What does the current banking system mean for housing, debt, inequality, jobs, businesses and taxes?
Ben Dyson, speaking at Just Banking Conference on 20th April in Edinburgh (19 mins):
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At the INET conference – the Institute for New Economic Thinking – which was in Berlin last week, one of the speakers thereâ€¦they were introducing Adair Turner, who’s the chairman of the FSA, and he was saying that Adair Turner’s not afraid to use taboo terms. What a lot of economists talk about is banks doing intermediation, which is this idea of banks taking money from savers and lending it to business that need to invest and grow, which is a fairytale, really. And he says, Adair’s willing to use the taboo term “Credit Creation”, which is about banks creating credit when they make loans, which is quite a different understanding of the system. But I actually think credit creation – the term itself – is masking what’s really going on. So I’m going to use the really taboo term, which is money creation. And the reason for that is that what banks create is not credit anymore – you might hear some economists saying “Banks don’t create money; they just create credit”. But if it’s credit, there would be some sort of risk there, but then the government comes in and says “We’re going to guarantee all of that credit, so if your bank fails, we’re going to use taxpayer’s money to give you all that money back.” So what this does is it makes this credit created by the banks as good as cash, every bit as safe, and it takes all of that risk of the bank credit. And then once there’s no risk with bank credit, it’s not credit anymore – it’s money. It’s guaranteed by the state and therefore it is money. And we use it for over 99% of all the transactions that we make, by value, so what we’re using is essentially privatised money which is created by banks.
So let’s look at some of the consequences of this. Firstly, housing: probably the one that affects most people in the most significant way. How many people here have heard this story – this conversation down the pub. Someone says “Why are house prices so high?” and then someone shoots back, “Well, there’s too many immigrants, innit!” Because obviously immigrants have so much money, when they’re moving into this country to find a new job working in Starbucks, they’re also bringing quarter of a million to buy a new house. So that’s part of the problem. And also there’s not enough houses, due to restrictions on planning. This sort of story and it’s one that many economists use, mainly because they don’t understand that banks create money. And because they don’t understand that banks create money the only explanation that they’ve got for high house prices is “supply and demand”. So they assume that there’s too many people wanting houses, and not enough houses. And this same explanation is used by politicians. This is basically the debate we have at the moment about housing.
But I want to show you this, let’s actually put some data to this. Now this purple line here is house prices from 1991 – this is all relative to 1991. This line at the bottom here is population growth, so in that entire 20 year period the population grew by 8% – not 8% a year, but 8% over 20 years.
This is the housing stock, so the actual units of housing in the UK, and that grew by 16%. So if we’re saying there’s too many people and not enough houses, yet the number of houses has been growing faster than the number of people, this is not a satisfactory explanation for the whole housing bubble.
This blue line – does anyone want to guess what this represents? It’s mortgage lending. It’s all the credit – or money – that has gone into the housing market. Now which of these two options do you think is the most convincing explanation for the housing bubble?!
Now I’m not going to read this out because it reads like an economics textbook and I don’t want to send everyone to sleep this early in the morning, but basically this is the chairman of the FSA, and what he’s saying in plain English is, the system works like this: banks start by creating credit, or money, and putting it into a particular market, for example property. What that does is it means that the prices in that market start to rise. And when prices start to rise, people say, “My house has gone up by this much; I’m feeling this much richer”. EVeryone thinks the property market is a good market for your pension, to be invested in, rather than investing in a traditional pension. Banks start to feel optimistic about where the market is going. You get “Location Location Location” on Channel 4, telling everybody you can flip houses and get up to a million (pounds) on 15 trades. Other people – some of my friends, for example – said “If we don’t buy a house now, and prices are going up 10% a year, then in a couple of years we’ll never be able to afford a place”. So a lot of people think now is the time to get onto the market before it’s too late, and all this leads to prices going up even faster. Now because banks are lending more, they’re earning more interest on all this lending to the property market. This is feeding back into their profits, and their profits go into their capital. If they have more capital, that gives them more willingness and more ability to lend on a simplistic level, and they’re thinking “This is great – let’s start lending more! Let’s do 90% mortgages, 100% mortgages, 110% mortgages; don’t worry about whether they have an income.” And that leads to more credit coming into the system, even further house price rises and even more optimism and profits and capital for the bank. And this is a pro-cyclical system that leads to house prices rising by 300% in the space of 10 years. So this is not a supply and demand issue; it’s an issue of banks being able to create money, or credit, and pump that into a fairly restricted market like housing. And of course the whole time you have people saying, “No, there’s no bubble”.
