MONEY AND BANKING

MONEY, BANKING, DEBT, LOANS.

  

I want to say at the start that I am not an economist; nor a mathematician. But

as  a social ecologist, I am appalled by the operation of capitalist financial systems that enable 0.01% of the global population to control 80% of the global wealth, and tolerate 1 billion people dying of hunger! 

I continue my struggle to understand financial services, capitalism, money, debt, loans;  to come to terms with the statements about loans and money. It is clear that global wealth is controlled by an elite. 

For a long time, most people in the world have been poor, and subject to the demands of conquerors, monarchs, emperors, rulers, dictators, leaders, and their bankers. Whenever the ruling families wanted money or valuables, it was expected that they obtained them from the citizens by taxation. These demands were made easier once the citizens kept their valuables in bank vaults. The rulers could simply take them and confiscate them as taxation.

For a long time, whenever people had valuables made of gold and silver or diamonds and pearls which they wanted to keep safe, they would place them, for a fee, with the goldsmith, or silversmith, to keep in their vaults.

The smiths, over time, would accumulate a vast store of valuable items. As these items gathered in their vaults, they would use them as collateral for loans and investments or as taxation for the government.

These items were assets that were not ‘liquid’; that is, they were not portable; they could not be moved nor sold on the spot. They could be valued and taken to market, and sold at auction. But their value could not be guaranteed. If no-one wanted to buy the items, they would be worthless.

On the other hand, gold and silver were portable when converted into coins. Coins were used as items of value to pay in exchange for food, shelter, transport, clothing, furniture, equipment, and so on.

For many decades, ‘usury’  was a mortal sin in the Catholic Christian world. Lending money at interest was forbidden: and in many communities that remains the same today. However, that did not mean that usury did not take place. It did mean that it was not carried out by Christians/Catholics. For example, in Italy, Spain, France, the UK and their colonies, money lending was carried out.. Christian borrowers would offer their valuables as collateral for loans. The Lenders would charge interest and take possession of the valuables in the case of default or late payment. The valuables always covered the value of the loans: full reserve.

Times of war gave rise to the greatest demands for capital, and loans.  Wars were carried out by monarchs and emperors, who demanded monies for equipment, the purchase of ships, the payment of mercenaries, far in excess of what they had to hand. So, in effect, usury became sponsored by the ruling families of Christian and Muslim countries as in the Crusades, Norman wars, Napoleonic Wars, Ottoman conquests. Bankers became experts at creating money, and prospered.

We have a picture in which bankers looked after valuable goods for wealthy customers, and created monies for the use of ruling families and the governments of the day. Initially, the  bankers raised the monies and charged government agents fees, not interest.

All new enterprises, whether involved in conflicts or corporate enterprises, required new money. This money took the form of coins of recognized denomination... Of course, anything over 1000 GBP would be bulky, heavy, and not very portable. As coins had replaced valuable items, so coins were replaced with paper, say receipts or promissory notes eg. ‘I promise to pay’. In response to the increasing demands for coins in their hundreds of thousands, notes and cheques became more common and eventually replaced coins.

We have a changing picture. Vaults full of  objects like rings, necklaces, candlelabras, chalices, plates, boxes, pots, knives and forks, swords, etc., made of gold and silver are replaced by coins. As more coins were used so they become more difficult to move. The banks issued pieces of paper to represent the coins and the goods of value.

It is worth noting that even today most people think of money as cash, as coins, as solid. items.

From the start of banks, bankers have been involved in making money portable, transferable, exchangeable, negotiable. The valuable items that they kept for their customers were converted into coins, and later into ‘notes’ or cheques or receipts. The papers were much more portable and very cheap to print.  They could be carried in your pocket or purse or by hand and represented the valuables held in your bank accounts or as land assets. The coins and notes were more reliable items of value and could be added and monitored. Soon, balance sheets were developed as statements of how much value was in the bank account, and how much had been spent: credits were expected to balance debits. Once debits exceeded credits, customers applied for loans, for new money from the banks.

The biggest customers of banks were and continue to be governments who also supervise and regulate banks and devise the rules.

Banks will loan money on the assumption that credits will be paid in the future. Up until the 20^th century, it was expected that the assets in the bank would cover the amount on loan: [full reserve banking]: so that if a new venture had assets of $1 million, it could borrow $1 million; and the bank had to deposit $1 million in the Central Bank.

In an attempt to spread the risk of a new investment, the Joint Stock Company was devised: according to which many people could invest in the new venture by buying shares in return for a dividend on their investments. For example, those who invested in the East India Company made a fortune. Those who put their money in the Louisiana Land Company lost it all. The success or failure of a Joint Stock Company is not guaranteed! although it can be insured.

Important aspects of banking are ‘the management of risk’ and the ‘generation of profit’. If a bank has managed risk, it takes a profit.

We have reached the point where banks are used as consultants and charge fees.

We have reached a point when money is not solid as coins. It is represented by numbers. At first these numbers were on a balance sheet. Later, on a computer screen.

As more and more coins were used, so they ceased to be portable. They became represented by ‘numbers’ so money became flexible and highly portable….being moved  on line from one account to another, in milliseconds.

The global expansion of trade and industry saw the rising demand for more new money. For example, the iron and steel industry required the construction of mines, and furnaces before there was any talk of ‘profits’. Railways and roads had to be built before they could have an organized timetable, rail fares, and traffic.

Banks responded by developing ‘fractional reserve banking’. If a bank had $100 in  cash, the bank could lend $1000.  If companies had assets worth $1million, they could borrow $70million, at the discretion of the bank……or even $700 million if the company had good prospects. Over a long time, say 50 years, this would not be a problem. [as long as the companies made profits] although the interest payments would be a lot.[4.5 times the principal]  It becomes clear that companies and banks are dealing in bank created money.  Banks did not have $700 million in hard cash, Banks no longer had reserves that covered their loans.

The application of fractional reserve banking would mean that the monies in circulation are number  entries’ on a contract form or later, digital entries on a computer programme. The profits of the bank continue to be calculated in terms of credit and debit.

The emergence of digital banking has led to quantitative banking. The search for predictability and certainty and secure profits has led to quantitative banking.

Banks and Finance Houses took great pains to hire mathematical experts who could derive formulae to develop predictions for their digital entries.

Today, real Estate/Housing is a major activity of the finance industry. In the USA, the Clinton/the Bush governments wanted to increase home ownership to all families. There developed the ‘sub-prime’ mortgage’ market, which offered  families the chance to buy their homes. These families had little chance of repayment and a high chance of default. Indeed some groups were called ‘NINJAS’: no income; no jobs, no assets.
The irony was that mortgage banks like LEHMAN Brothers were lending money that they did not have to clients who had no income!  


And so was born the 2008 credit crisis. When a large percentage of borrowers defaulted on their mortgage debts, banks and savings and loans companies went ‘bust’: that is, demands for money [debits] were exceeded by the supply [credits]. The finance houses could not pay their bills. All their planning was based on the assumption that there was no risk in the mortgages, and there would be a steady stream of repayments.

This assumption was reinforced by the predictions of the ‘quants’ who devised formulae and methods of packaging the mortgages into derivatives such as credit default swaps, options, futures, insurance; that protected the lenders from losses. But their calculations all assumed that everyone would repay their debts. When no-one paid their debts, the system collapsed!

Waiting to take their money out

Of course, it was easy to blame the borrowers for this crisis. But it should be argued that there should not have been ‘sub-prime’ mortgages. What is the point in giving unemployed workers a mortgage loan, and then expecting them to pay it back with interest.  Such a strategy is fraught with problems, particularly when unemployment increased and companies went bankrupt; interest rates went up; insurance premiums went up; and house prices went down, and everyone wanted to sell, but no one wanted to buy! Government plans were at fault.

We have moved from the 15^th century when usury was a sin, and loans were made to Monarchs, and aristocrats, and governments; to the 21^st. century when loans could be available to every family in the land.

