Banking a synonym of cheating
Monday, 18 May 2009
Maswood Alam Khan
Whenever I have to explain to someone what the present financial meltdown is all about I advise him to visualise and equate the global crisis with 'pass the pillow' game, an easy sport akin to that of 'musical chairs'. Our ladies who are too weak to run around musical chairs partake in 'pass the pillow' game with enthusiasm.
'Pass the pillow' game starts with any number of players sitting on chairs arranged in a circle facing outward. A music is played as the pillow is passed around and whoever would be holding the pillow when the music is stopped is out along with her chair. With players and chairs gradually thinned out only two contestants are left to fight the final. The winner is the one who does not hold the pillow and the loser is who is caught holding it, when the music is stopped.
In the present-day financial world anybody holding any financial instrument too long instead of immediately passing it over to somebody else is a born loser. Because, all the financial instruments of the whole world are basically fake, as most of these instruments are promissory notes with a false declaration: "I Owe You", in short IOU.
Banking industry, the pioneering IOU business, was in fact born through a dishonest idea that cropped up in a goldsmith's mind about two centuries back when coins made of precious metals were the financial instruments that replaced the barter system of transactions.
But those coins were too precious and too weighty for a shopper to carry while shopping.
Citizens had trusted goldsmiths to be the safe-keepers of their precious coins for a rent in exchange of warehouse receipts as a proof of ownership. Those warehouse receipts ultimately became negotiable instruments representing precious metals. Light, safe and easy to pocket, warehouse receipts were introduced as currency for buying and selling commodities in a market, ushering is a new phase into history when paper replaced metal as a medium of money.
One day, a crooked idea occurred to one goldsmith. He thought he could surreptitiously lend on interest the depositors' gold coins to the prospective borrowers as he was sure that all the gold-coin depositors would never come to his shop all at a time to demand all their coins; he thus became a lender (the first banker in history) of money that didn't belong to him; his cheating mechanism of creating assets out of his liabilities thus gave birth to the present-day banking and the warehouse receipts thus gave birth to paper currencies now being issued by the central banks.
Warehouse receipts or paper currencies always bore on its face a note of promise that 'we are bound to hand to the bearer of the bill the equivalent amount of gold or silver the moment the bearer presents it over our counter'.
"We are bound to hand to the bearer the equivalent amount of gold or silver'-this promise is no more there on the face of the paper currencies since the days of World War II when governments became more dishonest than the goldsmith. Thenceforth, it is only paper money not backed by any precious metal governments through their state-controlled central banks have been issuing to beguile the citizens into believing that the new paper money is as precious as those that were once backed by precious metals. A new chapter titled "Fraudulent IOU" was thus introduced in the history of monetary economics.
One day, in Sulemanpur, a remote village under Court Chandpur Upazila in Jhenidah district of Bangladesh, a brilliant IOU idea bloomed in the mind of Faruq Ahmed Kazal, an innovative man who was fathered by one named 'Pacha Mia'. Kazal started issuing notes on papers through hundreds of his agents promising that he would pay Taka 10 every month for Taka 100 for a minimum deposit of Taka 5,000 and a maximum of Taka 10 lac. Hundreds and thousands sold their properties and poured in to invest their hurriedly arranged money with Kazal's magical scheme of earning 120 percent profit only to be bereft of their last piece of property at the end of the day.
Never did Kazal receive in his own hand any money from his intending investors, a job his agents dutifully used to perform on his behalf. Those agents were petty people like a boatman or a rickshaw-puller. Many of those agents, who were once mere day labourers, are now pretty rich having their homes made in multi-storied buildings. But, Kazal was jailed in 2000 anyway. There is a rumour that Kazal, now on bailment, has been at large roaming around in the city of New York.
Had our government just lent a blind eye and a deaf ear to Kazal's banking activities he by this time could have been like one of those big bankers or financiers in the western capital markets who have long been thriving issuing similar IOU notes on papers, albeit at a little lower rate of interest or dividend.
Kazal-like bankers all over the world are primarily responsible for the present global crises that are firing people out of their jobs and farmers out of their fields. Sellers are being deprived of the real values of their commodities.
Before someone wants to understand how the present financial meltdown had originated he should first know how a bank makes smokescreens with a view to hoodwinking poor workers, farmers and taxpayers into believing that their money is safe in the banks the way a conman foists a counterfeited note upon an ignorant person making him believe that the fake note is otherwise genuine.
The crooked goldsmith, the first banker, didn't lend all the gold coins to intending borrowers in order to keep a reserve for some of his depositors who could anytime withdraw their gold coins on demand. Like the goldsmith, the present-day bankers also keep a reserve in proportion to their deposits that we call loan-deposit ratio that is usually not more than 80 percent of total deposit.
