5. Banks as Credit Agents

For Households and Nation States


This is just a brief look at how the relationship between the financial sector and individuals or their governments should properly be. Inherently, it involves a consideration of the deep and far-reaching conflict between money as a tool for socioeconomic progress and money as a tool for often ruthless domination and extraction.


From almost any angle we might view it, money appears to be one of the most effective tools ever devised. From a 'politically neutral' perspective, merely as a tool for mediating exchange, money's power appears evident in almost every corner of the world today, and also at almost any point in history we might care to look.


But we know that money isn't polically neutral. In fact, one of the great testaments to money's irreplacable power lies in the fact that, despite being arguably the most corrupt medium to exist in our world and our history, it's hard for most of us to imagine life without it.


The hiearchical relations that dominate the world's economies today (and obviously trace far into our history) are built with money at their core. And it's hard to imagine them being able to build such structures without it. But we might equally believe, by contrast, that money can be just as effective in providng a foundation for democratic and human rights.


As already stressed, the debt/credit-based systems of money we have today are not only an inevitable development of money (because they are the most efficient way to mediate exchange, to occupy the space between giving and receiving), but they are also society's greatest opportunity for justice, for decency, for democracy, for human rights.


In the conventional view, banks 'lend' money from an already-existing stock; money that (rightly or wrongly), belongs to other people. Thus there is established a lender-borrower relationship and debtors are expected to pay interest, often in considerable sums. To this day, the idea that debts are facilitated by the lending and borrowing of already-existing money is the fundamental justification for interest taking. (Indeed there can surely be no other.)


Yet it's also clear that lender-borrower relations hold the potential to be among the most corrosive that can exist in society. There's no shortage of stories one can read about the many horrific injustices faced by debtors - not just in history, but continuing in the world today. These are tales of the wealthy extracting ruthlessly from those far worse off than themselves. But let's not fall into the trap of treating this subject with undue superficiality; the lender-borrower relation isn't something that pockmarks an otherwise honest, legitimate financial economy. The lender-borrower relation is of such profound effectiveness in creating and sustaining hierarchy that, for perhaps as long as we have written records, it's been employed systematically, to the very foundational architecture of economic society. Lender-borrower relations today continue to allow those architects to dominate and extract through both the private and public sectors of the world's economies.


Consider the tyrant who, merely by professing his own self-importance, lays claim to the major institutions of economic society, declaring to run them for his own private profit and returning a wage to those willing to serve him. Such behavior, being conspicuous, is likely to invite the anger and resentment of many of his now disenfranchised economic subjects. While it's true that some may continue to feel enfranchised, for having the opportunity to serve and earn a wage, many will recognize both the injustice of the tyrant's claims and the loss of their own rights and opportunity. The victims of colonial rule, of other forms of imperial domination and of slavery were contemptuous of those schemes and those behind them. Many dedicated themselves to rebellion and revolt. That isn't to say such methods didn't work, just that they're not the most stressless methods by which to conquer and extract from large numbers of people.


Now consider the tyrant who fashions an economy to be in debt to him. In all but the most gratuitous examples, what we expect to see are people quietly, obediently, handing up their own wealth and opportunity, along with national/public wealth, in order to satisfy the tyrant's supposed claims. Both tyrants deliver as much injustice, but they invite starkly contrasting reactions. The reason for that is surely that claims made about finances are disarming for people who are often ill-equipped to make sense of them, let alone enough sense to raise objections.


The extreme social inequalities and the great 'unpayable' volumes of debt that plague the world today are not new. Ancient rulers, understanding that such debts were so corrosive that they made the life of society unsustainable, periodically renounced them, initiating a kind of 'reset', albeit for a cycle of abuse that would begin all over again.


The kinds of highly exploitative financial relations that are the backdrop for these stories were of such notoriety to have been labelled and condemned by history as 'usury'. And it might even be one of the most important messages earlier civilizations sought to pass down.


The advantage we have today is that we know the foundation for these hierarchical relations is false. We know that the 'loanable funds' model of bank 'lending', the foundation for interest taking, is just not an accurate description of how we facilitate debts. We know that banks create the money we need, when we express demand for it. We know that none of us, nor our governments, are actually 'borrowing' anyone else's money. We know that every unit of currency created in the global economy should be created democratically. But we also know that, by the telling of one small story about 'lending' and 'borrowing', in fact all that money is created anti-democratically, hierarchically.


We can say, then, that we understand both the injustices committed by powerful financial actors, as well as how to stop them.




Household Mortgage Debt


Almost any discussion of real world economics could begin with the observation that the household is the foundation of economic life. The ability of people in every corner of the world to have a home and the opportunity to work, to pay for that home and the lives lived within it, is the very bedrock of any functional modern economy.


And if the truth is that we don't have to rely on banks 'lending' us other people's money when we seek out things like a mortgage, then it's clear that:



  • Anyone, everyone, can have unexploited, interest-free access to credit.

  • Banks participate in a relationship with their customers that should fit a horizontal rather than a hierarchical description.




Banks are the recorders or monetizers of our debts, they stand side-by-side with us in a relationship that debtors ultimately have with society. When money is created for our use, it is society that must accommodate that money and honor it whenever and wherever it is presented. Banks are facilitators of that process, agents through which these fundamental relations can take place.


I discussed in a previous article how, when the debts of ordinary people create money, for example to buy homes, that there is a real, outstanding debt which debtors have to pay; not because it was "someone else's money", but because the system can only work if the process is reversed again, if the debt/money is paid down. If that didn't happen, the system would be unfair and couldn't be sustained.


