Are Bankers Time Travelers?
After I coordinated a real estate closing of a 20 unit condominium deal, which was planned to be reconverted back into rentals, for a long time client, he took me to a hole in the wall café where they served real Turkish coffee. I acquired a taste for that type of coffee when I visited Istanbul years ago. During our walk to the cafe I recalled my client’s challenging background. He emigrated to the US from Romania in 1990 after his sister and father were killed during a horrific neighborhood pogrom. Ironically, a year prior to the tragedy he was awarded a PhD in economics from University. His neighbors at that time congratulated him for his effort, the same neighbors that would a year later succumb to the insanity that gripped the region during the collapse of the Soviet government. Those were very volatile and hostile times because some people were starving while others were not which was a formula for devastating social upheaval. He had managed to get most of his family out and to the US through his social networks in the US and elsewhere.
When we were seated I ordered coffee and baklava. That combination was like no other for a mid-afternoon pick-me-up. My client ordered coffee with a Turkish shortbread. He said the shortbread ingredients included cardamom and ground coffee, which had a restorative synergistic effect. All I knew is, that too, sounded delicious. So as we were anxiously waiting, I asked, “Are bankers time travelers”? This was my client’s PhD thesis’ title, so I thought it would make interesting conversation. He laughed saying, “I haven’t talked about that in years”. I asked, “Can you explain ‘time travelers’”? “Ok”, he said, “but you have to stay with me, it gets a little weird. Under the US fractional-reserve banking system, when a bank writes a loan it just makes a notation on a balance sheet indicating that someone borrowed money, that a loan was made. There is no transfer of money from the bank’s vaults to the borrower, nothing, just the notation of debt on the bank’s balance sheet. The debt notation has no tangible value other than it is there”. “I thought that banks needed some kind of reserve”, I asked? “They do, between 3-10% depending on the amount they have loaned out”, he answered. “So”, I asked, “if a bank loans out a $100 it only needs $3-$10 in reserves”? “Yes, that’s true, but let me finish answering your original question.
Now the bank has to balance the notation it made by crediting the borrower’s account the same amount”. “Oh”, I said. He continued, “The bank then disperses the loan as agreed, and at that point in time the loan becomes real money that can be circulated into the stream of commerce”. “What do you mean real money? Where does the loaned money come from?” I asked, incredulously. He said, “It comes from the future, there is nothing backing it up except the creditworthiness of the borrower, that is, the borrower’s pledge to repay the loan from future income. There is only the notation in the bank’s balance sheet of the loan and that is what other banks and merchants rely on in order to accept payment for goods and services. The money is created from nothing, actually. The acceptance and reliance by banks, merchants and others on the notation of the loan in the bank’s balance sheet as real money is ‘legally enabled’ by the Full Faith and Credit Clause of Article IV of the US Constitution. Understand that the banks effectively reach into the future and extract money to be used in the present by relying on future payments of the borrower to satisfy the notation of the loan. The only source of money that validates the bank’s notation is from the future, that is, the future payments of the borrower”. “What happens when the borrower files bankruptcy”, I asked?
He said, “Well here’s the ‘punch line’, before 2008 when a borrower filed bankruptcy the bank either absorbed the loss, or was involuntarily dissolved or seized by the Feds if too many borrowers filed making the bank insolvent. So if a bank made too many bad loans and became over extended, it failed. At that point the Feds breaks it up into performing assets and non-performing assets which are liquidated, destroyed or recycled with a different solvent bank. All parties that were involved with the failed bank, the shareholders, the officers, the creditors, the investors, and the depositors went their separate ways licking their wounds, and that was the end of that drama. Nobody else was affected. Everything went smooth and the general economy continued as normal.
After 2008 however, the US banking policy was revolutionized. The policy was flipped upside down. The US decided that the big banks were ‘too big to fail’. They made the US taxpayer bail them out”. I interjected, “Do you mean after 2008 if a bank makes too many bad loans and becomes over extended the US taxpayer reimburses it?” “Yes”, he said, “it’s the current US policy not to allow the major banks to fail and the banks essentially transfer their losses and bad loans directly onto the taxpayer. The US taxpayer is now the guarantor for the banks’ profits, shielding them from failure. As a reminder the banks just make a notation of a loan to the borrower, they really don’t take money out of their vaults and give it to the borrower; they conjure it up out of thin air. So in reality the US taxpayer is giving money to the banks for nothing”. “What”? I exclaimed, “Are you saying that my grandkids and great grandchildren have to pay for today’s banker’s malfeasance and bad loans which are based on an empty notation in a balance sheet”? “Yes sir”, he answered. “You should also be aware that this is the first time in recorded history that a country has as a policy to bail out creditors. In the past, people always rescued fellow citizens, the borrowers, and never the creditors”.
“For example”, he continued, “look in scripture for Jubilee or at Deuteronomy 15:1, ‘At the end of every seven years you shall grant a release of debt...’. Also debt forgiveness was mentioned in the 48th provision of the Code of Hammurabi, written more than 3,500 years ago in Mesopotamia, which states that: ‘If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not grow for lack of water, in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year’”.
I said, “It sounds like you are saying that the bankers today are traveling into the future extracting money while creating a future tax payer nightmare, like involuntary servitude for my great grandchildren so they can generate profits for themselves today”.
Just then our orders arrived. We immediately began to savor our respective culinary treats. After a minute or so my client continued. “Actually, to be fair, the concept of reaching into the future, that is pledging future earnings for present use dates back again to Mesopotamia. There the landlords needed farm hands to work the land. Some landlords paid wages to the farm hands with notations on tokens such as shells, stones, or pieces of metal. Each token indicated how much grain the holder was due from the next harvest for his labor performed thus far. The holder of the token was then able to trade for essentials with other suppliers using the token as value. But the concept is the same as what is being used today, because the notation on the token by itself had no value. Only earnings from the future harvest could satisfy the notation, just like the bank’s notations on the balance sheet today”. “Wow, that’s amazing”, I said, “I never really thought about money like that”. “But of course, my point is that”, he continued, “back then if the landlord failed to make good his notations the holders of the tokens where made whole by the local power structure. Today it is reversed, the taxpayer bails out the notation makers, the bankers”.
“But what can be done”, I asked? “I mean that everybody knows in 2008 the financial system was on the verge of total collapse. Without bailing out the banks the US economy and the structure of our society would have been wiped out”. He answered, “Well yes and no. I say that because there are examples of what could have been done. Take for example Iceland. The way Iceland dealt with the financial crisis was to nationalize the banks, fire and arrest the banks officers and board members. They then put a moratorium on foreclosures and restructured the entire banking system. Iceland has since re-privatized the now healthy banks. It took time and a lot of political capital. It took leadership and stamina to complete the task”. “I think that would be impossible here”, I said. “True”, he answered, “We don’t have the leadership here because the bankers basically buy our politicians’ support”. “You mean if we get money out of politics that could give a chance for responsible and honest politicians to be heard”, I asked? “That would be a start. We would also need honest people to run for office and get elected”. The check arrived. We shook hands and left the café.