Loans have always been ‘new money’ created by the banks and banksters to meet the demands of the ‘rulers’ and other clients: on  condition  that money generated in the future would  be paid to the banks.

The borrowers would be credited with an agreed sum. At first, these credits would be cash, gathered up by the bankers. For example, during the Napoleonic Wars, the Emperor wanted cash to pay the wages of his soldiers. The bankers who could raise the cash, and deliver it to the front lines, would get the commission, and the fee. Many banks prospered during times of war!  patronized by the governments and their rulers.

As the demands on banks have become more and more extensive, so banksters have looked to more and more different ways to use money, and make it easier to transfer from one account to another. This has become more marked with the globalization of trade and industry. For example, a corporation in Australia may well be selling iron ore to a steel corporation in the UK. Some time ago this sale would require direct settlements by cash. Today, these dealings can be settled by the transfer of  digital money, in milliseconds. It is still necessary for the dealings to be settled in cash, but sometime later by interbank transfers.

It remains  puzzling to think about a system in which we believe that payments are made in cash, when the evidence shows that payments are made by transferring numbers from one account to another. Even the creation of ‘new money’ by banks is illusory as the banks do not have the cash to cover their loans. Banks add new numbers to an account, they do not print the notes nor coins. The modern banking system is based upon a ‘money delusion’.

There are important distinctions between ‘full reserve banking’ and ‘fractional reserve banking’. ‘Full reserve banking’ insists that  loans made by  a bank are covered by the assets of the bank: that is, $1million loans are covered by $1million reserves held by the Central Bank. And indeed, if new money is covered by old money, there is little danger of bankruptcy, and the amount of money on loan can be regulated by the Central Bank.

Today, in the rich developed countries ‘fractional reserve banking’ is the system.  Governments and Central Banks declare that there must be a lot of new money available to sponsor rapid growth. The demands for money are far greater than the supply. If an enterprise has a regular income, and whose prospects are judged to be good, and has assets worth $1million, it may ask for a loan of $10million or $20million; and may be given a loan of $100million. In this situation, the banks depend upon the success of the enterprises, and there is no question of failure. The investment banks create money. The financial crisis of 2007/2008/2009 was caused when debtors of the banks failed to repay their loans and interest , thus cutting off the supply of  income to the banks. Enterprises failed; countries went bankrupt. Banks failed. In every case costs exceeded  income; debits exceeded credits; withdrawals were greater than deposits; Bank statements were in deficit; debts exceeded credits. Organisations failed and went bankrupt.  The debtors had no way to convert their debts into cash, There were no reserves to cover the debts. Every debtor was in breach of contract. Fractional Reserve Banking does not require debtors nor creditors to have access to reserves that cover the loans. The system assumes that income was secure, and that the loans would generate interest, and create purchasing power.

Lord Adair Turner, once of the FSA, has declared Fractional Reserve Banking to be the cause of financial crises! He sees that any reform of the banking system must stop Fractional Reserve Banking.

Lord Adair Turner, in his recent presentations to INET, identified different forms of money: ‘metallic money’ including coins and notes; ‘fiat money’ created by the Central Bank and the State as notes and bonds; ‘debt money’ created by private banks as loans;‘credit money’ created by private banks as credit cards or cash cards.

 He confirms that 97% of money placed in circulation is credit or debt or digital entries  created by  private corporations., or banks, and 3% is metallic money.

It is difficult for many people to understand that nearly all the money that is in use in the world economy is digital numbers: that is, authorized entries on Bank balance sheets, created ‘ex nihilo’ by their fund managers. The many trillions of dollars that are quoted in statements are not ‘cash’ but are 'digital' entries.

It is time to turn our perceptions of money systems upside down! And to come to terms with  the ‘money game’.

First, from the days of Monarchs to elected  Presidents, governments have identified  and authorized ‘money’ as gold or silver coins and bank notes.

Second, the rulers of the State, and the Central Banks, have produced ‘money’ according to their declared needs: what we call 'quantitative easing'. It is not necessary for them to borrow Money: although that is what they do. The Treasurers of the State only need to  print it and avoid interest.

