I had turned loose into the world a depraved wretch, whose delight
was in carnage and misery.
(Mary Shelley, Frankenstein)
Like most human creations, money and banking can, when misunderstood, turn against their creator, taking on a destructive, out-of-control life of their own. Thus, after the collapse of the US banking system in 1929 and the following international economic depression of the 1930s, economists and politicians of the era came to understand the inherently volatile nature of money and banking, and they implemented strong measures aimed at taming and harnessing the financial sector in the service of the common good. However, over time this knowledge faded from memory, and economics, though aspiring to the status of science, actually regressed; as a senior economic analyst at the International Monetary Fund (IMF) put it recently, “for many decades in the interim, banks have almost been completely off the radar screen of macroeconomics. So we're starting again at a point that's almost pre-World War I.” As a result, from the 1960s the national and international regulation that had helped maintain a relatively stable banking system was dismantled, while new financial developments and innovations received minimal attention from outside the financial markets and, despite warning signs, elicited little regulatory response – culminating in the immense financial crash of 2007-8.
Possibly the most striking revelation to emerge from the financial crisis is how detached from reality mainstream academic economics had become. Most astonishingly, it omitted any serious study of money and banking. The IMF's chief economist admitted, “We assumed we could ignore the details of the financial sector”; the Governor of the Bank of England noted, “money, credit and banking play no meaningful role” in standard economic models; and a professor of finance acknowledged that economists “simply didn't believe the banks were important.” The reason for this was that in contrast to economists of the 1930s to 50s, later economists reverted to very simplistic, and fundamentally misleading, ideas about money and banking.
Current mainstream economics regards the state, or central banks, as controlling the supply of money in the economy and views commercial banks as functioning essentially as intermediaries between savers and borrowers. In fact, in the prevalent system of what is known as 'fractional reserve banking', about 97% of money is created by private commercial banks. This act of money creation takes the form of banks' extension of loans to borrowers, whereby a bank simply adds the amount of a loan to the borrower's account, held on computer (or, in earlier decades, in written ledgers). Thus, banks are fundamentally money creators rather than intermediaries. Savings ultimately derive from loans, not the other way round; in other words, debt is necessary for 97% of our money supply. Furthermore, this process of credit-creation is constrained only by banks' judgements of the likelihood of repayment of loans, and not by the monetary policies adopted by the state or central banks.
The implications of these, unbelievably largely forgotten, fundamental facts are huge, encapsulated in the statement of one of the few prominent figures who are beginning to remember, the former chairman of the UK Financial Services Authority (FSA), Lord Adair Turner: “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system's creation of private credit and money.” The central problem is that this system of money and banking is inherently economically unstable. Banks have an incentive to create as much money as they can, due to the interest they earn on the credit they issue. Ironically, it is often more immediately profitable for banks to lend to non-productive sectors, such as for mortgages and to other parts of the financial sector, than to the productive economy. This generates a mirage of prosperity, encouraging further demand for, and issuance of, credit, in what becomes an unsustainable, credit-induced bubble. As the chief economics commentator at the Financial Times put it, “the essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending.” The bubble will inevitably burst, or at least deflate, creating economic and social fallout, particularly if banks themselves collapse in the process; as Turner says, “Banks which can create credit and money to finance asset price booms are thus inherently dangerous institutions.”
The costs of this system to society are immense. Most obviously, and absurdly, it means that since nearly all money is actually debt, we are having to pay vast sums, in interest, to private banks for creating money out of nothing, simply so we can have enough money in circulation for a functioning economy. Secondly, since we are so utterly dependent on banks for 'holding' our money and enabling us to make and receive payments, they enjoy a further huge hidden public subsidy for being too important to fail, a subsidy that becomes painfully apparent when they have to be bailed out by the state. As the Governor of the Bank of England put it, for the banks it is “a case of heads I win, tails you – the taxpayer – lose.” Further ways in which the financial sector is a drain on society include its tendency to raise house prices far ahead of wages, due to the high proportion of credit that it extends for mortgages rather than for socially beneficial economic activity; and the tax avoidance schemes it devises, that allow large corporations, wealthy individuals and the banks themselves to shift the collective tax bill over to ordinary businesses and citizens. Ironically, a highly profitable financial sector is often lauded as a major contributor to a nation's prosperity, when in fact these profits are accrued almost entirely at everyone else's cost. Overall, the financial sector is – as currently structured – parasitic upon society at large.
How was it that mainstream economic thinking forgot the lessons of the 1930s, of how banking could become so destructively dysfunctional and dangerously unstable? It was due to a complex interplay of ideological bias, financial sector influence and complacency.
