Banks are not intermediaries, the loan comes before the deposit

Posted on March 24, 2013 by Deirdre

A key thing missing in last week’s coverage of the Cyprus crisis is that banks create a loan before they create a deposit. Almost all journalists and commentators all fall into the trap, believing that banks are true intermediaries between saver and borrower.

Michael Kumhof, a former bank manager at Barclays, disposes of this myth in his article with Jaromir Benes called the Chicago Plan Revisited, and in subsequent lectures and papers. Kumhof, an IMF economist, says clearly; “The loan precedes the deposit. I know because I did it and if anyone like Paul Krugman tells you otherwise he doesn’t know what he is talking about.”

I was explaining to a friend the other day that if banks have 100% backing for their deposits there is no risk of a run on the bank. Her reply was “But then they would have nothing left to lend out.” This friend was believing, as is fed to her in the daily media, that banks lend out their deposits. Kumhof goes further than this by saying “The chief function of banks is to create the nation’s money supply. They are solely in charge of it.”

So when rich Russians deposit their money in the Laiki Bank in Cyprus the deposits are not lent out at all. The bank itself decides who will have loans, issues the loan and at the same time writes an equivalent deposit on the other side of the ledger. How do you think the size of the banking sector in Cyprus reached eight times the size of the economy in 2011? The banks made loans and were solely in charge of the credit blowout.

And it is the same with the rapid expansion of the Iceland banking system. Banks made loans for houses, cars, aeroplanes, condominiums and seldom asked questions. In fact as Hordur Torfason the Iceland activist explained, he was called into the manager’s office and offered a big loan when he didn’t even want one. We know that the bank staff have incentives for issuing more loans. They are paid more if they do.

The tragedy of all this is that the universities are not teaching it honestly to each generation of students of economics. The economists tell the journalists and so the myth continues. Hopefully Cyprus will help the public understand the whole horrible faults of the way we rely on banks to create and decide on the country’s supply of credit.

A transcript of the first seven minutes of Michael Kumhof’s talk is here.

To tell the public or not to tell the public that they might have to help bailout their bank

Posted on March 12, 2013 by Deirdre

Petition on Banking Reform

A friend has emailed me with her concerns about making Open Bank Resolution public. That is when the banks demand their customers bail out a failing bank and it is coming to a bank near you soon. See website of Reserve Bank of New Zealand. She said if everyone knew, they would take their money out of the bank and they would collapse. My friend has drafted a great letter to the Dominion Post but has qualms about sending it.

Well that is exactly why we have launched a petition asking for a Parliamentary Enquiry into the best ways of making banks stable. You see right now, because banks create loans and control the amount of credit in the economy, only 8% of the deposits now in banks could be redeemed at any time. (That is if everyone went to the bank at the same time for their deposits. What an incredible dilemma. No wonder the Government isn’t telling us that as customers we might, after June 30 be required to help bailout a bank. Join our FB page at http://www.facebook.com/pages/Petition-for-a-Parliamentary-Enquiry-into-making-banks-stable/420764948002065

What we are suggesting is that Government takes the recent IMF paper by Jaromir Benes and Michael Kumhof seriously. It is called The Chicago Plan Revisited. It designs a system where banks have 100% backing for deposits, not just 8%. All the good economists who nutted out solutions after the Great Depression seemed to agree this was necessary. Ones like Milton Friedman, Henry Simons, Irving Fisher.

So back to the dilemma of to tell or not to tell the public. The banking system is inherently instable because it relies on fractional reserve banking, where the bank creates credit but doesn’t have a supply of what the authors call “indestructible money” to back it up with. This used to be gold. But it can be the type of money created by the Reserve Bank, the notes and coins we use. They don’t carry debt.

Is the current banking system inherently unstable? Yes. According to IMF data, there were 145 banking crises, 208 monetary crashes and 72 sovereign debt crises between 1970 and 2010. This represents a total of 425 systemic crises, an average of more than 10 countries getting into trouble every year.

How are we going to reform it if the public doesn’t have the knowledge? In countries like Argentina, Greece and Iceland they learn fast after a crisis.

You could always change to a Credit Union

Posted on March 6, 2013 by Deirdre

Today I phoned the CEO of the NZ Association for Credit Unions, Henry Lynch. I told him that feedback we had had from our members about our petition on Open Bank Resolution had included people who said they banked with a credit union anyway so didn’t have to worry about Open Bank Resolution.

It seems there are three big credit unions in New Zealand. Baywide Credit Union based in Hawkes Bay has 15 branches. First Credit Union in Hamilton has 50,000 members and NZCU South covers the South Island. No limit on deposit size. And there are other smaller ones. They are owned by their members and you can go to their AGM etc.

They do have mortgages, but only at floating rates. They don’t have credit cards but their debit cards, where you preload your money, uses your own money and is fine for all online payments like Amazon etc. That is a relief for those wanting to change.

I also learnt by listening to a Radio Live interview with the CEO of the Co-operative Bank that people don’t have so many problems changing banks these days. The only situation in which they have problems is if they have a fixed rate mortgage and it costs them to break it.

Credit Unions in New Zealand are champing under controls which don’t exist in Canada, where almost one in three people bank with a credit union. Last Sunday the Sunday Star-Times had an article which outlined the various laws and regulations which constrain credit unions or impose unnecessary costs on them. Obviously the New Economics Party would develop policies which address these concerns.

Adair Turner recommends Quantitative Easing for the People

Posted on March 3, 2013 by Deirdre

A breakthrough speech on Monetary policy by journalist and financial economist Anatole Kaletsky was published by Reuters on Feb 7, 2013.

