Saturday, January 28, 2012

Safety Society System Banking and Loan

With the bursting of the housing bubble in 2007-8, and the continuing economic downturn, the economy has been a popular topic of discussion. A vocal minority blame the Federal Reserve for our current economic woes. Many of them would like to "End the FED" and return to a gold-redeemable currency that we had prior to 1913. However, the US suffered with the business cycle, and numerous market crashes, panics and depressions prior to the FED. Unfortunately, just ending the FED won't change much. Gold vs. the FED is a false dichotomy. There are other much better banking and monetary alternatives.

Understanding how an equitable monetary and banking system would work requires understanding exactly what is right and wrong with our current system.

1. Central Banking. Our current system consolidates economic power into the hands of just a few individuals. Such absolute power is inherently corrupting. While we don't want government to exercise absolute economic power either, the challenge is to design a Constitutional system that allows the Federal Government to coin/create the currency and regulate its value, while allowing economic decisions to be made on a local level (Article 1. Section 8 US Constitution).

2. Contagion. The rich should be free to invest in and do whatever they want with their money and take all the risks they want. However, the risk taking of the rich should not adversely affect the poor. Our banks should be immune and insulated from the speculation and risk-taking of a few. Neither should our banks be "too-big-to-fail" requiring public bailouts.

3. Inflation. The continual inflation of prices, and the weakening of our currency is a hidden tax on the people. A gold-redeemable currency served to control prices. However, since the FED created our current debt-based, fiat currency, the US Dollar has lost over 95% of its purchasing power.

4. Fractional Reserve Banking. The FED creates money by selling bonds. But bond sales only accounts for a small fraction of all the money supply. After the FED creates money, it lends that money to the mega-banks at a low interest rate. For every $1 the mega-bank borrows, the mega-bank can lend $10. Through derivatives trading, and investing "on margin", banks can leverage their reserves up to 50:1 or even 100:1. This lending ratio is called the "money multiplier". In reality, the mega-banks "coin" most of the money in our current system at the time they issue a loan.

Even though the mega-bank creates most of the money out of thin air. The mega-bank must hold onto its small reserves. The bank can't just hold its reserves in cash because of inflation, so bankers invest those reserves in bonds or stocks or risky derivatives. However, if there is a stock market crash, bank reserves can disappear overnight and the bank is left insolvent and bankrupt.

5. Amortized Loans. These loans collect all interest up front. Consequently, the borrower builds almost no equity for the first 20 years on a 30-year loan. The problem of equity encourages the borrower to charge the next guy a higher price for the same asset. According to monetarist theory, dM/dt (money supply) + dV/dt (velocity) = inflation + dR/dt (real output). Therefore, because loans are the point of money creation, by charging the next guy an inflated price for the same asset, the Amortized Loan is a prime generator of inflation.

6. Unequal Access to Credit: in our current system certain individuals and groups have a greater access to credit than others. Using this advantage, they can borrow and buy out other publicly-traded companies in a hostile takeover.

7. Borrowing to Invest: in both cases of the the Great Depression and the current housing depression, investors including banks were borrowing "on margin". That means they could by 100 shares of stock for the price of 10. This wild speculation created money that was not backed by anything. When the FED increased banking reserve requirements (Basil 2 Accords) margin calls went out to individual investors and the markets crashed.

8. Capitalism. Capitalism is justified because we are told we should trust unelected private elite over the elected federal government. This is a false dichotomy. Capitalism is not free market. In capitalism, money creates money. Therefore, those that have money have unelected Machiavellian power to make investment decisions and make the rest of us their debt slaves and economic sharecroppers. Consequently, a capitalist will rarely support an idea or business that threatens his power and control or which he cannot exploit. Thus we see a long history of technology suppression in America. A correct economic system can be free market, equitably regulated, locally administered, without the capitalist.

9. Gold-Redeemable Currency. Money is the oil that lubricates the moving parts of any economic engine. The problem with gold is there is never enough. And like deBeers and diamonds, gold production and price can be manipulated.

