Iceland’s government is now considering a revolutionary monetary proposal – removing the power of commercial banks to create money by making loans and handing it to the central bank. The proposal was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”. He obviously does not understand finance at all. Just amazing.
This whole effort is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008 whereby they do not understand the causing of the business cycle very much like Marx himself. Mr Sigurjonsson amazingly claims the problem each time arose from ballooning credit during a strong economic cycle. He totally fails to grasp that historically this is the swing between Public and Private confidence. At times, people want private assets and then swing back and want cash. In this proposal, not even gold could rise – everything must be flat lined, which is the very objective of Communism – kill the business cycle.
He argues that the central bank can only try to influence the money supply with its monetary policy tools. Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. Then you will have bureaucrats eventually bribed to provide loans to friends. The banking crisis of ancient Athens in 354BC was precisely that. The government controlled the money deposited in the temple and it was being secretly lent out to friends to speculate in real estate.
Sigurjonsson wrote that “Crucially, the power to create money is kept separate from the power to decide how that new money is used”.
“As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote.
Sigurjonsson’s proposal is that Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. What he misses entirely, is that the banks were influenced by the NY boys who sold this idea of transactional banking to Europe, which has blown up in the face of bankers everywhere. But the NY Boys are back at it again. This is NOT relationship banking and they sold products in Iceland that buried the people saddling them with risk they did not understand. In Iceland, foreign capital poured in to lend money on inflation-indexed mortgages signed before the 2008 financial crisis typically denominated in foreign currency. Greeks borrowed in Swiss francs to save interest and lost when the Swiss went up 30%. I saw the same thing during the 1980s in Australia. This is bankers selling loans in foreign currency as a scheme to save money, yet this does not increase the domestic money supply for it is still denominated in another currency. So this proposal misses the entire problem. Regulate that loans domestically CANNOT be offered by banks in any currency other than the local currency for local transactions and we would be getting closer to the mark. This is the two-tier monetary system I have been talking about.
Iceland was hit hard as the crash of US investment bank Lehman Brothers caused the collapse of its three largest banks. The NY Boys let Lehman go to get a monopoly. Bear Stearns refused to participate in the Long-Term Capital Management bailout back in 1998 so letting Lehman and Bear collapse was NY politics. They rushed to save AIG ONLY because Goldman Sachs would have collapsed and they were protected since they stuffed their people in government everywhere based upon all the information and belief running around so many sources.
Iceland then became the first western European nation in 25 years to appeal to the International Monetary Fund to save its battered economy all because the NY Boys blew them up. This was not the fact that they create money through lending.
But as always, the analysis is shallow and they do not understand the world of international finance. It is not the creation of money by lending. This is the proprietary products and trading inspired by the NY Boys sold to the world.