Third, private banks are entitled to identify digital entries as money. More directly, we all think of the numbers in our bank accounts as money simply because the bank says we can.

Private banks create money as loans, out of nothing. ‘Money’ can be conjured up by bankers and fund managers in the form of loans, and debts. Those accredited with the most ‘money’ have the greatest ‘debts’.

We are caught in a puzzle in which economists talk money, products and demands; and no one refers to money as 'fantasy.' Whereas we were once able to see our gold bars in the vaults, today, we can only see notes in the ATM machine. We can not access all the money in our bank account as cash.

Refer to the writings and videos associated with the:

Institute for New Economic Thinking;

New Economic Foundation;

www.positivemoney.org 

www.peoplestandup.ca

Lord Adair Turner

IdeasLab 2013

Financial Services Authority, UK

George Soros

Open Society Foundation

Thomas Piketty

Paul Krugman

Joe Stiglitz

Niall Ferguson

The Ascent of Money: Channel 4 video

The Love of Money: BBC video

CLIMATE CHANGE 2014

CLIMATE CHANGE REPORT 2014

UN/ IPCC

In March 2014, the IPCC [the Intergovernmental Panel on Climate Change] explicitly declared that the global climate system is warming as a result of human interference. This declaration simply confirmed what environmental activists had been claiming for some time. But 

the declaration provided official approval for the demands for environmental policies by the countries of the UN.

During the 20^th century, the atmosphere and the oceans have warmed; the sea levels have risen; and greenhouse gases increased.

Ocean warming is the most dominant process, accounting for more than 90% of the energy accumulated during the period 1971 – 2010. This warming has led to the Greenland, and Antarctic ice sheets losing mass; and the global sea levels rising more in the last 100 years.

In the atmosphere, the levels of carbon dioxide, methane, and nitrous oxide are greater than in the last 800,000 years. The absorption of carbon dioxide by the oceans has led to increasing acidification.

The researchers of the IPCC acknowledge that some of these changes are due to natural causes such as volcanic activity, but there is overwhelming evidence of human influence on the climate system. Temperatures of the atmosphere and oceans are rising.

 Changes in the global water cycle have led to reductions in snow and ice: and increases in flooding, and drought. Large areas of the world have become uninhabitable.   Global sea levels are rising. 

Greenhouse gases continue to increase in response to the rising use of fossil fuels. Shifts in wind movements result in seasonal changes in temperature distribution and rain patterns. The IPCC reported that carbon pollution from automobiles had lowered significantly, but they asserted that it was still important to reduce the use of cars and lorries, and control oil pollution.

What is disturbing for politicians is that the Report made it clear that the current accumulation of heat in the oceans guarantees the climate changes for the rest of the century. Even if there were substantial reductions of greenhouse gas emissions now, the energy stored in the oceans will result in a 2C+ global temperature change beyond 2100.

 Heating of the global oceans will affect ocean circulation. Arctic sea ice cover will continue to shrink and thin. The evidence made it clear that human intervention in the past will have climatic consequences for the present and future. 

The climate changes that are in progress will lead to further changes in the future. The increasing temperatures of the upper levels of the oceans will result in the rising temperatures of the lower atmosphere, and alterations in the patterns of rainfall. It is essential for the United Nations to persuade all 196 member countries to take action to limit air and water pollution, and oil pollution.

WORLD DEVELOPMENT REPORT 2014

Risk and Opportunity

Managing Risk for Development

The World Bank has finally declared that the international community must focus on risk management./world development report

 Five key insights on the process of risk management :

1. Taking on risks is necessary to pursue opportunities

for development. The risk of inaction may well be the

worst option of all.

2. To confront risk successfully, it is essential to shift from

unplanned and ad hoc responses when crises occur to

proactive, systematic, and integrated risk management.

3. Identifying risks is not enough: the trade-offs and

obstacles to risk management must also be identified,

prioritized, and addressed through private and public

action.

4. For risks beyond the means of individuals to handle

alone, risk management requires shared action and

responsibility at different levels of society, from the

household to the international community.

