July 2017        

Money, banking, power

Jimmy Doran

The banking system has totally changed since the time when banks took in deposits, paid interest on this money, and then lent it out at a higher rate of interest to others.
     This model did not create enough profit for banks, and has not been used for many years. Banks now rely on commercial borrowing, inter-bank lending and the support of the Central Bank to balance the books from day to day. No longer are loans that are given out matched by deposits: the ratio between loans and deposits, known as the leverage rate, can be as high as 50:1. The thinking behind this is that the massive profit made on these loans outweighs any risk of defaulting loans.
     How does this work, and what are the implications for the economy, society, and the state?
     If, for example, borrower A borrows €100 million, the bank deposits €100 million in A’s account on the strength of their collateral or business plan, thus putting €100 million into the economy. This also gives the bank an asset, plus the interest that will be paid on it over the period of the loan—typically three times the value of the loan. This loan can be held by the bank or sold on to another financial institution.
     So, with the stroke of a pen, €500 million of new money is put into the economy. This demonstrates the power that banks have. Banks decide who gets loans, and what they are used for. They are the main source of new money being put into the economy, which stimulates growth and the direction of new investments.
     In this example, borrower A now has €100 million to spend on whatever they got the loan approval for—we’ll say to build a factory for manufacturing corn flakes. This will provide, say, fifty jobs for a year to build the factory and a hundred jobs permanently in the factory on completion.
     There will be spin-off jobs in the wider economy as well. It is estimated that for every three permanent jobs created there is on average one more created indirectly elsewhere in the economy. These workers and their families benefit from the wages earned; the state benefits from taxes paid by them and by the employer and on the profit created by the goods produced by the workers.
     The factory-owner benefits most, as they get all the surplus or profit left over, which will provide them and their family with a life of luxury. If the factory was making a small profit of 10 per cent a year, the workers would have created enough surplus value in ten years to own the factory in its entirety. If it were a 20 per cent profit, this period would be five years.
     This demonstrates clearly who creates the wealth in this society; but, unfortunately, this wealth is accumulated by the few and not by the many who create it.
     Society also benefits from having a new brand of corn flakes to choose from. This has little or no social value; but the bank’s only purpose is to make a profit, so it is irrelevant to it what is being produced. It could very well be weapons of mass destruction, greenhouse gases, or cigarettes.
     In Ireland, as a result of the global financial crash, Allied Irish Bank was taken into state ownership, but the state has now begun selling it off in batches. The first batch, of 28.7 per cent, was sold at the end of last month for €3.4 billion. It made a profit in 2016 of just under €2 billion, and that is likely to increase in the coming years. It has already paid dividends to the state of €6.6 billion.
     In 2008 AIB was bailed out to the tune of €20.6 billion. The bank still owes the state about €14 billion, which, going on the dividends and profit it is making, will be paid off sooner rather than later; and so we would have had a very profitable national bank owned by the state—that is, by you and me.
     The state is selling AIB in batches of 25 per cent to anyone who has a minimum of €10,000 to invest. (The average amount purchased by private investors was €46,000.) This makes sure that the working class are excluded from this particular gravy train. It is an opportunity for the few and not the many, who are the ones who paid and are paying the bank’s debts through increased taxes and savage cuts to public services.
     It makes absolutely no commercial or social sense to sell AIB to private capital for a one-off payment that won’t even cover the losses. As a result of the first tranche being sold, the state will already be down approximately half a billion in lost profit share at the end of the year.
     When private capital gets its hands on the bank, the profit, dividends, executive pay, bonuses and pensions for the golden circle will be king. There is no doubt that the first thing they will do will be to remove the cap on executives’ pay and bonuses. It is estimated that the profit will be exempt from taxes for approximately thirty years, because of losses incurred during the financial crash, and this is being promoted to prospective investors as another reason to buy shares.
     AIB should be kept in public ownership as a National Development Bank, working in the interests of the people and not with the sole purpose of making maximum profit.
     Michael Noonan claims that state-owned banks don’t work. This is untrue, as state-run banks work very well and are very profitable in Frankfurt, Paris, and Zürich, to name but a few.
     If we were to keep the bank in state ownership it would set the bar for the other banks, and would provide competition in the market that for once would benefit the customer and not big business. It would stabilise the banking system by providing certainty, and would be able to borrow money commercially at better interest rates, as there is less risk if the state is involved. These lower interest rates can be passed on to citizens and small businesses in the form of cheaper loans.
     The other benefit is that now the state would have the power to decide who gets loans, and for what purpose; so instead of forty-seven types of corn flakes we can have new businesses that provide real jobs, that produce goods that actually benefit the community, such as treatment for diseases, and increase and improve the services and infrastructure available to citizens.
     The sale of AIB to financial capital serves only that class and abandons the citizens to the neo-liberal scrap heap of low-paid, precarious work and inadequate housing, health services, education, and all the things that should be a right for our people.
     It is time that decisions that affect the people and the country were removed from our gombeen political class and their paymasters in big business and the EU and put under democratic public control. Maybe then we could start to build the Republic that the men and women of 1916 fought so bravely for.

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