Italian bank chief warns of 'colossal' trouble without deeper EU

The economic and banking problems in the EU, and indeed in much of the rest of the world, stem from the fractional reserve banking system, which is unsustainable by its very nature, with its boom-bust cycles and escalating levels of debt. Banks go bust unless they receive bailouts from the taxpayer! Banks’ behaviour is parasitic. See www.positivemoney.org.uk/2011/09/fractional-reserve-banking-leads-booms-busts/
In a fractional reserve banking system, whenever a bank makes a loan (always of digital money – the stuff we have in our bank accounts), it creates the loan principal ex nihilo (out of thin air) as interest-bearing debt, and when the borrower pays the loan principal back, it disappears back into the nothing from whence it came. So every time an inevitable bust comes, people lose confidence, and so do banks, and banks cut back on their lending at the same time as people try to increase the rate at which they pay down their debts. This, of course, means that there is a reducing amount of (debt) money in circulation, and voilà, we have a recession. See the book “Where Does Money Come From?” which is available at http://www.positivemoney.org.uk/where-does-money-come-from-book/
In contrast, a full reserve banking system is sustainable. Banks would no longer create money ex nihilo as interest-bearing debt. In a full reserve banking system, government would create all of the new money with which people expand their economy, and banks would create none. All new money would be created interest free and debt free by an independent Monetary Policy Committee, at a rate just sufficient to keep inflation at a long-term average of zero. This new money could be gifted to the government of each member country in proportion to its GDP as a proportion of the total EU GDP. Each member country’s government would spend its entire share of new money into existence according to its democratic mandate.
Banks would be neither too big, nor too old, to fail. Sounds too good to be true? It’s not – it’s how it could be, and very soon. Earlier this month, two research economists at the International Monetary Fund (IMF), published a paper (the US documentary film-maker Bill Still has made a 6-minute documentary video on this paper: www.positivemoney.org.uk/2012/08/bill-still-on-the-chicago-plan-revisited/
The URL for the IMF paper on the IMF website is: www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf) in which they report that they have run a full-reserve banking system on the IMF’s best mathematical computer model, to test the proposal first put forward by the famous US economist Irving Fisher in 1933. This proposal became known as “The Chicago Plan” and was supported by a raft of other famous economists including James Tobin, John Kay and Milton Friedman, and more recently by Martin Wolf, present chief financial editor of the Financial Times, Sir Mervyn King, present governor of the Bank of England, and Herman Daly, former World Bank economist. Irving Fisher said that its four main benefits would be:
(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money.
(2) Complete elimination of bank runs.
(3) Dramatic reduction of the (net) public debt.
(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.
In the economic situation we are in today it would be a massive improvement if we could achieve just one of these four benefits. Imagine getting all four of them!
In addition to these huge benefits the IMF researchers were able to prove that there would be large steady state output gains of almost 10%, due to the removal or reduction of multiple distortions, including interest rate risk spreads, distortionary taxes, and costly monitoring of macroeconomically unnecessary credit risks.
Another advantage is the ability to drive steady state inflation to zero in an environment where liquidity traps do not exist…
The above shows that there is a solution to the debt crisis, and there is an alternative to the austerity. This is what newspapers should be full of today!