The principle purpose of banking is asset-stripping. What is asset-stripping? The best way to understand it is this: financial terrorism. It’s really very simple, very insidious, very effective, and it wears a suit.
First, it’s important to understand the main operational aspect of banking: counterfeiting. Ooops, did I say counterfeiting? I mean “Fractional Reserve Banking.” Here’s how it works:
1. The alleged business model for banks is to lend money and earn profit by collecting interest as the loans are paid back.
2. According to bank regulations, your bank is required to keep cash “reserves” against loans that might not be paid back. This “Reserve Ratio” has historically been in the neighborhood of 10:1, which means the banks can lend out ten times their “reserves.”
3. You deposit $100,000.00 in your bank. The bank now has $100,000.00 of “reserves.”
4. Your bank can now lend out $1,000,000.00 against the $100,000.00 you just deposited. This is often referred to as “leverage.” (note 1)
5. See #4 above. This is where Cognitive Dissonance usually interferes with understanding how banks work. Read it repeatedly until you can understand how insidious and precarious is this thing we call “banking.” For more information, read this wiki entry.
6. So now your bank loans out $1,000,000.00 against the $100,000.00 you deposited. These loans are often used to buy things like houses. But the bank lent out $900,000.00 more than you deposited. Where did it get this money? The bank created it out of nowhere. It is allowed to by law. The bank did nothing. It did no work. It produced no real asset or product. It made nothing; THE BANK CREATED THE EXTRA $900,000.00 OUT OF THIN AIR. (note 2)
7. Let’s say someone then uses this $900,000.00 to buy a house. When the borrower fails to pay the loan, the bank “forecloses” on the house and takes legal possession of it.
8. The net result of this is simple: the bank created $900,000.00 out of thin air; the bank gains possession of real property when the “loan” isn’t paid. The bank gets a free house. All it had to do was sign a document creating money out of nothing.
Now, imagine a similar system where no one even had to deposit anything, where a central bank created the money for the “reserves” in this system simply by mouse-clicks on a computer, where the reserve ratios were effectively zero, and where no one was allowed to audit the banks’ books. Imagine such a system being employed on an international scale, where the assets being seized were national assets that had been paid for by taxpayer money. Assets like roads, bridges, sewer systems; productive assets like ports and rail systems. International creditors are laying claim to these assets as terms for international “bailouts” in “Greece, Ireland, and elsewhere. Imagine taxpayer money being used to build roads, and then having a bank seize the roads and start to collect tolls from the very same taxpayers who paid to build the road in the first place. That is where we are now.
But we’re not finished yet. In the fractional-reserve example above, the bank created money out of nothing and used it as part of the loan process to seize real assets. Now, imagine if a giant bank also had the right to print as much money as it wanted to and then give this money interest-free to member banks. Yes: free money for the banks, as much as they want.
OK, now that the banks are stuffed full of free money, let’s play a game: PRIVATIZATION. Privatization is a special kind of asset-stripping where public assets are sold off to private investors. Now, it is true that private companies will usually do a better job at managing assets (like buildings and roads) than government does. So, at its core, privatization is a good idea. The problem is, who will buy the assets? Will they be bought directly by the banks, using money they got for free from the Fed? You’ve already bailed out the banks twice in recent memory: the first time was the odious TARP bill, pushed by the even more odious Eric Cantor; the second was through the destruction of the buying power of your currency when the Fed printed $1.6 Trillion in new money and gave it to…the banks. Do you really want to sell your roads to the banks and then pay tolls to…the banks? Or would you rather have the banks lend money to private investors, then have the central bank crash the economy and make it impossible for those investors to repay the loans? Then, the banks will foreclose on the roads and…you pay tolls to the banks. Do you see how this works? Do you understand why the banks would be willing, even anxious, to make loans they know can’t be repaid? Do you understand why the banks made no-documentation loans, ARM loans, subprime loans? THEY GET TO KEEP THE STUFF. THEY GET PROFITS, TAXPAYER BAILOUTS, AND ENDLESS FREE MONEY FROM THE FED. They get your stuff. All of it. Everything you’ve built, you get to rent it back from the banks. This is what “Too Big To Fail” means.
At the beginning of this article I made this statement: “The principle purpose of banking is asset-stripping.” I’m sure few of you believed me. Do you believe me now?
It’s coming. Watch for it.
Note 1 – Also understand that #4 above also works in reverse; recessions result in people taking money out of banks in a process known as “de-leveraging.” During a de-leveraging, when people go to their banks to withdraw their “savings,” banks scramble for reserves.
Note 2 – This casual creation of money out of nowhere probably also explains why the Fed thinks that printing money is no big deal. Bankers think in terms of the fractional reserve system and are accustomed to creating money out of nothing. They do it every day, so what’s the big deal?