Posted Apr 10, 2015 by Martin Armstrong
QUESTION: Marty, thank you for explaining the banking problem. It is leverage but they cannot create money without a basic deposit. The way these people spin this you would think you just open a bank and create money by loans without any deposits at all. Why are these people so bent on destroying banks? This is the very same logic that use to be here in the former Soviet Union. We were taught the very same thing that capitalists and their banks were evil and government was our protector. You are correct. Bad ideas just keep haunting us forever.
ANSWER: Yes, this is a very concerning topic for it reflects the brainwashing that is underway right now that leads to authoritarianism once again. It is a serious problem for you can see in Iceland they do not understand that the crisis was caused by transactional banking not by fractional banking that pre-existed 2007. I really do not know but if anything makes me more concerned about the type of government we will end up with it is this very same line of socialistic thinking that all banks are evil and must be stopped.
These people who adopt socialistic thinking without understanding their argument and where it leads, only argue that eliminating banks and you somehow eliminate inflation and the world will be wonderful and gold will be $50,000. They are arguing for a barter system on the one hand and communism on the other wanting to hand more power to the State for only it should create money. They are confusing relationship banking with the new development of transactional banking where banks just try to make whatever they can on that transaction and could care less about the harm to the client. This is our major problem and this has led to their market manipulations. This all began with the takeover of Solomon Brothers by Philips Brothers in 1981 when the commodity world consumed Wall Street.
Banking crises have taken place NOT because of the fractional banking per se, but because the banks traditionally made money from the yield curve in the good old days BEFORE transactional banking. The deposit is on DEMAND and they would lend long such as a mortgage. When the crisis hits in the economy, the LEVERAGE reverses and then people want cash. The assets reflect a value far in excess of the actual money supply and then the assets must fall in value until an equilibrium is found. This varies greatly depending upon the asset class involved. Real Estate is the worst for there is no central exchange market as in stocks, bonds, and commodities. Real Estate fell to 10 cents on the dollar in the Great Depression primarily due to the Dust Bowl for the land became worthless.
It is absolutely absurd to claim banks do not need deposits first to create loans. From what? They leverage the deposits multiple times and that can be reduced, but if you eliminate the entire process that is insane. That is precisely the argument of the communists.
When Andrew Jackson destroyed the central bank, the Bank of the United States, you ended up with Wildcat Banking. Every bank began issuing paper money. There were banks who had no deposits and just printed money selling their paper money to dealers in New York at deep discounts. This was all FRAUD. It was not the way banking functions.
I really do not know why people distort this issue. What are they gaining other than laying the ground work for a new authoritarian government? They just need an enemy to hate and blame why they have been wrong in their expectations of inflation and whatever. This is not helpful. This reasoning will ONLY lead us down the path of eliminating banks and hand everything to government and then what? There goes all freedom.
The bulk of the “money supply” is electronic – not even paper. This is book entries in banks. Moving entirely toward electronic money is the goal of government for then you cannot escape taxes. But at the same time, you will eliminate bank runs. If paper money vanishes, how can you run to the bank and demand a withdraw? These same people who claim banks create money from thin air distorting the leverage for they cannot just create money without (1) capitalization to obtain a banking license, and (2) taking in deposits. Goldman Sachs is not a real bank. They became a bank to save their ass but they do not have branches taking deposits from little old ladies. They are a transactional operation out to trade and make money. They do not make money from lending. They will raise money for companies, but they do not lend them money from any deposit base of the general public. They should not even be a bank. They are an “investment bank” with a line of credit at the Fed.
While this nonsense is going on about banks, REAL money is buying assets for cash to get OFF THE GRID. But if these people think the solution is like Iceland and government should now be in charge of everything, you might as well embrace communism for that is the final step. This exaggeration about banks was the very same argument that started the whole communist movement that is absolutely true. They blamed the bankers in Germany, then said they were Jews, and then that turned into get the Jewish merchants, and then finally, what the hell – get all the Jews.
This entire line of reasoning is a highly dangerous path to take and one I suspect is really a socialist agenda to brainwash a lot of people just like the Global Warming nonsense. It has emerged countless times and it is pure sophistry that has never ended well. It is cyclical on schedule and the people promoting this historically call for blood.
This is NOT our problem. Our problem is government. It is their debt creation that will blow up very soon. The LEVERAGE in bank loans will add amplitude to the cycle. It is not the cause of the cycle. This voice is growing and this will be the source of violence and civil unrest. It will not be the first time they dragged bankers from their offices on Wall Street and hang them. War of Wealth was a play on this subject in general. It was the selling of the “Progressive Era” in the late 1890s that manifested in the income tax by 1913. It led to the creation of the Fed to control banking, and then the New Deal.
My fear – these same people will turn to government and ask them to take more control. This is not a world I want to live in.