Banks don’t work the way you think – but they should

While the EU toils over legislation aimed at improving the safety nets around banks, it’s worth asking why banks are such inherently dangerous institutions in the first place, reads the article in the Irish Independent from 3rd April 2014 entitled “Banks don’t work the way you think – but they should”

Here are a few highlights:

“In the modern economy, money comes not from the printing press; it comes from bank loans.”

“If you’re struggling with the idea that banks create the money they lend, you definitely won’t believe the next part, but it is absolutely true: If you repay a loan to a bank, the money that you borrowed no longer exists. This is why there can be less money during a recession and it also explains why reducing the debt of the economy doesn’t leave it in a better position.”

“In a nutshell: money comes from bank loans, every euro has a matching debt, and if we reduce our borrowings money disappears. We cannot resolve the debt crisis under this system per se. If we wish to grow the economy and expand our stock of money in the process, we must take on a euro of debt for every one we gain. If we wish to reduce our debts to more manageable levels, we must delete that quantity of bank-account money from the economy too.”

“This is an inherently unstable way to try to run an economy. Banks create too much money in the good times and destroy too much in the bad times. To have something as important as the amount of money in the economy decided by the mood swings of bankers can never form the basis of a stable economy, as the test of time has shown.”

“We could run the economy the way most of us imagine it is run, and have the European Central Bank issue all euros – the electronic ones as well as the notes and coins.”

The full article can be read here