Thursday, September 25, 2008


(Week 9 - Thursday, Sept. 25)

In the last two columns I have described the lower and middle zones of the image I am using to describe the fractional reserve formula that governs how banks can create and issue new money (a stone block wall which resembles a sort of tall pyramid). The lower zone consists of a foundation course of money on deposit in the banking system which are the proceeds of borrowing by the Federal government, and a number of layers stacked on top of that which are composed of the money on deposit of the banking system's biggest customers (large corporations, major public entities, the mega-wealthy).

Above the base layers are the middle courses, where we find the bank deposits of the hard-working, bill-paying, family-raising wage earner, small businessman and consumer (i.e. the "middle class") who perform the bulk of the wealth-creation work in society.

The Sub-Prime/Revolving-Credit Courses:

The top zone (upper courses) of the fractional reserve pyramid is made up of the money on deposit in the banking system of the people who are borrowing to live. Any pretense of this being funds that are "invested" is virtually gone. This is the level of "finance" where people live from "paycheck-to-paycheck" (if they are fortunate), and "loans" are taken out to buy groceries, put gas in the car, and pay for uninsured medical care. These are the folks who live in the financial purgatory of sub-prime mortgages, credit card dependency and payday lenders.

Whether consumers in the sub-prime/revolving-credit zone default on their "debts" is of little consequence to the monetary system as a whole. Business at this level is all gravy to the banking system, with little cost, except printing and postage on the billions of "new offers" they send out in the mail. That specifically is why people in the midst of a major credit-card "debt" crisis continue to have their mailboxes stuffed with new offerings, even from the same companies they are in arrears to. If the consumer went bankrupt the "debt" on these cards would lapse, but all the money that could have been squeezed out of their beggared estates would by that time have been collected anyway. Fresh "credit money" created out of thin air could be safely issued again, next time on even harsher terms.

For a system that depends ostensibly on the ability of people to pay their "debts", the controlling factor in the pressure-relieving bankruptcy game is not as simple as "loan repayment, or no", but rather the stratum in which any default occurs. In the base strata of the monetary pyramid, institutional default will convulse and even threaten the existence of the system itself (at least that is the fear fed by the fractional reserve formula). As one moves up the pyramid, this default-phobic reflex becomes progressively less operative to the point where in the top zone the banking system does not even want its customers to pay up. That is why privately credit card companies refer derisively to their customers who do pay their bills in a timely manner as "deadbeats". Their business practices result in keeping the consumer running ever faster on a tread-wheel of revolving credit, at increasingly harsh terms, the end of which is almost certain to be bankruptcy.

It should be noted that the soundness of the financial blocks in the bottom row still depend, however indirectly, on the performance of some of the lesser grade courses on top. Their portfolios are ultimately "debt"-based, and so depend on real people being able to "perform" on their financial obligations. A certain amount of rot can be tolerated, but let that be the problem of the middle managers in the upper layers. Of late, however, these prime players have had to reach further up into the realms of "sub-prime and revolving debt" in an attempt to keep their own stones in the "fractional reserve" wall patched up with enough money on deposit.

The perverse logic of this whole scheme is that if the common man goes bankrupt, even if millions do (especially in the sub-prime/revolving-credit zone), it is treated in the world of high-finance and the politics that attend it mainly with lip service, because their "loan" proceeds are not strategic stones in the wall (not the "reserves" for much "credit money" creation), but if a major bank fails it threatens to bring down the whole credit structure. The crazy upshot of this situation is that there is a degree of reality to it; as long, that is, as we the people accept the dubious "financial realities" of a monetary order that is based on the "fractional reserve formula" as propounded by powerful media, financial and political interests.

And so the public may acquiesce (if history is any guide) to these "bailout" schemes, albeit amidst indignant demands for more "accountability" in the system this time around. Those who labor to make mortgage payments, sub-prime and prime, are losing their homes by the millions, while Fannie Mae and Freddie Mac (the financial agents for those "investors" who "own" their mortgages) are getting hundreds of billions of dollars in "bailout" money. The fortunes represented by the lower courses of the fractional reserve pyramid scheme are thus secured, the banking system is "saved", and the system is made ready to go another round of "debt"-money expansion.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites: