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June 21, 2011 1:34 pm

The Left and the Banks

avatar by Gabriel Martindale

Email a copy of "The Left and the Banks" to a friend

First up, a story. Let’s say that I live a in high-crime neighborhood, or I’m terribly prone to lose things, or I’m a paranoiac, or just plain eccentric, but, for whatever reason, I lock all my money in a safe and won’t take it out, even to go shopping. But I need groceries, so what do I do? Well, suppose I manage to persuade a friendly shop-clerk to accept an I.O.U. He can come any time he wants and pick up the £100 which my groceries are worth from the safe, but in the meantime if he can’t be bothered to make the track to my mountain fortress, he can simply use the I.O.U. to buy £100 of goods himself. The I.O.U. can then circulate in the economy, just like hard cash and at any time whoever happens to have it can redeem it for the original.

So that’s my problem solved, but it’s not the end of the story because my paranoia hasn’t gone away and so I buy my groceries with an I.O.U. the next week and the week after that, and when I need some new furniture, I get that with an I.O.U. too and, since things seem to be working out with my scheme, I pick up a Hi-Fi, then a laptop, then a yacht.. After a year or so I’ve given out £200,000 of these I.O.U.s out and no-one objects; after all, I’m good for it: anyone can pop by mine whenever they want and I’ll give them the money they’re entitled to out of my safe.

The only problem is I’m not really good for it since all the notes in my safe only add up to £20,000. What do I do? Well what else can I do? I keep schtum about it, give anyone who does want to have their I.O.U. redeemed their cash, top up the safe with my monthly income and hope that not too many I.O.U. bearers turn up all at once. As long as they don’t, and no-one finds out I can get away with it until I win the lottery or find a leprechaun who can give me enough to cover my liabilities; hell, if I’m really lucky I can get away with it my whole life.

I think the word most people would use to describe what I’m doing is ‘fraud’ and they would think I should go to prison. However, based on contemporary economic practice there’s no reason to object to my activities and what you really should call it is ‘fractional reserve shopping’. Mix in some computers and this is literally exactly what banks do, except that, when they write fraudulent I.O.U.s, they expect you to pay it back at interest. Even if one accepts that usury itself is morally licit, modern banking is still just one big scam. It’s a scam that inflates the money supply, lessening every single day the value of ordinary people’s hard earned cash, and invariably creates asset bubbles that price ordinary consumers and investors out of the market. Moreover, it’s a scam that’s always on the point of collapse, requiring the daily activity of central banks to keep it afloat and every so often crashing the economies of entire countries, or the globe.

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Bankers are unpopular and, I think, deservedly so. They earn obscenely enormous amounts of money by committing literal fraud and impoverish everyone else, sometimes a little and sometimes a whole lot. Now, traditionally, the outlet for anti-banking feeling is the political Left, since, whilst the Right stands up for business interests and the law of market, the Left is seen as promoting the interests of the little people squashed by the mega rich. As they put it, why should the needy have to suffer public spending cuts, when bankers are given huge bailouts? However, this perception is based on a number of basic confusions.

One is confusion between the hard-Left and the center-Left. The first really are anti-bank, they want government control of the economy, equalization of wages and, ideally, the nationalization of finance, all of which would be inimical to the interests of the banker class. The thing is, though, that outside Latin America only a few bozos actually believe in the agenda of the socialism proper and when we talk about the Left in practical terms, whether it’s in America or Europe, we mean the post Berlin Wall center-Left. They are willing to ape the anti-banker rhetoric of the socialists as an easy way of picking up votes, but their actual policies tell a very different story.

The essence of the mainstream Left is a commitment to a large, generous welfare state on the one hand and an even larger, generous public sector employing lots of people on high salaries, on the other. The money for this doesn’t come from government owned industries, a thing of the past, but a combination of taxation and public borrowing. Ideally, lefties would always like higher taxes, but they recognize that there are practical and political limits to this, so they invariably have to fall back on borrowing to meet their ever expanding public sectors. Of course, there are limits to this as well, as Greece continues to demonstrate, so in order to get all the spending they want, the Left needs to boost tax revenue and the only way left to do this is to boost the economy.

This leads us to the second core commitment of the mainstream Left: economic stimulus. This can take one of two forms. Either the government borrows loads and loads of money and spends it, or the government encourages everyone else to borrow loads of money, by lowering interest rates, and they then spend it. Both of these tricks are supposed to increase ‘aggregate demand’ and hence get the economy pumping. This, of course, is a bubble, but until it pops, politicians are happy to call it ‘growth’.  So, as we see, the mainstream, electable Left’s approach to the economy involves absolutely everyone borrowing lots of money and, if they are going to do this, someone has to lend them the money and make bazillions in doing so and that someone is … banks!

If you don’t believe me, perhaps you’ll take a greater authority:

You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll

That might sound like a P.R. spokesman for Bank of America. but it was in fact President Barack Obama back in 2009, justifying his mega-stimulus (quite possibly the single worst single piece of legislation ever passed by an advanced democracy, then in the throes of a mass fit of hysteria, that it would probably like to forget).

So, if you are angry at bankers, don’t turn to people who think ‘credit is the lifeblood of the economy’ even if they do mix this up with some contradictory crowd-pleasing banker bashing. Turn to the economists and politicians who have a consistent record of arguing that easy money, fraudulent loans and central-banking shenanigans are both wrong and dangerous. You won’t find many, I’m afraid, but you will find some, and co-incidentally, while center-left and center-right politicians were talking about the ‘end of boom and bust‘, they vainly spent the past two decades trying to tell everyone things were going to fall off a cliff. The people who predicted the current crisis might just have a better chance of fixing it than those who didn’t have the foggiest idea it was coming and then tried to solve it by selling future generations into debt slavery in order to bailout the super-wealthy who couldn’t keep their fraud within sustainable limits.

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