Prof. Werner brilliantly explains how the banking system and financial sector really work.

I just wanna have you have a look at this this graph to frame it it's UK private debt since 1880 and you can see what happens around the Great Depression and then suddenly Thatcher comes to power private debt takes off Richard financial sector are bloated or a dominant financial sector its effect in your view on the real economy first of all it's interesting that the national income accountants who think a lot about the overall economy how to measure it and how to you know structure the data they actually have been struggling for decades with the question what to do with the financial sector why because GDP is actually created by national income accounting by adding up value-added activities and that's where the financial sector has a problem what is the value added and it's it's been so difficult that essentially the national accounting statisticians have to make up a fictional value and just add it on to GDP and say ok that's we can say that maybe is is what the financial statistics because essentially there is no value at it there's value extracted and so really you need to subtract it from GDP has the finance sector the fire sector has it become a cost center because this is that as you know is there a sweet spot where it's actually serving humanity society and facilitating business and when it becomes a profit generator in and of itself it becomes detrimental to the wider to the wider world star with you well exactly even the mainstream textbooks in finance banking and macro monetary economics will will show banks as financial intermediaries now there's there's a problem with that it's clear there is a high price that we're paying for this what should be a humble intermediation service that's being performed and their salaries that are being paid a you know famously very high which is very strange if they're just intermediaries physically where does that end up I think there's a structural problem that is the concentration of the banking sector so in the UK five banks count for 90 percent of deposits which is one of the most concentrated banking systems in the world in Germany those high street banks account for 12% of deposits and 70% of deposits are accounted for by 1,500 local not-for-profit community banks there's a general tendency when an organization gets large and larger and larger and gets very big essentially decisions are made without accountability and the temptations of power strike Lord Acton famously put it this way you know power corrupts and absolute power corrupts absolutely so when you have very large banks and only five of them dominating the economy and through the political mechanism and the already financial sector centered political system and political infrastructure you know the City of London having a person in Parliament that is not elected the remembrance and in all these rights of this square mile as a sovereign state in all these things and the Queen needs permenant to go there exactly and so what you will get is large banks only wanting to deal with large customers in order to do large deals and that's also where you get the large bonuses well we've done the study is on the US which has the biggest banking sector in the world over 15,000 banks of all sizes and shapes the very large banks deal with the very large customers give very large loans the medium-sized banks give medium-sized loans who is lending to small firms it is only the small banks now the UK doesn't have those so the structure has become too concentrated and what is badly needed in the UK's decentralization one has to break up the financial sector and have much smaller units because small banks community banks are locally accountable you can't certainly do a crazy project or Corral you know big corruption because people see what you're doing but I think you'd argue for decentralized banking system would you even though eurocity like Richard to comment on this because I am and I'm sure Richard is but we've had our Metro banks we've had our older models we've had our 1 savings challenger Bank Solar Challenge challenge event we've had handles Bank or handles Bank ins done a fantastic job but it's still tiny exactly now they will stay tiny the ones that are UK challenger banks and that a profit oriented you know you know why because the moment they get a bit bigger yeah they will be bought up and they will disappear this is exactly what happened over the last 100 years Richard when you think about inequality inequality in the UK and it's a hot topic and you think about as you'd like the banking sector to be decentralized flatter structure more resilient how do you begin to talk to the public or the political class about achieving those goals essentially you know if we want to produce something we need funding so there's a role for banks in almost everything that's happening in the economy but what exactly is that role that just quickly I'd like to reflect on that banks are being thought of as intermediaries but not really what's happening banks what are they they're creators of the money supply so you're firmly of the view that banks create money out of thin air yes well I produced the first empirical studies to prove that in the 5,000 year history of banking banks are thought of as deposit-taking institutions they'd lend money the legal reality is banks don't take deposits and banks don't lend money so what is a deposit at posit is not actually a deposit it's not a bailment it's not held in custody at law the word deposit is meaningless the law courts and various judgments have made very clear if you give you money to a bank even though it's called a deposit this money is simply a loan to the bank that's true yeah so there is no such thing as deposit a battery name then the banks borrow from the public okay so that much we've established what about lending surely they're lending money no they don't banks don't lend money banks again had law it's very clear they're in the business of purchasing securities that's it so you say okay don't you know confuse me with all that legalese you know I want alone I want alone yeah fine here's the long contract here's the offer letter and you sign at law it's very clear you have issued the security namely a promissory note and the bank is going to purchase that that's what's happening it put it in layman's terms what does that mean it means that what the bank is doing is very different from what it presents to the public that it's doing how does this fit together so you say fine the bank purchase is my promissory note but how do I get my money I want you know what's your grand don't care about the details I want the money the bank will say well you'll find it in your account with us that would be technically correct if they say we'll transfer it to your account that's wrong because no money is transferred at all so really from anywhere inside the bank or outside the bank why because what we call a deposit is simply the bank's record of its debt to the public now it also owns you money and its record of the money it owes you is what do you think you're getting as money and that's all it is and that is how the banks create the money supply the money supply consists to 97% of bank deposits and these are created out of nothing by banks when they lend because they invent fictitious customer deposits why they simply restate slightly incorrectly in accounting terms what is an accounts payable liability arising from the loan contract having