16. Review and Reform of the Federal Reserve Bank

[christophercarney]

Point taken on the corruption. I have been involved on-off again with another person debating the merits of a hard (specifically precious-metal backed) currency, and this person advocates for something similar as you - a public commission established to set up to "oversee" the money managers, to make sure we don't print too much. He claims we could make this work and there would be no need for hard currency. I have the same reservations about this as I do for letting an entity (public or private) set the interest rate, since there is so much damn power in that. Anyway, I appear to have digressed again but this is a common motif with a centrally managed entity vs. the free market.

The "Wildcat Era" was at the turn of the 19th century, so you are right. It was called that because private banks competed with federally chartered banks, so there was a lot of confusion in many financial matters since there was no standard currency (besides gold), and each bank had different lending rates and reserve requirements. Some banks went under and their depositors lost everything, while other banks profited. I am not sure how profound this confusion was, I have read different interpretations on this peculiar time period in our history. I need to review it more.

Which brings me to my main point. I am still formulating my response on why we could let the free market set interest rates. Unfortunately I have not been able to find any historical data on interest rates before the Fed (even before 1970 is hard to find), so I will instead rely mainly on reason and deduction. Hopefully I'll have something by week's end.

[christophercarney]

Here is my response on free markets setting the interest rate.

Banks make money on the difference in interest they pay out to depositors versus the interest they charge in loaning to prospective borrowers. This is known as the interest spread or simply the spread. So it matters not so much how high or low these particular rates of interest are but only the difference between them, for the consideration of bank policy that is.

Since there are essentially two knobs a bank can turn, and can turn each one 1 of 2 ways, then there are a total of four combinations. It is these combinations that define how many customers will decide to deposit with them and also how many people will obtain loans from them. If a bank sets interest on loans too high, then that turns away many prospective borrowers. Likewise if a bank sets the interest rate too low for depositors, then customers will also be chased away. By the same token, a bank cannot offer interest rates on loans too low, because that starts to cut into profits. Same goes for offering too high an interest rate for depositors.

Since it is in the best interest to obtain both as many depositors AND borrowers as possible, the bank will set these rates that correspond to the maximum profit. Since profit is derived from the spread, it is somewhat limited by how far it can move either one. It is therefore a balance and the better the balance, the higher the profit. Since the profit is directly proportional to the needs of the banking community, for both depositors and borrowers, we can expect a symbiotic relationship where everyone's needs are met.

The beauty of this is two-fold. As already mentioned, the interest rate corresponds directly with the bank's bottom line. The other one has to do with the operation of a true free market. When economic activity is brisk and more people are willing to borrow, the bank raises interest rates. This has the effect of discouraging further borrowing if the rate is raised too high and/or too fast. This is the free market response to how the Fed would battle inflation. Likewise, if an economy is slowing, and less people are borrowing, this is a signal to lower interst rates to encourage borrowing once more. Since people are saving and not spending, once the rates are lowered to the "sweet spot", the borrowers are more willing to spend and invest again. The problem we have today is that the Fed has lowered rates to near zero, and still economic activity is anemic at best. This is because the rate has little to do with fundamentals and is based entirely on distortions the Fed introduced in all its interventions in prior years. It has had the effect of confusing the banking community and the public by "intercepting" the free market signals that otherwise would be telling the system to spend or to save.

This is a simple description and of course ignores many other aspects of banking and ploys banks use to attract customers such as ATM fees, credit card offers, and many other financial products.

Now, the big concern today is we have 6 mega banks running the show, JP Morgan Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs, and one other one I'm forgetting about. The fear is that these 6 banks will collude to set interest rates that are only advantageous to their profits and do not serve the customer, or worse directly influence the business cycle by continuing the boom/bust periods that the Federal Reserve has been so good at creating lately. It is not clear to me that they could actually accomplish this due to the previous analysis, because they would be cutting off their nose to spite their face, by raising interest rates too high or too low all at once. However, the qualifier in the analysis is how a bank would ideally operate in a free market, and we have anything but that today. The reality today is that the banks get to borrow money at 0% from the Fed, and then invest in guaranteed US Treasuries paying anywhere from 2 to 4% at no risk, or worse get to invest in the $600 trillion global derivatives casino leveraged at 30:1 or higher. All at no cost since they borrow from the Fed at 0%. That being said, it is imperative this practice is ended. In addition, Glass-Steagall must be reinstated, which would bar the banks from using Fed money and depositor money in risky leveraged bets by separating them into traditional banking institutions and the more risky globalized casino ones.