5. Governments have a critical role in managing systemic

risks, providing an enabling environment for shared

action and responsibility, and channeling direct support

to vulnerable people.

 Likewise, better insurance and protection

can make coping less difficult and costly.

The benefits of preparing for risk outweigh the

costs

Crises and losses from mismanaged risks are costly, but so are

the measures required to better prepare for risks. So, does preparation pay off? Evidence suggests that the benefits can outweigh the costs—sometimes overwhelmingly so. For example,

mineral supplements designed to reduce malnutrition and related

health risks may yield benefits at least 15 times greater

than the costs.

Risk management also requires evaluating different risks and

the relative need of preparing for each. Given limited resources,

setting priorities and making choices is both unavoidable and

necessary. For instance, a small country prone to torrential rains

and also exposed to international financial shocks must decide

how much to spend on flood prevention and how much to save

to cushion against financial volatility.

Not only trade-offs must be considered, but also synergies.

“Win-win” situations can both diminish risk (the possibility

of loss) and increase potential benefits. Prime examples

are investments in nutrition and preventive health; improvements

in the business environment; and disciplined monetary

and fiscal policies. Such synergies are widespread and

should be emphasized—which is not to say they are costless

or easy to implement.

People and societies struggle to manage risk

If risk management can have positive impacts and is cost effective,

then why aren’t people and societies better at manag-

ing risk? The specific answer varies from case to case, but is

always related to the obstacles and constraints facing individuals

and societies, including lack of resources and information,

cognitive and behavioral failures, missing markets and public

goods, and social and economic externalities

 The interlinked components of risk management

Knowledge

To understand shocks,internal and external conditions, and

potential outcomes, thus reducing uncertainty.

Coping

To recover from losses and make the most of benefits

Insurance

To transfer resources across people and over

time, from good to bad states of nature

Protection

To reduce the probability and size of losses and increase those of benefits

Preparation Coping.

This realization leads to an important message. Identifying risks is not enough: the obstacles to risk management must also be identified, prioritized, and addressed through private and public action.

An holistic approach to managing risk

Individuals’ own efforts are essential for managing risk, but

their success will be limited without a supportive environment. Most individuals are inherently ill-equipped to confront

large shocks (such as the head of a household falling ill),

systemic shocks (such as a natural hazard or a financial crisis),

or multiple shocks (such as a drought followed by a food

price shock). In such cases, risk management requires shared

action and responsibility at different levels of society, from the

household to the international community. These social and

economic systems can support people’s risk management in

different yet complementary ways.

• The household is the primary instance of support, pooling

resources, protecting its members—especially the vulnerable—

and allowing them to invest in their future.

• Communities provide informal networks of insurance and

protection, helping people deal with idiosyncratic risks and

pooling resources to confront common risks.

• Enterprises can help absorb shocks and exploit the opportunity

side of risk, contributing to more stable employment,

growing income, and greater innovation and productivity.

• The financial system can offer useful risk management tools

such as savings, insurance, and credit, while managing its

own risks responsibly.

• The state has the scale to manage systemic risks at the national

and regional levels, to provide an enabling environment

for the other systems to function, and to provide direct

support to vulnerable people. These roles can be achieved

through social protection (insurance and assistance), public

goods (national defense, infrastructure, law and order), and

public policy (regulation, macroeconomic management).

• The international community can offer expertise, facilitate

policy coordination, and pool resources when risks exceed national

capacity or cross national and generational boundaries.

These systems interact, often complementing and sometimes

substituting for each other’s risk management functions.

For instance, enterprises rely on macroeconomic stability, public

services, and financial products to remain dynamic and continue

to provide income and employment to people. The financial

system can provide tools of insurance, saving, and credit

only if enough households and enterprises are able to partici

pate in the system and the economy features a certain degree of

stability and predictability. Markets, in general, can provide risk

management tools and resources at a growing scale only if the

necessary public services, such as the rule of law and a sound

regulatory framework, are in place.

