Can Solving the Financial Crisis Be This Simple?

Since my earlier blog poston the current crisis, I have been digging into the analysis and solution proposed by a group whom I call the “Fiat Money/Full Reservists”, or FM/FR people. These are critics of the present money and banking system who are NOT gold bugs insisting on “solid money, backed by gold”.  (The gold bugs are the most numerous and vociferous critics of our present money and banking system; their position has been well countered by many mainstream economists.)

Instead, the FM/FR folks propose a disarmingly simple solution to our financial crisis: buy back our national debt with Treasury-issued "fiat" money AND simultaneously increase required banking reserves from 10% to 100%.

 

In 1 or 2 years, we would:

1. Have no National Debt. It would be extinguished, without inflation (the inflationary effects of issuing fiat money would be offset by the money CONTRACTION caused by raising reserve limits for banks;

2. Accrue no more interest on that debt, thereby eliminating the annual deficit (now about equal to interest on the Debt).

3. Have installed a SUSTAINABLE full reserve banking system– as championed by Ben Franklin and which prospered for many years, until Hamilton and the fractional reservists won out and sent us in the wrong direction.  Fiat money (Greenbacks) issued by the government, not banks, is how Lincoln successfully financed much of the Civil War.

4. Escape the current economic mess, which may well be the final collapse of the ultimately unsustainable 300-year old private fractional reserve banking system.  Fractional banking can prevail only with ever increasing levels of debt. It is doomed to collapse when creditable borrowers can no longer be found, as now.  (I thought unqualified subprime borrowers were the final dregs, but Paulsen on November 14th called for increased consumer credit card debt.)

Here's the best of what I have found on all this so far on the Web:

 

An eye-opening video expositionof our money and banking system. Watch this first.

 

Ellen Brown’s Web site around her fascinating book, “The Web of Debt”. Read the Introduction and Chapter One on her site.  “The Wizard of Oz” was all about money and banking?  Who knew?  In her book, available on line, Ellen advocates the FM/FR solution, and even argues for socializing much of banking.  Were that to be done, she argues, the government, rather than banks, could collect interest for lending activities, and that income would enable elimination of the income tax.  In all: no national debt, and no income tax.

 

A very informative mini-series video is available free, and is also purchasable as a DVD. This video and the money masters Web site http://themoneymasters.com reveal US history through the lens of money and banking conflicts once at the forefront of US politics and now almost unknown.  They then prescribe the "cure" for our ills: fiat money and full reserve banking---FM/FR. 

 

Stephen Zarlenga's American Monetary Institute is the foremost institutional advocate of Fiat Money/Full Reserve. Note Kucinich's Nov. 4 victory speech excerpt on this site. (Dennis first met his wife Elizabeth when she accompanied Zarlenga to his Congressional office in support of FM/FR).

 

Also see the Wikipedia articles on Full Reserve Banking, Fractional Reserve Banking (less good), and Monetary Reform.

 

I am troubled that the Fiat Money/Full Reserve advocates are almost all "amateurs", not front line academic economists (except Milton Friedman(!)), and some veer off into conspiracy theories. But I have not been able to find a cogent refutation of their analysis or of their proposed solution, which sounds too good to be true. 

 

Is it? I need help understanding why it WON'T work.

 

Please let me have your thoughts and findings about all this.