A bank accepts deposits and lends them out. But, almost every lending returns soon to the bank as a deposit and is lent again. Imagine that a loyal investor after receiving a hefty bonus from Kazal is investing again and again with Kazal as long as he believes that the money receipt is genuine and Kazal always keeps his word of promised returns.
In essence, when people borrow money they do not keep it at home as cash, but spend it or save it in a bank.
The spent money also finds its way back to a bank quite quickly. It is not necessarily the same bank, but thanks to inter-bank lending, cash ultimately resides in banks that may collectively be viewed as one large bank in terms of deposit creation. So, by lending a bank is also creating its own deposits.
Now that the banks can create their own deposits, over-ambitious bankers and financiers in the West started defying the so-called healthy loan-deposit ratio and were not satisfied in lending money to borrowers alone. They embarked upon creating some weird banking instruments for securitization, hedging, leveraging, options, futures, derivatives and so on. They enabled banks to lend more money out than they took in as deposits. They also borrowed on the international markets and lent money they did not have but assumed to have in future. Overvaluation of financial instruments and reckless dependence on intangible futures are actually the root causes of the current financial crisis.
Thus the weighted average of loan-deposit ratio now stands at not less than 175 percent in most of the developed world, meaning a bank is now lending Taka 175 against its cash defraying ability of Taka 100-a maddening commercial behaviour that should be compared with the pyramid scheme Kazal adopted in Court Chandpur in offering a fake yet seemingly credible means of making money at exponential rate.
The financial institutions have considered financial instruments, like securities, as good as cash and added them as cash in the deposit creation cycles at a rate that brought the loan-deposit ratio to more than 100 percent. The modern banking system is a classic example of a massive pyramid scheme. But as with every pyramid scheme, as long as people and institutions are happy not to demand cash withdrawals from the banks it is sustainable.
During the hectic dawn of the current financial crisis that sparked at the end of September 2008, doyens and executives of giant banks and financial institutions had appeared to the public running helter-skelter like headless chickens as they could smell that it was the time that their pyramid started collapsing. This easily explains why banks had stopped trusting one another and even inter-bank lending collapsed.
The collapse process, always an instant one, is accelerated by a dramatic loss of confidence amongst the pyramid customers. Once a single customer cannot withdraw his deposit, a great number of others start demanding payouts.
US Federal Reserve Board Chairman Ben Bernanke must have known this mechanism and perhaps had whispered to former President Bush that unless America shifted its weight injecting cash, guaranteeing deposits and lending, forgetting whatever mischief the pyramid purveyors had committed, the very banking system was bound to collapse.
Instead of finding those highly paid CEOs (pyramid purveyors) of banks and financial institutions handcuffed and jailed we had found them being showered by a whopping 3.0 trillion dollars in USA alone as stimulus packages. Now imagine that Kazal is being garlanded and handed a certificate of honour by our President along with a cheque of Taka 100 crore as a stimulant to carry on his business as usual!
There are trillions of dollars worth of financial instruments (like securities) that cannot be redeemed due to the lack of cash in the system-the so-called toxic wastes. These instruments are still in the financial system earning interests.
Governments around the world injected cash into the global banking system to a tune of around $10 trillion. At the same time they allowed bank executives and financiers who organised this pyramid scheme to remain at their posts to manage the injected money.
Governments became the ultimate customers of pyramid purveyors with the hope that confidence of customers would somehow stop the giant pyramid scheme from collapsing.
In a normal free market economy a business that fails should be allowed to collapse. If the business is a giant pyramid scheme, like the current financial system, it must be allowed to collapse and its executives and operators should face prosecution. Letting the banks collapse would have been a far more commercially sound solution than the current approach, provided the governments would have secured and guaranteed socially vital interests directly.
To sum up, an untreatable disease, the equivalent to AIDS has already afflicted the world economy. But the HIV virus, that causes AIDS, was injected into the world economy when governments freed paper money from the mandatory requirement to be backed by precious metals.
It is high time we reintroduced gold standard to value our currencies and thereby redeemed our birthright to enjoy true value of our money we are offered as price of our blood-sweating labour. We demand our money to be backed by gold and silver. Currencies of lower denominations may well be issued in papers; but currencies of higher denominations, say, of Taka 10,000 or above must be in pure and unalloyed gold nuggets. Otherwise, in the 'pass the pillow' game of the financial world it would always be the weak and the poor who will be caught holding the pillow----a pillow that contains a fake promissory note declaring: "I Owe You".
