Money lies disguise banking truths

Economist Norbert Haering, discussing “the veil of deception over money“, argues that closely limited and clearly specified interests distort deliberately the true nature of banking. The vast majority of money in circulation, he says, isn’t issued by central banks but by private financial institutions.

By Lars Schall

The following interview was originally published at ASIA TIMES ONLINE here.

Norbert Haering studied economics at the German universities of Heidelberg and Saarbruecken, receiving a doctorate from the latter in 1994. He then worked, inter alia, at the Commerzbank and the German edition of Financial Times. Since 2002 he has been a correspondent for monetary policy, financial markets and economics at Das Handelsblatt, the leading German business newspaper. He is the co-founder and director of the World Economics Association and editor of the “World Economic Review“. His five books include Economics 2.0: What the Best Minds in Economics Can Teach You About Business and Life (Palgrave Macmillan, 2009, co-authored with Olaf Storbeck), and Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards (Anthem Press, 2012, co-authored with Niall Douglas).

Lars Schall: Dr Haering, recently you have attended the fourth annual conference of the Institute for New Economic Thinking (INET) that was held in Hong Kong. Has it been worthwhile for you to have been there?

Norbert Haering: It was of course a great honor to have a whole session at such an important meeting dedicated to the subject of my book. I presented in a session called “Economics and the Powerful“ with Keynes-biographer Lord Robert Skidelsky and Steve Keen. We had a very interesting and lively discussion. On top of that, I benefited in my function as an officer of the World Economics Association: Hong Kong was a very good place to explore possibilities to co-operate with INET and other institutions which share our goals, like the Fung Global Institute for example. And of course, Hong Kong is a great place to visit.

LS: What’s the intention of the World Economics Association, which emerged from the Post-Autistic Economic movement?

NH: Our ultimate goal is to replace the intellectual mono-culture that currently rules economics by something which we call complementary pluralism. We want different theories to be accepted as different and complementary ways of looking at the social and economic reality. That is where physics has arrived. Think of quantum physics and relativity theory. They are hardly compatible, but they are both respected theories and they explain different aspects of nature very successfully. There is no good reason why economics should not achieve something similar.

LS: More personally, what drives you in general in your work as a journalist and book author?

NH: I am a political person and economics is a very important political science. A lot of politics is done by misinforming people about economics and pretending that it is an objective, apolitical science. That bugs me.

LS: Why do you focus in your work often on the phenomenon of power?

NH: I like to ask questions that others do not ask, like: Who is it good for? And this questions often points to the powerful groups who can shape the discourse. They have successfully imposed a taboo on discussing power and the powerful in economics. I like to break taboos.

LS: One simple question: What is power?

NH: I don’t like to spend a lot of time on defining and classifying the many sorts of power that there are. A definition that would encompass them all would become very abstract and boring. Just like you do not need to define sex to understand it, you do not need to define power. In our book, we deal with the power to abuse informational advantage, the power to charge customers more than it costs you to produce, the power to create money out of nothing, the power to change the institutional setting to your advantage, the power of the corporate elite to set their own pay and the power of rating agencies to issue self-fulfilling prophecies and several more.

LS: Has power played a role in the build-up of the financial crisis?

NH: Definitely. It was absolutely crucial. Banks and credit rating agencies used their power conferred from informational advantage and from the trust in their judgement to create the conditions for the crisis. But the most pernicious abuse of power was the power of banks to create money by pushing credit into the housing market. Too much bank-created money and debt was what made the crisis so catastrophic and so hard to deal with.

LS: Why is the power factor for the most part in economics completely ignored?

NH: The powerful need to legitimize their power. If they can’t, the next best thing is to have it become invisible. That is what economists are doing for them. They pretend that workers always have a next best alternative to their current job, which is almost as good. Thus, no power for the employer. They pretend that something close to perfect competition is the norm. Thus, no market-power of companies. They claim that money is not important. They compare it to a veil over what is going on in the real economy. Thus, the institutions that make money and control the flow of money have no power.

LS: It is noticeable that you have no problems to identify yourself in public as a „conspiracy theorist“. Is it sometimes inevitable to be a „conspiracy theorist“ when it comes to the analysis of power in the world?

