented from doing so by the court order.

An ENGLISH court, in one of these cases, ruled that payments deposited with the fiduciary institution in NEW YORK are the property of the bondholders, and no longer belong to the debtor country. Therefore, they should not fall under the jurisdiction of a US judge. Indeed, therein lies another anomaly created by the judge’s ruling: His decision ignored the arrangement ARGENTINA reached with 92% of creditors, but then issued measures that affect payments to these majority creditors—arguably bringing them coercively under his jurisdiction.

The ARGENTINEAN Congress also passed legislation according to which it will give non-restructured bondholders – such as NML – the same deal it granted to the restructured ones, but no more. To fulfill this commitment, the government has been depositing these payments in an ARGENTINEAN banking institution, which the “vulture funds” could claim at any moment if they so wished (so far they have not).


Some observers speculated that the ARGENTINEAN government would agree to settle with the vulture funds after expiration of the RUFO clause. RUFO stands for “right upon future offer” and is inserted in the restructured bonds to promise their holders they will have a right to be offered any better deal that other bondholders receive in the future. If ARGENTINA had settled before the expiration of the clause, it could have faced immediate demands from majority bondholders for payments proportionally equal to those made to NML. But the expiration of the clause in January did not bring any change to ARGENTINA’S offer to the vulture funds. These observers’ speculation failed to recognize that a settlement where NML gets paid the whole amount it demands—even in the absence of the “RUFO effects”—could invite lawsuits from other non-restructured bondholders. In fact, in the wake of the Supreme Court’s ruling last June, some of those bondholders have already filed suit hoping to follow in the footsteps of NML. Since these investors hold claims to some $15 billion, this is hardly an advisable course of action for ARGENTINA.

Background Information:

US COURT RULING ON ARGENTINE BOND DEFAULT- THE PARIS CLUB, USA AGRICULTURE COMPANIES, AND INTERNATIONAL FINANCIAL SPECULATORS “GRAB” FOR ARGENTINA


Regardless of what happens with ARGENTINA, however, repercussions from GRIESA’S decision reach much farther. The ruling continues a trend that, legal experts say, has seen holdouts increasingly better treated by courts, at the expense of the soundness of sovereign debt restructurings. What former IMF economist ANNE KRUEGEr characterized in 2003 as a gap in the international financial architecture is now wider than ever. By increasing the potential rewards of holdout behavior, this recent judicial precedent will make future debt crises harder to resolve, with unpredictable systemic consequences.

At the same time, creditors might opt for a jurisdiction where the traditional understanding of pari passu still holds – such as ENGLAND-- at the expense of NEW YORK’S current dominance as a preferential jurisdiction for issuing sovereign debt. Indeed, a large number of prominent economists warned of this possibility following GRIESA’S ruling.

Background Information:

THE CENTRAL BANK OF ARGENTINA BREAKS RANKS WITH NEO-LIBERAL BANKING POLICY AND TARGETS JOBS OVER LOWER INFLATION


SHARE OF THE COMMODITY CAKE


Last September, facing the UNITED STATES and other countries’ continuing resistance to reach a consensus, developing countries voted to create a sovereign debt workout mechanism, and negotiations have begun on establishing such a legal framework at the UNITED NATIONS. Even in the worst-case scenario—failure to get all countries on board—these negotiations would create a U.N.-endorsed standard for settling future sovereign debt crises. If history is any guide, there is one thing we know for sure: sooner or later there will be a country that needs to resort to it.




WORLD BANK

Investigative Report Finds World Bank Displaced 3.4 Million People




International Financial Institutions and their blow to global economy

IMF - Destroyer of Nations 


Wednesday 22 April 2015

ICELAND AND THE NEW MONETARY SYSTEM




CAN ICELAND 
SAVE THE WORLD?

The 2008-09 financial crisis forced ICELAND to come up with profoundly new banking and monetary systems.