Mainstreaming risk management into

development programs

The World Development Report 2014 offers dozens of specific

policy recommendations to improve risk management at various

levels of society. Its overarching advice, however, is

that these recommendations should be implemented in a proactive,

systematic, and integrated way to optimize their effectiveness.

For this purpose, it advocates that countries establish

a national risk board, which can help mainstream risk management

into the development agenda. This could be a new

agency or come from reform of existing bodies: what is most

important is a change in approach—one that moves toward a

coordinated and systematic assessment of risks at the national

and even international levels. Implementing this recommendation

may require a substantial change in the way governments

develop and implement their general plans, considering

change and uncertainty as fundamental characteristics of

modern economies.

Five principles of public action for better risk

management

Analysis throughout the WDR 2014 suggests that the public

action essential to supporting people’s risk management can

usefully be guided by some key principles.

 A few facts about risk and risk management from around the world

Despite some progress, many people remain vulnerable:

• More than 20 percent of people in developing countries live on less

than $1.25 a day, and nearly 75 percent on less than $4.00.

• 70 percent of people in developing countries do not use formal

financial tools.

• Over 70 percent of the labor force in South Asia and Sub-Saharan

Africa are self-employed and do not benefit from risk-sharing

within firms.

• People living in fragile and conflict-affected countries made up 15 percent of the world population, and one-third of people living in extreme poverty in 2010.

When risk is mismanaged, crises ensue:

• More people die from drought in Africa than from any other natural hazard, whereas virtually no one has died from drought in

developed countries in the past four decades.

• The mortality rate from illness and injury for children under age

five is almost 20 times higher in low-income countries than in high income countries.

• 147 banking crises struck 116 countries from 1970 to 2011: the average

cumulative loss of output during the first three years of crises

in emerging markets was 26 percent.

• During 2011–12, the famine in Somalia claimed 258,000 lives,

despite 11 months of repeated warnings; opportunities for early

intervention were missed by the donor community to avoid political and security risks.

Effective risk management can improve resilience to negative shocks and the ability to take advantage of positive shocks:

• Between 1990 and 2010, the share of people in developing countries with access to improved sanitation increased from 36 to 56 percent, while the immunization rate for measles doubled. Infant and maternal mortality fell by more than 40 percent.

• Farmers in Ghana and India—among other countries—who have

rainfall insurance have increased their investments in fertilizer,

seeds, and other inputs.

• Whereas a decade ago most developing countries suffered from

a pro-cyclical bias, now more than one-third of them conduct

recession-reducing countercyclical macroeconomic policies.

 Do not generate uncertainty or unnecessary risks

The state should strive to lessen uncertainty and reduce risks—

or, at minimum, not worsen them. Why or how would a government do that? First, it may perpetuate social norms that

discriminate against certain groups, such as women or ethnic

groups, making them more vulnerable. Second, it may favor

the group that supports it politically against the legitimate interests

of others. Third, a government that is internally fragmented

and disorganized may adopt ambivalent policies or

implement policies ineffectively. Finally, the government may

be guided by ideology, wishful thinking, or simple desperation

when confronting difficult problems, instead of relying on

measures based on good evidence and analysis.

 Provide the right incentives for people and institutions

to do their own planning and preparation, while avoiding

imposing risks or losses on others

The right incentives are critical to avoid cases in which some

benefit at the expense of others. Bailouts should be avoided,

but if they occur, they should be designed to prevent providing

the wrong incentives. Turkey’s experience after the 2000–01

banking crisis (and especially the unwavering stance of the

country’s bank regulatory agencies) offers a prime example.

Social protection can be criticized for not encouraging selfreliance

and posing an unsustainable burden on the state.

These problems can be avoided by a design that takes people’s

incentives directly into account. Well-designed safety nets—

such as conditional cash transfers or workfare programs in

Bangladesh, Brazil, India, and Mexico—have promoted better

household practices in education, health, and entrepreneurship,

while remaining fiscally sustainable. Two changes in

people’s mindset related to individual and social responsibility

are critical for effective risk management: moving from dependency to self-reliance, and from isolation to cooperation.

Providing the right incentives can contribute in both regards.

