Panic on the Streets: Banking system under stress

I’m in Europe for a month, making my first trip back since heading to live in NZ nearly 6 years ago. Currently i’m having a lovely time in Southern Spain in a pretty little village called Benahavis.

Watching the UK news is so different: small soundbites, nothing too deep and its making me dizzy. But not as dizzy as those pictures of people queuing up at their local Northern Rock to get all their money out.

They seem so calm about it without quite realising the ramifications of their actions. A run on a major bank in the UK? Who would have thought it could happen in the modern well regulated era.

We have seen finance companies in NZ topple over like dominoes but the general public has taken the view that they were accidents waiting to happen and that people should have taken more care in what they were investing in. But a major financial institution would be a different story.

For money reformers the recent credit crisis was inevitable, a product of the incessant growth in the global money supply. How it will play out is anyone’s guess but there has never been a better time to expose the weakness and corruption at the heart of our money systems.

In the meantime people should check to make sure they do not have to much exposure to any single financial entity. What is amazing to me is how the stock markets have proved so resilient. There is lots of talk about the strength of the underlying economy but the effects of these recent months will take a long time to feed through.

I have a feeling this story has a long way to go.

Internet Banking: Coming Soon

I’ve been following the spread of microfinance for a while and have been getting involved with Kiva which has been a great experience. I have also noted the rise of social lending businesses such as Zopa, Prosper and even Facebook. Jason has written a good piece on the rise of new forms of financing.

What interest me further is whether all finance can move to a P2P platform and seriously eat into the major lending markets currently controlled by the commercial banks.

I think it could do. This crosses the web with money and complimentary currencies.

Remember that anyone can create “money” if they really want, it just can’t be in the form of bank notes issued by the Reserve Bank. Commercial banks create bank loans by a simple bookkeeping entry. Only 2% of the money supply in NZ is in the form of notes and coin so banks don’t actually hold any money other than a bit of cash.

My point is that P2P finance could take off in a very big way once we get the hang of it. My guess is that the firms currently involved don’t realise how big this could be.

Expect the central banks to cast their beady eyes over these operations once they get a roll on. For now it’s just some web bizness but this feels like 1694 all over again.

The Nature of Money

In a previous post Does Money Grow on Trees? I looked at how money comes into existence, but in a broad sense of the word.

In his paper, The Nature of Money, John Kutyn examines in detail what money is starting from the late 16th century. He explores the development of what we know as bank notes from their early days as accommodation bills and the establishment of the Bank of England as a way of funding a war against France.

He follows the development of money and banking primarily through the legal process andlooks at numerous cases in law of challenges to the meaning of money and the transactions it is used for.

He challenges the banking system to show that it is not acting fraudulently in law when it uses deposits as money and actually creates money via new loans. Of course only a Reserve Bank can create money or so the law states. So is true? Well i suggest you read his paper and draw your own conclusions but he makes a compelling case.

Not content with that he then moves on to looking at the economic impacts of the current system which has a built in imperative for growth resulting in continued boom bust cycles. He argues that this is down to the interest burden and that debt free money is the only way a stable economy can be achieved.

As we approach yet another global bust and possible depression it is worth relfecting on the themes in this paper.

Money doesn’t grow on trees or so they say

They also say that money makes the world go round…well metaphorically it does. It oils the wheels of commerce and enables us to transact with each other and exchange our goods and services.

But how does money actually grow? There always seems to be more of it around. Who creates it?

You probably assume your local central bank does because only they can print notes and coins. That much is true but that’s only a bit of the story. Currently only 2-3% of the total money supply is created in the form of notes and coins that we keep in our wallets and purses.

The rest? Well as JK Galbriath noted the way in which most money is created is “so simple that the mind is repelled”. The private banking system simply create the balance of new money by issuing new loans.

That’s it. For those of you who thought banks lent out money you have deposited with them i’m sorry to inform you that this is not the case.

If you deposit $1000 in the bank, they now have the ability to lend out (and in the process create new money) up to $10000. Of course they charge interest on that loan which is where they make their huge profits from.

I’ll give you an example:

In New Zealand the money supply has increased 101% in the last 8 years. So the total money stock has more than doubled in 8 years!! In that time house prices have risen 143%.

But the official measure of inflation has only risen 20%. Hello…..what is going on here? Yes it is a complete mess.

It is not the central bank or government printing money and causing huge (but unmeasured inflation). It’s the private banks who are doing it! The ones who scream and shout if governments ever think about reclaiming their right to issue money interest free on behalf of their citizens.

It is one of the greatest swindles of in history.

It requires that people sit up, take notice and look hard at what is happening around them. In the US especially the system is starting to creak…..look at the housing market and the lenders that operate in it.

Please see the following sites for more information. Once you learn about this life will never be the same

US: www.monetary.org

UK: www.monetaryreformparty.org.uk

Can: www.comer.org

Aus: www.peoplesbankparty.org

As my old history teacher said read, learn and inwardly digest.

