'It's coming to America first', sings Leonard Cohen, 'the cradle of the best and of the worst'. He is referring to democracy; it's democracy that is coming. 'It's here they've got the range and the machinery for change; and it's here they've got the spiritual thirst'. But what part of America is Cohen referring to? In the song he's referring to the U.S.A. and prophets are always right, of course. Nevertheless, our bet is on Cuba. Economic democracy will come to Cuba first (with political democracy in its wake). The U.S.A. will follow.
Along the road from the town of Guines to San Nicolas, a government wall-message reads: 'El sentido del momento historico es cambiar todo lo que debe ser cambiado'. Translation: 'The meaning of the historic moment is to change all that needs to be changed'. Amen!
Let's change the institute of interest, then. Let's change it so that productive investments will no longer be burdened by it, provided the borrower is an ESOP- or similar company (see Rules 1, 4 and 5 for safe money creation by the Central Bank). Cuba can lead the world in this, if its government still has enough spiritual thirst for such real revolutionary change.
What's a bet without risk?
When a bank fixes its interest-rate, basically three factors are taken into account:
1) The default risk;
2) Overhead and interest expenses;
The default risk is always there, of course. The borrower may not pay back. He may die or, if a company, may go bankrupt. This risk is covered as much as possible by requiring security ('collateral') for every loan, such as the retention of property, a mortgage or any other form of security. This in itself is prudent and quite legitimate. But it does not always cover the entire risk.
Now, again, it was Louis Kelso's genius to see that this residual risk can be calculated and then insured, just like any other risk can be insured. He called it 'capital credit insurance', but it might as well be called 'default risk insurance'. So, instead of paying interest, the borrower can pay an insurance premium to the Central Bank to cover the residual default risk. Now, this is not semantics. Insurance is not interest. In practice the premium would be no more than 2%, perhaps even as low as 0.5%. At any rate, as low
as possible, just enough to cover the risk. For it would be unjust for the Central Bank to pass this risk on to the taxpayer, as happens in the U.S. now with the bank bail-out.
Kelso further noted that the Central Bank of any country does not have to make a profit, as it is held by the State and maintained by the taxpayer. The same goes for overhead expenses, whereas the Central Bank in principle does not have any interest expenses as its core function is not to borrow money in order to lend it out. So, yes, Kelso did suggest that there should be some State-held (collective) institutions, such as the Central Bank. This is why the Cuban Central Bank can play a key-role in Cuba's transition and transformation. The vision is a prosperous, peaceful and free Cuba, leading the world in
financial/economic development. And all this in no more than 25 years. Again we say: 'You can do it, Cuba!'