Protecting Bahamian banking system from next global collapse
By JOHN TOMLINSON
From a speech delivered
to the Nassau Institute
WITH the current threats to the state of world economies:
* Sovereign debt at levels unprecedented,
* Governments unable or unwilling to deal with levels of expenditure,
* Taxpayers beginning to revolt,
* Gold at an all-time high, and
* Highly destructive natural disasters on the increase, who knows what event is going to trigger the next collapse? We can only be confident that something will.
When it does, we can also be confident that American Banks will, once more, be found to be wanting.
They remain holding massive levels of sovereign debt.
Massive levels of toxic mortgages still remain on their books. A new avalanche of foreclosures is heading in their direction.
In Europe, Greece approaches another bail-out, Portugal is receiving one and other countries are on "watch."
The world is awash with debt: sovereign debt, corporate debt and personal debt are each at record and barely manageable levels.
No banking system is currently risk free. That includes the Bahamian banking system. Although it, along with Canada, managed to survive the downturn of 2007/2008 reasonably well, as the Bahamian banking system is currently structured, it too, is subject to failure. The next international banking collapse, however, is likely to be massively larger and more severe.
Can we protect our banks and our deposits? Yes, I believe so.
Before we attempt to look at solutions, however, I would like briefly to review the history of money and banking so that we may better understand what needs to be done.
Historical Perspective
God did not create money. Man did. Money is not some God-given inexplicable entity over which we have no control. Man created money in response to having settled on the land and making human beings dependent on exchange for survival. If there are problems with money we can and must sort it out ourselves.
One of the requirements for any fair market is an accurate measure of exchange value. We need to know what the fair value of the product of our own expenditure of energy is compared to the fair value of the product of someone else's energy.
Barter
In the first instance we judged through barter. Barter, of course, didn't work for every exchange and the need soon arose for a commonly accepted medium of exchange. Accuracy of the measurement of exchange value was - and remains - the key to fair exchanges.
Many products were tried. Some deteriorated over time and their exchange value diminished.
Eventually gold became accepted throughout the world as the most accurate and useful product or commodity to use.
1. It did not deteriorate over time.
2. It is homogeneous. Therefore, it can easily be divided into smaller portions of equal purity and used for exchanges of smaller exchange value.
3. It is scarce. Therefore it takes a great deal of human energy to find and refine.
In most matters gold has the attributes of a successful medium of exchange. That is why gold lasted for centuries as the most trusted and most accurate "money".
Security was another thing altogether. If you had one gold coin, you could carry it with you and sleep with it and protect it. Ten got a bit lumpy! One hundred became downright uncomfortable.
Even for one hundred gold coins, it might not have been practical to build a strong room or a strong box. People began to consider where to store their gold coins safely.
Goldsmiths had sufficient stocks of gold to be able to afford to build a strong room. They stored their gold on shelves in their strong rooms. Some of them had extra space on their shelves. Some people began to store their gold on the shelves of their local goldsmith and goldsmiths would charge them a storage fee.
The goldsmith would give each person who stored gold with them a receipt for the amount of gold stored and a form, upon which they would accept instructions to deliver that gold, or part of it, to someone else. Today, we call that form a cheque.
Those who stored their gold on the shelves of their goldsmith found it very convenient and believed it to be secure. The practice grew.
A shelf in those days was known as a 'bank'. The goldsmiths who stored gold for others eventually became known as 'bankers' and their businesses as 'banks'.
As their businesses grew and more and more people stored their coins with them and their shelves became fuller and fuller, bankers soon noticed that, as people brought new coins for storage and others withdrew their coins or issued cheques which the bankers honoured by giving coins to the payee, only the first few rows of coins moved. Some came and some went from these first few rows but the coins at the back remained on the shelves and did not move.
Coins
Bankers, driven by their own greed, soon began to take some of the gold coins which sat at the back and loaned them to earn themselves 'usury' or 'interest 'as we call it today. They reasoned that no-one would be the wiser and that they could return them before the people to whom they belonged might notice or claim them back.
The bankers who did this knew full well that what they were doing was wrong, fraudulent and illegal. They also knew that, if this treachery were to be discovered, they would no longer be trusted to store other people's gold.
