John Tomlinson replies to Richard Coulson

First Published: 2011-11-26

Richard Coulson is a retired investment and private banker.  I have attacked the banking system within which he has worked honourably and successfully for much of his life.  I would expect nothing less from someone whom the system has served well over the past 40 or 50 years.   Over the past 37 years I have often seen successful people completely incapable of seeing or understanding the underlying reality of the system they operate.  Their excessive confidence in a system that has served them well for years, seems to blind them from seeing the ground shifting beneath their feet.  The arrogance that sometimes accompanies such excessive confidence often leads to both sarcasm and condescending overtones.  Richard’s letter is no different.   I have found it both disappointing and sad.

For years Germany was seen as the lynchpin of the European economy and the U.S dollar as the standard for the world economy.  Until yesterday Richard refuted my argument that all sovereign debt is now suspect, in part by referring to Germany, stating – quite accurately – they had never had difficulty placing their bonds.  Yesterday Germany shot his argument in the foot.  Germany failed to sell 1/3 of its bond issue.   He has now changed his original assertion.  The ground shifted under Richard’s feet.   I hope he soon sees the more complete picture for his own sake as well as the sake of anyone he advises.

U.S. government debt has already received one downgrade of its credit rating.  Questions are being raised about further downgrades due to the inability of the U.S. to come to grips with its debt problem.  Major American banks are now being subjected to new stress tests.  This is where Europe was two years ago.  America is not exempt from the laws of economics or the laws of gravity.  How long until the rest of Richard’s confidence is washed away?

China is now looking to other currencies for their reserves.  More and more people and nations (including China) are investing in gold rather than U.S. Dollars.

There seems to be no political consensus in  America for serious change to the system.  Why should there be when both Washington and Wall Street are dependent on bank lending –both commercial and central bank lending.  It cannot continue.  Whether Richard likes it or not, the markets will hold America responsible just as it has Europe.

The U.S. Dollar is heading down the tubes.  Richard says that no country can escape collapse if the U.S. fails.  Yet, during the massive failure of Lehman’s and the huge bail out of the U.S. banking system in 2007/2008, Canada, Australia, Brazil and China did not face the same economic difficulties of the U.S, U.K. and Europe.  Richard’s assertion simply does not hold water.

Please note, further that the wealthy in America, the UK and Europe did not suffer the same economic deprivation as the rest of us.  They still partied and lived well.

I repeat.  By making our banking system impervious to collapse, separating from the U.S. dollar and focusing on top-end tourism, we in the Bahamas can also survive quite well indeed.

Richard takes me to task for my claim that ownership of the money in bank deposits belongs to the banks and not depositors.  Yet, according to the law title does belong to the banks, not the depositors.  That is established fact.  He dismisses the legal position and redefines ownership in ‘practical’ terms as “having the right to withdraw demand deposits at any time.”  Well, having the right to do something and being able to do it are two different things – as more and more people are coming to see.  Richard’s is an extraordinary definition of ‘ownership’.

Why are so many American banks suffering the indignity of undergoing new stress tests?  They wouldn’t have to if there was no question about how safe deposits actually are.

Finally, Richard takes me to task about where Bahamian savings will be invested.  Unfortunately his habitual pattern of thoughts won’t let him think beyond the system as it is – dependent on debt finance.

“And what will banks do with these funds?” he asks.  “Surely not let them sit idle – they would have no income with which to pay interest on the deposits placed by the money-market funds.”  He immediately forgets that, under the proposed system, the banks will not do anything with deposits.  The deposits will not belong to the banks.  Deposits will belong to the individual depositors.  If individual depositors wish their funds to remain idle, they may.  Under the proposed system, inflation will not eat away at its value.

If banks wish to manage savings investments for depositors, banks will have to offer a fund into which savers are willing to place their money in exchange for shares in the fund.  These funds will not belong to the bankers.  They will belong to the share-holders, the very savers whom Richard seems to assume are incapable of making financial decisions.  There would be no circular movement.

Individual savers will be asked, where do you wish to invest your money?  Every saver should have his or her own choice.  It will not be the case that ‘bankers know best’.  They have proven that they don’t.  We have all paid the price through inflation and misallocation of resources.  The world is already awash with debt.

It’s time to change to a better system – a system where equity can play a more significant role and we can begin to build a collection of assets for future generations rather than to perpetuate and increase the burden of debt that is already stifling economic growth.  The last thing we need is to get the banks lending again.

We need to develop new equity markets for the benefit of savers, those needing money to build businesses and to provide that collection of assets for our children and grandchildren.


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