How to privatise the banking system

Should the State ever wish to privatise the banking system it would be easy to do. Although not quick. It will take a while for the bank credit to be paid down before the economy would be fully-backed. The aim is to remove the State guarantee of bank deposits, so that if a bank lends more than it can afford by borrowing short to lend long the customers (not the taxpayer) face the risk of loss.

If the State decided to remove the guarantee of bank deposits overnight the result would be very destabilising. Suddenly most of the money in circulation would be worthless... customers would be required to wait until loans are returned to the bank before it can be withdrawn. So, the solution is to match the credit deflation with new money in the economy.

The State should withdraw the guarantee for new lending only, whilst keeping it for existing deposits. That way, as debts are paid down, less and less of the money supply circulates as bank credit. All new loans must be fully-funded and come from 100%-reserve banks.

To counter-act deflation new money would be issued into the economy debt free. It would be permanently-circulating money. This type of money could be loaned but the lender would give up use of the money for the period of the loan, unlike Fractional-reserve banking.

So, existing guarantees remain in place but all new lending must be fully-backed. A lending institution would need to set up a separate arm or subsidiary which does not fall under State protection... and money would need to be sourced from a customer willing to lend, not just from depositors.

31st December 2008