Sunday, 23 January 2011

Bankers, bonuses, bullshit, bluff and blackmail

A Guide for the Morally Perplexed

If you had a printing press set up to produce perfect legal copies of £50 notes, you would consider yourself lucky, wouldn't you? It would be almost as if you had a license to print money. No, that would literally be a license to print money. Before long, you'd be pretty rich and no doubt boasting to your mates down the pub about how clever and hard-working you must be to be making all this money. After all, money doesn't grow on trees; it takes a lot of effort to press the 'on' switch on your money-making machine and then harvest all those £50 notes every day. In fact, it's so time consuming that you're absolutely pooped, what with the effort of stuffing all that money into your trousers. Of course, this is just a little fantasy story or fable, isn't it? I mean, no one actually does have a license to print money like this, do they?

Let's change the rules very slightly. You have your money printer, just as before, but you can't just print all the money you want. You're limited by how much you already have. Let's say that this time you're only allowed to print up to 9 times the value of all your current assets. Still, that's not bad. You might not be able to join the super-rich, but at least you can very quickly become 10 times as rich as you are now, with almost no effort. But there's another catch: you're not allowed to spend the printed money yourself. Instead, you are required to lend it out. Actually, that's not as bad as it seems, because you can charge interest on these loans and assuming they don't go bad, you'll still get your money back in the end, plus the interest. So, after a while you will indeed be 10 times richer than before. Better still, as the loans get paid back, you can print more money; always 9 times whatever you get back in repaid loans. That's fantastic, because it means that there's no limit to how rich you can get. It's just a matter of time, and to be quite honest, it's a damn sight easier than producing consumer goods, growing coffee or doing anything that might tangibly benefit anyone in a real sense. Surely, no job or industry in the real world can be anything like what I've just described, can it?

Actually, I have just described the essential elements of the fractional reserve banking system which is the basis of the global financial system. In the real world, the multiple is not usually 9; it's generally higher, often as much as 100 or more. It's a lot more complicated than this in practice, of course, but the basic truth is that banks are licensed to create large sums of money out of literally nothing and the money they create is the ultimate source of most of their profits. The complications come from the various different forms in which money can be created, together with the enormous gambling and insurance industries set up by the banks alongside the money fabrication process. These latter activities serve both to magnify and obscure the process of conjuring money out of thin air.

If you doubt these claims, please take a credit card from your wallet and think about it for a while. Do you think that there is any 'real' money behind that card? No. When that card was issued by a bank, a credit facility was born out of nothing but the bank's reserves, which are only a small fraction of the value of the credit facilities they issue. You can, however, spend all the way up to your credit limit, as if the card represented real money. Indeed, once it is spent, it is real money and you have to pay it back to the bank. If you go to work and do a job producing real goods or services, you have to earn the money to pay back to the bank the money they simply conjured out of nothing. So, would you rather be a worker, or a banker?

Its ability to create money from nothing puts the banking 'industry' in a uniquely privileged position and makes it quite unlike any other endeavour. Bankers' profits come largely from their ability to print money rather than the actual goods and services they provide. In fact, bankers produce very little of real value. Their primary product is debt, which is loaded onto the rest of us. Bankers are also allowed to gamble on that debt and when those gambles go catastrophically wrong, they are not required to pay up: instead the rest of us have to step in to cover those gambling losses, just as we did in 2008.

So, should we be worried when bankers threaten to move out of the UK if we don't allow them to pay themselves massive bonuses? No. In fact, we should encourage them to go, if that's what they want. They do absolutely nothing which a nationalised bank couldn't do much better and with less risk. Banks are literally parasites upon the real economy, and we should be relieved if we manage to get rid of those parasites. The money they make comes out of the pockets of the rest of us.

This is why we should all find it utterly nauseating to see the seemingly endless parade of bankers on our TV screens at present, attempting to 

1) Justify their astronomical salaries and 

2) Blackmail our legislators into caving in to their demands for light regulation.

They hope to achieve these aims by convincing us that they make a vital contribution to our economy, when the truth is the exact opposite of this. A good case in point is Goldman Sachs, the 'world's most pre-eminent investment bank', which was fined $550 million by the US regulator, for fraud. It's hard to tell exactly how much this fraud netted for Goldman Sachs, but suffice to say the bank's profits are measured in billions, and its directors were left completely unpunished. If you or I were to commit fraud, we'd be going directly to jail, without passing 'Go' and certainly without being allowed to keep the majority of our ill-gotten gains. Not so, if you happen to be a banker. They must be laughing all the way to ... uh ... themselves. 

Yet bankers seem to know no shame, as last Thursday night on British TV (Channel 4's '10 O'clock Live' show), a Goldman Sachs employee told the audience that he deserved every penny of his astronomical remuneration. Goldman paid out over $39 billion to its employees last year, or $431,000 each on average, some of it deriving directly from fraud, but most of it simply due to the fact that banks are allowed to create money from nothing. Nice work, if you can get it, and Goldman is just a typical example.

So, should we be desperately grateful for the presence of these fraudsters in our midst, pushing up the cost of housing, school fees and Ferraris, with salaries based on money stolen from the rest of us, or in effect just counterfeited? I hope you have all the information you need in order to decide on your answer, next time a prominent banker threatens to move to Switzerland if we don't give him exactly what he wants, given that you are aware that even a trained an untrained monkey could make huge profits from banking.

Please let us stop referring to the banking sector as an 'industry'. It is not an industry, but a scam, very closely resembling a Ponzi scheme, which we keep falling for. If it is not radically reformed, then there will be another global financial crisis within 10 years.


  1. Unfortunately you don't properly understand how fractionally reserve banking works. Banks do not magically just conjure up money to lend out, it is the process of spending and redepositing lent money that creates new money in the economy. And whent that new money is created, the bank pays to use it in the form of the interest it pays to funders. Please take some time to improve your understanding of how a bank works.

  2. @ 1st comment, by Anon:

    I'm afraid you're wrong. The long-winded explanation of how banks create money is that the amount of debt created is the limit of an infinite geometric progression. So a bank takes £1 on deposit and lends out 90p. This is then deposited, either with the same bank or another - it doesn't matter because I'm talking about the banking system as a whole, not just a single bank. Of this 90p, the banks are then allowed to lend out 90% (let's say) or 81p, and so on ad infinitum. The limit of an infinite sum with fraction, f, is 1/(1-f), so if f = 9/10, the limit is 10. In other words, the original £1 deposited can very quickly become £10. My original argument is therefore completely valid.

    Banks can co-operate or create subsidiaries to speed up this whole process, effectively lending and re-depositing money to themselves. So, banks can easily create debts up 1/(1-f) times their reserves. In the process, they pay interest to each other; effectively to themselves. How much interest does the average deposit account attract? Almost nothing.

    So, when a bank issues a credit facility like a credit card, does that money actually exist in the bank's reserves? No. Indeed, banks' liabilities far exceed their reserves. If what you said were true, the banks would not have needed to be bailed out by central government. So, they do 'magically conjure up money' out of literally nothing, and it is central governments (i.e. us) who have to underwrite their bad loans.

  3. To put it simply: if banks had the reserves to cover their bad loans, that would be the banks' problem. But they don't have the reserves to cover their bad loans. The shortfall is due to banks conjuring money out of nothing. That's now society's problem.