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Posts Tagged ‘banking’

Over a month since I last wrote on this subject, and government and businesses are becoming increasingly desperate and concerned over the failure of banks to lend money, (which after all is what they’re in business for), and stimulate the economy. Now that the UK government (along with other countries) has guaranteed the balance sheets of banks, there is no excuse.

My suggestion to get things moving turns the normal rules of debt, saving & interest through 180 degrees. Instead of banks paying interest on money they borrow from one another, why doesn’t the government, (who owns the major share in many banks), pass an Act, perhaps with a sunshine clause that will lapse after say three years, and regulate that banks who hold money for more than a few days will be levied with an interest charge or tax on the level of their average cash balances over that period, and banks who increase their lending to companies or the mortgage market will receive interest on that part of their lending which is derived from borrowing from other banks..

This mechanism could be handled by central banks, who could no doubt make a small margin for their taxpayers on this trade.

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Seemingly the problem now is not one of capital but one of liquidity. Apparently the banks are not behaving like banks should. They are not lending money to one another and the whole cyclical system of revolving credit, debt, and repayment is all but frozen.

So how about this suggestion to get things moving. Instead of banks paying interest on money they borrow from one another, why don’t governments around the world reverse the normal rules of debt/interest and regulate that banks who hold money for say more than a few days will be levied with an interest charge and banks who borrow will receive interest. This mechanism could be handled by central banks, who could no doubt make a small margin for their taxpayers on this trade. 

This would encourage banks to keep the money flowing, since if they didn’t they would have to pay. It seems to me that in Dell Trotters immortable words,

everyone’s a winner.

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