Canadian educators are providing a critically important role for the Occupy movement by informing ordinary citizens about the underlying factors that cause so much havoc for the economy.
Protestors want to know why out-of-luck banks got bailed out, while bad-break mortgage holders got evicted from their homes? Are unemployed college graduates struggling to repay tens of thousands of dollars in students loans undeserving of debt relief? And the big question: who allowed public money for bank bailouts to end up as bonuses in the pockets of bank executives?The author shows how private banking creation of money provides them with huge profits (30% of all profits generated by the economy) which they use to control government and control who gets money (credit).
The focus on bankers, a.k.a. banksters, is appropriate. Banking and finance is where power lies: power to satisfy individual greed, or power to act in the general interest.
Recently at a teach-in at Occupy Toronto Jim Stanford provided further clarification about the private banking scam of creating money-out-of-thin-air, what the banksters do with all their profits, and finally, what needs to be done so that money serves the public interest. Here is an excerpt from his teach-in lecture.
They produce paper. And then they buy and sell paper, for a profit.
Here's a little economic lesson. You can't live off paper. You need food, clothing, and shelter to survive -- not paper. And since we are human beings, not animals, we need more: we need education, and culture, and recreation, and entertainment, and security, and meaning. Those are the fundamentals of economic life. Not paper.
What is paper actually good for? You can wallpaper your house with it. You can line your birdcage with it. In a pinch, you can wipe your butt with it.
But other than that, paper is just paper. It is not concretely useful in its own right.
How do banks create that paper? Let me put it bluntly again: They create it out of thin air.
It is not an economic exaggeration to state that the private banking system has the power to create money out of thin air.
Not cash. Not currency. Only the government can produce that.
But most money in our economy -- over 95 per cent of money in our economy -- is not currency. Most money consists of entries in electronic accounts. Savings accounts. Chequing accounts. Lines of credit. Credit card balances. Investment accounts.
In that electronic system, new money is created, not by printing currency, but through creating credit. Every time a bank issues someone a new loan, they are creating new money.
It's like a big magic machine, creating money out of thin air. And it's called the private credit system.
One of my favourite economists, John Kenneth Galbraith, put it this way: "The process by which private banks create money is so simple that the mind is repelled."
How do they do it? They start out with some capital. Let's say a billion dollars. Then they lend it out. Then they lend it out again. And again. And again and again, 10 or 20 or 50 times over.
Each new loan, is new money. The economy needs that money, let's be clear. Without new money, we wouldn't be able to pay for the stuff we make. So we'd stop making it, and we'd be in a depression.
So the creation of new money (or credit) is as essential function for the whole economy. It's like a utility. But we've outsourced that crucial task to private banks. We've given them a legal license to print money -- and the freedom and power to do it on their own terms.
Their goal is not providing the economy with a sensible, sustainable supply of the credit we need. Their goal is using their unique power to create money out of thin air, to maximize the profits of the banks, and the wealth of the shareholders.
How does this system work, creating money out of thin air? It only works if:
Number 1: Not everyone comes to the bank to withdraw all this imaginary money, in the form of real cash, at the same time. And if...
Number 2: The banks keep lending to each other, which is essential to make sure each one has the cash it needs for withdrawals.
We can immediately see that this system is inherently fragile. Banks create new loans many times larger than their capital, profiting off the interest they earn. But the money was created out of thin air. It's not actually there, if people want it at the same time, and if the banks won't help each other out.
So Canada's banks are fragile, too. True, our banks only lent their capital out 20 times over, not 50 times like the Europeans did. That's because Canadian regulations capped the leverage at 20. But they've still got 20 times more loans out there, than they actually have money in the bank.
Confidence is essential to the stability of the whole system. But confidence is intangible and impossible to predict. If confidence went south, Canadian banks would collapse as surely as Lehman Brothers or Dexia did.
Now, what do the banks do with all that money they created out of thin air? They lend it out. Some of it flows into the real economy, to pay for homes and cars and capital equipment. But not enough goes there. That's why our real economy is stuck. That's why there are 2 million Canadians unemployed, official and unofficial.
