Posted on Liberal Democrat Voice By David Boyle | Published 27th July 2011 – 2:24 pm

You can’t use the phrase ‘perfect storm’ these days. It is a cliché. But how do you express, with sufficient clarity, the phenomenon of a financial tsunami and a financial hurricane happening at the same time?

Because we need to start asking how we might cope if the very worst happens – as well it might – and both the US government and key European nations default on their burgeoning debts at the same time?

The euro has been rescued by the latest bail-out, but an American default would unravel that and cause a second banking crisis, far more ferocious than the first – and on a scale that makes it quite impossible to bail out just by borrowing more money as we did before.

Going further into debt to tackle a global debt conflagration would also be like throwing petrol on the flames.

The danger is that, within a few hours of the crisis hitting, the world’s cycle of speculation, the $3 trillion a day that pours through the world’s wires, will unravel like Tinkerbell when nobody claps.

The question is urgent and of course the debates about what should be done have to be done quietly. We can only hope they are taking place, but – since financial regulation seems to have progressed little further than hoping for the best – it is a good bet that they are not.

Let’s not be under any illusions about the risk. Our economies are now interdependent, and our food and energy so interconnected by related just-in time delivery systems, that a major economic crisis on that scale and immediacy threatens us with serious social disruption. Possibly even mass starvation.

During the Far Eastern debt crisis in 1997, we saw TV pictures of hospital patients thrown onto the street at bayonet point as the health services shut down. Nearly a decade and a half later, we could witness scenes far more terrifying and closer to home.

So what might be done? It might hasten that moment of catastrophic loss of belief if our leaders were to start talking publicly about what they might do. But it makes sense for the rest of us to start making plans – and debating them too.

So here are the top three things we ought perhaps to decide now if the worst happens:

 
1. Create the money necessary to pay off the debts – and to create emergency liquidity in the system. This is not quantitative easing, which was simply snaffled by the banks, as it was when the same thing was done in Japan a decade ago. It is the modern equivalent of the Treasury bills printed by David Lloyd George to stave off a banking collapse in July 1914. This would work best by international agreement, so that the money is created by International Drawing Rights and credited to governments to pay off the debts, but it could also be done country by country.

 

2. Create emergency mediums of payment, as they have in places like Brazil and Uruguay – very low interest and no-interest currencies that can support local economies in the absence of national currency, issued through local government and other institutions. These will emerge anyway, as people turn to internet systems like bitcoin, but it makes sense for central and local government to provide more reliable local alternatives.

 

3. Create the social networks capable of supporting people to live their lives, and do so through existing public services – so that every surgery, police station, hospital and housing estate gets their own manned time bank (virtual infrastructure is not what is needed here, and will only benefit the articulate middle classes) to provide mutual support during and after the crisis.

But there is one thing that needs to happen now, above all else. We need to establish one central unambiguous truth: the future of humanity, the future of our communities, and of civilized human life, comes before the integrity of the banking system.

If the banking system collapses, because of the weight of debt, then the money must be created – as we know it can be – by the world’s central banks to settle the ruinous debts and to start again. That must happen even if it makes a mockery of the financial system we have built, and even if it risks inflation later.

That has got to be our slogan: life before banks. If that creates moral hazard, then it is better than complete moral collapse.

David Boyle is a fellow of the New Economics Foundation and the co-author of Eminent Corporations.