Many people assume that reforming the banking system to prevent commercial banks creating money (through the fractional reserve banking system) will hurt the financial sector as a whole. After the recent crisis, it might be natural to Wall Street or the City as ‘the enemy’. However, the truth is that pension funds, asset management firms, wealth management firms and mutual funds will all benefit from the reform.
This is significant because it means that while half of the financial sector may oppose the reform, the other half should be campaigning for it.
Why Do They Benefit?
The reform specifies that government should create and inject a debt-free money supply into the economy, in contrast to the current system (where all new money is created when banks make new loans and the loan is then spent and counted as new money).
This debt-free money supply makes it possible for us to pay down our debts (a feat that is technically impossible under the existing system).
As we pay down our debts, debt repayment starts to take up a decreasing proportion of our income, so our disposable income increases. When we have paid off credit cards, personal loans and (eventually) mortgages, our disposable income will be significantly greater. (Debt repayments currently soak up around 30-40% of the average person’s income).
Once the debts are cleared, this freed-up money can go into three things:
- The real economy (spending)
- Pension funds and preparation for retirement
- Savings (which will be used to fund loans by banks)
Considering that we have a looming pensions crisis (which has been completely overshadowed by the recent crisis but can be expected to start causing disruption in the next 5-10 years), people will need to put more money into their retirement provision – paying into pension funds or making their own investments in mutual funds etc. This amounts to a lot of new money flowing through the asset management industry.
Consequently, while the banking sector will shrink as a result of the reform, the asset management sector will grow. One half of the financial sector will oppose the reform, while one half will support it.