Mansoor H. Khan

The Relevance of Abraham Lincoln's 17-Point Monetary Declaration

Please see the following article which incorporates some of your ideas:

seekingalpha.com/artic...

Toward a New Macro Economic Theory

W.E Heasley,

"(1) household’s now have to show their share of unfunded entitlements and national debt (the $185,000 to $740,000 figure depending on the size of the household) on their own personal balance sheet (Yikes!),"

You should count most of these liabilities as assets somewhere on U.S. households' balance sheets since most of these liabilities are to U.S. Citizens? Unless the quality of these assets is very low (that is liabilities are not expected to met).


On Oct 11 08:56 AM W.E. Heasley wrote:

> Interesting article/excellent points.
>
> As you round out your argument in the future, you might want to illustrate
> your argument by the following:
>
> (1) household’s now have to show their share of unfunded entitlements
> and national debt (the $185,000 to $740,000 figure depending on the
> size of the household) on their own personal balance sheet (Yikes!),
>
>
> (2) the new entry on their balance sheet from (1) above would sink
> many and/or impair most balance sheets,
>
> (3) with the new entry on the balance sheet from (1) above the consumer/household
> would quickly understand the size and scope of government is unsustainable.
> That is, the line item from (1) above needs shrunk as quickly as
> possible in order for the balance sheet to improve,
>
> (3a) if the item from (1) above is added to the personal balance
> sheet, the consumer/household would also understand that increased
> income alone will not solve the balance sheet problem,
>
> (4) that if the item from (1) above is added to the balance sheet,
> and assuming the household can somehow struggle along with such debt,
> when the household ceases to exist (decreased), the heirs to the
> household inherit a much reduced sum or they merely inherit debt.

Is Private Enterprise the Anti-dote to Capitalism, "Communitrianism"?

I have replied to your comments to my article (A Radical Solution for America's Insolvent Financial System).

A Radical Solution for America's Insolvent Financial System

I will now address your questions:
1) Where will the money come from to pay for compound interest? In my plan the money supply will be grown by the government by 3% to 4% annual rate. This is just a very simple formula. I am using the average annual historical rate of growth of gold money supply as my guide. Note that I am NOT proposing a gold backed currency. I am just using history as a guide to determine the rate of growth of the money supply when gold was used as a medium of exchange. The new money will simply be spent by the government for general expenses (military, courts, jails, food stamps, etc).
2) The new banks will be charging interest and making loans or equity investments as they wish with no one looking over their shoulder. The depositor's money will be fully at risk in the private bank (of course zero risk in the government bank). The interest rate will be set by supply and demand (no open market operations to play with short or long term interest rates to distort price signals as is done by the current FED). Over time the public will learn that the rate of inflation is low (1% to 3% if productivity increases average 1% to 2%). The public will not bid up asset prices as much in anticipation of inflation (eventually). A bank that is too loose in lending will go bankrupt and cannot be bailed out (this means fewer bubbles and less often). The banks will not have deposit insurance and that means a public that will be more discerning when handing cash over to a private bank. This in itself discourages risky behavior but does not eliminate it. Adam Smith's invisible hand will punish incompetent banks and greedy depositors.
3) I expect the interest rates to be low in my plan (eventually) because inflation expectations will be low (eventually). Also, it will be much more difficult for banks to create money (i.e., mismatched maturity lending which enables fractional reserve banking). The higher the mismatch in maturity between deposits and loans the more the probability that a bank will not be able to meet a redemption request (withdrawal request). This means that either the bank must keep very high level of reserves or not mismatch maturities between deposits and loans too much. This limits private money creation (but does not completely eliminate it).
4) As far as the probability of this plan being adopted I would say that review of world history shows stranger (good) things have happened in the past. The fact that I am typing this on this blog over the internet discussing this stuff proves my point. I suspect that bankers know the value of these ideas (since publishing my blog I have learned that these ideas have reached as far as being on proposed bills in Congress. See wealthmoney.wordpress..../). Banking industry is strongly resisting change in this direction. But remember Bankers are people too with minds and hearts and kids and grand kids. When enough of them are convinced that a radical re-design of the whole system is needed for a better world it will happen. In the meantime we can educate each other and the bankers and pray for change.