NH: I have to admit that I enjoy flirting with the term because it is one of these taboos used to shut critics down. In truth of the fact, there are no conspiracy theories in our book Economists and the Powerful. The Bilderberg group is not even mentioned. It is all about incentives for economists to conform with the interests of the elites, which do not need active conspiracies do their trick over time.

LS: On the top of the hierarchy of power in the world stands the financial industry with a commanding lead. Why is that the case? Or, to put it differently, what’s the historical source of the power enjoyed by the financiers?

NH: Money is power goes the saying. Money is crucial for survival and often in too short supply. If that happens to you, those who control it can impose conditions before they lend you some. That is how big financiers and bankers got important privileges from the monarchy already in the middle ages. A government that did not have enough money, would lose its wars. Thus, bankers like the Rothschild, the Medici and the Fugger became key players in politics.

Starting with Alexander Hamilton and probably not ending with Hank Paulson and Jack Lew, it was a matter of routine in the US that Wall Street bankers would obtain the office of Treasury Secretary. It is no wonder at all under these conditions that a financial system was designed over time which suits bankers very well and gives them great power.

LS: You’ve published recently a paper, The veil of deception over money: how central bankers and textbooks distort the nature of banking and central banking“ (see: Ultimately, you’re arguing in it that there are some clearly specified interests at work that intend that as few people as possible understand our financial system. Why? Maybe because it is in the end a special kind of Ponzi scheme?

NH: Yes, you could call it a Ponzi scheme. Banks give the people and companies who take credit from them deposit money, which everybody uses to pay bills and taxes as if it was as good as cash. The extra money fuels the economy and increases the demand for loans. Money is created ever faster. But, just as in a Ponzi-scheme, as soon as not enough suckers are found any more to further increase the speed at which money and debt are created, the system breaks down, and we have a crisis. Then everybody learns that bank deposits are not as good as cash because banks could only exchange a fraction of these deposits for cash. Just think of Cyprus.

LS: Please explain how money is actually created in our modern money system, starting with central banks.

NH: It does not start with central banks. That’s just what we are led to believe. We are supposed to think that central banks start and control the process. There have been systems entirely without a central bank. It starts with a bank giving me 100,000 euro as a mortgage loan, for me to buy a house. The bank clerk does a few keystrokes, creates an account for me and puts a deposit of 100,000 euro on it. This is new money.

The central bank comes in only later to make sure that the deposits created by individual banks get distributed evenly through the system. The central bank also requires a so called minimum reserve in the form of cash or deposits at the central bank. The banks have to borrow these reserves from the central bank. But the central bank will always provide the loans that the banking system needs. Otherwise it would cause a liquidity crisis.

LS: And what’s wrong with that, as far as you are concerned?

NH: There are a number of things wrong with that. The government gives a valuable privilege to the banks by declaring the deposits they create effectively legal tender. You can pay your taxes with deposit money that banks have created. Everybody is required to accept these deposits for payment. The banks make a lot of money creating money out of nothing. This is a profit that I think the government should get.

Taxes could be a lot lower if the government did not give away this very valuable privilege for free. And, what might be even worse, commercial banks have a tendency to blow up debt bubbles, which later burst and cause financial crisis.

LS: In your paper you draw special attention to remarks by Jens Weidmann, the current president of the Deutsche Bundesbank, and Otmar Issing, the former chief economist of the European Central Bank (ECB). Why so?

NH: I use these remarks to show that central bankers give us a distorted account of the nature of money and of the role of commercial banks and central banks. They wrongly make it seem as if central banks had a monopoly to create money and as if central banks had always been agents of general well-being. In reality, a number of them were originally created as private banks and until today there is a strong element of lobbying for and protecting commercial banks.

LS: So what has to be said from your point of view about the famous “independence“ of central banks that we always here about?

NH: Even Adam Posner admitted in Hong Kong that it is usually in places which have a large financial system that the calls for independence of central banks from the government are heard first and the loudest. Independence form the government goes along with the prohibition to finance government debt, and this means that banks get most of the benefit from money creation.

LS: This year will see the 100th anniversary of arguably the most influential among the central banks of the world, the US Federal Reserve. What is your judgment in general on this peculiar entity?

