Bob Diamond has posted an extraordinary article on the Guardian's Comment is Free today - apparently drawn from a lecture he's doing for the BBC (and why? is the very reasonable response to that news).
I have posted a comment in response to his absurdly misleading comments on bank responsibility, saying:
Bob Diamond presents a quite extraordinarily misleading and patronising view of the role of banks and what their consequent responsibilities are in this article. Many points could be drawn out: two suffice.
First of all if Diamond were to be believed he is nothing much more than a glorified Captain Mainwaring, taking in local people's deposits, counting them carefully, storing them in the vault behind his desk and lending them on with great care to others well known to the bank manager. This is utterly untrue. This is not in any way remotely related to the model of banking we have in this country.
Of course banks handle deposits, but as anyone who has reviewed rates available to depositors for the last few years will know just how contemptuous banks have been of those who wish to use their services for this purpose. There is good reason for that: banks do not (and never have) needed depositors for enable them to make loans. The simple fact is that the money banks lend is created by them out of thin air. It's offensively easy for them to do so. All that happens when someone asks for a loan is to credit a current account with the amount of the loan and debit a loan account with the same sum. That's it: that is how 97% of all money in the UK is created, but as is clear, deposits play no part in that process. Instead banks literally create the cash they lend and can get away with this trick so long as people think they're good for their promise to pay — which they will be so long as, as is now the case, the government clearly considers them too big to fail and explicitly and implicitly guarantees all they do. The insult to the injury is that having made this cash out of thin air they then charge heavily for it — vastly more than they pay for deposits. No wonder an organisation that can costlessly create what it sells is so profitable.
Bob Diamond acknowledges none of this, and the fact that much of the profit he and his colleagues supposedly generate is effectively licenced to them by the fact that the government has failed to claim for itself the right to he profit made on the creation of money; money which only the state can legitimise, but which banks have claimed for their own benefit and which they have used to speculate at considerable social cost to society at large, as Adair Turner and others have noted.
Secondly Bob Diamond fails to make any mention of tax, or the tax havens that banks use to mitigate their liability to pay tax. The payment of tax is the single biggest indicator of social responsibility in my opinion. Diamond does not even mention it, but his bank has been shown to be a persistent avoider of tax liabilities by me and other tax analysts. It's hard to be sure how much Barclays avoids in tax so opaque is its accounting but it's also safe to say it is likely to run to hundreds of millions of pounds, probably a year, and over the period he reviews in his article much more than that.
Associated with this is the clear commitment of his bank to the active promotion of tax havens for its own sue and for the use of its customers. Tax havens, or secrecy jurisdictions as I prefer to call them, can be defined as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate the use of that regulation secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. As such these places are fundamentally anti-democratic since they seek to undermine the mandate of democratically elected governments to elect the tax that is due to them.
Worse still, they create a criminogenic environment of secrecy where a lack of accountability (at best) and the deliberate turning of a blind eye (at worst) facilitates aggressive tax avoidance (at best) or outright tax evasion and illicit behaviour (at worst). Banks may protest that they do not want such business, but they persistently demand secrecy, resist all measures to ensure the information they hold is made available to those investigating tax abuse and other crime and by their actions they make clear where they stand on this issue, and that is on the side of the abusers.
Diamond ignores all this. As a result I regret to say his article, and presumably the lecture from which it is drawn, is just a PR exercise that deliberately otherwise seeks to draw a veil over the real operations, duties and responsibilities of banks and how they fail to deliver on them.
As a result it's fair to say Diamond misses the mark on this issue by a mile. The case for reform of so many facets of banking remains compelling, and urgent and articles such as this only confirm that's true.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
An excellent response
As I write, 78 comments to his article and every one hostile. What on earth made him think this would be a good idea?
[…] http://www.taxresearch.org.uk/Blog/2011/11/03/12708/ Share this:FacebookTwitterPrintEmailMoreDiggStumbleUponLinkedInLike this:LikeBe the first to like […]
Richard, you are rapidly becoming my biggest hero. But use a speelchekcer 😉 Your extremely valid points lose a smidgen of authority when they are filled with smelling pisstakes.
One other point – banks do require deposits to balance the books, they just don’t require them PRIOR to making loans.
It leads me to the conclusion that the only banking specific regulation we actually need is the banning of interbank lending.
Bookkeeping itself is essentially bent. Banks and sovereign countries can create their own legal tender so it’s wholly inappropriate to apply the same bookkeping standards to them as to the rest of us.
Spot on Richard.
Sometimes we are rather envious of your erudition.
As in “we wish we could have thought of that!”