(The writer is a banker. He may be reached at e-mail: maswood@hotmail.com)
Whenever I have to explain to someone what the present financial meltdown is all about I advise him to visualise and equate the global crisis with 'pass the pillow' game, an easy sport akin to that of 'musical chairs'. Our ladies who are too weak to run around musical chairs partake in 'pass the pillow' game with enthusiasm.
'Pass the pillow' game starts with any number of players sitting on chairs arranged in a circle facing outward. A music is played as the pillow is passed around and whoever would be holding the pillow when the music is stopped is out along with her chair. With players and chairs gradually thinned out only two contestants are left to fight the final. The winner is the one who does not hold the pillow and the loser is who is caught holding it, when the music is stopped.
In the present-day financial world anybody holding any financial instrument too long instead of immediately passing it over to somebody else is a born loser. Because, all the financial instruments of the whole world are basically fake, as most of these instruments are promissory notes with a false declaration: "I Owe You", in short IOU.
Banking industry, the pioneering IOU business, was in fact born through a dishonest idea that cropped up in a goldsmith's mind about two centuries back when coins made of precious metals were the financial instruments that replaced the barter system of transactions.
But those coins were too precious and too weighty for a shopper to carry while shopping.
Citizens had trusted goldsmiths to be the safe-keepers of their precious coins for a rent in exchange of warehouse receipts as a proof of ownership. Those warehouse receipts ultimately became negotiable instruments representing precious metals. Light, safe and easy to pocket, warehouse receipts were introduced as currency for buying and selling commodities in a market, ushering is a new phase into history when paper replaced metal as a medium of money.
One day, a crooked idea occurred to one goldsmith. He thought he could surreptitiously lend on interest the depositors' gold coins to the prospective borrowers as he was sure that all the gold-coin depositors would never come to his shop all at a time to demand all their coins; he thus became a lender (the first banker in history) of money that didn't belong to him; his cheating mechanism of creating assets out of his liabilities thus gave birth to the present-day banking and the warehouse receipts thus gave birth to paper currencies now being issued by the central banks.
Warehouse receipts or paper currencies always bore on its face a note of promise that 'we are bound to hand to the bearer of the bill the equivalent amount of gold or silver the moment the bearer presents it over our counter'.
"We are bound to hand to the bearer the equivalent amount of gold or silver'-this promise is no more there on the face of the paper currencies since the days of World War II when governments became more dishonest than the goldsmith. Thenceforth, it is only paper money not backed by any precious metal governments through their state-controlled central banks have been issuing to beguile the citizens into believing that the new paper money is as precious as those that were once backed by precious metals. A new chapter titled "Fraudulent IOU" was thus introduced in the history of monetary economics.
One day, in Sulemanpur, a remote village under Court Chandpur Upazila in Jhenidah district of Bangladesh, a brilliant IOU idea bloomed in the mind of Faruq Ahmed Kazal, an innovative man who was fathered by one named 'Pacha Mia'. Kazal started issuing notes on papers through hundreds of his agents promising that he would pay Taka 10 every month for Taka 100 for a minimum deposit of Taka 5,000 and a maximum of Taka 10 lac. Hundreds and thousands sold their properties and poured in to invest their hurriedly arranged money with Kazal's magical scheme of earning 120 percent profit only to be bereft of their last piece of property at the end of the day.
Never did Kazal receive in his own hand any money from his intending investors, a job his agents dutifully used to perform on his behalf. Those agents were petty people like a boatman or a rickshaw-puller. Many of those agents, who were once mere day labourers, are now pretty rich having their homes made in multi-storied buildings. But, Kazal was jailed in 2000 anyway. There is a rumour that Kazal, now on bailment, has been at large roaming around in the city of New York.
Had our government just lent a blind eye and a deaf ear to Kazal's banking activities he by this time could have been like one of those big bankers or financiers in the western capital markets who have long been thriving issuing similar IOU notes on papers, albeit at a little lower rate of interest or dividend.
Kazal-like bankers all over the world are primarily responsible for the present global crises that are firing people out of their jobs and farmers out of their fields. Sellers are being deprived of the real values of their commodities.
Before someone wants to understand how the present financial meltdown had originated he should first know how a bank makes smokescreens with a view to hoodwinking poor workers, farmers and taxpayers into believing that their money is safe in the banks the way a conman foists a counterfeited note upon an ignorant person making him believe that the fake note is otherwise genuine.
The crooked goldsmith, the first banker, didn't lend all the gold coins to intending borrowers in order to keep a reserve for some of his depositors who could anytime withdraw their gold coins on demand. Like the goldsmith, the present-day bankers also keep a reserve in proportion to their deposits that we call loan-deposit ratio that is usually not more than 80 percent of total deposit.
