Monday, December 21, 2015

Mosley on Money and Banking

‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money, p. 5  J. K. Galbraith
Ivo Mosley is serializing a wonderful book on money and banking.  I have been recommending it highly and quoting it so far, but there is one glaring error he is committing.  I hope he repents of it before he publishes.

Here is a sample of what is so good:
The law which authorised the buying and selling of debt was the Promissory Notes Act of 1704.... Many lawyers, including the then Lord Chief Justice Sir John Holt, were against the new development: they considered that a loan of money was a private agreement between two persons, not an asset to be bought and sold. 
His work is rich in digging up bodies buried, history and explanations.

(I had to elide one sentence from that paragraph:
 It was brought in specifically to put the stamp of legitimacy on money created by banks. 
for reasons that will become clear anon.)

Now, note he mentions debt and money.  He shifts from the topic of debt (promissory notes) and the buying and selling thereof, and loans of money in that quote above.  In 1704 no one confused the two, debt and money, or for that matter, credit and money.  The term money is used dozens of ways today, almost always incorrectly, as Galbraith noted.

A loan of money would have been in the form of silver or gold.  In such a case someone might have borrowed an ounce of gold to buy a horse, with a promise to repay he who lent him the ounce of gold.  The horse seller is out of the deal, he got his ounce of gold, and rid of the horse. The horse was security if the borrower failed to repay the ounce of gold to the lender.  On both sides of the transaction there was an asset: an ounce of gold, a horse.

A promissory note is written when one does not have an ounce of gold to buy a horse, but writes a note  to promise to pay at some agreed upon time.  In this case the assets is the horse on one side, and the word of the buyer, or credit, of the other side.   The buyer's promise to pay is now a debt he owes.  The seller extended credit to the buyer, vendor financing, actually a very common event in history.  Indeed, what is sorely left out of all economic discussions is the simple fact the "vendor financing" is the standard normal in history.

Please pause and note this is simple and clear: there is either money and debt, or credit and debt.  All loans are of either form.  There is nothing in finance, high or low, that falls outside of these two categories, and this has been true for the history of mankind, all places, all times.  When pondering economics, hold fast to these two categories, and everything that comes your way will be clear.

There are many problems in discussing economics, and an immediate one in this subsection of economics, loans, is there is private vendor financing, asset-backed, which might be called bene-credit if not at interest (as is usually the case) and then there is this monstrous asset-less loss-socialized bank credit at interest which might be called mal-credit.

Pynchon said something to the effect "... get them to ask the wrong question and the answer does not matter."  As long as people are arguing over what the term money means and no one asks what the term credit means.

Now, having started off succinctly in the above paragraph, note what Mosley does next, in the same paragraph, the salient items in red:
But Parliament consisted of rich men voted in by other rich men, and it overrode the lawyers. The public justification of the parliamentarians was that new credit-money, created by the Bank of England (founded in 1694), was already enabling the King to go off to war: it was a good development, and the law should catch up. The private attraction was that members of Parliament were already using bank-money to get even richer. When other countries saw the power the new law gave to the English government and to English speculators, they passed similar pieces of legislation. Today, we are living with the ever-worsening, and ever more global, consequences of that development. 
See the unwarranted, hybridized terms? Introducing the debatable terms relating to money, when he means credit? From the clear money and credit to "credit-money" and "bank-money (debt-money I suspect he also means)".  I've put them in red in his paragraph to emphasize what is going on.  This is just plain wrong.

Mosley then gets utterly wrong in his attempt to explicate:
First, take public ignorance. Most people don’t understand how banks create money. In fact, it is very simple. When a bank lends, it creates two equal-and-opposite debts (promises to pay money): one from the bank to the borrower, one from the borrower to the bank. The borrower’s debt to the bank is familiar and easy: it stays with him or her (or ‘it’ if the borrower is a corporation) until it’s repaid. The only difficult bit to get one’s head around is: What happens to the debt from the bank to the borrower? Answer: it becomes money.
Banks don't create money, they do not create gold and silver!  That paragraph is incoherent, a complexity contrary to the real world. His paragraph would be splendid if he simply stuck to the proper definition, as I will rewrite:
First, take public ignorance. Most people don’t understand how banks create credit and debt. In fact, it is very simple. When a bank lends, it creates two equal-and-opposite tallies: one from the bank to the borrower, one from the borrower to the bank. The borrower’s debt to the bank is familiar and easy: it stays with him or her (or ‘it’ if the borrower is a corporation) until it’s liquidated. The only difficult bit to get one’s head around is: What happens to the credit from the bank to the borrower? Answer: it becomes a bank asset.
My rewriting is both simple and correct. Mosley is a better thinker, scholar and writer than I am.  But he is making a fundamental error with his maldefinitions.  Is not my reworking of his paragraph not splendidly clear, even revelatory?  Well, Mosley wrote it, I just put in the correct terms where he uses incorrect terms.  (I wonder if I use the rewritten paragraph in my next book it would constitute plagiarism?)

