Richard financial sector bloated or a
dominant financial sector its effect in
your view on the real economy first of
all it's interesting that the national
income accountants who think a lot about
the overall economy how to measure it
and how to you know structure the data
they actually have been struggling for
decades with the question what to do
with the financial sector
why because GDP is actually created by
national income accounting by adding up
value-added activities and that's where
the financial sector has a problem what
is the value-added and it's it's been so
difficult that essentially the national
accounting statisticians have to make up
a fictional value and just add it on to
GDP and say ok that's we can say that
maybe is is what the financial
statistics because essentially there is
no value added there's value extracted
and so really you need to subtract it
from GDP has the finance sector of the
fire sector has it become a cost center
because this is that as you know is
there a sweet spot where it's actually
serving humanity Society and
facilitating business and when it
becomes a profit generator in and of
itself it becomes detrimental to the
wider to the wider world stolid you well
exactly even the mainstream textbooks in
finance banking and macro monetary
economics will will show
banks as financial intermediaries now
there's there's a problem with that it's
clear there is a high price that we're
paying for this what should be a humble
intermediation service that's being
performed and their salaries that are
being paid you know famously very high
which is very strange if they're just
intermediaries I think there's a
structural problem that is the
concentration of the banking sector so
in the UK five banks account for 90
percent of deposits which is one of the
most concentrated banking systems in the
world in Germany those high street banks
account for 12%
of deposits and 70% of deposits are
accounted for by 1,500 local
not-for-profit community banks there's a
general tendency when an organization
gets large and larger and larger and
gets very big essentially decisions are
made without accountability and the
temptations of power strike
Lord Act and famously put it this way
you know power corrupts and absolute
power corrupts absolutely so when you
have very large banks and only five of
them dominating the economy and through
the political mechanism and the already
financial sector centered political
system and political infrastructure you
know the City of London having a person
in Parliament that is not elected the
remembrance and in all these rights of
the square mile as a sovereign state you
know all these things and the Queen
needs fermenting to go there exactly and
so what you will get is large banks only
wanting to deal with large customers in
order to do large deals and that's also
where you get the large bonuses well
we've done a study on the US which has
the biggest banking sector in the world
over 15,000 banks of all sizes and
shapes the very large banks deal with
the very large customers give very large
loans the medium-sized banks give
medium-sized loans who is lending to
small firms it is only the small banks
now the UK doesn't have those so the
structure has become too concentrated
and what is badly needed in the UK's
decentralization one has to break up the
the financial sector and have much
smaller units because small banks
community banks are locally accountable
you can't certainly do a crazy project
or Corral you know big corruption
because people see what you're doing
essentially you know if we want to
produce something we need funding so
there's a role for banks in almost
everything that's happening in the
economy but what exactly is that roller
just quickly I'd like to reflect on that
banks are being thought of as
intermediaries but not really what's
happening
what are they they're creators of the
money supply so you're firmly of the
view that banks create money out of thin
air yes well I produced the first
empirical studies to prove that in the
5,000 year history of banking banks are
thought of as deposit-taking
institutions that lend money the legal
reality is banks don't take deposits and
banks don't lend money so what is a
depositor deposit is not actually a
deposit it's not a bailment it's not
held in custody at law the word deposit
is meaningless the law courts and
various judgments have made very clear
if you give you money to a bank even
though it's called a deposit this money
is simply a loan to the bank that's true
yeah so there is no such thing as
deposit a battery name then so banks
borrow from the public okay so that much
we've established what about lending
surely they're lending money no they
don't
banks don't lend money banks again at
law it's very clear they're in the
business of purchasing securities that's
it so you say okay don't you know
confuse me with all that legalese you
know I want alone I want alone fine
here's the loan contract here's the
offer letter and you sign at law it's
very clear you have issued a security
namely a promissory note and the bank is
going to purchase that that's what's
happening put it in layman's terms what
does that mean it means that what the
bank is doing is very different from
what it presents to the public that it's
doing how does this fit together so you
say fine the bank purchase is my
promissory note but how do I get my
money I want you know what's your
hundred grand
I don't care about the details I want
the money the bank will say well you'll
find it in your account with us there
would be technically correct if they say
we'll transfer it to your account that's
wrong because no money is transferred at
all so really from anywhere inside the
bank or outside the bank why because
what we call a deposit is simply the
bank's record of its debt to the public
now it also owes you money and its
record of the money it owes you is what
you think you're getting as money and
that's all it is and that is how the
banks create the money supply the money
supply consists
- 97% of bank deposits and these are
created out of nothing by banks when
they lend because they invent fictitious
customer deposits why they simply
restate slightly incorrectly in
accounting terms what is an Accounts
Payable liability arising from the loan
contract having purchased your
promissory note as a customer deposit
but nobody has deposited any money I
wonder how the FCA deals with this
because in the financial sector you're
supposed to not mislead your customers
