Tuesday, 2 February 2016

Historical quotes on banking.

The following historical quotes about banking are being handed out to all those coming to the meeting on banking in Newcastle-upon-Tyne (UK) on 6th Feb 2016.

"The bank hath benefit of interest on all moneys which it creates out of nothing." -
William Paterson, founder of the Bank of England in 1694, then a privately owned bank.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford, founder of Ford Motors.

"Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits." Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain.

"The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests." - The Rothschild brothers of London writing to associates in New York, 1863.

"I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people." Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924.

"The banks do create money. They have been doing it for a long time, but they didn't realise it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create it." H W White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." - Napoleon Bonaparte, Emperor of France.

"I believe that banking institutions are more dangerous to our liberties than standing armies." - Thomas Jefferson, US President 1801-9.

"If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson in the debate over The Re-charter of the Bank Bill (1809).

"The government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity." Abraham Lincoln, US President 1861-5. He created government issue money during the American Civil War and was assassinated.

"The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilisation." Otto von Bismark (1815-1898), German Chancellor, after the Lincoln assassination.

"That this House considers that the continued issue of all the means of exchange - be they coin, bank-notes or credit, largely passed on by cheques - by private firms as an interest-bearing debt against the public should cease forthwith; that the Sovereign power and duty of issuing money in all forms should be returned to the Crown, then to be put into circulation free of all debt and interest obligations..." Captain Henry Kerby MP, in an Early Day Motion tabled in 1964.

"... our whole monetary system is dishonest, as it is debt-based... We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned." - The Earl of Caithness, in a speech to the House of Lords, 1997.

Saturday, 30 January 2016

Hoenig falls for the popular myth that bank capital is expensive.

Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig says that requiring banks to fund themselves via more capital or capital/equity like instruments like bonds that can be bailed in will raise bank funding costs and hence force banks to make more risky loans to cover those costs.

Anat Admati, economics prof at Stanford, would be able to explain to Hoenig why capital is no more expensive than debt. But I’ll run thru the argument very briefly for the umteenth time. It’s very simple.

If a given bank is funded ENTIRELY by capital, the risks run by capital holders are EXACTLY THE SAME as if the bank is funded entirely or almost entirely by debt. E.g. if the chance of the bank’s assets declining to X% of book value are 1/Y in any given year when the bank is funded entirely by capital, then the chances of the same thing happening when the bank is funded by debt will be exactly the same. Ergo the charge made by debt holders and capital holders for funding the bank will be the same.

Friday, 29 January 2016

Oxford economics prof not allowed to pay cash for new car.

I’m still scratching my head over this.

Simon Wren-Lewis (Oxford economics prof) says he has enough cash to buy a new car. But when he tried to buy one, the car dealer said new cars could only be acquired via an interest free loan.

I suspect this is plain old trickery. I.e. I suspect if you look at the small print in the “interest free loan” agreement, you’ll find something like the rate of interest suddenly jumps to 10% after two years, but is not charged to car buyers immediately. That is, after three or four years, the car dealer can send car buyers a stonking great bill for interest and if there are any complaints, he just says that was all in the small print.

Tuesday, 26 January 2016

Banks increase the total amount of debt – what of it?

One function performed by private banks is to intermediate between borrowers and lenders, though they also create a certain amount of new money every year.

If there were no banks, then there’d be a big reduction in intermediation. I.e. while individual lenders would lend to individual borrowers, there’d be a big reduction in the total amount of lending and borrowing: that is, there’d be a big reduction in the total amount of debt. Put that the other way round: banks result in more debt.

Given that the word debt has negative overtones, that might seem like an undesirable outcome. Unfortunately, while overtones fool most of the people most of the time, they don’t prove very much.

A classic example is the phrase “national debt”, which the large majority of people, and possibly even the majority of so called “professional” economists, believe to be undesirable. That’s because (to repeat) the word debt has negative overtones, so the national debt must be bad, bad, bad. Incidentally the overtones are even worse in the German language, which helps explain Germany’s obsession with maintaining an external surplus, i.e. being a creditor rather than a debtor.

In fact, national debt can perfectly well be viewed as a form of saving, and if you like, called “National Savings”. That is (as MMTers keep pointing out), national debt is very much like a deposit account at a bank, with government playing the part of the bank.

Anyway, is there a problem with the increased amount of debt brought about by private banks? Well as long as debtors are able to pay the interest on their debt, there shouldn’t be a problem.

In other words to the extent that there are an excessive number of cases where debtors CANNOT pay the interest, i.e. where the lending is irresponsible, then clearly what private banks do is wrong: i.e. the increased amount of debt they occasion is undesirable.

Now what’s the basic cause of that sort of that irresponsibility (e.g. NINJA mortgages)?

