Economics for Activists

Week Three – The privatization of Money

Mechanics Institute Limerick

May 2013

“The process by which money is created is so simple that the mind is repelled.”(John Kenneth Galbraith)

Mary Mellor – Chapter Two: The Privatisation of Money

1. Banking and the State2. Banks, States and Debt3. Money Creation and the Banking System4. From Regulation to Deregulation5. Liquidity and Solvency6. Innovations in Banking: Securitised Finance7. Private Good; Public Bad8. Conclusion

“… a tangled interaction between the market and the state….”

The commercial creation of debt has slipped from public control…

The commercial creation of debt has slipped from public control…

Although not from public liability.

The commercial creation of debt has slipped from public control…

Although not from public liability.

While the capitalist financial system has privatised the money system, it remains a system of social trust.

The commercial creation of debt has slipped from public control…

Although not from public liability.

While the capitalist financial system has privatised the money system, it remains a system of social trust.

The market alone cannot sustain it.

Page.32

State endorsement of bank debt means that banks are able to issue liabilities at will.

Page.33

Unlike state-issued ‘fiat’ money which, when issued becomes the property of the receiver to dispose of as they will, money issued by banks has to be paid back with interest.

Page.33

Unlike state-issued ‘fiat’ money which, when issued becomes the property of the receiver to dispose of as they will, money issued by banks has to be paid back with interest.

Control of money issue passes from the state to the banking sector and with it the benefits of seigniorage, that is, financial profit from making loans.

Page.37

This creation of credit-money by lending in the form of issued notes and bills, which exist independently of any particular level of incoming deposits, is the critical development that Schumpeter and others identified as the differentia specifica of capitalism.

If banks could not issue money they could not carry on their business.

Credit creation is the actual business of banking

Page.39

It is clear that in the late twentieth and early twenty-first centuries, the bank credit creation system was not just responding to the needs of production but to the demands of speculative inflation.

Page.40

As states were receiving the product of uncontrolled credit creation, the public would eventually have to pay the price in its role as guarantor of the money system.

Page.47

Money was seeking a way to make more money, but with so much ready money available, there was a limit to where viable investments could be found.

Page.48

Securitisation – ‘originate to distribute’

LIQUIDITY AND FINANCIAL ASSETS

Like a real asset, a financial asset may have more than one function. In addition to serving as a store of wealth, a financial asset may make it possible to transfer risk from one person to another, and may make it possible for speculators to make "bets" on the fortunes of a particular company.

But these functions are separable. There is no reason why the person who supplies the money for a financial asset should take the risk associated with the asset. And the risk can be transferred from one person to another independently of any transfer of the money investment from one person to another.

…a long term corporate bond could actually be sold to three separate persons. One would supply the money for the bond; one would bear the interest rate risk; and one would bear the risk of default. The last two would not have to put up any capital for the bonds, although they might have to post some sort of collateral.

- Fischer Black, “Fundamentals of Liquidity” (1970)

Residental / Commercial Mortgage Backed Securities

Failing to see that commercial money creation was behind the flood of money in the new financial world, bankers and financiers congratulated themselves on the amount of money they were making.

As money markets have grown, bringing together a wide range of financial organisations including the banks, the privatised financial system is effectively creating money for itself.

Mary Melor, The Future of Money (Pluto Press, 2010), p.53

Irish Mortgage-Backed Securities listed on Irish Stock Exchange, April 2012

AIB Mortgage Bank (AIB) - €11.87 billion

Celtic Residential Irish Mortgage Securitisation - (Ulster Bank) - €20.6 bn

Phoenix Funding Limited - (KBC Bank) - €11.55 billion

Emerald Mortgages (EBS) - €4 billion

Kildare Securities (Bank of Ireland) - €3.45 billion

Fastnet Securities (Irish Life & Permanent) - €23.774 billion

Lansdowne Mortgage Securities (Start Mortgages) - €729 million

Total listed (of those found) : €75.973 billion

http://dublinopinion.com/2012/04/02/irish-mortgage-backed-securities-initial-notes/http://dublinopinion.com/2012/04/04/irish-mortgage-backed-securities-part-two/http://dublinopinion.com/2012/06/08/update-on-amoroin-securities-from-clare-day-td-6-june-2012/http://dublinopinion.com/2012/09/06/bank-of-ireland-mortgage-backed-securities-april-1988/