On Oct 03 11:31 AM swaps wrote:

> Interesting plan for an orderly liguidation and reorganization of
> the financial system.
>
> My only unanswered question is how do you create the additional dollars
> (inflation) that is a required component of any banking system which
> charges interest? Adnthe reorganized and new banks will be charging
> interest.
>
> Right now, the Fed's role is to continually create surplus money
> (inflation) so that wages can be increased to help borrowers (wage
> earners) keep up with the treadmill of compound interest.
>
> Since the creation of what CNBC empty suits call the "inflation fighting"
> Fed, the value of the 1913 dollar has dropped 95 pecent. When the
> Fed gets so stretched it can't inflate any more, as at the end of
> the realty bubble, its battle plan collapses into chaos.
>
> Your plan is so radical there is no way the banking establishment
> will let it see the light of day. And there is no way the banking
> establilshment will ever let the government just print money for
> its projects and needs, for then it would not be in hock to and under
> the control of the same banknig establishment, as is clearly the
> case today.

Putting Insolvent Banks Back on Their Feet

I agree. The systemic risk needs to be explained in detail What would happen?


On Sep 24 09:59 PM Joe Shareholder wrote:

> Let 'em fall. Who needs them. I'm tired of the word systemic risk,
> because it means nothing to me. Completely subjective. In other
> words, if your lobbyist is hot, you are too big to fail. It's open
> for interpretation as well as corruption. Nuff said.

Great Banking Confusion: Is There a Better Way?

Yves Smith of Naked Capitalism has pointed out that Irwing Fisher had proposed something similar in his book, 100% Money (Published in 1935).

Here is how my proposal is different:

Irving Fisher in his book 100% Money (1935) proposed that all banks be required to hold 100% reserves for money deposits payable on demand. In other words the government should outlaw fractional reserve banking. Fisher believed that booms and busts are a result of credit created by fractional reserve banking.

I propose that the government require commercial banks to provide 100% reserve account as one of the options. I do NOT propose that the government should outlaw fractional reserve banking.

Summary:

a) The 100% reserve accounts would just be another option that a public would have. I am in no way saying that banks should be forced to offer 100% reserve deposit accounts only just that they must provide it as one of the choices.

b) I also propose that many institutions absolutely necessary to maintain law and order must not take any credit risk with their liquid capital (utility companies, municipalities, states, hospitals, etc). The idea here is that civil law and order should not be disrupted even if several very large financial institutions fail at the same time.

c) I would also remove the protection of FDIC insurance for moral hazard reasons. But I would still have an FDIC like institution to facilitate a quick and smooth transfer of 100% reserve accounts to another bank from the failing bank. The idea here is to keep the payment system running smoothly so day-to-day commerce can continue to function even if a very large deposit taking institution fails.

d) The main objective is to preserve Adam Smith’s invisible hand in disciplining and destroying poorly managed very large financial institutions. I am not proposing that we write a more stringent Glass-Steagall Act or keep anyone from creating complex financials products (securitization, derivatives, etc.) or keep any bank from investing non-100% reserve bank deposits in risky and/or complex financial products. In fact, I would want most banking regulations repealed, as they are unable to protect us from systemic meltdown. Doing this will greatly lower regulatory compliance costs for banks.

e) I strongly believe that if we don’t let very large financial institutions die then they will eventually economically destroy us by mis-allocating huge amounts of capital. There should be no such bank that is too big to fail. But we also don’t want to descend into total chaos after a meltdown and not be able to maintain a basic payment system to conduct day-to-day commerce.

f) In short, our basic electronic ledger based payment system should function even if several very large deposit taking financial institutions fail at the same time without resorting to physical paper cash to conduct day-to-day transactions. Deposits in 100% reserve accounts will provide a basis to build new viable financial institutions if a meltdown occurs.

g) My proposal is a variation on what is sometimes called “Free Banking” with the 100% reserve deposit account as a required option for the public.

Is Private Enterprise the Anti-dote to Capitalism, "Communitrianism"?

We should foreclose on the banks. See article via link below:

A Radical Solution for America's Insolvent Financial System

seekingalpha.com/artic...

A Radical Solution for America's Insolvent Financial System

I can understand why a proposal for a new government institution bothers you but note that this government owned digital bank will not make loans (no credit decisions). It is simply a safe storage of electronic money (digital cash) and a clearinghouse for settling checks. If we don't do this then we will have much more private money creation via the process of fractional reserve lending by private banks (because they will have our deposits) to pyramid upon. We will one day (again) run into system wide insolvency. If most of the deposits reside in the proposed government owned 100% reserve bank then systemic failure risk is removed.


