The Banks Didn't Lend Money To Anyone

The Banks Didn't Lend Money To Anyone

Free money, you say?
There's plenty of talk this week about mortgage debt forgiveness — or relief or restructuring, call it what you will — this has got a lot of people very fired up. It's the disease of the week for the talking heads and pundits on the panel shows.

Decent hard-working taxpayers will probably be skeptical of any scheme using  the term "forgiveness", and rightly so. Many pre-Tiger people worked hard for their money, saved up a healthy deposit, and paid off their heavy mortgages with no help or forgiveness from anybody — why should today's debtors be any different?

I wouldn't dare offer a solution of my own or even any analysis, not being any kind of an expert on morgages, debt financing, or other such animals. What I can tell you is a little something you may not know about the most important item: the very money itself.

I think we're all agreed that when you borrow money from someone, you should pay it back. That's only fair. The banks may be the kind of big faceless corporate institutions that we all love to hate, but after all is said and done, they did lend you the money.

But here's the thing, the banks didn't actually lend money to anyone. I know it's in the headline, but I'll wait while you read that again: the banks didn't lend money to anyone.

If I lend you a hundred euro, it's money I've worked for and saved up — Marx described money as "concentrated labour". My lending it to you is a personal sacrifice for which I deserve reasonable recompense, i.e. interest. This has been the standard view of loans since the concept of money was invented. However this model does not apply to the modern banking system.

Prior to their loaning you, say €250,000 for a house, the banks did not own this money. They did not have it in their account to lend. The money "sprang" into existence the very moment you signed the contract — your promise to pay is what created the wealth().

Only banks are entitled to do this, you and I cannot simply print money in this fashion. Put simply, the banks invent money which you then pay back in full with interest (often adding up to twice the capital amount).

Let me remind you:

  • this is not money that other people had placed in the bank on deposit
  • this is not money that the bank will miss from their accounts
  • this is not money the bank had saved up
  • this is not money that the bank had earned

So what is it? Is it really just some instantly-created free money (for them). That can't be right, surely?

"But…but," you may protest, "it was real money. I bought a house with it! I know you're saying it was all magical, but it must have come from somewhere!?"

Indeed it did. It came from you and me.

"How's that?"

Scarcity creates value; the less there is of something, the more valuable it is. The converse is also true, the more of something there is, the less value it holds.

You, as a member of the Euro Zone, are a small shareholder in the company called the Euro. Your official "share certificates" appear in the form of little currency notes with the word Euro printed on them (you probably know precisely how many of these certificates you have in your wallet right now).

But when a company prints extra shares, it dilutes the current holdings. You used to own 20% of the company? Now you only own 15%.  So too with the Euro — when banks create new money, the old stuff (yours) is worth less. This is what causes inflation, which is an entirely modern invention — ever wonder why some buildings in town have a 200 year lease at only £5 a year? That's because a hundred years ago £5 had the same buying power year after year.

At the height of the Celtic Tiger inflation was running at 4%. That means 4% of the entire wealth of the country was being siphoned off by the banks creating new money (for free) and lending it out (at a profit).

Fat cat rolling in money -- sound familiar?

So when you hear about struggling mortage holders, and your conscience pricks you because you know morally that all debts must be paid — ask yourself, do the banks really deserve this money? What exactly did they do to earn it?

Remember, when your next mortgage payment is due, you are not "paying back" the bank — they never had the money in the first place: it was embezzled from the people of Ireland.

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Endnotes:
  1. This is the practice known as fractional reserve banking, whereby the bank only needs to keep a tiny amount of actual cash in the vault. All the money they lend is fictional. [back ↩]