So the conclusion (for now), is that I would be far more comfortable in a free market interest environment providing the following:

1. Glass Steagall is reinstated
2. Providing completion of #1, only commerical "traditional" banking institutions are allowed to influence the interest rate, not the riskly lending instutitions unprotected by the FDIC

I believe these two would be enough to ensure that interest rates are set that are fair to both banks and the public in a free market setting. Eventually we need to expose the fractional reserve lending practice, where $1,000 in bank deposits today leads to $10,000 in newly created money as it is lent to prospective borrowers. This is really another knob to affect inflation, by setting the amount in reserves banks must hold against depositors' savings. Today the reserve rate is actually much closer to 0% thanks to all kinds of tricks and accounting gimmicks by the banks. I would look to move this back to 10% at a minimum, no gimmicks.

I hope the above makes my viewpoint somewhat. Feel free to comment and/or poke holes as I know I couldn't possibly cover everything in this short summary.

[blake]

I thank you for your response, it was well written. Your posed is the standard defense of the free market. Basically it states that the free market will fight among it selves therefore providing the highest service at the lowest price. The problem is they don’t.

Let’s take a look at another industry, say computing. How many companies provide Operating Systems now? There are two main ones now, Microsoft and Apple, and a hand full of smaller ones in niche markets. When I was a child when all this was starting there were dozens. What happened? The corporations who have more money or access will leverage that to either drive other smaller companies to sell or to go bankrupt. Now why would they do that instead of competing with each other? The answer is simple, market share. You see profit is just one of the many motivations a corporation has. Market share is as important, if not more important, to a corporation as it’s’ profits. Corporations will conclude with each other to drive smaller companies out of the market, because it’s easier to divide a market amongst a fewer set of companies than a whole industry. None of this was caused by the Fed; it just is the nature of corporations to act that way.

You see the free market is an open market, it’s just not a level playing field. Some companies have a bigger footprint than others, and therefore have a bigger say in their own industries. Without a level playing field there is no competition, there is only survival of the fittest. A big corporation could sale their product at a loss just to drive a competitor out. We see it now with companies like Wal-Mart when they sale their product so cheaply that no smaller company has any hope of keeping up. When the last of their competition falls to the waste side do you believe that prices will remain low? Would the banks act any different than any other corporation? I think there would be no difference at all.

I had a chance to look up the “Wildcat” banking era, and we both were slightly wrong. The “Wildcat” era took place between 1816 and 1863. Although your description of that time period was spot on. Having had a chance to review the history of that time I could find nothing there to help you here. One of the key events that happened was the Panic of 1837. This panic was brought about when President Andrew Jackson failed to renew the charter of the Second Bank of the United States, the central bank of its time. The fall out to this was quiet significant, 40% of the banks at that time close, another 8% partially failed. Real investment fell by 23% and the money supply fell by 34%. After the failure to renew the charter of the Second Bank of the United States a period of runaway inflation in sued. This coincided with a five-year depression, and then record-high unemployment levels (for that era).

This doesn’t paint a pretty picture of what would happen if we tried this today. In my opinion it would probably be worst now with our more complex economy than it was in 1837.

[christophercarney]

So if I read your response correctly you are weary of the free market setting interest rates because under our capitalist system the largest most successful corporations tends to drive others out of business, thus reducing the playing field to a virtual monopoly. And yes, I agree, once a store like Walmart has completed its takeover, it can do whatever it wants with prices, though I still maintain it is limited by reality because if prices are raised too high and nobody can afford them it stands to lose a lot of profits. But then again this is where the free market comes into play.

So would you feel better if we had the mega banks broken up, and say we imposed a cap on the market capital any bank could carry? I haven't thought this through entirely, just throwing it out there. What if we had more or less a thousand banks with the same market capitalization? Would that be more of a level playing field? The problem with this of course is that it is somewhat anti-capitalist, dictating how much success one single company can have before they are regulated into submission. But I would like to know where you would stand on that.

Naturally, the case for a free market is made much more difficult today because of the fact we have six mega banks running the show, and this didn't just happen by chance. This was the result of crony capitalism and the collectivist centralized nature of our monetary system and more accurately the Federal Reserve. With a few strokes of a pen, or more aptly a computer key, it decided which banks would receive trillions in bailout money over the past three years. Talk about playing God.

