Have we in march a Banking Crisis of unknown scale? This banking crisis, is it a fault of the theories of the so called new conservatives or «neocons»?. Does the banking world crisis obey to a structural deficiency of the capitalism?, that would appear periodically, never in the same manner, and with more or less force and extension in each economic cycle.
Or are the culprits of the world banking crisis rather an important number of bankers of many developed nations, together with the authorities of these? The first ones, more than bankers, are «trashy window bank employees». And they are lacking of foresight, stupid and eager of money and power, in a sinister and criminal amalgam generated in a «chaos born within itself». The authorities are responsible of not having established a legal frame of alertness and regulation of the financial structure, increasingly sophisticated and complex. Which is adapted to such so evident, important and vital activity for the modern economies, as is the reasonable guarantee of the banking deposits and the generation of the banking enough credit. The fool is that who ignores what he must know.
Do this suppose a return to the ideas of the socialist economy? Do we need a Great financial state Brother?, another heavy, costly, slow, slightly productive, official mechanism. Nooo. The mission of the Public Powers is to establish a frame or financial practical, legal and modern method or way of action. With the sufficient means for its control and the correction of the alterations produced by the inevitable diversions (like a driver or a ship pilot), in a constant, relatively simple and agile way. Then, it is necessary to allow operate the economic agents, that are all of us, acting as consumers, businessmen, borrowers, employees, institutions, etc., in the different partial markets: of credit, transport, supplies, stocks, etc. Why has it to be the State?, because it is the institution that is supposed must control and rule, over persons and private entities.
Why cannot be the IMF or the World Bank, born in the Breton Woods agreements and with long actuation history, the supranational organizations that execute these new labors of inspection and correction? I believe that because they lack the legal and coercive means, to impose their economic criteria to sovereign different states. The proof is the compound attitude of the European states against the world banking crisis, make concrete in specific, individualized, different actions, for each participant state. For much that, in its origin, it was called Common European Market. When the states are too heavy and cumbersome juridical, historically and socially, the unanimity is very difficult and laborious.
We will see the mechanism of the creation and of the contraction of the credit, from the mechanism of the creation and of the retreat of deposits in an economic system. The reason is that both are the core of the origin of the current financial chaos, in progressive and advanced development …
How does banking activity work? Why and for what are credits requested to the banks? Why is it very important that the banking «assets» are healthy and recoverable at their ending time? Are healthy the parameters of the current financial activity: system liquidity (European M2); relative volume of non-paid expired debts; maintenance of the bank deposits; control of the “general level of prices”; confidence and credibility of the different economic agents, etc.?
The banking receives all classes of deposits from the public: checking, savings and time limit accounts. And even it emits certificates or bonds with its guarantee, which sells to big public institutions, companies and investors. Also the banks lend to others them «cash» and even come to the Central Bank of their Systems, asking for funds for different time periods. All this money the banking «owes» to the public in general. So it the items that represent it, appear in their «liabilities». For the use of this money, the banks pay a few interests to their depositories (rather little) or to their lenders and bondholders (slightly more). The own funds of the banking would join also these «liabilities», always a small fraction of them, represented by their shares and not distributed earnings, which they owe to their owners or shareholders. We call «banking» to the set of the bank system of an economic integrated system. And, «banks» to the set of these public and private specialized agencies of that one.
A part of that money, the banks keeps it in their branches windows and strongboxes, forming their treasuries and the legal and voluntary reserves. Let’s suppose that the banks keep as «cash» one of every 5 monetary received units. The other 4 units of money they give for different periods and prices (types) to their «credit clients» or borrowers: companies, public organizations, banks and persons, both natives and foreigners. Even they do it buying bonds and IOUs of companies and their shares and increases in capital. Those all use them for their needs and investment decisions, treasury, circulating and to buy for the consumption both in short and long term. They are in the habit of being over their real possibilities of bringing together their own payment means.
We consider the houses mortgages to be directed to an investment, specially in certain countries. Since the persons who take them, believe that if they have to sell the houses, «always» they will receive more than they cost them. And their real use value, if they are made well, are kept reasonably along the life of their first owners. This would mean that Spain would have a saving rate very superior to the attributed in the official statistics. Since a part of the public would be saving, even over his possibilities, in a good of the type «value deposit». Why the difference with the statistics? For a difference of criterion, as almost always it happens. I call “value deposits” of to the goods in which it can concentrate and keep and still be used without a valuable deterioration. The houses (well constructed and located), the jewels and the ancient coins (at their real value), the money (in moderate inflation times) are goods generally used as value deposits by the persons. And it is not a car, even a high class one, which value loses value excessively after the purchase.
In addition, a part of the lent money comes back to the banks, as new deposits of their borrowers. Because nobody uses immediately all the received money, keeping only the necessary cash for the minor immediate payments. Neither it is hidden at home or in the company, except during social catastrophic periods. This is going to generate more reserves and new available cash for lend or invest by the banking.
