Tuesday, 25 September 2012

Why do we want banks?

I am talking about 'we' : those people with spare cash, with savings, with a regular income, with at least 100GBP each a day..... the minority who think they are the ‘norm; the 500 million out of 7 billion’.
We want banks as places to receive our payments, our salaries, our pensions; to pay our bills; and when necessary, give us credit........let us be DEBT SLAVES. In fact, many people think that when you put money into a bank, that money is kept there.  It is assumed that your money is safe and available on demand. This is known as ‘Full Reserve Banking’, and does not operate in the UK nor anywhere else. It is a fantasy. There are a number of versions of this system. According to the narrow version, a bank would function as a ‘deposit box’, in which the total monies are held, for a fee, until withdrawn by the depositors. The bankers would be driven to set up as many accounts as possible, so as to increase fee incomes. The bankers would focus on their customers and their accounts. A broader version recognizes that the monies held are never withdrawn simultaneously, sitting in their accounts for long periods of time. Banks could invest and loan the deposits held in the bank, for profit. Banks can act as intermediaries between investors and business enterprises, and loans can be made for profit. The significant aspect of Full Reserve is that a loan must be secured by an agreed sum, on deposit either at the bank or the Central Bank.  
For example, in order that 10,000GBP be lent at 10% interest for 10 years, 10,000GBP must be held in reserve on deposit. The full reserve ratio is 1 to 1: or 100%. This would mean that if there was a default, the bank could recover the loss from this collateral. This is not how banks operate today.  But this is how many people think banks work. In fact, many people do not know how banks operate!

