Did you know that commercial banks create money out of nothing, and lend it to you at compound interest, and moreover insist that you pledge real assets for such loans? Let me repeat - banks create money out of nothing. So why not have our own municipal bank which creates money out of nothing and which will enable lower property rates, low interest home loans and low interest student loans for the benefit of all our citizens?
The myth, which private bankers maintain, is that they accept deposits and then lend these deposits on to borrowers, earning the difference between the higher and lower rates of interest. This is not the case. Banks lend on those deposits, which can be withdrawn by new borrowers either by cheque or electronically. In terms of the latest Basel III agreement, banks are only required to have share capital and reserves of 12%. The other 88% of loans and advances represent money created out of nothing. This is known as the fractional reserve system.
How we will benefit:
(i) The City of Cape Town currently has outstanding borrowings and bonds of R5,5 billion. A municipal bank would enable the redemption of these loans and the funding of all infrastructure programmes at zero interest. As a result of the municipality not having to pay interest and the bank’s profits, ratepayers will enjoy a permanent reduction of at least 15% in annual property rates, and future increases will be lower than the official rate of inflation.
(ii) A ratepayer who deposits for example R60 000 for a fixed period of 5 years, will receive a competitive interest rate of say 6% per annum and be entitled to a home loan of R500 000 at a fixed rate of 2% p.a. Remember that the municipal bank will create this money out of nothing. It will pay R3 600 p.a. on the fixed deposit and receive R10 000 p.a. on the home loan.
Currently, Capetonians who have home loans spend 52% of their income on interest and repayment of capital per year. A drop in the home loan rate from 9% to 2% p.a. would result in a substantial boost to take-home pay and a rise in overall levels of prosperity.
(iii) In order to assist all our young people in obtaining the best education possible, student loans for tertiary education will be available at a nominal rate of 2% p.a. Applicants will have to be South African citizens permanently resident in the city for at least 5 years, with those born in the city receiving preference.
A municipal bank will not only help to eradicate poverty, it will make Cape Town one of the most prosperous cities in the world. Are there any precedents? One may look no further than the state bank of North Dakota in the USA, which was founded in 1919. North Dakota is the wealthiest state in the USA, having full employment and is one of only two states reflecting a budget surplus.
STEPHEN GOODSON is qualified in all aspects of banking and currently serves on the board of the South African Reserve Bank, where he has been a director for the past 8 years.
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