Monday, 6 July 2015

Who really owns the money?

From many comments on the current financial crisis in Greece - and from the utterances of the Greek PM and his so-called Finance Minister - I get the impression that a majority of people have no idea of how Banks operate, and even less idea of where they get the money. It doesn't seem to register that the 'money in the bank' is actually 'owned' by the people who deposit it there, not the Bank. Nor do they seem to appreciate that the friendly 'High Street' banker is in a totally different league to the so-called 'Merchant Banking' operations in the City. For one thing your High Street manager doesn't get to play with Fund Investment - probably the worst he can do is lend a client a bit too much or allow to big an overdraft.

The guys in the city are another world. These are the guys who can move billions at the touch of a button, the men who lend huge sums to companies and to governments. But there are also limits to how much and whose money - and again, it isn't theirs or the banks. Once again, it is money entrusted to them by investors and depositors. The trick is that the Banks work for their investors and their shareholders - famously a court in the US decreed in the 1930s that the sole function of a corporation is to make a profit for its shareholders. That is what banks do when they lend anyone money, which is also why most of us don't borrow any more than we need to. After all, why pay more than you absolutely have to for the privilege.

There is much fulminating about the Banks having lent too much, or the Banks making profits at the expense of the people - but who forced anyone to borrow the money in the first place? Until the 1990s, Bank Regulation meant they had to 'hold' in their vaulty a considerable portion of the money deposited with them. Then, presumably in the belief this would bring 'growth', governments decided to allow a bank to lend almost everything it held on deposit. Thus, if a depositor put in §100, the bank could lend a borrower §90, and when he paid that into his bank account, they could lend up to §81 of that, and so on ... That fueled the 'credit boom'.

The next problem is that of governments themselves. They have, in reality, only the money they can gather in taxes to spend. If you push tax to high, the big money leaves and tax revenue falls, so goivernments are forced to balance spending and income by taking loans usually organised by the IMF. The alternative is to simply 'print more' a trick that saw the value of the British Pound collapse under the free spending Labour governments of the 1970s. Those who scream about how the €uro has 'denied nations their democratic right' to resort to the printing presses forget that the value of the money is only as good as the gold, trade or whatever that underwrites it. Bank of England notes still contain the legend 'I promise to pay the bearer on demand ...' and technically you could take your Bank Notes to the Bank that issued them and demand the hard cash in coin, preferably gold.

For years now the Greek crisis has been brewing and all the other countries caught up in it have managed to find solutions. Some, like Ireland, took the pain, fixed their overspending problem, and are now recovering, others lag, but are dealing with it. Greece alone has refused any reform. Their PM and Finance Minister have caused enormous frustration by repeatedly coming to the table with the same empty hands. As one Minister put it, they smile, they shrug, and say, you make a proposal, we'll consider it. Now they claim they want the debt written down - in other words, they want to stick their hands into the pockets of every taxpayer, depositor and investor yet again, and take even more out of everyone else's pockets while still refusing to reform their freespending.

More worrying is the fact that many of those asked, on leaving the Polling Stations, say they voted No to 'punish the banks' or to 'punish Brussels'. Fine, but tomorrow, when the banks have nothing to offer, or when Tsipras and his henchmen print Drachmas and try to pass them off on a 1 for 1 basis, it will probably take less than 24 hours for the value to crash.

Well, the people have spoken. Whether they stay in the €uro or not is a moot point. Some believe Europe will bend over backwards to keep them in. I'm not so sure they will, Mr Tsipras and his Finance Minister have annoyed everyone. So they refuse to pay their debts? Greece will find it incredibly hard to get fuel, medical supplies and a whole range of other things they can't make themselves. Countries having to work on 'cash up front' generally run into massive problems very quickly.

Will it 'kill the €uro' as so many British commentators and media 'experts' seem to hope? I doubt it. That would cause a much, much bigger problem economically for the International community than many realise and it will hurt everyone. It might be a good idea for all those journalists, campaigners and the rest, calling for Europe to 'write off the debt' or 'give emergency aid' to back off a little and consider. The Greek Referendum has been used to 'send a message' and to cover up the fact the Greek government refuses to carry out meaningful reform of an economy based on other people's money.

The Greeks have been living on and spending everyone else's money since they cheated their way into the €uro. They were eager enough in the early days to get into the €uro for the very simple reason the Drachma was shot to ribbons and only just still viable. They wanted the €uro then, because it gave them, they thought, a limitless source of funds to cover their profilgacy. They've made no effort to collect their own taxes, they allowed capital to vanish, and even the EU subsidies to disappear into projects that were just to boost the wealth of a few. They've been refusing to reform for the last five years, and now its caught up with them. Mr Tsipras wants 30% of government debt written off - which means the rest of the EU, the depositors and taxpayers must pick up his bill, presumably so he can carry on spending.

I know what my answer would be if I were a bank manager and a debtor approached me with that sort of demand. This argument is not about 'democracy' or even control of their own economy, it is about paying your own way, and paying your debts. They don't 'own' the money supply, neither does Brussels or anyone else - it belongs to us, the taxpayers, depositors, and investors.

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