So now we have to contend with this and it is next to impossible to make the case for a free market because they have nearly taken this away as an available option.

Your example of the Wildcat banking era is important for overall learning, but I do not believe it portends necessarily what would happen today if we let the free market set interest rates, and I'll explain why. You stated yourself that the panic ensured when Andrew Jackson failed to renew the charter for the 2nd Central Bank. This smells like a setup job to me. I need to do more research, but I believe from earlier research I had done that the people behind the 2nd bank purposefully set in motion a series of events so that the banking system and the economy would fail, to get back at him and what he stood for, and also to convince the people that a central bank was needed after all. If I've learned anything from history it's that these games have been going on for far longer than we think they have.

As you have already stated it is difficult to find historical information on this subject, and even what can be found is full of contradiction and a lot of it plain omission. And the only things I have found out there on free markets is just that we should either let them set the interest rate or we shouldn't. There is literally nothing out there that I can find. I probably have to order some books on economics to see if I can find something.

Thank you for your response.

[amadeus]

I'm following this thread with extreme interest. Thanks to both Blake and Chris for insightful comments. My question is but one-- is there any correlation between GDP and the value of a dollar? And if there is, how can a lower unemployment rate serve to raise the value of the dollar?

[christophercarney]

Hello amadeus. Yes, there is. There are several in fact, but I believe this is the one you are looking for.

The higher the GDP, the most investment-worthy is our country, meaning the more apt are other countries to invest in our securities (both US Treasury and equities). If GDP can keep growing, or we can at least show that it will keep growing that will continue to attract foreign investment. This creates more demand for US dollars, which is dollar positive.

There is of course a catch, and that is the level of our debt. If the level our our debt is too high, that may be enough to offset the appetite for US investment, despite a high GDP. OR, the foreign investors may demand a higher interest rate before they invest. This is dollar negative since more money will have to be created at a future date to entice this investment.

My economic sense tells me that a higher unemployment rate is dollar negative, since this means more people on government assistance (and we know that government itself isn't productive, it gets its money by borrowing and taxing), so this is naturally inflationary. So a lower unemployment rate would be dollar positive. However, the 8.3% official unemployment rate is a heavily manipulated number in government's favor, so unfortunately I have to say a lower unemployment rate is not necessarily reflective of an improving economy.

If you could rephrase your question to say how can more people employed serve to raise the value of the dollar, then what I said previously is more applicable.

The bottom line is the more people employed, the more the economic activity. The less people on assistance, the less the funding needs of the government. Both these are what you want for a strong economy to entice foreign investment (domestic too, I just glossed over that to simplify the explanation).

Maybe someone else has a different viewpoint.

[blake]

One only has to look at the Robber Barons from the late 18th and 19th century to see that monopolies will not conform to the free market. Instead they manipulate it. Yes prices have only a certain amount of “elasticity” to start with and beyond which people well not buy, but this is mainly psychological. Take the gas price right now, $4.00 gas is considers to high, but 5 years ago $2.50 was consider way to high. What changed? It wasn’t oil prices or the refining cost that changed they are roughly the same. What changed was the consumer psychology. The gasoline company can to this by pushing a little by little until they get what they want, thus moving the consumer psychology to except their higher prices. Essentially they push and then they retreat just not as far as they pushed in the first place. This is how all monopolies operate. A Bank monopoly would do the same with the interest rates.

I would be interested in breaking up the major banks and putting caps on the market capitalization under the guise that, “Too big to fail is too big to exist”. I don’t see this as anti-capitalist. Requiring a fair playing field and requiring regulation to be met cannot be anti-capitalist. Anything less would be chaos, just like what we have now. I would also reinstate Glass Steagall, increase the reserve rate 10% or more (also I would require a hard floor of 10% to be instituted so the rate can’t be lowered blow 10%), and I would change the leverage rate for investment banks also, 30:1 is insane. There should also be more proof of capitalization before a leveraged deal would be allowed to move forward. I would do this weather the Fed stays or goes. What would be anti-capitalist would be to nationalize the banks, I would be against that.

I’m not as concern about the bail-outs as I’m concern in why they needed it in the first place. Don’t get me wrong I didn’t like them either, it’s just I don’t want to be in that position again. Everyone who complains about the bail-out forgets the choice we had at the time, either we bail-out the banks or we all lose our jobs because the credit market froze up. My concern was how we got there in the first place. If this were to happen again today guess what, we would do the same thing again because nothing has change. We would have no choice again. It would not matter if we had a Fed or not the choice would be the same, collapse or bail-out. The major reason behind the economic collapse was 30 years of deregulation of the financial market.

