The Italian Banking Crisis: No Free Lunch – Or Is There?

It has been called “a bigger risk than Brexit”– the Italian banking crisis that could take down the eurozone. Handwringing officials say “there is no free lunch” and “no magic bullet.” But UK Prof. Richard Werner says the magic bullet is just being ignored. 

On December 4, 2016, Italian voters rejected a referendum to amend their constitution to give the government more power, and the Italian prime minister resigned. The resulting chaos has pushed Italy’s already-troubled banks into bankruptcy. First on the chopping block is the 500 year old Banca Monte dei Paschi di Siena SpA (BMP), the oldest surviving bank in the world and the third largest bank in Italy. The concern is that its loss could trigger the collapse of other banks and even of the eurozone itself.

There seems little doubt that BMP and other insolvent banks will be rescued. The biggest banks are always rescued, no matter how negligent or corrupt, because in our existing system, banks create the money we use in trade. Virtually the entire money supply is now created by banks when they make loans, as the Bank of England has acknowledged. When the banks collapse, economies collapse, because bank-created money is the grease that oils the wheels of production.

So the Italian banks will no doubt be rescued. The question is, how? Normally, distressed banks can raise cash by selling their non-performing loans (NPLs) to other investors at a discount; but recovery on the mountain of Italian bad debts is so doubtful that foreign investors are unlikely to bite. In the past, bankrupt too-big-to-fail banks have sometimes been nationalized. That discourages “moral hazard” – rewarding banks for bad behavior – but it’s at the cost of imposing the bad debts on the government. Further, new EU rules require a “bail in” before a government bailout, something the Italian government is desperate to avoid. As explained on a European website called Social Europe:

The EU’s banking union, which came into force in January 2016, prescribes that when a bank runs into trouble, existing stakeholders – namely, shareholders, junior creditors and, sometimes, even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000 – are required to take a loss before public funds can be used . . . .

[The problem is that] the subordinated bonds that would take a hit are not simply owned by well-off families and other banks: as much as half of the €60 billion of subordinated bonds are estimated to be owned by around 600,000 small savers, who in many cases were fraudulently mis-sold these bonds by the banks as being risk-free (as good as deposits basically).

The government got a taste of the potential backlash a year ago, when it forced losses onto the bondholders of four small banks. One victim made headlines when he hung himself and left a note blaming his bank, which had taken his entire €100,000 savings.

Goldman Sachs Weighs In

It is not just the small savers that are at risk. According to a July 2016 article titled “Look Who’s Frantically Demanding That Taxpayers Stop Italy’s Bank Meltdown”:

The total exposure of French banks and private investors alone to Italian government debt exceeds €250 billion. Germany holds €83.2 billion worth of Italian bonds. Deutsche bank alone has nearly €12 billion worth of Italian bonds on its books. The other banking sectors most at risk of contagion are Spain (€44.6 billion), the U.S. (€42.3 billion) the UK (€29.8 billion) and Japan (€27.6 billion).

. . . All of which helps to explain why banks and their representatives at the IMF and the ECB are frantically demanding a no-expenses-spared taxpayer-funded rescue of Italy’s banking system.

It could also explain why Goldman Sachs took it upon itself to propose a way out of this dilemma: instead of buying Italian government bonds in their quantitative easing program, the ECB and the central bank of Italy could buy the insolvent banks’ nonperforming loans.

As observed in a July 2016 article in The Financial Times titled “Goldman: Italy’s  Bank Saga – Not Such a Big Deal,” Italy’s NPLs then stood at €210bn, and the ECB was buying €120bn per year of outstanding Italian government bonds as part of its quantitative easing (QE) scheme. The author quoted Goldman’s Francesco Garzarelli, who said, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet.” Bringing the entire net stock of bad loans onto the government’s balance sheet, he said, would be equivalent to just nine months’ worth of Italian government bond purchases by the ECB.

Buying bank debt with money generated by the central bank would rescue the banks without cost to the taxpayers, the bondholders or the government. So why hasn’t this option been pursued?

