5. Banks as Credit Agents
For Households and Nation States
As already stressed, credit systems of money are not only an inevitable refinement of money, they are also greatly the more socially just, non-hierarchical form of money. Anything else, anything that takes money away from the just and equal rights of the people, is unacceptable and an attempt to recreate the economics of class, injustice and abuse we are all too familiar with today. Our duty, then, is to ensure that our systems of money work - and can continue to work - as they are supposed to: horizontally, not hierarchically.
If household and national finances can be facilitated free of unnecessary hierarchical, lender-borrower relations and free of interest (and of course they can), then that is what we must ensure. The result will be a new way of doing economics, a new foundation for economic life; a foundation in decency, honesty and real rights for everyone. The ability of the world's people and the world's governments to have a democratic relationship to money, to have access money, free of unnecessary exclusion or exploitation, would transform the global economy, bringing opportunity to billions and represent a multi-trillion dollar annual shift from the few out to everyone else.
Furthermore, it should be clear to the reader that the household is the bedrock of any economy. The ability of people all over the world to have access to the means of buying a home and the opportunity to work, to pay for that home and the lives that are lived within it, is the very foundation of any functional economy. It really is now time to ensure that these vital concerns are recognized and given the protection of Human Rights law.
You already know that this system works in such a way that everyone can have access to money without "borrowing" anyone else's, that banks, rather than being "lenders" over us, are really very much more in a horizontal relationship with us; they are our agents, the recorders/monetizers of our debts; they stand side-by-side with us in our relationship with society. That's simply - and thankfully - how currency systems work. Banks monetize our debts and then release that money/debt onto society; it's much more helpful, therefore, to recognize our debts as debts we owe to society. We owe those debts back to society through agents licensed to facilitate it - banks. That is a much more accurate portrayal than the conventional idea that we've "borrowed" and must return other people's money (with interest, of course). Banks are really just our bookkeepers, keeping score of who owes and who is owed. And in performing that role, banks create the medium through which we all exchange and makes the life of the economy as we know it possible - money.
For the time being, let's say that banks' role can be summarized as facilitating the lifecycle of money. They facilitate the creation, the circulation and the eventual settlement of our money/debts. We've discussed money creation and will discuss it again, so let's turn now to the fact that banks' responsibility to create money is balanced by a responsibility to uncreate that money again. Banks must ensure that the money they create - because it is a debt - is settled/honored again. And that, of course, is the very same responsibility the debtor has her or himself.
Let's explore the proper role of banks through a couple of examples; household mortgage debt and national sovereign debt:
Household Mortgage Debt
When the debts of ordinary people are used to create money, for example, to buy homes, there is first the appearance of new money on the system followed by the exchange of money and property between buyer and seller. It's clear that there's an outstanding debt, it's clear that it is the acquirer of property who is indebted and it's clear that the process can only work if it's reversed again, if the debt/money is honored/paid down. If that didn't happen, the system just couldn't work.
It is first the debtor's responsibility to pay her/his debts and it is the role of the bank to stand next in line, to backup or to underwrite the debtor in that responsibility. So long as the debt is secured, the bank can seize the securing property and use its sale to settle the account. If the debt is unsecured or insufficiently secured, then it is right that the bank should take a loss. This is what we pay them for. It is the banks' service and the risks they face that we pay for, not compensating them or anyone else for the "foregone use" or the "time value" of money.
Banking, then, does involve costs and risk (that would have to be passed on in prices). What banking doesn't involve and must be removed is the unfounded story that they are "lending" and we are "borrowing" other people's money, requiring us to compensate them with interest. The money did not belong to anyone before it was "loaned" and it will not be returned to anyone when the debt is paid down; there is simply no need to pay and nobody to compensate with interest. Banks can charge transparent, competitive fees for the services they provide; they have no need and no right to mislead customers in order to increase profits.
With regard to risk in this sector, 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 administrative costs). Falling house prices, uninsured properties burning to the ground or being washed away in floods might present such risks. But even at today's historically low interest rates (e.g. 5%), a homeowner will pay twice for their home over 30 years. If these payments were tied to risk, it would have to mean that, each 30 year period, around 50% of the entire nominal value of mortgaged housing stock would have to be lost or destroyed, without insurance, before any sums were paid against them. Which is patently absurd.