The Cold War encouraged a simplistic polarisation between the ideas of individualistic, free market capitalism on the one hand, as opposed to collective, state planned communism on the other. Among those defensive of capitalism, it became a matter of almost religious faith that the less business was regulated and coordinated by government, the better; the liberated forces of entrepreneurship and competition would spontaneously produce the best possible economic and social outcome. In synchrony, academic economists in the 'west' incorporated this idealised view of capitalism into the very foundations of their discipline, by assuming that the economy could be modelled essentially as the interaction of fully rational and informed economic agents, the sum of whose individually self-serving actions would translate into an efficient, stable system delivering the maximum benefit for all. Crucially, it was assumed that money would flow frictionlessly through this system to where is would be best put to use, as water naturally finds its level under the simple force of gravity. The business of banking, seen as a merely passive conduit for money to the underlying 'real' economy, could therefore be ignored. Unwelcome consequences of the free market – particularly in the financial sector – were pretty much defined out of existence, and economists who studied such 'market failure' came to be dismissed as maverick. Mainstream economics, aping rigorous science, devoted itself to the elaboration of sophisticated mathematical models – based on assumptions about human economic behaviour, however, that were quite unreal. “As I see it,” wrote a Nobel Prize-winning economist a year after the height of the financial crisis, “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” According to a former member of the Bank of England's Monetary Policy Committee, “the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources.”
Even in the decades immediately following the Great Depression, the powerful, well-connected banking lobby had managed to resist prudent financial regulation. But as mainstream economists – many of whom received funding from, and worked for, financial institutions – began to ignore the overall structure of the financial system, current and former bankers came to be seen as the only real 'experts' or possible candidates for official posts, despite all the obvious conflicts of interest. In the words of an unusually free-thinking former IMF chief economist, “A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true.” Banking legislation and accounting rules were written by and for bankers, and financial innovation was encouraged, based on the universal justification that competition and market forces would inevitably render the financial sector stable, efficient and socially beneficial. Ironically, the contribution of prudential regulation to the relative stability of post-1930s banking added to the sense of complacency towards that very legislation. US Federal Reserve Chairman Alan Greenspan was typical in arguing that “modernization” of the financial sector was needed “to remove outdated restrictions that serve no useful purpose, that decrease economic efficiency,” and that “the self-interest of market participants generates private market regulation.” In this spirit, a US regulatory agency's 2003 annual report featured a photo of a group of regulators and bankers taking a chainsaw, pruning shears and loppers to a stack of financial regulations.
And so, from the 1960s, the financial sector came to operate increasingly on the basis of unrestrained competition and became more globalised, as 'fire-break' controls on the permitted scope of banking activities, the scale of bank lending and international capital flows were removed – the effects of which were magnified by the adoption of computer and communications technology. The structure of the financial system, therefore, became increasingly determined by whatever new innovations and schemes would generate the greatest profits for market players. In this rawly competitive environment, banks came under greater pressure to maximise profits by lending as much as possible and putting any available capital to the most profitable use. They were thus impelled to push hard against the financial, and remaining regulatory, limits to prudent, sustainable banking and to find to new ways to push ever harder against those limits.
The key innovations to emerge were securitisation and credit derivatives, techniques of financial engineering designed to optimise lending and borrowing by dealing with the risks of repayment default in quite new ways. By securitisation, loans or anticipated cash-flows are repackaged to produce bonds, or securities. Whereas in the past banks extended loans and then kept them on their balance sheet until repayment, now they could sell these loans on to third party investors in the form of bonds. Similarly, with the use of credit derivatives third parties, acting somewhat like insurers, could take on the risk of repayment defaults, in return for a fee. The general idea – promoted by bankers and institutions such as the IMF – was that, according to the notion of 'market completion', money could now flow around the world more efficiently, as investors and borrowers could be matched across the globe by any manner of means. Thus, it was said, with securitisation and derivatives the risk of loan defaults could now be dispersed widely among willing investors rather than being concentrated in banks, thereby – crucially – making the banking sector more resilient.