NH: For one, they have been hiding for a long time the fact that the regional Feds who are in charge of supervising the banks are controlled by these banks. People like Jamie Dimon of JP Morgan, who sit on the Board of the New York Fed, are effectively controlling themselves. If the interest of the banking community and of the country are in synch, the Fed often works very well. They did a much better job in dealing with the financial crisis than the ECB. If and as far as the interests of Wall Street are conflicting with the interests of Main Street, the Fed will know on which side their bread is buttered.

LS: With regards to one group of bank costumers, the savers, there’s something only a very few people really know about – if I bring my money to the banks in order to have a bank deposit, I am a creditor of the banks, even though I do not want to lend them money. Can you elaborate on this, please?

NH: This is the core of the problem of our financial system, that we do not have a save payment system, which is independent from the solvency of banks. This is the reason why we always have to save the big banks if they screw up. If they go under, our payment system goes under and people lose their money. The money that people hold in accounts in order to pay their bills should be treated differently from money they want to invest.

If you just want to use the services of the banks to pay your bill in a convenient way, you should not have to give the bank a credit. The money should remain in your possession, just like money you have in a money market fund or in stocks remains yours. If that was the case, we would not have to save all the banks any more, and they could not create too much money any more.

LS: A little, but growing number of people is advocating a return to the classic gold standard. Would a return to the classic gold standard change anything on the banking problem as you see it?

NH: Not fundamentally. The gold standard reins in the amount of money the central bank can create, but not the amount of money that commercial banks can create on top of that. It might make a debt bubble a little less likely, because banks know they cannot be bailed out as easily any more. But if a crisis happens, it will be really disastrous, if the central bank is constrained by a gold standard. We have seen this in the Great Depression.

LS: So what are the real alternatives according to your analysis? What needs to be done?

NH: The key is to limit banks’ ability to create money and to pour too much new money into asset markets, like the stock market and the housing market. There are various ways to do this. Richard Werner, a banking professor at the University of Southampton, argues for credit guidance. He says central banks should limit the growth of bank credit going to consumers and into asset markets, while encouraging credit for productive investments.

This credit guidance was an important element in the industrialization of countries like Japan, South Korea, Taiwan and Germany after World War II, and still is in China. Another approach is the Chicago-plan or 100%-money, which was promoted by Henry Simons and Irving Fisher among others. Currently International Monetary Fund economist Michael Kumhof is creating quite a stir with this proposal. It is being discussed a lot these days.

LS: How does 100%-money work?

NH: It would mean that banks have to have all their deposits covered by their own deposits at the central bank. They could not create deposits any more, but could only intermediate money which the central banks have created. The central banks would have to create a lot more money of course, which would mean that governments would receive much higher central bank profits.

LS: What sorts of resistance against fundamental reforms and new directions can be expected coming from interested parties?

NH: The right to create legal tender out of nothing is almost as good as the ability to make gold out of sand. Bankers will fight teeth and claw to preserve that privilege. They will continue to try and portray those who argue for fundamental reform as crazy weirdos, who do not understand money and economics.

LS: How do you interpret the beginning renaissance of gold in the international monetary / financial system in general? What reasons do you see for it?

NH: Gold is fundamentally different from paper money and bank deposit money in that its quantity cannot be increased at lib. It differs also, because it does not have debt as its counterpart. Banks have eroded the trust in deposit money by the money and debt bubbles that they have blown up. Gold looks attractive in such a situation.

LS: In January this year, the Deutsche Bundesbank announced that it wants to repatriate some of its gold holdings at the NY Fed and all of its gold from the Banque de France. Do you consider it a bit strange that apparently it will take seven years to bring roughly 300 tons of gold from New York City to Frankfurt and five years to bring roughly 370 tons from Paris to Frankfurt? Moreover, the Bundesbank will leave a huge amount of its gold in New York City and London to have in the event of a currency crisis “the ability to exchange gold for foreign currency […] within a short space of time.“ Does this argument convince you?

NH: The specifics of the plan for partial repatriation of gold seem to be designed to quash the public discussion about gold storage abroad. For many years to come, the Bundesbank will be able to answer these calls by saying: we are already working on it. And that will work well as a communication strategy. But the truth of the matter is that there is no good reason to store your national gold treasure abroad. The issue and the way in which the Bundesbank got itself tangled up in conflicting statements and justifications during these discussions makes one suspicious that either there is a problem with the gold or that Germany might not be as sovereign a state as we like to think. I do not know which one is true.