You say you don’t trust in a public commission of any type because the public commission will be corrupted. Who will be doing the corrupting? It will be the free market that will be doing the corrupting. So to fix the free market from corrupting a public commission we toss the keys to the free market and say go ahead take it out for a drive. I do not have any illusions of where the free market would choose to drive us. They would take us to the same place that they are bribing us to take them now. The upshot for the free market is that they could do it faster and cheaper on their own. With no legal restraints to hold them back they would choose any rules or rates that would be in their interest and not anyone else.

By the by, Thank god for public libraries.

[christophercarney]

You make several good points, but I would still need to see it fleshed out exactly how these banks would push the interest rates in their favor (and not ours). Since they have a built-in floor for how much they could charge lenders, and a built-in ceiling how much they could pay depositors, I fail to see how this damage would be catastrophic, particularly if they were limited in size and there were no promises of bailouts by the Fed or the government. This is a different psychology the banks would have to live under - discipline, that they haven't had to for a very long time.

I agree with everything in your second paragraph. I would actually like to see a reserve rate a lot higher than 10%, but that discussion gets into the nature of money which I would like to avoid for now (we'll get there). The funny thing is you said you are against nationalization of banks, as am I. But isn't that what we essentially have now? Whenever a major bank gets into trouble it gets bailed out, the money is printed, and the US taxpayer is on the hook, either through inflation or taxes. This sounds like a form of nationalization to me. But it's even worse than that, because the US taxpayer doesn't see any of the profits. Anyway, this is a side point.

The bailouts are another discussion and have to do with the nature of our monetary and banking system. It was designed this way with the inception of the Fed. The author of the book "The Creature from Jeckyl Island", has stated many times in his book that the nature of the game is bailout.

You have to understand I have and will always have an extreme distrust of centralized power. A public commission, even with the best interests at heart, are still a form of centralized power. Votes can be bought, just as they are today, behind closed doors, or worse the public commission will be made up board members of the big banks (look who's on the boards of the Federal Reserve banks today). The point is this evil, monied interest is always with us, will always be with us, and will never stop trying to infiltrate the best laid out plans. How will you ensure the public commission can be trusted? Look at how our Congress has been bought off, and there's over 500 of them. I just don't see how we can ever trust a cabal of individuals to do what is right for the public. You can say we need to get the money out, but you see this quickly turns into a circular argument as we also need to reform the money itself.

Perhaps there are other solutions out there besides just a pure free market and a public commission. Maybe a blend?

[christophercarney]

By the way, the latest 99%D commercial I saw has been reworded on this grievance to say

"Reform of the Federal Reserve System"

I wanted to state for the record I am against reform and am solely for ending the system and replacing it with something that actually works for the people. This decision appears to have been made unilaterally.

[blake]

Christopher I like your idea about a public/private cooperative, our country has some luck in the past using them. I have not thought down this lane so I'll need to do some thinking on that. My first notion would be that the fed uses a regional banking system perhaps it could be expanded to include traditional banks as voting members. Perhaps with some kind of public input also. My worry would be how to balance it so no one side could monopolize it. Of course this would work better with a 1000 banks and not just 6, so capitalization caps would need to be in place.

We do not have nationalized banks, we have Corporate Socialism instead.

[christophercarney]

Come up with a formula. Equal weighting on both sides. Note, if you have 1,000 banks voting how they want interest rates set this is more or less the free market at work. Of course I am fine with that .

The check, and balance, would be the public input.

Perhaps it would go something like this. The top 10 "modes" as input by the various banks (in other words the ten rates that show up with the most frequency), and the the same for the public commission of however many members (or similar so that the weighting is the same) are thrown into the pot. The two highest and the two lowest are thrown out. The median value left is the agreed upon rate. Something like that.

There would also be more rules (as much as it pains me to say) placing limits on how fast and/or how much it could change from month-to-month and within a particular year, barring emergency legislation.

In addition, I would want to see the public commission have new members every 2 to 4 years, and of course made up of qualified representatives. Perhaps these are simply House members and/or Senators (if we can ever manage to vote in some people who will bring some real change that is).

