'Banking profits are so enormous' says Patrick Hosking in The Times today Back to front about bonuses. He lists 5 of the ways banks create their profits, but he does not specifically name and explain the ultimate profit gusher for banks. This is: virtually unlimited credit creation that banks are licensed to perform whenever they see a profit opportunity coming into view. Without these credit creation powers, their largest profit sources would be mostly cut off.
Martin Wolf in the Financial Times 9th November 2010 was more succinct:
'The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending'
Ben Dyson, economist, on YouTube says that there is 'a common misunderstanding that governments create the majority of the money in an economy'
Ben's (6 min) video has an easily understood overview of the monetary/banking system and why it should be radically changed. But you may need listen more than once if the ideas are new to you. A good new year's resolution for 2011 is to understand credit creation like a top banker does. It's not difficult. It's just extraordinary. It is also highly important to us all. As tax-paying bank-rescuers we all contribute to the stable society which enables the wonder of credit creation which unfortunately banks have misused. Note: Not everyone who works in financial services understands the system.
For further academic insights into the way banks use society-inspired credit creation to their own private ends and how a better system would work, study anything by Prof Richard Werner of Southampton University, on this blog or elsewhere. Also study James Robertson's work.
Perhaps Patrick Hosking will spell out the banking credit creation bonanza in a later column? I wonder if he is glossing over it?
posted by Charles Bazlinton. Link to YouTube on The book The Free Lunch - Fairness with Freedom