Mr. Tomlinson has given, as I expected, a vigorous rebuttal to my response to his Nassau Institute presentation. I should make clear at the outset that I have never been associated with a typical commercial bank, so I cannot be charged with any long-time professional loyalty to entrenched banking practices. I am something of a gad-fly, all in favor of new approaches, but they must be realistic.
I agree with many of his points. Germany has shown it is not impervious to debt malaise. It’s quite true that banks in Canada, Australia and Brazil (and The Bahamas, for that matter) have not suffered the catastrophic losses and required the bail-outs of US or European banks.
But why? Not because they adopted the extreme re-structuring solution proposed by Mr. Tomlinson. I believe those strong banks still hold plenty of loans. The difference is that they are generally good loans, made with traditional l bankers’ prudence and subject to effective regulation. But in the US, and to a certain extent in Europe, prudence was replaced with greed and incompetence, and regulation was woefully lacking. These were serious failings with dreadful consequences, but gradually and painfully they can and will be corrected.
I do not think I showed any arrogance or sarcasm to Mr. Tomlinson, certainly not intentional , in trying to demonstrate why his re-structuring proposal, well-intended though it may be, simply will not work.
Consider the immediate consequences. Possibly as much as $4.7 billion of savings deposits is to be withdrawn from our Bahamian banks for return to customers. How? These deposits presently support loans – mortgages, personal car loans, home improvement loans, working capital loans, business expansion loans. Will the banks abruptly declare these loans to be due and payable and call them for immediate re-payment? Economic chaos would result.
And consider the consequences for the bank customers who suddenly get back their savings deposits. Mr. Tomlinson says they will now be able to use the cash for investments freely chosen by them. That’s an admirable principle, but where in fact will they be able to invest? In our economy, only a small fraction of that $4.7 billion could find a home in equities that would be acceptable to the former savers. The vast majority of savers will simply seek something similar to their interest-paying deposits – letting money sit idle is hardly a realistic option. The alternative must inevitably be some form of money-market fund, which will in turn face the same problem of where to invest. Government or corporate bonds or notes?- not enough. Commercial paper?- we don’t have any. Where else, if not right back into bank deposits?
If there is some flaw in my analysis, I would be delighted if Mr. Tomlinson could show it to me. It looks to me as if we are stuck with our traditional deposit-taking, lending institutions. Which will be fine if, as in Canada, they operate under old-fashioned, prudent banking principles and tough regulation.
Finally, I comment on Mr. Tomlinson’s objection that a bank depositor loses “control” over his money. Is it any different if you subscribe equity shares in a company? The company can use your money any legal way it thinks fit. And it’s often harder to sell shares than withdraw a deposit, of which $50,000 are insured in The Bahamas.