Hostages to a rampant banking system

General view of the seminar on Public Investment Banks, which was organised in Brussels by the Bureau of European Policy Advisers (BEPA). (EC Audiovisual Services).

General view of the seminar on Public Investment Banks, which was organised in Brussels by the Bureau of European Policy Advisers (BEPA). (EC Audiovisual Services).

The European Commission presented yesterday its European Financial Stability and Integration Report (EFSIR) at a joint conference with the European Central Bank (ECB) in Brussels. Overall, the report concludes that “despite improvements, the financial crisis continued to exert a significant impact in holding back economic growth in 2012”. Earlier today, Friday 26 April, the European Central Bank (ECB) issued its eighth report on the results of the “Survey on the access to finance of small and medium-sized enterprises (SMEs) in the euro area”.

The main findings of this report are also quite discouraging as far as the role of the financial sector is concerned and more so the banks. It concludes like that: “Financial developments in 2012 have had a significant impact in holding back an economic rebound. In particular, they have born heavily on economic growth and employment performance, as visible in negative annual GDP growth and rising unemployment figures across the European Union (EU) and the Euro area”.

Rampant banks

In view of these concrete conclusions that the financial sector continues to act as a main impediment to growth, the Commission is raising a fundamental question concerning the banks. The Commission staff working document goes as far as to question the very role of the banks. The relevant quote is very interesting: “Banks are one of the main players in the financial system, but it is important not to lose sight if the financial instruments and activities performed by banks can be provided differently, including other trading venues or multilateral market platforms. In this regard chapter 4 describes progress to regulate the over-the-counter (OTC) derivatives markets. Derivatives play an indispensable role in modern finance, but the recent financial crisis has shown that they have the potential to exacerbate financial instability. In general, both the lessons of the financial crisis and recent academic research suggest that OTC derivatives markets have the potential to impose large social costs. Consequently, financial regulation has an important role to play in mitigate them, particularly given the light regulatory approach that characterized this field of finance prior to the crisis. To tackle these inherent vulnerabilities, the EU focused its attention on the lack of transparency, as well as on the excessive counter party and operational risks in OTC derivatives markets”.

In this quote there is a ground-breaking observation reading like that, “OTC derivatives markets have the potential to impose large social costs”. In short the writer of this important paragraph describes very well, what was evident right from the moment when the ongoing financial first broke out in the US in 2008. What he or she really observes here is the fact of the complete liberalisation of the banking sector, which is thus being freed to exercise against the entire society its built-in ability to CREATE MONEY! By doing so the banks can present to society their own paper values, demanding to be recognised in face value and paid duly by governments and households.

In this respect the free functioning of the OTC market for derivatives plays a key role. It’s in this market that the banks can create as much nominal values as they like, by exploiting all and every real economy sectors as their underlying markets and create huge new values on them. Societies cannot avoid accepting those products/liabilities/values because they have been created legally and governments and households have to redeem them in full. It was like that when the American administration was obliged to redeem in face value the many hundred billion wealth (actually rubbish) of CDSs created by the financial giant AIG. AIG had undersigned and insured all the incredible and difficult to understand paper values products the New York banks had created.

In the EU like the US

In Europe the same was true with the unbelievably huge loans the major German and French banks had granted to Eurozone governments and private agents and the relevant CDSs that went with them. The relevant passage of the Commission Financial Stability and Integration Report (EFSIR), is very enlightening. It goes like that: “In 1999, a single financial (European) market in which funds could flow and market participants could trade freely across EU borders was a distant dream. Since then significant developments have been achieved. European financial institutions and markets have become more interdependent…Old ways of organising financial regulation and supervision were called into question, and cross-border risk transmission channels intensified… The financial crisis has demonstrated the need for an additional focus on financial stability issues. Responding to these developments, a revamped “European Financial Stability and Integration Report” was established in 2010”.

While in observing and describing the reality the above passage is almost impeccable, as far as its proposal is concerned for a concrete policy instrument to contain the lethal liberties of banks, the text is deplorable. If it was feasible to contain the banking sector with “Financial Stability and Integration Report” the world would have been a much better place.

Unfortunately, nor the Commission neither the European Central Bank have proposed a return to the banking system of the 1970s, where banks were good at safeguarding deposits and grant loans to trustworthy businesses and households. Today the banking system has undertaking among other things the key public service of handling all and every economic transaction, thus holding hostage the entire society. A public platform handling economic transactions and offering other such services to households and companies has to be created soon, if modern societies really want to get rid of the financial gangs that govern today.

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