Move Your Money Campaign Won’t Change Banking

The Left never fail to disapoint. You can’t hate them for it because many of them genuinely do care. But they so often miss the point.

And the new Move Your Money Campaign is a case in point

Why Move Your Money?

We all know that the banks have failed us and something has to change.

The banks won’t change of their own accord and politicians and regulators are too narrowly focused on maintaining the status quo, so we must be the agents of change. It is simple: make a positive decision about where to put your money.

Banks rely on the deposits of ordinary savers. So when you choose where you keep your money, you are choosing between supporting business as usual or taking a simple but powerful step towards a better banking system and a better future. By moving your money you can directly support an ethical and socially useful bank, and send a message about the sort of society and economy you want to see. And one you’d rather not.

March 2012 is ‘Move Your Money Month’. The month when we act together, move our money, and begin to change British banking for good.

On some levels this a reasonable and even logical idea — from a Left-wing perspective that is. Use market power to encourage banks to behave more ‘ethically’…

However the campaign does not deal with any of the actual problems with UK banking. They concentrate on the side show of where banks invest your ‘savings’. This seems to be because MYM misunderstand the banking crisis

The banks failed badly, but despite receiving the biggest taxpayer-funded bailout in history, nothing much has changed. Banks continue to pour money into socially useless lending and risky speculation, leaving us exposed to more crises, commodity bubbles and instabiliity.

Sadly you are not going to change an industry if you save it from its own incompetence and flaws. Nothing has changed with banking because nothing was allowed to change.

Also poor or risky investement decisions aren’t really the problem. The Fractional Reserve system is both speculative and risky by it’s nature. It’s not a sound system that badly invested all our money. It is simply, an unsound system.

You put your money in a bank and they go speculate with it. It’s not stored or saved for you. And to make things worse they use your money to justify loans and investments of 10 to 100 times the value of your deposit. Hasten the term ‘Fractional Reserve’…

Sadly MYM don’t seem to deal with this issue at all. Generally they just encourage people to shift their money from ‘bad’ speculative institutions to ‘ethical’ ones. And neither do they mention the debasement of money. Which naturally undermines wealth and encourages speculation.

My feeling is the MYM will achieve little, and certainly not the “change” they are looking for. At most they may encourage Barclays — who they really don’t like — to create a ‘Hippy’ Fund…

Banks and Fences

Next week Sir John Vickers publishes the ICB’s final report on bank reform — which I’m confident will be quite pointless…

Nonetheless it has got the people over at The ‘Good’ Banking Forum quite excited. And they have put together “8 rebuttalls (sic) to the banking lobby” outlining their arguments for structural separation or ring fencing or whatever…

© Michael Coghlan

If I’m being honest I’m at a loss to explain the point of ring-fencing. It has precisely nothing to do with the Credit Crunch. And it won’t prevent another one. The real problem with banking is the fractional reserve system. A system that allows ALL banks to lend out far more money than they have on deposit.  So it doesn’t matter if you split up big banks into retail and ‘casino’ operations — they will still work under the same system.

There isn’t anything inherently wrong with fractional reserve banking. In many ways it is very useful. But there are some huge problems with the way it is regulated. Under the British version of FRB bankers, investors and ‘savers’ are not fully exposed to the risks. The majority of the British population have little understanding of FRB. And there is a distinct lack of competition.

So how should we reform our banks? Well, here are a few suggestions…

  1. It should be illegal for Governments to bailout private companies and individuals. So that means no more bailouts and no more Financial Services Compensation Scheme. If FRB is to work properly all players need to be fully exposed to the risks. The State cannot continue to bailout participants when something goes wrong. Otherwise bankers will continue to make risky investments. And investors and savers are never going to demand higher reserve ratios.
  2. All banks must explicitly advertise Reserve Ratios on all account types. It’s not much too ask. And it will help savers and investors make more sensible decisions about where they place their money*.
  3. All Banks must offer and advertise a 100% reserve ratio account. This is essentially just a true savings account. Again it’s not too much to ask of banks. And it will hopefully encourage savers to consider how secure their savings really are*.
  4. More competition. Creating a bank needs to be simplified. Currently it can take up to a year and cost £10m to set up a new bank. Savers and investors need to be free to save and invest their money with whomever they like. It’s not as if the Government mandated system has been a raging success… And of course the aim of more competition is to spread risk over a wider base and encourage innovation.
Now I imagine some of you will disagree with me on the specifics of banking reform. But I hope you will agree that the key problem is the fractional reserve system. Not whether banks run retail and ‘casino’ operations under one roof…
* We also need significant currency reform to encourage higher reserve ratios but that is another topic for another time…