THE NEED FOR BANKING REFORM 2014

 BANKING IS A CON?

 MONEY IS A FANTASY?
BANKERS AS CRIMINALS.?

The collapse of the global banking system 2007/2008 revealed  that the regular crises of the financial services industries are fundamentally due to dubious practices by banks. I have been puzzling about these practices and their implications for bankers and fund managers, and the needs for banking reform.The biggest puzzle is the cash delusion. I have found it very difficult to come to terms with the facts that we talk 'cash', but deal in numbers. The Global economy has expanded in the face of digital money, and that we no longer depend upon 'hard cash'. Indeed, we could not possibly deal in  quadrillions $ or GBP as cash. We can only use 'digital entries' that are created out of nothing!

Investment bankers and fund managers have been concerned for a long time to manipulate other people’s money to maximize profits, and minimise risk. Finance companies like JPMorgan, Goldman Sachs, Lehmans , MorganStanley, Barclays, RBS, DeutscheBank, worked out schemes that enabled them to increase the range of their clients, and invest their monies for the best returns, and highest fees and bonuses. The development of de-regulated markets following President Reagan in the USA, and Prime Minister Thatcher in the UK, led not only to more innovations in the financial services industries, but more dubious practices; and bankruptcies and the collapse of the global financial system! It is not surprising that from 2007/8, and the global banking crisis, bankers have been called ‘banksters’: bankers as criminals!

This is not new. It is easy to forget that in the past, banking was a crime. In particular, lending and charging interest was forbidden by Christians. It was known as usury, and was classified as a sin. Of course, this did not mean that money exchange and loans did not happen. It did mean that only specific groups, such as Jews, were permitted to be bankers and described as usurers. Jews as usurers led them into social and political disrepute, best represented by Shakespeare’s Shylock., in the Merchant of Venice.

               Today, we have come to think of bankers as ‘crooks’, and fraudsters’ in the light of  millions of people across the world  losing their savings, or defaulting on their loans, and banks losing money, and investment bankers being busy paying themselves million dollar fees and bonuses. In fact as the poor have got poorer, the rich are getting richer.

Bankers  are part of the ‘loan cycle’.   One of the first steps that bankers take is to create new money in the form of loans. An interesting trick is that modern banksters are allowed to create money out of nothing.  They do not depend upon the availability of  customers savings or deposits.  How do they do that? simply by writing numbers in a ledger and  charging you interest for the transaction and paying themselves a bonus for the business.  For example, you  pay into the bank $1000 and they can lend you 54,000 or 70,000 at 8% compound interest. Banks are allowed to leverage the money they create 54 to 1 or 70 to 1, or even 100 to 1, [if they are unregulated] on the assumption that the loans and interest will be recovered within a specified time limit, generating profit.  The more loans that are allocated the more profits are generated and the more interest paid. There is a world-wide market for loans.  The loans are new money. They do not consist of coins and notes. They are ‘digital’. This is part of the overall ‘scam’ that is ‘banking’. It is highly likely that disreputable bankers simply create numbers to trade. Bankers talk cash, but deal in numbers. They do have to make sure that the statements of account balance in the day book. But some do not bother.  Traders in investment banks make and transfer and exchange money as number entries on statements of account. They bet against each other in various markets: stocks, shares, bonds, currencies, commodities, derivatives, credit default swaps; buying and selling so as to make profits.

Loans are bound by contracts but not by cash.  ‘Banksters’ protect their cash monies by creating new money. It is only when new money is greater than earned income, or traded products and exceed GDP, that problems arise. If loan money is $20 trillion and ‘products’ only generate $2 trillion, the loan cycle survives only when there are no default events. It is estimated that the current markets create more than $700 trillion. New money/digital money is far greater than cash: at a ratio of 97 to 3.

Fund managers are using ‘saver’s money’ to invest in government projects and corporation stocks and shares They focus on maintaining and increasing the funds. And of course the savers have similar demands: often depending on the funds for their pensions.

Fund managers want to encourage people to join their funds, and increase the capital and generate interest. These demands lead fund managers into ‘evil’, into fraud! Into dubious practices, when unregulated.

The classic fraud is to operate a ‘Ponzi scheme,’ whereby the capital invested by new members is used to meet the demands for  payments by other members. Ponzi schemes promise high returns with no risk. But what is kept secret is that the fund managers do not invest any of the deposits.   But as soon as the deposits decline, and the demands for payments increase, the scheme will collapse! and holders will lose their money. Of course the scheme could set up a Credit Default Swap and promise to cover losses on accounts.

