Blog 26

2009-February-27

Can the UK banking system survive in its current form?

My technical education included business related economics. It's perhaps this fact that has allowed me to take what I have come to call a 'hyper-macro' view of the current economic crisis.

Using the power of the Internet I have done a great deal of research relating to the development of the banking system over the last 100 years. The conclusion I've come to as to the cause of this and every other financial crisis that's occurred during the last 100 years and the way to deal with it have become, well to me anyway, all too obvious.

The keywords are 'Fractional Reserve Banking', and the main culprit is ‘false credit’. A toxic system is inevitably going to create toxic debt.

The current generation of economists it seems, operate from a platform that accepts the current financial and banking systems as being normal. Most, if not all of their training is learning about the system 'as-it-is', not what it should be. This is understandable since it's been around for a long time. The discussions, opinions and solutions being bandied around on the media almost all relate to patching up the current system, getting credit flowing again (whatever that means) and hoping that it all settles down, back to where it was before.

At this point, I want to define what I consider credit currently is and what it should be.

Credit should be the redistribution money that is ‘surplus’ in the financial system. Individuals or companies that have surplus money can deposit it in a bank (depository), and receive [reasonable] interest. In order to redress the balance between ‘money supply’ and ‘goods available’ in the system it’s necessary to return this surplus money to the system. Therefore, the banks lend the money they have on deposit at a higher rate of interest than they pay to their depositors, the difference being their profit. Not too much wrong with this, (providing not all their depositors ask for their money back at the same time).

Currently, 90% of all credit issued is backed by money that does not exist. The banks lend money in the form of plastic [credit/debit cards], promissory notes or an electronic entry in a computer system. Providing the lenders and the borrowers don’t ask to actually 'see' real money no one ever knows that the ‘credit’ supplied is not backed by money or worse, is not backed by any ‘real wealth’. That the banks make a great deal of profit from charging interest on money they don’t have is the single most significant factor that led to the current economic collapse.

The current amount of money (that doesn’t exist), that can be lent by the banks ‘legitimately’ is equivalent to 10 times the amount they have on deposit from investors.

This is Fractional Reserve Banking and it is in my opinion (and the opinion of many others) the single most ‘toxic factor’ that led to the amount of ‘toxic credit’ in the system and the most significant culprit for the current crisis.

In effect this disguised 'Ponzi Scheme' provides the banking system each year with an amount in interest equivalent to the total amount they have on deposit. Now this is absurd, it’s no wonder the system collapsed, in fact it is surprising it was able to survive for so long without collapsing sooner. What’s even more surprising is that Governments around the world actually regulate the fractional reserve ratio, they are in effect partially responsible for their financial woes.

Yes the system needs to be shored up in the short term, but any overhaul of the banking system needs to include the abolition of fractional reserve banking.

Finally, to answer a question raised this morning on BBC World News “Can the UK banking system survive in its current form?” the answer is:

  • Yes, if when the dust settles everything reverts to how it was before.
  • No, if the banking system is overhauled, fractional reserve banking is outlawed and banks revert to what they were originally intended to be, depositories for surplus wealth.

Fractional reserve banking, ‘Google it’ and be prepared to get angry.

 

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