From Nick O’Connor – Capital & Conflict (Great Britain) –
What if I told you that your entire financial life – your savings, bank accounts, pensions, mortgage, share dealing account, SIPP, home, car and life insurance, everything – was for sale? That it could all be bought by a stranger without your best interests at heart and controlled, manipulated and tampered with from afar? That someone could essentially own you and make you the 21st century equivalent of a serf?
This isn’t a thought experiment. It’s a prediction. I believe there’s credible and compelling evidence that it will happen, at some point in the next five years, perhaps sooner. Today I want to show you why.
It’s a disturbing thought. But I assume you don’t read Capital & Conflict to hear about “safe” ideas: there are plenty of other places you can find those. Sometimes it’s the most unpalatable, unconventional or seemingly unlikely ideas that are the most valuable in the long run. I think this is one such occasion.
You’re welcome to disagree. But do me a favour in return will you? Give me five minutes to let me make my case, then make your mind up if I’m right or wrong.
The road to financial serfdom
One thing that’s become clear in 2016 is just how desperate the world’s central banks are to “save” the system.
If you’re saver or pensioner this isn’t news. Low interest rates punish savers and rock bottom annuity rates – a direct side affect of QE – means retiring today you’ll get half the pension income you could have expected a decade ago. But you have to put up with it “for the greater good” of the economy and the financial system.
What we’ve learnt this year is that central bankers will also happily sacrifice the commercial banking system in their desperation.
Negative rates are crushing the commercial banks’ margins. According to the Bundesbank, negative rates cost German banks €248m last year. It’s one of the reasons Deutsche Bank is struggling (one of many admittedly). Essentially negative rates mean the traditional business of banking – taking deposits and creating loans – is becoming unprofitable.
This is a point several people at the MoneyWeek Conference last week, including Russell Napier and David C Stevenson, made. They also added the fact that through macro-prudential regulation, central banks can now closely control what commercial banks invest in and what their businesses look like. David believes that this is the end of the traditional banking system as we know it: that it won’t be long before commercial banks are split into a “boring, traditional” loan making company, and a “casino” investment bank.
On the face of it, none of this is going to cause anyone any sleepless nights. The banks were partly responsible for the financial crisis. Breaking them down, making their business unprofitable and closely controlling what they do will be music to a lot of people’s ears.
But wait! I’m not here to lament the end of the traditional way of banking. I’m here to warn you about a threat to your financial freedom.
There’s a lot of support for the idea of government controlling the commercial banks using radical means, both popular and academic. One idea is the Chicago Plan. This was a proposal put together in the 1930s, which would force the banks to match their loans to their deposits. To only loan out money they actually had in their vaults. It would have been an end to fractional reserve banking.
The plan has been resurrected in recent years. Former Bank of England governor Mervyn King referred to it in his book The End of Alchemy as a way forward (the alchemy he mentions is banks’ ability to create money via the fractional reserve system).
The IMF looked into it, too, in a 2012 paper called The Chicago Plan Revisited. Here’s how the paper described it:
Under the Chicago Plan the quantity of money and the quantity of credit would become completely independent of each other. This would enable policy to control these two aggregates independently and therefore more effectively. Money growth could be controlled directly via a money growth rule. The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending.
In theory there are some major benefits. No more banking runs, less severe business cycles, as banks can’t get carried away during boom years, no more national debt. It also cures baldness and allows men to speak with eagles. Sounds great!
Really it’s all about control. It would allow policy – the state – to control both money supply and the amount of credit in the system. It’d turn the economy into a control command system, where the authorities direct where money and credit can and can’t go. It comes down to the same idea we see time and again: that the people in charge of the system know best and that their “policy” outranks your freedom.
Again, no one out on the street would really care about this the way the authorities describe it, which is both mind-numbingly dull and takes advantage of anti-bank sentiment. It could happen tonight and there’d be no one out on the street protesting. That’s the whole point.
But it’s all a part of a bigger plan, one that sees regular savers and investors turned into state owned serfs. Here’s how the plan works:
- Negative interest rates crush commercial banks’ margins, weakening them.
- Macro-prudential regulation allows you to control exactly what they’re doing and understand their balance sheet.
- Split the commercial banks into two, a “traditional” part and a “casino” part.
- Nationalise the “traditional” part, either directly or by way of regulation – either using the next crisis as cover or pre-emptively acting “in the public interest”.
At this point the traditional arm of commercial banks – the part that advances loans and takes deposits for you and me and the businesses we work for – become a part of the state. It would enable central banks to directly control how credit and capital flows around the economy. They’d be in charge.
They would also own you.
Think about it. Take a look at what services banks offer: mortgages, current and savings accounts, ISAs, SIPPs, insurance, share dealing. Imagine if the state directly owned and controlled all of that.
You’d have the dead hand of the state on every area of your financial life, influencing what you can and can’t do with your money. It’d also make it much, much easier to appropriate money from you: directly from your savings, by increasing duties and taxes on your share dealing or pension, by “price gouging” you on your mortgage.
Haven’t paid that parking fine yet? It’s ok, we’ll just deduct the money directly from your savings account.
It’d also make it an absolute doddle to impose capital controls – to stop you investing overseas or moving large amounts of cash out of the system. Transaction taxes would also be easy: if the state owns your current account, it knows what you’re spending your money on and can tax it accordingly (let’s say 1% of the money you spend on cigarettes and alcohol). A wealth tax? Easy! There’d be no need to “declare” your wealth, the state could just use the banking system to audit it.
People may well accept the total loss of their financial freedom when times are good. But in an economic panic… it’d be a different story. No price would be free from its interference. No market would operate without it “directing” prices towards their “correct” level. God knows what would happen to the property market. (Actually I’ll guess: a massive state-backed boom, followed by a crash, followed by more repression.)
Keep in mind that commercial banks gouge their customers as it is. Just yesterday it emerged that during the 2008 financial crisis, the Royal Bank of Scotland used its global restructuring unit – supposedly a non profit generating division designed to help distressed businesses – to generate extra fees in order to help save the failing bank. The Telegraph had the story yesterday, reporting on leaked documents that seemed to prove the accusation:
The letter asks staff to look for companies that have breached the terms of their loans, or would breach them if properties were revalued at lower levels, or if they needed other financial support. These could then be used as opportunities to restructure loans and charge extra fees, the letter said.Banks can restructure loans when a company gets into financial difficulty, typically when it makes sustained losses, misses loan repayments or the value of its assets falls sharply.
Substitute a failing bank for a failing state that owns all the banks. You get the picture.
I don’t think any of the above is too far-fetched. In fact, directly controlling the commercial banking system through regulation and ownership might even be a vote winner. Only afterwards would people realise they’d traded their freedom for the illusion of stability.
“People who abhor the idea of a political dictatorship often clamour for a dictator in the economic field.”That’s how Friedrich August Hayek put it in his classic The Road to Serfdom. And it’s true. Politically people would never accept a small group of people deciding what is wrong and right and what should and shouldn’t happen to their lives – that’s a dictatorship. But economically, people are much more willing to accept that someone else knows best.
That’s a financial dictatorship. And it’s coming.