Legal Pension Fund managers, who control many millions of savings deposits, are desperate to find investments that are safe, and capable of growth. It is reported that Fund Managers respond positively to ‘hedge funds’ which are limited partnerships for ‘millionaire’ investors. Hedging these funds is the attempt to reduce risk, and maximize returns by carefully managing the fund. Indeed, they need the hedge fund manager to manage meticulously with insight to anticipate variations, and protect the value of the investments.

When the financial markets are volatile with all items going up and down in value, it is important for fund managers to be able to place their monies into other items, such as  futures, swaps, options such as oil, currencies, wheat, rice. They will set up derivative contracts to buy or sell at a given time, for a given price and thus hedge their bets, and ensure the value of the funds. In the past, it was common for derivative contracts to be made against the price of rice. Implicit in the dealings is that the items would go up in value. And the skill is in identifying when the prices go up, and being able to manage the trading, and the prices. If they went down, the investment funds would lose value. The manager would have gambled and lost!

Credit Default swaps came into operation because of these risks. CDS’ are a contract to compensate you in case of a credit default.  In view of the millions of pounds/$ in circulation looking for appropriate investments, fund managers would make financial contracts for compensation, in case of default, arranging for swaps or options to exchange monies for commodities/items. Money managers can be involved in buying or selling stocks and bonds; and currencies;or commodities.

It is worth noting that in every case the deal would be to safeguard the value of funds, not to promote the success of trading companies or production companies. The capitalist investment is designed to increase the funds.

Most deals in ‘derivatives’ would take place over the counter. They would be beyond the regulation of an exchange. The trade was previously valued at $700 trillion, and now in 2014, at $1.2 quadrillion. The trade is unregulated, and subject to illegal manipulation.

Credit default swaps have been described as ‘pretend insurance’. The contracts may have been drawn up carefully so that the ‘swaps’ will be made, and the investments retrieved in the case of a default. But  Credit Default Swaps have been also been accused by Jeff Neilson in Canada as a $600 trillion  ‘paper Ponzi scheme’- that is, a fraud designed by Wall Street syndicates that have no intention of honoring the contracts. The syndicates receive payments, initiate default, and refuse to pay compensation.

Banks, Building Societies, [in the UK] or Savings and Loans companies [in the US] act as mortgage brokers. Over the last 20 years in the USA, in particular, mortgages were increasingly given to poor families who had little hope of repaying the full mortgage, and a high likelihood of defaulting on their loans. They were called sub-prime mortgages. This was possible as a result of new schemes of insurance supported by government agencies. The mortgages were credit default options whereby ‘default’ was covered by insurance and the sale price of the property at auction. In effect the mortgage brokers received payments of interest from the clients, and insurance payments from the Insurers, and auction value of property. The Banks created new money as loans on many millions of property. However, once the mortgage holders started to default, and payments stopped, the Insurance groups, such as AIG, were the first to suffer. They were unable to keep up with the insurance payouts, and soon became bankrupt. In the UK, customers demanded cash from Building Societies, causing a ‘run on the bank’. In this way the financial crisis unfolded in the USA and the UK, and later in the EU. It became clear that many of the principal global Banks had been actively involved in the ‘sub-prime’ scheme: buying and selling mortgage options across the world; putting loans together as bonds and selling them as investments. As soon as the sub-prime schemes failed, and the poor families defaulted on their loans, many banks became bankrupt and appealed for help from governments. The failure of the financial sector was the direct result of their dubious practices in unregulated markets.

In the past money as ‘cash’ was tangible, solid, handled, moved, carried, transferred, exchanged, created and distributed:  created by Central Banks from copper, silver, gold, and paper, or plastic, and used by the citizens, governments and bankers for payments of services and products.

Many citizens are convinced that all ‘money is cash’ and that all dealings are in cash. They go to the bank, take cash out to pay for items or services or they receive cash in payment and take the cash to the bank. All dealings are in cash!  Citizens, including myself, experience a ‘cash delusion’.

Irrespective of what we may think, financiers in the UK inform us that only 3% of money dealings are ‘cash’. 97% of money dealings are ‘digital.’ Global banking is ‘cashless’ internet banking. All transactions are digital and involve altering the number entries in the statements of accounts. Transactions and exchanges can now be done in a few seconds. Money is transferred, exchanged in millions, simply by clicking a keyboard and altering the numbers.

In a computer system, ‘digital numbers’ represent cash/gold/silver/ bank notes, cheques and bonds. Many people now pay for things and services by credit cards. The transactions are digital and cashless.