Now the real human impact of this is, if you look at what it actually costs to pay for a house, if you see the press affordability indexes and house price indexes, they always talk about the price of the house relative to somebody’s income. But you don’t only pay the price of the house; you also pay the interest on the loan that you took out to buy the house. And the interest actually adds up – it’s always slightly more than the amount you actually borrow over the 25 years. It could be one and a half and up to two times the amount you actually borrowed. So I think it’s more useful to look at how much you’re paying back in total with the interest included. In 1952, which was when my grandparents bought a house, it would on average have taken you 5 years and 3 months of your income – 100% of your income for that period of time – to pay off your mortgage with all the interest on top. Whereas now, it’s going to take you around 11 years and 8 months. And this is one of the reasons why you now need 2 income earners to run a family whereas back in the fifties you only needed one. And what this means for anyone under the age of 40 is that you’re going to be working for another 10-15 years to pay for the place where you live, and that’s time you spend in the office working instead of spending with your kids, or doing the things you really want to do.
So, the impact on debt. Now, if banks create 97% of all the money that we use, they’re not giving that money out for free…there’s only really two ways of getting this money from the banks. The first is to borrow it through loans by us, as the public, going into debt to the banks..the other way of doing it is to actually work for the banks, but there’s only a percentage of people that can actually do that…so basically, we, as the public, have to borrow the entire money supply from the banking sector..and of course we have to be repaying all those loans, because all that money was borrowed…and paying the interest on top. So, we’re effectively paying interest on the entire money supply. If there is 100 pounds in your bank account right now, then somebody else has a 100 pounds of debt, which they’re paying interest on…and somebody has to have that debt..and then the implication is that if banks don’t lend, there will be no money in the economy..we’re dependent on bank lending to create the money supply.
So, there’s a couple of rules of money, which most economists and David Cameron and most politicians are fairly ignorant of…and it’s quite simple. If you want more money in the economy, you have to have more debt..under the current system. It’s not a law of nature, you can redesign the system so it works differently, but with the current system, if we want more money, we have to have more debt…and if we want less debt in the economy, then we will have less money. When you repay your loan, the money that you used to repay that loan effectively disappears from the system and so, in terms of the situation we’re in now and trying to get out of this debt crisis.. personal and household debt is higher than it’s ever been in history..what we need actually is to have less debt and to have more money in the system…so that you have a stimulus..but that is practically impossible with the current system, as it works at the moment..and I think Steve Keen, who is speaking this afternoon, will probably suggest some ideas to address that second issue there, how we get less debt and more money in the system…but where we are right now you’ve got cash, this green line at the bottom. This is the same chart as Josh showed, the bank-issued money supply here is just going completely out of control and at the top you have the total debt…and the debt now is actually mounting up to higher than the money supply, because you have the interest amounting and building up on top of the loans that people can’t repay.
So inequality…I’m just going to show this very briefly. This is a bit of a complex chart, but essentially that purple line that you see there shows whether people are paying more in interest than they’re actually receiving from their savings… and what you’ll see is that the bottom 90% of the population by their wealth and their income is paying more in interest to the banks than they’re actually receiving on their savings and other investments. So what this is, is a net redistribution of income and wealth from the bottom 90% to that top 10%…and before we crunched these figures, we assumed it would be from the bottom half to the top half. It’s not, it’s 90%. Even people in the top 20% are paying interest to the top 10% of wealth…and that’s because of the way this money system works, all based on debt, through this constant redistribution upwards and inwards.