anyway so the banks create the money
supply by inventing these claims on
themselves the you know the fictitious
deposits that can be actually positive
for the economy as long as there's money
creation is in line with the creation of
new goods and services implementation of
new technologies and therefore adding
value and adding value in the economy is
funded by this money creation if that
happens and we're talking about business
investment productive loans productive
bank credit you will have no inflation
these loans can also be serviced and
repaid you have a stable economy with
our problems and with low inequality and
so countries that achieve this that the
banks lend mainly for productive
purposes whether it's Germany in much of
its 200 year history or in the last
century the East Asian economies where
bank credit was largely for productive
purposes then you find but there's two
more cases I quickly need to point them
out because that's the country just
could just could just clarify that that
inequality is is significantly lower
lower inflation is yes and you believe
in the role and the real economy is
booming yes
that's when bank credit creation is
focused on productive lending for
productive purposes as opposed to
speculation and as host do those are two
other times if banks create credit for
consumption is obvious what's gonna
happen you suddenly have more money
created created and more demand for
goods but it's the same amount of goods
and services so you're creating consumer
price inflation that's well understood
and and central banks are watching that
a little bit I'm also was what's less
well understood is and what's the
biggest in the UK it's probably more
than 70% of all lending actually way
more than that
is bank credit creations that so money
creation for financial transactions for
asset transactions for purchasing
ownership rights now then you have a
problem why because you're creating new
money but you're not creating new goods
and services
you simply you're giving somebody new
purchasing power over existing assets
and therefore you must push up a
surprises so this you can you can draw a
chart where you show you know asset
prices land prices property prices in
the UK and it will match very closely as
well I've shown in in Japan and other
countries and that also creates the
inequality when the the banking sector
has focused too much on unproductive
lending and the UK's dominant it strikes
me the what you're telling me and tell
me I'm wrong is that lending in order to
get round this deposit stroke loan
situation needs to be categorized you're
right exactly that right that's right we
need to look at where the money is going
that makes a whole world of difference
so if money is bank credit is extended
for productive purposes you'll find
you'll get a good economy no inflation
and financial stability and also you
don't have this inequality problem do
you think there should be different
capital ratios to all know the whole
Basel capital approach doesn't work why
because it's its premise on the idea
that banks are just financial
intermediaries but they're not their
money creators we need bank regulation
that recognizes reality of how the banks
actually operates on what you're saying
this is a regulation from clearly yes
it's a regulation problem that's right
we need different regulation and the
only regulation that actually has
succeeded in in history and we have good
data for the 20th century in particular
in preventing asset bubbles and banking
crisis which are all driven by this bank
credit for financial transaction he
releases acid boom and it's a game of
musical chairs you know you have to play
it it's rational to play while the music
is playing which is how a surprise are
driven by evermore bank credit for
financial transactions the moment it
stops a surprises fall you get the first
bankruptcies banks get risk-averse the
whole thing goes into reverse and banks
go bust but you can avoid this and the
only regulation that is succeed
in avoiding this is guidance of bank
credit simple rules and the simplest
form of bank credit guidance is to
simply ban bank credit for financial
transactions it doesn't mean financial
transactions are bad no let the
speculators speculate and let them even
borrow money but not from banks that
would make a whole world of the future
they borrow from well they can issue
bonds or you know borrow in the markets
whatever they want but that's where they
shouldn't get access to the public
privilege of money creation and that
creates the problem that creates
boom-bust cycles but in some countries
they've succeeded in preventing this
asset inflation which ones such as
Germany without even credit guidance by
having a banking structure banking
system that's dominated by banks that
don't want to do this financial
speculation in the first place these are
the community banks that Germany was 70%
of all the loans being known as the
smaller ones the 1,500 folks bunkin
Dreyfuss and booking they actually the
main banks in Germany there's so many of
them each is small and they lent mainly
for productive purposes to small and
medium-sized enterprises the middle
strand which has been the backbone of
German economic success for the last 200
years despite Wars and disasters has
only been successful because they also
have to have local small banks funding
them all the way through that doesn't
exist in the UK and that's been why the
small and medium-sized enterprise sector
always has had a problem in the UK so
we're stuck with speculation and
horrific property porn renovation shows
well the solution is of course to create
these small banks we need to create
small banks they're the natural lenders
to small firms the public wants stable
growth none of those boom-bust cycle
banking crisis public money used to bail
out banks people don't want that in
germany these community banks dominate
goes they've never used public money in
these 200 years not a single one has
ever been bailed out with public money
and no depositor has lost any money
although richard your argument is the
complex principles are terribly simple
it is very simple and although you're a
little defeatist I'm not the you are
maybe I'm defeatist um but I like it but
it's just the idea
can I put it go on getting getting
through the Reggie treatment they are so
reluctant but that's when his hard work
that's how are we good that's what we
got you in we're gonna we're gonna have
you I think I think I have to say this
has been brilliantly explained
