Great Article About Banks

[Vosene]

Oddly enough I was chatting around this topic with a chum last year (who is paid very handsomely as a banker in the UK) - arguing that if everyone, including nations, simply said 'Our debt doesn't exist', what would actually happen? Since the money doesn't exist to start with (it has been conjured out of thin air), the debt can't exist either.

 

http://www.telegraph.co.uk/comment/personal-view/7273332/Darius-Guppy-our-world-balances-on-a-sea-of-debt.html

 

The banks don't have our money, if we all asked for it at the same time, they'd disappear (which is why Northern Rock would have gone pop without billions of our money).

 

I agree with the author of the piece linked above, we need to completely re-evaluate what money is, and what it's for - because at the minute, we're all being conned.

 

See also - Money As Debt

[La_Dolce_Vita]

...and if you are talking about the debt levelled on nations by the IMF and World Bank the people of those nations can quite rightly claim that it isn't their debt to repay.

[Thunderstruck]

Check out: Common purpose! (it's not a joke!)

[Chinahand]

Its well written piece - its got its balance between rhetoric and bluff about right - and I do admit that this sort of thing isn't as well known as it should be, but can I be blunt, Mr Guppy isn't being particularly insightful.

 

This is really introductory economics - and his claim that the banks reserve requirements aren't discussed in the FT or The Economist is totally laughable - try googling China and reserve requirements - China's just changed in its banks reserve requirements and it is headline news at the moment if you are interested in such matters.

 

The UK doesn't use reserve requirements to control bank lending - its a very blunt mechanism - as Mr Guppy says tweaking it can massively grow or shrink the monetary base. In normal times the Bank of England uses the rate at the discount window to control bank's lending, currently they are using that plus Quantative Easing.

 

But I don't want to get bogged down in banking theory.

 

There is a much wider issue involved here.

 

Debt, money etc are simply ways of expressing the interconnections that human relationships can create.

 

With them we are able to do things in parallel - people can get on with doing one set of things while others are doing others.

 

Without them one person would have to complete what they are doing before the next person could start.

 

Obviously the more interconnected the world is the more uncertain it can be, and that is no doubt scary - on the Isle of Man people's livelihoods used to depend on nothing more than the sunshine, the rain, the health of the turnip crop and the availability of herrings - it was predictable.

 

Nowadays - well just walk into any shop and look at the goods on sale there - goods from Vietnam, China, India, the US, the UK, Spain, Europe. There are huge supply chains all linking together around the world. Most of them are trivial, and most of us could see one part of them disapear with no effect on us, but the fact is due to specialization if you spend your life learning how to make a kettle switch off better and suddenly people in China start making a better one - well its time to retrain, or move!

 

At the moment billions of people still have to work in series - they plant there crops and they wait, they dig them up and they wait, they eat their crops and they wait, they sow their crops and they wait.

 

This is a terrible waste of human talent, giving these people the ability to use their abilities better is what economic growth is. Sure all that involves money and debt and banks filtering bits of paper between those who need funds and those who have them, but those are just the side effects of human ingenuity - and people are welcome to try to find better ways of doing it really they are!

 

I always find it odd that so called socialists who lament the waste of people trapped in poverty or factories fail to understand that economic growth is empowering and interconnecting people to use there time more usefully. That includes poets and painters and musicians as well as inventors and entreupreneurs and people who are bloody glad to get out of the fields and work in a nice factory for 55 hours a week at RMB 1000 a month (£94.82).

 

At its most basic society is always asking itself how much does it need to set aside for a rainy day. If it sets aside too much it is wasting opportunities, but if it sets aside too little - well ouch. Capitalism is about the best mechanism yet invented to attempt to test where that dividing line is. And a liberal democratic state is currently about the best way to protect people if the balance goes wrong and to share the benefits it goes right.

 

I'm sure LDV will come on and call me a hopeless idealist, fixated on neo-liberalism.

 

Well I'll make a bet - the Arab traders who sailed there dhows east, the Chinese merchants who saled west, the central asian traders who took their goods along the Silk road, the Portugese and Spanish adventurers who took the Arab and Chinese technology and innovated it to supplant the Silk road, who were paid by italian bankers which lost ground to Dutch and then British merchant houses who fell to American Rivals who built railroads accross the plains to a west coast which now designs computers to be made in China - all these people used and developed capitalist ideas and sought ways to profit from getting better use out of what they did - and I'll make a bet you these ideas will still be central to human endeavour in a millenias time.

 

Certainly banking and financial innovation will change as quickly as technology changes - they work hand in hand - and there will be much hardship and difficutly and banks will boom and go bust. But to be blunt, look around you - we've had a bust, but modern life hasn't ended, there is a chance the bust will go into a double dip or whatever, but I guarantee you the worlds interconnections will grow - and that is what money and banks are exemplars of.