The impact on jobs and businesses. Well, you have what economists call the real economy…the shops, the factories, the real businesses…you know the people that produce and create stuff instead of moving numbers round in computer systems…and the real economy needs money to be able to trade and to function…but all this money again has to be borrowed from the banking sector. So, the real economy has to pay interest on their proportion of the money supply to the banking sector and then again this gives you a constant redistribution from the real economy to the banking sector. If you are wondering why the banking sector is the wealthiest and most profitable industry in the world, this is partly why. It’s not because they are creating massive value, it’s because they’re creating all the money that the rest of us need to use. So this is effectively a tax on the money supply. It’s like giving Tesco a licence to print money and then saying that we have to borrow everything from Tesco. You also have a redistribution from the rest of the UK to the City. So, obviously, Scotland, Northern Ireland, Wales, the North of England needs money for their local economies to function and again we’ve got to pay interest on all this money. A lot of that interest is being redistributed to the highest earners in the banks, who tend to be centred in London. So you have this constant redistribution from the rest of the country back to the City of London.
Ok, and then for the high street…there’s a lot of people who say…oh and I spoke to one politician and said, ‘don’t you think it’s an issue that banks are able to create money in this way?’ and he said, ‘no, I think credit’s a brilliant thing. It means that people can buy washing machines on credit cards whereas otherwise they’d have to save up for it’…and there’s a lot of people who think this is good for the economy to have easy credit because it stimulates the economy. What actually happens is that everything that is spent on a credit card in the high street or on Oxford Street or in the town centre today is something that can’t be spent next year because it has to be repaid. So, what we running up to about 2007…you had loads of people using credit cards to borrow money and spend…and what happens after a while of that is they get the bill and then they think, ‘ok, I’ve overspent a little bit, I should probably hold back now and start trying to repay this’. So you have this sort of debt hangover. What’s happening as this is happening is that all the businesses are saying, ‘ well, this is brilliant, we’re doing better than we’ve ever done before, the economy is healthy.’ Most of these high street chains aren’t really looking at the build-up in consumer debt. They just think, ‘this is good.’ So, they invest in staff, in expanding their businesses. They take on debt so that they can expand quickly enough and then when everybody gets their bills and they stop spending, these businesses have to lay off people and they just try to survive..and then this is what you get, essentially a boom-bust cycle…where it’s pumped up by credit, everybody thinks the economy is doing amazingly…but it turns out to be a house built on sand..and the whole thing collapses when the debt gets too much…and then every time it collapses, people get laid off. It tends to be the temporary workers, the people on insecure contracts who are laid off first..so this has a big impact on poverty.
Do you think it would be useful to have a stable money supply, for business? Because with this current system, you are guaranteed to not have that. You’re guaranteed to have banks creating too much money, when they’re feeling confident and then too little when they panic…and that is what’s causing this boom-bust cycle. It’s not just herd psychology or some law of nature. It’s fuelled by bank credit and banks’ creation of money.
Ok, so the last point..higher taxes. Anyone know what happens if you print your own 10 pound notes at home? A couple of hundred years ago, banks actually used to do that. They printed 10 pound or 5 pound notes as a receipt for what you had put into the bank. When you take your shiny metal coins down to the bank and deposited them, they give you this receipt on paper…and people used to use these receipts as money. They’d spend these paper receipts instead of actually getting the metal coins out of the bank and taking them to the shop and spending them and then the shop having to take them back to the bank. But effectively what had happened with this is that the nature of money had changed from the coins to the paper money and banks were the only ones creating this paper money…and the government of the day, a conservative government realised that we’ve allowed this power to create money to shift to the banks…and they used it effectively to create too much money and to blow up the economy in the 1840s. A conservative prime minister, believe it or not, said, ‘we’re going to take this power to create money away from the banks’.. and they did this in 1844..and that’s why it’s now illegal for you to print your own money at home.
Now ever since that…it doesn’t cost 10 pounds to print a ten pound note..it costs a few pence and the profit on creating that paper money, the difference between the cost of creating it and the actual face value is then handed over to the treasury and it can be spent by the treasury, which means it’s money that we don’t have to pay in taxes…and this has been a significant amount of money. In the last ten years this has added up to about 18 billion pounds. In 2009, that profit on creating paper money was enough to pay the salaries of 120,000 nurses. It’s a significant amount of money.
