Basic accounting & Basic accounts

1. Basic accounting

The FT peddles the same old myth, that somebody can make a profit by trading with himself:

Changes to the state pension announced at the weekend will bring the exchequer a stealth windfall of almost £6bn a year from 2016-17, mostly paid by public sector employers and employees in the form of increased national insurance contributions.

The extra NIC deducted from public sector employees' pay packets (if they end "contracting out") is indeed a reduction in government spending, and HMRC can book an increase in receipts from public sector employees as extra income if they so wish but the extra receipts from public sector employers is matched by an equal increase in government spending to pay the extra employerer'sNICs in the first place.

It's an uphill struggle all this. A working assumption must be that most people really are as thick as pig shit (is pig shit actually "thick" or is it more runny? No idea.).

Pointing out that this is a self-cancelling transaction is about as futile as trying to explain that interest paid to HM Treasury on its holding of UK gilts is HM Treasury's income but it's also HM Treasury's expense because they are paying the interest in the first place. Or the fact that Housing Benefit claimed by social tenants is not government spending because the money is being paid by one branch of the government (DWP) to another branch (local councils) who then pass it back to HM Treasury anyway, who in turn fund the DWP and so on ad infinitum.
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2. Basic accounts

Lola alerted me to Douglas Carswell's bright idea on banking reform, which is pretty much the same as Positive Money's bright idea, and they say so themselves:

My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes.

Apart from the fact that the government do not want to reform banking in the slightest, as the UK government (like so many other governments, including but not limited to the USA and the EU) is run by, for and on behalf of bankers, this will not achieve anything:

1. Let's gloss over Carswell's fundamental error that credit creation starts with somebody depositing money in the bank. No it does not. It starts with the bank making a loan.

2. And let's gloss over the fact that banks would manage to circumvent the rules on a practical level, for example by lending out money taken for "storage purposes", booking the corresponding receipt as being for "investment purposes" and then slipping the money back into "storage" again before anybody notices, i.e. by the end of the each day's trading.

3. The point is, we do not need to mull over what would happen if customers were offered two different types of accounts, because we already know.

Twenty years ago, we still had the Post Office Bank and the Trustee Savings Bank, which were government run/sponsored, implicitly 100% government guaranteed and safe. And we had commercial banks, which also had some sort of government guarantee for deposits, but it wasn't very high (it was up to 90% of the first £30,000-odd until a few years ago, I've no idea what it was twenty years ago).

And twenty years ago, we had a lot of building societies, which were inherently safer than banks (because of what they did, how they did it and all the restrictions imposed on them).

4. So instead of making commercial banks offer two different types of accounts (which can be easily circumvented, see 2.) we could simply set up a new government bank (similar to PO or TSB) and offer people "basic accounts" which pay little or no interest, offer no overdrafts, which do direct debits and offer a debit card and not much else, and which are 100% government protected.

In this case, there would be no need to make commercial banks offer "storage purpose" accounts or to give a government guarantee for deposits with commercial banks because if people want that, they can put their money with the new PO-TSB. And if they want something a bit racier without a guarantee, they are free to open an account with a bank on whatever terms and conditions they please.

5. Will commercial banks continue to merrily blow credit bubbles and land price bubbles, like they always have done, with or without government guarantees for deposits, with or without there being safer types of investment, with or without all but the fiercest bank regulations? Yes of course they will. They'll keep splitting the zero and creating new loans and new "investment purpose" accounts.

6. Will people be happy with this? No of course not. During the next boom, people's urge to make a quick buck and get something for nothing (or the politicians desire to be seen to be giving the voters something for nothing) will take over, the PO-TSB will be privatised, demutualised, become a quoted company, over-trade and then go bankrupt again, the government will bail them out etc, and then the cycle starts again.

7. And during the next bust, the government will simply extend the deposit guarantee to all accounts again, or increase the eligible amount, just like they did this time.

As ever, the real problem here is the bankers (and landowners) tapping into people's desire to make a quick buck and get something for nothing, and the politicians just going with the flow.

People have to remember that they are the ones who end up paying for the quick bucks - for sure, all Halifax members got £1,800's of "free shares" in the 1990s (I've still got my contract note selling them on the first day) but we've ended up paying a lot more than £1,800 each to bail out Lloyds-HBOS. Its the usual vested interests who are getting richer from all this, not the likes of us common or garden voters.