Well one important cause is the fact that governments stand behind private banks. For example there is FDIC insurance for small banks in the US. As to large banks, Uncle Sam dishes out hundreds of billions of dollars at laughably low rates of interest to large banks in trouble, as happened in the recent crisis. And as to the UK, state backing for private banks has been provided free of charge since WWII. That is, unlike the FDIC system where at least banks pay an insurance premium, UK banks have obtained state protection for free until very recently.

But all the latter forms of state protection throw up a problem, namely: if the insurer pays when you lend in an irresponsible manner, why not lend irresponsibly and keep the profits when all goes well, while sending the bill to the insurer when it doesn’t? It’s a heads I win, tails you lose scenario.

Of course we couldn't just abolish all forms of state support for banks and leave it at that. But we could make money lending entities (aka banks) fund themselves in much the same way as any normal corporation, that is with substantially more capital than they currently do. Obtaining a third of funds from equity is perfectly normal for non-bank corporations, and Google is funded 90% by equity. Google, far as I know, is not a disastrous flop.


It is hard to prove what the optimum amount of debt is. Thus it’s a big over-simplification to argue that just because private banks increase the total amount of debt that the effect of private banks is harmful. In contrast, what does the real harm is the backing for private banks offered by governments.  

Friday, 22 January 2016

Simon Wren-Lewis keeps quiet about pro-austerity academics.

This article by SW-L (Oxford economics prof) portrays the austerity versus anti-austerity argument rather too much as a left versus right argument for my liking. The baddies are the political right, while the goodies are the political left who have been allegedly trapped into buying the pro-austerity argument by devious righties.

SW-L is quite right to say that devious righties have forced many leading lefties to buy the pro-austerity agenda by repeatedly asking the question “What about the deficit?” every time the left proposes any sort of anti-austerity measure. And if the right has to enlarge on that deficit question, it just trots out the old nonsense about a government being like a household in that households have to balance their books.

Of course some righties (perhaps the majority) actually believe that governments can be compared to households. So the truth is that it’s a case of clever righties tricking dumb righties AND well meaning lefties.

Another possibility is that George Osborn and his pals seriously believe that households can be compared to governments, in which case the WHOLE OF the political right is dumb!

However, that’s not the whole story. The unfortunate truth is that there are plenty of so called “professional” economists who (like dumb righties) also don’t understand the differences between micro and macro economics: i.e. who don’t get the distinction between households and governments. SW-L as an academic understandably wants to keep quite about those individuals.

Two so called professional economists who quite obviously don’t understand the difference between macro and micro, and who have devoted a large amount of effort to opposing deficit increases are Kenneth Rogoff and Carmen Reinhart of Harvard. But so called professional economists working for the IMF and OECD are equally guilty.

Sunday, 10 January 2016

What % of money for loans comes from intermediation?

Commercial banks which want to lend are forced to obtain some of the relevant money from savers, else those banks run out of reserves. At the same time, banks create a certain amount of money from thin air every year. So how much “loan money” comes from each of those two sources?

It could be argued that since the money supply expands at 5 to 10% pa, that the ratio is about 90% intermediation 10% origination. But is ONE YEAR the appropriate period? Probably not. I suspect the appropriate period is the duration of the average loan: say roughly 10 years, during which time the money supply would double roughly speaking (in nominal rather than real terms). So in that case we’re talking about an intermediation / origination ratio of about 50:50. But that’s very much a back of the envelope calculation.

It can be argued that when a loan is repaid, money vanishes, and when a new loan is granted, ALL OF the relevant money is created from thin air. That’s not a totally invalid way of looking at it. But it’s a bit of a silly way of looking at it, and for the reason given above, namely that a bank HAS TO attract some money from savers (including those who repay loans) else it runs out of reserves.

Thus the conventional view of banks adopted by those who have never opened an  economics text book, namely that they are piggy banks which cannot lend until they receive savings, is not totally invalid.

The moral is that if you think philosophy is abstract, you ain’t seen nothing: try working out what banks are and what they do.

Thursday, 7 January 2016

How safe is the money you’ve deposited in your bank?

According to Ellen Brown, it’s increasingly unclear how safe depositors’ money is in the US and Europe. Reason is that banks use depositors’ money to place mega derivative bets, and want ever more freedom to do that. Plus banksters run rings round politicians and regulators when it comes to altering legislation so as to enable banksters to do that.

Assuming Ellen Brown is right, that’s just one more argument for full reserve banking. That’s a system under which money which is supposed to be totally safe is lodged with the state, while derivatives, loans to mortgagors and businesses and anything faintly risky is funded just like any normal corporation: that is by shareholders and bondholders who stand to lose everything if the worst comes to the worst.

Ellen Brown more or less says that in her final paragraph which reads, “Meanwhile, local legislators would do well to set up some publicly-owned banks on the model of the state-owned Bank of North Dakota – banks that do not gamble in derivatives and are safe places to store our public and private funds.”