The Inflation Objection

Perhaps the concern is that it would be inflationary. But UK Prof. Richard Werner, who invented the term “quantitative easing” when he was advising the Japanese in the 1990s, says inflation would not result. In 2012, he proposed a similar solution to the European banking crisis, citing three successful historical precedents.

One was the US Federal Reserve’s quantitative easing program, in which it bought $1.7 trillion in mortgage-backed securities from the banks. These securities were widely understood to be “toxic” – Wall Street’s own burden of NPLs. The move was highly controversial, but it worked for its intended purpose: the banks did not collapse, the economy got back on its feet, and the much-feared inflation did not result. Werner says this was because no new money entered the non-bank economy. The QE was just an accounting maneuver, an asset swap in the reserve accounts of the banks themselves.

His second example was in Britain in 1914, when the British banking sector collapsed after the government declared war on Germany. This was not a good time for a banking crisis, so the Bank of England simply bought the banks’ NPLs. “There was no credit crunch,” wrote Werner, “and no recession. The problem was solved at zero cost to the tax payer.”

For a third example, he cited the Japanese banking crisis of 1945. The banks had totally collapsed, with NPLs that amounted to virtually 100 percent of their assets:

But in 1945 the Bank of Japan had no interest in creating a banking crisis and a credit crunch recession. Instead it wanted to ensure that bank credit would flow again, delivering economic growth. So the Bank of Japan bought the non-performing assets from the banks – not at market value (close to zero), but significantly above market value.

In each of these cases, Werner wrote:

The operations were a complete success. No inflation resulted. The currency did not weaken. Despite massive non-performing assets wiping out the solvency and equity of the banking sector, the banks’ health was quickly restored. In the UK and Japanese case, bank credit started to recover quickly, so that there was virtually no recession at all as a result.

For Italy and other “peripheral” eurozone countries, Werner suggests a two-pronged approach: (1) the central bank should buy the distressed banks’ NPLs with QE, and (2) the government should borrow from the banks rather than from bondholders. Borrowing in the bond market fattens the underwriters but creates no new money in the form of bank credit for the economy. Borrowing from banks does create new money as bank credit. (See my earlier article here.)

Clearly, when central banks want to save the banking system without cost to the government or the people, they know how to do it. So the question remains, why hasn’t the ECB followed the Federal Reserve’s lead and pursued this option?

The Moral Hazard Objection

Perhaps it is because banks that know they will be rescued from their bad loans will keep making bad loans. But the same moral hazard would ensue from a bailout or a bail-in, which virtually all interested parties seem to be advocating. And as was observed in an article titled “Italy: Banking Crisis or Euro Crisis?”, the cause of the banks’ insolvency in this case was actually something beyond the banks’ control – the longest and deepest recession in Italy’s history.

Werner argues that the moral hazard argument should instead be applied to the central bank, which actually was responsible for the recession due to the massive credit bubbles its policies allowed and encouraged. Rather than being punished for these policies, however, the ECB has been rewarded with even more power and control. Werner writes:

There is thus a form of regulatory moral hazard in place: regulators that obtain more powers after crises may not have sufficient incentives to avoid such crises.

What May Really Be Going On

Werner and other observers suspect that saving the economies of the peripheral eurozone countries is not the real goal of ECB policy. Rather, the ECB and the European Commission are working to force a political union on the eurozone countries, one controlled by unelected bureaucrats in the service of a few very large corporations and banks. Werner quotes David Shipley on Bloomberg:

Central bank officials may be hoping that by keeping the threat of financial Armageddon alive, they can coerce the region’s people and governments into moving toward the deeper union that the euro’s creators envisioned.

ECB and EC officials claim that “there is no free lunch” and “no alternative,” says Werner. But there is an alternative, one that is cost-free to the people and the government. The European banks could be rescued by the central bank, just as US banks were rescued by the Federal Reserve.

To avoid the moral hazard of bank malfeasance in the future, the banks could then be regulated so that they were harnessed to serve the public interest, or they could be nationalized. This could be done without cost to the government, since the NPLs would have been erased from the books.

For a long-term solution, the money that is now created by banks in pursuit of their own profit either needs to be issued by governments (as has been done quite successfully in the past, going back to the American colonies) or it needs to be created by banks that are required to serve the public interest. And for that to happen, the banks need to be made public utilities.