 

The only way to get rid of them is to go back to living off turnips. Do you really want to do that? It seems that Mr Guppy does. I don't.

[Freggyragh]

Point 1. I thought the article was talking about the futility of government regulation, not the absence of any attempt. The problem with government attempts to control the money supply stem from the inability of governments to control asset inflation, and borrowing based on it. If it were just money it would be simple. The problem is that governments cannot point it out when lending figures are based on bubble economics, because, as we know, in the good times politicians are too dependent on public sentiment to put the brakes on the dreams of speculators.

 

 

Point 2. Your explanation of the development of East West trade as driven by liberal capitalism is bogus. Silk was itself a currency in China, and both production and trade were state controlled. The same was true of Japan, and Korea. The Silk Road only really began to boom under the protection of Ghengis Khan - who was not a shopkeeper, or merchant - but the head of a military state. The Portugese and Spanish adventurers were state funded. The British and Dutch empires were, I'll admit, initially funded by private enterprise, but soon came to rely upon state forces and administration. I agree with a lot of what you say about private enterprise, but you should also admit that most of the great leaps forward in the technology of trade are from state sponsored projects, and I'm not just talking about roads, ports and airports, but computers, modern telecommunications, radar, GPS, satellites, etc, etc.

 

Point 3. Writing an article about the unregulated excesses of the banking system is not the same as going on a turnip diet, anymore than pointing out the dangers of unregulated capitalism would have been a backward step at the height of any other major bubble.

 

Point 4. 'There' is not a personal pronoun. Not being pedantic, your posts are interesting, and long, better spelling would help.

[La_Dolce_Vita]

Chinahand -

I always find it odd that so called socialists who lament the waste of people trapped in poverty or factories fail to understand that economic growth is empowering and interconnecting people to use there time more usefully. That includes poets and painters and musicians as well as inventors and entreupreneurs and people who are bloody glad to get out of the fields and work in a nice factory for 55 hours a week at RMB 1000 a month (£94.82).

I think you are missing the point of the socialists objections. Everyone knows that what we do in work result in a service or good being provided. And that such goods and services are new or continually improved. And the improved functions of these services and goods more often than not make our life easier when we purchase them, etc, etc.

The problem is that these improved living standards do not compensate nor impinge on the value of the work being undertaken for that person. You're still the obedient child in the workplace, people are still often doing mindless work - which has little reflection of their abilities, and they still don't have control over their work.

 

Living standards have improved and people in the west have more comfortable conditions in work than 50 years ago, but the call centre agent of today is in the social position and doing the same mindless sort of work as the factory line worker of yesterday.

 

Oh yes, the entrepreneurs, the inventors, and the very talented artists - they'll do well in our society. But do these people make up the majority of the population?

 

Capitalism is about the best mechanism yet invented to attempt to test where that dividing line is. And a liberal democratic state is currently about the best way to protect people if the balance goes wrong and to share the benefits it goes right.

[Capitalist]...and I'll make a bet you these ideas will still be central to human endeavour in a millenias time

Depends on whether you are really referring to Capitalism or the current way the economy works. You seem to mixing the theoretical ideas of capitalism and stating from that basis why it is the best system worked out so far - even though the international and national economies operate very differently from Capitalism. The liberal democratic state does currently function to mitigate the worst aspects of capitalist processes, such as unemployment, but its existence rests largely on maintaining the current system and perpetuating a system that doesn't work well for the people.

 

You appear to be hopelessly idealistic if you are a neoliberal. It's been tried and it doesn't work very well. The recent financial crisis attests to that. I didn't think you were a neoliberal anyway.

 

Certainly banking and financial innovation will change as quickly as technology changes - they work hand in hand - and there will be much hardship and difficutly and banks will boom and go bust. But to be blunt, look around you - we've had a bust, but modern life hasn't ended, there is a chance the bust will go into a double dip or whatever, but I guarantee you the worlds interconnections will grow - and that is what money and banks are exemplars of.

But when they do go boom or bust the result are many who are jobless and homeless. I think this is far, far too high a price to be paid. Certainly not a problem that we should just live with and not try and wonder how things can be done to fix such a problem (and others). It especially takes the piss when the relatively recent innovation is for anti-capitalist practices to be used to foist the risk onto the public - how many of the biggest businesses and banks have been subsidised or bailed out by governments over the past twenty or so years? Again, we don't really live in a capitalist system.

