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

Financial sector is bloated

um I just want to have you to have a

look at this this graph to frame it it's

UK private debt since 1880 you can see

what happens around the Great Depression

and then suddenly Thatcher comes the

Power private debt takes off F

financial sector a bloated or a dominant

financial sector its effect in your view

on the real economy first of all it's

interesting that um the national income

accountants who think a lot about the

overall economy how to measure it and

how to you know structure the dat 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 um and it's it's been so

difficult that essentially the um

National accounting statistic have to

make up a fictional value and just add

it on to GDP and say okay that's we can

say that maybe is is what the financial

sector is doing because essentially

there is no value added 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 is is the 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 start with you

well exactly um even the mainstream

textbooks in finance Banking and macrom

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 the salaries that are

being paid you know famously very

high which is very strange if they're

just intermediaries Lally 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

account for 90% of

deposits which is one of the most

concentrated banking systems in the

world in Germany um 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 is a general tendency when

an organization gets large and larger

and larger and gets very big um

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 know all these rights

of this square mile as a sovereign state

you know all these things and the queen

needs permission to go there right

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 we've done a study 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 is decentralization one has to

break up the the financial sector and um

have much smaller units because small

Banks Community Banks are locally

accountable you can't suddenly do a

crazy project or corrup you know big

corruption because people see what

you're doing but I think you'd argue for

decentralized banking system wouldn't

you even though you're a city devote

without a doubt but because it's anti

Richard Like Richard to comment on this

because I am and as I'm sure Richard is

but we've had our Metro Banks we've had

our older malls we've had our one

savings Challenger Banks all the

Challenger Challenger Bank we've had

handles bank or handles bank and done a

fantastic job but it's still tiny

exactly now they will stay tiny the ones

um that are UK Challenger Banks and that

are profit oriented and you you know why

cuz 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

Banks create money

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 uh

decentralized flatter structure more

resilient how do you begin to uh talk to

the public or the political class about

achieving those goals essentially you

know if if um we want to produce

something we need funding so there was a

role for Bank s in almost everything

that's happening in the economy but what

exactly is that role I just quickly I'd

like to reflect on that banks are being

thought of as intermediaries but this is

not really what's happening Banks what

are they then the creators of the money

supply so you're firmly of the view that

Banks create money out of th a yes well

I I produced the first empirical studies

to prove that um in the 5,000 year

history of banking banks are thought of

as uh deposit taking institutions that

lent money the legal reality it is Banks

don't take deposits and Banks don't lend

money so what is a deposit a deposit is

not actually a deposit it's not a

bailment it's not held in custody U at

law the word deposit is meaningless the

Law Courts and various judgments have

made very clear if you give your 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

you name then so Banks borrow from the

public

okay so that much we've established what

about lending surely they're lending

money um no they don't Banks don't lend

money Banks again at 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

legal E I want a loan I want a loan y

fine here's the loan contract here's the

offer letter and you sign at law it's

very clear you have issued a security

namely a PR Miss note and the bank is

going to purchase that that's what's

happening at put it in layman's terms

what does that mean it means that um

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 purchases my

promissary note but how do I get my

money I want you know it's a lo I want

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 will transfer it to your

account that's wrong because no money is

transferred at all it's already 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 owes you money

and its record of the money it owes you

is what 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 promissary 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 um anyway I I don't have the

so 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 this money creation

is in line with the creation of new

goods and services uh 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 um

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

problems and with low inequality and so

countries that achieved this that the

banks L mainly for productive purposes

whether it's Germany in much of its 200

year history or um in the last century

the East Asian economies where Bank

credit was largely for productive

purposes then you're fine but there's

two more cases I quickly need to point

them out because that's the contract

just just just clarify that that

inequality is is significantly lower

lower inflation is low yes

and the real economy booming yes that's

when Bank credit creation is focused on

um productive lending for productive

purposes as opposed to speculation and

and asset price as opposed to there's

two other types if banks create credit

for consumption it's obviously what's

going to happen you suddenly have more

money create 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 but what what's less well

understood is and what's the biggest in

UK um it's probably more than 70% of all

lending um actually way more than that

um is Bank credit creation 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 they're constant

aren't they 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

Banks create inequality

chart where you show you know asset

prices land prices property prices in

the UK and it will match very closely as

as 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 is dominant it

strikes me that 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 is that right

that's right um we need to look at where

the money is going that makes a whole

world difference so if money is is Bank

credit is extended for productive

purposes you're fine you get a good

economy no inflation and financial

stability and also you don't have this

inequality problem and do you think

there should be different Capital ratios

towards each Capital the whole Basel

Capital approach doesn't work why

because it's it's premised on the idea

that banks are just Financial

intermediaries but they're not they're

money creators we need Bank regulation

that recognizes reality of how the banks

actually operate so what you're saying

this is a regulation problem clearly yes

it's a regulation problem that's right

we need a 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 asset Bubbles and banking

crisis which are all driven by this bank

credit for financial transaction you

leads to this asset boom and it's it's a

game of musical chairs you know you have

to play it it's rational to play it

while the music is playing which is how

asset prices are driven by ever more Bank

credit for financial transactions the

moment it stops asset prizes fall you

get the first bankruptcies Banks get

risk revers 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 um

the simplest form of bank credit

guidance is to Simply ban Bank credit

for um Financial transactions it doesn't

mean Financial transactions are banned

no let the speculated speculate and let

them even borrow money but not from

banks that would make a whole world of

difference who do they borrow it from

well they can issue bonds or you know

borrow in the markets whatever they want

but they shouldn't get access to the

public privilege of money creation you

see I you mean and that creates the

problem that creates the boom Cycles but

in some countries they've succeed eded

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 so Germany with 70%

of Bank call the lers Banks being no not

the L Banks the smaller ones the 1,500

FKS bank and R Eisen Bank they're

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 stun 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 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 wants stable

growth none of those boom bust cycle

banking crisis public money used to

bailout Banks people don't want that in

Germany these Community Banks it's very

because 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

complex principles are terribly simple

it is very simple and although you

although you're a little defeatist I'm

not maybe I'm defeatist but but I like

it but it's just the idea of how can I

put it getting getting through the

regulatory they are so reluctant but

that's why hard work that's why we

that's why we got you in we're going to

we're going to have

you I think I have to say this has been

brilliantly explained has the UK got a

finance C is it a trick question cuz the

UK doesn't have Finance the city of

London has and is not part of the UK

good

answer good answer it's International

he's right the city of London is outside

the United Kingdom do you know that it's

it's really shocking and therefore it's

also not part of the EU which explains

the although 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 it's the banks that have the

votes right right per Offa you know how

you How do you start unpicking this

puzzle I never knew that's very useful

piece of information it's not part of

pretty dangerous piece of information

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's since you know

1688 I have to make a not since the

corent invasion