It's clearly first the debtor's responsibility to pay her/his debts. But it's also clear that in some circumstances debtors may not be able to do that. An important part of what the bank does, then, is to stand next in line, backing-up or underwriting the debtor in that responsibility. Where debts are secured, as they naturally are with household mortgage debts, the bank can seize and sell the securing property to settle the account. Only when the debt is un- or insufficiently secured are banks at risk of losing money. Banks, then, do face risks and costs in making their services available to us. That is what we should be paying them for. What we should not be doing is compensating them or anyone else for the "foregone use" or the "time value" of money. Banks can and should charge transparent, competitive fees for the services they provide; they have no need and no right to mislead customers in order to make supernormal profits at their expense.


Let's have a quick closer look at risk, in part because, when confronted with the fact that banks don't actually 'lend' other people's money, some will quickly switch to claiming that it is risk, rather than the 'foregone use' of money that is the basis for taking interest.


Well, in order to be exposed to risk, the bank must face an uninsured loss in the value of securing assets, such that their sale can no longer cover any outstanding sums against them (plus any costs of administration). Falling house prices, uninsured properties burning to the ground or being washed away in floods would indeed present such risks. But even at today's historically low interest rates (~5%), a homeowner will pay twice for their home over 30 years. If these payments were tied to risk, it would mean that, over each 30 year period, approx. 50% of the entire nominal value of mortgaged housing stock would be lost or destroyed without insurance, before any sums were paid against them. Such a belief or claim is obviously absurd.


So banks' interest taking isn't tied to risk. Banks take interest simply because they can, because bank customers don't understand the basic terms of the relations between them. The competitive market fees for originating, maintaining and settling a mortgage account would be a small fraction of their current level. If expressed as an interest rate, it would be surely a small fraction of 1%. Banks are taking tens or hundreds of thousands of dollars, many years of life and a great deal of opportunity away from working families (and then often taking their home as well) simply because they have us believing we're "borrowing" other people's money.




From Households to Banks: The Gift that Keeps on Giving
In what is surely an inevitable travesty once interest on household mortgage debt has been accepted, the front-loaded mortgage allows banks to keep cashing in. Here, banks not only take huge sums of interest which they have no right to take, front-loading that interest simultaneously keeps the outstanding principal, on which interest is charged, as high as possible and delays its payment for as long as possible, pushing back as far as possible any claim a homeowner might have to her/his own home; something which will pay yet again when the bank gets to take the home itself, in the next routine collapse of the capitalist economy.



Over the 35 year period 1973 to 2007 (up to the crash), mortgage interest rates averaged around 9.3%,[1] almost exactly the rate required to make households pay three times for their homes; once for their home, twice as a gift to the already rich. And this will be repeated for each property, every time time a mortgage is channeled through it. Can we really understand the vast economic consequences of making the great majority pay so much extra for a home and sending it all to a few at the top?


And this says nothing of the much wider catastrophe of allowing such ruthless exploitation of people's need for a home. We are basically saying that people must pay three times for a home (or as much to rent), twice as a gift to the rich, or go without. Under these circumstances, it's impossible to believe that the neofeudal economy can provide housing security to many, let alone to all. Many millions of families globally face extreme economic disadvantage and the fact that they will never enjoy secure or adequate housing. All for the benefit of a small financial elite.





National Sovereign Debt


I've already covered how money created by governments for domestic spending cannot be conceived as a 'debt' in any conventional sense - that any obligation associated with this kind of public money creation is an obligation only to maintain the fairness and stability of the system. There is absolutely no legitimate requirement on nation states to 'collect back' all the money they issue. In fact they appear to have a quite counter obligation to provide a national currency base that is immune from such demands for repayment. This is true even though today money is created for governments as 'loans', thus as debts, in exactly the same way money is created for households and the wider private sector.


So there's a very important class of public debt - that associated with national currency creation - that should not be a debt at all.


But there are other areas worthy of brief consideration. For example, in the case that a government might have, or be perceived to have, debts to foreign entities denominated in any currency. Well, the reason we have money and banks exactly as they are is so that access to money - access to legitimat debt - can be facilitated on demand without the need for any actual lending or borrowing. Governments are not excluded from that. Banks create money through the process of recording into being our (or our governments') outstanding debts; no lending or borrowing is actually taking place and no interest should be asked for or given.


So, throughout finance, debts work by the endogenous creation of money as records of outstanding debt; it is not 'loans' and it is not 'borrowing'. To the extent these processes produce real debts, they should be interest free.


Finally, there's the idea that governments can provide savings instruments in the form of interest bearing bonds. Governments can sell bonds, not because they need to raise money, but to allow savers to make savings in a way that is safe and offers some protection against inflation (the decline in the value of our money over time).


The problem that exists here is the potential for wealthy investors to be in the market, not to protect the value of modest savings, but to enjoy a healthy, ongoing income at the taxpayer's expense. In a democracy, it's natural that people will ask "Who should be entitled to a rate of interest courtesy of the state and at taxpayers' expense?"


I've only touched very lightly on the main points of public debt here, but it's enough for good thought and action. Public debt is an important domain through which economic power is expressed over countries all over the world.


Help us fight to end that global injustice and replace it with basic economic literacy and real rights for all:



  1. Basic economic literacy as an educational right.

    Teach children where money comes from and why, how banks and debts basically work.

  2. A democratic, debt and interest free national currency base.

    Nations are currently required to "borrow" their currencies into existence from capitalist banks.

  3. Interest free access to credit for households and all governments.

    Banks create and destroy money as we go into and out of debt; interest beyond fees is unwarranted and unnecessary.






1. https://www.freddiemac.com/pmms/pmms30.htm.










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