 Keep a long-run perspective for risk management

by building institutional mechanisms that transcend

political cycles

Institutional mechanisms are needed that induce the state

to keep a long-run perspective that outlasts volatile shifts in

public opinion or political alliances. For instance, the state’s

provision of health services must be funded on a continuous

and sustainable basis to succeed. Thailand and Turkey offer

successful examples with their recent shift to universal health

insurance programs. The financial system must strike the

right balance between inclusion and stability. In Malaysia, the

central bank, the finance ministry, and the private sector are

preparing a long-run strategy for the financial sector. Countercyclical monetary and fiscal policies also require a long-run perspective. To this effect, Chile, Colombia, and Norway have

been targeting a long-run budget balance.

 Promote flexibility within a clear and predictable

institutional framework

Flexibility in adjusting to new circumstances is essential to

promoting resilience and seizing opportunities.

 Selected policy recommendations from the WDR 2014

For the household:

• Public health insurance, run in partnership with the private sector,

with emphasis on preventive care and treatment of contagious

diseases and accidents

• Public education, run in partnership with the private sector, with

focus on flexible skills, adaptable to changing labor markets

• Targeted safety nets for the poor, for instance, conditional cash

transfers with payments directly to women

• Enforceable laws against domestic abuse and gender discrimination

For the community:

• Public infrastructure for the mitigation of disaster risks, built in consultation with surrounding communities

• Transportation and communication infrastructure, especially to

integrate and consolidate isolated communities

• Police protection against common and organized crime, especially targeted to communities under threat

• Enforceable laws against racial or ethnic discrimination

For the enterprise sector:

• Secure and respected private property rights

• Streamlined and predictable regulations for taxation, labor markets, and entry and exit of firms

• Enforceable regulations for workplace safety, consumer protection, and environmental preservation

• Consider the possibility of delinking social insurance (that is, health insurance and old-age pension) from work status

For the financial system:

• Sound financial infrastructure (payment systems, credit information) to facilitate financial inclusion and depth

• Enforceable regulations that foster both consumer protection and

competition among financial institutions

• Macroprudential regulation, for the financial system as a whole, to lessen financial crises and avoid bailouts

• A national financial strategy that addresses trade-offs between

financial inclusion, depth, and stability

For the macroeconomy:

• Transparent and credible monetary policy, oriented to price stability and conducted by an autonomous central bank

• For the majority of countries, a flexible exchange rate regime, in a context of transparent and credible monetary policy

• Countercyclical and sustainable fiscal policy, aided by an independent fiscal council

• Provision for contingent liabilities, such as natural disasters, financial crises, and pensions of an aging population

For the international community:

• Engagement in bilateral, regional, and global agreements to share

risks across countries, enhance national capacity, and confront

common risks, favoring proactive and coordinated interventions

• For elusive global risks, such as climate change, formation of a

“coalition of the willing” with like-minded country governments,

creating incentives for other countries to join in.

economic trends, and innovation by enterprises in the face of

technological and demand shocks. A challenge for the state is

to promote flexibility while preserving a sensible, transparent,

and predictable institutional structure. For enterprises,

the Danish model of “flexicurity” offers such balance, combining

labor market flexibility alongside a strong social safety

net and reemployment policies. For the macroeconomy, inflation

targeting regimes with floating exchange rates offer

a good model of flexible yet institutionally sound monetary

policy.

 Protect the vulnerable, while encouraging self-reliance

and preserving fiscal sustainability

For households that remain highly vulnerable to shocks, the

state can provide safety nets. These are possible even in lowincome countries, provided the support is clearly targeted to

vulnerable populations and is designed to encourage work effort.

Ethiopia’s Productive Safety Net System protects millions

of households from food insecurity while investing in community

assets. The international community can also provide

resources and expertise to vulnerable populations. Although

much criticized, foreign aid has been successful when provided

in coordination with accountable local institutions, as

occurred in Indonesia after the 2004 tsunami. Effective risk

management, by promoting sustained growth, can lessen vulnerability and help eliminate extreme poverty.

SKU 32799

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!