Blog 17

As 2008 draws to a close its legacy is a year of capitalistic exposé of financial chicanery, theft and misdemeanor by the banks and financial institutions around the world. 

What better time than to issue a somber warning that the financial institutions are unlikely to ‘mend their ways’ of their own volition. Unless fast action is taken by Governments to impose strict controls over the handling of savings, investments and credit availability for ordinary people then 2009 will undoubtedly go the way of 2008.

Perhaps it’s also time to uncover the ‘pyramid-selling-like’ antics of the banking system. Another relatively uncontrolled mechanism the banks have installed over time as a means of creating unlimited amounts of credit that turn into vast mountains of profit for them derived from interest on money they lend that doesn't exist.

I’m talking specifically about Fractional Reserve Banking (FRB), which in my opinion is probably a far greater crime against modern society than all the mis-doings of the F-May, F-Mac, Lehman Bros, Bernie-M, et al brigade. There companies merely manipulated the money created by the banks from their FRB pyramid scheme.

While usury in times past and in its original form was a crime against society and currently remains a heinous crime in Islam (riba), it’s now used only to describe excessive charging of interest. Despite that, charging interest or excessive interest it is not currently a criminal offence under the law of most countries.

In fact, most people would accept the principle that banks charge a higher rate of interest to their debtors than they pay in interest to their depositors, the difference being a more than reasonable profit for doing next to nothing. Banks obviously also cover their operating expenses and make a profit by charging for other bank services.

So let’s come back to FRB, the 'pyramid-like' instrument installed by the banks a hundred years or so ago that creates a geometrically increasing amount of credit based on nothing, but that nets the banks as much in interest income annually as the total value of their reserves.

I will say that again because a single sentence is not worthy of the magnitude and consequences of such a blatant fraud.

The banks have a mandate that allows them receive as much in interest income annually as the total value of their reserves.

Unbelievable, yes. So how do they do it? And why if it is so obvious is the practice apparently condoned by Governments?

Well, the mechanism is a little difficult to explain without getting too complicated, (which is why they have been able to get away with it for so long), but basically the creation of Central Banks and the formation of a banking cartel overseen by the Central Banks of the world allows the banks to work in unison. Their aim has always been to maximize their excessive profits to the detriment of society as a whole.

As for why Fractional Reserve Banking is condoned by Governments, well for the cynically minded that should not be so difficult to figure out. The bankers magic money making mechanism works like this:

Step:

1. Depositors lend Bank-A a total amount of real money, say $10,000, the bank then becomes a debtor to its depositors.

2. Bank-A promises to pay its depositors 5% per year interest.

3. A member of the public who has no money asks Bank-A for a loan to buy a car.

4. Bank-A  gets the member of the public to sign a loan agreement to pay back $11,000, the amount borrowed plus 10% interest, over a specified period of time.

5. Bank-A deposits $10,000 in the member of the public’s checking account.

6. The member of the public goes to a car showroom, writes out a check for $10,000 and drives away in his new car.

7. The car showroom owner banks the cheque in his account at Bank-B.

Now, quite by chance another member of the public went into Bank-B at the same time and arranged exactly the same deal. He went to another car dealer and bought a car for $10,000 with a check drawn on his previously arranged loan account at Bank-B.

By another chance, the second car dealer happens to bank with Bank-A. So Bank B now has a check for $10,000 drawn on Bank-A and Bank-A has a check for $10,000 drawn on bank B. So what do they do? Well they simply exchange checks, after all they are both members of the Central Bank Club.

You will notice that neither bank, the member of the public or the car dealer actually saw any real money. The banks just sit back now and receive monthly payments that do now consist of real money totaling $11,000 for the duration of the loan term.

Now, if that was all there was to it, the status quo while not perfect, would be acceptable to most people, to society as a whole and would not seriously affect the balance of money supply.

But, and it’s a very big and geometrically explosive BUT.

Both Bank A and Bank B, having secured a ‘promise to pay’ in the form of a signed document from their respective members of the public, now have the potential to lend up to 10 times more than the face value of the promissory document ($11,000) in further loans (a whacking $110,000!), backed and condoned by the Central Bank. Furthermore, each of these new promissory loan documents can in turn be used in exactly the same way to generate a further 10 times volume of credit, and so on.

As you have seen most of the money lent by the banks does not have to exist, no matter how many banks are involved in the credit/spending/more-credit roundabout of fake money it always ends up back at the bank that lent it in the first place. And as long as the banks creditors don’t all ask for their money back at the same time the fraud can continue to grow almost in perpetuity.

The amount of credit available is limited only by the supply of goods and services, and that calculation is no longer the preserve of Government but completely under the control of privately owned Central Banks. By introducing the amount of credit available slowly the supply of goods and services available is balanced by the cost of all goods and services rising to match credit supply. Much in the same way as money used to match gold reserves and later GDP in the good old days when Governments controlled the money supply.

Fractional Reserve Banking, as the name implies is the dubious practice of maintaining a reserve ratio of depositors real money that's just a fraction of the amount of virtual money that's lent, usually around 10% of the amount lent. A fractional reserve ratio of 10% doesn't sound like much, which is why it's so clever, what it actually means is that the amount on deposit is just 10% of the amount lent. The banks lend around 10 times more than they actually have and because they don't deal with actual notes, no one notices what they're up to.

It’s no wonder then that the banking system goes through such turmoil every 10-15 years or so, like a snake shedding a skin that it’s outgrown, writhing itself into the next grubby money making phase.

It’s also no wonder that the very people who enter the banks premises cap in hand to beg for credit, do so simply to purchase the very things they helped create in the first place. The real wealth they created having been diverted into the coffers of the banks. Again, it’s no wonder that it takes 30 years of debt commitment for the average family to buy a home that’s worth only a fraction of the cost to build due to the inflationary effect of unlimited, un-backed mega-credit.

The clever can hoodwink the not-so-clever for a time, but as populations become more educated and the clever continue to make unforced errors due to their avarice and greed, a time will come when there will be a social revolution of sorts mounted against the financial sector. In fact, if things continue the way they have developed during 2008, then 2008 may yet prove to have been the turning point.