The Most Potent Message

The Golden Rule: Why Bankers Are In Charge

by Ian Welsh

2014 February 26

The most potent message, and the strongest effect on behaviour, is when someone has the right to create money. Money, in our society, is created by borrowing. Banks and other financial institutions which have the right to lend thus have the right to create money. They have to have some form of collateral, even if that collateral is just an expectation of future earnings “great business idea, we’ll lend you money, and use your expected profits as our collateral.”

This money can be loaned out at multiples of the underlying asset. During the 2000s some brokerages were allowed multipliers (leverage) of over 40%. Even better, often whatever you buy with a leveraged loan can then be used as an asset for another round of leverage, leading to extremely high levels of effective leverage.

Some organizations also have access to very low interest rates: they can borrow at close to “prime” the rate the central bank offers to the very best credit risks. Major banks are amongst those who can borrow at this rate. They can then lend out to other people, again, at a higher interest rate, and with leverage.

If you, personally, could borrow money at 1% annual interest rate, and lend out ten times that, do you think you could make a profit? What is your mortgage rate? What is your credit card’s interest rate?

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In theory profits are supposed to be self-limiting. If an industry makes more money than other industries, outsiders should see an opportunity, start up businesses, compete and drive down prices.

In the real world, that doesn’t happen as often as it does in theory, because you can’t just start up a bank with access to the Central Bank’s window. You can’t easily start up new pharmaceutical businesses, because it’s vastly expensive and there are huge regulatory hurdles. And when it does happen, why would you compete? Why not take the outsize profits? Why would you drive down profits? How does that benefit you?

The other check is supposed to be diminishing returns. The more money you have, the harder it is to find something to invest in: you run out of mortgages, or you run out of businesses to invest in which can make those returns. This does work, somewhat. It is at the heart of why the financial collapse happened: there weren’t enough assets for all the money chasing them, so widespread fraud occurred (liars loans, for example) and many people were given loans who couldn’t pay them back, while artificial assets were created which were not worth what they were sold for. Eventually this collapsed, but because the financial industry had already bought the political world, they were bailed out at a cost of trillions.

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When you make millions in a few years: enough to live on for the rest of your life, in high style, it isn’t important if you’re driving the firm to bankruptcy. You don’t need the bank or the firm to be there, you’ve already made your mint.

Now, as a politician, if you do what the financial industry (or any other wealth industry) wants, they donate to your reelection campaign. They make sure your friends and family have jobs. They invite you to the best parties. And if you’re defeated, and have voted the right way, well, they’ll take care of you afterwards as well, with a cushy job. Bill Clinton, who deregulated Wall Street, is worth 100 million dollars.

Because bankers control a lot of money, they control what other people do.