On Sep 24 11:10 AM Boot wrote:

> I agree that there needs to be an orderly bankrupsy. However, giving
> the government the power to be the digital bank doesn't give me warm
> fuzzies. I simply don't trust our current (albiet privately owed
> FED) and the inroads these oligarchs have made in the US govt at
> all levels. Who would run the GOVT bank, but the current banksters.
> We need to disband the FED and create seperation of Banks and State.
> We fought for religious freedom, now we need to do so in the market
> place.
> Aside: If we hadn't abandoned the gold standard in 1971, would we
> have been in IRAQ or Afganistan at all? Wars cost real money, but
> the leveraging of fiat currencies has put the US in several theatres
> that it simply couldn't of afforded otherwise. Again, banks making
> inroads on US foreign policy. Not a fan, and I don't say it lightly
> being US Army (ret).

Banking Industry Still Too Big to Fail

Here is how we can allow them to fail without massive destruction of bank deposits.

A Radical Solution for America's Insolvent Financial System

seekingalpha.com/artic...

A Radical Solution for America's Insolvent Financial System

Can you please give examples?


On Sep 25 08:37 AM Marli wrote:

> Mansoor's solution is carefully thought out, and well articulated.
> However, it completely fails to factor in the human element. The
> unintended result of this program would be crippling cprruption and
> widespread fraud.
>

Federal Government Must Take a More Aggressive Stance with Failed Financial Giants

Here is a plan for very aggressive way to deal with the insolvent banking industry:

Please follow link:

seekingalpha.com/artic...

The Rise (But Not from the Dead) of Zombie Banks

Here is way to deal with the zombie banks:

A Radical Solution for America's Insolvent Financial System

Please see link:

seekingalpha.com/artic...

Bank Reform: One Central Banker that Gets It?

"...risks inherent in the functioning of a market-based financial system do not again jeopardize the functioning and foundation of our economy"

There is another way to deal with this risk. We should separate the money storage and payment clearing side of banking from the loan making and investing side:

The (usually) transparent process of inter-bank lending works so well that most of the time we don't even think about it. This process has largely weaned the public away from physical paper money. Note that most money (about 90%) now exists only as entries on bank ledgers, backed by loans (debt). Also, note that possessing physical paper dollars is like having equity in the economic output of the United States of America, and has no credit risk associated to it. Physical paper money is not anyone's liability.

Bank deposit money, on the other hand, does have credit risk associated to it. That risk consists of the liability of the bank in which the deposit resides. Strangely enough, most of the time the credit risk of bank deposit money is lower than the theft and physical-loss risk of physical paper money.

That is why we use bank deposit money more than physical money. Through this (normally) transparent process of inter-bank lending, the banking system acts like a huge clearinghouse (essentially a giant ledger) which clears payments between its customers without the physical transfer of cash, and keeps track of who has how much money. Most money in the world economy is not physical (paper cash or gold) but logical (ledger entries).

To summarize: physical paper money is equity. Bank deposit money is backed by debt (actually that's not 100% true--reserves at the federal reserve system are also equity, essentially an electronic version of physical paper cash).

That difference -- that physical paper money = equity in the nation's economy, and that a bank deposit = debt (a bank obligation) causes great confusion.

We have become very comfortable with bank deposit money, without thinking much about the credit risk we are taking. Bank failures, when they happen, create confusion and chaos because the vast majority of businesses and individuals use checking accounts for convenience (they can write checks rather than handling physical paper cash) and they don't really think much about the credit risk that is normally associated with keeping their money (their most liquid capital) in a bank in a checking account. In fact, in most cases users of checking accounts do not want to take a credit risk. But in the current banking system there are no alternatives.

Is There a Better Way?
Consider the banking industry's contribution to society. The banking industry provides three major services to the public:

It provides a "safe" place to hold the public's most liquid assets (cash).
It acts like a giant clearinghouse (settling checks without physical paper cash transfer).
It is a source of loan money (banks evaluate the credit worthiness of borrowers). Think of "credit worthiness evaluation" as a service to society. If bankers do a poor job at evaluating credit worthiness they will end up mis-allocating economic resources.
What I am asserting is that it is possible to have a banking system where a customer would get benefits 1 and 2 described above without taking a credit risk, if banks gave people a choice between a regular account and a special "100% reserve account."