[blake]

I could see organizing the traditional banks along the 12 districts of the current Fed and having each of the 12 districts voting to endorse their own forecast. This should take regional differences into account, and this should allow smaller districts to have an equal say. We don’t want to have a system that is bi-coastal centric. The new central bank (with reduced powers) will do their own forecast and then they will collect all the models and distill them down to one model. The Central Bank will present the agreed upon model to the Public Commission who can either accept it or send it back for rework, they could make recommendations but no dictates. The regional districts should have full autonomy from each other and the Central Bank, thus making the Central Bank one voice amongst many. Each district will be free to form their own forecast without any outside influences.

The Public Commission should consist of an odd number of members as to avoid ties; I was thinking that 7 members should provide enough different points of view as to keep any one person from controlling it. I agree that these positions are so important that term limits are necessary. The same would be true for the head of the Central Bank, having Greenspan as head of the Fed for nearly 20 years was just dumb. I would be comfortable with a term of 4 years for the Public Commission and 8 years for the Central Bank. If there is a chairman position it should be ceremonial with no additional powers. All Commission meetings will be open to the public (preferably televised on C-Span) so all decisions will be made in the full view of the public. No Commission member will be allowed to move between the banking industry and the Public Commission (or vice-versa) for a period of 4 years. Bankers will have a side to play on and they should stay on that side. The president will nominate Commission members and the senate will confirm, because these positions cannot remain empty for long and they are so important the senate will be required to schedule an up or down vote within 90 days or the nominee will be automatically confirmed. Any corruption discovered will be punished by a mandatory 25 to life jail sentence.

Lastly concerning the Central Bank I would propose requiring a renewal vote every 10 years. This may cause the new Central Bank to act cautiously in their actions (if you can be fired you usually try harder). You can think of this as a regularly scheduled no confidence vote. Our fore fathers were correct in allowing future generations the ability to change laws, policies and even the Constitution. Though I believe we need a Central Bank today I’m not arrogant enough to believe I can make that call for future generations. They will and should change any of this to suit the needs of their times.

Of course all of this is just a modest proposal.

[christophercarney]

I would be willing to entertain a central bank with severely reduced powers for a time, but I do not want a central bank in the long term. What you propose is not much different than what we have today I think. Worse, if you get a bought off commission you simply end up with a rubber stamping of whatever the central bank presents as its interest rate decision.

If all the central bank is doing is distilling the individual banks' decisions down to one model, why not dispense with it entirely? At this point it's functioning only as a figurehead, nothing more.

Also, by giving the public commission only a yes or no vote, with an odd number of participants, you are reducing the equation for corruption down to only one member. This is very dangerous.

Don't get me wrong, I think your proposal is head and shoulders above what we have today, but I still think it leaves the door open for too much corruption still, despite the inclusion of term limits.

[blake]

No system will be perfect, we will all need to accept things that we ourselves would not do. I would never on my own design a system that would include the free market. The same amount of mistrust you have in a public commission, is the same amount of mistrust I have in the free market. The taste of compromise is usually unpalatable to everyone, that's how you know you got it right. Believe me when I say it was hard to accept some of the things I proposed myself, I mean trusting bankers (OMG). Especially after their actions recently. That's the nature of compromise.

If anyone tries to bribe the public commission they would need to bribe more than one commissioner to insure the outcome they wanted. Last time I check one vote doesn't beat 6 votes. Next, even if they succeeded in "buying off" the commission what will they achieve? The most they could do is to keep the status quo. The commission does not set monetary policy, they only accept or decline it, that's it nothing else. To change monetary policy itself they would need to bribe many individual banks or several regional districts. That would get expensive very fast and there would be so many people involved they would easily get caught and then they would get 25 to life.

In this proposal there is a system to do the very thing you want to do so very much, to kill the Central Bank. The problem I'm sensing hear is that you wish to do that by fiat and not by voting. The best way to achieve your goals is to reduce the Feds power first, then use the no confidence vote to finish the job. If the Central Bank were to be dissolved right now there would be an incredible shock to our economy which would cause the people to demand it to be reinstated, and it will take another 175 years for your argument to regain traction. Don't get me wrong here I would be fighting on my side of the table to keep the Central Bank, but you will get your chance and perhaps your arguments will carry the day.

In a system where banks can vote for monetary policy there will be a need to keep them independent from each other. Even with their own capitalization and the reserve system banks will still need to borrow money. With no Central Bank the traditional banks will be forced to borrow money from each other (or even worse an investment bank). As a matter of fact some banks or collection of banks will try to fill that vacuum. They could use that as a means to pressure other banks to vote they way they are told. This would be a type of corruption. A central banks primary job is to act as the lender for the banks. Without a profit margin motive and having no market share to covet a central bank has the ability to offer these loans allowing the traditional banks to retain their independents from each other.

