Tuesday, October 20, 2009

Three Prinicples for Honest Banking (3)

3. Banks should not record deposits on their balance sheet.

Modern banks record deposits as assets on their balance sheet. This is wrong. A bank is just a warehouse. A storage company does not record the furniture it stores for people who have gone overseas as an asset. If the owner transfers the furniture to another storage company, its business has declined, but it has not affected its balance sheet. It would want as much business as possible, but the value of the furniture stored would be largely irrelevant.

Similarly, a share registry is not concerned about the value of the shares for which it registers ownership. It is only interested in the number of companies that it has as clients. A bank would want to have as many as clients as possible. However, the size of the claims recorded would not matter to the bank.

A bank is recording an entitlement that belongs to someone else. The claim does not belong to the bank, so it is not entitled to include it on its balance sheet.

Modern money is just digits on a computer file. These digits are records of wealth that belong to other people, so they are not the banks assets at all. Digital records should not be recorded as assets.

More at Money.

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