Thesis Number: #5 (Page 5 of 9)
The Alchemy of Banking
The sweep of history lays bare how “money” emerged as a symptom, not the cause, of societal-wide crises. Bankers became entrenched as the magicians who had discovered the secrets of alchemy. They did not even need base metal to create their golden future. And their “capital” was tied to rock-solid security. If borrowers defaulted, bankers did not lose – they had the best possible collateral: planet Earth. High finance became surreal, divorced from the real world.
16th c.: King Grabs Monastic Lands
Aristocrats create market in land
Merchants supply Mortgages
17th c.: Gentrification of Government
Rent-seekers create Bank of England
18th c.: Privatisation of the commons
National Debt formalised in politics to facilitate rent privatisation
When governments made attempts to regulate the financial sector, bankers always remained one step ahead. In Britain, one such attempt was the Bank Charter Act (1844). This made it illegal for private banks to create new money (printing notes). No problem – the law did not prohibit cheques. Cheques were invented to enable joint-stock companies to inflate the “money” supply. The City of London became “by far the greatest combination of economical power and economical delicacy that the world has ever seen” (Bagehot 1915: 3).
Profit from the fabrication of “money” is called seignorage. James Robertson, who has worked in both the British banking sector and in the Cabinet Office, notes that, with coins and banknotes accounting for about 3% of the money supply in Britain, private banks were guaranteed huge profits “because our government allows the commercial banks to create the other 97% out of thin air in the form of profit-making loans which they write into their customers’ bank accounts as ‘credit’” (Robertson 2012: 48).
Price Takers or Fixers?
The financial sector defines its arbitraged operations as the “simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies…to ensure prices do not deviate substantially from fair value for long periods of time.” In fact, the failures are with governance. Banks engage in rigging the markets, as with the interest rate fixing scandals that shamed six banks, four of which were fined €1.7bn by the European Commission (Barker and Schäfer 3013). Banks are not price takers. They fix prices.
This is how Martin Wolf, chief economic commentator for the Financial Times, indelicately put it: “The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending” (Wolf 2010). Foolish bankers are, towards the end of every business cycle driven by land speculation; but not so foolish as to leave themselves exposed. It’s called moral hazard: behaviour in the knowledge that they would be rescued by government. The servile State uses taxpayers’ money to protect shareholders who invest in banks. What choice do they have? Their primary function is the perpetuation of the rent-seeking culture that created the political/financial nexus in the first place.
It is fraudulent, but legal. That is why bankers do not go to gaol for their stick-ups in the high streets. We should not be surprised at the corrupt behaviour of people who, straight from university, seek employment in the financial sector. Corrupt deeds revealed in the aftermath of the 2008 crisis exposed to the public gaze the culture of cheating that characterises that sector (Box 2).