By Daniel Stelter

THE ROLE OF MONEY, CREDIT AND BANKS

Just a few years ago, ICELAND became a focal point in the global financial crisis, when the small country’s banking system collapsed.
Sometimes, a profound crisis leads to great new insights and strategies. Such is the case with Prime Minister SIGMUNDUR DAVÍÐ GUNNLAUGSSON’S decision to have a commission of economists come up with a proposal for a fundamental reform of ICELAND’S banking and monetary system.

Background Information:

WHAT HAPPENS WHEN BANKS CONTROL THE ECONOMY?

RATING AGENCIES, THE FEDERAL RESERVE, THE PARIS CLUB, THE IMF, BROKERS AND SPECULATOR



The solution they came up with — the introduction of “sovereign money”– has applications far broader than just for tiny ICELAND. Why? Because it would strip banks of their ability to create money and instead would concentrate this power with the central banks only.

This is an ambitious goal, no doubt – but it is hugely important. In today’s world, banks can create nearly unlimited quantities of money out of thin air – that’s why we speak about “fiat money.”
Note then, when you get credit from your bank, the bank does not lend you money, which was saved before by someone else. Instead, the bank just creates the money by the act of crediting your account. Accordingly, most of the money we use was actually created by private banks. Only a small proportion was created by central banks such as the Fed and the ECB.



Please move to 1hr:16min:00 to watch related topic: The International Monetary System

Since 1973, when the last link of money to gold was given up, we have seen an unprecedented credit boom leading to more financial crises. The report prepared for ICELAND counts 147 banking crises in 114 countries since that year.
Credit growth has been significantly higher than economic growth, leading to the current debt problems of private and public sectors.

CENTRAL BANKS WITH LIMITED POWER

In spite of all the headlines around quantitative easing in EUROPE and tapering in the UNITED STATEs, not to forget ABENOMICS in JAPAN, we have to keep in mind that in today’s world, central banks have only a limited and indirect way of influencing the process of money creation in the banking sector. The Bank of ENGLAND pointed to this fact just recently.

The only means of influencing the process of “credit = money creation” is by setting standards like minimum reserves and interest rates: Measures like “quantitative easing,” where central banks buy assets like bonds and stocks, hoping to influence the real economy via the so called “wealth effect.”
Up to now, quantitative easing has not worked, as we can see in the UNITED STATES. Yes, asset prices have gone up and the U.S. stock market is trading at lofty levels.

But real economic activity is still below pre-crisis trend and the labor force participation rate is significantly lower. In the case of another recession, the central banks have no ammunition left to fight it.

NO TRUE REFORM OF THE BANKING SYSTEM

In spite of all the soothsaying, seven years after the crisis we have made no real progress in fixing our monetary system. 
It can hardly be counted as progress that banks have gotten even bigger and that they thus have even more potential to blackmail taxpayers to rescue them in case of a new crisis.
Governments have tried to tighten relevant regulations, but with limited effect. In the 1930s, the GLASS STEAGALL Act put the entire set of regulations onto 37 pages.

Today’s version, the DODD FRANK Act, tries to accomplish the same on 848 pages and the implementing regulations run an estimated 30,000 pages. That is a clear sign that banks still engage in way too many and far too complex activities — and will always look for loopholes.

BANK SYSTEM:  PROFITS REMAIN PRIVATE - WHEREAS LOSSES ARE BORNE BY THE PUBLIC

For all their often very public wailing, banks continue to live in the best of both worlds. Profits remain private, whereas losses – cast as the costs of an unfortunate “accident” – will be borne by the public.
Only if banks could actually go bankrupt in case of mismanagement is it possible to envisage a continuation of today’s world of private money creation. Otherwise, it is time for a change.

It is not the first time in economic history that banks have overused their ability to produce money — and that over-indebtedness leads to significant economic problems.

Facing the Great Depression, a group of professors, including HENRY SIMONS and IRVING FISHER, drafted in 1936 the “CHICAGO PLAN.” According to them, banks should be deprived of the ability to create money on their own and rather only lend out money that is truly deposited with them by savers.