Mosley recognizes something is wrong with his explanation, but he gets the problem wrong, explaining it away by calling it counter-intuitive:
That sounds counter-intuitive: ‘the debt from the bank becomes money’. But it’s the very essence of banking. If I have ‘money in a bank account’, it means simply that the bank owes (promises to pay) me money. The numbers in my bank account indicate how much the bank owes me. If I pay someone, I arrange it so the bank owes the other person some of that money, instead of me. When payment is made, the bank simply moves numbers from my account into the other person’s account. The other person feels paid – they have been paid! That is how banking works – and how it always has worked. Debt owed by a bank circulates among people, and becomes money. ‘We the people’ are happy to use it as money, because it is convenient and because banks have, in the past, put some of their massive profits into making their services cheap to use.
No, not counter-intuitive, just wrong.  But it's good except for the badly used terms, so let me fix this too:
It's simple... If I have ‘tallies in a bank account’, it means simply that the bank keeps track of my putative accumulation of credit. The numbers in my bank account indicate how much the bank says I have in tally. If I pay someone, I arrange it so the bank credits the other person some of that tally, instead of me. When payment is made, the bank simply moves numbers from my account into the other person’s account. The other person feels paid – they have been paid! That is how banking works – and how it always has worked. Credit tallied by a bank circulates among people, and remains credit. ‘We the people’ are happy to use it as money, because it is convenient and because banks have, in the past, put some of their massive profits into making their services cheap to use. 
I left that last reference to money in for the simple reason it is true, people are happy to consider it as "money" (it cannot be used as money,  any more than a bowling ball can be used to play a violin) and in the effort to obfuscate economics, some people have been convinced credit and money are one and the same.  Mosley's point gets to the reality that bad credit can crowd out good money.  Also, Mosley is right this time. if the terms are corrected, that "this is how banking has always worked."

Now, let's move on to the "so what" over banks lending credit.

1. The bank lent you nothing.  You use the credit to build a house.  Bank loans of mal-credit ruin the economy (see below).  You cannot repay the debt.  You lose the house, and owe the net shortage between the amount of credit you borrowed, and for what the asset was liquidated (short sale, foreclosure, etc.).  The bank lost nothing, but gets the house. You still owe the bank a payment from your income stream for the difference.  Heads they win, tails you lose.   Simply can't pay?  It gets worse:  you owe the IRS income tax on the part you cannot pay the bank, since it is imputed income.  That is the law.  Can't pay the IRS?  Then kiss your passport good-bye.  That is the law.  Syrian refugees are better off than American citizens under capitalism.  Syrian refugees can at least escape to anarchy, the free market.

2.  More, from Mosley -
Governments like, and in some cases need, to compete with each other in arms acquisition. Banks happily finance this competition: ... because repayment is guaranteed out of taxes. They are also happy to fund arms manufacture because if demand is guaranteed, a profitable outcome is more likely.
...
Nearer to home, a domestic example: London property. In a rising market, banks happily ... lend: they feel secure that the loan will be repaid. ...rising prices: speculators profit, and everyone else is relatively poorer. So much so, that most young people in London today cannot dream of owning the house in which they live. (My note: same everywhere capitalism rears its ugly head.)
...Booms-and-busts ... legally-authorised, starting with the South Sea and Mississippi Bubbles (both 1720). The pattern has stayed the same ever since. During a boom, ... assets of the majority dwindle in comparison: they cannot afford to consume enough to make existing capital profitable, let alone for the creation of more. Recession follows. The incomes of workers are further eroded by unemployment, as unprofitable businesses collapse. A vicious circle sets in. At this point, the assets of the rich must also shrink if they consist of productive investments: only speculative hot air and puff will produce profits (an example is the London property bubble referred to above). This kind of economic collapse all-too-often leads to totalitarianism and war: the twentieth century provided enough examples of that, for us all to hope that the need for monetary reform will be noticed soon.

Lastly, we might notice the plight of poor nations vulnerable to predators... governments are corrupted, displaced peoples migrate (or attempt to migrate) ... in search of survival. The potential for a fairer, more just and prosperous world is squandered. Much more could be said about this process, so vast and damaging to the human race, and to prospects for our future.

This is quite good, and to make it even better, if you read the original, I elided any time Mosley used the word money.  Heck sake, Mosley could entirely skip the use of the word money, and he'd be a superior expositor! But better he simply use the terms correctly.

When vendor financing is in any way touched by non-market forces (the hegemon), the economy is distorted by misallocation and malinvestment.  Whereas in vendor financing failure to pay results in the lender taking a loss, or getting back the horse he wanted to sell, only the lender takes a loss.  Any risk and loss exposure is limited to the two parties.  We can call this free market phenomena "bene-credit" to distinguish it from the hegemon-backed fraudulent loans which we might call "mal-credit."

