When banks refuse to lend, what is the point of a commercial bank? It’s not a fanciful question. Banks throughout Britain and other countries are on a lending strike because their balance sheets are shot to pieces. For example, tens of thousands of people whose mortgage deals are up for renegotiation cannot get a loan at any price and face losing their homes. Small businesses are in a similar state.
While the Bank of England has cut official interest rates, the banks themselves have taken no notice. In some cases, mortgage rates have actually risen as banks desperately try to rebuild their balance sheets. Bradford & Bingley is hanging on by a thread, while the Royal Bank of Scotland (RBS) and HBOS are this week seeking no less than £16 billion more from shareholders in what is known as a rights issue to fill massive gaps on the asset side of their accounts. Even some analysts, including Evening Standard city editor Chris Blackhurst, have had it with the banks and his advice was blunt: “Investors should tell Sir Fred Goodwin [chief executive of RBS] and his colleagues where to go: no, we’re not going to take up the rights; we don’t want to own any more shares in your organisation.”
Again, what is the point of profit-making, capitalist bank in these circumstances? In fact, what is the point of the Bank of England itself and other regulatory bodies around the globe? Between them, they are responsible for a financial crash that will make 1929 look like a walk in the park. As a result, mass unemployment coupled with soaring inflation are looming.
How has this come to pass? Banks and building societes were transformed in the 1980s and 1990s to provide credit for the growth of transnational corporations and became subject to the global financial system. Where once they had to restrict lending to cover for eventualities like savers wanting their money out, banks were given the green light to print money under what is termed fractional banking. Today, British banks are required to keep only the smallest fraction – just above 0% in fact – of their deposits as reserves. Consequently, the amount of money in circulation has soared way beyond the value of goods this money can possibly buy and inflation – or the depreciation of paper money – is taking off.
No wonder those who know about all this (and have loads of money) are getting into commodities like oil, grain and, of course, gold. This morning, gold was trading at $895 dollars an ounce, above its all time high of $850 in 1980 when inflation was in double figures. As for the banks’ actual assets – which are also used to lend out money against - these are clearly worth much less than their nominal value.
Large swathes of banking “assets” are packaged-up debts that have been bought and sold as speculation. When the financial merry-go-round stopped abruptly last year it was because bankers left holding the debt parcels suddenly faced the fact that the “assets” they were supposed to represent – namely unsecured mortgages handed out like confetti in the US – were pretty worthless as the borrowers had defaulted. The credit-crunch kicked in.
Now the rest of us are supposed to pay the price for the bankers’ folly and greed. Of course, we need a banking system of some sorts but we don’t need one that is based on gambling with other people’s money. Or one that, when times get tough, refuses to help out ordinary people burdened down by debt or who were given mortgages up to seven or eight times their salary so that banks could boost their profits and bonuses. This kind of banking is entirely parasitical and we need it like a hole in the head. As part of a wider economic reorganisation along not-for-profit, co-operatively lines there is an urgent need to develop a new banking system, one that is owned mutually and whose primary aim is to serve savers and depositors, and not shareholders.
AWTW communications editor