The dream of owning a home, once a cornerstone of Australian society, is becoming increasingly elusive. Wages stagnate while housing prices soar, leaving many struggling to make ends meet. The financial system, designed to serve the people, now operates in the interests of a select few. This stark reality is the outcome of a grand experiment — the deregulation of the financial system — an experiment that has demonstrably failed.
The Failed Promise of Deregulation
The deregulation of the financial system, initiated in the 1980s, promised increased efficiency and competition. However, instead of delivering on its promises, it led to a dramatic expansion of the financial sector, fueled by bank financing to transfer existing assets rather than create new wealth. This expansion came at a significant cost to the real economy, with the financial sector extracting vast profits from productive sectors. The unintended consequence of deregulation has been the enrichment of the already wealthy, widening the gap between the haves and have-nots.
The concentration of banking power is evident in the decline of credit unions and mutual associations, which once accounted for 70% of the home loan market. Today, the big five banks dominate with over 90% market share. This concentration and capitalizing interest on loans have made homeownership increasingly unaffordable for average Australians.
Capitalizing Interest: A Sneaky Accounting Trick?
Capitalizing interest is a key mechanism by which banks extract wealth from borrowers. When a bank issues a loan, it creates new money, increasing the money supply. However, the corresponding debt burdens the borrower, obligating them to repay the principal plus interest.
Banks amplify their profits by capitalizing interest, debiting the loan account with the interest due, extending the loan’s life, and increasing the total repayment amount. When a loan is created, the bank puts new money into the borrower’s trading account. When the loan is debited with interest, the bank treats interest as part of the original loan and adds it to the principal. They create new money that should go to the borrower and take it for themselves as a capital gain belonging to the shareholder. Borrowers pay for the bank's capital gains.
To paraphrase the last paragraph — Debiting interest to a loan account is treated as a capital gain for the bank, creating new money while increasing the borrower’s debt burden. The borrower pays interest twice: once through the capitalized interest and again through regular interest payments. Capitalisation transfers wealth from borrowers to banks and their shareholders as a capital gain.
A Suggestion for the Reserve Bank Board
The Illusion of Capital Gains
The current financial system is built on the illusion that money can earn more money. This misconception is perpetuated by pursuing capital gains, often seen as a measure of economic growth. However, capital gains for one person frequently represent a loss for another. There is no net increase in wealth, merely a transfer of existing wealth.
The Australian housing market exemplifies this dynamic. Easy credit and government policies have inflated housing prices, forcing buyers to take on crippling debt levels. This debt burden then stifles economic growth by reducing consumer spending. The capital gains enjoyed by homeowners come at the expense of those who are priced out of the market or struggling to meet their mortgage repayments.
Towards a Democratic Money System
The failures of the current financial system demand a radical reimagining. We need a system that operates in the interests of the many, not the few; a system that prioritizes community well-being over individual profit maximization; a system that embodies the principles of fairness and balanced reciprocity. This is the promise of democratic money or cash.
Democratic money means everyone has equal access to money and receives the same value for each dollar. In a democratic money system, the power to create and distribute money is decentralized, shifting away from the current model where banks monopolize this power.
Imagine a system where new money is introduced into the economy not through bank loans but through direct distribution to individuals and communities. This new money could fund essential public services, invest in renewable energy infrastructure, or support local businesses. By empowering communities to decide how this money is spent, we can ensure that it is used to create real wealth and improve people’s lives.
The Principles of Elinor Ostrom and Governing the Commons
The principles of Elinor Ostrom’s work on governing the commons offer a valuable framework for designing a democratic money system. Ostrom’s research demonstrated that communities can successfully manage shared resources when they have:
- Clearly defined boundaries: Who is part of the community, and who benefits from the shared resource?
- Rules adapted to local conditions: What are the specific needs and challenges of the community?
- Collective-choice arrangements: How do community members participate in decision-making?
- Monitoring mechanisms: How is the use of the resource tracked and managed?
- Graduated sanctions: How are rule violations addressed?
- Conflict-resolution mechanisms: How are disputes between community members resolved?
- Minimal recognition of rights to organize: Does the community have the autonomy to govern itself?
- Nested enterprises: How are governance activities organized at multiple levels for larger systems?
By applying these principles to finance, we can create a democratic money system that is fair, sustainable, and accountable to the people it serves.
Permanent Asset Markets: A Practical Implementation of Democratic Money
One practical way to implement democratic money is through Permanent Asset Markets (PAMs). PAMs offer an alternative to the current debt-based system by allowing communities to monetize assets through shares in a community-owned company rather than through loans. This approach eliminates the need for interest payments and allows for the equitable distribution of profits among community members.
The implementation of PAMs can begin with essential services like housing. Permanent Housing Markets (PHMs) would allow individuals to purchase and sell homes incrementally by buying and selling shares in a company that owns the properties. This approach would:
- Make housing more affordable: By eliminating the cost of interest, PHMs would significantly reduce the overall cost of homeownership.
- Increase community control: PHMs would give communities greater control over the development and management of housing.
