Frosti Sigurjónsson wrote an amazing report which teaches us how the Icelandic banking system worked before, during, and after the 2008 crisis, why the crisis happened, and how to fix the system. Frosti's solution is the "Sovereign Money System." The report is worth reading even for skeptics of such a system, since chapter 9 is dedicated to answering some of the big skeptical questions which might be raised.
The Sovereign Money System (SMS for short) is very simple in its outline. In this new system, the Central Bank of Iceland is the only institution that has the power to create new money. The amount of money to be created will be decided by the Money Creation Committee, and the allocation of the new money will be discussed in parliament.
The aim of the SMS is to guarantee the money deposited by customers into their transaction accounts. Those who would like to invest are welcomed to do so through the investment accounts. However, in that case the bank owns the customer's money, i.e. the customer has to take the risk. So if the investment fails and the bank is unable to pay back the initial investment + interest, the state is not obliged to bail out the bank. It is partly the customer's responsibility (for choosing the wrong bank) and partly the bank's responsibility (for choosing the wrong investments.) Debtors would also lose money and property since it is their inability to pay back that leads into this collapse.
In the SMS, it becomes much easier for the state to control the money supply, have price stability, and make the risk-takers take responsibility for the risks that they are taking. As Frosti puts it, one "fundamental aim of the Sovereign Money System is to reduce the risk of the power to create money being misused or abused for private gains" (p.78).
Another key feature of the SMS is that the newly created money goes to the government via the Central Bank of Iceland. The way this works is that the government sells interest-free bonds to the CBI and then puts the money into circulation. The fact that the creation and allocation of money are done by two different organizations is already a strength, but what is more, the fact that an increase in money supply directly increases the country's revenue is beneficial, too. Frosti suggests five different ways in which the government can distribute the additional money to the citizens. In each case, the idea is to put the money directly into the real economy as opposed to the speculative economy of assets, interests, etc.
A system like the SMS is indispensable for any country who wants to deliver a good social security system. Compared to the current banking system in Iceland, the SMS allows the government to substantially reduce spending on bond interests and increase its revenue. This allows the government to allocated a larger budget for social security, something which is very much needed in the current depressed and unequal economy of Iceland. Also, the SMS is more democratic and real-life oriented in that the government only supports those who are laboring and producing surplus-value in the real economy, while forcing speculative investors to assume full responsibility for the games that they choose to play.
In short, the SMS creates a safe haven for honest workers and keeps the players involved in casino capitalism outside its fence. I think this is a great idea and I really hope that Iceland will set this great precedent for other countries to follow. (It is too much of a tall order to expect anything like this system to be introduced in a country like Japan, even though Japan is in much more dire need of such a system compared to Iceland.) It might not be a flawless perfect system, but at least the principle which it aspires to uphold is clear, simple, and noble, and the details of this system seem much more practically effective compared to those of the current system.