[Vosene]

The problem as I see it, and this is something I thought already, and was reinforced by watching Money As Debt and Money As Debt 2 (both can be found in their complete state on YouTube) - is that the banking system (which I think can be separated from capitalism in many ways) absolutely DEMANDS boom and bust, it guarantees it.

 

Banks conjure up loans out of thin air, then lend money that they don't have, but they only create the principal loan amount, for the loan to be repaid, the 'system' has to generate the loan+interest, or the person/organisation who borrowed the money defaults, and surrenders what it is they've bought.

 

(Ain't that a kicker? Take Northern Rock for example, it was lending money for mortgages, money that it categorically Did. Not. Have. - and yet when the borrower of those mortgages defaults, Northern Rock, a bank that only still exists because it was given billions of pounds of OUR MONEY, gets to take back the house, probably off the very person who's supporting it in part with their fucking taxes, and all based on the original lie of Northern Rock's financial model.)

 

For any loan to be repaid with interest, the monetary system demands that the loans + interest are generated, that's simple maths, but since the original loans are only debt, money that the banks didn't have, the loans can only be repaid by the creation of more debt.

 

In short, our entire monetary system, as dictated by the banks, demands that just about every single person in the civilised world is in debt to them (up to and including nations), if the debt was ever fully repaid, money as we know it would cease to exist.

 

And when trouble does come along, the 'financier of last resort' is the taxpayer, the very people who owed money to the banks to start with, and then get to pay it all over again in their taxes to save the shower of spivs and tricksters! (If you're paying a mortgage and paying taxes, you actually get to pay the same banks twice at the same time.....)

 

It's fundamentally broken and it's absolutely perverse - it truly is indefensible on both a moral and a common sense level. (Oh yes, it also guarantees the destruction of our planet and the extinction of humanity, as it's entirely dependent on constant 'economic growth' (which actually means consumption, of course), i.e. infinite growth from a finite resource.)

 

If you haven't already watched Money As Debt and Money As Debt 2, I strongly recommend setting aside a couple of hours of your time to digest them both properly - the basic message of them is genuinely scary.

 

It's important to note that Money As Debt was produced BEFORE the current recession/crash/clusterfuck.

 

http://www.youtube.com/watch?v=vVkFb26u9g8 (1)

 

(2)

[La_Dolce_Vita]

In short, our entire monetary system, as dictated by the banks, demands that just about every single person in the civilised world is in debt to them (up to and including nations), if the debt was ever fully repaid, money as we know it would cease to exist.

 

And when trouble does come along, the 'financier of last resort' is the taxpayer, the very people who owed money to the banks to start with, and then get to pay it all over again in their taxes to save the shower of spivs and tricksters! (If you're paying a mortgage and paying taxes, you actually get to pay the same banks twice at the same time.....)

And although Chinahand refers to capitalism a lot, what you are talking about isn't capitalism - which just shows what a fucked up system we live in, because the banks make their decisions and operate under some idea that capitalist practices prevail WHEN IT SUITS THEM.

[Chinahand]

Banks cannot just create money - if they create money at a rate which is greater than the ability of human ingenuity to come up with ideas to use that money usefully then all that is occuring is inflation.

 

This is one of the hardest jobs to judge - as people can believe they are creating something worthwhile - such as building houses, finding new ways to get people to buy them etc - when infact all they are really doing is blowing up a bubble with the additional money created in the economy not been used productively.

 

It is far better to think of human ingenuity in understanding bubbles than money. I feel that Vosene has it almost completely about face - banks will go bust and go bust very quickly - ie 2 or 3 years if they lend money out they do not have - look at it this way - at its core banks aren't creating REAL money - only nominal money - which has to be based on something of real value or else someone isn't going to get the money they deposited in the bank back.

 

Another way to think about it is that because you don't need all the money in your bank account all the time the bank borrows it and gives it to someone else. But its still your money - the bank has to pay it back to you and if the person who borrows it doesn't use it productively and so can't pay it back with interest then the bank will have lost your money.

 

On average you only need 10 or so percent of the money in your account on any given day, so the other 90% gets lent to other people.

 

That makes for the second point - Northern Rock was solvent. If people had kept there money in the bank then it is more than likely that over time enough of the mortgages would have been fully repaid to pay everyone off, with the bank still been left with a small profit.

 

But once a run starts on a bank it is impossible to pay everyone off straight away - the bank has lent 90% of your money away for 20 years or whatever. By borrowing short and lending long the bank is inherently at risk if withdrawls spike unexpectedly.

 

I am not for a moment claiming banking is perfect and the system doesn't need working on - eternal vigilence and all that. But the type of bull shit Vosene is putting up is precisely that. It shows a massive misunderstanding that money is human innovation. You can't claim leaves are £5 notes and make everyone millionaires.