Sustainability - Where do we start?

Sustainability - what is it?

Sustainability is a much maligned word “full of sound and fury, signifying nothing”. Well that’s a tad harsh but the word has been dragged through the mud from the early days of “sustainable development” to the “four pillars” namely enviornment, economy, social and cultural.

Reductionism rules!

You could argue that we have a sustainable society already because we are still here…6 billion of us. That’s not a bad effort considering we started off with just two .

But when we look back at our history we see clearly the duality of our existence: misery, bloodshed, violence and despicable acts; and amazing creation, beauty, love and art. It;s hard to argue that much has changed in the last 10,000 years at least.

So where to? Can we ever become whole or will we always be engaged in a battle between the dark and light forces in our amazing universe.

I believe sustainability as a metaframework not an end in itself. It allows us to ask ourselves “what kind of society do we wish to live in?’…..if we can define that then all the other stuff will follow. The problem we have know is we start with the reduced view whether it is the environment or social issues or economic growth.

Then when it all ends in conflict we wonder why.

So where do start? Well there’s the ten commandments magna carta, uk bill of rights moving along to more modern frameworks such as the US constitution and one i quite like is the UN Declaration of Human Rights which came into being on 10 December 1948.

This was ratified by all then 58 member states which was no mean feat. The committee which prepared the initial text was chaired by Eleanor Roosevelt herself. You can view it here

Article 25 and 26 are of particular interest being on the issue of education and well being.

It’s well worth a read.

Article 1, Section 8 of the US consitution notes:

Congress has the power “to coin money, regulate the value thereof”……….it doesnt say banks have that power mind you.

Coming back the the topic at hand: how do we craft a society that sustains itself without the externalisation of environmental, social, cultural and economic costs.

- Eliminating poverty (Article 25 of the UNDHR).
- Compulsory free education to 16 for all (Article 26 of the UNDHR).
- Life, Liberty and Security of Person (Article 3 of the UNDHR)
- Life, Liberty and the Pursuit of Happiness (US Declaration of Independence)

I could go on.

What is it that we want? We dont want our prisons overflowing with societal detritus. We therefore must ensure at all costs all children we bring into this world are well looked after with resources to ensure that is the case. Decent fresh food not the fossil fuel sugar laden processed rubbish churned out my the corporatised supermarkets. No wonder so many children are going round the bend…we’re poisoning them.

Safe, secure and healthy homes are vital for our children. Well resourced educational facilities are next on the list alongside decent parks and safe public spaces. Ripping poverty and its bedfellows out of our society has to start now with major expenditure….the kind normally reserved for invading other nations and killing machines.

If anyone argues “show me the money”…well it’s right there in front of you. There always has been and continues to be a huge transfer of wealth from the state to the private financial sector. It’s fact: in the UK the sum has been estimated at GBP20-40bln a year. In the US i imagine it will be a more significant sum.

Underlying all this is the question of who owns the money supply, where does the power lie.

If we dont have an idea of what we’re aiming for we will most certainly miss the target. We know we already have as levels of happiness and well being have been static for decades (sorry GDP is not going to help).

If we focus on building strong roots then sustainability will come. Right now no amount of fiddling will help. As the Declaration of Independence noted,

“whenever any form of government becomes destructive of these ends, it is the right of the people to alter it or abolish it, and to institute new government, laying its foundation on such principles and organising its powers in such form, as to them shall seem most likely to effect their safety and happiness”.

How to curb excessive house price rises

Today Michael Cullen revelaed an audacious plan to apply a mortgage levy to fixed rate mortgages. This predicatably went down like a lead balloon. It’s just another tax on property owners and likely to be very regressive in nature.

House prices are expensive especially when related back to wages and rents. The question to ask is why prices have risen so much in the last 5 years. One simple explanation is increased migration. This creates demand for new housing for the new population but it is also the nature of the new arrivals that is important. Many immigrants are skilled and wealth with 60% approved last year under the business or skilled categories. Added to this was a general weakness in the NZ$ back in 2001/2002 which made NZ property look very cheap. This in turn allowed higher prices to be paid for property mainly through the auction process here which created a general revaluation of property across the board.

That revaluation in 2002/2003 lifted prices and generated a whole new group of property investors and developers. Property was suddenly on the move and a great investment. With immigration picking up again it is hard to see how prices can fall from current levels.

By imposing a mortgage levy all the government would achieve is to make people less well off leading to higher wage demands. As the imposition of stamp duty in the UK showed it is hard to restrain a property market when demand is strong.

With so much overseas capital arriving, even with the NZ% so strong (though it should be noted not so strong against A$, Eur or Stg) it is very difficult to control the property market.

One alternative is to look at the actual supply of money otherwise known as credit. There has been mention of LoanToValue ratios and attempting to control them. It may be easier to actually limit or reduce the amount of credit banks can grant, in essence saying “hey there just isn’t any more money out there”.

I will explore the issue of changing the reserve asset ratio another time but it is clear that the mortgage levy is not the answer.