____________________

Ellen Brown is an attorney and author of twelve books, including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. She can be heard biweekly on “It’s Our Money with Ellen Brown” on PRN.FM.

37 Responses

  1. The countries suffering this banking crisis should simply do as Lincoln did. Instead of borrowing money from the private bank’s printing press at interest, they should just print the money themselves.

  2. investors shouldn`t touch Italian Banks with a barge pole. they are infested with EU, ECB, Mafia,P2 and Interbank Corruption.

  3. The North Dakota Public Bank is bankrolling the Police and National Guard attacks on Sioux Nation Standing Water demonstrators who are protesting about Canadian Oil Pipeline construction over the Missouri River. Can`t Ellen Brown ask the NDPB to stop this Corruption of Public Money. ND Governor Dalrymple must be keeping his Oil Shares in the NDPB Vault.

    ________________________________

    • The Bank of North Dakota has nothing to do with it.

      Police — local and state — have all been militarized and federalized per The Patriot Act, homeland security act and NDAA.

      Merry Christmas!

  4. Reblogged this on Deadly Clear and commented:
    “To avoid the moral hazard of bank malfeasance in the future, the banks could then be regulated so that they were harnessed to serve the public interest, or they could be nationalized. This could be done without cost to the government, since the NPLs would have been erased from the books.”

  5. […] Fonte: The Italian Banking Crisis: No Free Lunch – Or Is There? | WEB OF DEBT BLOG […]

  6. “Virtually the entire money supply is now created by banks when they make loans, as the Bank of England has acknowledged.”

    I appreciate your work Ellen, but this is fundamentally flawed. As a small business owner, when I buy something for $1, and sell it for $2, I create fictitious mathematical value (in the private sector), which the government bank must match with debt.

    The deeper root, however, is not in what I buy and sell, but in the real estate valuations in the real estate marketplace. Yes, the banks get all the appreciation of those increased land/building values, and we get the debt like perpetual serfs, but the reason the banks are so powerful and incompetent is because of the behaviors in the private sector.

    The FIRE economy (Finance/Insuranace/RealEstate) are at the top, but the same behavior is throughout the populace. The top 1% only reflects the behavior of the 99%. Now we are all stuck with the consequences, which is too volatile even for banks; hence they need a bailout despite all their advantages. The math didn’t work at the beginning, now we just have the compounded result.

    • Agreed, the math doesn’t work with respect to asset bubbles. It does work though with respect to credit creation for productive purposes. The bank advances credit, the producer spends it on workers and materials, creates a product, and pays it back. It’s actually the borrower AND the banker who create money. The banker can’t create it without a borrower. Basically the banker underwrites the borrower’s IOU. The borrower trades his own IOU (which is not acceptable in the marketplace) for the banker’s IOU (credit money in the form of deposits, which are now accepted as money).

    • I think you have this part wrong, “I create fictitious mathematical value (in the private sector), which the government bank must match with debt.” You wouldn’t be able to buy something for $1 and sell it for $2 if the consumer didn’t have the money. As Ellen says in The Web of Debt, in the deflationary phase Great Depression there were plenty of products, but people didn’t have money to buy them. You wouldn’t have been able to sell your widget at all, much less for twice as much.
      I disagree with your idea that the 1% just follows the 99%. The 1% owns almost all of the assets and is a different animal. As asset owners, the 1% has garnered almost all of the economic gains since 2008.

    • Sorry Steve, you have got it wrong. If you buy something for $1 and sell it for $2 there is no way you have created a “fictitious mathematical value”. I would guarantee you would demand to be paid with $2, either as cash or as a Cheque. The Government has nothing to do with creating the extra dollar. The only involvement of the Government is in creating the hard currency that may be used. In all likelihood, your buyer is using “money” from his bank account, which more than likely, has come from an advance from a bank. Banks do not issue a borrower with the “money” needed to pay the interest on their loan. It always has to come from other people who are in exactly the same boat. Hence, in any system based on a profit motive there must always be an increase in the money supply to cover the extra repayments.

