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Features

Economical Truths

Richard Werner

There's a simple solution to the banking crisis, says RICHARD WERNER

Fbanks.jpgLooking ten years ahead in the world economy may not be quite as difficult as one might expect: there are clearly discernable long-term patterns. One is the observation that over the last 30 years the frequency and amplitude of boom-bust cycles has increased.

Eight years ago I warned in many conference speeches that we had to expect ever greater cycles of asset inflation and more and bigger banking crises. I based this prediction on my analysis of the root cause: the trend to make central banks more powerful and less accountable for their actions to democratically elected bodies.

The Bank of England was made independent in 1997. It took it a decade before it oversaw the first run on a bank in Britain in 100 years. The independent European Central Bank (ECB) started a decade ago. In this time it managed to inflate, then deflate vast speculative property bubbles in Ireland, Spain, Portugal and Greece, and cause fiscal profligacy of crisis proportions in these countries.

I also warned that as a result of future banking crises the powers of central banks would be further increased. Whenever they messed up in the past, they were rewarded with more power and independence. Whether it is the so-called 'oil-shock' inflation of the 1970s, the creation of the Japanese asset bubble and propagation of an epic 20-year recession or the Scandinavian boom-bust cycle of the 1980s and 1990s, the winners were always those responsible for the disasters. No wonder central banks talk about such crises as 'opportunities' that are 'necessary' to achieve their goals.

Surely we have learned our lessons and the so-called 'global financial crisis' will usher in reform? To the contrary, the pattern is merely being reinforced. The main winners are the central banks. The US Federal bank was made even more powerful this year. The Bank of England has just been given new powers unprecedented in Britain. And the ECB has, thanks to the Greek debt crisis, been able to move beyond the few limitations placed on its unrivalled powers.
So looking ahead for another ten years, I am afraid the prediction remains the same: we have to brace ourselves for a continuation of this pattern. If central bank policies continue, the immediate years ahead could be characterised in many countries by deflation and economic belt-tightening on a scale not seen for decades.

This is not to say that cycles, crises, recessions and hence greater inequality and social instability are unavoidable. Banking crises could be ended if only one simple rule was adopted: regulation that prohibits banks from extending credit for transactions that do not contribute to GDP. When banks 'lend', they do not transfer money from elsewhere: they create new purchasing power out of nothing. Approximately 98% of the money supply is created this way. Banking crises are caused by asset bubbles. These, in turn, are created by bank credit creation for transactions that do not contribute to GDP, are unsustainable and cause crises. Adopting this rule would also improve social cohesion and social welfare, as inequality would fall. These measures would work well when combined with limits on loan-valuation ratios and policies to boost the cooperative sector in the economy, including credit unions and mutual financial institutions. All this would lower the percentage of national income that is allocated to those who do not have to work for it (for example, those of working age living off interest or dividends), and hence would reduce inequality.

Unfortunately, those in charge have other intentions than avoiding banking crises or increasing equality. Crises enable the implementation of fundamental systemic changes, such as deregulatory reform. Or the creation of the United States of Europe. We are closer than ever in the 60-year history of this plan, which is not about economics but the centralisation of control and reducing democratic freedoms. A cataclysmic financial crisis in Europe is what the planners of the USE now need, and the ECB has worked hard to get us there. When the European Ministry of Finance has been created, perhaps already before the end of the year, this new super-state will be almost complete.
Usury (compounding interest) and modern banking (the creation and allocation of the money supply by banks) were invented by the Babylonians. Usury is forbidden in the Bible. And the only time Jesus used violence was when he confronted 'the money changers' in the temple. Bible translators are not usually aware of the details of ancient banking, particularly that it was based in temples. The temple banks issued fraudulent deposit receipts in operations identical to the activities of modern banks. There can be little doubt that Jesus actually threw out the bankers. John's Revelation also has much to say about Satan's use of the monetary system to corrupt and centrally control the world. The required systemic changes would be inconceivable without crises. Central bankers are doing a good job at ensuring we have plenty of those.

Richard Werner