But going back to this chart, which shows you the green line at the bottom is money created by the state…the blue line is money created by the banking sector. We’ve been getting the profit on this much here. The term for this profit is called Seigniorage and we’ve been getting that profit and we’ve been missing out on this bit here. So this is approximately 2.1 trillion pounds of taxes that people have had to pay, which wouldn’t have been necessary if banks (the state?) had kept this ability to create electronic money as well. So 2.1 trillion…to put that into some kind of perspective…it’s enough to pay off the national debt twice over…and there’s a big debate about whether the national debt is good or bad…but the higher the national debt, the more taxes that are being diverted from public spending to paying interest on that debt, the more money that’s being diverted from taxes to the financial sector. It’s enough to pay for three year-long tax holidays. It’s enough to pay for the NHS for about 20 years…or we could have high-speed rail everywhere.
So, the key point is that by creating money, banks are shaping the economy. What they want to do with that money is going to determine the shape of our economy..whether we are going to have an economy that’s based on businesses and jobs or whether it’s based on everybody trying to get rich on property….and you can see that in what we actually have now. So, final thing..we have a choice between potentially having money created either through the state or some sort of democratic means for something socially useful or we have it created by banks..and we have more expensive housing, economic instability and speculation… and back to these rules..what we need right now is less debt and more money and you can’t do that as long as you have all money created by banks as debt. So, there we go.
You might hear some economists saying: Banks don’t create money, they just create credit.
The term “credit creation” is actually masking what is really going on. What banks create is not credit anymore – it’s guaranteed by the state and therefore it’s money!
“In 1952 it would cost you 5 years and 3 months on average of your income to pay off the mortgage with interest. Now it will cost you about 11 years and 8 months. This is one of the reasons why you now need two income earners to run a family, whereas back in 50’s you only needed one. You are going to be working for another 10 to 15 years.”
- Population grew by 8% over last 20 years
- Housing stock grew by 16% (number of houses grew faster than number of people!)
- Mortgage lending grew by almost 600% over this period!
“This is not a supply & demand issue, it’s an issue of banks being able to create money and pump it into housing.”
“If banks create 97% of all money that we use, we, as the public, have to borrow the entire money supply from the banking sector and we have to be repaying all those loans and paying the interest on top.
“When banks don’t lend, there will be no money in economy. We’re dependent on bank lending to create the money supply. …It’s not a law of nature, it can be redesigned…
- If we want more money in the economy, we have to have more debt.
- If we want less debt in economy, then we will have less money.
“What we need is less debt & more money. But this is practically impossible in the current system.”
The bottom 90% of the population is paying more on interest to the banks than they’re actually receiving on their savings or investments. This is a net distribution of income and wealth from the bottom 90% to the top 10%. And that’s because the money system is based on debt.
JOBS & BUSINESSES (11:25)
The real (productive) economy needs money to be able to trade and function. But the real economy needs to borrow this money from the financial sector and pay interest on this money. There is constant redistribution of wealth from the real economy to the financial sector and from the rest of UK to the City of London.
This system creates boom-bust cycles. In the current system we’re guaranteed not to have a stable money supply. Banks create too much money when they are confident and then too little when the’re panicking.
HIGHER TAXES (15:22)
Profit on creation of paper money (seigniorage) – the difference between face value of banknote and the costs of producing it – is handed to the treasury. However profit on creation of electronic money is not.
Profit on creation of paper money was £18bn in the last 10 years. This profit went to the state.
Commercial banks created over £1 trillion in the last 10 years. The profit on creation of electronic money is lost. If the government had created this money then UK residents could have paid £1 trillion pounds less in taxes, or public services could have received £1 trillion more. Incidentally, the UK national debt currently stands at approximately £1 trillion pounds. (It is however unlikely that the government would have created as much money as the private bank have – their reckless lending was the major cause of the financial crisis.)
This is money that we wouldn’t have to pay in taxes, if the state had kept the ability to create electronic money as well.