This
needs to be preserved for posterity!
Chris
Trotter, not a bad commentator as they go, has said it “money is
created out of thin air”
Creating
money out of thin air
Ever
wondered where home loans come from? It's worth a moment's thought
Chris
Trotter
5
May, 2012
A
bank extends someone a line of credit amounting to hundreds of
thousands of dollars - from where? Where does the money come from? Is
there a vast vault somewhere, filled with cash, like Scrooge McDuck's
money bin? Does the bank simply lower a big basket into the pile and
haul up a home loan?
No.
In reality, home loans are book entries - nothing more. The bank
assesses its clients' credit-worthiness, fixes a repayments schedule,
and, during the next 15 to 20 years, in addition to recovering the
loan, charges them an eye-wateringly large sum for the privilege of
using its purely nominal capital.
So,
in the beginning, there's a book entry, and, by the end, the bank has
taken thousands of dollars of its client's very real cash, cancelled
its book entry, pocketed the interest, and started the process all
over again with a new generation of dupes - oops! - I mean clients.
Home
loans are, therefore, a kind of wager. The bank bets on the debtor's
ability to repay, with interest, a sum of money which, strictly
speaking, it does not possess.
Since
most human-beings are decent sorts, who almost always keep their
word, this is a pretty safe bet on the bank's part. Indeed, if we're
being truthful, the risk of the bank losing on the deal is
negligible.
(After
all, it holds a mortgage on the house!) In fact, you could even argue
that it's the debtor who, through years of honest toil, creates his
or her own home loan - while, simultaneously, paying the bank a small
fortune for being generous enough to believe that its client was good
for the money.
This
is a monstrous sort of power, made even more frightening by being
placed in private hands. Surely, the ability to financially enslave a
reasonably large chunk of the population (mortgage, literally
translated from the Old French, means "a death- dealing pledge")
shouldn't be entrusted to just anyone.
If
someone's going to create money out of thin air, and then charge
people to participate in the conjuring trick, then, surely, that
someone ought to be the state?
That
is certainly what a great many New Zealanders used to believe. Which
is why, 30 years ago, the state used to own the Bank of New Zealand,
the Post Office Savings Bank and the Rural Bank.
It
also, almost certainly, explains why a state-owned institution called
the State Advances Corporation could finance couples into a first
home at an interest rate of 3 per cent.
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The
singular advantage states enjoy over both individuals and private
institutions when lending money is immortality. Citizens, real and
corporate, come and go but the citizenry lives forever.
In
practical terms, this means the state can afford to extend credit on
vastly longer time horizons than any private financier. It also means
it can lend with far greater assurance than the largest private bank.
Being the institutional expression of its citizens' collective needs
and interests, the state is really only lending to itself.
Back
in the late 1930s, the first Labour government used precisely this
argument to finance its massive state housing programme.
The
Reserve Bank of New Zealand lent millions of pounds to the government
at nominal interest rates on the security of the thousands of homes
it was about to build, and the rentals those houses would provide to
the Treasury for decades to come.
It
also knew that by setting such a construction programme in motion,
and by using New Zealand sourced materials wherever possible,
thousands of new jobs would be created, and that the men and women
who were hired to do those jobs would pay taxes to the state instead
of drawing welfare payments from its dwindling coffers.
Was
the credit advanced to the government by the Reserve Bank ever
repaid? Nobody's quite sure. What we do know, because they stand all
around us, is that thousands of houses were constructed for families
to live in, at rents they could afford, and that thousands found jobs
that paid them a living wage and freed them from the dole.
Some
might say that if these achievements are considered as interest on
its loans, then the Reserve Bank, and the nation for whom it acted,
got a very good return on its investment.
Surveying
the global havoc wreaked by the world's privately owned financial
institutions, I am moved to inquire whether any of them should ever
again be permitted to create money out of thin air.
And
looking at the huge number of homes that need to be built in
Christchurch and around New Zealand, perhaps the best place to turn
for the financial resources required to build a fair and prosperous
future - is to ourselves
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