  7. This is the best speech I have ever heard on and about Banking.

    May 21, 2013 Why the whole banking system is a scam – Godfrey Bloom MEP

    • European Parliament, Strasbourg, 21 May 2013

    • Speaker: Godfrey Bloom MEP, UKIP (Yorkshire & Lincolnshire)

  8. Suppose a central bank buys €200 billion of NPLs with new deposits which it creates, and suppose that they only expect to recover €100 billion from the loans. What happens to the ECB’s balance sheet?

    Liabilities increase by €200 billion. Assets increase by €100 billion. Net worth drops by €100 billion, making it massively insolvent. Either it has to be bailed out by the euro-zone governments, or the problem gets ignored and the euros have been devalued because the euros in circulation are no longer backed by enough assets to give them their full value. (It might take some time for inflation to show up, because people might not realise that their money has been debased). Either way, someone has to pay in reduced net worth.

    You can create money by fiat, but you can’t add net worth by fiat. If one group is made better off as a result of an accounting entry, it is because another group is made worse off by the same amount.

    • the idea that the economy is a zero sum game is plainly false. of course all boats can be lifted. you assume a false static conception of what is really a dynamic economy. If unemployed people and capital are put to work proactively, new value is created. Read Ellen Brown’s books to learn.

      • I didn’t say that the /economy/ is a zero-sum game. I’m saying that /debts/ (such as bank deposits and cash) are a zero-sum game. Most bad economics in my experience comes down to someone claiming that the asset side of a debt exists, but that the liability side doesn’t. Either a debt exists (in which case both the asset and liability side exist, cancelling each other out in the global net worth), or it doesn’t (in which case neither the asset nor the liability side exists).

        Net worth is increased through production and decreased through consumption, which is why the economy as a whole is not a zero-sum game. But anything else just transfers net worth around. You cannot increase global net worth through accounting entries.

        • ” I’m saying that /debts/ (such as bank deposits and cash) are a zero-sum game.”

          One of the main points in Ellen Brown’s work is that bank deposits are NOT a zero-sum game. The bank “keeps” your deposit for you, so you can come and get it any time you wish, and uses it for derivatives gambling, etc., too. Similarly, with loans the bank just conjures up the money in its books and money is created–non-zero sum.

          • Any debt is an asset of one person (natural person or corporation) and a liability of another person. So when a new debt is created, or when an existing debt is written off, the sum of the net worths of the two parties is unchanged. Debt must be zero sum, because you can’t have a debt which is owed to someone without it being owed by someone, and vice-versa.

            Bank deposits (the money which banks create) are a debt (from the bank to the account holder), and are therefore zero-sum.

            If you deposit cash with a bank, that just transfers ownership of the cash i.e. zero-sum, and there is a new debt from the bank to the depositor i.e. also zero-sum.

            When a bank makes a loan, there is a new debt from the borrower to the bank i.e. zero-sum, and a new debt (the bank deposit) from the bank to the borrower i.e. zero-sum. All debts are zero-sum. The only way that global net worth can change is through production (which adds to it) and consumption (which subtracts from it). Everything else is just a transfer of net worth.

            • “When a bank makes a loan, there is a new debt from the borrower to the bank i.e. zero-sum, and a new debt (the bank deposit) from the bank to the borrower i.e. zero-sum. All debts are zero-sum”

              No. Bankers lend what they don’t have thru fractional reserve banking, thus creating a bigger pie for themselves–non-zero sum. The Fed, similarly, loans money it creates out of thin air, not taking it from anyone.

              • Dear Ernie,

                “No. Bankers lend what they don’t have thru fractional reserve banking, thus creating a bigger pie for themselves–non-zero sum. The Fed, similarly, loans money it creates out of thin air, not taking it from anyone.”

                You are right that banks create money – so there is more money after a loan is made than there was before. (They also destroy money when loans are repaid, so there is less money after a loan is repaid then there was before). But you’re disagreeing with something I’m not saying.

                I’m not trying to make the false claim that there is a fixed amount of money, or that banks lend money that has been deposited with them. The normal picture which people have of banks is that they take deposits of money from savers and lend them out to borrowers, which we both agree is wrong. The money creation comes first.

