Monetary Theory: Part Three, What Should Be Done?

I was somewhat surprised to learn that the Bank of Canada, Canada’s central bank, When it was nationalized, was chartered to do three tasks.  First it issues the country’s currency.  Second, it is the bank of last resort.  And third, it funds all public loans.  That is, when improvements to the Saint Laurence Seaway needed improvements, the bank funded the public loans for those improvements.  It also funds the loans for provincial and municipal loans.  These loans are at no interest and no bond issues are floated to raise the money.  This a pay as you go arrangement that worked well in the past.  The total government debt was never more than about 20 billion or so.  The government levels were limited in spending by the inability to finance large projects, pay excessive salaries, excessive benefits, and pensions.  There was no need to float bonds to make up shortages in pension funds, overdrawn city budgets, and the like.  Starting in 1977 the government of Canada started issuing bonds for any use, any excuse.  By 1979 the government debt had climbed past 700 billion dollars, Canadian.  Today that debt is almost 900 billion.  A suit was successfully brought against the government to halt all bond sales as they were illegal.  Ain’t that a kick in the head if you hold Canadian Government bonds?  And ain’t that a kick in the pants to all government politicians who want to keep borrowing against tomorrow?

I like the Canadian model.  A central bank ought to issue the currency and coinage.  And it should be the bank of last resort.  Should it be quasi owned by the banking industry?  Definitely not, keep those bankers on their side of the street.  And I would also forbid government banker to go into private banking houses and private bankers to enter the government bank.  If you want to keep the honest half way honest, do not let those in an industry that is being regulated work in any future capacity for the government.  And do not let regulators work in any future prive positions, it is a conflict of interest.  The fact is, no matter how noble of heart one might be there is always the temptation to blur the lines and create conflict of interest possibilities.  If you are a lawyer, and economist, a financial specialist, make your choice early in life for there will be no going back.  As far as interest rates are concerned, the bank should set normal rates.  That is, before all the credit creation, all the asset bubbles, all the QE, one might expect an average return as defined by the start market averages as 4%, plus or minus a little.  Without inflation and without expansive credit practices one should expect that return.  Therefore, the interest rate should never be far from 4%.  Yes, require banks to place deposits of sufficient size to prevent runs on the banking systems.  We should understand the physical currency no longer matters, its the electronic currency that makes a difference, so it is very difficult to have a run on the bank.

Every bank should be incorporated in one state only.  Wells Fargo can incorporate in all fifty states but each of those banks will be beholden to the state.  Thus they may be affiliates but they must be independent.  All mortgages, residential and commercial must be originated locally in each state where the property resides and must be held locally.  That will stop so much of the improperly originated mortgages that so often go belly up.  The third part of bank reform is that only one dollar of reserves or bank capital can be lent out.  Allowing Banks to lend the same dollar several times is letting the bank go bankrupt in the future.  The other part of that is any shortfall, loan loss, or other financial mishap of judgement will come out of the bank officers collective hide.  They will pay for losses they incurred, not the depositors and not the shareholders.  What this does is bring the responsibility of the banking system back down to a level where risk is manageable and excessive salaries are not possible.  Salaries will be limited at the top of no more than four times what the lowest wage earner makes.  Total benefits shall not exceed 5% of the total compensation for all employees.

The central bank shall not issue more credit than necessary.  If the economy grows at 3%, credit create should not exceed that amount for that year.  You see, credit creation is the real problem in the world.  The last figure I saw on world debt, which included all the swaps and derivatives, the promised future payments of benefits, and government issuance of every stripe as well as corporate paper is close to 1000 trillion dollars.  The world is lucky to make a tenth of that amount.  Central bankers have helped to make this mess along with government idiots that we all helped to elect.  It is clear that reset buttons will be pushed soon enough, the question is where it all starts and how fast it will cascade through the world.

So what else do we do?  Get rid of large corporations.  Break them up into smaller units, economies of scale be damned.  This type of economy of scale only works for the very few, not the many.  Number one, every corporation, thanks the our wise and sometimes insane supreme court says that corporations are real people imbued with human rights.  Fine, if so, then they have the right to die.  If the average age across the globe for humans is say sixty five, then the corporation will meet its fate at that age.  It dies, its assets are sold, its stockholders are paid off as or the creditors.  All corporate bonds shall be issued so that they will be paid at maturity and will have a sinking fund held by a bank or central bank, if you like, for that exact purpose.  Further, all officers of the corporation shall not be paid more than four times the lowest paid employee.  You see what I am doing?  I am putting a cap on wealth creation.  If your idea makes you a million or two, I’m happy for you.  You start a company and grow it to a multimillion dollar business and now want to sell out, I got no problem with that.  But you will have to find shareholder to buy you out.  That is, there will be no conglomerates gobbling up other corporations.  We will not permit mergers of corporations.  Either you make money or you go broke.  If I start a local garbage pickup company and want to retire, then I find a number of people who will buy me out by capitalizing a corporation and running it for the sixty five year period.

I also outlaw all public unions since a public union is a conflict of interest.  And I apply the same guidelines to cities, counties, states, and federal government.  No appointed employee or legislator shall make more that four times that of the lowest employee.  Well, I am issuing my own death warrant.  You see, credit has affected the whole of life to the point that even those areas we do not associate with asset bubbles and corruption is similarly affected.  Why are school superintendents able to make a quarter of a million dollars every year and more?  Our children are learning that well.  No, time for a reset on that crap, and the same with the university and college professors and administrators.  When our public institutions have several administrators per instructor then we know something isn’t rotten in Denmark, it’s rotten here in River City.  When it comes to public institutions such as education I want that same law of wage compensation, the highest guy doesn’t earn more than four times the lowest guy and that includes teaching assistants and student instructors.  Okay, so I have passed over into fiscal theory.  I like a flat tax, the government needs for the entire system of local, county, state, and federal government no more than ten percent of the nation’s income.  Corporations will be taxed at the individual rate and will pay the costs associated with sewage, water, and other utilities.  There will be no giveaways, otherwise Mr Tax Code will treat the giveaways used to attract businesses as income to the business.

Interest rates charged for the various loans and savings will be allowed to vary.  But they must reflect their economic growth rate.  If an area in one state is experiencing a rapid rate of growth then we would expect interest rates for mortgages and business loans to rise accordingly.  and the savings rate would also rise.  This is important since savings is what makes capitalism work, not excess credit and excess debt.  Savings becomes investment and that is what we want.  The individual formulas can be worked out but areas of fast growth need a damper on their growth, otherwise the result is local inflation and that is a bad tax on everyone but the rich.  I am not a fan of sales taxes for the reason that they adversely hurt the poor and middle income while making local and state governments greedily relying on such taxes.  By paring the financial size of government and making it less of a haven for the corrupt to amass fortunes at public expense, I say restrict their growth by restricting their revenues and ability to borrow funds.  Yes, some projects will require more funds than can be raised locally.  That is where our central bank comes in handy.  An interest free loan, oversight on the projected spending, and the forming of a limited special tax district for a strict time period that allows that loan to be pain in full.  There will be no union labor or labor rates for public project as it is a conflict of interest.  There will also be right to work laws.  A labor union is restraint of trade at best and organized crime at worst.  I also have a plan to end high medical cost as well, but that is another post.  My simple principle is that you get what you pay for and that you pay for what you get.

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