What about the money that doesn't flow into the real economy? Unfortunately, the banks use enormous amounts of it to place bets, enormous bets, buying and selling the paper assets that are created and traded in these towers. It's gambling, not production. It's legalized, subsidized gambling, all protected by the state.
The interaction of the private credit system, together with the speculative motive, that creates such turmoil and destruction, with each successive financial bubble. Without massive injections of new credit, the asset bubble could never expand so far -- whether it's sub-prime derivatives, dot-com stocks, or rare earth futures.
If speculators had to spend their own money on these asset bubbles, the prices could never rise to such precarious and destructive levels.
Now, there are two key problems with the operation of this private credit system, and its interaction with speculation, that we must understand in order to fight for change.
First, the flow of credit -- created out of thin air by these banks -- is like a roller-coaster, all depending on the mood swings of the bankers.
When their greed overwhelms their fear, they will lend to anyone with a pulse. But when their fear overwhelms their greed, and they want to hoard every penny possible against the feared run on the bank, they pull back loans even from their most reliable customers.
This roller-coaster, called the "bankers' cycle," is an inherent and destabilizing feature of the private credit system. And since the whole economy depends on the flow of new money, the flow of new credit, we are forced to follow the same roller-coaster.
The second problem is that there's nothing underpinning the paper valuations of financial assets, when they've been pumped up by the combination of speculation and irresponsible credit creation.
Then, when speculators' moods switch polarities, the whole thing comes crashing down. Quoting Galbraith again, "A popped balloon never deflates in an orderly manner."
And then we all pay the price for a crisis we didn't cause. And we all suffer the hangover from a party we weren't invited to.
This cycle of paper expansion and contraction, euphoria and panic, is hard-wired into the DNA of the deregulated private financial system. The cycle has happened before. And it will happen again. The current crisis was no unfortunate accident, no "perfect storm." This crisis is simply par for the course, for a system that values speculation over production -- and that gives the private credit system free reign to throw gasoline on the fire, through unlimited, unregulated credit creation.
It will happen again and again, until we change the rules of this pointless, destructive game.
So what do we do?
First, tax them. That's the idea behind the Robin Hood Tax, that we are fighting for today. Make them pay a little bit, with every pointless, unproductive transaction, to help clean up the mess they left behind.
A transactions tax alone won't solve the problem. It won't stop the process. But at least it will support the public services that we need, all the more so in the wake of each financial meltdown.
Same goes for corporate tax cuts. Let's reverse them. Put the federal rate back to 18 per cent for the financial sector alone, and we'd raise $1.5 billion per year for essential public services.
Taxing the banks is important. But taxing the banks is not enough.
So, second, we must control them. Put in place rules that require them to use this immense power, the power to create money out of thin air, to use it sensibly and productively. Prohibit the gambling. Make sure loans are aimed at sustainable, productive purposes.
The new measures being promoted internationally by Mark Carney are a step in the right direction. But a tiny, tiny baby step. We need more powerful restrictions.
And friends, even controlling the banks is not enough.
What we ultimately have to do is take them back. There's nothing magical about creating credit out of thin air. There's no special technology or knowledge needed. Just the legal power.
We can create credit out of thin air, just as well as any private bank can. Ultimately, we need a public, democratic, accountable banking system. One that serves the Canadian economy, not the wealth of those who own banks.
If we can create money out of thin air to buy and sell sub-prime mortgage bonds, then by god we can create money out of thin air to pay for affordable housing that could end homelessness.
If we can create money out of thin air to buy short options on Greek sovereign debt, then we can create money out of thin air to invest in a green energy system to stop global climate change.
If we can create money out of thin air to speculate on international currencies, we can create money out of thin air to buy needed medicines to prevent hundreds of millions of needless deaths from disease in the Third World.
There's no magic to it. These ideas are prudent and rational and economically sound. Because like we said at the beginning, it is work and production and sharing and sustaining that supports our real economy. Not gambling with paper.
These towers look powerful. But ultimately they are built on paper.
We've got the real power, with our ability to work and produce and share and sustain. We've got the power to build something new. We've got the power to replace these towers with a system that works.
And that's exactly what we've started to do with this movement. Thank you for what you are doing! And let's get on with the job!