                You describe banks as lending what they don’t have. It sounds to me like you think of it as a two-step process: the bank creates some new money which makes it better off, and then it lends this new money to someone, so it now has as much money as it had to start with, but is also owed some money by the borrower. That would be very misleading, which is easiest to understand by analogy:

                Ask yourself this: if you wrote on a piece of paper “I promise to pay the bearer $1,000”, signed and dated it, and then put it in your wallet, would you be better off? Then ask yourself who would be better off and who would be worse off if you gave the IOU to *me*. That’s essentially how bank money works.

                I genuinely hope this helps. It’s taken me a long time to wade through the different theories to get to this point. I really recommend thinking in terms of balance sheets and net worth – it makes so much of this stuff easier to understand.

                • I think you’re wrong and suggest you read Ellen Brown’s explanations of the process.

                  • What if Ellen Brown is wrong and I’m right? Don’t just take her word for it (or mine for that matter): make sure you understand it for yourself.

                    Try doing some thought experiments – that’s what I did. Imagine a desert island with a handful of people on it, and try to find a scenario in which there is no money at first, and no money at the end. In between, the banker makes a loan, and by the end he manages to own more than he had to start with. I predict that you won’t be able to do it, unless the banker charges interest and the borrower doesn’t default. It’s very instructive to do this sort of thought experiment for yourself.

                    You can call me naively wrong if you like, but I’d take that rather more seriously if you actually pointed to specific errors in my reasoning.

                    Seriously – keep an open mind. You were open to the idea that the naive view of banks as mediators between savers and borrowers is wrong. Don’t stop there. Keep learning, and gain a better understanding.

                    Regards,

                    Chris.

                    • Thought experiments, schmought experiments. They won’t get you anywhere. Facts are needed, not airy reasonings. The bank of England has admitted that banks create money when they make “loans”. Rehypothecation goes on routinely in the financial industry, whereby banks and other institutions use collateral more than once. Fake accounting (mark to market, etc.) and fake evaluations are the banks’ standard procedure. There are many ways that money is created in a nonzero sum way. The main point, which comes up in Ellen Brown’s work often, and which you seem not to have read at all (try The Public Bank Solution), is that credit used judiciously can raise everyone’s boat in a non-zero way. She gives plenty of historical fact to show it.

                    • Actually Chris, that experiment has been done under several different scenarios starting with the idea of nothing being considered private property and the community all cooperating to help each other. Then there is the era of barter trading with some people having an ability, or interest, in certain areas, and exchanging things through bargaining.
                      All these experiments have to assume that the island can provide self sufficiency, otherwise everybody just eventually dies.
                      However, the people eventually discover that barter trade is quite complicated and someone comes up with the idea of having the community agree to accept a token that can be used to differentiate the value of one item against another. What this token is to be, how it is made, and how it is to be distributed were the questions the whole society on this isolated island had to agree to.
                      As a society, they were able to come to agreement about these issues, which led to the proper understanding that the issue of the island’s “money supply” was the property and responsibility of the islanders. But what this agreement did was raise other questions. How is everyone going to know if the tokens they hold are genuine tokens? And what is to be done if someone makes counterfeit tokens?
                      Suddenly, this small community is looking at some form of management structure to handle and oversee all these questions. As will happen in virtually any community, there will always be people willing and/or able to take on a leadership role, just as there will always be people who are willing to follow a good leader, or a bad one if it is to their benefit.
                      However, to get back to the tokens, out of fairness, it was agreed that everyone on the island would be issued with the same number of tokens to begin with. the islander agreed on a prorata system for families with kids, but the end result was an amicably common agreement. Naturally, as the island population grew so must the “money supply”. There were no rules set in regard to how items might be valued in respect to the tokens – it was up to the buyer and seller to come to an agreement as to what the item was worth. To start with, when most of the items were basic necessities, the system worked quite well. Naturally, as happens with human nature, some of the islanders were more industrious, or had more initiative than others, and hence, gradually accumulated many more tokens than they started with.
                      As a closed community, there was a genuine sense of each person having a responsibility for each other, and as is natural with human nature, some people are less capable than others. Thus it came about, that those people who were able to accumulate more tokens than they started with, agreed to return some of these to the management to distribute to the islanders that had run out of tokens. And so it was, that everyone survives and the island’s trade was able to continue, as everyone was able to be a consumer and help consume the products that were produced.
                      the community fully realised it was pointless to produce anything if it wasn’t going to be consumed. That would have been a waste of resources, a waste of energy and a waste of time.
                      The continuation of this experiment will have to wait until the next chapter.