Nevertheless, it is assumed that cash reserves are available to cover the transactions. It is assumed that the digital transactions are based on the ‘cash’ in your bank account, and the ‘cash’ that will be transferred to your account in the future. These assumptions ignore the fact that there is no cash in bank accounts. The only cash in the bank is the banknotes in the ATM, printed and delivered by the Central Bank.

It is true that many  countries  do have gold reserves, and their wealth is judged in terms of the balances  between their reserves and their spending. 

The USA has the largest gold reserves of any country at $361.8 billion; followed by the IMF $125.7billion,. Germany $34.9 billion; Japan $34.6 billion; the Netherlands $27.2 billion; the UK $13.8 billion. Gold reserves are normally used to under write the cash demands of banks. Gold is used as collateral for the monies created by banks. Gold is the basis of digital money. But these reserves are inadequate for the digital money demands of the global money funds. For example, the total gold reserves do not cover the $1.2 quadrillion traded in derivatives markets.  

97% of money in circulation is ‘digital’. It is ‘bank created money’.

It is used to buy houses/ equipment/vehicles/transport/ to pay wages,etc.. This  money is created  as a loan, out of nothing. For each loan that the banks arrange, digital money is created. The ‘numbers’ are treated as if they were ‘cash’. They are talked about as if they were cash. Digital numbers are regarded as ‘cash’ and to have the value of ‘gold’, simply because we think them to be!  The numbers in our bank accounts are cash simply because we think they are. Given that we never see the cash, nor the gold, but only the numbers, perhaps it doesn’t matter that there is no hard cash. The digital money is easy to handle, easy to manipulate, easy to calculate, easy to transfer, easy to protect, easily available on computer systems. If most of the transactions are ‘digital’, and the entries are simply numbers, banking becomes a game of arithmetic! A banking casino!

The essential aspect of all these bank transactions is that the numbers ‘balance’ in the ‘day book’. There has to be balance between debits and credits; loans and cash; debts and income.

The Central Banks and the governments have to judge as to whether the finances of a country are in balance. They must regulate the creation of money. However, when it is necessary for banks to possess ‘cash’, they simply arrange with the authorized government, and Central Banks, to make and print the coins and notes they need. In effect, all countries are in debt. They do not have enough money to cover their expenses.

 In 2013, the USA borrowed up to $17 trillion; in 2012, Japan borrowed  $11.7trillion;  the 27 countries of the EU, $16.4 trillion, with Germany, France, Italy and the UK having the biggest debts. China, with one of the largest GDP, has international debts of $2.5 trillion.

At this point we have to confront the fact that the sovereign debt of the USA and Japan, and other countries, is greatly in excess of their gold reserves. They are not able to cover their debts. Are they all ‘bankrupt’?

In contrast, out of a world population of 7.2 billion people, there are 12 million who are valued at $46.2 trillion.  There are 1,426 billionaires who have an estimated  wealth of $5.4 trillion.

In North America, 3.73 million people have $12.7 trillion.  

In Asia, there are 3.68 million with $12 trillion.

In Europe, 3.4 million individuals have $10.9 trillion.

It is clear that some individuals have access to larger sums of money than many countries. But we have to confront the fact that these riches are not cash money. They are

digital money created as loans by banks, and entered on bank accounts. We conclude that banking systems are digital, cashless, internet banking in which numbers represent cash. And few people have ready access to cash. We work in systems in which there is little cash. The total gross wealth of $54 trillion is on paper in numbers. This digital money is not covered by cash. The total gold reserves are $1.02 trillion. We are operating a capitalist system in which digital money is greatly in excess of cash money: and in which all money is created by banks, regulated by governments.  The money is ‘leveraged’ 54 to 1: that is, if the bank has one pound it can create 54.

What we think of as money is created out of nothing by banks. What we think of as cash is created by Central Banks with the authority of governments. Banks create money as loans out of nothing, and make paper profits out of the interest charged  for the loans. The capitalist system is based on ‘leveraged money’, which is created by banks, and is best regarded as ‘fantasy money’  and is best described as ‘digital money’.

It is difficult to be clear  about what the financial services think they are doing. Why was Greece penalized so severely by the EU and the IMF and the World Bank for having a sovereign debt far less than many other countries in Europe? The penalties seemed to deny the fact that  countries and corporations depend upon loans. Their development and growth are a product of debt. If they had to have money as cash, growth would be a slow process.  The austerity imposed by the Troika made the crises in Greece worse, restricting all access to hard cash and loan cash; and condemning the Greeks as spendthrifts!