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Banks are the Problem

by on February 22, 2013


Private banks are in direct competition with the currency-issuing government, over the liquidity market. The liquidity market is essentially the supply of money to the economy. The more liquidity the government creates, the less liquidity will be demanded from private banks. Since banks make profits by charging interest on loans, they have a direct and obvious incentive to continually increase their lending, and the prospect of increased government deficits represents a direct threat to their ‘bottom line’ (profits). Continually increasing lending results in continually increasing debt.

Private debt serves four functions- to finance investment, consumption, speculation, or debt payments. Most individuals or households use debt to finance some consumption (including mortgages, which are a special case, not considered standard consumption), primarily through credit cards and home equity lines of credit. Many also speculate in the form of equity ‘investments’ via their retirement portfolios (here, the term ‘investment’ is often used incorrectly- investment is financing of future production; trading equities or any non-sovereign securities is speculation). Those who are in financial trouble (i.e. have ‘unhealthy’ balance sheets) often liquidate any speculative assets in the process of servicing their growing debts, as well as taking on more debt in order to make minimum or interest payments. For these families and individuals, the situation is dire. If they are unemployed, then their access to credit is limited or nonexistent, and their chances for escape from this downward spiral are near zero.

But what causes unemployment? The logic is simple: the amount of goods & services demanded in the economy is determined by the combination of real demand (‘wants’) and liquidity (buying power); when liquidity falls, fewer goods & services are demanded, and therefore employers reduce their workforce, creating unemployment. One way for liquidity to fall is for private debt to expand at a rate that is faster than the future ability of the borrowers to pay it off. Under these conditions, and over time, the cumulative payments for debt service occupy an increasing share of disposable income (after-tax income), which forces reductions in savings and consumption. These reductions in consumption create the signal to employers that it is time to reduce their workforce, and unemployment results.

Given that unemployment is the result of a liquidity shortage, and that the liquidity shortage is the result of unsustainable growth of private debt, the only logical solution is increased liquidity from the government; i.e. deficit spending. Private debt cannot solve a liquidity crisis, because it is that which creates liquidity crises. Public liquidity must be issued in order to increase demand sufficiently to achieve full employment. There is no other way.

As they are in direct competition with the government for the liquidity demands of the public, private banks will naturally always oppose deficit spending, particularly in times of liquidity crisis, when conditions make it more likely that their role in the system will be questioned by the public, and subsequently by the government. One method of defense they have created is the indoctrination of the academic economics field, and thereby of the economics profession, with a set of methodological views and ideologies which are systematically stacked against government involvement in the economy, particularly via fiscal policy. This set of views is known as neoliberalism. They enforce these views by influencing access to tenure at most universities with economics departments, as well as by controlling the Nobel Memorial Prize in Economic Sciences, which was not established by the will of Alfred Nobel- as the other Nobel Prizes were- and which is instead sponsored and controlled by the central bank of Sweden, the Riksbank.

During liquidity crises, the creditworthiness of borrowers falls, as payments are missed and loans are defaulted upon. These conditions allow banks to increase the rates of interest they charge, both on revolving lines of credit (as payments are late or missed, rates are increased on variable rate accounts), and on newly issued loans to less-than-perfect borrowers. The more desperate borrowers are for liquidity, the higher the rates of interest they will agree to pay. As mortgages come into default, homes go up for auction or are repossessed by banks, giving them massive real estate assets which can be sold for hefty profits during a later economic recovery.

As private banks essentially control the central bank, they direct the central bank to engage in massive asset purchase programs, known as quantitative easing, or QE. QE does not directly enrich banks’ balance sheets, but it does free up liquidity by swapping out fixed assets on banks’ balance sheets for liquid reserves. As borrowing is depressed during such periods, banks are loaded with excess reserves, which they can use to finance speculation in financial markets (margin & direct asset purchases), driving financial asset prices up, which enriches shareholders, who are primarily banks, funds & fund managers, and executives. At this level, the actions of banks can be seen as derived from the profit-seeking motives of their executives and major shareholders.

By concealing the fact that sovereign governments can issue debt-free currency, and thus provide debt-free liquidity, private banks protect their market share and defend their bottom line. The incentive is natural, and predictable, as the system is built in such a way that makes it inevitable. The most powerful opposition to government deficit spending during times of high unemployment, recession, or depression, is inevitably fueled by private banks. As long as banks compete directly with the government in the liquidity market, this opposition will remain. It is inescapable.

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