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But back to the day you get your loan. The bank attends to these _tice reported to me as a bank-watcher. entries in its double entry books of accounts. Its accounts are in bal- Often, the foreclosure is not part of a general credit squeeze, but is ance. You are in debt to the bank and the bank has given you the green —_ imposed by a bank on a single business. This, too, is not necessarily light to go out and do some spending. You can draw it out in cash, but —_ unreasonable. If they have good reason to believe that a business is the vast majority of transactions will probably occur on paper (for _going bad, banks have to try to get their money out like anyone else. example, cheques) or via electronic transfer (credit cards, EFTPOS and = However, thanks to having demanded guarantees, mortgages, floating so on). charges and other forms of collateral, banks are the least likely to lose But, says the bank, you are forgetting the question of liquidity. It in any normal business failure. More often, they walk off with all the will be our money you draw out, as you have not yet paid any in. _ assets, leaving hundreds of small trade creditors with nothing, so all True. But what happens to it next? You write some cheques, use the _sorts of innocent third parties are caught in the net. credit card, and spend the cash. All of this goes into the tills of the Despite all these privileges, however, banks have managed to run up people you pay it to. And where do they put it at the end of the day? ~— mountains of bad debts. How? It is very easy if you are stupid Back in the bank, of course. Not necessarily your bank, but back into —_ enough, and lending large sums to irresponsible entrepreneurs is a very the banking system. good start. . If the banks have issued a total of a million dollars in new credits All the honest depositors and borrowers of Australia are suffering one day, they will have a million dollars in extra deposits the next. today because our banks have been in the hands of people who were And unless something very odd is happening, your own bank will have —_ incapable of recognising a shonky deal when they saw one. These roughly equivalent shares of both the new credits and the extra bankers, greedy for a bigger share of the financial market, gave credit deposits, Thus they have only had to use their own money for a few to people who were simply corporate raiders, people who were not hours, and back it comes. In other words, under normal circumstances, building genuine businesses or doing any- bank liquidity corrects itself just as surely as thing for the well-being of the community. their balance sheets do. Bank financed takeover bids did immeasur- This is why the total amount of credit able harm to many of our greatest compa- advanced by all the banks to all their cus- + nies, while the subsequent corporate collaps- tomers can go up and down from day to day, sete realise that the vast es left the banks with bad debts which they why we can have credit squeezes and credit majority of everything you then claimed as tax stasen, ee the expansions, all without the banks losing liq- we taxpayer pick up the bill for 39% of the cost vidity oF unbalancing their balance i. " look at is in hock to banks - of thelr folly They then charged the rest to But there is a very big difference between homes, farms, factories, their surviving customers in increased the bank's circumstances and yours. When . charges and continuing exorbitant interest you got your overdraft, what the bank gave businesses, cars, boats, TVS- rates. ‘ou it created with the stroke of a pen, a ing H All these bad debts were supposed to have dlick of computer keys, ink on po what almost everything. And all in collateral backing, but when the chips were you give back to the bank you earn by your exchange for what banks down the collateral was insufficient How talent, labour, sweat of your brow and risk 4 H this happened is an object lesson for anyone of your assets. create out of thin alr. who believes either in market values or the Even though the purchasing power you acumen of the banks. Let us suppose that now have was created by the bank out of Fred wanted to buy a television station for thin air, you as sure as heil are in their debt, $1.2billion. He went to a bank for a loan. and the bank may well have control of a real asset of yours which you They asked for collateral, whereupon he offered the TV station he was were required to offer as collateral. buying. They checked the market and found that he had offered So banks have this great privilege - that of creating money and cred- $1.2billion. To the market value addicts, this was the latest price and it. By the exercise of that power banks determine who sinks and who _ hence what the TV station was ‘worth’ as collateral. So Fred got the swims, who eats and who starves, who lives in luxury and who in loan. What price the Clever Country when people of such paralysed poverty. intellect are holding the reins? COLLATERAL These were the people who were determining the economic future of the country. It was the bankers, not the government who decided that When it lends us money, does the bank put itself at risk? If it has the corporate raiders should be bank-rolled and productive industry lent prudently, (that is to someone who will be able to repay and honest starved. It was the bankers who created a climate where Australian enough not to abscond), there is every chance they will pay the loan _ inventions and innovations of real commercial value have had to be back. Does the bank then actually need to have our home, business or —_ sold to overseas manufacturers for exploitation. “Too risky", they farm as collateral? Only if it does not trust its own judgement. chanted, and rushed off to their appointments with Christopher Skase. Demanding collateral is a wonderful way of avoiding the need to be What is worse, these people have not had the decency to crawl away prudent and wise, so they demand it all the time. under a stone and die. Look at the names of the people who were run- This represents a real risk to the borrower. Just as banks can create ning the banks in the late eighties, when the mountains of debt were credit by the click of computer keys, so also they can contract or piled up. They are still in their boardrooms, blaming everyone but destroy credit by calling in loans. Experience indicates that there are —_ themselves for the results of their incompetence. cycles of credit expansion and credit contraction. Ordinary people and Perhaps they aren't just bastards after all, but stupid bastards. — = anti —_ = — _ died te of mei they may The enormity of this power of credit creation and collateralisation of ave Gone OF et Cane, a0 Far Cigas ie eeeepeices ORR We gaat. assets is itself stunning, but when one realises how and why it can be There are very few people or businesses which could immediately _ysed then the situation becomes even more frightening. find the money to pay off all their debts and mortgages. They could Just think about this. Almost all real property in our society is col- not find the money immediately even in the best of times, and if times ja toralised to banks. In other words it is in ‘hock’. When you next look are tough it is still more difficult. So the bank may move in, sell their out of your ahaa across our great cities and Guus antl rolling hills collateral assets for fire-sale prices, and leave them destitute. realise that the vast majority of everything you look at is in hock ry Of course, this does not mean that every bank foreclosure is unrea- —_hanks - homes, farms, factories, businesses, cars, boats, TVs -almost sonable, But unreasonable foreclosure is the most common malprac- everything. And all in exchange for what banks create out of thin air. COLLATERAL When it lends us money, does the bank put itself at risk? If it has lent prudently, (that is to someone who will be able to repay and honest enough not to abscond), there is every chance they will pay the loan back. Does the bank then actually need to have our home, business or farm as collateral? Only if it does not trust its own judgement. Demanding collateral is a wonderful way of avoiding the need to be prudent and wise, so they demand it all the time. This represents a real risk to the borrower. Just as banks can create credit by the click of computer keys, so also they can contract or destroy credit by ealling in loans. Experience indicates that there are cycles of credit expansion and credit contraction. Ordinary people and their debts are caught in these cycles irrespective of anything they may have done or not done, and for them the consequences can be great. There are very few people or businesses which could immediately find the money to pay off all their debts and mortgages. They could not find the money immediately even in the best of times, and if times are tough it is still more difficult. So the bank may move in, sell their collateral assets for fire-sale prices, and leave them destitute. Of course, this does not mean that every bank foreclosure is unrea- sonable, But unreasonable foreclosure is the most common malprac- NEXUS¢#13 AUGUST-SEPTEMBER 1992