The reality, however, was quite the reverse. Since the sale of financial products was driven by the increasingly short-term profit motive, financial innovations were actually aimed primarily at hiding risk rather than reducing it. Banks could therefore get away with profiting from more reckless lending – for as long as “the delusions of this time” could be maintained, as the FSA put it. Highly elaborate and opaque mathematical models, touted by bankers as allowing the risk of complex new securities to be carefully controlled, were systematically over-optimistic and achieved a merely illusory precision. While many such securities initially looked good by reliably generating a high return over the short- or medium-term, this came with the hidden cost of greater long-term catastrophic risk. “IBGYBG,” short for “I'll be gone, you'll be gone,” became of a catch-phrase among these products' innovators and sellers, including the ratings agencies – primarily Moody's, Standard & Poor's and Fitch – who earned colossal fees from giving their 'AAA' seal of approval to these innovations. When in 1996 the banks succeeded in having their own risk models incorporated into international banking standards (Basel II), this undermined precisely the kind of regulation that may have protected the banking system as a whole from those very models' biases and limitations.
By using credit derivatives, individual banks profited from regulatory loopholes in the insurance sector in a way that collectively made the banking system less stable. Derivatives were championed as increasing the 'price-discovery' powers of the market place, when in fact their use made the task of valuing companies, including banks, far more difficult. The proliferation of often complex and opaque derivative transactions – with many going unrecorded, 'over the counter' – meant that financial institutions became interconnected in such maddeningly complex ways that it became impossible really to know what types and levels of risk any bank – or the sector as a whole – was exposed to. Derivatives turned out to be, indeed, “financial weapons of mass destruction.”
With the competitive drive for profits pressuring banks into putting any available capital to the most profitable use, they reduced their levels of 'idle' working capital to the bare minimum. To this end, banks relied increasingly on cheap short-term loans in order to honour day-to-day payments – in the form of interbank lending, and with so-called commercial paper and repurchase agreements or 'repo'. An executive at the US investment bank Bear Stearns recalled his firm's daily repo financing: “Our guys would borrow maybe $75 billion a day, ... most of it daily.” Even many supposedly prudent high street banks across Europe began to adopt this short-term funding strategy. In other words, banks made money by maintaining only a dangerously wafer-thin buffer against cash-flow insolvency, or a liquidity crisis. Much of this bank borrowing derived from minimally regulated, and potentially flighty, money market mutual funds, bank-like institutions operating in a manner that avoids costly banking regulation.
An additional danger accompanying both derivatives and repos is that they were granted exemption from bankruptcy laws, measures designed to avert mass panic withdrawals of funds from companies to allow, at the very least, an orderly and fair distribution of funds to their creditors. However, financial institutions that are on the creditor side of derivative and repo contracts with an apparently faltering bank have both the incentive and the right rapidly to withdraw their funds, along with sizeable penalties, before others do, in a vicious circle leading to a 'run' on the fund. This protection against the risk of counterparty bankruptcy also seriously undermines the basic 'market discipline' of carefully having to monitor the creditworthiness of those one enters into contracts with.
Prudent regulation was evaded and risk concealed further by means of ever more elaborate accounting techniques (developed largely by the 'Big Four', comprising Deloitte, PwC, Ernst & Young and KPMG) increasingly deployed by corporations including banks, and even governments. The widespread use of 'off-balance sheet' accounting – usually involving 'offshore' or low-regulation jurisdictions such as the City of London, the Cayman Islands or some US states – meant that company accounts, particularly those of banks, no longer presented a true picture of their financial condition, a basic requirement for averting fraud and enabling market forces to operate properly. “Accounting has become a new exercise in creative fiction,” declared the head of a prominent investment firm, while a member of an urgent task force at the Accounting Standards Board went as far as to argue that the banking collapse was “a crisis largely caused by accounting.”
Through the evolution and complex interplay of these financial innovations, there grew a vast 'shadow banking' system where banking activities are conducted out of range of even the light regulation covering standard banking. In the shadow banking system in particular, the traditional checks and balances of prudent, sustainable banking, based on transparency and accountability, all but disappeared, enabling bankers to profit from deception on an institutional scale. The financial crisis was caused by a sudden collapse in this shadowy system of smoke and mirrors – essentially a bank run within the financial sector. High street banks, which had become increasingly involved, directly or indirectly, in shadow banking, were therefore brought down with it.
Ironically, relative to the scale of the problem the causes of the crisis, in shadow banking, have barely been addressed at all, while the much trumpeted reforms of standard banking have been minimal – largely due to intensive lobbying from the banking industry. The major part of the government, taxpayer-funded, response to the crisis has been simply to re-inflate the bubble economy; most of the money supposedly pumped into our real economy through 'quantitative easing' has effectively disappeared into the financial sector. Hence the widespread view that further financial crisis is inevitable; one financial consultancy report predicts that excessive private sector money supply, asset price bubbles and financial crises will plague the global economy for the foreseeable future.
