On election day, while making his victory speech, our new Prime Minister used the favourite quote of politicians, when he said,
The people have spoken This statement has several flaws.
Politicians love the idea of the people speaking, because it authenticates their position and authority. The idea that they embody of the voice of the people warms their hearts, but it is a nonsense. The people can never speak; they only get to tick; and then suffer in silence.
Sunday, November 30, 2008
On election day, while making his victory speech, our new Prime Minister used the favourite quote of politicians, when he said,
Saturday, November 29, 2008
Friday, November 28, 2008
An Australian military chaplain leading a memorial service in France on Armistice Day spoke of the young men who had sacrificed their lives resisting tyranny and fighting for peace during the First World War. It is time that we stopped believing this nonsense.
Labels: Armistice Day
Thursday, November 27, 2008
11 November is Armistice Day. On that day in 1918, the Great War came to an end. I was in Australia for Armistice Day this year and was amazed at the fuss that was made, particularly on television. When I got home, I was told that we had had the same fuss here.
I am amazed at the number of young people who are visiting the battlegrounds of Europe and attending memorial services. When I was young, men who had fought in the Great War were living among us, but Armistice Day almost passed without notice. Now they are all dead, Armistice Day is suddenly becoming a big thing. What is going on?
I sense that the decline of Christianity and the rise of materialism in modern life have robbed young people in the West of any transcendent experience. The death of transcendence has left an emptiness that needs to be filled.
Young people who would never visit an old lady who lives alone three doors down the street will stand in a war cemetery and weep for a great great uncle who died nearly a hundred years ago. Standing on a battlefield and pondering young men who travelled across the world to live though hardship, pain and death is the closest thing to a transcendent experience for young people who have never known anything but comfort.
Wednesday, November 26, 2008
The previous post described the situation under law, but there is no reason why the relationship between a bank and a depositor should be decided by judges. Banks are providing a service to their customers. The customers are entitled to demand whatever service they want. If enough customers demand a particular service, an astute bank will provide that service. If enough people demanded a different service, several banks might start to provide it.
Many people will be happy to accept the service provided by banks under the current legal arrangements. They are happy for the bank to take control of their money and use it as they please, provided they can get good interest and no fees on their cheque account. If that is what they want, that is fine.
However, many other customers will want a different type of account. They will prefer a bailment-type cheque account in which their money does not get transferred to the balance sheet of the bank, but remains the property of the depositor. Many customers do not want to become creditors of the bank. They want to be the owner of their money.
Modern banking law does not prevent banks from contracting with depositors to provide a bailment-type account. The money in this account would not become an asset of the bank. It would not be available for the bank to use. It would be stored in the same way as a storage warehouse stores my furniture.
When my salary goes into my cheque account, I want it to be available when I demand it. I do not want to the bank to treat my money as its own property. I do not want the bank to loan my money out to someone else. If the bank provides this service well, I am happy to pay a small fee for that service.
I do not want the bank to decide when I am not going to use my money. I am capable of doing that myself. If I do not need some of my money for a time, I will move it into a term deposit, so the bank can lend it out for a time, but I do not want the bank just deciding it can lend the money in my cheque account whenever it chooses. I do not want the bank treating my money in the way described by Lord Cottenham in my previous post. I want a cheque account that is a bailment. If enough customers were to demand this service, some innovative bank should provide that service.
We should stop talking about bailout of banks and start demanding bailment from banks.
Tuesday, November 25, 2008
If a deposit in a cheque account is a bailment, then the bank could not record the cash as an asset on its balance sheet. It could not use the cash for its own purposes.
During the 19th century, the British Law Lords ruled that a demand deposit is not a bailment. This decision has since between adopted by courts all over the world.
In a case in 1811, Sir William Grant ruled that money paid into a bank is not a bailment, but a loan. The banker is not a bailee, but a debtor (Carr v Carr). In a subsequent case, he said, “The money paid into a banker immediately becomes a part of his general assets and he is merely a creditor for the amount" (Devayne v Noble).
Lord Cottenham summed up the early decisions in Foley v. Hill and Others.
Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it . . . . The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal....According to modern law, a bank deposit is not a bailment, so the bank is entitled to record the deposit as an asset on its balance sheet.
I doubt that this is understood by most bank depositors.
Monday, November 24, 2008
Bailment is an important legal concept.