purchased your promissory note as a customer deposit but nobody has deposited any money I wonder how the FCA deals with this because in the financial sector you're supposed to not mislead your customers anyway so the banks create the money supply by inventing these claims on themselves the you know the fictitious deposits that can be actually positive for the economy as long as there's money creation is in line with the creation of new goods and services implementation of new technologies and therefore adding value and adding value in the economy is funded by this money creation if that happens and we're talking about business investment productive loans productive bank credit you will have no inflation these loans can also be serviced and repaid you have a stable economy without proms and with low inequality and so countries that achieve this that the banks lend mainly for productive purposes whether it's Germany in much of its 200 year history or in the last century the East Asian economies where bank credit was largely for productive purposes than you find but there's two more cases I quickly need to point them out because that's the country just court just could just clarify that that inequality is is significantly lower lower inflation is yes and you'll even the row and the real economy is booming yes that's when bank credit creation is focused on productive lending for productive purposes as opposed to speculation and I suppose do those are two other times if banks create credit for consumption it's obvious what's gonna happen you suddenly have more money created created and more demand for goods but it's the same amount of goods and services so you're creating consumer price inflation that's well understood and and central banks are watching that a little bit I'm also was what's less well understood is and what's the biggest in the UK it's probably more than 70% of all lending actually way more than that is bank credit creation that so money creation for financial transactions for asset transactions for purchasing ownership rights now then you have a problem why because you're creating new money but you're not creating new goods and services you simply consider you're giving somebody new purchasing power over existing assets and therefore you must push up asset prices so this you can you can draw a chart where you show you know as the prices land prices property prices in the UK and it will match very closely as where I've shown in in Japan and other countries and that also creates the inequality when the the banking sector has focused too much on unproductive lending and the UK's dominant it strikes me the what you're telling me and tell me I'm wrong is that lending in order to get round this deposit stroke loan situation needs to be categorized you're right exactly that right that's right and we need to look at where the money is going that makes a whole world for difference so if money is a bank credit is extended for productive purposes you'll find you'll get a good economy no inflation and financial stability and also you don't have this inequality problem do you think there should be different capital ratios to all know the whole Basel capital approach doesn't work why because it's its premise on the idea that banks are just financial intermediaries but they're not their money creators we need bank regulation that recognizes reality of how the banks actually operate what you're saying this is a regulation from clearly yes it's a regulation problem that's right we need different regulation and the only regulation that actually has succeeded in in history and we have good data for the 20th century in particular in preventing acid bubbles and banking crises which are all driven by this bank credit for financial transaction he releases acid boom and it's a game of musical chairs you know you have to play it it's rational to played while the music is playing which is how a surprise are driven by evermore bank credit for financial transactions the moment it stops a surprises fall you get the first bankruptcies banks get risk-averse the whole thing goes into reverse and banks go bust but you can avoid this and the only regulation that has succeeded in avoiding this is guidance of bank credit simple rules and the simplest form of bank credit guidance is to simply ban bank credit for financial transactions it doesn't mean financial transactions are bad no let the speculative speculate and let them even borrow money but not from banks that would make a whole world of deferred as a borrower from well they can issue bonds or you know borrow in the markets whatever they want but that's where they shouldn't get access to the public privilege of money creation and that creates the problem that creates the boom-bust cycles but in some countries they've succeeded in preventing this asset inflation which ones such as Germany without even credit guidance by having a banking structure banking system that's dominated by banks that don't want to do this financial speculation in the first place these are the community banks that Germany was 70% of all the lenders being known as boats the smaller ones the one thousand five hundred folks bunkin ryfi sambuca they actually the main banks in Germany there's so many of them each is small and they lend mainly for productive purposes to small and medium-sized enterprises the middle stand which has been the backbone of German economic success for the last 200 years despite Wars and disasters has only been successful because they also have to have local small banks funding them all the way through that doesn't exist in the UK and that's been why the small and medium-sized enterprise sector always has had a problem in the UK so we're stuck with speculation and horrific property porn renovation shows well the solution is of course to create these small banks we need to create small banks they're the natural lenders to small firms the public once stable growth none of those boom-bust cycle banking crisis public money used to bail out banks people don't want that in germany these community banks dominate goes they've never used public money in these 200 years not a single one has ever been bailed out with public money and no depositor has lost any money although Richard your argument is the complex principles are terribly simple it is very simple and although you know you're a little defeatist I'm not you have maybe I'm defeatist um but but I like it but it's just the idea of can I put it so on getting getting through the ready treatment they are so reluctant that's when he's halfway that's why we good that's what we got you in we're gonna we're gonna have you I think I think I I have to say this has been brilliantly explained as the UK go to finance course is it a trick question because the UK doesn't have finance the City of London has and is not part of the UK International is right the City of London is outside the United Kingdom you know that it's really shocking and if therefore it's also not part of the EU which explains the it couldn't be part of the EU because you have to have democratic elections and the City of London doesn't right it's the banks that have the votes right right first off you know absorptions I don't know how'd you start I'm picking this puzzle that's very useful piece of it's not and it's not part of the UK because the Queen is not allowed to enter without permission she's not the sovereign therefore it's not part of the UK you know of course that since you know 1688 its regular since the coronation