Isn’t this the same Bob Diamond that said ‘it’s time for the banks to stop saying sorry’ a few years ago?
Someone needs to show these assholes the real world the rest of us live in.
Good article. Would have been great if the text hadn’t been stretched to right-justify – makes it almost impossible to read.
Mr Diamond seems to have failed to notice that the entire community he claims his enterprise benefits has been strong armed by himself and his cronies into a life supoort system for their own decadent activities.
The fact that he has ruminated for three years before producing theis risible, self serving guff is another naill in the pseudo darwinian idea that these people are there on merit.
If he’s so rich, why isn’t he clever?
The old banks create money of of thin air argument again. You are confusing the money creation effect of a banking sysrtem with how an individual bank works. I recently got a mortgage from a bnk which was not where I had my current account. They paid the mortgage directly to my solicitor. How exactly do you believe they created this money? The ansmer is that they used some fubnds that they had already raised in the form of deposits (of wholesale funding) and was sitting in liquid assets on the balance sheet. No deposit was created to fund it, it was already there. The majority of lending in the UK never sees a cureent account but goes directly to payment.
And with the greatest of respect – you’re wrong
As much greater minds than mine would agree upon
I think that very few people actually understand how commercial banks work – most. like PaulF, seem to believe that they function like old fashioned building societies, which were entirely dependent on deposits.
Richard, I suggest you would be doing the public a service if you could reference readily accessible material by the ‘greater minds’ to which you refer. For example, I am aware of the work of Victoria Chick, but for the most part it is difficult to get hold of unless you have access to a university library. We need the resources to make the argument.
I’ll try to add it to my list of tings to do
It is the redepositing of money received from some who has lent it from a bank that creates money in the bnaking system. If a bank creates a loan and deposits into my current account, do I owe the bank any money, no, no lending has happened in the economy.
I know many economist like to believe in the theory of how banks operate, but ignore how it works in practice. RBS reported today that it has £170bn in liquid assets, i.e. it has funding sources that exceeds it lending by at least £170bn and those are not funding sources it has created, it has attracted this real funding through term funding and deposits.
It is the same as everyone believes the banks can just borrow as much as they like from the BOE at 0.5% and then just lend it one to make a fortune, if only it were that simple.
And with the greatest respect – that’s the head in the sand, denial of the reality stance
“It is the redepositing of money received from some who has lent it from a bank that creates money in the bnaking system. If a bank creates a loan and deposits into my current account, do I owe the bank any money, no, no lending has happened in the economy.”
You’re getting CREDIT, mate, not money. The easiest example is the credit card. You are out with your mates at 11.00pm at night. Yuo have no ready cash on you. You decide to pay your round of drinks with your credit card. The card is read and the bill is automatically paid, yet all the banks are now shut! Where did that money come from? The fact is, new credit (or money) was created once you gave the bartender your credit card, which you have to pay back at principal and interest.
Banks give you credit as the basis for a loan, not money.
Did you sign for the money, an agreement that you’d ‘repay’ it over a period of time, or something similar? You created a promissory note when you signed. Does the term promissory note sound familiar? 🙂 Like, I promise to pay the bearer, for instance? You created a form of currency yourself right then when you signed. The bank promptly creates an equivalent in a more familiar format (virtually) in your account (or any designated account) and then tells you, ludicrously, you’ve got to pay it all back to them on the basis they’ve loaned you money they already had. They didn’t! You created the currency when you signed the promissory note. Complicated? Indeed. It gets easier with familiarity. Get yourself a copy of the Mary Croft PDF or familiarise yourself with the Freemen on Youtube. It will get easier.
Worth a look at http://www.economania.co.uk/where-money-comes-from.htm for explanations of where money comes from by such luminaries as President Obama and former UK Chancellor Reginald McKenna. Also check out http://www.economania.co.uk/links-resources.htm for a large and expanding source of further references.
PaulF – May I suggest you google the “positivemoney” website where you will find that all is explained re. the loan scenario you describe.
Bob Diamond and many other bankers try to maintain the myth that money creation is still carried out in the Captain Mainwaring style but after the introduction of computerised banking, legislation was never changed to prevent certain banks from creating new money for every loan or credit card transaction.
Richard Murphy’s description is correct and it is important that we all know and understand this.