Therefore they developed the practice of always behaving impeccably; always appearing to be circumspect and extremely prudent. This was the beginning of the need to maintain confidence in banks.
Of course, the reason it became necessary to maintain confidence in banks was that, upon examination, there was absolutely no reason whatsoever to be confident. The banks were misrepresenting the amount of gold they had on their shelves and for which they had issued receipts.
What fraud? What misrepresentation? You may well ask. Well, the person who received the borrowed gold coin would have bought something with it and the seller would have received the borrowed gold coin in the exchange. The seller would have lodged this "borrowed" gold coin with the bank for safekeeping. The seller would then have received a new receipt for the "borrowed" gold coin. But, the original depositor would also still have his receipt for the same gold coin. Thus, the banker would have issued two receipts against the same gold coin.
That is a clear misrepresentation, and a clear fraud.
As the volume of deposits increased, bankers began to issue standard receipts. They would pre-print a number of receipts for, perhaps one, two, or three gold coins payable to the bearer. When one or more gold coins was deposited, bankers would give the depositor one of these pre-printed receipts with the precise number of gold coins already printed on it.
In the belief that these pre-printed receipts were fully backed and freely exchangeable for gold, people soon began to trade these receipts rather than the gold itself.
Of course, banks soon began to lend their paper notes as well as gold coins and when the recipient deposited the paper notes in the bank, the bank would issue them with a receipt for the paper money. Thus, banks would have issued three receipts against the original gold coin deposited. The fraud became larger. Today there are few limits to the amount of misrepresentation that is permitted. From the day the first banker loaned the first of his depositors' gold coins, it was impossible to reconcile the total of all receipts issued with the amount of gold available to honour them. The gold-backed monetary system was finally destroyed by this impossibility.
At each stage in this destructive process, gold itself was blamed by the bankers for being too restrictive on their ability to lend. The reality was that banks were too busy producing fraudulent receipts purporting to represent more gold than the banks or even Fort Knox actually held.
In 1811 and 1848, two judicial decisions in the UK legitimized this fraudulent practice by determining that the instant that a depositor puts money into a cheque account, title transfers from the depositor to the bank.
From that instant, the bank actually owns the money and can do with it as it sees fit. From that instant depositors became no more than unsecured creditors of banks and secured creditors now have first claim on the money in your cheque account!
Did you know that the money in your check account is not yours? Did you know that secured creditors of your bank have first claim on your deposits? Did you realize that banks are gambling with your budget money?
Since those dates, banks themselves have owned all the money in them. It is not your money anymore. The banks can do what they want with it.
The money-lending operation of banks is no longer a fraud - legally.
But, the mechanism has not changed and thus still produces the same misrepresentation.
Misrepresentation is a fundamental part of the onward lending of depositors' funds.
Here is the root cause of both risk and moral hazard in the banking system. It is this root cause we must attack to make banks completely safe.
What are some of the most serious side-effects of the onward lending of depositors' funds by the banks?
1. All of the money in the banks belongs to the banks - not to depositors.
That gives bankers enormous power. If you or your business needs money, banks can provide it - but, on their terms. If you don't meet their criteria you have no access to it.
2. One of their criteria is that you must already have sufficient other assets to repay any money borrowed easily, if necessary. Those without sufficient assets (the poor) are thus excluded from access to the bulk of the money-supply.
That's enough history. What is the position today?
1. No banks hold enough 'cash' to meet all withdrawals simultaneously.
In 2007/2008 the Western banking and monetary system faced massive collapse. Why? For the same reason the gold system collapsed. Every time banks issue new loans, they create new money. Today money is a digital figure. Banks credit the borrower's account with the amount of the loan. The total deposits increase and the money supply increases. But, the amount of 'cash' available to meet the now increased claims doesn't increase. No bank holds enough cash to meet all withdrawals at the same time. When a 'rush' occurs, banks look to 'lenders of last resort' to bail them out.
