Seems from this source that the EZ elite have tumbled to the blindingly obvious, namely that with leverage ratios of 33:1 as advocated by the UK’s finance minister, George Osborne and not vastly better leverage ratios proposed by Basel III, it doesn’t take a huge drop in bank assets for a bank to become insolvent.
To be exact, and assuming a ratio of 33:1, bank assets only have to fall in value by 3+%, and the bank is technically insolvent. And of course bank assets have on numerous occasions over the last 50 years (and doubtless over the last 150 years) fallen by that much. In other words those respectable and supposedly stable institutions where you’ve deposited your money in recent decades are a farce.
Moreover, after the recent Cyprus bank fiasco, it was obvious that money in other periphery banks was no longer entirely safe.
Seems from the above source (which does not look 100% reliable, I must admit) that the EZ authorities are now making it EXPLICIT that depositors money is no longer safe. Well at least they’re honest.
This form of honesty has of course been advocated by Positive Money, Profs Laurence Kotlikoff and Richard Werner and other advocates of full reserve banking for years, but with a difference, and as follows.
Simply making it possible to bail in ALL DEPOSITORS is a crude solution to the problem. A much better solution (proposed by the advocates of full reserve) is to give depositors two basic options. First they can have accounts that are 100% safe and guaranteed by the state. But so as to avoid taxpayer exposure and bank subsidies, that money is not put at risk: nothing is done with the money.
Second, depositors can choose to act in a commercial manner: have their bank lend on their money, and that means interest is earned. But that’s commerce. And a normal rule of commerce is that the person who stands to gain when things go well, also takes a hit when things go wrong.
Unless of course you think that depositors are entitled to present taxpayers with a “heads I win, tails you lose” set up.
And finally, while that “two account” system is pretty much part and parcel of full reserve, the reverse does not apply: that is, it’s perfectly feasible to implement the two account system without implementing full reserve lock stock and barrel.
Hat tip to “Pollik” on the Positive Money Forum.