                • When bankers lend out of thin air, real money is created. This can be spent on real capital improvements that can lead to increased production and income. The new money created by the loan is needed in the now-larger economy. It is ‘backed’ by an increase in real economic activity. The problem comes when the loan money is paid back out of this new activity. That repayment money does not disappear. It is not “destroyed.” I’ve paid back a loan with real money I scrimped and saved. No, that real money goes to fatten the wallets of the private owners of the bank. There is now more money in the economy than before the loan was made. Repayment does not cancel out the money created by the debt. This simple fact makes conventional economic models irrelevant. Those models obfuscate the truth.
                  I would be no better off with a promise to pay myself $1,000. However, if I gave you that IOU, you would definitely be better off. Especially once I paid it in full!
                  Similarly, banks do not need to pay themselves back money they created making loans that don’t perform.

    • You are in a bit of a quandary there Chris. A monetary sovereign nation/central bank cannot become insolvent – it cannot go broke – and it can always meet any commitments to which it is a party. A fiat currency has no intrinsic value/worth, and in truth isn’t backed by anything other than a guarantee that it isn’t counterfeit and is willingly acceptable by the society generally.
      Essentially, that is why it is crap to say the taxpayers bail out the banks, and therefore, are responsible for the debt. There is no way the taxpayers can ever repay the debts their Governments rack up on their behalf. All this accounting bullshit is exactly that – bullshit – manipulation of figures in a man made system that has no reality in nature.
      The simple fact is that “money” has only one single purpose – to be a convenient medium of exchange. The other fact is that only a Government is in a position to provide a universally accepted medium of exchange for any given society that comes with a guarantee it is genuine and not counterfeit. And that doesn’t matter whether it is in the form of hard currency or digital currency.
      Over the centuries, Governments have been derelict in their responsibility to their people in allowing the private banks to create the vast amount of their nation’s “money supply”. They have done this without any rational controls in relating their nations productive capacity to its consumption capacity. If a relative balance can be maintained between these key factors, and any population growth, inflation cannot become a problem.
      Essentially, the current system is fraudulent and corrupt, and cannot be reformed by fiddling around at the edges.

      • Chris:

        –Thanks for the effort to clarify. Something I’ve learned from this blog and its comments is that money & debt are exciting issues about which people have strong opinions. These issues are surprisingly not as cut and dried as one would expect from their at least in part mathematical natures. I strive to understand, but I am still really puzzled.

        “I’d like to try to convince you that accounting does actually correspond to the real world.
        Owned assets and debts are things which exist in the real world. If if you make two lists for a person, the first containing all of their owned assets and all of the debts owed to them, and the second containing all of the debts which they owe, you have a balance sheet.”

        –Yes, but most of the debt side of the balance sheet does not originate from the real world but rather comes out of thin air. Here we have imagination entering into our mathematical calculations. This hugely benefits private banks which create this imaginary money then expect to be paid back with money earned in the real world. Banks write up their concocted “debt” as a new “asset” they “earned” by the hard work of making an accounting entry. Actually that “asset” consists merely of having supposedly successfully snookered the hardworking entrepreneur or home “owner.”

        “I’d personally say that a monetary sovereign nation/central bank /can/ be (in fact, usually is) insolvent i.e. it has a negative net worth, meaning it has more liabilities than it has the assets which it can pay them with.”