Here is another error, which seems inconsequential at first:
This leads to the theme of how the law supports banking. Banking was, and still is, very distinct from money-lending. Banking creates money: money-lenders lend money which already exists. For many centuries, banking was practiced as a series of agreements between consenting adults (so to speak). Those consenting adults were the rich and the powerful: merchants and bankers, monarchs and princes.
Ungh!  Banking was always money-lending.  The work bank (banque) comes from the shelves in a jewelers shop (usually the strongest building in town), where in gold deposits of gold owners were stored. (Banquettes are shelf seating.) Stored gold was noted on a receipt, in essence a warehouse receipt.  If the owner of the gold desired it be lent out as an act of charity, the "banker" would manage the affair. In time some depositors allowed the shop owners to lend the gold at interest (criminal activity - usury) and those deposits, sitting on the shelf, were specially marked for the purpose.  People holding warehouse receipts sometimes would endorse the receipt over to another, and in time this practice morphed into currency, with one note moving from hand to hand and over time creating and extinguishing many debts.  But observe, in every instance, the note is backed by gold.

These bankers then began to put out these notes fraudulently without any gold backing them. Fraud on top of usury! This distorted the market, calling forth goods and services pleasing to fraudsters, to sop up this fraudulent currency, fraudsters whose demands run to the corrupt, whimsical and destructive.  In time, these fraudsters were found out, a run on the bank occurred, and the malefactors were executed.  Now they are bailed out, and the losses are socialized onto those who actually pay taxes from productive pursuits, and their children, unto the third and fourth generation.  This is capitalism.

But since the practice is so powerful, it became state-sponsored, and protected by law.  The state kept the term banking, since it was originally a respectable term, and adopted the process of first writing currency against gold and silver deposits, then at fractional reserve (maybe 10% fraud), and now lending fraudulent notes at near 97% fraud, 3% asset.

I've noticed in my reading of the ancients, how religion and banking were one and the same, or became so.  The word money comes out of Latin, and the Goddess of Memory, Juno, at whose temple gold and silver was stored and money was minted (moneta, mint, money).  What does memory have to do with  money?  Keeping straight who owes what to whom, and who has claim on what money is stored, is critical to commerce and order. Mafiosi and Pilipino bookies rely on memory to keep accounts straight, nothing new.  In time tallies were used, up to this day, now digitally.  In 1836 Parliament was burn down after burning tallies got out of control.  We no longer mention tallies, although they are a critical today as ever.

Judaism and memory (zakar) are inextricably linked. Israel also kept its money, the obligatory payments to the priests, in the Temple, naturally, the most secure place, where people were struck dead by God if they violated the space.  Until recently banks were designed to look like religious buildings, mainline catholic (note the small c) churches, or at least like Roman temples with granite and classical columns.  You still see these all over USA in cities and towns, now used as coffee shops and such.  Since calvinists legitimized usury, now banks look like calvinist churches, ignoring the first act of Jesus after being proclaimed King by the masses was to overthrow the money changers in the Temple.  (I have Vedic scholars keeping an eye out for instances in that milieu.)

Mosley's book will call for a change in the laws, and I hope he agrees with me, the change is to eliminate all banking regulations.  The task is not to tweak at the edges, but to withdraw the support, a complete separation of money, credit, banking and state, as thorough, and for the same reasons, as the separation of church and state.

There will still be people agreeing to both sides of the worst deals, but like gambling debts, when such deals go bad there will be no force of law behind them.  The damage inherent in banking today will be limited to the players, with none of the "privatizing the profits, socializing the losses" we have today.  Our children, and future generations, will have nothing to fear from us.

What do do about the damage done, the 1% who hold 80% of the worlds' wealth?  Nothing.  Within weeks of withdrawing the hegemon's support, the greatest wealth transfer in the history of mankind will begin, as Warren Buffett has to pay out of his own pocket to protect his assets as tallied, and economic squatters and looters take over his assets as assuredly they would when no sheriff evicts a squatter from a home Buffett "owns" but has never seen and can never get around to visiting.  We have this already in law, it is called "adverse possession."  If Buffett himself can show up and sleep there and paint the living room, he can keep it.  If you show up, sleep there and paint it, as long as you make clear it is Buffett's and you taking it contrary to his wishes, then it is yours after ten years.  Buffett has so many houses now, you'd be safe.  So goes the rest of his assets.  And also of all the other 1%.

Minions will object in such a world there would be no wealth.  Well, there would be no wealth defined as personal accumulation.  We'd have wealth defined as an ever-widening range of goods and services, ever more tailored to specific demand, ever more affordable within the personal earnings of an ever widening range of people.  The former is bad wealth, which crowds out the latter, which is good wealth.  The latter is only possible in a free market, capitalism forbids it, and socialism fails to achieve it.

(As an aside, but central to my current investigations, is the central ethical premise that all loans are charitable events, and may never be at interest, at any rate, at any amount, at any length of time whether money or credit is lent.  Loans cannot ever be a business activity.  But set that aside for now.)

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