It is now 5 years since the banking crash but its effects are still with us. What exactly happened, what has the world done about it, and is there anything to stop something similar happening again?, asks Open Democracy in a really good and well referenced article on the lack of understanding of money and banking by mainstream economists.
Here are a few highlights:
Possibly the most striking revelation to emerge from the financial crisis is how detached from reality mainstream academic economics had become. Most astonishingly, it omitted any serious study of money and banking.
Current mainstream economics regards the state, or central banks, as controlling the supply of money in the economy and views commercial banks as functioning essentially as intermediaries between savers and borrowers. In fact, in the prevalent system of what is known as ‘fractional reserve banking’, about 97% of money is created by private commercial banks.
[B]anks are fundamentally money creators rather than intermediaries. Savings ultimately derive from loans, not the other way round; in other words, debt is necessary for 97% of our money supply.
The central problem is that this system of money and banking is inherently economically unstable. Banks have an incentive to create as much money as they can, due to the interest they earn on the credit they issue. Ironically, it is often more immediately profitable for banks to lend to non-productive sectors, such as for mortgages and to other parts of the financial sector, than to the productive economy.
The costs of this system to society are immense. Most obviously, and absurdly, it means that since nearly all money is actually debt, we are having to pay vast sums, in interest, to private banks for creating money out of nothing, simply so we can have enough money in circulation for a functioning economy. Secondly, since we are so utterly dependent on banks for ‘holding’ our money and enabling us to make and receive payments, they enjoy a further huge hidden public subsidy for being too important to fail, a subsidy that becomes painfully apparent when they have to be bailed out by the state.