        –Yes, nations, by issuing bonds in exchange for real world money, can accumulate huge liabilities, which, increasingly often, real world tax receipts cannot hope to pay back. So they roll the debt over to obtain at least a short term fix. I get that. But aren’t central banks quite different from nations? They don’t build roads and bridges. They are the lenders of last resort, but their loans are “assets” not liabilities, and they have few expenses. So how can a central bank have a negative net worth? Yes, central banks have been buying bad debt from private banks, but that bad debt was created out of nothing so why can’t it just go back to being nothing? Banks can always either go out and find better loan customers, or go ahead and shrink to fit a shrinking economy. The only thing wrong with this that I can see is rich people don’t want their ballooning “assets” to shrink. When they already have more than enough by definition or they wouldn’t have extra to invest for rentier profits! Here you see both the excitement and the confusion all this causes.

        “Interestingly, the money issued by a private bank (when it remains solvent) is far more valuable than government/CB-issued money. Its money is backed by the promise of borrowers to sell something in future which the holders of the money consider valuable.”

        –In other words, private bank loans are supposed to be backed by real world activity.

        “If the borrowers fail to repay their loans, the bank’s owners have to make up the difference, up to the limit of their capital. It is only if the capital is wiped out that creditors of the bank (such as deposit holders) suffer any losses.”

        –Here is the crux of my problem. Make up the difference to whom? Since bad loans were supposed to be backed up by real world income, but that income failed to materialize so the loans failed to be paid back, why not just write off bad loans instead of insisting someone pay for them? Surely banks don’t have to pay themselves back?! Or is it all just to make numbers on a page work out right? Work out right for whom? If the banks want to immediately make more money out of their uncertain loan-assets by selling more shares of bank ownership based upon these uncertain assets, too bad. They are behaving irresponsibly, and the buyers of their shares deserve to lose money. Not the depositors! Why a bank, which can create money out of nothing, would need to sell shares is beyond me.

        “.. if the net worth of the banks increases from negative to positive by the government bailing them out (i.e. transferring assets to the banks or removing liabilities [the bad loans that someone must pay?] from the banks), this must (as a matter of arithmetic) reduce the net worth of the rest of the world. You might not know exactly who will suffer the loss (or when), just as you don’t know who will suffer the loss when a criminal issues counterfeit money, but there is no doubt that /someone/ will eventually.”

        –You mean the whole world loses when governments take on banks’ imaginary bad-loan losses? Yes, if taxpayers have to pay real world money in exchange for made out of nothing money, their net worth is being sucked away. Where does it go?

        • Good questions posed there Chris. Just to clarify, I may have misled you with my reference to “Government/CB” – what I was referring to wasn’t the CB as currently set up today in most countries, but simply the official operating arm of a monetary sovereign nation that has their publicly owned bank to handle the financial transactions. That sort of bank pays for the infrastructure on behalf of the Government, and in that sense, “owns” the assets on behalf of the public. With this sort of bank there is no need to buy Govt bonds and issue currency – the Bank simply creates the legal tender necessary for any due diligent project or program, as approved by the Parliament/Congress.
          As for the bad debts floating around in the world today, there is no valid reason why they cannot and should not be written off. The vast majority of them are basically just book entries anyway, or numbers in a spreadsheet, and to the extent that virtually no bank in today’s world is in a position to withstand a “run” it shows how fraudulent and corrupt is the system “we” have allowed to be created.
          When you really get down to analysing these problems it seems to me the root cause is bad management – bad management on the part of Governments, bad management on the part of bankers, and bad management on the part of people in choosing and electing their representatives.

        • Sorry Susuru, I should have addressed my earlier reply to you rather than Chris.

        • Chris:

          You mean banks are obliged to actually fund the loans they make? No one would borrow money they couldn’t spend. The problem is: of those bank “liabilities” in the deposits formed from loan proceeds, up to 90% doesn’t come from real money from the bank but is created by digital entries at no cost to the bank. Yet the borrower is expected to work hard to pay 100% back with real money, not digital entries. This is hugely unfair. Why should private owners get this windfall?