Your statements about corruption assumes that corruption is one sided. It isn't. For someone to be corrupted someone else has to do the corrupting. So every time you say the public commission will be corrupted what you are saying is that the free market will be doing the corrupting. So for the crime of corrupting a public commission you would decide to reward them with the very thing they wanted in the first place, absolute control. In the corruption race between the government and the free market the free market wins hands down. One only needs to look at the past couple of decades to see that the last people on this planet you would want to trust would be the free market. The six major banks have been fined billions of dollars collectively. For such things as bribery, fraud, corruption, and lying to both the public and government. Companies that have been fined for criminal activities includes Enron, Worldcom, Tyco, Exxon, Archer Daniels Midland, Pfizer, BCCI, and General Electric, just to name a few. A list of the top 100 corporate criminals can be found at corporatecrimereporter.com/top100.html#Briefs. These are the people you want us to trust. I just can't bring myself to do it.

[christophercarney]

Hold on one second.

Much of what you have written makes sense. But what has happened to this country, specifically the financial and banking sectors, is so complicated, so pernicious and so corrupt that you cannot say it is all due to the free market. Some of it, yes. But it is unfair to say that the free market is entirely to blame.

We have a system where the big banks get loans at 0% from the Fed, and then when they get into trouble they get bailed out by Uncle Sam via the taxpayer. That is not the free market. That is corporate socialism. Worse, the boards of many of the big banks, a lot of them serve on the boards of the Federal Reserve regional boards - so much for public interest. They are directly responsible for lobbying Congress for all the financial "regulation", in quotes because often the regulation ends up giving more perks back to the banks than before the regulation. This is called moral hazard.

Look at Hank Paulson, ex Goldman Sachs CEO, who gave his previous employer how many trillions when he was US Treasury Secretary? How about "Doing God's Work" Lloyd Blankfein, CEO of Goldman who is also on the New York Federal Reserve board? Free market? Give me a break.

How about John Corzine? The list goes on and on.

There is nothing free about it, unless you're one of the CEOs voting to get free money at 0% to leverage at 40:1 and then turn to Uncle Sam for a bailout when everything goes to pieces like it did in the fall of 2008. Which it will again because nothing has been fixed in the financial system. In fact it has gotten much worse.

You can call it corporatism, socialism, corporate welfare, oligarchy, or even fascism, but to call it free market is somewhat disingenuous.

Anyway, I think I've belabored my point. I have been thinking of an alternative system. It has recently occurred to me that there is another way that doesn't rely on the free market, a central bank, or even a public commission.

One need only look at North Dakota for an example. I'm talking about state chartered banks. Except these would be operated at not-for-profit, with the interest spread set just enough to pay their staff and operating costs, such that they are completely self-funded. No profit by law = No chance for corruption.

These state chartered banks would only handle on-demand deposits like savings and checking accounts. The minimum reserves would be 25%. No maximum. All of the timed deposits would be handled by the investment banks who would no longer be covered by the FDIC and could make any bet they want. The caveat is, if they lose their shirt, they go bankrupt. All details in every contractual obligation would be fully disclosed to the investor, such as when someone invests in a CD then the bank must by law inform the investor how much of his/her money will be "gambled" with in the market.

The above basically accomplishes the objective of Glass-Stegall without requiring the law itself to be reinstated, a bonus because in Volcker's own words recently there is no political will to reinstate it at this time.

Should a state bank have a surplus at the end of the year, it would be required by law to refund all of it to its depositors and lenders in accordance with their accounts. Should a bank show a loss, it draws from its liquidity fund which was set aside with the creation of the bank. This is sort of the not-for-profit answer to the free market, and best of all it is self-correcting through feedback. After a few years stability should be very high.

The main criticism to this system is what if lots of liquidity is suddenly needed. That is usually the case made for a Central Bank. My question would be to first ask why the need for massive amounts of liquidity if the above measures were already in place.

Last, I would be remiss if I didn't say none of this would be possible without a debt-free currency system, preferably with some kind of commodity backing, making it very unlikely that the value of the currency would take a sudden and drastic leap down (as is possible today on the floating currency exchanges).

I am finding it extremely difficult to go forward without involving more and more aspects of banking and monetary reform as they are so interwoven. Are you having that problem too?