The quality of 'collateral' held by many banks in the US today remains suspect. Many banks continue to hold 'toxic' assets in the form of foreclosed mortgages at their original loan value. They have not been required 'to mark to market'. They can afford to continue to hold them because the Federal Reserve lends them money at the rate of 0.0025 per cent whilst banks lend it to the government at 3.5 per cent. These two combined, have hidden the real state of too many American banks for too long.
2. The system of Central Banks as lenders of last resort has failed.
Banks used to depend upon Central Banks as lenders of last resort to bail them out in the event of a rush. In 2007/2008 the Central Banks alone couldn't do it and the taxpayers had to bail them out.
Bankers have always lent to their point of imprudence in pursuit of maximum profit. This pursuit first destroyed the gold standard. Then it destroyed the Central Bank standard. Now they are dependent upon taxpayers. But, taxpayers are in revolt. Will they continue to bail out banks? I think not. I hope not.
3. The world is awash with debt.
Yet, there is a hue and cry to 'get banks to lend again'. We don't need more debt. The last thing we need is more debt. What we need is more investment. Equity investment can get the economy moving again without the drag of repayments. Repayments take capital back out of a company limiting its ability to grow and employ more people. Contrary to popular belief, banks do not provide capital. They provide debt and debt is a burden. Capital is not a burden. Capital is an asset.
4. The authorities are not trying to remove risk from the banking system. Bankers are too powerful - they control access to all the money and they provide governments with the loans with which governments buy voters. The authorities are not trying to remove risk. They are merely trying further to mitigate risk in the banking system as it is. They are not trying to remove moral hazard. They are merely trying further to mitigate moral hazard.
Both risk and moral hazard arise from the UK court decisions of 1811 and 1848. If you want your deposits in the Bahamian banking system to be safe, to be protected from the next banking and monetary collapse, both risk and moral hazard must be removed from the Bahamian banking system.
This will require a change of law which returns title of their deposits to Bahamian depositors. Ownership of the money in your cheque account must be returned to you.
5. The prospects for the US dollar are not looking good.
The Federal Reserve Bank continues to print money to support government overspending. The effects of the money already printed have not yet fully worked themselves through into wages and prices.
The money-supply thus continues to increase and, as banks begin to lend once again, the rate of increase will accelerate enormously. The value of the US dollar will then plummet to new and unprecedented lows.
Do we want the Bahamian dollar to plummet as well? I certainly hope not. The cost of living will skyrocket. The social and economic consequences are unthinkable.
If we wish to protect the Bahamian dollar, I believe we have little choice but to sever our present ties to the US dollar.
To make our banking and monetary system completely safe, the Bahamian government must also enact new legislation.
To make the UK banks safe, Lord Caithness put a Bill (that I had had drafted) into the House of Lords on January 30, 2008. That Bill was not enacted and expired at the end of the last parliament.
Had it been enacted and thus become law, the UK banks would not have failed.
In the new UK parliament, a new Bill has already been introduced to the House of Commons to return title to depositors and the Earl of Caithness is ready to introduce another Bill (to return title to the depositors) to the House of Lords following a debate on the banking system.
This new Bill will make a good template for legislation in the Bahamas.
Passage of a Bahamian Bill to return title to depositors will reverse in the Bahamas the effects of those mistaken judgments made in 1811 and 1848 in the UK. Then, your cheque account deposits will once more belong to you. It will be your money - not the bank's money. Banks will then have a fiduciary responsibility to you. They will not be able to lend your money. Only you can do that.
You will, of course, have to pay for the services of storing and distributing your money. Storing your money has never been free. You have paid for it through inflation. As I hope I have demonstrated, the largest producer of inflation is, in fact, the onward lending of depositors' funds. That will stop. The only inflation produced after that will be from government printing of money.
The current rate of inflation is in excess of 3 per cent per annum. No bank will charge you that to store your money for you. Most likely, you will be paying 1 per cent or less.
You are currently paying distribution fees. That will continue.
Banks will not be able to lend your deposits. They will need to set up funds in which you may buy shares or units. These funds will then make investments. They will invest the money you transfer to them when you buy shares or units. Instead of the banks investing their money, you will be investing yours.
You will be entitled to your share of the investment profits that banks have been making and keeping for themselves.