These special accounts, which are not available to the public today, would have no credit risk. The money in such accounts would not be lendable. There would still be fraud risk, of course. A bank desperate for cash might be tempted to "dip" into the reserves allocated to their 100% reserve accounts. Of course we would make such "dipping" illegal. The 100% accounts would be the electronic equivalent of storing physical paper bills in a safe deposit box at the bank.

Such accounts would have no credit risk (like physical paper cash) but would have the benefit of being used in electronic transactions and be accessible by personal checks. Of course, a 100% reserve account would not earn interest but would most likely have monthly maintenance fees associated to it (similar to a safe deposit box; it would also be very much like the reserve accounts that banks have with the Fed).

Such accounts, if widely used, would lessen the impact of bank failures on the economy in terms of a contraction of the money supply, chaos and confusion--but would not completely eliminate them.

Lending involves business risks (credit risks). If a customer were to choose a non-100% reserve account then he would be subject to losing his money. This would force the public to do some homework before handing money over to a bank (in essence, customers would need to consider banks' credit ratings, quality of management, etc.).

Of course, in this type of setup, a non-100% reserve account would probably have to pay a higher interest rate than the fractional reserve accounts do today. In fact if the public had a choice of 100% reserve accounts, there would be no need to impose legal reserve requirements on non-100% reserve accounts. There would be a clear separation between accounts that have a credit risk and accounts that don't. The accounts with credit risk would need to set their interest rates high enough to attract depositors.

If our banking system were set up this way, we would avoid huge systemic risks in the future, since a major part of the money supply would likely be sitting in non-lendable accounts. Many enterprises probably should not take any credit risk with their liquid capital (utility companies, municipalities, states, hospitals, etc.). In any insolvency or bankruptcy the 100% reserve accounts would receive priority, and unless the bank was fraudulently “using” these reserves the deposit owners of such accounts would never lose their money. If an electronic deposit account with no credit risk were available, then any individual or business choosing not to use such an account would be subject to losing their at-risk deposit. If such an alternative were available, then the depositor who chose the lendable money account would be warned that he or she could lose money if the bank became insolvent.

Once this choice is given to the public, the banks can then be allowed to fail without severely impacting the payment system which is needed to conduct day-to-day commerce. The only job of the FDIC would then be to insure smooth transfer of 100% reserve accounts to another bank.

I will go a step further and state that the availability of such accounts (non-lendable, 100% reserve accounts) should be mandated by Congress through force of law. Each business and individual should be able to choose whether they want to take a credit risk or not.

Putting Insolvent Banks Back on Their Feet

I agree. Let them fail. But we do need to separate the payment and clearing system from the loan and investing system. For details see:

A Radical Solution for America's Insolvent Financial System.

Please follow link:

seekingalpha.com/artic...

A Radical Solution for America's Insolvent Financial System

The article below explains why digital money (100% reserve deposit accounts) will be extremely useful:

The (usually) transparent process of inter-bank lending works so well that most of the time we don't even think about it. This process has largely weaned the public away from physical paper money. Note that most money (about 90%) now exists only as entries on bank ledgers, backed by loans (debt). Also, note that possessing physical paper dollars is like having equity in the economic output of the United States of America, and has no credit risk associated to it. Physical paper money is not anyone's liability.

Bank deposit money, on the other hand, does have credit risk associated to it. That risk consists of the liability of the bank in which the deposit resides. Strangely enough, most of the time the credit risk of bank deposit money is lower than the theft and physical-loss risk of physical paper money.

That is why we use bank deposit money more than physical money. Through this (normally) transparent process of inter-bank lending, the banking system acts like a huge clearinghouse (essentially a giant ledger) which clears payments between its customers without the physical transfer of cash, and keeps track of who has how much money. Most money in the world economy is not physical (paper cash or gold) but logical (ledger entries).

To summarize: physical paper money is equity. Bank deposit money is backed by debt (actually that's not 100% true--reserves at the federal reserve system are also equity, essentially an electronic version of physical paper cash).

That difference -- that physical paper money = equity in the nation's economy, and that a bank deposit = debt (a bank obligation) causes great confusion.

