 Do we need to change the system? Do we really need to have a financial system 2.0 and not to patch the old one? So the Prime Minister of Iceland has actually commissioned me to do our research into the matter with some economists, local economists, to research what role the depression reserve system played in Iceland's meltdown. And it's quite interesting the sort of preliminary results that I can maybe share with you is that in a 20-year period after the crash in 2008, banks created up to 20% per annum in an economy that was growing by just about 3% per annum. This could never end well. And another very interesting point is that the central bank really tried to contain it, really tried to use its tools, which is basically to raise the policy rate from 5% up to 18%. And also, and not so unclearly, it warned the banks about creating so much money. But to know our way, the banks actually continued to double the money supply until they hit the wall. So it really begs the question, do we operate under a radical system? Do we need to move to a less radical system? Would anybody here in the auditorium, would anybody like the idea of allowing banks to print money bills, to create coins? We now allow them to create the equivalence of this in electronic format. That's a radical idea. I would say we need to be a little bit less radical and a little less trusting. And this service that the banks are creating, or created for Iceland, in a miserable way and a very, very bad service, they were commissioned with the task of preserving the equilibrium and keeping a stable and good monetary system for the economy, but they totally failed. And at the same time, they charged a lot for it. So a preliminary results show that the service of providing the electronic one is not free. And we've been trying to estimate the amount that it seems to be up to 1% of GDP per annum, that they take as extra profit. And unlike here, where you have a very competitive banking sector, we have three big banks in Iceland, and 90% of the market is oligopoly. It's not a fully competitive environment where the profit is competed away. Which it could be in other markets. So they've been profiting handsomely from providing a very, very bad service. So it's very interesting sort of first results. And now we're looking into what solutions are there. Do we look at the solutions across the money, or do we look into the 100% money solutions or hybrids between there, or do we how to move forward? Maybe I should not have had the answer longer to tell you more later on. But it's many of the things that you said about we need a big, big crash to finally do the change. And I think we had ours in Iceland, and it is our responsibility as politicians to make sure that it doesn't happen again. We cannot contain the volcanoes. They go off as we wish, but we can contain the banking system. We should make every effort. Prosti, thank you. I mean, Allison, there's an alderman of the city. How do these sort of an hour-season proposals strike you? I mean, would this mean a fundamental change to how the city operates today? Well, I think it's clear to say it's a real challenge to the current system. And obviously I expect, and I hope there are people here in the audience from the main banks who can comment on it from their own personal point of view. Because I'm certainly not here to support any, in a sense, particular sector. But I am here to support how the city tries to support the financial services and the importance of that to the economy of London, the economy of the UK, the number of people employed, the contribution to the tax returns, et cetera. The financial services is so important that one has to see any kind of change or proposal to be considered very carefully and tested because any transition from this current system, if it's by a catastrophe because of another major crisis or because of a change of complete policy, would have a significant impact, the transition to people working and the whole way of life that we actually exist on. Let's not say it shouldn't be considered. But I must say it is a huge challenge, which I think would have a large amount of resistance. Ben, one of the two options that Martin outlined was an option that I think you have been promoting with banks, that they could be just acting as agents. Are you finding that that's an idea that's gaining traction or is it hard work? Well, a bit of both. It definitely is hard work to get people to consider these different ways of running the financial system. But one of the issues that Martin didn't get time to speak about is the impact on debt. And this, for me, is the main issue that's going to require us to change the system eventually. If you have a system at the moment where money is only created when people go into debt, and somebody takes that loan from a bank, that's the point where 97% of the money that we use is actually created. And what it means is if you want to keep your economy growing, you want to keep more money coming into the economy, then you rely on people taking on ever further, ever higher levels of debt. And we've currently got private debt, so there's household debt and business debt that is almost as high as it's ever been in history. And the growth policies of the government are really about, as Martin describes it, getting the credit machine going again. It's just pumping more newly created money into the system, but it all has to be borrowed. And if debt was what caused the financial crisis in the first place, it can't be that the answer is to get people to borrow even more. Now, as long as you rely on banks as the only creators of the money in the economy, that's the issue that we face. The potential of taking this power to create money back to the state is that the central bank or the Treasury can actually create money without requiring anybody to go into debt. So you can put new money into the economy that doesn't come with any additional debt. And that actually allows you to start paying down some of the existing household debt. It makes a banking system safer because it's less leveraged and it makes your economy more resilient because there's less debt in the system. And that's the issue that isn't really being discussed at the moment by policy makers or by economists to a large extent. Martin, I think Ben's probably just touched on the question I was going to ask you. But what would be the implications for the economy and the way it trades today? That's a very interesting question. I think Ben's put this very, very well. I mean, it's what I was thinking of in a different way of getting it when I talked about the original government created money, obviously replaces debt money. But when I was talking about a hybrid, you could imagine a system, for example. I'm not saying this is the optimal, I'd have to think about it a lot. But you could imagine a system in which you've decided for various reasons that there's a limit to how much