      • Thanks for the response Chris, and I do fully understand the relationship between balance sheets and net worth and agree with your analysis. Where we are at odds is in our perception of “money” and its creation. The link you gave starts off with the deliberately misleading statement that has been perpetuated over the centuries – “Money is created, in the form of a bank deposit…..”
        The trouble with that statement is that it is accepted as true, and unfortunately, it does happen to be the way the financial system works.
        However, it only works because the Governments around the world let it work. When a bank creates a deposit it creates that deposit in the digital form of the nation’s legal tender. And who in actual reality, is supposed to have the sole authority to create a nation’s legal tender? The Government of course. Anyone else who tries to do so is a counterfeiter, so, contrary to your claim, it is the private banks who are doing the counterfeiting, not the Government/CB.
        In truth, if a society were run honestly, the only way money could get to the economy is by the Government buying products and services that are available. Hence every time a Government spends it is directly adding to the savings capacity of the private sector. Every time a Government taxes the private sector it is deliberately reducing the savings capacity of that sector.
        Another truth is that all “credit” is actually the property of the people because, only people have the ability to repay the advance as a result of their effort and initiative in the future.
        In 1863, President Lincoln knew how the money system is supposed to work, and he made it happen with his creation of the “greenbacks”.
        “The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers….. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.”
        And finally, the Government/CB does create a tremendous amount of assets via the nation’s infrastructure and public services whenever it creates and spends its sovereign currency that the public authorises it to control and create.

  9. Ellen, I have trouble grasping what you (and Werner?) mean when you say that “inflation did not result” in America following the trillion dollar giveaway to Wall Street’s bankster gangsters in 2009. Certainly at the level at which 90% of Americans live, inflation has been VERY SIGNIFICANT in our basic costs of living — housing, utilities, food, transporation. This is not altered by the lies that the Federal government and others tell about it. As we all know, these numbers — e.g. the consumer price index — are totally rigged: they are a hoax. In the real world, inflation in America for most Americans over the past decade and more has been DEVASTATING. Similarly, the prices of financial instruments — stocks, e.g. — have risen dramatically. So, WHAT exactly is it that are you talking about?

    • Hi, there are actually two definitions of inflation – inflating the money supply and price inflation. The circulating money supply has not gone up since QE, though that was its supposed purpose – to get more money into the real economy. Some prices have gone up, but it’s largely because of near zero interest rates, shortages, and other factors not originating from QE. Food went up in California because of the drought. Medical insurance went up for many people because of Obama care. Rents went up because hedge funds and other big investors could capitalize on the very low interest rates to buy up properties and use them as cash cows. The stock market went up because interest rates are so low on bonds that savers are moving into stocks, and because the Federal Reserve is now paying interest on bank reserves, which they can use as collateral in the repo market and invest this leveraged moneyfor their own accounts. Housing is going up, but that was after a radical plunge. It’s just drifting back up to where it was.

  10. “The FIRE economy (Finance/Insuranace/RealEstate) are at the top, but the same behavior is throughout the populace. The top 1% only reflects the behavior of the 99%.”

    This time is different: consumer moral hazard has emerged over the last ~20 years. It’s okay for the banksters to depend on “end-of-a-cycle” moral hazard, but once the populace gets wind of it, it’s game over.

    IMHO, precepts such as the ‘Balance Sheet Recession’ are to blame for this moral hazard collusion between FIRE & the populace.

  11. I’ve read your work for years and I just can’t cope with the naivity any longer. Werner’s QE works in the short term at the massive cost of moral hazard, meaning IN FUTURE the bankers know they will never have to face the music. It’s not about the past (we have to bail them out anyway so it’s cost free!). It’s about what this says about the system. If you QE you must nationalise the banks. You must do it at the same time as Sweden did to remove the current crop of bankers and send a message. If you don’t do that you are a banker shill like Werner and closet socialist. This solution only leads to huge govt-banker cabals. You think QE in the US was cost free???? The Trump and Sanders supporters know that’s rubbish with QE allowing the bankers to take their homes. Shocking and utterly corrupt. If Japan is a shining example go live there. You will see QE has created a nation of zombies.

    • ” If Japan is a shining example go live there. You will see QE has created a nation of zombies.”
      Japan may be considered a nation of zombies to some extent, but it is not because of QE!

  12. […] Posted on December 21, 2016 by Ellen Brown […]

  13. […] The Italian Banking Crisis: No Free Lunch – Or Is There? […]

  14. […] — source ellenbrown.com […]

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