Abstract
In the first part of this series, I demonstrated that the current fractional reserve banking system produces a fundamental conflict of interest between private banks and society. The aim of this second part is to describe three radical solutions to this interest conflict. The Chicago Plan and the Sovereign Money approach propose to prohibit private banks to create money by abolishing fractional reserve banking. The Modern Money Theory on the other hand tries to challenge the current economic systems as a whole based on chartalist ideas. All three approaches have serious deficits. However, they are complementing each other well. The Modern Money Theory solves the main problem of the Chicago Plan and the Sovereign Money proposal, whereas the latter two solve the major issues of the former. I will outline a synthesis of those three theories in order to overcome the interest conflict between the private banks and society.
Highlights
The collapse of the global financial markets in 2008 and the following recession has given us a unique opportunity to think about the efficiency of our current economic system
I have shown that independent of the theory, which explains this money creation process, issuing of money by private banks leads to a fundamental conflict between the risk-seeking bankers and the risk-averse society
The society on the other hand has an interest to limit the money creation by the private banks, because the excessive issuing of bank money increases the probability of bursting bubbles and bank runs with tremendous negative consequences for the real economy and the taxpayers
Summary
The collapse of the global financial markets in 2008 and the following recession has given us a unique opportunity to think about the efficiency of our current economic system. The money supply is endogenously determined by the demand for credit and is not anymore under the direct control of the central bank. A proposal with would only prohibit private money creation as described in the endogenous money theory would not solve the problem, because private banks could still take excessive risks in the money multiplier model through securitization. One argument could be that we give private banks this extraordinary privilege to create money, because they fulfil an important function in the economy. The too-big-to-fail banks are not fulfilling their functions for the economy They do not transfer the money from the depositors to the businesses who want to invest, because it is much more profitable for them to speculate with the depositors’ money Investors are more willing to finance their investment with debt, if prices (e.g. the value of a house) compared to the costs of borrowing the money increases faster, because they could always sell their investment with
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