In supposedly democratic countries it is, in principle, the ordinary voting public that is responsible for how its society operates. However, the electorate has been denied the necessary analysis – whether from the news media or from genuinely informative public inquiries – of banking, money-creation, shadow banking and accounting. Were this provided we might, for example, begin to recognise the ways in which free-market finance inherently tends towards instability rather than stability; to consider the case for replacing our current private sector, out-of-control, debt-based system of money creation with a publicly accountable, prudent and measured system of money supply; to see a need radically to rewrite financial law from the ground up so that banking can rest on far simpler, solid foundations and reliably serve the public interest, rather than being a confused and frenzied casino that weighs down, distorts and destabilises our real economy; and to bring accounting rules under democratic control as statutory legislation rather than being left to unaccountable, private bodies controlled by the accounting firms and their corporate clients. Just as Dr Frankenstein was responsible for creating a tragic human monster, so are we collectively ultimately responsible for our severely dysfunctional financial system and the activities of its bankers.
1 Michael Kumhof, 'The Chicago Plan Revisited', presentation at 31st Annual Monetary Trade Conference: 'Fixing the Banking System for Good', Global Interdependence Center and LeBow College of Business, 17 April 2013. See also Victoria Chick, 'Why Don't Academics Understand Money?', presentation at 3rd annual Positive Money Conference, 'Modernising Money', 26 January 2013; Stephen A. Zarlenga, The Lost Science of Money (Valatie, NY: American Monetary Institute, 2002).
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57 Eric J. Weiner, 'The next financial crisis', Los Angeles Times, 20 September 2013; Yalman Onaran, Michael J. Moore & Max Abelson, 'Banks Seen at Risk Five Years After Lehman Collapse', Bloomberg, 10 September 2013; Eric Helleiner, 'Should we be feeling more secure?' Toronto Star, 24 September 2011; Michael Hiltzik, 'Big U.S. Banks keeping door open to another financial crisis', Los Angeles Times, 13 September 2013; Steve Denning, 'Alan Blinder: Six Reasons Why Another Financial Crisis Is (Still) Inevitable', Forbes, 12 September 2013; Gretchen Morgenson, 'After a Financial Flood, Pipes Are Still Broken', New York Times, 14 September 2013; Editorial: 'If It Looks Like a Bank, Regulate It Like a Bank', Bloomberg, 3 November 2013; Ben Shreckinger, 'Did an invisible run on banks kill the economy?' Boston Globe, 23 December 2012; Michael Mackenzie and Tracy Alloway, 'Repo ‘fire sale’ risk worries regulators', Financial Times, 2 October 2013; David Reilly, 'Repos' Still Cast a Shadow', Wall Street Journal, 19 June 2012; Emily Stephenson & Douwe Miedema, 'Fed's Tarullo: short-term bank funding should be top regulatory focus', Reuters, 20 September 2013; Morgan Ricks, 'Reforming the Short-Term Funding Markets', Harvard Law School, John M. Olin Center Discussion Paper, No. 713 (2012); Enrico Perotti, 'We must escape the grip of short-term funding', Vox, 5 July 2010; Anat R. Admati et. al., 'Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive', Stanford Graduate School of Business, 22 October 2013; Yalman Onaran, 'Bank Regulators Should Toss Basel, Use Leverage, Hoenig Says', Bloomberg, 14 September 2012.
58 Matt Taibbi, 'How Wall Street Killed Financial Reform', Rolling Stone, 10 May 2012; William D. Cohan, 'Was This Whistle-Blower Muzzled?', International Herald Tribune, 21 September 2013; Mayra Rodríguez Valladares, 'Waiting for Uniform Derivatives Rules Is a Losing Proposition', American Banker, 11 June 2013; M.C.K, 'The SEC's dereliction of duty', Economist, Free exchange blog, 7 September 2012.
59 House of Commons, Treasury Select Committee - Quantitative Easing: Written evidence submitted by Positive Money, January 2013; Josh Ryan-Collins, Richard Werner, Tony Greenham & Giovanni Bernardo, Strategic quantitative easing: Stimulating investment to rebalance the economy, New Economics Foundation, July 2013; Andrew Huszar, 'Confessions of a Quantitative Easer', Wall Street Journal, 11 November 2013; Liam Halligan, 'UK QE has failed, says quantitative easing inventor', BBC News, 22 October 2013.
60 A World Awash in Money: Capital Trends Through 2020, Bain & Co., November 2012. See also Zoltan Pozsar, 'Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System', IMF Working Paper No.11/190, August 2011.