Good description
Complex systems theorists at the Swiss Federal Institute of Technology in Zurich, empirically identified the global network of power of 43k transnational companies A relatively small group of companies, mainly banks, were shown to have disproportionate power over the global economy.. the transnational which was top of the list of the top 50 of the 147 superconnected companies was Barclays plc. Bob Diamond is hardly a ‘glorified Captain Mainwaring’.
http://www.newscientist.com/article/mg21228354.500-revealed—the-capitalist-network-that-runs-the-world.html
Furthermore, at a Treasury Select Committee, Bob Diamond claimed not to know how many Barclays subsidiaries are offshore (although Chuka Umunna MP suggested it was over 300). This from a man who was in charge of the ‘tax minimization unit’ for Barclays prior to taking over as Chief Executive from John Varley, and was responsible for the opaqueness of Barclay’s accounting system.
Amusingly, I helped write those questions that Diamond could not answer
I should have guessed! I’m sure that I have heard that there are more like 3000 Barclay subsidiaries but I can’t find the reference.
I remember one mechanism where Barclays and a US bank collaborated in using a subsidiary in a tax haven so that they were able to recycle profits back into their respective countries minus or a very much reduced level of tax. They really are ‘all in it together’.
Bravo Richard.
Re. Syzygy’s link above: the idea of a need for “global anti-trust rules” is very interesting.
For every penny of credit a bank extends, it has to square the books, and borrow it from somewhere, be it a depositor, selling bonds, using its own capital, accessing the inter bank market or running to the central bank. It has to square the books each and every day.
‘A’ deposits money in his current account with Smirkleys Bank. ‘B’ arranges an overdraft with Smirkleys Bank. Both A and B beleieve they have access to that money, but, in reality they have claims to the same money. If they, and everyone else, excercises their claim at the same time (unless the bank can borrow the money from somewhere else), the bank is BUST.
The money ‘creation’ comes from bank ‘X’ taking a deposit, lending it to A, who deposits in Bank ‘Y’. If Bank ‘Y’ then lends that money on to B, then new claims on money are created. Bank ‘Y’ does not know that its deposit is based on a sum of money in Bank ‘A’ which can be drawn on demand. This is the money ‘creation’ process.
I hope that helps.
No, it’s utterly untrue
The reality is that this is just not the way it works
You’re spinning a fasle yarn
I used to work in a back office of a bank, reconcilling the nostro accounts, and then helping the dealers to square the the bank’s books.
Every day, all of the branches would report in their net balances, and the traders would be running around furiously trying to square up the books by the eod cut off.
One day somebody misreported balances, and it created havoc. In this circumstance, the bank had to use emergency facilities at the Bo, and there was hell to pay.
Banks have to make sure their accounts are square each day — I’ve seen it.
I don’t understand where you are coming from? How does it work in yuor eyes?
Accounting for what is there is not the same as saying where it came from in the first place
Please don’t confuse the book-keeping with the economics
Ok, so you mean the bank-s- in the wider systemic sense then?
An individual bank has to balance its books, in an accounting sense, so cannot create money in and of itself. But when you put a group of banks together, under the auspicies of the central bank, then credit creation happens?
This I agree with, and has very damaging effects on the economy as bank-s- create credit far in excess of real savings, thus extracting rents from the wider economy..
Each bank can do it – at will
Systemically it is how the system works
If it did not there would be no money
After all – cash is just 3% of money supply – the rest just entries in a ledger
Ok, but you agree that banks have positive reserve ratios (each bank balances its books, even if it is with funny money).
The problem is that those reserves are claims on other claims, which are claims on claims (and so on) of the 3% ‘real’ money?
As we have seen – balancing is irrelevant – Lehman did that very comfortably and was bust
Lehman’s books could only balance if the market would lend them money to cover the shortfall against their increasing liabiltiies – so they couldn’t balance their books. Doesn’t this prove that a bank can’t create its own money, otherwise they wouldn’t have a problem?
Hang on, money is only created if people believe the bank can pay. But if the bank creates the cash by making curret and loan accounts for itself without eanyone else being involved there was no cash before they did such action and none after so of course a bank can’t solve such a problem when the confidence in its ability to pay has passed. so your logic simply fails
Banks still have to use double entry book keeping don’t they? I had assumed they have to marry up assets against liabilities on their balance sheet?
How can a single bank create money ‘if people believe they can pay’, and still balance the books?
Because when they create cash they mark £10,000 (say) in a current account (Cr) and £10,000 in a loan a/c (Dr) and voila, money out of nothing and debits = credits
Now, your next problem is?
JT you should watch the Youtube documentary called The Secret of Oz by Bill Still. It’s about how The Wizard of Oz, the book, was a metaphor for the banking system and much more. It touches on Jesus and the moneychangers, how the Romans arranged their finances including the death of Ceasar, tally sticks when he goes into the BofE museum, very interesting, and bookkeeping. I watched it with a bookkeeper and she exclaimed “Of course – double-entry bookkeeping!” at one point and I suspect you may do the same.
