Home > Finance and money > It’s the credit creation, stupid

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.

Categories: Finance and money
  1. johnm
    April 11, 2011 at 4:41 pm

    Having watched the banks [and the ‘city’] bully hapless politicians from the time of wilson I couldn’t believe that they had no plan to start a load of new banks and ruin thier old adversaries when they had the chance. That said it’s not too late to start new banks for retail banking and to remove the guarantee on deposits from any bank that engages in ‘casino’ banking.
    Of course it’s the credit creation! I’m going to have a very flat forehead if this goes on.

  2. April 12, 2011 at 8:03 am


    I think I’m developing a flat forehead too. Does the crisis have to keep on getting worse before we’ll consider much more radical reform?

    Just look at the media narrative on Iceland. Rather than being hailed as the method for dealing with a severe banking crisis which threatened their economy owing to excessive leverage (i.e. default, investigate & prosecute), the media is just focussing on their reluctance to pay back our (unilateral) decision to invoke the deposit guarantees.

    What ever happened to caveat emptor?

  3. johnm
    April 13, 2011 at 10:48 pm

    I was abroad last week watching the waves chase each other to shore the only snippet I caught about Iceland was bbc world news on the referendum to accept[?] the bankers offer.
    Despite my best efforts[to be informed] I feel like I’m walking around in a daze where I keep missing the blindingly obvious.

  4. April 14, 2011 at 8:46 am


    I’m sure that if you’re studying these events by not just listening to the mainstream media, but seeking alternate explanations then you’ll end up considerably more informed than most people in this country.

    The links on the left are a great place to start: Max Keiser, Chris Martenson, David Malone (Debt Generation), and the comments on Paul Mason’s blog are good too.

    Incidentally the comments towards the end of this thread give a real sense of what is looming:


    #34 #36 #37 #38 Are referring to the reigning in of mortgage multiples (what do the banks know that we don’t?)

    #35 Sums up the macro forecast: “To keep the Ponzi scheme going more fictitious capital had to be thrown in after the 2008 financial crash. The adjustment is still to come & next time interest rates can’t go any lower. All they can do is to continue the debasement of the major currencies.
    Both inflation & a decline in output beckon.”

    In other words Stagflation, 21st Century style!

  5. johnm
    April 16, 2011 at 6:17 pm

    Thanks for the suggestions I’ve set aside Chris Martensen until I have more time, Paul Masons blog like so many by msm people is more valuable for what it provokes, in comments, than anything intrinsic, aside from uni-of kansas I dip into the others already and admire their ballsy honesty as much as their insight.
    Looks to me like they’re trying to devalue the currency at precisely the rate that property prices drop, without panicking the herd, meanwhile the bankers have recovered their fumbled baton and are charging off oblivious leaving their agents to negotiate with the previously bribed officials.

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