Channel: Alessandro Del Prete

Views: 552,310

Rating: 4.9129286 out of 5

Keywords: Richard Werner, Banking, Financial Sector, Lending

Id: EC0G7pY4wRE

Length: 15min 44sec (944 seconds)

Published: Thu Mar 09 2017

Reddit Comments

[u/bitsteiner]

Totally underrated video. And the situation is not much different in the US, banks create money for real estate speculation mainly. Also watch this video about Prof Werner. He is a really brilliant mind: https://www.youtube.com/watch?v=p5Ac7ap_MAY

[u/100_Jose_Maria_001]

Good stuff. I spent years in college and grad shool studying economics, and nobody ever taught us the implications of private banks having the power of money creation, which they call the factional reserve system. I am learning way more by reading posts here. Just goes to show why so many people are so unaware of what is causing the problems on a concrete level. They know its the banks, but not necessarily the mechanisms by which they are being priced out of their own cities, their purchasing power eroded, etc.

[u/Mark_Bear]

Excellent point, especially around the 10 minute point.

[u/weeble76]

I used to work with David Buik. An absolute gentleman.

[u/[deleted]]

I assume OP picked this up from my earlier comments about R. Werner in another thread.

Welcome to the entrance of the rabbit hole, my friend.

You may want to read his best-selling book Princes of the Yen, or just watch the youtube documentary.

https://www.youtube.com/watch?v=p5Ac7ap_MAY&t=4117s

[u/Spartan3123]

That's a really good video, but I don't think the solution is to have thousands of little banks. I think we need to do this https://www.youtube.com/watch?v=BgRqoLu1ldk

We need to burn down this scam with fire and brimstone ( hyper bitcoinization end goal )