Banks' interest taking isn't tied to risk (an argument commonly advanced), they're taking interest because they can. The competitive market fees for originating, maintaining and settling a mortgage account would be a fraction of their current cost, perhaps a fraction of 1%, if expressed as an interest rate. Banks are taking many thousands of dollars, many years of life and a great deal of opportunity away from working people (and then often taking the house as well) simply because we've been led to believe, falsely, that we are "borrowing" other people's money.
From Households to Banks: The Gift that Keeps on Giving
In what is surely an inevitable depravity 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 system.
Over the 35 year period 1973 to 2007, mortgage interest rates averaged around 9.3%, almost exactly the rate required to make householders pay three times for their homes; once for their home, twice simply as a gift to the already rich. Every time a working person spends 30 years laboring to pay 3 times for a home, the rich are in for a windfall. The beneficiaries of that interest can buy lavish homes and profitable assets (including the firms for which the working man toils), without ever having to lift a finger in contribution to the economies they take their lavish lifestyles from. And this is a process that is repeated for each property, every time time a mortgage is channeled through it. Each mortgaged property in the land might net the rich and powerful 10 or 20 times its value across its lifespan. If nowhere else the class structure of capitalism is plain to see, it is plain to see here.
National Sovereign Debt
Just like households, governments are entities for which money should work honestly and democratically.
And just the same as with households, when a state instructs its bank (a central bank) to deficit (debt) spend, that money is created in that process. Just as with households, the dominant class would have us believe that the state, on our behalf, are "borrowing" their way into debt. But the truth, again, is that that is created money; it is no more "borrowed" than our household debts.
In fact, the story here is even more compelling: it's only by convention that we call this money creation a "debt" at all. In the case of households' deficit spending, we clearly did have debts that must be honored i.e. money created must be paid away again. If we didn't do that, the system wouldn't work. But in the case of state money creation, it's clear that we do not have that same obligation to recover money and pay it away again. In fact, the opposite appears to be true. It appears to be self-evident that every nation should have a currency base that is democratic, free of debt and free of interest, which allows members of the public to keep savings immune from demands for repayment.
As it stands, governments, at least in the capitalist world, are effectively "borrowing" their currencies into existence. The dominant class are not only taking interest on all this money, the notion that these are real debts is being used as a political and economic weapon, to dominate, dictate, contain, impoverish and extract money and assets at a global scale. It's possible that every nation on Earth today is subject to these overarching, unnecessary and wholly fabricated "lender-borrower" relations.
In the developed nations of the world, our so-called national debts are towering sums that transfer billions upon billions every year to the dominant class, deprive us of a functional public sector and public rights, as well as serve as a political football to smear political opponents or tell us we're "living beyond our means". In the poorest nations, those already most damaged by imperialist economic practices, these so-called national debts may be the reason many don't eat, or have basic infrastructure like roads, hospitals or schools. In a pattern repeated all over the world, these so-called "debts" are foisted upon nation states deprived of democratic alternatives and then used to justify the deprivation of the public sector and the transfer of valuable public assets into private hands.
For those who wish to look at how the criminality at this level of finance goes even further, John Perkins (find him on Facebook), in 'Confessions of an Economic Hitman; How America Really Took Over the World, gave us graphic examples of how countries are targeted, as a matter of foreign policy, to be saddled with heavy, odious "loans", where large sums of (again, created) money are squandered on projects which profit banks, corporations and a compliant (often installed) rulership, but are of no benefit to the citizenry who are required to pay for it.
In our effort to challenge the immense corruption of it all, we propose, simply, basic economic literacy as the foundation for greater rights for all. Although we won't discuss much more about point 3 below on this website, we've already seen ample reason that numbers 1 and 2 should form the necessary foundation for our economic lives. And point 3 is really just an extension or enlargement of the very commons that gives life to numbers 1 and 2:
A democratic, debt and interest free national currency base.
(Nations are currently required to "borrow" their currencies into existence from capitalist banks.)
Interest free access to money for households all over the world.
(Banks create and destroy money as we go into and out of debt; interest beyond fees is unwarranted and unnecessary.)
Common resources and industries that allow the public sector to pay for itself, reducing or eliminating the burden of taxation on working families.
(Capitalist states currently tax their workers in the region of 50-60% of their incomes.)