We have become very comfortable with bank deposit money, without thinking much about the credit risk we are taking. Bank failures, when they happen, create confusion and chaos because the vast majority of businesses and individuals use checking accounts for convenience (they can write checks rather than handling physical paper cash) and they don't really think much about the credit risk that is normally associated with keeping their money (their most liquid capital) in a bank in a checking account. In fact, in most cases users of checking accounts do not want to take a credit risk. But in the current banking system there are no alternatives.

Is There a Better Way?
Consider the banking industry's contribution to society. The banking industry provides three major services to the public:

It provides a "safe" place to hold the public's most liquid assets (cash).
It acts like a giant clearinghouse (settling checks without physical paper cash transfer).
It is a source of loan money (banks evaluate the credit worthiness of borrowers). Think of "credit worthiness evaluation" as a service to society. If bankers do a poor job at evaluating credit worthiness they will end up mis-allocating economic resources.
What I am asserting is that it is possible to have a banking system where a customer would get benefits 1 and 2 described above without taking a credit risk, if banks gave people a choice between a regular account and a special "100% reserve account."

These special accounts, which are not available to the public today, would have no credit risk. The money in such accounts would not be lendable. There would still be fraud risk, of course. A bank desperate for cash might be tempted to "dip" into the reserves allocated to their 100% reserve accounts. Of course we would make such "dipping" illegal. The 100% accounts would be the electronic equivalent of storing physical paper bills in a safe deposit box at the bank.

Such accounts would have no credit risk (like physical paper cash) but would have the benefit of being used in electronic transactions and be accessible by personal checks. Of course, a 100% reserve account would not earn interest but would most likely have monthly maintenance fees associated to it (similar to a safe deposit box; it would also be very much like the reserve accounts that banks have with the Fed).

Such accounts, if widely used, would lessen the impact of bank failures on the economy in terms of a contraction of the money supply, chaos and confusion--but would not completely eliminate them.

Lending involves business risks (credit risks). If a customer were to choose a non-100% reserve account then he would be subject to losing his money. This would force the public to do some homework before handing money over to a bank (in essence, customers would need to consider banks' credit ratings, quality of management, etc.).

Of course, in this type of setup, a non-100% reserve account would probably have to pay a higher interest rate than the fractional reserve accounts do today. In fact if the public had a choice of 100% reserve accounts, there would be no need to impose legal reserve requirements on non-100% reserve accounts. There would be a clear separation between accounts that have a credit risk and accounts that don't. The accounts with credit risk would need to set their interest rates high enough to attract depositors.

If our banking system were set up this way, we would avoid huge systemic risks in the future, since a major part of the money supply would likely be sitting in non-lendable accounts. Many enterprises probably should not take any credit risk with their liquid capital (utility companies, municipalities, states, hospitals, etc.). In any insolvency or bankruptcy the 100% reserve accounts would receive priority, and unless the bank was fraudulently “using” these reserves the deposit owners of such accounts would never lose their money. If an electronic deposit account with no credit risk were available, then any individual or business choosing not to use such an account would be subject to losing their at-risk deposit. If such an alternative were available, then the depositor who chose the lendable money account would be warned that he or she could lose money if the bank became insolvent.

Once this choice is given to the public, the banks can then be allowed to fail without severely impacting the payment system which is needed to conduct day-to-day commerce. The only job of the FDIC would then be to insure smooth transfer of 100% reserve accounts to another bank.

I will go a step further and state that the availability of such accounts (non-lendable, 100% reserve accounts) should be mandated by Congress through force of law. Each business and individual should be able to choose whether they want to take a credit risk or not.


On Sep 24 04:08 PM Socialism cannot compete! wrote:

> No. A government-owned bank? NO!!! The solution is not more government
> takeover! Too much government is what got us here!! Let failure
> happen, but let private capital pick up the pieces at bargain prices
> -- those who have been prudent and preserved capital will have incentive
> to continue to do so, and to thrive for it. Those who were not prudent
> will have to face the risk of continuing down the wrong path.
>
> And digital money? Please -- that is more of the same fiat-induced
> problem that makes it seem easy to expand via credit. We need to
> move to a system backed by hard assets, so that real value does not
> get lost. Credit bubbles exist only because the expansion of paper
> money is so far out of whack compared to actual hard goods. Some
> call this leverage. It's also the ratio of fake-to-real. When money
> is based on something real, it can't happen.