Bailment is the process of placing personal property or goods in the temporary custody or control of another. The custodian or holder of the property, who is responsible for the safe keeping and return of the property, is know as the bailee. The person who delivers or transfers the property to the bailee is known as the bailor. For a bailment to be valid, the bailee must have actual physical control of the property. The bailee is generally not entitled to the use of the property while it is in his possession, and a bailor can demand to have the property returned to him at any time (Lawyers.com).
A bailment is not the same as a sale, which is an intentional transfer of ownership of personal property in exchange for something of value. A bailment involves only a transfer of possession or custody, not of ownership. A bailment is created when a parking garage attendant, the bailee, is given the keys to a motor vehicle by its owner, the bailor. The owner, in addition to renting the space, has transferred possession and control of the vehicle by relinquishing its keys to the attendant (Free Dictionary).The main distinguishing feature of a bailment is that possession of the property is transferred to the bailee, but ownership remains with the bailor. Trusting my furniture to a warehousing company for storage is an example of a bailment. The warehouse has possession my furniture, but I am still its owner.
The second feature of a bailment is that the bailee is not entitled to use the property for their own purpose. The warehouse company is not entitled to use my furniture.
Sunday, November 23, 2008
Who should decide if money in a cheque account is not being used and is available for lending to someone else? In the modern system the bank makes this decision. However, the bank cannot read the minds of its depositors, so it does not know what they are planning to do with their money, or when they will want to spend it. Banks can only work on average behaviour and past experience. Neither are good predictors of the future.
The person who is best placed to decide whether money is available for lending is the depositor. They know their plans for the money. They know what they are planning to do. They are best placed to decide how much they need to hold back to deal with unexpected expenses.
If banks only paid interest on term deposits and there was a small fee for the operation of an account where the money is available on demand, then people would respond to these incentives. They would quickly identify money that they do not need immediately and transfer it into a term deposit that paid interest. The bank would then know that it was available for lending to others, without having to make guesses about the depositor’s intentions.
The banking system would function better if banks stopped deciding when money was available for lending and left these decisions to depositors.
Saturday, November 22, 2008
Some people think that I should not worry about the bank recording my deposit as an asset on their balance sheet. They do not under the nature of modern banking law. When a person deposits money in a bank, they change from being an owner of an asset into a creditor of the bank. They give up a property right in exchange for a contractual right. They swap the ownership of an asset for a promise to receive repayment on demand.
Owning an asset is generally better than being a creditor. If I get a 3 year loan of $30,000 from General Motors, I can buy a new truck. My balance sheet looks like this.
Before making the sale, the truck was on the General Motors balance sheet, as part of its inventory. Once they have sold the truck to me, it becomes my asset. I can drive wherever I like in the truck. I can paint it bright blue, if I choose. General Motors have lost control of the truck. They cannot control its use it any more.
General Motors has swapped the truck for a credit contract for the money that I have borrowed. They cannot demand it back until the three years are complete. A contractual right is less certain than a property right. When they owned the truck they knew exactly what they had. The credit contract is more risky, because they cannot be certain that they will get their money back when it is due. I may get into financial trouble and be unable to repay the loan. The bank has the uncertainty of a credit contract, whereas I have a property right in the truck. The one holding the property right is in a better position than the one holding the credit contract.
In the same way, holding cash provides more security than holding a credit contract. Being a creditor of the bank is not the same as being the owner of cash. If I demand repayment and the bank fails to pay me, I cannot charge it with theft. All I can do is sue the bank for breach of contract and demand payment of damages. If the bank defaults, my contract right is converted into a claim in bankruptcy. I have to line up with other creditors and take my chances.
All that a bank depositor “owns” is the right to enforce the bank to keep its promise. I believe that most people want better security for their money. We need banks that offer a different option.
Friday, November 21, 2008
Before assuming that Bank No 2 described in my previous post, read this example.
If John returns from overseas and puts $10,000 in his check account, the balance sheet of the bank shows an increase of $10,000 under cash. If John were the first client of the bank, its balance sheet would look like this.
Assets Cash 10,000
It is true that the bank also records a liability to John. However, because the bank has control of the cash, it has a stronger position. John has become a creditor of the bank, so he is now very dependent on the bank honouring its obligations.
If the bank thinks that John is unlikely to withdraw its money, it may make a loan to Pete. Its balance sheet would then look like this.
Pete buys a truck from Bill, who deposits the cash he received in the bank. The bank’s balance sheet now looks like this.
The banks cash to asset ratio is fifty percent, so the bank now complies with the Basel Accords. It easily meets the standards set by governments all over the world.
