An Extraordinarily Misleading View of the Role of Banks

An extraordinarily misleading and patronising view of the role of banks and what their consequent responsibilities are was  published in Guardian on 3rd Nov 2011 (an extract from an inaugural BBC Today Business Lecture!)

Bob Diamond – Group Chief Executive of  Barclays bank – is in this lecture on banking not just missing the point, but being wholly misleading, according to Richard Murphy from Tax Research UK in his excellent comment:

First of all if Diamond were to be believed he is nothing much more than a glorified Captain Mainwaring, taking in local people’s deposits, counting them carefully, storing them in the vault behind his desk and lending them on with great care to others well known to the bank manager. This is utterly untrue. This is not in any way remotely related to the model of banking we have in this country.

Of course banks handle deposits, but as anyone who has reviewed rates available to depositors for the last few years will know just how contemptuous banks have been of those who wish to use their services for this purpose. There is good reason for that: banks do not (and never have) needed depositors for enable them to make loans. The simple fact is that the money banks lend is created by them out of thin air. It’s offensively easy for them to do so.

All that happens when someone asks for a loan is to credit a current account with the amount of the loan and debit a loan account with the same sum. That’s it: that is how 97% of all money in the UK is created, but as is clear, deposits play no part in that process. Instead banks literally create the cash they lend and can get away with this trick so long as people think they’re good for their promise to pay – which they will be so long as, as is now the case, the government clearly considers them too big to fail and explicitly and implicitly guarantees all they do. The insult to the injury is that having made this cash out of thin air they then charge heavily for it – vastly more than they pay for deposits. No wonder an organisation that can costlessly create what it sells is so profitable.

Bob Diamond acknowledges none of this, and the fact that much of the profit he and his colleagues supposedly generate is effectively licenced to them by the fact that the government has failed to claim for itself the right to the profit made on the creation of money; money which only the state can legitimise, but which banks have claimed for their own benefit and which they have used to speculate at considerable social cost to society at large, as Adair Turner and others have noted.

Secondly Bob Diamond fails to make any mention of tax, or the tax havens that banks use to mitigate their liability to pay tax.

You can read the whole comment here.