- Stabilize housing prices: By decoupling housing from the speculative forces of the market, PHMs would create a more stable and predictable housing market.
Steps to Establish a Permanent Housing Market
Creating a Permanent Housing Market requires a concerted effort from individuals, communities, and government. Here are some suggested steps to initiate the process:
- Recruit a Community: Bring owners, investors, and renters interested in forming a PHM.
- Establish Legal Framework: Register the PHM as a for-profit company to integrate with existing financial markets.
- Develop a Constitution: Define rules regarding cooperatives, companies, tenure, duties, and operational functions. Use the Ostrom principles as a guide.
- Ensure Flexibility: Allow for transferring people and homes to other companies without penalty.
- Specify Investment Returns: Define the return on investment and how the internal market for shares operates.
- Outline Share Purchase Rules: Specify rules for occupants to buy residence shares.
- Determine Service Provision: Decide how services will be provided and whether they should be provided by organizations using democratic money and operating as PAMs.
- Establish Confidentiality Rules: Define how information is verified and kept private.
- Collaborate with Other Groups: Work with other groups using democratic money to share knowledge, skills, and procedures.
A Netlogo Model for a Community Housing Market
Building a Better Future: A Call to Action
The transition to democratic money will not be easy. The current financial system is deeply entrenched, and those who benefit from it will resist change. However, the costs of inaction are far more significant. The growing inequality, environmental degradation, and social unrest we see today are all symptoms of a financial system that is out of balance.
By embracing democratic money and PAMs, we can reclaim finance for the people and create a more just and sustainable future for all. This requires a fundamental shift in mindset, abandoning the individualistic, profit-driven ethos that dominates the current financial landscape and embracing a more cooperative, community-oriented approach. It demands courage, persistence, and a willingness to challenge the status quo.
Here’s a roadmap for change:
- Policy Advocacy: Lobby governments to reform banking regulations, encourage simple interest loans, promote profit-sharing mechanisms and ensure electronic money operates like cash.
- Pilot Programs: Establish small-scale PAMs in specific communities and sectors to demonstrate their feasibility and benefits.
- Community Engagement: Conduct public education campaigns to raise awareness about the shortcomings of the current system and the potential of PAMs.
- Leveraging Existing Institutions: Partner with community banks and other like-minded organizations to support the development and implementation of PAMs.
- Government Support and Regulation: Seek government backing to provide a regulatory framework that ensures fairness, transparency, and accountability within PAMs.
By taking these steps, it is possible to create a more just, equitable, and sustainable financial system that benefits everyone.
To get another perspective on the ideas in this article, listen to a 15-minute AI-generated podcast generated by Google Notebooklm.
FAQ: Democratic Money and Permanent Asset Markets
1. What is the main problem with the current financial system?
The current financial system, heavily influenced by deregulation, has led to a concentration of wealth and power within the financial sector. This system prioritizes profit maximization for a select few at the expense of the well-being of the broader community, contributing to issues like unaffordable housing and a widening wealth gap.
2. How does capitalizing interest contribute to this problem?
Capitalizing interest allows banks to generate profit by charging interest and fees twice. This practice increases the borrower’s debt burden while simultaneously creating new money for the bank, further enriching the financial sector at the expense of borrowers.
3. What is the concept of “democratic money”?
Democratic money proposes a system where the power to create and distribute money is decentralized, ensuring equal access and value. It aims to shift away from a debt-based system towards a model prioritising community well-being and shared prosperity.
4. How can Elinor Ostrom’s principles of governing the commons be applied to finance?
Ostrom’s principles, which emphasize community-based management of shared resources, offer a framework for designing a democratic money system. These principles include clearly defined boundaries, adaptable rules, collective decision-making, monitoring mechanisms, and conflict-resolution processes.
5. What are Permanent Asset Markets (PAMs) and how do they work?
PAMs provide an alternative to debt-based financing by allowing communities to monetize assets through shares in a community-owned company. This eliminates interest payments and facilitates a more equitable distribution of profits among community members.
6. How can Permanent Housing Markets (PHMs) address the issue of housing affordability?
PHMs would enable individuals to purchase homes incrementally by buying and selling shares in a company that owns the properties. By eliminating interest and transfer costs, PHMs would significantly reduce the overall cost of homeownership and stabilize housing prices.
7. What steps can be taken towards a democratic money system?
The transition involves:
- Policy Advocacy: Lobbying for reforms removing capitalisation of interest and fees and creating new money by financing the buying and building of community assets.
- Pilot Programs: Implementing small-scale PAMs to demonstrate their feasibility.
- Community Engagement: Educating the public about the limitations of the current system and the benefits of PAMs.
- Collaboration: Partnering with organizations aligned with the principles of democratic money.
- Government Support: Seeking government backing for a regulatory framework for PAMs.
8. What are the potential challenges in implementing a democratic money system?
The deeply entrenched nature of the current financial system poses a significant challenge. Resistance from those who benefit from the existing system is expected. Overcoming these challenges requires a collective shift in mindset, embracing a more cooperative and community-oriented approach to finance.