LS: Let’s speculate for a second. With what kind of thoughts do you think does the leadership of China and Russia – two big gold buyers – observe this German gold story?

NH: My guess is that they do not have any of their gold in New York. If they did, they would probably consider taking it home now.

LS: Is it the right thing for the BRICS nations [Brazil, Russia, India, China and South Africa] to do to launch their own development bank to rival the IMF and the World Bank?

NH: This is a good development for the BRICS as well as for potential customers of their development bank. It will mean that IMF and World Bank will have a harder time to impose their market ideology and their creditor-friendly policies on any country in trouble.

LS: Are trade imbalances the crux of the euro crisis?

NH: Trade imbalances are the main problem of the European currency union. Germany has a huge surplus. This means that Germany continues to give new credit to the other countries, who get deeper and deeper in debt. Without Germany accepting a trade deficit, it is impossible for the other countries to ever pay down this debt. It would require having strongly increasing wages in Germany for a while, in order to increase domestic demand and at the same time help other countries to regain competitiveness. Germany seems unwilling to countenance this option.

LS: Why do the politicians of the EU and the main protagonists in mainstream media say on a constant basis: “We’re rescuing the Greeks, we’re rescuing the Spaniards, et cetera,“ when in reality the EU is rescuing private banks (predominantly German and French ones)? Can’t this be communicated in an honest way with the supposed sovereign in a democracy, the people?

NH: Influential groups are influential because they get their own messages and views across. The financial sector is very influential. It has managed to distort the thinking of media people, economists and policy makers alike.

LS: If you were calling the shots, how would you solve the euro crisis? And do you think a real solution is desirable right now seen from a standpoint of the financial and political elites in euroland?

NH: I would order the central bank to end the acute crisis by doing similar things to what the Federal Reserve has been doing, perhaps more focused on pumping money into the real economy, rather than into the asset markets. Then I would give people the choice of either ratifying a new European Treaty, which would envisage a fiscal union among other things, or go back to national currencies in a harmonious way.

I suspect a new treaty would be rejected. What I see instead as the plan pursued by the elites is to keep the crisis going to force reforms in the direction of fiscal union, without materially involving the parliaments or the people. This is highly undemocratic.

LS: What are currently your biggest concerns when it comes to the world economy?

NH: The attempts by central banks to restart the economy are almost entirely based on re-inflating asset markets. This means, the level of debt in the economy is not reduced. It might be that the ultimate crisis is only pushed back this way.

LS: Thank you very much for taking your time, Dr Haering.


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2 Responses to “Money lies disguise banking truths”

  1. Hunter sagt:

    That was really a really good piece of writing. I like individuals who truly take some time to prepare decent material – it’s all an education at the end of the day. Very well thought out and put together. Thank you.

  2. Joe Mok sagt:

    I think Dr Norbert Haering and most „money as debt“ writers over-estimate money creation as a privilege. Money is NOT created out of thin air through bank lending. Virtually all long term bank loans are collateralized. Valuing the underlying asset over the life of the loan is risky and difficult. Against this risk, the bank must raise and hold capital (albeit very thin). Asset backed lending is actually LIQUIDITY CREATION, not exactly token money. 90% of lending cannot be converted to legal tender as coins and bills are merely 2 to 3% of total liquidity created via lending. This „asset backed liquidity creation to earn interest“ business model can back fire as seen in the huge losses of the lenders in 2008 to now. Many banks loss more money than all the profits made in 2 decades.

    Today government deficit is financed privately and citizens can watch the debt clock and scream. Many government has learnt the pain when they lose market access. If you took liquidity creation „privilege“ out of private, risk-for-profit hands and convert it to government monopoly (as argued by Social Credit parties), deficit will not need to show up as trackable sovereign debt as there is nobody to repay. This system is fine under fiscally responsible government piling up foreign reserves like Singapore but hopeless for governments elected by pork and war-mongering. The government already control internal security, war making, social programs, taxation … and you want to give them control the currency also ? Talk about concentration of POWER.

    By all means hate the bankers for rent seeking, turning down loans to sick mother, being over compensated … Just don’t transfer liquidity creation powers to the government. I shudder to think what they will do with it. The same people will simply move from being bankers to politicians – they already wear the same clothes.

    Joe Mok

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