The modernised system would actually reduce the role and influence of the Reserve Bank. Currently its main purpose is effectively to prop up and enable the current scheme run by the banks, as well as manipulate interest rates. Post-reform, it would merely act as the provider of the payments system, and the secure holder of real money (through providing the Customer Funds Accounts, Investment Pools and Operational Accounts to banks). This reduced role minimises the possibility that human error or poor judgment at the Reserve Bank could lead to wider problems in the economy.
The Monetary Policy Committee would also have less power and influence over the economy. Although it would gain the power to create new money (within constraints), it would lose the power to set interest rates. The Reserve Bank currently tries to encourage banks to create money by lowering interest rates to get more people to borrow.
By lowering interest rates to encourage a small amount of extra borrowing, they also wipe out the interest income that many pensioners survive on. Then, when the economy is 'overheating' and they try to raise interest rates to stop new borrowers, previous borrowers (potentially the very borrowers who stimulated the economy out of a recession by going into debt) see their interest payments rocket and their disposable income massively reduced.
This is like using a sledgehammer to crack open a nut. Post-reform, the MPC would simply authorise the creation of the new money that they believe is needed to stimulate the economy, having a much more targeted effect without harming anyone else.
The money supply would be easily and precisely measurable. The current, real-time money supply could be publicly accessible on the Reserve Bank’s website.
The modernised system would make the financial sector less of a drain on the rest of the economy and more of a service to it. Contrary to what is commonly stated, the financial sector currently does not create much wealth - it merely extracts wealth from the rest of the economy. Our reform restores the financial sector to its proper role of facilitating the creation of wealth and value in the economy.
The creation of wealth and value in the economy is primarily achieved by entrepreneurs working with engineers, scientists and salt-of-the-earth working people – who were all educated and trained by teachers and lecturers – all of whom are kept in a state of productive good mental and physical health by nurses and doctors and the health system, helped along the way by the recreation and entertainment industries.
These are activities that add value to society, and a well-functioning banking system should enable (rather than hinder) these activities.
Lending and investment would be naturally channeled to entrepreneurs and productive businesses, rather than being used to create bubbles in the housing market and push housing costs out of reach.
The modernised system would remove the root cause of the recent house price bubble - endless creation of money and debt by the banking system. The 200%+ house price inflation between 1997 and 2007 has left households with a choice of either working for an extra 10 years, or accepting a significantly reduced standard of living throughout their lives.
By phasing out the national debt and withdrawing government bonds as an investment option, investors and pension funds would need to direct their money towards productive uses. As they start to lend to corporations at lower than the cost of borrowing from the bank, the banks will in turn be forced to find other borrowers, and will therefore start lending more to smaller businesses and entrepreneurs, stimulating the economy from the ground up.
The modernised system would ensure that we direct more money into socially useful activities, as decided through the decisions of thousands of consumers and savers (rather than the priorities of a few bankers).
Rather than pumping 60% of all new money (which is presently created by the banking system through the loan-making process) directly into the housing market (creating bubbles and pushing the cost of housing out of reach), the distribution of this new money could occur first through thousands of ordinary workers, who by the law of averages will make a better decision on which businesses should be supported (with their spending)