61 Renaud Lambert, 'Economical with the truth', Le Monde diplomatique (March 2012); Norbert Häring, 'The veil of deception over money', Real-World Economics Review, No.63 (March 2013); Patrick Chalmers, 'Why Doesn't the Media Understand Money?', presentation at 3rd annual Positive Money Conference, 'Modernising Money', 26 January 2013; David Dayden, 'The Media Can't Stop Sucking Up to Alan Greenspan', New Republic, 22 October 2013.
63 Jackson & Dyson, Modernising Money, pp.175-321; Andrew Jackson, 'Sovereign Money: Paving the Way for a Sustainable Recovery', Positive Money, November 2013; Mary Mellor, 'Could the money system be the basis of a sufficiency economy?', Real-World Economics Review, No.54 (September 2010); Timothy A. Canova, 'Lincoln's Populist Sovereignty: Public Finance Of, By and For the People', Chapman Law Review, Vol.12 (2009), pp.581-90; Morgan Ricks, 'Regulating Money Creation After the Crisis', Harvard Business Law Review, Vol.1 (2011).
64 Sikka, written evidence to Parliamentary Commission on Banking Standards; Vivien Beattie, Stella Fearnley & Tony Hines, memorandum to House of Commons Treasury Committee, Banking Crisis, Vol. II - Written Evidence, 1 April 2009 Ev.10-13; Prem Sikka, Steven Filling & Pik Liew, 'The audit crunch: reforming auditing', Managerial Auditing Journal, Vol.24, No.2 (2009).
By Keith Fisher, November 2013.
Further web links:
|To deal with climate change we need a new financial system||'Abolishing
debt-based currency isn’t a new idea, but it could hold the secret to
ending our economies’ environmentally damaging addiction to growth.'
|QE makes the rich richer: Positive Money||Positive
Money’s Executive Director, Fran Boait explains why [they are]
protesting against the Bank of England and the recent moves it’s taken.
|Why Theresa May Is Only Half Right: The Real Problem With the Bank of England||'It's time for a more radical approach to quantitative easing.'
|Monetary policy has an enormous impact on politics. It's time for a radical rethink
||'Theresa May knows monetary policy isn’t working. QE is increasing inequality, and low interest rates aren’t the solution.'
|Scrapping cash: don’t let the banks coin it
into Rogoff's proposal to axe cash is the privatisation of the
currency. Let's cling on to our notes, until publicly accountable
central banks are ready to create digital reddies.'
|Ireland's Outrage Over EU's Apple Ruling Reveals Fraudulent Global Tax System
shows how subordinate to the corporations our establishment have
become—they want a tax haven nation where workers pay countless charges
and the wealthy pay nothing.'
|From the Battle of Seattle to the Financial Crisis
financial sector succeeded by hitching the defense of its interests to
one of the few remaining resonant assumptions of an otherwise crumbling
neoliberal ideology: that the state is the source of all things bad
that happens in the economy. While benefiting from the government
bailout, Wall Street was able to change the narrative about the causes
of the financial crisis, throwing the blame entirely on the state.'
||Foreign Policy in Focus||29.8.16
|Banker Who’d Revolutionize Money Says It Can Be Done From Within
... says few are aware that it’s actually the commercial banks that
have the largest role in money creation, not the central bank. Reverse
that, and greater stability ensues, goes the thinking.'
|Ever wondered how money is created? Watch the latest Big Money Questions show for a simple explainer||'How is money created? It masquerades as such a simple question, but it’s one that befuddles MPs, even economists and so many of us who happily use the stuff every day.'||Daily Mail
|Hillary Clinton's New Anti-Trump Ad Misses the Mark||'Clinton accuses Trump of "rooting" for a crash caused by her own donors.'
|Tax havens ‘serve no useful economic purpose’: 300 economists tell world leaders||'Experts including Thomas Piketty, Jeff Sachs, Nora Lustig and Angus Deaton call for more tax transparency.'
|Why younger people can’t afford a house: money became too cheap||'There has been a failure in both the media and government to properly
diagnose the cause of high house prices. Until the causes – our systems
of money and planning – are properly understood, we cannot hope to fix
|How TTIP threatens UK’s ability to enforce fair taxes on corporations||'Corporations
are regularly using secretive corporate courts to undermine the ability
of countries to pass effective tax legislation, according to a new
report, Taxes on trial: How trade deals threaten tax justice.'