debt back money you want because of, indeed, you have to control debt. And it's a very interesting question how that will go about. The government can create the rest of the money system directly, as you say. It technically, as it were, I'm not suggesting this, it could be done without 100% monopoly. You could imagine a hybrid system. In fact, as I've probably pointed out, effectively we had a hybrid system in the past because until really when I think the 70s and 80s, banking sectors here, it was in the US, had enormously high liquidity requirements, which amounted to, I can't remember the exact figures, something like 30% in the UK, I think, which amounted to, which meant, in other words, that the government could create money because that was needed by the banks to hold as their liquid assets. Of course, it depended precisely on what form these liabilities were. But you can imagine such, you can imagine such hybrids. The only other point I would make is that, and I think that's something that, well, effectively, I mean, just that's one point. The other point is that's what we've actually been operating the last six years. The central bank has created money, in fact, for a very long period in the last six years. Near all the monetary growth in our economy was generated by the central bank. The same was true in the US. People argued that this was immediately going to be inflationary, but that was absurd because the banks weren't lending. That was why they were doing it. I'm not saying that this is the optimal, but that's actually what happened. So we've operated with hybrid systems of this kind in history frequently. We could easily go back to it rather than relying on banks in full. And the only other point I would add, and I agree with Ben's basic point, it's really hard for me to believe that further leveraging of our economy would be stable. We're trying it, of course, but it's one of the reasons I am concerned that we might have another big crisis because the success of our current policy does depend on leveraging up the household sector particularly further. The government doesn't want to leverage itself, that's what austerity means, and somebody's going to have to, you know, our economy. We're not going to solve it, well, I will leave that aside. But so the, it is correct to argue, one of the arguments for doing this is to get away from the debt machine. So ladies and gentlemen, that's all of us. A question perhaps to Frosty and then Allison. I mean, what sort of political environment do you think has to exist for this level of change to be acceptable to the electorate? Well, I think, for example, the kind of environment that you have in Iceland where you had a recent crash. I think people to, you have to demonstrate that the current system is really flawed and really be interested in fixing it. One of the points that I thought maybe might be a little bit clear is that the incentives in the current system are completely wrong. For example, where people now fully believe that their deposits are state guaranteed in various ways. We're using liabilities private companies instead of money. So we're using the deposits as money. And these deposits are expected to be guaranteed fully by the state. It means that consumers, they are not interested in asking the bank how secure it is, but how risky it, how much interest does it offer on this kind of money. So the managers of the banks, they are getting the wrong incentives from the clients. They're always being asked to increase the leverage to create more returns and not to think about creating a stable bank. So the whole system is geared towards an incentive as to creating another crash. It's basically everybody in the banking industry being paid and to create a most risky bank possible until it fails. Therefore, while we have a system incentivized like this, even if people don't think like this, they're just, the incentives are like this. There is no pressure from the consumers to give a secure bank. Then we're gonna continue to see more banks fail and the governments have to come in. The politicians will have to make great apologies to the taxpayers when they go into the state coffers to save the depositors. Because there is no alternative other than to save the depositors. When people cannot access their deposits, they cannot buy necessities. You will have a rupture of society. Therefore, banks, private banks are creating our money and it's fully state guaranteed. And I think this is a very, very dangerous system that we have. We need to think carefully about it. Whether we, it's a very radical system to continue operating. I come from the software business. I'm not a politician. It's my first years here in politics. I have been a software entrepreneur. And when we find the work in the system that's this big, we really replace the software. We don't try to patch it. It's just too bad. So we make great apologies and we fix it completely. And what astonishes me as a new politician is the inertia and how willing people are to keep the old software going. Very, very bad software. Alison? Yes, Michael, I think your question was what political environment is needed in order to consider or make the change? And I think Frosty was right when he started to say that almost there needs to be some critical crisis, some complete meltdown or explosion in the case of icing perhaps. And because the problem is that what we're looking at is to say to people, do you trust the politicians in government to run your money system? I know Martin was arguing that there would be a central bank which would be independent, but then actually it would actually also be owned by the government. So I'm quite sure the independence has to be clear. But you either got politicians who are running your money system and people don't trust politicians that much, or you've got the bankers and the private sector running it which is what it is at the moment. And really, those aren't necessarily totally a great appeal to the general public. Obviously think tanks and lobbying groups and pressure groups like Positive Money will bring these ideas to the fore. And discussions like this will ensure that hopefully politicians and other people will be persuaded or he's able to consider. But I think that the political environment isn't ready at the moment. And I think it would be very resistant to something which I think seems to be so radical. Can I just interject? Because I think this is an incredibly important point. Because it interacts. We've been engaged essentially, and Andy Haldane's work again has made this so clear, what he calls a red queen's race between the riskiness of the banking system on the one hand and the extent of government guarantee on the other. This is a multi-century race. It's not just the last 30, 40 years. It's a multi-century race in which banking balance sheets have got bigger, banks have become more leveraged, and governments have found themselves