10. COMPOUND INTEREST: Not all interest is bad. The Catholic Church's miss-interpretation of interest = usury and its prohibition of all interest made it so that banking and money lending was not a sustainable profession. However, in economy where inflation is controlled, compound interest is totally corrupt. Compound interest adds the interest accrued to the initial principal. This results in a hyperbolic curve where initial investments continue to compound at an exponential rate. This means, that initial investments years later can be worth many times their initial value. The problem with this is that it treats money as having intrinsic value which it does not. Additionally, compound interest can result in debt that never can be repaid. Furthermore, elite families have established Joint Stock Trusts which are owned by the family and no one individual. These Joint Stock Trusts (still legal in the City of London), are highly invested in US and other Government Bonds, and have passed down these investments from generation to generation resulting in unimaginable wealth for these elite families and totally unsustainable debt for the G20 nations. We are fooled into thinking in terms of how much our personal investments could make over 1 lifetime, in comparison to the elite who are using their family Joint Stock Trusts to generate incredible wealth from Bonds purchased a hundred or more years ago.

1. SAFETY SOCIETY SYSTEM: Instead of protecting the currency itself by making it redeemable for gold or a warehoused item, the Safety Society System is focused on creating a locally administered banking institution that is immune from the expected economic shocks that historically topple other banks. Full Reserve Banking, makes a bank resistant to banking runs, stock market crashes, and contractions of the money supply. I believe that if a system protects the banking institution, that system will protect the people and the value of their money.

2. Scientific/Principle Basis. When it comes to monetary theory, the Milton Freidman equation is the law:

dM/dt (money supply) + dV/dt (velocity) = inflation + dR/dt (real output)

This equation explains everything about the operation of money in an economy. Thanks to this equation, Japan was transformed from a feudal society during WW2 to a First World Economy in just 30 years. Think of that miracle.

During the few years following an evonomic collapse, bartering and Mercantile-money system (take commodity to bank that creates and issues money sufficient to purchase commodity) will be useful. However, when it comes to restoring America, we are going to need a efficient and equitable modern monetary system.

In talking about economic alternatives to the FED, it seems many have become neo-feudalist and seek to self-impose their own austerity measures.

The 30-year Japanese Miracle depended on several factors. What we are talking about is a phenomenal growth in Real Output while controlling inflation.

3. Money Supply. The key here is making loans and determining credit worthiness. If an individual or group has an idea, and they can prove feasibility, then money should be created to make it happen.

What I have been saying with my Safety Society System is the patented idea, the land, machinery, proven oil reserves in the ground can serve as the redeemable backing and collateral for the loan and money creation.

Infinite money can be created and infinite loans can be issued which will never cause inflation because money creation will always be perfectly in-line with real output.

4. Velocity. This has to do with how technology can increase the rate of transactions. The more transactions per unit time = more real output.

A. Identity. Need to establish who is who
B. Property Rights. Need to know who owns what.
C. Rule of Law. Need established rules to transfer property from one person to another.
D. Represent real assets by paper, or electronically (increases velocity because if you had to transport asset to sell it, transport costs and time are a drag. Problems arise when paper and electronic entries are not tied to anything of value. This undermines faith and social capital)
E. World-wide electronic markets [EBay]. Helps sellers find buyers. However, this is bad for commodities. If there was a drought in the Midwest. Brazilian corn could outcompete domestic corn. Therefore, domestic prices should reflect the actual cost to produce corn and tarrifs should protect domestic producers in a difficult year.

5. Encourage Saving over Borrowing.
A. SSS wouldn't lend for everything. Maybe only homes
B. SSS wouldnt necessarily for venture capital, only redeemable relative-non depreciating assets. (money is asset-redeemable and not debt-based)
C. SSS would not approve a loan above its appraised value. The focus would be on retaining value in an inflation-less system (Federal Government regulates value of current coin). However, the saver could pay as much as they wanted and out-bid the borrower.
D. As people save, they won't need to borrow. Thus new money is not created.
E. Simple Interest rates and fees would be high enough to favor saving over borrowing.

6. US Treasury via the Congress Creates all Money in the Money Supply and regulates its value. Sufficient money is created, upon demand, at the time of loan approval.