||Global Justice Now||15.2.16|
|What would the world look like if the banks crashed tomorrow?||'Huge
chunks of money would suddenly drop out of circulation into thin air
and the consequences would be catastrophic: cash machines and debit
cards would all stop working, threatening the entire financial system
with collapse. ... It is this scenario that is keeping governments
enthralled to the banks. As taxpayers we are on the hook to spend a
fortune rescuing big banks, because letting them fail would mean that
millions of people would lose access to their money. However, this need
not be the case ...'
|The World’s Favorite New Tax Haven Is the United States||'Moving money out of the usual offshore secrecy havens and into the U.S. is a brisk new business.'
|The tyranny of global finance
capital has emerged even stronger after the financial crisis having
staved off regulation and putting the blame on public spending.'
|Britain's Trillion Pound Island - Inside Cayman
Cayman Islands. It is a Caribbean paradise of sun, sea and cocktails,
but there is something else going on. Big money, big corporations...
and seemingly no one paying a penny of tax.
Now Jacques Peretti travels to Cayman in search of the truth about this controversial British tax haven, and uncovers some shocking revelations for what this sun-drenched island means for everyone back in Britain.
Jacques meets the politicians, playboys and ex-pats on the islands in a bid to unravel the truth about a place with the population of Bognor Regis... but a trillion pounds in the bank!'
|'Greed Is Not Good'||'Speaking
a few subway stops away from the epicenter of the global financial
crisis, U.S. Sen. Bernie Sanders promised to remake the financial
system to serve America’s working families in a speech in New York
|What Really Caused the Crisis & What to Do About It
||'Adair Turner discusses his new book, Between Debt and the Devil: Money, Credit, and Fixing Global Finance.'
||Institute for New Economic Thinking
|Fortune 500 Companies Stash $2.1 Trillion Offshore as US Taxpayers Foot the Bill||'New study highlights the repeated failure by U.S. lawmakers to crack down on tax avoidance schemes.'
|You can print money, so long as it’s not for the people||'Why
do those who seem happy enough with quantitative easing recoil if it’s
for social investment? Jeremy Corbyn’s idea of people’s QE is not so
dangerous. ... [A]ll money is created from nowhere. In normal
circumstances, it is created from nowhere as credit, by private banks,
and lent to us, usually (85% of the time) in the form of a mortgage on
an existing residential property.'
|Proposals for Full-Reserve Banking: A Historical Survey from David Ricardo to Martin Wolf||'Full-reserve
banking, which prohibits private money creation, has not been
implemented since the 19th century. Thereafter, bank deposits became
the dominant means of payment and have retained their position until
today. The specific contribution of this paper is to provide a
comprehensive outlook on the historical and contemporary proposals for
full-reserve banking. The proposals for full-reserve banking have
become particularly popular after serious financial crises.'
|A Commentary on Patrizio Lainà’s ‘Proposals for Full-Reserve Banking: A Historical Survey from David Ricardo to Martin Wolf’||'Patrizio
Lainà’s paper, and our commentary here, reflect the perennial battle
between the Currency and the Banking Schools. The main contention of
the Currency School is that the functions of money creation and
financial intermediation not only are, but should be, separable, and
only be came entwined by a (reversible) accident of history whereby
commercial banking developed on a fractional reserve basis in Europe'
|Bureaucrazies Versus Democracy||'The
Troika of the IMF, the EU and the ECB is out to break the government of
Greece. There is no other way to interpret their refusal to accept the
Greeks' latest proposal.'
|Follow the money: inside the world's tax havens||From
the Cayman Islands to Jersey, tax havens are busier than ever – a
secretive world of offshore accounts and shell companies. Nothing to do
|Banks are not intermediaries of loanable funds - and why this matters||'Problems
in the banking sector played a seriously damaging role in the Great
Recession. In fact, they continue to. This column argues that
macroeconomic models were unable to explain the interaction between
banks and the macro economy. The problem lies with thinking that
banks create loans out of existing resources. Instead, they create new
money in the form of loans.'
|The reality gap in the role of banks||'BoE paper finds theoretical view of lenders is out of date.'
|Banks are not intermediaries of loanable funds - and why this matters||'In
the intermediation of loanable funds model of banking, banks accept
deposits of pre-existing real resources from savers and then lend them
to borrowers. In the real world, banks provide financing through money
||Bank of England
|Can money be a force for good?||'There
is more money in the world than at any other point in human history, so
why doesn’t it reach the places that need it most?'
|Iceland: Fundamental reform of the monetary system must be considered
Sigurjonsson, Member of the Parliament of Iceland and Chairman of the
Committee for Economic Affairs and Trade, today published a report
outlining the need for a fundamental reform of Iceland’s monetary
|A new era for monetary policy - Event with Adair Turner (video)||'The
main speaker was Lord Adair Turner, former Chairman of the Financial
Services Authority (FSA). Lord Turner outlined how the monetary system
works and the current monetary policies countries are using. You can
see his full talk here.'
|Republicans and Wall Street Say to Hell With Protecting the Public!
mostly the lobby, specifically a few very large banks that don’t like
those restrictions on their activities. They want to be able to take
more risk. They’re not worried of course about how that could
negatively impact the rest of us... I think it tells you that democracy is basically broken.'