Very few people realise just how political the Wizard of Oz is
Andrew Lloyd Webber amongst them I suspect
Both JT and Paul F should get hold of the New Economics Foundation’s recently launched book “Where does money come from ?” for an extraordinarily carefully researched guide to the UK banking system.
That is a very readable and extremely comprehensive explanation of the system from authoritative writers.
I should have added (rather sadly) that JT and PaulF have obviously been duped !
Even with deposits they have it wrong. If you deposit £10 the theory is that the banks send £1 to their reserve account at the BoE and can lend on the remaining £9.
What they actually do is pass the whole £10 on and lend £90 at interest – money they have created as debt out of nothing because it is legal for them to do exactly that.
The ability of the commercial banks to create money should be withdrawn and restored solely to the Central Bank, who could actually create debt-free money by spending it directly into the economy when it is needed and withdraw it when it is not.
Jack, surely, if this were the case, then the banks would be reporting massively negative reserve ratios?
I know that Northern Rock had (effectively) negative reserves just before they went bust. Are you saying that HSBC has negative reserve ratios?
The banks have more cards to play in their pack. The loans, for example mortgages, can be bundled up and sold on as mortgage backed securities MBS and these will be rated by the credit rating agencies to encourage buyers – for instance pension funds, who need an income stream, which can be derived from the monthly mortgage payments. These payments can also be insured against default. Of course the system is not quite this simple. This can also work with credit card loans, car loans, student loans etc.
Ok, they can bundle up the loans, but still, they have to sell the package. This squares up the double entry book keeping. Create loans (which still have to be funded by borrowing the cash from the money markets, maybe ‘overnight’ to balance the books), then when they can sell the securitisation, they can properly net the assets against liabilities. Northern Rock went bust because a) nobody would buy their securitisations and, at the same time, b) nobody would lend to them, even overnight. They had nowhere to turn.
Where am I going wrong?
Your double entry. I’ve dealt with that
I take no credit for this little ditty that appeared in the comments under an article in last Saturday’s Guardian about the Occupy London protest:
Early each day to the steps of Saint Paul’s
The smug little banker soon comes
“I got a pay rise of 50 per cent
You f*****g peasants get crumbs”
Bob Diamond pehaps?
Not at all. By lodging their deposit at the BoE as I described they are maintaining the required ratio. That is how Fractional Reserve Banking works and is why it should be abandoned without delay.
The vast majority (90%) of the bank’s lending is of money that cost them absolutely zero, so every jot that is earned from it is profit. Not a single penny has to be returned to the notional depositor because there was no such depositor in the first place ! Except perhaps for the initial 10%. of course.
Try reading Nomi Prins’ book “It takes a pillage”. She was MD of Goldman Sachs and later worked for Bear Stearns, and knows from personal experience how all this happened (and still happens) and some of it would be little short of fraudulent if it wasn’t actually legal.
If the banks were normal businesses their financial shortage would be illegal ! The difficulty most of us have is not in understanding how the system works but in believing it. The truth is much stranger than fiction.
Which deposit are they ‘lodging’, I don’t understand?
I thought reserves are the proportion of a bank’s total deposits that are held in ‘risk free’ securities or held at the central bank. The larger proportion of a bank’s deposits are lent out or invested in securities or invested in casino market capitalism – a highly regrettable action. This is the text book definition of how ‘fractional reserve’ banking works. If this reserve ratio slips below 0%, then the banks are totally dependent on the money markets for funding, and if the money markets freeze, then they are bust, see Northern Rock, Lehmans, RBS and HBOS…
The ‘90%’ I think you mean, refers to the banking system as a whole, not the individual banks?
Or can you explain where I’ve gone wrong in my thought process?
The 10% (or in Eduardo’s example 5%) must be held in the Bank’s reserve account at the Central Bank. And Sandra is correct. Congressman Cucinnich has introduced a bill which would get rid of fractional reserve banking.
This should solve the problem of virtually all money being created as debt by the banks.
In 1844 Robert Peel’s bill prohibited the banks from creating money in virtually the only form it was then known – bank notes and coin. It is still the law. But he could not then have known about “digital money” so that loophole is being used by the banks and ALL that money (approx 97% of all the money in the system) is debt- money. Thus the debt mountain is continually increasing.
Richard Murphy is absolutely correct – its a grand ponzi scheme. And it doesn’t take much reduction of the reserve ratio to create insolvency. Think about it ! Anything below 100% imeans that the banks are in actual practice insolvent – if everyone wanted thir money back they couldn’t meet the demand.
