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The too big to save banks

By Dark Politricks

I have just watched an interesting BBC documentary by Robert Preston about the banking crisis called “Too Big to Save”.

The premise was basically that our financial system is in such a mess and our country so loaded up with sovereign debt that if another crisis came along, which according to the programme is very likely, the banks are too big to get bailed out as there isn’t enough money left to do so even if the desire was there to do it.

As well as examining the fundamental problems inherit in our banking system he also looked at the history of recent banking and what led up to the recent crisis as well as revealing how little the public really understand about banking and how money is actually created.

Most people still seem to believe that banks only lend out money that they have deposited from savers but this couldn’t be further from the truth. Due to the wonders of fractional reserve banking and international agreements such as Basel that determine the levels of reserves banks require they can basically lend out £90 for every £10 they own.

Also because most money in circulation is now digital banks literally have the ability to create new money from thin air by entering a few keystrokes into a computer.

Whereas there are laws that determine who can legitimately create coinage, e.g the Bank of England, there is nothing in our debt based monetary system preventing banks from creating new digital money by issuing new debt to customers. They do this through simple accounting methods because whenever someone takes out a loan from a bank new money comes into existence and is deposited into someone else’s bank account as new digital money. Once this new money has been deposited in one account the bank can then use the laws of fractional reserve banking to multiply the money supply again by issuing more loans and so on and so on.

This has been taken from the excellent campaign for positive money site which aims to overhaul our current banking system and the site explains it very well.

The ‘Rules of Money’

Under a fractional reserve banking system, there are two ‘rules of money’:

  1. When a bank makes a loan, it increases the amount of money in the hands of the public (by increasing the total quantity of digital bank deposits)
  2. When a member of the public repays a loan, it reduces the amount of money in the hands of the public (by decreasing the total quantity of digital bank deposits)

Consequently, through excessive lending between 2000 and 2008, banks were able to double the money supply in just 7 years – an increase in the total money supply from £884 billion to £1,674 billion. The chart below shows the increase in the Bank of England’s M4 measure of money supply,  and therefore the total quantity of bank deposits, in each year. Each red bar represents new money created by the commercial banks (click the image to enlarge):

All the ‘Money’ in Your Bank Account Represents Someone Else’s Debt

Since all the number money in your account was created by banks making loans, this means that for every pound in your bank account, someone else is in debt by an equal amount.

In fact, due to compound interest, the public’s debts are now greater than all the money that exists in the economy. According to Bank of England figures, if the UK public collectively took all the money in our bank accounts and used it to pay down our debts, we would end up with no money at all and still owe £306billion (plus interest) to the banks!

In other words, we now have a debt-based money supply issued entirely by private, profit-seeking companies. Our money supply has been effectively privatised.

Not only did our banks increase our money supply by overloading the population with easy to obtain and “cheap” debt they started to engage in risky activities that were nothing more than gambling dressed up as “financial innovation”.

Derivatives started off as useful tools to help hedge risk on investments but they soon became a device to make large amounts of money by taking riskier and riskier bets on future market positions.  Sales of complicated financial instruments such as Collateralized loan obligations and Credit default swaps allowed banks to bypass regulations by hiding the risk they were taking so well that only a very small percentage of people actually knew what was really going on. Even the top banking officials and financiers in the documentary had trouble explaining what some of the terms actually meant!

The only difference I can really see between those of us that use Betfair to bet on the horses gambling on the outcome of a race and those bankers and city wide boys in the stock exchange betting on the position of a stock at a particular date is the type of clothing worn and the segment on the nightly news where the results are given.

It really does seem as if a suit and some long winded names for the bets involved are the only difference between a gambler and a banker. There is one more difference however and that is the danger to society when the gamble goes wrong. A regular visitor to gamblers anonymous might lose a weekly wage or his house if he’s really unlucky but the city trader or bankster that loses a bet can literally loses billions and potentially puts millions of people on the street if their gambles don’t pay off.

It seemed from the documentary that Robert Preston understood the types of fraudulent behaviour the big banksters were engaging in and most of his interviewees did as well. The web is full of sites dedicated to exposing the types of financial terrorism the likes of Morgan Stanley and Goldman Sachs have engaged in and even certain politicians talk the talk when they have to. What is yet to be seen though is any kind of concrete action directed against these banksters and fraudsters.

The banking system is still posing a systemic risk to the whole economy and little action has been taken by our politicans to rectify the situation. All the talk of splitting the banks up has come to nothing as of yet and not only are the banks still not lending to the small companies that need to be thriving to restart our economy the bankers are still paying themselves stupidly large and unreasonable bonuses.

Any mention of a permanent tax on banker bonuses or financial transaction tax just leads to not so veiled threats by the horrific Angela Knight and other leading UK bankers to pack up their bags and trot off to Singapore or Hong Kong. Not only has the banking sector held the UK economy hostage once it seems intent on keeping us hostage long enough in the hope that we might eventually forget their misdeeds and crimes and let them carry on with nothing more than a slap on the wrist.

With ever increasing inflation, tax rises and extortionate petrol prices along with all the austerity measures and cuts in public spending the coming year is going to hit middle and low income familes hard. Whilst the common man and woman are being asked to just bite the bullet and take all the price rises on the chin we are then expected to read stories about million pound bonuses being paid to the same people who have caused our misery.

Unless some of our politicians get their act together and stop bending over to the international bankers then public anger will not only be righteous it will be immense once the pennies run out. If 2011 really is as predicted the “year of rage” then a lot of that rage is going to be directed at the pricks in pin stripes. Fred Goodwin might actually consider himself lucky to only get away with his fat pension and only a few smashed windows and a damaged car.

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  1. Tweets that mention The too big to save banks | Dark Politricks -- linked to this post on January 19, 2011

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