In the General Economics books is demonstrated that with that initial mentioned reserve of 1 monetary unit of each 5 received, the set of the banks can manage to give on credit up to 5 monetary units. More that creating bank money, what they real and more properly make is to multiply the possible credit to the society, whom they serve and from whom they benefit, with their activity as financial intermediaries. Our reader will have felt that, likewise, when the banking has to attend to payments and sell assets for it, the set of these then contract in the proportion 5 to 1. And as an intrinsic quality of the money is that it cannot vanish, so we call this essential process, as credit creation and not of bank money.
Those lends in general are, together with his modest own money reserves, the «assets» of a bank. The part of its balance that it can immediately use, demand, realize or sell other one in the secondary or interbank markets. It is very important that these assets are sure, chargeable in their proper moment, good. Since if an anomalous punctual retreat of money by its depositories happens or presents a good investment of or lending opportunity, the bank has to recover the cash, liquidating a part of these «assets» or paying with healthy assets.
How are now the performing parameters of the bank activity? The immense majority of the credit in general granted by the banks is good and recoverable. The real number of bankrupts of declared bad debts is low and controllable. The public in general (companies. Institutions and persons) keeps his deposits in the banking and attends to the payments, staggered in the time, of his lends in general or of his liabilities (payment of services, to suppliers, obligations). The liquidity of the system, the European M2 or his American equivalent, is high and even lightly inflationary. And it is more than sufficient to allow to realize all the economic necessary transactions, which is one of the principal functions of the money. Nobody has money «per se», but to use it in a more or less near future or, at least, with the hope or intention of doing so.
Another thing is that it is retained, kept under bed, buried or shut in the branches strongboxes. Why? For fear and distrust, which are the demons of the anticredit. In effect, the latter point or parameter, that which noisy and essentially faults, consists in the fact that the confidence, the guarantee, the solvency and the respectability among the agents of the system tends intensively to 0.
And the prolongation of the banking crisis, characterized by the deterioration and the disturbance of its essential activities, will turn progressively the potential bad debts in real, will restrict the creation of bank deposits and will extend in “shocking waves” the damages to the whole economic system.
There are no good thinking listened heads. The social leaders that risk, do not apply half measures, compromise themselves and always mistake something, are cornered, ignored or they can not arise or act. Because they are not politically correct, full of calm and good nature, expert in communication and manipulation of emotions, and using anesthesic words of the action, the revulsive and the concerted effort. The national societies face now an incredible, unthinkable problem a few months ago. And they are deprived in these moments of a social guiding and governing ideology and, in general, of useful, helpful and reliable leaders.
The Interest rates and the Liquidity. Another vision of the intimate Reasons of the Crisis.
It is said that with the descent of finantial rates, money is injected into the financial system, wrinkled by the confidence lack in the institutional or final borrower. And all resolved. But not. With the rates descent the business are facilitated. The private ones, the managerial ones and the public ones. On having stooped the bar of the financial costs, I can get tangled up better, can better attend to the payments of a mortgage at variable rate, or risk in another investment with minor marginal yield (the additional yield that the new investment will give me). The rate is a «relative measure» of the official value of the accepted means of payment.
The liquidity is the European M2 or his USA equivalentl: the money (about 8 % GDP) and the cuasi money: the deposits and easily realizable titles of debt (without term deposits). If there are no means of payment, though they are cheap (interest rate), I can neither spend nor invest. Where there is no flour, everything is gloomy, says the popular Spanish wisdom.
But already we have liquidity (the M3 (that includes the M2) is growing (to about 11-12 % in the last months) and the rates are very low. The compound action of October 8 of the principal central world banks, has left them in 1,5% in USA and 3,75% in the Euro monetary zone. Then, what does happen to us? Well, we do not have confidence in the possible investment. Or we are afraid that we will have difficulties to pay the loan. And the fear spreads as oil. The people handle numbers, but it cannot easily handle feelings or intuitions. Because they are not easy to measure. And one lacks moral courage and education to walk along these seemingly unknown ways.
The rates are like the engine and the liquidity, the fuel. Why does not run the car? Because it does not have driver: the will of the experienced driver who guides it. Apart that a productive investment does not produce at once. A nuclear power station takes 15 years, since begin the planning and decision works. Four legislatures. And they cannot risk, without a regulatory insured frame. There are 25 million houses constructed in Spain. Are needed many more? And, many people have been bought at excessive prices, thinking that its price always would grow. I calculate in 450 thousand the normal replacement (for around 50 years of house life). We have been constructing 650-700 thousand during the last three or four years.
Some corollaries or consequences of enormous importance.
The absolute liquidity does not exist, because there is no money in reserves to simultaneously attend to all the depositors. Not neither in any bank, nor in any country. For definition of what is the using of money. This happened to the British Northern Rock, which had long tails in the windows. In Spain there are around of 2,2 trillions of Euros in bank deposits.
It is necessary to re-establish the confidence in the bank system of every country. Then there will be credibility and monetary money and enough credit surplus. This is more difficult in these moments, that a few months ago. Because the public is started realizing that his money is not have in the basement of his bank branch. In fact the real arrears is minimal yet. Another thing is that the borrowers are all potential bad debts, especially if the economies deteriorate. And the banks with these captive and depreciated assets can not do anything.