But in their case it is not illegal.
A Congressman in the United States now recognises this problem:
http://youtu.be/4IdPyYRnOY0
Dennis Kuccich and his HR2990 Bill aims to address the problem.
Dear Richard,
I believe that for obvious reasons most people may be not aware of the simple process of money creation.
It is indeed very simple, and what you stated in your article is mostly accurate.
Money is created when a bank writes a loan: credits a current account with cash and debits a loan account with the same sum. It’s simple and it’s not a “trick” from the banks, it’s the way it is supposed to be done.
But allow me to disagree on one simple point of your statement; the claim that deposits as nothing to do with it. It has indeed, because banks must comply with a given rate of deposits [normally 5% (expected to be increased to 9% now)].
To make this clear I would like to use a simplified example, suppose a bank as only one client. Let’s say this client doesn’t hold any deposit in his bank.
Wouldn’t the bank be in a position to lend, say 10’000 £ to its client because of this? Well, it’s tricky. In theory it’s very easy: as you mentioned above, the bank can simply lend money to its client, debiting and crediting the usual accounts. Immediately, after the loan is created, its deposits to loans ratio would be 100%. But what happens when the client withdraws its whole loan from the bank? Then the bank would clearly be breaking the law, as it would have 0 in deposits and 10’000£ in loans. To prevent this from happening the bank, having only one client would have to agree with its costumer to leave 500£ in a savings account, for instance, so it could abide with the 5% deposits to loans ratio.
Of course one could easily argue that the whole money was created by the bank in the first place, which is true. But that doesn’t mean that depositors have nothing to do with it, because that costumer just became a depositor. In fact banks absolutely need depositors to create loans, and simply can’t do it without them. The fact that the deposited money was created by the bank, changes nothing to this simple fact: that very same costumer had to make a deposit so the bank could loan him the money he had asked for. Remember that this is not an insignificant feature of banking functioning. That client just contracted a loan to a bank, to whom he now owns 10’000£, but actually had to leave 500£ in a savings account, while taking only 9’500 home. He is now liable to 10’000. If trouble arises to his bank, he may found his 500 lost or at least frozen for a while, and still owe the bank 1000£. After this how can one argue that banking has nothing to do with depositors and the confidence they have in the banks?
Of course in the real world banks don’t ask you to leave a 500£ deposit for every 10’000£ you get from them as a loan, but that’s simply because they have other costumers with savings and current accounts that allow them to abide with the 5% deposits to loans ratio.
In other words – what I say is right in practice – and of all loans created it is highly likely 5% stay with any bank as we don’t have many banks….
I’ve been reading the other comments, and found out the question I’ve raised has been somehow debated before. It seems you’ve focused on a bank creating deposits and loans for itself… I don’t know if this is legal at all, but what would be the purpose anyway? To have cash to “speculate” or “invest”? Maybe they could do it, but still, they would have to keep 5% of it as deposits [makes me laught 🙂 ]…
Are you saying they can use this “deposits”, from loand they made to themselves, as a base to create loans for their costumers and keep the deposits to loans ratio on the line? Is it legal?
Yes to both questions
That’s what happens
As long as people trust the system it works
When they don’t it’s called a Ponzi scheme
So many clueless people on here, some of which work in banks or are accountants. Truely astounding. Maybe if people actually picked up a set of banks accounts and looked at them, they might understand that banks are 100% funded and not by magic free money.
But then again, maybe the banks are lying in their accounts…
Well we know they do
RBS, Lloyds and HBOS werte all squeaky clean in 2007 when in fact we now know their auditors knew that was not true
So shall we assume along with that that you’re also wrong on your first assertion and in fact banking is the Ponzi scheme we say it is?
Here’s Laurence J Kotlikoff on the subject; “… banks aren’t formally insolvent in large part because they are using phony accounting to stay afloat.” He goes on to give examples too (from the book ‘Jimmy Stewart is Dead’, which he might have subtitled ‘And Captain Mainwearing’s Not Feeling Too Good Either’. 🙂
Honestly Paul I can understand your astonishment. I could not believe it at first.
But have a good delve on this wsebsite : http://www.positivemoney.org.uk/
and if possible get a copy of Where does Money come from? One of the co-authors
Richard Werner is professor in Economics at Southampton University and was the orgiinator of the phrase “quantitative easing”.Amongst others he quotes JK Galbraith :-
“The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent!”
He also points out that “banks create new money whenever they extend credit, buy existing assets or make payments on their own account ,which mostly involves expanding their own assets, and that their ability to do this is only very weakly linked to the amount of reserves they hold at the central bank.”