A bank accepts deposits and lends them out. But, almost every lending returns soon to the bank as a deposit and is lent again. Imagine that a loyal investor after receiving a hefty bonus from Kazal is investing again and again with Kazal as long as he believes that the money receipt is genuine and Kazal always keeps his word of promised returns.
In essence, when people borrow money they do not keep it at home as cash, but spend it or save it in a bank.
The spent money also finds its way back to a bank quite quickly. It is not necessarily the same bank, but thanks to inter-bank lending, cash ultimately resides in banks that may collectively be viewed as one large bank in terms of deposit creation. So, by lending a bank is also creating its own deposits.
Now that the banks can create their own deposits, over-ambitious bankers and financiers in the West started defying the so-called healthy loan-deposit ratio and were not satisfied in lending money to borrowers alone. They embarked upon creating some weird banking instruments for securitization, hedging, leveraging, options, futures, derivatives and so on. They enabled banks to lend more money out than they took in as deposits. They also borrowed on the international markets and lent money they did not have but assumed to have in future. Overvaluation of financial instruments and reckless dependence on intangible futures are actually the root causes of the current financial crisis.
Thus the weighted average of loan-deposit ratio now stands at not less than 175 percent in most of the developed world, meaning a bank is now lending Taka 175 against its cash defraying ability of Taka 100-a maddening commercial behaviour that should be compared with the pyramid scheme Kazal adopted in Court Chandpur in offering a fake yet seemingly credible means of making money at exponential rate.
The financial institutions have considered financial instruments, like securities, as good as cash and added them as cash in the deposit creation cycles at a rate that brought the loan-deposit ratio to more than 100 percent. The modern banking system is a classic example of a massive pyramid scheme. But as with every pyramid scheme, as long as people and institutions are happy not to demand cash withdrawals from the banks it is sustainable.
During the hectic dawn of the current financial crisis that sparked at the end of September 2008, doyens and executives of giant banks and financial institutions had appeared to the public running helter-skelter like headless chickens as they could smell that it was the time that their pyramid started collapsing. This easily explains why banks had stopped trusting one another and even inter-bank lending collapsed.
The collapse process, always an instant one, is accelerated by a dramatic loss of confidence amongst the pyramid customers. Once a single customer cannot withdraw his deposit, a great number of others start demanding payouts.
US Federal Reserve Board Chairman Ben Bernanke must have known this mechanism and perhaps had whispered to former President Bush that unless America shifted its weight injecting cash, guaranteeing deposits and lending, forgetting whatever mischief the pyramid purveyors had committed, the very banking system was bound to collapse.
Instead of finding those highly paid CEOs (pyramid purveyors) of banks and financial institutions handcuffed and jailed we had found them being showered by a whopping 3.0 trillion dollars in USA alone as stimulus packages. Now imagine that Kazal is being garlanded and handed a certificate of honour by our President along with a cheque of Taka 100 crore as a stimulant to carry on his business as usual!
There are trillions of dollars worth of financial instruments (like securities) that cannot be redeemed due to the lack of cash in the system-the so-called toxic wastes. These instruments are still in the financial system earning interests.
Governments around the world injected cash into the global banking system to a tune of around $10 trillion. At the same time they allowed bank executives and financiers who organised this pyramid scheme to remain at their posts to manage the injected money.
Governments became the ultimate customers of pyramid purveyors with the hope that confidence of customers would somehow stop the giant pyramid scheme from collapsing.
In a normal free market economy a business that fails should be allowed to collapse. If the business is a giant pyramid scheme, like the current financial system, it must be allowed to collapse and its executives and operators should face prosecution. Letting the banks collapse would have been a far more commercially sound solution than the current approach, provided the governments would have secured and guaranteed socially vital interests directly.
To sum up, an untreatable disease, the equivalent to AIDS has already afflicted the world economy. But the HIV virus, that causes AIDS, was injected into the world economy when governments freed paper money from the mandatory requirement to be backed by precious metals.
It is high time we reintroduced gold standard to value our currencies and thereby redeemed our birthright to enjoy true value of our money we are offered as price of our blood-sweating labour. We demand our money to be backed by gold and silver. Currencies of lower denominations may well be issued in papers; but currencies of higher denominations, say, of Taka 10,000 or above must be in pure and unalloyed gold nuggets. Otherwise, in the 'pass the pillow' game of the financial world it would always be the weak and the poor who will be caught holding the pillow----a pillow that contains a fake promissory note declaring: "I Owe You".
(The writer is a banker. He may be reached at e-mail: maswood@hotmail.com)