How long will bankers keep fooling us?

Here is a typical example of half-truths and disinformation: This morning John Humphreys of Radio 4's Today programme asked his listeners whether they were baffled about the current financial crisis and wanted to know where all the money was and who got it. Together with his "expert" interviewee he then proceeded to confound them further. John Kay, author of "The truth about the markets" wasn't telling the truth at all. When asked by Humphreys why the banks, if they had lots of money but weren't willing to lend it, would need more money from the treasury, he explained that they had assets, but those assets were in IOU's from ordinary people and these were no longer trusted, hence the banks would want to swap those for trusted IOU's from the US government. Humphreys interjection that not all personal loans would default and did not people pay back their loans with real money and were not the properties against which they were secured still worth something, if not as much as last year, was met by the most laughable suggestion from Kay that in this case the American government could eventually even make a profit by bailing out the banks. Finally Humphreys wanted quoted an email from a listener stating that the banks would not put the new money from the government into circulation but use it to improve their balance sheets, to which Kay replied that their capital had been depleted due to past bad practices and needed to be improved in order for them to be able to put further money into circulation.

All this raises more questions than it answers. The simple truth is that almost all money in circulation, far from being "real money", to use Humphreys term, comes into existence as a debt. In what is known as fractional reserve banking, banks create credit, in other words, invent money which they then lend, backed only by a small ratio of assets, these assets in turn mostly not being gold, silver or commodities but entitlements to repayments from debtors. For example, a bank would lend to an individual a hundred pounds of non-existing money based on having a single pound of real assets; those hundred pounds of outstanding debt would then be declared an asset of the bank on the basis of which it then can lend another thousand, and so on. The current crisis, therefore, is not down to bad management but inherent in the system of debt-based finance. Governments have long since abdicated the right to issue money into circulation and given that right to private banks from whom they themselves then borrow back. In other words, governments have been privatised a long time ago.

What makes the situation so hard to understand for most people is that they have trusted their governments and economists for so long and put their faith into a fraudulent system, which makes it hard to now accept that we were all fooled into pledging our real wealth, e.g. properties, in exchange for phony money, and then put in real sweat and labour in order to pay it back plus the penalty of interest. To unravel the mysteries, here are some questions that should really be asked, although economists will avoid them at all costs:

If banks were justified in charging interest on loans they make because they allegedly took some risk, why should they now not also pay the price of having assessed those risks incorrectly? Why should the tax payer fund the result of their commercial incompetence? If a private individual invests into a business venture which returns losses, the government does not reimburse them, so why are the banks as commercial enterprises different in this respect?

If the government or treasury has so much money to inject into the banks in order to help them survive, why - at the same time - is the government borrowing money from those very banks? After all, there isn't a government in the world which does not have a national debt or so-called public borrowing requirement. Does the money the government will give to the banks reduce their debt? If it instead increases the indebtedness of the government, where does the government borrow that extra money from, seeing the banks are currently short of cash?

Given that governments represent or manage the wealth of their respective countries and people, and given that all governments are in debt, who are these fabulous individuals who own more than all the countries of the world put together in order to lend to those governments who are all in debt? And where did they get those vast sums from? Who sold them the earth and with what authority?

If governments need to give money to the banks so that the banks can put that money into circulation to prevent a deepening of the financial crisis due to lack of available funds, why does not the government simply put the money into circulation itself through development projects? Why should the government need to give the money to a bank who might not put it into circulation as intended? And why should that bank profit from government and tax payers money? Shouldn't those profits rather go back to the tax payer?

What happened to the theory of free markets if we now privatise profits and nationalise losses? If the banks' assets (outstanding debt commitments) are no longer worth as much as they were, shouldn't the banks have to bear that loss since they took profits for many years when those same assets were overvalued?

The questions could continue, and the only honest answer would be that we have been conned. This would finally lead to demands for accountable government and thorough monetary reform. Instead, we are more likely going to get plenty more of the misleading explanations put forward by "experts" such as Kay. The question of who is really in charge, the governments or the bankers, is not one they would like us ask, since we might then want to wrestle that power back off them.