Johnson was the International Monetary Fund's economic counsellor (chief economist) and director of its Research Department, from March 2007 to the end of August 2008.
|Moyers & Company
|Teaching Economics After the Crash
||'Aditya Chakrabortty reports on the student fight to reform their economics education.'
||BBC Radio 4
|Debate over monetary system grows||'Nearly
all money is created by commercial banks in the act of lending. They
also decide whom to lend it to, and for what purposes. Is this good for
the economy? A growing movement is arguing for an alternative.'
|MPs Debated Money Creation and Society||'After
170 years of silence from the House of Commons on the subject of money
creation, there was finally a debate in the Main Chamber at the House
of Commons on the subject of ‘Money Creation and Society’ on 20th Nov
|Does money grow on trees?||'The
debate about the banks' power to create money is becoming much more
mainstream. After the recent event, Does Money Grow on Trees?,
parliament is scheduled to debate the issue for the first time in 170
|Growth: the destructive god that can never be appeased
blind pursuit of economic expansion stokes a cycle of financial crisis,
and is wrecking our world. Time for an alternative.'
|Matt Taibbi and Bank Whistleblower on How JPMorgan Chase Helped Wreck the Economy, Avoided Prosecution
Fleischmann, JPMorgan Chase whistleblower. She was a deal manager at
the bank, where she says she witnessed "massive criminal securities
fraud" in its mortgage operations during the period leading up to the
|The $9 Billion Witness: Meet JPMorgan Chase's Worst Nightmare
||' "It was like watching an old lady get mugged on the street," she says. "I thought, 'I can't sit by any longer.'" '
|Martin Wolf, Financial Times: Stop banks from creating money (Video)
Wolf, Chief Economics Commentator of Financial Times speaks at the
event “Does Money Grow on Trees?” at the hall of the Institute for
Chartered Accountants on 9th September 2014.'
|Sovereign Money in Critical Context||'Responding to criticism of monetary reform from a variety of economic viewpoints.'
|Why aren't the British middle-classes staging a revolution?||'Why
aren't the middle-classes more angry about stories such as the Phones4U
collapse, and what will it take to tip us over the edge, asks Alex
|The Biggest Tax Scam Ever
numbers are staggering. More than $2 trillion in U.S.-based
multinational profits currently sit in offshore accounts, representing,
by credible estimates, in excess of $500 billion in unpaid taxes. If
that money were deposited in federal coffers tomorrow, it would wipe
out the deficit for 2014. And every year that Congress dithers on a
crackdown, America is forfeiting an approximate $90 billion in revenue.'
|Making money - the state must reclaim its sovereign rights
does money comes from? In the 97% of the money we use is created by
commercial banks out of thin air, as they advance credit. Charlotte
Jackson argues that this system costs us all dear - as citizens,
debtors, taxpayers, and as victims of economic instability.'
|Why we can’t leave the power to create money in the hands of banks or regulators||'We cannot rely on failed regulators to prevent banks from abusing the power to create money, as Ann Pettifor suggests.'
|Strip private banks of their power to create money
counterfeit banknotes is illegal, but creating private money is not.
The interdependence between the state and the businesses that can do
this is the source of much of the instability of our economies. It
could – and should – be terminated.'
|Who Goes to Jail? Matt Taibbi on American Injustice Gap from Wall Street to Main Street
Taibbi is out with an explosive new book that asks why the vast
majority of white-collar criminals have avoided prison since the
financial crisis began, while an unequal justice system imprisons the
poor and people of color on a mass scale.'
|All the Presidents’ Bankers: Nomi Prins on the Secret History of Washington-Wall Street Collusion||'Financial journalist Nomi Prins explores how a small number of bankers have played critical roles in shaping a century’s worth of financial, foreign and domestic policy in the United States.'||Democracy Now!||8.4.14
|Inflation: The fraud at the heart of our economy that is destroying the middle class||'Wages have not kept up with the 67-fold increase in money supply.'
|Change to UK's money system could solve our long-term economic problems||'If electronic money was created directly by the Bank of England progress would be made, but sparks would inevitably fly.'
|The great story
US business press failed to investigate and hold accountable Wall
Street banks and major mortgage lenders in the years leading up to the
financial crisis of 2008. That’s why the crisis came as such a shock to
the public and to the press itself. ... [W]hy was it that some
journalists, mostly outside the mainstream, were able to produce work
that in fact did reflect the radical changes overtaking the financial
system while the vast majority in the mainstream did not?'