 

If you doubled the amount of money in everyone's bank account all you'd get is inflation. The real intriging thing though is that if you doubled the amount of money in some people's bank accounts you'd get a better world as they used that money to create wealth through using it innovatively. The problem is that it is incredibly hard finding out who those people are.

 

An awful lot of blame for the current financial mess is that politicians mandated the banks, especially in the US to put large amounts of money into the bank accounts of people to encourage them to buy houses - fannie mac and fannie may were mandated to increase the loans they were given out, even when they complained that doing so would risk their solvency - the politicians ignored these worries and passed legislation insisting loans were given out with the implicit statement that they would bail out these insitutions if they failed. Guess what - they did.

 

No doubt there is a moral responsibility on the part of the managers of the banks - but as I've said before human greed has always and will always exist - a far more important issue is how that greed is regulated and during the boom the politicians encouraged a culture of impunity - that is what has created this mess.

 

Oh and Freggyragh - I was having a rant so firstly sorry for the spelling - I have always admitted I cannot spell for toffee and "their" and "there" and failing to use apostrophies and incorrectly making them plurals are hard wired neurological failings, I try and review but my inner voice tells me it sounds ok and so I hit post and they are all still there. Sorry!

 

And my simplistic, over-brief summarization of how the desire to make money and innovate technology and ideas - I think you are over harsh saying it was bogus. Simplistic and incomplete sure, but bogus OUCH! - I freely admit the role of governments etc, and think you are wrong about the silk road - it existed from Roman times - the Han dysnasty. It was hugely influencial in the Tang (7th to 10th century) when China and India traded cultural ideas along it as Islam grew as a trading power.

 

The Mongols kept it alive and vibrant when it was begining to be supplanted as nautical technology developed by the Arabs was picked up across the Mediteranean and eventually ended up in the hands of the Portugeuse who could only continue to take it westwards and south into the great unknowns creating imperfect trading rather than appropriating empires.

 

That movement from appropriating to trading still isn't anywhere near fully completed (but I still say the Portuguese were better at it than the Mongols, the Dutch were better than the Portugese, the British were better than the Dutch, the Yanks have been better than the British, the issue for our time is whether the Chinese will be better than the Yanks!), but for me that change in mind set is the core of liberal capitalism - you trade, and do not steal.

[jimbms]

Chinahand, you have just done a yard of waffle to say that the money you put in the bank is used by the bank to lend to others and to make a profit and if we all wanted to withdraw our money the bank would be fucked.

[Vosene]

Chinahand, you have just done a yard of waffle to say that the money you put in the bank is used by the bank to lend to others and to make a profit and if we all wanted to withdraw our money the bank would be fucked.

 

Or rather, if more than 10% of us wanted to withdraw our cash at once, the bank would be fucked, since the other 90% is Monopoly money that somehow they get to charge interest on.

[Chinahand]

Vosene, that post shows you just do not understand. It is totally and utterly wrong.

[jimbms]

Vosene, that post shows you just do not understand. It is totally and utterly wrong.

Congratulations, this must be a first from you, a reply in just one line.

[pongo]

Banks cannot just create money

 

They can in so much as they create liquidity / increase the money supply --- which by most standards would be a part of the definition of what modern money actually means. (You know that ... I know )

 

Chinahand, you have just done a yard of waffle to say that the money you put in the bank is used by the bank to lend to others and to make a profit and if we all wanted to withdraw our money the bank would be fucked.

 

It would not ultimately be the bank that would be fucked - it would be the system as a whole - all of us including the banks. We are all part of the same systems. Liquidity would contract back up the lending chain.

 

Banks may lend money which they have not got but they do no lend money which is not ultimately in the system and therefore available to be lent. This comes back to what we mean by 'money'. Money is effectively a contract which facilitates liquidity. This is one of the crucial benefits of fractional reserve banking. One significant purpose of liquidity being, ultimately, to lubricate commerce and to create work. Liquidity can be created by lending provided that there is a different person / institution on either side of the deal. But the thing is a house of cards if the bank is ultimately lending to itself to create profits.

 

Britain would never have had an empire had it not been for the invention of Fractional Reserve Banking. Man would never have gone to the moon. Europe would probably still be fighting cavalry wars paid for with bags of gold. People like Ron Paul (and maybe celebrity fraudster Darius Guppy - although his arguments are confused) seem to argue for an end to the free market and a return to something like the Gold Standard. With money fixed against commodity values. They seem to forget the disaster of the inter war years when a return to the Gold Standard stifled economic activity and ultimately created the misery of the depression.

[jimbms]

Which boils down to, if we take our money out of the banks they are fucked and we may be also. I think Zimbabwe learned that too late.