So how do they operate? Financial groups, such as banks, mutual funds, hedge funds, investment funds, insurance companies, pension groups, operate ‘Fractional Reserve Banking’, according to which monies or assets held can be leveraged or multiplied by many times in the form of  loans, creating new money according to demand. For example, any 10,000GBP cash held on deposit will allow the bank to lend up to 100.000GBP; and any 100,000 on account can create 1,000,000; and that can be used to create 100,000,000. The fractional reserve ratio in this case can be 1 to100. The bank can use 10,000GBP to create 100,000,000GBP.
In this way, Fractional Reserve Banking is designed to create new money as loans. Money is regarded as debt not cash. Bank profits are generated from the interest paid on the loans. In this way 10,000 cash is used to create 100,000,000 ‘virtual money’ as debt. Today, of all the ‘monies’ available to bankers and fund managers, 97% is digital/virtual, 3% cash/coins/notes.  The amount of digital money lent has little to do with the amount of cash in circulation. Under Fractional Reserve banking, cash deposits are not held at the Central Bank. Bankers and financiers and traders manipulate ‘money numbers’ on a screen, talk ‘cash’, but  their electronic dealings take place without regard for the consequences of their trading in numbers  for cash, stock and commodities markets across the world. The ‘money numbers’ traded everyday in markets can be many  trillions GBP……in loans, in commodities; currency exchange; stock market dealings; derivatives, futures………..
Today, the only ‘cash’ is to be found in our wallets and purses, and ATMs, pay packets, and shops; and a bank does promise to pay cash to us on demand via an ATM or cash clerk.
Before 1986, fractional reserve banking in the UK had been subject to rules set by parliament and the Bank of England. After 1986 the Financial Services Act allowed an unregulated fractional reserve banking system, in which interest is charged and
profits generated from every transaction and the higher the interest rate, the greater the profits. Following the deregulation of the UK banking system in 1986, the pursuit of profits and fees was more important than customer care, and banks constantly enticed customers to take out loans at the highest interest rates possible. Few customers, including myself, actually worked out the total payment made on a loan and preferred instead to decide if they could afford the monthly repayment and negotiate the loan according to the monthly repayment, not the rate of interest.
Under both systems, new money is debt money.  ‘Full Reserve’ means that the 10,000GBP I borrow is secured by 10,000GBP in a deposit account. Every loan is secured against a cash deposit. Whereas ‘Fractional Reserve’ means that any agreed amount can be used as collateral for a loan, and the loan itself can be up to 100 times more than the collateral.  Money is debt!
Banks and financial groups were free to develop their services for maximum profit and efficiency. The first thing to change was that it was no longer necessary to deal in nor transfer cash. The transfer of cash had always required armoured vehicles and guards. But now all transactions were digital projects. No cash, only digital entries transferred at the stroke of a keyboard. Fractional Reserve banking means that money can be created more quickly and easily, x100, and facilitates growth.
Shops/factories/offices/ all enterprises can borrow monies, x100, to expand their facilities and services, irrespective of their savings, but dependent on their assets as collateral. Most of the ‘money’ that is used does not exist as ‘cash’, but is represented by digital numbers. It is assumed that monies are kept in bank accounts, ad infinitum. It was thought to be safe
for the sums on loan to greatly exceed the cash available and it was denied that banking becomes much more risky in the event of defaults. But as we saw following 2007, many people defaulted on their loans, and even more claimed their cash deposits, and the banks could not meet these demands, and went into liquidation. They could not pay cash as promised and so had to appeal to the governments for bailouts: that is, print the money.
Fractional Reserve Banking makes it easier to negotiate loans when the client has substantial assets. Countries have taxes, GDP, commodities, minerals, resources which entice banks to loan money to governments. Even though governments have the right to print money to meet their costs, most use Central Banks to organize their monies in the form of loans.
National debts can be as high as $15 trillion, as in the USA, with   interest payments of $500 billion per year; and the UK, with 1.2 trillion GBP debts, has to meet 43 billion GBP  annual interest. Other countries have large debts: Belgium $1.3 trillion; Japan, $1.5 trillion; France $1.7 trillion; China $1.9trillion; Ireland $1.8 trillion; Italy $2.2 trillion; Germany $2 trillion; Russia $76 billion; Greece E345 billion. Unregulated Fractional Reserve banking has led to sovereign debts being larger now than ever.
The Banks are free to negotiate deals to their advantage, and help governments to manage their finances for a fee. In Europe, the countries of Ireland, Iceland, Portugal, Greece, and others have borrowed more than they could afford and gone bankrupt. What that means is that they were unable to pay their debts, nor to pay their bills. They had run out of cash.
In order to pay their debts they have had to ask the Euro-zone for bailouts: that is, more debt to pay debts. The  public debates between the finance ministers of the EU have been about the balances of numbers in accounts, and how to reconcile the credits and the debits; the assets and income with the loans and the interest payments.
The negotiations have not been about the morality of a system that sacrifices social welfare for the protection of banking profits.
While poor countries borrow to meet their monthly costs, rich countries borrow, rather than use their assets, to pay for their projects. They are concerned to ‘leverage’ their incomes so as to fund major projects like wars, weapons, space travel. The 1:100 ratio enables them to borrow very large sums of money.
Poor countries like Greece or Portugal or Hungary or Argentina or Guinea or Somalia or Sudan or Niger or Congo borrow, knowing that they will default. On the other hand, why do some banks lend to countries that they know are likely to default? Or in the case of Goldman Sachs, devise strategies with governments like Greece that will enable them to default with minimum risk to the lender [the creation of credit default swaps]. All the dealings are about profits as embodied in the rates of interest. As long as the debtor country keeps paying, it raises the profits of the creditor.
We are involved in a ‘numbers game’, and one that punishes all who do not ‘pay up’. One of the rules of the game is that debts are paid on time and in full.  In the case of a ‘bankrupt’, debts are to be covered by more debts [that is, loans by more
loans, interest payments by more interest.] Another rule is that the ‘bankrupt’ is obliged to reduce costs, and increase income, so as to balance the books and repay the debts. The ‘bankrupt’ has to be punished. Greece has to be punished.
Over the last four years we have all been witnessing what happens to debtors who fail to pay, who default. For example, in the USA, sub-prime mortgage debtors have lost their houses. Often, in the cases of sovereign default, such as Argentina or Greece, the clients may have repaid the principal.  But as we know, the contract is to pay principal + interest, as the interest payment comprises the profit for the creditor. Recently, it was reported by Gavin Hewitt/Robert Peston of the BBC, that Greece has paid  the principal owed, but may be unable to pay the interest in full.
How much interest is generated by these transactions? Loans are subject to compound interest. For example, collateral of 1million GBP, enables a loan of 100,000,000GBP. The compound interest of 7.5% for 20 years generates 424.7millionGBP.
The client is liable for the payment of the principal + interest: that is, 524.7millionGBP. In effect, the original loan is subject to a fee of 424,700,000GBP. So the client borrows 100 million, and pays 525 million in return. In this case, the original sum of 1 million is used to generate 525 million as new money! All of which is gathered by the bank/hedge fund/investment group, etc. as profit. Banks charge exorbitant interest fees and prosper.  Countries and their peoples, die! simply because they have to pay back 4.24 times the original loan.
At the moment, let us say that the national debt of Greece is Euros345 billion, according to Wikipaedia/World Bank/CIA/EU. It is worth noting that the numbers vary from one report to another, and so it is difficult to be precise.
But if we follow Gavin Hewitt, the principal sum is not the problem!  The interest payable is the problem. It is easy to see why:  E345 billion @ 7.5% for 20 years, would be E1.46 trillion.
In 2011, the government was in the situation whereby it was being forced by the Eurozone to cut all expenses, and raise all incomes so as to repay the total interest of up to E1.46 trillion to the banks by 2020. As a consequence, the country has suffered intense social unrest …..strikes, demonstrations, riots.
However, recent negotiations in 2012 have led to the acceptance that the interest payments are ruinous to a country that is poor, and undergoing recession. There has been an agreement that 30% of the interest will be sufficient ….Even though the
banks have been ‘weeping’ over this ‘haircut’, 30% of E1.46 trillion is still a large profit on a ‘virtual principal’. It is still more than the original loan! We will have to wait to see if the debt interest is cancelled, so that Greece [and other such countries] can re-start with a clean
plate. Remember the original loan has been paid back, and the banks are being asked to reduce their profits, but the profits are still ruining the country. The payment of interest would not be seen as a problem for a country such as Germany, USA, or China whose economy was growing by +5%/7%/10% a year. But for Greece, and many other poor countries across the world, whose economies are shrinking by -7% per year, these payments have become impossible. These loans were made at the height of economic growth when the payment of interest [no matter how exorbitant] was thought to be ‘no problem’.
In the years following the ‘credit crunch’ of 2007/8/9 when some of the biggest banks in the world went bankrupt, and many countries went into recession, and the global financial system almost collapsed, some alternative strategies are necessary so
as to ease the economic pressures on poor countries……that is, most countries.
One solution could be to lower the compound interest rates charged on loans. For example, a loan of E100million @ 1% for 20 years would generate E22million interest; and the principal + compound interest would be E122,019,004. Another solution would be to calculate the simple interest: a loan E100,000,000 @1% simple interest for 20 years would be E120 million.
These totals are significantly less than E424 million repayable on a loan at 7.5 %. But they are still exorbitant at a time of economic recession. And all represent significant profits for the creditors on transactions that are trading virtual sums created and deleted at the push of a button. These transactions are politically significant in circumstances when a government has to raise taxes and to cut all social services in order to repay the interest on a loan; or when a government, like the USA, has borrowed so much that it can only afford to pay the annual interest, and therefore has to sell off national assets so as to remain solvent. Governments, such as Greece or Ireland or Portugal or Iceland or Spain or Italy, may have repaid the principal of their loans, but cannot pay the interest. This interest could be four times the principal! Ireland with a national debt of $1.8 trillion is facing interest payments
of $7.2 trillion; or Italy, $8.8 trillion interest.  These are all inconceivable amounts of money: particularly for countries that are barely covering their costs. But the non-payment of interest is unacceptable because it is the profit for the banks.
Should any government be permitted to borrow more than it can ever possibly repay? Should any government be permitted to borrow sums at interest rates that will lead to bankruptcy?
Should funding agencies be able to charge punitive interest rates?
Should creditors be able to lend money to clients who cannot pay their debts?
Should interest rates be variable according to the circumstances of the debtor?
Should we follow the example of the Grameen Bank, initiated by Muhammad Yunus, and charge very low interest rates, for small loans ?
Should interest rates be capped for everyone, so as to limit the profits of the creditors? Would it be better if all loans had a fixed fee?
How could a regulator stop the debtors and the creditors from taking advantage of any preferential contracts?
This leads us to another  solution:  the necessity for oversight and regulation.
Which organization could be given authority to supervise, regulate, and control the financial affairs of individuals, corporations, countries? The World Bank, the IMF, the United Nations, the EU, the AU? among others.