Kaletsky explains that one of the most influential financial policy makers in the world, Adair Turner, chairman of Britain’s Financial Services Authority has drawn attention to the fact that the combination of zero interest rates and Quantitative Easing as it is currently practised are neither alleviating unemployment nor halting declining living standards. Giving money (about $85 billion a month) to the banks and Wall Street investors by buying government bonds isn’t working.

Adair instead suggests dividing up this money evenly among American citizens and distributing it every month to stimulate the economy. It would work out a $283 monthly for every man, woman and child in America. He says it would be infinitely more effective than distributing money to bond investors and banks through QE.

Lord Adair Turner’s Feb 6 speech Debt, Money and Mesphistophales: How do we get out of this mess? is not for the faint hearted. At 46 pages it is a challenge, and after a quick skip through, I will trust Kaletsky’s summary. The references include Minsky, Milton Friedman (he invented the term “helicopter money”, often attributed to Ben Bernanke) Henry Simons, and the authors of the The Chicago Plan Revisited, Jaromir Benes and Michael Kumhof. Professor Steve Keen from Australia has been recommending Quantitative Easing for the People for some time.

As Ellen Brown says, “The Federal Reserve has lavished over $13 trillion in computer-generated bail-out money on the banks, and still the economy is flagging and the debt ceiling refuses to go away. If this money had been pumped into the real economy instead of into the black hole of the private banking system, we might have a thriving economy today.”

Natural Economics by Gary Williams

Posted on February 28, 2013 by Deirdre

Gary, a long time permaculture teacher has recently written a booklet called Natural Economics. Gary has a Master of Commerce, a Bachelor of Science and a Bachelor of Engineering. He works as a soil engineer. He lives with his partner Emily on a small farm in Manakau, north of Otaki. They have a wide diversity of farming and forestry activities, from home gardens and orchards to staple crops, animal grazing, firewood and plantation forests and wilderness.

Our party is very much about applying the principles of permaculture to economics and Gary in this work has written of life and death, growth and decay, expansion and contraction. “Natural ecosystems”, he says “have a very different rhythm to that of our present economy with its time-rigid orderliness, high energy and destructive technology and ever increasing exploitation and expansion of consumption”.

“Well functioning ecosystems are self-organising and maintain themselves by continual exchanges and the flow through of energy or information, with multiple connections and feedback linkages.”

He talks of natural economics being achieved through a common ownership of the basic resources of the land and a universal income for all citizens.

There is more. This little booklet is attached for all to read. A fuller review of it is here

Should New Zealand prepare immediately for oil shortages?

Posted on February 27, 2013 by Deirdre

Last night at our Transition Towns meeting we had a good speaker from the Otaki Clean Tech Centre on alternative liquid fuels. He spent the first part of his talk summarising the position with fossil fuels. What a reminder! One thing he told us was that our New Zealand strategic oil reserves are held on a piece of paper in Japan. I am keen to confirm this and so have today written to the Minister of Energy and Resources, Hon Simon Bridges.

Then I see on my email today a link to a media statement from ASPO Australia. He says New Zealand should prepare immediately for oil shortages. ASPO’s website is here. That led me to a link to a talk by Professor Susan Krumdieck. Well it is hard to find 32 minutes to watch a youtube video but I assure you this is worth it. She is talking to business people and makes the cases that is is a dumb investment investing in fossil fuels where there is such a low return on energy invested.

Which leads me to thinking about what has happened over the last few years of a National Government, hell bent on building roads and deaf to the cries of the manufacturing and export industries about the high NZ dollar. The answer is always about how New Zealanders will feel the pain of a lower dollar in higher petrol prices. We continue to drive at 100km an hour, though in times of awareness that speed comes down to 80 km an hour. In the seventies oil shocks we had carless days and had to drive slower. But right now we have been lulled into a state of torpor, dreaming that this oil, which cost so much to produce and so many lives in oil wars to protect, will continue at this price forever without dirsuption. Are we sleepwalking to catastrophe?

Who Owns the Big Four Australian Banks?

Posted on February 17, 2013 by Deirdre

You will know that New Zealand banking system is dominated by four large Australian banks, but did you know who owns them? Well I did a bit of a search and found this website called Spankyourbank. There you can look at http://www.spankyourbank.com.au/who-owns-how-much-of-our-banks where it gives the ownership chart.

Four companies dominate. We find that between them, the four, HSBC, JP Morgan, NAB and Citigroup own 49% of ANZ, 34% of NAB, 43% of Westpac, 38% of the Bank of Queensland, 37 % of the Commonwealth Bank and 28% of the Bendigo Bank.

So while we worry that the big four in New Zealand are owned in Australia, it is not quite true. They are owned by UK and US based banks.

For example BNZ, purchased by National Australia Bank (NAB) in 1992, has the following five largest shareholders:

HSBC Custody Nominees 16.9%

J P Morgan Nominees 12.2%

National Nominees 11.5%

Citicorp Nominees 4.6%

Cogent Nominees 1.9%
HSBC has 13.6% of the Commonwealth Bank, which owns ASB, 17.5% of ANZ as well.

Now who is HSBC? Well they are so big that when they were fined last December a record $1.9 billion for money laundering, they were not just too big to fail but too big to jail. While HSBC has been caught laundering tons of cash for drug cartels and alleged terrorists, yet no bank officials will be prosecuted or imprisoned. An editorial in the NY Times http://www.nytimes.com/2012/12/12/opinion/hsbc-too-big-to-indict.html?_r=0 on 11 Dec 2012 said it was a dark day for the rule of law.

They were sponsors of the Sevens Rugby Tournament and no questions were apparently asked.

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