Columbia Journalism Review
|Did Hyman Minsky find the secret behind financial crashes?
||'Minsky's main idea is so simple that it could fit on a T-shirt, with just three words: "Stability is destabilising."'
||BBC News Magazine
|Bank of England on Money and Money Creation in the Modern Economy
been talking about the way money is created for the last 4 years. We’ve
also argued that the textbooks used in universities were inaccurate. At
last, there’s an official document and videos that we can send to all
those economists, academics, politicians and everyone who still
shake their head when we’re explaining this.'
|Insurers may be at the centre of the next big crisis
are now a crucial part of the so-called shadow banking sector – an
emerging hotch-potch of financial groups that are filling the vacuum
left by shrinking banks.'
|Why reregulation after the crisis is feeble: Shadow banking,
offshore financial centers, and jurisdictional competition
crucial element in the complex chain of factors that caused the recent
financial crisis was the lack of regulation and oversight in the shadow
banking sector, which is largely incorporated in offshore financial
centers (OFCs), but instead of swift and radical regulatory reform in
that sector after the crisis, we observe only incremental and
ineffective measures. Why?'
||Regulation & Governance||12.13
|Loophole Slowly Tightens on a Bank
sale to Lockhart was, for all practical purposes, a fiction. ... The
reason these losses have not shown up on the profit and loss statement
before is that accounting rules on securities valuation give banks a
lot of leeway. ... Isn’t financial innovation wonderful?'
||New York Times
|UK banks benefited from £38bn ‘too big to fail’ state subsidy||'[T]he
inherent instability of the banking sector and the negative impacts of
this instability compels the government to provide insurance, which,
due to moral hazard, actually increases the risks that banks take – so
increasing financial instability.'
|Volcker Rule Blame Game Begins
turns out that a good-sized chunk of Zions Bancorp's earnings existed
only in its executives' minds. ... [A]ccounting rules had been letting
Zions maintain a fiction.'
|Let's get this straight: AIG execs got bailout bonuses, but pensioners get cuts
||'No one has accused city workers in Chicago or Detroit of bringing down the economy, but they could face pension cuts.'
|Fed Eyes Financial System's Weak Link
in the short-term markets in 2008 were not unlike the bank runs—mass,
simultaneous withdrawals of deposits—that preceded the Great
||Wall Street Journal
|Sustainable banking starts with determining human needs
||'Banks should stop asking "how can we make as much money as possible?"'
|Here's why Wall Street has a hard time being ethical
new report finds 53% of financial services executives say that adhering
to ethical standards inhibits career progression at their firm. A
former Wall Street trader describes why.'
|The housing market: unsustainable asset bubble or ladder to prosperity?||'Fran
Boait, campaign manager at Positive Money, looks at the role of the
housing market in creating a more sustainable economy.'
||Blue & Green Tomorrow||23.11.13|
|Orthodox economists have failed their own market test
||'Students are demanding alternatives to a free-market dogma with a disastrous record.'
|Academics back students in protests against economics teaching
||'Professors argue in letter to the Guardian against "dogmatic intellectual commitment" to "orthodoxy and against diversity."'
|The great austerity shell game
how the capitalist scam works: let government borrow for crisis
bailouts, then insist cuts pay for them. Guess who loses.'
|Why the 1% should pay tax at 80%
Reagan-Thatcher revolution changed society's beliefs about taxes. If we
want economic growth shared fairly, we must rethink.'
Green Party takes on the banks
||'The Green Party of England and Wales
made history by joining
the United States Green Party in calling for an end to the private
creation of money by banks.'
|'The City of London is the government' - Rowan Bosworth-Davies, former Scotland Yard detective
||'The government is absolutely terrified of facing up to the bankers.'
||Bristol Broadband Co-operative
Owned is a documentary that reveals how money is at the root of our
current social and economic crisis. Featuring frank interviews and
commentary from economists, campaigners and former bankers, it exposes
the privatised, debt-based monetary system that gives banks the power
to create money, shape the economy, cause crises and push house prices
out of reach.'
|Money has been privatised by stealth||'The greatest privatisation in history has gone unnoticed. It's time to take from the banks the power to produce money.'
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