Tuesday, October 13, 2009

Jubilee as Protection against Fractional Reserve Banking

Imagine you had a $100 in your account, and your family needed some money. They all promise to pay you back, so you write a check for $400 to mom, $300 to dad, $200 to bro, and $100 to sis.

Inconceivable, right? Not if you call yourself a bank! Then it is perfectly legitimate. Welcome to the world of fractional reserve banking.

Fractional banking means that private parties can create money from scratch, then loan it out. Oh, yeah, AND require repayment on interest. On money they never had in the first place!

The money is made-up, but the debt is quite real! If you can't pay back their made-up money, with interest, they might just have the right to garnish your wages.

When looking at the big picture, the entire edifice of modern banking is a huge exploitation machine, run by the parasitic banking classes. Their method of operations is to create as much loan money as possible, because that means more profit for them. Thus, as you can see, it is the banks who are the primary drivers of unsustainable consumerism, perpetually encouraging and enabling debt burdens.

There is literally no end point, no natural limit to the amount of debt that banks will foist upon the commoners. The logic of competitive capitalism dictates the cut-throat competition to spread loan growth. The banking industry, just like biological parasites, will grow out of control until their host is destroyed. This is what Greenspan was referring to when he famously said his faith in capitalism was shaken: he naively assumed banks would regulate themselves to avoid self-destructive loan growth. The problem is, individual banks might want to restrict their own growth, but the banking system as a whole cannot. Banks who issue more debt simply crowd out and take over banks who issue less, thus ensuring out-of-control debt growth for the whole system.

The Jubilee cycle is like a regular innoculation and treatment, killing off the parasitic infestation of debt parasites. When bankers know that debt will automatically be forgiven, they will control their own debt-issuance. Why would they give out loans when they know the debt will be erased? At the beginning of the Jubilee cycle, long term loans, up to 50 years, are possible. As time gets closer to the Jubilee Year, loan terms are shortened. Naturally, banks would be far less likely to provide loans at all, as the risk of total loss is great if the debtor strings repayment out.

Under the fractional reserve system, banks are able to hoard wealth and power in a naked power grab. Jubilee offers protection against that power.

Now, some might suggest that we regulate banks, perhaps even eliminate fractional reserve banking altogether. Here is the problem:

As we know from history, money holders will attempt fractional reserve lending, getting away with it as much as they can. The proposal to regulate banks on that scale involves a massive state regulatory apparatus. As we know, bankers are expert at corrupting regulators, so even with the expense of a full regulatory regime, we cannot expect to ever truly eliminate fractional banking.

The Jubilee cycle would accomplish the best of all worlds: minimal government establishment, while leading banks to restrain themselves in accordinance with their own self-interests.


John R. said...

Hi Justin.

You know, I think you're right, right, right and then just a little bit off.

You know we discuss all these economic theories and schools, but these ideas - a jubilee, the gold standard - are creatures of law, not economics.

And, well, people don't like the gold standard. But you have to understand what it is. It doesn't make anyone do anything, it just establishes a convention. It says "a dollar is __ amount of gold". It just defines a dollar. It doesn't prevent anyone from trading in gold itself, or some other currency they prefer, or bartering, or anything else.

Will people "stick to it"? Well, if the convention is placed in the constitution, which is the most fundamental law of the land, then it can't be changed by anyone, unless the constitution is amended. So sure, people will stick to it. It's in the constitution. That's the whole idea.

More importantly, even the government will have to stick to it. At least, they can't fudge over what a dollar is, like they do now. Or if they do, they can be readily exposed and I guess hung, as they should be.

The jubilee, too, would have to be a one time thing in the constitution, because of Amendment 14 section 4. I don't think you could SCHEDULE jubilees, because that would be a distortion of the law and the economy. But by doing it once, the precedent would be established that the debt machine can be canceled out by law when it gets out of hand. That might be enough to restrain the lenders. And they would be further restrained by a gold standard.

Gotta have both. That fixes everything.

wraft said...

Jubilee is only appropriate when lending becomes excessive and reckless. In the last 10 years or so, credit cards were issued for consumer spending. The banks calculated that they could make money on the penalties and usurious interest.

Steve Keen is trying to model the theory of Minsky who believed that capitalism has a built in flaw. Minsky says lending goes through 3 stages - prudent and conservative, then on easier terms, and then finally a Ponzi stage.

I don't think a Jubilee will require any promotion or coordination. People will just start defaulting en masse.

John R. said...

Well wraft, you make an interesting point. I know a number of instances right now where people have defaulted on mortgages and the lender is doing nothing.

That's an informal jubilee for some.

But it's no way to live, wondering when, or whether, they're coming to kick you out of your home.

Much better to formalize it, face it, fix it. IMO.

Justin said...

That is so true, John. Debt WILL BE cancelled in a debt-deflation depression, but it will be done the slow, painful, and destructive way, bringing down the entire economy with it. I advocate Jubilee as a practical measure simply to end the suffering, get to the bottom of it, and restart the system.

I really do like the idea of the currency being yet another check on govt power. Historically speaking, govts went off the gold standard in times of war, then in response to the Great Depression. I know, you don't need to remind me, those are actually great reasons to keep us ON the gold standard!

I read somewhere, hopefully I notated it in some blog post, that the reason the gold standard worked so well in the British Empire was because of the corresponding usage of real bills (Adam Smith advocated this system). The gold standard worked so well in the early American republic because we were actually on the gold AND silver standard, bimetallism.

Thus, I think history has shown us that the gold standard, by itself, is not the answer, but a stable system must have a way to expand the money supply for the needs of commerce.

Anonymous said...

Just found your blog. I've been banging the drum on a Jubilee for the better part of eighteen months.

It's either this, or 20-30 years of deflation. Keep it up. The word needs to get out.

se7ensnakes said...

The bigger picture...
We see pictures of the mint running off paper dollars and we think that is where out money comes from. It does but to a degree. 97% of the money supply comes from a variety of private enterprises, namely banks. You dont have to be too smart to realize the potentials there for manipulating the economy. Foreclosures as well as excessive debt works equally well for these bankers