It’s the credit creation, stupid
The ICB Interim report is out today, and we could we witnessing a triumph of spin and mis-direction. The banking sector, the ICB and the media all appear to have singularly failed to spot the following:
It is the loan creation aspect of Retail that the Investment banks wants it sticky mits on, not the deposits!
Analysis by Steve Keen in his Roving Cavaliers of credit shows that the Money Multiplier effect is bunkum. Credit creation preceeds money creation, not the other way round. Seignorage is the privilege of the banks who create loans “out of thin air”.
The Golden Goose is therefore the lending business, hence the neoliberal desire to de-mutalise building societies etc. The strategy was to liberate the access to credit, not to obtain savings.
Taking a look at page 191, Figure A7.1, of the ICB Interim report it states that “Securitisation” should only reside in the “Permitted in non-bank institutions” box.
I’m curious as to how the commission expects that this will work in practice given that “Securitisation” actually transcends Retail & Investment banking, as stated in my ICB Submission.
The retail arm “Originates” the loan in the first place. So they must hand it over (i.e. sell it) to the Investment arm for them to package up and re-sell!
Therefore, the Retail arm is de facto engaging in Securitisation! To declare it sits outside the retail sphere is a blatant mis-representation of how modern banking works! It is not the institutional form of banking that matters, but the monetary functions of banks.
Is the wool getting well and truly pulled over our eyes, here?
This is a firewall without any walls.
If this weren’t bad enough, “The price is wrong!”
Since the 1990s the risk associated with greater lending has been under-estimated, and seems to be continued to be under-estimated. From my ICB submission:
“the phenomenal growth in debt witnessed these last 20 years may not be all fully attributable to genuine economic investment and instead could be the symptom of poorly judged credit issuing”
It was based on Peter Warburton’s seminal work “Debt and Delusion”. The Neoliberal model of financial stability was to reign in inflation through a deliberate disregard for credit creation; the expansion of which was completely under-priced:
“The virtual elimination of the credit quality spread, in all its dimensions, ought to be regarded as a source of fear and trembling, not a celebration of capital market efficiency.” (p.174)
“The highly developed consumer credit and securitised loan markets of the USA
provide an acid test of credit quality developments throughout the Western world.” (p.175)
And so far, it seems that they have failed that test. The pursuit of competition through de-regulation has helped to mask declining levels of debt quality through the appearance of benign risk levels. Risks which when potentially need to be shouldered by private institutions is being shifted onto taxpayers.
The stakes have just been getting and higher and higher since Warburton wrote that in 1999, yet no-one seems to have the intelligence or balls to challenge this fundamental assertion:
The debt is not warranted, and is severely under-priced. It is not “investment” debt that has been growing, but debt for consumption. Debt that has been peddled in ever greater quantity facilitated by fraudulent mis-pricing of risk!
The relentless creation of (misguided) credit has appeared to have been ignored yet again by institutions who supposedly are entrusted with the country’s best interests.