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