Friday, 26 February 2010

Presbyterian Mutual Society. A solution?

On the Cobden Centre website Toby Baxendale explains a piece of high economics which he claims offers a pain free method to refund Presbyterian Mutual customers. The society’s investors are considered the only private savers in the UK to have lost deposits due to the banking crisis.

The article forms a wider critique of institutions which invest savers’ money. By a process of financial alchemy banks, building societies and other organisations, conjure credit from the ether, which increases the money supply and leaves the depositor reliant on an illusion that his / her money is being kept safe until he / she needs it.

Baxendale wants to see legislation which provides savers with the tools to dictate how much risk a bank or building society can take with their money. It is a scheme grounded in conservative principles of sound money and it offers a useful corrective to the idea that conservative economics are in thrall to financial wizardry, or the banking system.

Savers, and politicians in Northern Ireland, will be most interested in the practical solution which the Cobden Centre is suggesting, to end the PMS’ woes.

“Following the work of 5 Nobel Prize winners and the founder of the American Chicago School, I would suggest the following written about in the Day of Reckoning article;

The Bank of England immediately issues notes to cover all the deposits i.e. redeem all the depositors for 100% cash notes and coins to be placed in their accounts. Please note, this costs the Bank of England the price of paper and the ink and nothing else and IS NOT INFLATIONARY and generates no liability to the UK taxpayer – see next point.

At the same time, get the administrator of the PMS to delete all current creditors (the depositors) as these have now been redeemed from the bank’s books by the Bank of England. The deleting of these bank obligations means that the money the depositors did lend on deposit to the PSM no longer exists, so for the sake of argument, if there was £310m of deposits, these have been redeemed in cash by the Bank of England and the equivalent amount of deposits have been removed from the money supply. Cost to the Bank of England = zero and cost to the UK tax payer = zero. Money supply stays the same.

The PMS in administration now has only assets i.e. loans from entrepreneurs /people who are repaying the loans or mortgages. These can now continue to get repaid, but instead of paying the creditors of the PMS, there are now none, so these loans can go into paying off the National Debt.

This way all parties win.”


It is an ingenious scheme, so far as I can tell, and one which the Cobden Centre intends to promote as a realistic method of giving hard working savers their money back. As yet no party has endorsed it as policy, but as Toby notes at the bottom of the article, it would only take one courageous MP to introduce a private members’ bill and the idea could gain legs.

4 comments:

andrewg said...

How on earth is converting a debt that will never be repaid (and therefore worthless) into a debt that is guaranteed to be paid in cash (and therefore worth the full value) not inflationary? This is a financial perpetual-motion machine. I call shenanigans.

Anonymous said...

Is that not what happened when the Treasury repaid all the depositors their £4.5 billion in Icelandic banks whether guaranteed or not?

Toby Baxendale said...

It is not inflationary in any way.

If the money supply was made up of 100 units of money, of which 5 units were cash and 95 units were demand deposits and we changed those 95 demand deposits into 95 units of cash, we would still have 100 units of money right?

So with the PMS , we take the £300m of demand deposits and change them into cash from the demand deposits that they currently are, thus the money supply stays the same.

Note, cash is the stuff you have in your pocket. A demand deposit is a bank saying it owes you a claim on demand to a certain amount of cash. The problem being the bank does not always have that cash as it is lending it out and cash can not be in two places at once. You can not own it and the property developer who has been loaned it can not both own it. It can not be in two places at once, only in one. Your bank statement is an IOU from your bank as in all cases, they have lent it out to another party.

So the depositors in the PMS have £300m of demand deposits that the PMS can not pay out to its depositors in cash, hence a run on the PMS has happened. Let the Bank of England have the demand deposits, there are worthless. It can then put in £300m of cash. Like the 100 money unit example above, we still have the same amount of money , therefore no inflation.
The Bank of England can then get back the loans of approx £200m they think that can be wased to chip off a bit of the national debt.
See the works of Hayek, Soddy, Buchannan, Freidman ,Tobin and Allais on this, all of them Nobel Winners. See here for more information.

http://www.cobdencentre.org/2010/02/a-day-of-reckoning/

andrewg said...

Anonymous:

No, they used taxpayers' money for that.

Toby, let's continue this on your own blog.