Despite this compliance, we now have a strange situation where the bank only has $10,000 cash, yet both John and Bill think they have $10,000 in the bank. If they both try to withdraw their cash out at the same time, they will not be able to get it. The bank cannot call in the loan from Pete, because he no longer has the cash. He has brought a truck.
Bill and John’s cash is not lost, but they cannot get hold of it when they demand it. The best the bank could do is to give $5,000 to both Bill and John and make them wait for the rest of their money. The bank could force Pete to repay his loan, but if he has to sell the truck quickly, he might only get $5,000 for it. John and Bill would then be in trouble, as one of them would have lost $5,000.
Thursday, November 20, 2008
Imagine two banks.
Bank No 1 says,
We will store your money and keep it safe. We will not use your money as if it belonged to us. We will deliver it to any person, as you instruct us. To cover the cost of providing this service, we will charge a small monthly fee, but you can be sure that your money will be here when you want it.Bank No 2 says,
We will look after your money for you and we will deliver it to anyone according to your instructions. However, if we see that you are not using your money, we will lend it to someone who can make use of it. The interest will compensate you for the risk.Which bank would people choose?
The risk you run is that when you want your money, the person who borrowed it may not have returned the money back to us. We will have to borrow the money from some else to repay you, so you may have to wait to get your money. If for some reason a whole lot of people all decide to withdraw their money at the same time and there is a run on the bank, many of you could lose your money. This risk is unlikely and the benefit is that you will have no fees.
I do not care which bank people would choose. They can work out the risks and the benefits and do what is best for them. If they prefer the cheaper option, they are free to choose it, provide that they do not expect me to rescue them, if things go wrong.
The problem today is that we do not have a choice. Most people think that they are dealing with Bank No 1, whereas there bankers believe they are Bank No 2. There is a dangerous disconnect between the understanding of risks and expectations.
Monday, November 10, 2008
Many commentators are urging greater regulation of the banking system to prevent future banking crises. These efforts will fail, because they do not deal with the basic flaw with the modern banking system.
When I give some share certificates to a courier to deliver to another person, the courier company does not claim ownership of my shares. They do not add my shares onto their balance sheet as an asset, because they realise they belong to me.
When I put some of my goods in a warehouse for storage, the warehousing company does not claim ownership of my goods. The goods they are storing are not recorded on their balance sheet as their assets. They realise that they goods in storage still belong to their owners.
Banks are in the business of storing and delivering money. I store my income in a cheque account until I am ready to spend it. I write a cheque on my account to get the bank to deliver money to a person to whom I owe money.
Although they are in the business of providing delivery and storage services, banks do something odd with the money that is entrusted to them. They claim ownership of the cash that is put into cheque accounts and other demand deposits and include them as assets on their balance sheets. If they think that I will not use my money for a while, they will lend it to someone else.
This creates a strange situation where I think that I own the money in my bank account, but the bank also claims to own it. The only word to describe their behaviour is fraud. Governments everywhere have legitimised this theft.
I think that I can spend my money when I choose, but the bank has most likely lent it to someone else, who has already spent it. This is the basic flaw in the modern banking system. It creates a system where two people end up owning the same money.
This basic flaw is the reason for bank runs in troubled times. It is the reason why banks can be highly leveraged (the cause of the current crisis). This flaw is the reason for the credit multiplier that has exaggerated the effects of the credit crunch. Regulation will not eliminate these problems, because it will not deal with the basic flaw.
The only solution is honest banks, which start treating money entrusted to them with the same integrity as courier companies and warehousing companies. If we demanded that all banks act in this way, most financial crises would disappear.
More on this topic here.
Labels: Credit Crunch
Sunday, November 09, 2008
Today is election day in New Zealand. The speeches are finished and the bribes are on the table. All that remains is for the votes to be counted, but one vote counts more than all the rest.
Who did God vote for?
Nebuchadezzar was the most powerful ruler in Mesopatamia, but when he lost God's vote, he ended up eating grass,
until he honored and glorified him.
His dominion is an eternal dominion;I doubt that God has voted for any of the people wanting to be our leaders.
his kingdom endures from generation to generation.
All the peoples of the earth are regarded as nothing.
He does as he pleases with the powers of heaven and the peoples of the earth.
No one can hold back his hand or say to him: "What have you done?"
What is the future of a nation when God votes against all its potential leaders?
