Credit To The Nation
It's the economy, stupid. The idiot's guide to the banking crisis - and why it's even more serious than we've been told.
Tom Prendeville, 11 Dec 2008
It is a common misconception that banks loan money. They don’t and never have. What banks do is create non-existent money in the form of credit and loan it out, charging interest on it.
Banks operate on the principal of Fractional Reserve Lending, sometimes more accurately described as fictional reserve lending.
The way this worked historically was that for every tenner in real money the banks had on reserve, they could lend out €100, which is ten times that amount.
But that was in the good old days. Since the 1990’s, the ratio has grown to a staggering 20 to 1 and in some – more extreme – cases as high as 70 to 1. The six Irish owned banks are far from being the most exposed: they have €407 billion out on loan yet their core capital stands at €23.3 billions which represents a ratio of 17½ to 1.
To the average man or woman on the street who needs €250,000 to buy a house, it doesn’t matter how the money came into being. Or so people tend to assume.
Unfortunately it does. Because, the way the system works, it will eventually cost them €400,000 to pay back the €250,000 mortgage thanks to interest charges. Appropriately enough, the word mort gage which is Latin in origin literally means death grip.
It would be possible to create interest-free money (more of which later) – but Governments long ago abrogated this right and handed it over to private banks instead, who out of virtually nothing, created over 90% percent of the money which is now in circulation. Or to be more precise, the digital money that exists on a computer screen.
In Ireland’s case, €450 billion was created out of thin air during the ’90s and onwards, and loaned to people.
Initially, the new borrowed money created a credit-fuelled boom, with money filtering down from developers through the builders and the well-paid workmen, who in turn spent it in coffee shops (and on breakfast rolls) and so forth.
PYRAMID SCHEME
However, we are now in the phase where the whole process has gone into reverse, with all the borrowed money plus interest being slowly sucked out of the economy by the banks.
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