As a comment on my posting “When Economics becomes sensible again” a reader has written:
” You say, ‘There is a vast imbalance of debt’. I wonder how you come to even think of the possibility of imbalance? Wherever there’s a debt there’s always a balancing credit, by definition – whether you’re dealing with money or anything else. But I’m sure you must have an answer . . .”
I replied: “Yes, I do have an answer and it is a very obvious one. A debt immediately starts acquiring a running penalty — interest payments — until it — and they — are all paid off.”
The reason why I’m also making this a separate post is that this actually puts the finger on what has been the greatest weakness in our financial systems both during the gold-standard years before World War I and afterwards — especially afterwards.
The Bank of England saved a major bank from bankruptcy in the mid-19th century but such was the furore afterwards — that it contradicted the terms of the Banking Act of 1844 — that it never did so again. When Overend, Gurney & Company, the largest commercial bank in the world, collapsed in 1866 the Bank of England did not save it. This caused a great deal of suffering among shareholders, depositors and bank workers but it was all over and done with well within two years and it had no repercussions at all in other countries.
But after World War I, especially after 1931 when this country left the gold standard, the Bank of England began helping finance houses and banks. After World War II, by which time hundreds of banks in the country had become the Big Six, they were deemed TBTF (‘Too big to fail’). After the 2008 Great Recession — as it is increasingly being called — the government fell over itself to save the Big Five. But it was one thing giving them enough cash over the fateful September weekend when the cash machines had to be ready for the Monday, it was quite another to then start feeding the banks with massive amounts of Quantitative Easing in order to get them to start lending again.
They didn’t do so — and are still not doing so — and although eminent and experienced advisors — e.g. Paul Volcker in America and Sir John Vickers in this country — have been calling for banks to be treated he same as every other business, it still hasn’t happened. The banks remain a ‘Moral Hazard’. And, as most advanced governments are themselves also deeply in debt, they won’t make an honest job of it until the debt imbalance is so great that it can’t be ignored any longer and the world financial system is in danger of crashing — again !