12 Jul 2012

Where does the money that banks create go?

Hopefully, you are all aware of the fact that commercial banks have a virtual monopoly on the creation of new money. I've tried to work out precisely how much money gets pumped into the economy by banks - it's not simple. Intriguingly, Labour MP Michael Meacher has recently blogged the "the Big 5 lend £7 trillions a year heavily geared towards high-risk speculation hedged by the safe profitability of property mortgages".  I've contacted him to ask where the 7 trillion number comes from, but not heard back from him yet.

It would be great to have the details about where all that money goes. One very interesting report, mentioned by Aditya Chakrabortty in the Guardian, is one called "The Madness of Barclays" that was produced by the Centre for Research on Socio-Cultural Change at the University of Manchester. There's a powerpoint presentation that you can download here.

There are some very revealing numbers in that report. In particular, the study shows that of the £230 billion that Barclays lent to UK customers in 2011, only 2.7% went to Manufacturing. Nearly half was lending for home loans.  Between 2007 and 2011, lending to Finance increased 31.2%, lending on property increased 59.1%, Home loans increased 56.4%. Other areas (manufacturing, construction, energy and water, wholesale and retail and other business) dropped by 26.5%.

What a brilliant demonstration that banks simply cannot be relied on to do anything useful for the economy with their money creation monopoly. Imagine how much better things would be if the money creation was not used to buy property that already exists, but for building new social housing so that people can live in decent conditions.

But there is more. We learn that Barclays has a total level of exposure of nearly £1.8 trillion - that's more than the entire UK GDP (£1.5 trillion). Just imagine what would happen if default rates suddenly soared for some reason. That is an enormous amount of risk, risk that is currently almost entirely taken on by the taxpayer, who would no doubt have to bail out Barclays if things went wrong.

Finally, there are details of where Barclay's income comes from.  36.9% is interest charges.  You don't have to be a rocket scientist to make profits if you have the right to create money out of thin air and charge interest on loans. I doubt that you really need any particular skill to "make" money that way. A further 26.1% of earnings comes from fees and commissions - like charging 2-3% on credit card payments in a foreign currency. That's pretty demanding stuff too.  There's another 23.2% from "trading" - doing things like racheting up and down the foreign exchange markets to milk money from the system. Only 7.0% comes from "Investment". Frankly, that's pretty pathetic.

In other words, nearly all of Barclays earnings come from extracting value from the economy. Hardly anything reveals any real contribution to the system.

As I say - money creation is too important to be left to commercial banks. Money creation should be done under public control and in the interests of citizens. 

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