The Secrets of Bank Stability 

[May 12, 2012]

We believe the international elites really know what should be done in order to have bank stability. Why do we believe that? Simply because we believe there must be a conscience behind the development of the financial system into the disaster it is today. We can’t believe it can be this screwed up simple by chance. Some people have to have done this on purpose. But how did they do this?

If we could find these secrets, we would also know what development to reverse. So what are these secrets? Here are the top 4 we have found.

1. Destroy the bank reserves
Today a lot of people blame the banks for being so unstable. But how come the banks are by law required to have only minuscule reserves, reserves that would make any other business to go bankrupt?

For example, according to Wikipedia, the new Basel III is a lot stricter than the Basel II requirements:

“Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.”

 

We can contrast all this newspeak and single-digit-reserve-requirements with the old German banking act of 1873, where the following was the requirements for private banks:

“The bank is obliged to keep a reserve of at least 33 1/3 per cent of the total amount of its outstanding notes in German currency, imperial treasury notes, gold bullion, or foreign coins, the pound fine calculated at 1,392 marks; and the balance in discounted bills, which mature in three months, and which are indorsed by three, and in exceptional cases by two, persons known to be solvent.”

 

The rules were more or less the same for the central bank. So all banks had to hold 33.3% in what more or less were gold reserves and the rest in real bills. Real bills are short term bills of exchange, maturing within 3 months, called real bills since they where backed up with real goods and services on the way to be delivered to the buyer. So the law requires 100% real and highly liquid reserves.

Now, that’s quite far from the house of cards we call banks today, despite the Basel III requirements. Sure, the reserve requirements of today are minimums, but in practice they serve more as official targets. Try to get a bank concession based on the old 100% reserves of gold and real bills of the past and you’ll see what the authorities say. They simply wouldn’t want that, certainly not from a sizable bank.

2. Destroy the accounting system
The basis of an advanced economy is sound accounting. Without freely negotiated market prices, there’s no input into the accounting process (something pointed out by Ludwig von Mises in the 1920’s and admitted by communist theoreticians and communist practice). An accounting system can be called sound if it simultaneously works to avoid overstatement of assets and understatement of liabilities. The way to do this is through two simple rules:

The Law of Assets – an asset must be carried in the balance sheet at acquisition value, or at market value, whichever is lower.

The Law of Liabilities – a liability must be carried in the balance sheet at its value at maturity, or at liquidation value, whichever is higher.

 

This is not only very far from today’s accounting rules, it’s in fact the complete opposite. So you go figure why the profits, losses and bonuses appear so screwed up to the ordinary citizen.

3. Destroy the unit-of-account
In order to perform even sound accounting, you need a decent unit-of -account. In the days of hard money, the unit-of-account often was the same as the means-of-exchange. The default was often gold or silver. This was no accident. In e real World, the most stable unit-of-account known is gold, silver being the second choice. By eliminating the connection between gold/silver and the national currency, people were made to continue using the national currency as unit-of-account instead of gold/silver as before. For example, eliminating the connection between gold and the US dollar, made people instantly and indirectly stop doing their accounting in gold. Instead they did it in terms of the rotten promises/liabilities of fiat dollars.

The unit-of-accounts used throughout the World today are absolutely terrible. How could you perform anything close to decent accounting using such terrible unit-of-accounts? No wonder things are screwed up.

4. Destroy currency competition
Finally, in order to have people use such poor unit-of-accounts, there was a need to force people to use the fiat currency both as means-of-exchange and unit-of-account. They did this by banning all alternatives within the borders of the country and by creating national monopolist currencies managed by the central banks. This is necessary, since under currency competition, where people can freely choose the best money, the good money tends to drive out the bad (the reverse of Gresham’s law). This would of course be against the intentions of those that want to destroy the unit-of-account.

All this is what happened about 100 years ago in most countries. The freely competing currencies of national and foreign banks, almost all of them prudently emitting their own money, were suddenly banned to do so.
It all ended with the national banks getting their current monopolies. The only major change today is that they have tried to ban also the competition between national currencies by creating supranational atrocities like the Euro. The end of the last ounces of competition would be a global currency of a place like the IMF.

To sum up, in case you really want an unstable banking system, destroy bank reserves, destroy the accounting system, destroy the unit-of-account and then destroy the competition. Then you would have a really screwed up banking system. Like we do today. These are the main secrets we have found.

If you really are looking for a stable banking system, take these secrets and simply reverse them. It would take a couple of weeks or months to prepare, not more. Knowing the secrets is in knowing how to act. Will we see such changes? For the sake of the World and the future, let’s hope so.

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