Your money will come out of your cheque account and enter the cheque account of the fund in which you invested. Total deposits will not change. Under the new legislation, each bank will be required to maintain its own cheque account. Then, when you pay bank fees, that payment will leave your account and enter the account of the bank.
Total deposits will not change. The Bahamian dollar will not be being debased and the money supply will be able to be accurately measured and controlled.
Once the government has enacted this new legislation and banks may no longer lend depositors' funds, there can be no inflation in the Bahamian banking system and monetary system unless the central bank prints new money.
What this means
1. The Bahamian banking system will then become the strongest banking system in the world.
2. There will be no circumstances under which the Bahamas will need to call upon the IMF to bail it out. The Bahamas could then withdraw from the IMF. Not many are aware that under the rules of the IMF members may not back their currencies with gold.
3. The Bahamas could return to the gold standard if it so wished.
As a result, the Bahamian currency could become in demand as a reserve currency - it certainly would be sought as a 'safe haven'. The financial services sector would boom. Investment in the Bahamas would increase significantly.
Other currencies will continue to depreciate. The Bahamian dollar will not.
* The price of all imports will decrease. The price of foodstuffs, gasoline, medicines and other basics will fall and wages will purchase more. Everyone will feel better - as if they have had a wage increase.
* Existing foreign currency debt would be repayable with fewer and fewer Bahamian dollars.
* Exports will become more expensive - and that includes the costs to tourists. Tourism will need to focus more and more on higher-income tourism. They will demand better services and thus we will have to train our workforce accordingly. Canada had to make similar adjustments when its currency jumped 50 per cent rather abruptly.
The alternate is less appetizing. The thought of remaining tied to the US dollar and allowing the Bahamian dollar to join the US dollar as it heads toward oblivion is very frightening indeed.
After having enacting the required legislation, there will still be an imbalance that will need to be addressed. At the moment of conversion of the Bahamian banking system, the banks will still not have sufficient cash to meet withdrawal.
We in the Bahamas are very fortunate because the Central Bank of the Bahamas has been very careful in its supervision of banks here, and this shortage of 'cash' can be easily resolved.
At the end of last year, the banks had deposits of B$1,205,033,000 in cheque accounts. They held cash of B$113,117,000 plus deposits with the Central bank of B$518,706,000. This left them short by B$631,833,000.
Banks also hold B$1,093,244 of Treasuries and other Bahamian Government securities.
If the Bahamian Government bought back B$631, 833,000 of those securities for cash, the banks would then hold B$1,205,033,000 in deposits for depositors and B$1,205,033,000 in cash.
Bahamian banks would then be 100 per cent free from risk and 100 per cent free from moral hazard? They would be fully safe, whatever happened to the banking system of the rest of the world.
In addition, The government would save $30 million per year on interest costs and the banking sector would increase its profits by $33 million.
In summary:
1. The world banking system is likely to suffer a much larger collapse than that of 2007/2008. Therefore, we ought to take the necessary steps now to strengthen the Bahamian banking system.
2. The banking system needs to be fully protected because we use it to store our money - the money we set aside to meet our family and our business budgets. We need it stored safely - both free from theft and free from loss of purchasing power.
3. We can and should strengthen and protect the Bahamian banking system by passing new legislation which returns title of their deposits to depositors and liquidating sufficient bank investments to ensure that banks hold sufficient 'cash' to return every deposit simultaneously.
4. The Bahamian dollar is currently tied to the US dollar. The US dollar has been falling in value and, as a result, so too has the Bahamian dollar. I believe the US dollar is set to fall precipitously. Do we wish to allow the Bahamian dollar also to fall precipitously? I do not. I hope you too, do not. I hope the government does not.
5. The Bahamas can withdraw from the IMF.
6. The Bahamas could return to the gold standard.
7. Economic growth could then continue in the Bahamas regardless of the state of the rest of the world.
All of the above is achievable if we can encourage the government to pass legislation to return title of their deposits to depositors.
Once this is accomplished and the banks are fully protected, we will still have to remain vigilant and pro-active to ensure that an open and free market is developed and maintained.
This is a necessary precondition for all the remaining economic benefits to occur.
July 18, 2011
