The sub-prime mortgage scandal is only a factor in the continuing financial crisis. Indeed, the financial crisis is the manifestation of a global financial system (called unfree market finance capitalism, or just finance capitalism) which is fundamentally flawed and about to collapse. The flaws ensure that the system cannot:-
* avoid economic cycles
* avoid the build-up of the cycles into bigger ones
* prevent rich-poor division
* solve global poverty
* provide social and economic justice
* address the major problems of the environment
The biggest factor in the financial crisis
The biggest factor in the crisis is what conventional economics claims is the secret of the ‘free market’s’ purported success, namely, conventional endogenous loan money. This loan money:-
* is created out of nothing (by the pressing of computer buttons) by the banking system
* has interest (as distinct from administration cost) added
* is not directed at the development and spreading of productive (together with the associated purchasing) capacity so as to achieve a Say’s Theorem (Law) balance of supply and demand (with producers and consumers being the same people) while, at the same time, forwarding social and economic justice.
In short, finance capitalism concerns itself with the making of money out of money and NOT with the true purposes of the real economy and society.
The creation of money takes place primarily in banks
Contrary to popular belief and continual propaganda, banks do not lend their own money or that of the depositors. Instead, lent credit is new money which is created out of nothing (by the mere pressing of computer buttons) and, on repayment, the principal of the loan is cancelled.
‘The actual process of money creation takes place primarily in banks.’ (Federal Reserve Bank of Chicago (1992), Modern Money Mechanics – a Workbook on Bank Reserves and Deposit Expansion.)
In the UK around 97% of the new money supply is created in this way and there are similar figures for other countries including the USA.
However, when the banking system creates the loan money out of nothing it creates sufficient money for the principal to be repaid but no money is created for the repayment of the interest. Therefore, if the overall money supply is not to shrink, more and more interest-bearing debt must be created. The result is that there is a continuing pressure for more and more interest-bearing debt to be created and that is the fundamental mechanism which lies behind the build-up of individual, town, corporation and national debt.
Conventional economics claims that the system of interest-bearing money serves the needs of the economy by efficiently allocating resources. But this is not true – the banking system money does not allocate its interest-bearing money to new productive capacity and its spreading. Instead, it allocates it to derivatives; to the bidding up of existing asset prices (such as house prices); to consumer credit; to putting individuals, companies and societies into ever-deeper debt, indeed, to anything but the real, productive economy.
Moreover, the paying of interest diminishes the capacity of borrowers to repay and diminishes their capacity to consume.
In addition, conventional endogenous money requires two lots of financing (one for production and one for consumption when only one lot – for both production and consumption at the same time – is necessary). The result is that there is continued inflation.
Because it has detrimental effects and does not serve the purposes of a true, fair, free market, let alone the purposes of society, conventional endogenous loan money must be gradually eliminated. This can be done by a gradual rise in banking reserves eventually to 100%. Banks will then be left with the duties of lending (as they are supposed to do) their own capital and (with permission) the deposits of their customers; and of administering interest-free loans stemming from the national bank.
Other factors contributing to the financial crisis
Other factors in the financial crisis include:-
* off-balance sheet creations and the unregulated, largely unseen, derivatives market
* the elimination of legislative constraints (e.g. repeal of the 1933 Glass-Steagall Act which ensured that banking, stockbroking, mortgage provision and insurance had to be separate activities)
* the ending of proper banking reserves
* the reliance only on interest rates as the basic controlling mechanism
* corrupt lending practices and valuations
* the vacuous belief that the ‘free market’ is Perfection Manifested (and soon everything returns to the most perfect equilibrium).
The purported ‘free market’ is not free, fair or efficient
All of the factors contributing to the crisis take place against a background of deceitful propaganda and deception about the ‘free market’. The truth is that the ‘free market’ is not free, not fair and not efficient and there cannot be true democracy unless all individuals (whether or not in conventional jobs) have their own independent productive capacity giving them their own income.
Furthermore, throughout the world, capital ownership is concentrated – in some ‘free market’ countries only a handful of families own most of the stock market (in Indonesia fifteen families own around 60% of the stock market). Over-concentration of economic power and the prevention of the operation of a true free market (in which producers and consumers are the same people) are prime causes of autocracy and poverty.
NB The justification for the present system of the banking system creating money and lending it at interest is that, by so doing, it is furthering the allocative and justice purposes of an efficient ‘free market’. However, in reality, it does not allocate resources efficiently and justly and, since interest is also unnecessary where productive capacity is concerned, the whole justification for the present system collapses.
On top of which, the present system (unlike binary economics) is incapable of achieving a proper balance of supply and demand with producers and consumers being the same people as required by Say’s Theorem (Law) and the requirements for social and economic justice.
The fifty nine false assumptions of mainstream neoclassical economics
Indeed, mainstream neoclassical economics is fundamentally flawed and that is because it is based on many false assumptions. This is a matter of considerable importance because if only one assumption is false (or, at the most, two or three assumptions are false) then the whole structure of neoclassical economics becomes invalid. Please visit the page FALSE ASSUMPTIONS to see the fifty nine false assumptions of mainstream neoclassical economics.
Because of the interest which compounds, debtors are under continual pressure to repay and, on the international scene, whole countries are effectively colonised by having to repay amounts many times the original loans. Also, because of interest, much frenetic activity is engendered and poor people without material security cannot be expected to moderate their claims on material prosperity unless they have a fair deal like everybody else.
But binary economics gives the fair deal because it spreads productive (and the associated consuming) capacity so that all individuals in the population – including babies, carers and those not normally in conventional employment – have at least some form of secure, independent income.
