Economics - Enrico Longo

The Role of Banks in Inequality and a Future Without Interests

Enrico Longo

 

There are several arguments to be discussed and criticisms to be made in our economic system - multinationals, the issue of employment, exploitation, etc. The whole Symposium is not enough. We’ll see then that the cause of it all is the banking system.

OK, let’s now try to discover the subtlest secret of finance.

Let’s start from a simple example.

We accumulated a small savings and we decide to entrust it to an investment fund through an expert by paying him  in advance a fat commission! The first thing that the manager will do with our money  is to buy himself a beautiful brand new Porsche (if he uses his savings he would be more careful).
Right ... but he is dealing with our savings, we then think. But is he really working to make us rich? Actually, fund managers can not hardly beat the index[1]. They lose money, more or less, as we would have if we play the stock market personally. But win or lose, nothings changes for the manager. That's the point - he always makes money!  In advance. The money is ours and the profit is his!

So what now? Do we leave the money in our bank accounts so at least we do not take risks and remain liquid?
But the trick starts right here - in the bank.

We deposit our €100 and the bank makes us believe that they keep it safe! Instead they loan it. Because the bank is compelled to keep only 10% cash, confident of the fact that not all depositors will withdraw all their savings at the same time. They lend our money to any entrepreneur, one that is rather secure, because they have evaluated him, they are informed, they are not naïve, or they grant a mortgage. All of this with our money. The bank never lends its own money!

This is still nothing. We think that the bank’s profit is in the famous spreadsheet - the bank pays us a 1% passive interest (liability) on our deposits, and cash in an active interest (asset) of  7% or 10%  from loans.
Such  difference therefore is the bank’s profit?  Wrong, much more.
With my €100, the bank can create between 10 to 20 loans of €100 each, or rather it creates money between one to two thousand euros. Money that it hasn’t got. All these new money  are nothing more than  accounting entries, credit-money, money created ex nihilo[2].

Let's see. As mentioned, out of the €100, 10% liquidity is obliged, so then it loans the 90% to Tom. Tom receives 90 euros which, sooner or later, will be deposited as savings to his account. The bank will hold again 10% in liquid form and lends the €81 difference to Dick ... and so on. With a simple mathematical calculation we’ll find out that the bank can loan from €100 to €900 which earn interest up to 10%, a huge pile of money!
The Central Bank knows very well that a maximum of 10%  of all deposits are transacted daily because depositors withdraw money or creditors deposit money.

Let’s sum up. The bank earns disproportionately on money that 10%  is ours and the 90% that does not exist. They are geniuses!
It's fake money, vacuum money. But money, even if it’s false, controls the world. Companies must produce to pay off interests, we need to buy but we can not afford and we go into debt.

Even if we do not borrow money, without knowing it, we pay interests[3]. A contractor is indebted to produce and charge the cost of debt on prices of goods! Simple.
On the average, 50% of the prices of goods and services consists of interests (only a tenth was paid in the Middle Ages). In other words, what we buy would only cost half if, for example, companies were self-financed, producing only  for the real needs for themselves and their consumers.
It is estimated that 80% of the households pay more interest than they receive, and only the last 10%, the holders of capital,  receive more than what they pay for. Let's do a quick note common to many. How much interest have you got if you are paying mortgage, and how much interests do you receive in your savings?

Here's the real reason why the rich are getting richer and the poor getting poorer, may they be individuals or states.
And while we make ourselves fooled by the promises of 3%, 6% or even 12% interest rates, we believe them and the banks know that they are deceiving us. Do not forget that the business journals are owned by the banks.
Here's the carrot, and we never see the stick. Because of debts, companies are obliged to grow, not to satisfy the real growing needs but to repay interests. Thus, when we are saturated with goods and we slow down purchases, everybody goes to buy at financial values, where the price rises by the mere fact that everyone buys. Then the financial bubble bursts, and, once again, the money that goes up in smoke is ours, not the banks’.

Let's now see technically how it happens and let’s try to jump, let’s go to the source ... the place where money is created and begins to generate interest.
With your €100, the bank lends it to the industry tenfold. It lends money that it hasn’t got, created from nothing, and derives profit from the interests.
The bank enters the new €1,000  as assets because it earns interests and similarly as liabilities because now  the credit-money is in circulation and the indebted entrepreneur will issue checks as guarantee and sooner or later these will be encashed. The debtor pays the debt with periodic payments.

When the debtor fails to pay, the bank has to record a loss. But it's not a big tragedy for the bank (Remember that 90% of that money was a mere accounting entry, and the remaining 10% was ours).

But the bank needs to put back something in place. If now,  a sum on the column of liabilities is missing, the bank will also redo its assets (assets and liabilities must always be equal), and will do so by taking money from its equity.

If this situation were to multiply, then the problem would become serious. Too much outstanding debt, not repaid, the bank would fail.

But there’s nothing to worry about! The bank will be saved ... this is why there is the Central Bank, the last resort lender. They tell us that it intervenes in order to save the depositors’ money, but the fact is that the bank knows that it (Central Bank) will not allow them to fail.

Now we need to be clear on one thing -  most of the debts are made by simple people who normally pay! The major borrowers,  other than the large companies, are precisely the states! The states are insolvent by nature.

The state needs money to cover expenses but can not print money. And to whom does it ask? The Central Bank! The state must issue treasury bills, hands them over to the Central Bank, which in return releases money that corresponds the value of the treasury bills, as we know it includes an interest!
It would be impossible for the State to issue interest-free money directly, but in Europe, this is expressly forbidden by Article 104 of the Treaty of Maastricht.
Here is the source of everything. Money generates interest from the start.
So we understand that the ideal debtor is, and remains, the state. The Central Bank lends money to the state through treasury bills and upon maturity the state will pay by issuing new treasury bills -  here is the eternal debt of the state.
OK. The Central Bank does not risk practically nothing. It enters treasury bills among its assets (because it is a credit and earns interest) and then opens a corresponding liability from which the state withdraws money.
Let’s make it clear,  this happens in private banks - withdrawing money that does not exist. If one of us did the same thing with bad checks, we’ll end up in jail!

The state begins to issue checks or money orders to pay its expenses. This wave of money ex-nihilo increases the money supply in circulation by raising prices of goods and services.
When suppliers and government employees receive these checks, they deposit them on their accounts and the bank will start its game again as we have described above.
We now have money created from thin air by private banks coming  from money created from nothing by the Central Bank. Very brilliant!

And all this money supply creates inflation!

And the interests that the state must pay to the Central Bank are those of the public debt, that’s why they cut government spending!

And the Central Bank is 94% owned by private banks!

It’s dumb-founding!

What is there to do then?
To have a state that issues money; create the figure of a public bank; charge a tax for the possession of capital instead of the right to ask for interests ... there have been so many proposals from economists and not only at the macroeconomic level.
But if we do not have the immediate opportunity to do this, since this system would be redone from the bottom-up, we can begin, however, to buy more products of SMEs (which on the average have lesser debts), we buy from sustainable and "zero-kilometer" markets, learn to consume less, and not to indebt ourselves if not for "real necessities", learn to give up the unnecessary.
But not only that! In Sweden, a non-profit co-operative bank that collects savings and provides interest-free loans, circulates the money of the people to the people, and all customers are partners and owners of the bank has been in existence for some years.  A bank in which the president earns a little bit twice than that of an employee because they don’t make profits, they only earn in order to pay salaries and overhead costs. A bank that does not work with financial instruments. A bank that finances the members in difficulty, only the small scale local producers and non-profit associations.

It is called Jak Medlemsbank, and for a couple of years now some people are trying to replicate the model in Italy.