At least we are good at growing grass in New Zealand!!
The kings of the earth take their stand.
and the rulers gather together
against the LORD and against his Anointed One.
The One enthroned in heaven laughs;
the Lord scoffs at them.
I have installed my King (Psalm 2:2,4,6)
He has brought down rulers from their thrones
but has lifted up the humble.
He has filled the hungry with good things
but has sent the rich away empty (Luke 2:52,53)
Thursday, November 06, 2008
During his acceptance speech, Obama Barack talked about the diversity of people and then said,
We will be the United States foreverThis is not true. The time will come when the American people will give up on the United States to become part of the Kingdom of God. They may choose this willingly, or the united states will be swept away by chaos as the Kingdom emerges.
Labels: Kingdom of God
Listing to the euphoria in the United States, I can understand the excitement their would have been in Israel, when the finally got a king. If they had listened to Samuel's warning (1 Sam 8), they might not have been so excited.
Wednesday, November 05, 2008
- America did not singlehandly win World War 2 war. On a per capita basis, New Zealand had twice as many casualties as the United States. However, the real price for the war was paid by the Soviet Union with 20 million deaths. It was the eastern front that broke Hitler, not D Day. The Russians had effectively defeated Hitler, before D Day had even begun.
- The real winner of the Second World War was Stalin’s Russia. He gained control of most of Europe. The winner in the East was Communist China. Claiming a victory, but leaving warlords and dictators in control seems to be the American way.
- In the parts of the world where America gained most control, West Germany and Japan, the kingdom of God has gone backwards. The problem is that that pushing the American way is not the same as preaching the gospel. When I visited South Korea recently, I saw far more evidence of the American spirit, than I saw of the gospel. In contrast, the numbers of believers have increased in the Soviet Union and China.
- America financed the war and supplied most of the military equipment, but it prospered through doing so. The war created the military industrial complex that is so powerful in America today.
- The common claim that NZers would be speaking German, if the US had not come to our rescue is a canard. Even if we had been conquered, the gospel might be more effective than if it is now.
- God does not use nations to establish the Kingdom of God. He does not use military power to build his Kingdom. He will advance his Kingdom through the Holy Spirit working in his church.
- I do not assess any event by whether it advanced democracy or freedom. My single criterion for assessing an historical event is whether it creates conditions that advance the kingdom of God. Looking at modern Europe, it is clear that the Second World War did not advance the Kingdom of God.
Tuesday, November 04, 2008
Patrick Buchanan takes a similar view in Churchill, Hitler and The Unnecessary War: How Britain Lost its Empire and the West Lost the World.
Monday, November 03, 2008
I recently heard an interview with Nicholson Baker, an American novelist and author of Human Smoke: the Beginnings of World War II, the End of Civilisation. He has studied newspaper commentary on the war and has some interesting thoughts about it. He challenges some widely held beliefs about the war.
Sunday, November 02, 2008
Several generations must pass before a war can be assessed objectively. My parents thought that the First World War was a noble cause. They had to believe this, because their fathers had fought in Europe. Now we are able to assess this war more objectively.
When I studied the causes of World War 1 at high school, it quickly became obvious that the First World War was a costly and pointless war. The whole thing was a great mess. The leaders of Europe blundered into war, with no understanding of what it would cost and what they hoped to achieve. The First World War is now widely viewed as a terrible mistake.
The accepted wisdom is that World War 2 was a good war. Hitler was going to take over the entire world. If we had not won this war, the entire world would be speaking German and greeting each other with “Heil Hitler”.
This caricature is even sharper in the United States. Americans rescued the foolish Europeans by defeating Hitler and making the world safe for democracy. Walter Lind sums up the common view.
At present, most Americans know only a comic-book version of history, one in which Germany deliberately started both World Wars as part of a drive to conquer the world, a drive stopped when valiant American armies defeated the German army. And, oh yes, some Brit named Churchill beat the Luftwaffe in the Battle of Britain. Thanks to the victories of the freedom-loving allies, we now live in the best of all possible worlds, where everyone can be a "democracy"Not only is this view widely accepted among Christians, it is used as a justification for the just war theory. World War 2 is the good war that proves that Christian militarists are right.
We are now beginning to get a clearer view of the Second World War. Sufficient time has passed for a more objective evaluation of the war to emerge. Two recent books that will upset some people, contribute to better understanding of the causes and conduct of this war. When the dust settles, I believe that we will be less certain that this war was a good and just war.