It is not surprising that many clients, corporations or countries, become unable to repay the sum in total and default. It is clear that none of the funding agencies and their traders care about the circumstances of the debtors. All they are interested in is the generation of  profits and bonuses. It is none of their business that many countries like those in Africa, such as
Namibia, Niger, Sudan, Somalia, Congo, need loans to pay for foods to feed their starving peoples. The countries want grant-aid, but are driven to loans…..that will bankrupt them. To survive, these governments have to negotiate for debt-cancellation.
None of this would matter under a system of ‘full reserve banking’ simply because every loan would be tied to cash or assets.
It must be admitted that none of this would matter, because many countries would be unable to raise enough cash to provide collateral for any loans.
So we are faced by a dilemma. How to structure and regulate a ‘fractional reserve system’ that does not bankrupt those countries that try to borrow money? How to design a ‘full reserve system’ which is more flexible in demands for collateral and assets? On reflection, it seems that banking systems that are intended to benefit the banksters and fundsters, and sacrifice the debtors, are not socially nor morally justified. They protect the interests of the 1% and control the savings and investments across the world. They are only interested in peoples and governments who want to borrow money, and pay maximum interest.
One can conclude that any banking system that is totally dependent upon the generation of profits from the interest on loans is unacceptable. As we have seen, the calculation of the interest due from poor debtor countries leads to their bankruptcy.
Such loans and compound interest are not intended to alleviate global poverty. They are intended to maximize the profits and bonuses of the banksters.
A different system is essential: one in which the money needed for survival is printed and not borrowed. The cycle of debt, as organized by fractional reserve banking, and upheld by full reserve banking, must be abandoned.

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