Boom and Bust Economics and money creation

Something emerges when trying to understand the roots of the economic crash and the ensuing crises that are currently engulfing Europe and the United States. This is how money is created. There are two things related to this. One is what the bank does if you go there and apply for a business loan, mortgage, etc., and the second is fractional reserve banking. Without a certain knowledge of these two financial tools, no real understanding of the functioning of the economic system or of the crash is possible.

The activist group Positive Money explains that only 3% of the money supply comes in the form of banknotes and coins created by the British government. The rest, 97%, is e-money created out of thin air by banks when they make a loan. It is created by typing the amount into a computer and crediting it to your account. The interest charged varies, and in the case of credit card loans, it is exorbitant. With this power at their fingertips, it’s no surprise that banks are using hard selling to get people to take out loans. A huge chunk of the money created – hundreds of billions of pounds in the 10 years leading up to the crash – was used to finance housing mortgages, which increased 370% between 1997 and 2007. Hundreds billions more of that new money went to financial services and casino-type banks. “In the meantime, business loans have stagnated, hurting the real economy and lowering jobs and growth.”

This huge increase in the money supply for mortgages inflated the price of housing by 200% during this period. During the same period, the population increased by 5% and the number of houses by 10%. As households spend more on keeping a roof over their heads, less money is spent on other basic necessities, which lowers demand and contributes to the recession. How much money have banks created?

“Banks created over £ 567 billion in 2007 alone as a result of this reckless money creation, the total amount of money (and therefore debt) in the economy has doubled in just under eight. years – from around £ 1 trillion in 2001 to over £ 2 trillion in 2009. Shockingly, only 8% of this money created goes to businesses that contribute to GDP. The vast majority of the rest is used to speculate on house prices and financial assets. “

It can be seen that if you want to create a bubble economy that makes the banks richer, but starves the wealth-creating sector, you would be hard pressed to design a better system. The bursting of the bubble becomes inevitable, causing misery and the ruin of millions of lives.

Fractional reserve banking is the other wind that bankers have to maximize their profits, regardless of the effects it may have on a nation’s economy. This is where the banks keep a percentage of the money deposited and lend the rest. This seems perfectly reasonable in theory, as we don’t all want to take our money out of the banks at the same time. However, when you consider what might actually happen, a different picture emerges. Michael Snyder on provides a good explanation of how this might work in practice:

“If the reserve requirement is 10%, for example, a bank that receives a deposit of $ 100 can lend $ 90 of that deposit. If the borrower then writes a check to someone who deposits the $ 90 [in any bank], the bank that receives this deposit can lend $ 81. As the process continues, the banking system may extend the initial deposit of $ 100 to a maximum of $ 1,000 ($ 100 + $ 90 + 81 + $ 72.90 + … = $ 1,000 ). “

The influence on the money supply of this multiplier effect could be staggering. The more one reads all this, the more one becomes incredulous, that in a democratic society where we elect governments to take care of us, such power should be given to the banks.

Regulations meant to prevent abuse were relaxed to the point that governments had no idea what bankers were doing. Combine all of this with the notion of “too big to fail” and it’s not hard to see why the crash happened and barely affected the 1% of the rulers of the universe.

Changes and reforms to such a system must get to the heart of the matter, namely the enormous power given to banks to create money out of thin air. Removing this power is essential for the economic health of a nation. Here’s how Positive Money puts it:

“Taking away the power to create money from banks would end the instability and boom and bust cycles that are caused when banks create too much money in a short period of time. It would also ensure that banks could be allowed to go bankrupt without taxpayer bailouts. This would ensure that the newly created money is spent in the economy, so that it can reduce the overall public debt burden, rather than being loaned into existence as is currently the case. “

Will our politicians, whatever their party, push for these reforms and save us from the misery of the collapse of the next bubble?

About Ruben V. Albin

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