IMF's epic plan to conjure away debt and dethrone bankers

[SkydiveJonathan 0]

http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world.

Entitled "The Chicago Plan Revisited", it revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression.

Irving Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw it with his own eyes in the early 1930s as creditors foreclosed on destitute farmers, seizing their land or buying it for a pittance at the bottom of the cycle.

The farmers found a way of defending themselves in the end. They muscled together at "one dollar auctions", buying each other's property back for almost nothing. Any carpet-bagger who tried to bid higher was beaten to a pulp.

[SkydiveJonathan 0]

This is incredible stuff from the IMF. Basically a return to government money rather than private and the largest debt Jubilee in human history...

it is
plausible to assume that a real-world implementation of the Chicago Plan would involve
at least some, and potentially a very large, buy-back of private debt. In the simulation of
the Chicago Plan presented in this paper we will assume that the buy-back covers all
private bank debt except loans that finance investment in physical capital.

http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

[SkydiveJonathan 0]

The concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical Book of Leviticus, a Jubilee year is mentioned to occur every fiftieth year, in which slaves and prisoners would be freed, debts would be forgiven and the mercies of God would be particularly manifest.

In the Holy Bible, Leviticus 25:8-13 states, "And thou shalt number seven sabbaths of years unto thee, seven times seven years; and the space of the seven sabbaths of years shall be unto thee forty and nine years. Then shalt thou cause the trumpet of the jubile to sound on the tenth day of the seventh month, in the day of atonement shall ye make the trumpet sound throughout all your land. And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubile unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family. A jubile shall that fiftieth year be unto you: ye shall not sow, neither reap that which groweth of itself in it, nor gather the grapes in it of thy vine undressed. For it is the jubile; it shall be holy unto you: ye shall eat the increase thereof out of the field. In the year of this jubile ye shall return every man unto his possession."

[kallend 2,027]

Quote

The concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical Book of Leviticus, a Jubilee year is mentioned to occur every fiftieth year, in which slaves and prisoners would be freed, debts would be forgiven ...

I bet it would be hard to get a loan or mortgage in year 49.

...

The only sure way to survive a canopy collision is not to have one.

[jclalor 12]

Very interesting, please go on.

[SkydiveJonathan 0]

Basically it takes away the power of banks to create money. They would be able to lend only what they had. No more credit booms and busts.

[SkydiveJonathan 0]

The second advantage of the Chicago Plan is that having fully reserve-backed bank
deposits would completely eliminate bank runs, thereby increasing financial stability, and
allowing banks to concentrate on their core lending function without worrying about
instabilities originating on the liabilities side of their balance sheet. The elimination of
bank runs will be accomplished if two conditions hold. First, the banking system’s
monetary liabilities must be fully backed by reserves of government-issued money, which is
of course true under the Chicago Plan. Second, the banking system’s credit assets must be
funded by non-monetary liabilities that are not subject to runs. This means that policy
needs to ensure that such liabilities cannot become near-monies. The literature of the
1930s and 1940s discussed three institutional arrangements under which this can be
accomplished. The easiest is to require that banks fund all of their credit assets with a
combination of equity and loans from the government treasury, and completely without
private debt instruments. This is the core element of the version of the Chicago Plan
considered in this paper, because it has a number of advantages that go beyond decisively
preventing the emergence of near-monies. By itself this would mean that there is no
lending at all between private agents.