"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. " Henry Ford.
by Phil T Looker, 14 March 2023
After the dramatic collapse of Silicon Valley Bank (SVB) at the end of last week, the biggest US bank failure since 2008, governments and regulators around the world are running around in headless chicken mode, trying to find a way to avoid a descent into turmoil throughout the banking sector and head off any further bank runs as depositors get their money out while they can.
Already, with regional bank First Republic following SVB into insolvency, panic in the market has seen a third bank in the US fall into the arms of regulators: New York-based Signature Bank, with assets of $110bn, was seized on Sunday night, becoming the third largest bank failure in US history.
In the US, the Fed on Sunday guaranteed all SVB deposits and launched an emergency lending facility, while President Joe Biden pledged to do “whatever is needed” to protect deposits.
After the dramatic collapse of Silicon Valley Bank (SVB) last week – the biggest US bank failure since 2008 – governments and regulators around the world are scrambling to avoid a spiral into turmoil and stem contagion.
Already, panic in the market has seen a second bank in the US fall into the arms of regulators: New York-based Signature Bank, with assets of $110bn, was seized on Sunday night, becoming the third largest bank failure in US history.
US central bank, The Federal Reserve, guaranteed all SVB deposits on Sunday and launched an emergency lending facility, while President Joe Biden pledged to do “whatever is needed” to protect deposits. We can excuse Dementia Joe of course, but every senior banker, accountant, economist and political policy maker ought to be fired if they don't know what is needed. The question that needs to be asked is why these wombat felchers did not do what was clearly needed, long ago.
What confuses global policymakers so much?
The banks create the money first, and then they have to get it back again. Global policymakers don’t notice the claim on future spending power piling up in the banking system.
At 25.30 mins in the video linked below you can see the super imposed private debt-to-GDP ratios.
The banks create the money for loans to buy assets. They do this by turning a claim on future earnings into an asset. As a business banking manager for a major UK bank I created £millions by lending my clients money. Every £ I loaned made the bank £1 richer. The assets sit on one side of the balance sheet and the loans on the other. If anyone defaults the bank can repossess that asset to recoup the money. Everything balances and the system is fine, unless the person negotiating the loan miscalculates the risk and lends money secured against a worthless asset.
Central bankers provide easy money to prop up the markets by issuing treasury bonds at low interest rates. Everything is still fine. Central banks stop providing easy money to prop up the markets. Borrowers can no longer borrown more to cover their interest payments on existing loans. Asset prices fall and suddenly a bank's liabilities are greater than its assets. Nobody wants to buy debt when the debtor cannot pay the interest due and black holes start opening up in the banking system.
The effects are far reaching, Bank credit effectively brings future spending power into today.
Private and corporate banks create the money supply.
Money and debt come into existence together and disappear together like matter and anti-matter. Bank loans create money and debt repayments to banks destroy money. Bank loans create 97% of the money supply
Bank loans create money and debt repayments to banks destroy money. What does this mean in the real world?
Bank credit effectively brings future spending power into today. They create the money out of nothing for you to spend today, and you make the repayments in the future. When you make the repayments, this destroys money. Interest is the charge you pay for the service of borrowing your own money from the future.
Early success can be achieved at the expense of an impoverished future. Global policymakers just don’t notice the claims on future spending power piling up in the banking system.
Obviously what needs to be done to get us out of the boom and bust cycle is a reform of the regulatory system to ensure that loans are properly secured against real assets with real value and not against fairy dust.
This concludes lesson one of our Banking for Wankers course.