In such a system, all money would be created by the central bank only. The goal they hoped for was a smoothing of the business cycle and fewer banking crises. In addition, a shift from the old to the new monetary system would allow reducing the debt overhang significantly:

    ■  Banks would have to back all lending with central bank money. As they don’t have the central bank money right now, they would have to borrow this money from the central bank.
    ■  In order to reduce their debt with the central bank, banks would hand over the government debt that they own to the central bank, which would effectively cancel it.

HIGHLY PROFITABLE BUSINESS OF CREATING MONEY

A financial system that is more stable and less crisis-prone, where debt problems are solved? That sounds too good to be true. And indeed, the proposal was not implemented when it was proposed in the 1930s, due to significant counter-pressure by banks. They did not want to lose the highly profitable business of creating money.

This makes it even more interesting that, a few years ago in 2012, two economists from the IMF, JAROMIR BENES and MICHAEL KUMHOF, revisited the CHICAGO Plan of FISHER and colleagues and calculated the effects with today’s technology.
The paper is a good read and includes a brief look into the history of money.

Money was always a result of credit transactions and not a means to barter. Boom and bust cycles as well as a tendency to wealth concentration are inherent in this monetary system. Debt restructuring and a ban on interest were already well known in ancient times as described in the Bible.

Even the idea of sovereign money is not new. Luminaries such as BENJAMIN FRANKLIN, DAVID RICARDO, THOMAS JEFFERSON and later Nobel Prize winner MILTON FRIEDMAN (1967) were supportive of the idea.

The econometric analysis of the Chicago plan with today’s tools came to a convincing result:
    ■  A switch to sovereign money would work and the benefits would be higher than envisaged by IRVING FISHER and colleagues.
    ■  In the case of the UNITED STATES, it would even be possible to reduce parts of the private debt load as the balance sheet of the banking sector equals about 200% of GDP – more than the outstanding government debt.
    ■  According to the research, the growth rate in the UNITED STATES would be higher due to lower real interest rates, lower taxes and lower costs for monitoring the credit quality of banks. The core function of banks, the efficient allocation of capital, would continue to function well.

Basically, such a switch would equal a monetization of existing debt. This does not have to be inflationary, as the money was already created in the past and would not lead to additional credits and demand.

This view is shared by experts such as ADAIR TURNER, the former Chairman of the UK Financial Services Authority and MARTIN WOLF, chief economist of the FINANCIAL TIMES.

NOT A SYSTEM FOR ALL

But would such a system enjoy the trust of the public? After all, central banks have contributed to the crisis by pursuing a continuously one-sided monetary policy of lowering rates at every minor crisis. And since 2009, this has had the effect of boosting asset prices with limited benefit on the real economy.
In addition, the central banks’ actual degree of independence from governments can well be doubted. It is too tempting for politicians to use easy money to boost government spending and short-term economic growth.

In the view of JAROMIR BENES and MICHAEL KUMHOF, these risks do not speak against a shift to sovereign money. Of course, one should not let criminals like JOHN LAW be in charge of the central bank or finance wars with it. He was the infamous Scot who invented a paper monetary system to solve the financial problems of the FRENCH king in 1717.

In both cases, the growth rate of money would be too high, leading to devaluation.

I still believe that, in spite of the justified criticism of central banks, especially given their poor performance in light of the financial crisis, it is worthwhile to take a deeper look at sovereign money:

    ■  It might be the best and most efficient way to deal with excess debt levels in the western world.
    ■  It would be an efficient way to limit the risks of the banking sector.
    ■  It would break the link between governments and banks.

ICELAND IS NOT ALONE IN DRIVING TOWARDS A SHIFT TO SOVEREIGN MONEY.

In SWITZERLAND a group of activists is preparing a referendum. The supporters calculate that the government would earn seven billion SWISS Francs from depriving private banks of the right of money creation and giving it to the central bank.

Applied to the U.S. economy, this would equal about $180 billion – per year!
Irrespective of the outcome of the discussions in ICELAND and SWITZERLAND, both admittedly small countries, it is an encouraging sign that we start to discuss the fundamental principles of our economic system and the role of money, credit and banks. It is time to change the system.