7. US Treasury loans money to Local Banks called a Safety Society at a variable prime simple interest rate which gets passed on to the individual borrower.

8. Local Safety Society determines loan eligibility and credit-worthiness based on previous and projected employment history, income, etc. Loan eligibility criteria would be nationally standardized but locally applied.

9. Local Safety Society makes loans only on "real" assets or on the projected building of or production of a "real" asset or the mining, farming or production of a "real" commodity.
a. Credit-worthy Individuals could take out a loan on an existing home or new home construction.
b. A community could take out a loan for a museum or community aquatics center based on the projected revenue on an approved ballot initiative for a 1% sales tax.
c. A corporation could take out a loan to purchase land and drill for oil based on the scientifically verifiable oil deposits.

10. The money created for these Safety Society loans is backed by the "real" assets, real estate and "real" commodities that the loan is being issued to purchase, produce, or mine.

11. SSS loans are fee-based. Local Banks make their money to cover overhead exactly the same way they do now by charging loan origination fees and monthly service charges.

12. The borrower builds equity from day 1. If the borrower comes on hard times and misses several payments. These payments are deducted from the borrowers equity. Thus the Loan becomes an instant reverse-mortgage. Repossession occurs when the borrower has lost all equity in the home, building, farm, mine.

13. Other credit and banking institutions would handle other speculative "venture-capital" banking ventures. SSS would only issue loans for non-speculate real assets that could be repossessed.

14. SSS Bank deposits are not used to issue loans. SSS operates on Full Reserves, and all deposits are kept at the bank for immediate withdrawal at any time.

15. The Federal Government generates revenue based on the prime simple interest rate. This tax/free constitutes a Constitutional uniform and voluntary tax on the use of money and extension of credit. This prime interest rate would be used to regulate the value of the currency, and control inflation by removing excess liquidity from the economy.

1. People want a gold-redeemable, or commodity-redeemable currency so that when the bank goes bust, they don't lose their money. But, really. Why not set up a system that saves the bank? What good is gold when the entire economy just fell apart? You can't eat gold when society just collapsed. Better to prevent the collapse.

2. SSS protects the bank from individual bankruptcy, by making sure each loan is backed by real assets and goods and commodities that can be repossessed so that the Bank can repay the US Treasury.

3. Again, this is not money "created-out-of-nothing." SSS money is not "debt-based". Loan approval is the point of money creation, and money is created by the SSS for real assets. The real assets back the money. The focus is on the banks being able to redeem their money in case the borrower defaults. This is what insulates the bank and other borrowers and depositors from the failure or misfortune of a few individuals.

4. Because money creation is always backed by a real asset, according to the Milton Friedman equation, the Money Supply always keeps pace with Real Output.. Therefore, there would be no inflation.

5. Because SSS banks wouldn't lend for Stocks, bonds, derivatives, the banks would never be left holding a bunch of worthless pieces of paper with nothing to repossess.

6. Because inflation is controlled, the SSS Bank can hold deposits as cash, and never has to invest in paper (stocks, bonds, derivatives) that carries the risk of becoming worthless.

7. Focus of the SSS bank is the preservation of value. The Laborer is not forced to subjugate themselves and enslaved themselves to the Wealthy to grant them credit. SSS is free market without the capitalist.

8. Wealthy can still use their wealth in speculative ventures separate from the SSS system.

9. Because of our inflationary economy instead of an economy focused on the preservation of value, companies must grow to keep up with inflation or die. This requires that companies ruthlessly compete against one another and after dominating the domestic market, are forced to expand overseas to keep pace.

10. All countries would be economically free to develop their own resources without international exploitation.

11. Wealthy are sill free to speculate all they want. But with SSS, the regular laborer class is protected from the risk-taking.

12. Both sides debate that neither government nor the unelected government should be controlling the economy and deciding where money goes. SSS is merit-based. That means if an individual, coorperation, or community is credit-worthy, they will have access to the money they need; created on demand.

11. Inflation is controlled by the Federal Government increasing interest rates on loans. The increased interest rate pulls money out of the system. If prices are falling, the Treasury can decrease interest rates. This interest rate constitute a Constitutional voluntary fee and excise on the use of credit.


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