more fully engaged. And the governments have been more fully engaged. And this is the core of what I was arguing last week. It's very, very important because it's central to understand this is the system today. And maybe the bankers themselves would rather not have it. So I'm gonna suggest a way out of it for them. Which also answers others' questions. Essentially, their liabilities are too important. So they can't be allowed to default on their liabilities. Improsti's absolutely great. No society. We've had approximately 140 major banking crises in the world since 1980, and in no case did any significant self-engovernment allow depositors to get cleaned out. It's just not on. Because their liabilities are so safe, they were guaranteed by the, or core liabilities are so important, they're guaranteed implicitly or explicitly by the state. And in the last crisis, at a crucial moment, I've described, on October the 10th, 2008, the central, the bank, the governments of the entire Western world guarantee the whole thing. It's an amazing thing to have done. Amazing thing to have done. Now, of course, there's a price to be paid for that because basic economics would save. Your liabilities are guaranteed and you're in a risk-taking business. You're gonna take a lot of risk and you're not gonna worry much about equity. That's why equity disappeared. So the government has said, well, we can't have that happen again. So what are we going to do? And the answer is, we're going to regulate you down to every staple in your business. And my friend Douglas Clinton, I've spent a lot of time, complains about this. Why are the banks being run by the governments? But they are. Why with governments have got systemic risk committees which are going to get more and more intrusive? Why are they interfering in their risk weights? Telling them how to do, breaking out their... Because they know they're running, essentially, the government's money. Now, so the only way out of that mess is to separate the two. I discussed that at length. It also has these other advantages. Now it seems to me the long run solution for the city is not to be engaged in, essentially, the government money business even though it gives you very nice balance sheets for certain institutions and actually to be engaged in trading activities broadly defined as we have in equities and bonds and other such securities in which the liabilities are structured in such a way that you can take the losses. If you can take the losses in the market, you're in the market. That surely is what the city used to be. Banking in this way was a trivial part of the business back in the 19th century. There was a lender of last resort function, but it was relatively, really was quite limited compared to what we have. So maybe the real answer to your question, apart from the complete meltdown of the financial system, and then we think again, and they came very close to doing this in the 30s in the US, really close. It's not interesting how close, though they went the last equal way instead. But perhaps part of the answer is, if you stay where we are, this is absolutely core point, you end up with a semi-socialised system and that is really horrible for the people operating in finance too, it seems to me. However lucrative it might be in the short run and it will make more sense for them to try and get away from it. And having a system in which the implicit liability fall on the state and they can do whatever they like on the asset side, I think that's over. Martin, just a quick question then. What we saw in the Western world was indeed remarkable in terms of government standing behind the banks. There was however, at least one exception, Cyprus. That is correct. And in Cyprus, I mean, I travel quite regularly to Cyprus. Depositors lost varying amounts of their deposits with the banks. I mean, it has absolutely destroyed trust in the government and the financial system. But didn't we see there perhaps a precursor of what could come with the next bay on out? Well, I don't think so. But this is an interesting possibility. By the way, Iceland also defaulted on its foreign liabilities, which was much more intelligent. But the... I think the Cyprus were worried about the Russians. No, it was more this. Cyprus is a very... I think Cyprus is the exception that proves the rule. I know Mr. Deisselblum believes it's the other way, but I'm gonna just make the argument. In Cyprus, the point was, it required a rescue from the rest of the Eurozone. The Cyprus government of Cyprus could not do the rescue. That's because it couldn't print the money. And it was not in great financial shape, so it couldn't borrow itself. So it needed a rescue funded by the rest of the Eurozone. If you're in the Eurozone, you have the disadvantage you don't control the central bank. So you're part of what you would normally do in this goes. And for two reasons, the rest of the Eurozone decided not to bail out Cyprus. The first reason is they didn't think it was in any way systemically significant, which they had, for example, thought about Ireland. And they were right, by the way. And the second was, they really didn't want to defend in their parliament, bailing out in full and taking risk on their book, the people who had deposited in Cyprus. I hope I don't need to elaborate further on that. So they let it go. I don't think that gives you any precedent whatsoever for what the German government or the French government or the Dutch government would do if the deposits in question were domestic. Mr. Deisselblum believes that he will be able, and indeed it's part of our own proposal in the Independent Commission of Banking, that there will be certain bail-in-able debt that would sort it out. But the truth is if a bank got into sufficient difficulties, you start having to write off deposits, uninsured deposits, which would include corporate deposits, and it would create a very, very, very big mess. And the likelihood, in my view, certainly it's a timing consistent promise that we economists like to say, the likelihood is that in a meltdown that affected core institutions in a core state, too big to fail banks, any one of the SIFIs, the globally significant financial institutions, they wouldn't let this happen. So I certainly wouldn't regard Cyprus as indicating any fundamental shift in what would happen in a true crisis. And that's the core of Tim Geithner's book. I mean, Tim Geithner's book, which is a very interesting book by the way, I believe, makes it very clear that as far as he's concerned, that he was right in the core of a pretty important government, they're not gonna let the system melt down if that's what they're facing. Thank you, that's very clear. Ladies and gentlemen, we need to move to the next stage in tonight's event. So I'm going to hand over to Richard and Fran, who are going to explain what comes next. But before I do that, could I ask you to thank the panel in the usual way?