Moreover, at present, virtually everyone has either had a scarring experience of poverty or has a perception or fear that they might fall into poverty. In short, people feel insecure and that is one of the main factors in explaining greed. The insecurity – and the associated aggressive consuming attitudes – will only disappear if ALL people have material security and, at the same time, all people in some degree earn in exactly the same way as do others (i.e. at least part of their individual income should come through capital ownership). Only then will there be hope of people voluntarily minimising their greed. Moreover, as between individual countries, fairness between populations is essential if there is to be willing co-operation.
Greed is also caused by the present financial system which creates sufficient money for the principal of interest-bearing loans to be repaid but does not create sufficient money with which to repay the interest. The result is that more interest-bearing money has to be created (with more inflation and more people going into debt) and more frenetic activity in the endeavor to try to make repayment. Worse, the system favors the short term destruction of natural wealth rather than its long term maintenance. Unless the role of interest in the financial system is substantially diminished not only is the environment at risk but so is the stability of the world financial system.
It is also the case that populations stabilise when there is a reasonable standard of living, good education and health and at least some status for women. Binary economics provides these things and is essential if the present growth of the world’s population is to be moderated.
Lastly, there is now an extraordinary range of ‘alternative’ green technologies capable of generating clean electricity but which cannot be used because, in the present system of interest-bearing money, they are not financially viable. Examples include tidal barrages, tidal lagoons, and large-scale solar structures. However, with interest-free loans they will become viable. The world must have clean electricity generation and that means the use of interest-free loans to introduce the technology.
Solution to financial and environmental crisis
The fundamental cause of the global financial crisis now manifesting itself in various ways is a banking system which:-
a) creates money out of nothing
b) adds interest (as distinct from administration cost)
c) directs it at anything except the development and spreading of the ownership of productive (and the associated consuming) capacity so as to achieve a Say’s Theorem balance of supply and demand with producers and consumers being the same people while, at the same time, forwarding social and economic justice.
Because only enough money is created for the principal of a debt but not for the interest which must be paid, more and more interest-bearing debt must be created if the system is not to collapse. But, as the amount of interest-bearing debt continually rises, not only is the debt hugely increased (with consequent massive systemic instability) but inflation is continuously created.
The instability is compounded by the newly-created money not being put into the development and spreading of productive capacity. Thus the USA, putting the interest-bearing money into anything except productive capacity, has in practice hollowed out its economy which, of course, exacerbates the effect of the huge, mind-boggling, debts.
The solution can be summarised as the issue of national bank-issued interest-free loans (administered by the banking system) for the development and spreading of productive (and the associated purchasing) capacity to all individuals in the population. All environmental capital projects, all governmental capital projects, micro-credit, small business, student loans and the private sector if wide ownership is involved are covered by the solution.
NB At the same time as the national bank loans are issued, the banking system must be curtailed in its present ability to create money out of nothing and lend it for any purpose except the development and spreading of productive capacity. The curtailment can be done by a rise to 100% banking reserves.
At the core of the solution is the use of interest-free loans issued by the national bank for the purpose of productive capacity. Such loans cannot be inflationary, indeed, they are counter-inflationary – when the loans are repaid, they are cancelled leaving behind in the economy productive, income-generating capital assets. Thus productive assets always back the currency.
Crucially, the loans originate with the national bank. By originating the money with the national bank (rather than the banking system) society’s ownership of the money supply is established and so the money can be interest-free and focused on the purposes of productive capacity and the real economy so as to achieve a Say’s Theorem balance of supply and demand while, at the same time, forwarding social and economic justice.
Thus it is proposed that a country’s national bank should create interest-free loans. On repayment, the loans (like the principal of normal bank loans) are cancelled leaving the capital projects in existence. The money for repayment of loans is collected and repaid as it is at present except that the capital projects would cost, roughly, half, even a quarter or less of what they cost today.
The collateral for the loan would be similar to that today e.g., either secured on the project itself or on the repaying power of the government and its administrative systems. Essentially, the government would be repaying itself thereby removing creative liquidity which has fulfilled its function.
In the past the mechanism has been successfully used for public capital projects in Canada, New Zealand, China and Guernsey and is believed to be being used in Malaysia today for some big public capital projects. Gradually, over time, the banking system (by an increase in required reserves) would be increasingly restricted in its own creation of money unless such creation demonstrably spreads productive capacity and assists sustainable development.
NB While the supply of interest-free loans (originating with the national bank) increases, there needs to be, at the same time, a decrease in the present ability of the banking system to create money out of nothing. This would be done by, over time, a gradual rise eventually to 100% banking reserves (which effectively ends the ability of the system to create money out of nothing). The banking system would, of course, still be able to lend its own capital and (with permission) the deposits of customers.
The solution is expressed visually below.
Solution to the Global Financial and Environmental Crisis
National Banks are the institutions from which the supply of interest-free loan money for productive capacity should originate. Such origin is the only way to break the grip of interest-bearing money.
International financial institutions
Present international financial institutions are all in the grip of the old paradigm of interest-bearing money and its inefficient, unjust allocation. Something new is needed but there is the problem that, because the new binary paradigm is not properly understood, any new international financial institution will be manipulated to serve the purposes of the negative forces now bringing the global economy to destruction. Thus the true intent intent of the New World Order is to put the whole world into debt and so under NWO control.
The Banco del Sud has raised seven billion dollars from its member countries so as to avoid dependence on interest-bearing international money and it proposes lending at low interest-rates to member countries for particular infrastructure projects.
However, the Banco del Sud has no money supply of its own; probably does not understand that, where productive capacity is concerned, interest can be avoided; has very limited aims; and, because it is conceptually weak, could very easily be corrupted by the existing paradigm and its practices.
Next page: Incomes for All