UNISONActive is an unofficial blog produced by UNISON activists for UNISON activists. Bringing news, briefings and events from a progressive left perspective.

Saturday, 16 June 2012

Central Banks Fire Up the Printing Presses

On the eve of Greek elections, Europe's central bankers are hoping to avert a financial panic by signalling their readiness to create money to support banks. While continuing to use austerity programmes and attacking the living standards of working people. http://www.bbc.co.uk/news/world-europe-18444253
Paradoxically the austerity programmes have taken money out of the economy creating the conditions for a debt meltdown. It’s clear the programme is designed to lower wage and welfare costs in order to compete with China and India.

For now, the stresses gripping Europe from its debt crisis are tightening. Governments are struggling to borrow. Banks are wary of lending to each other and their customers. And nervous depositors are pulling money from Greek and Spanish banks.

As European officials head for a Group of 20 summit in Mexico, central bankers say it's up to government leaders to find a solution. Then we suggest they go to the Positive Money web site to find it!

Mario Draghi, head of the ECB, said Friday that the central bank would continue to support banks if the election results Sunday point to Greece's exit from the euro currency union and ignite panic in financial markets.

The announcement late Thursday that the Bank of England will offer British banks up to £140 billion pounds in almost no interest loans has raised the possibility that further turbulence in Greece could make it harder for banks to get money. Major banks take out overnight loans from other banks to pay day-to-day bills.

If this lending freezes up, some banks won't be able to operate. That problem triggered Lehman Brothers' collapse in 2008, which escalated panic and choked off interbank lending. Central banks had to intervene to give banks short-term loans.

In Spain the banking sector holds liabilities of 3.8trillion Euro, that’s more than the debt of its government debt and that of Italy, Portugal, Ireland and Greece states! The Spanish crisis perfectly illustrates not the financial irresponsibility of the feckless South – a popular misconception, particularly among the German public – but instead the inherent instability of a financial model, fractional reserve banking, which has been enthusiastically adopted around the globe and the stupidity of governments borrowing money from the banks when the own their currency.

While many people are aware of fractional reserve banking, very few realise that it has a critical implication: banks can and do create new money. In fact, approximately 3% of the money in the UK economy is created by the Bank of England and the Royal Mint. The other 97% is created electronically by banks.

If banks lend more, then the amount of money in the economy increases, which can lead to an economic boom. Conversely, if banks stop lending, then the rate at which new money enters the economy slows, and the economy falls into a recession.

Banks also have direct control over which parts of the economy get this new money.

Unsurprisingly, they have directed it into the types of lending that are most profitable from their perspective, such as mortgage lending. Banks favour this type of lending because the bank can take possession of a house if a borrower defaults on their loan repayments.

Thus, banks are inclined to withhold funds from productive lending, and instead direct loans, and thus new money, towards speculation, which reinforces bubbles in housing and other asset markets.

This is exactly what happened in Spain, where banks funnelled enormous amounts of new money into the property market, causing a bubble that later burst. These bad debts associated with the collapse of the Spanish property market are so substantial that they now threaten the solvency not just of the banking sector, but also of the entire Spanish economy and, by extension, the rest of the Eurozone and the UK.

In addition to poorly directing new money in an economy, fractional reserve banking is also inherently unstable as the public and institutional lenders may suffer a collective loss of faith in a bank, and all withdraw their money at the same time. But there isn’t actually enough money in a bank to pay everyone back at once, so confidence in the bank will collapse.

This will encourage more people to rush and withdraw their money. And so on and so forth, until, much like a Ponzi scheme, the system collapses.

Spain and Greece are both currently suffering from such bank ‘runs’, and the European community and the Bank of England is frantically trying to diffuse the panic before the system unravels completely. It’s a pointless exercise as the mathematical limits of debt based money are finally being reached and money is vanishing from the system.

For in this scenario more and more debt has to be issued in order to pay off the interest of past debts…but the banks, governments and the people are already overloaded with debt! The solution of the elites has no less the effect of pouring fuel onto a raging fire!