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The Elephant In The Room
The real reasons as to why bank regulations will not be able to fully control banks.
“The elephant in the room” is an English expression used to describe a scenario where an obvious issue that is known to everyone is seemingly ignored, mostly because it is an uncomfortable or controversial topic.
Exactly this scenario occurred at probably one of the most renowned panel discussion as of date regarding the finance – and banking crisis, namely an event organised by the Bündnis90/Die Grünen on the 28th of May 2013 in the Haus am Dom in Frankfurt, Germany. The event was called “ „Boring Banking – Vom Bankbeamten zum Investmentbanker – und zurück?“
Two rounds of discussion panels were held in the forenoon and one in the afternoon, both of which were attended by very high-ranking banking officials.
One of the topics was “Do we need less restrictive banking regulations?” which was discussed by Andreas Dombret, Member of the executive committee of the Deutsche Bank and department head for financial stability, Andy Haldane, executive director for financial stability at the bank of England, Anshu Jain, co-board member of the Deutsche Bank AG , and Gerhard Schick, MDP Bündnis 90/Die Grünen, speaker for financial politics.
The afternoon round of discussion with the topic “The European bank union – which community systems are additionally necessary?” was led by the speakers Jörg Asmussen, member of the directorate of the European central bank (ECB), Ludgar Gooßens, CEO of the Deutscher Sparkassen- und Giroverband (DSGV) and Thomas Losse-Müller, state secretary of the treasury of Schleswig-Holstein.
First Round of Discussion
After the first round of discussion was closed, the attendants and spectators were given a chance to pose questions for the panel, one of these individuals started his line of questioning with the phrase: „I would like to address the elephant in the room“ and asked the panel whether merchant banks do in fact create money out of thin air, and if this was the case, whether this practice should be regulated and again if true, with what kind of ultimate aim.
The question was “answered” only by the co-board member of the Deutsche Bank AG, Anshu Jain. He showed his appreciation for such a direct question and pointed out that it was a good question with definite merit.
He then went on to outline that when his two sons ask him about the Deutsche Bank’s business practices he tells them that the Deutsche Bank uses money from customer’s savings accounts in order to give out loans to other customers who need them („we are turning savings into capital“).
Anshu Jain’s answer later caused Mr. Gooßens, CEO of the Deutsche Sparkassen- und Giroverband (DSGV), too rather smugly remark that he was a bit surprised to find out that the Deutsche Bank actually operates quite similarly to a savings bank.
According to the empirical evidence presented by some of the leading economists in the field of money creation, approximately 95% of the (book) money that is given out by commercial (and savings) banks in the form of loans to their customers is in fact generated at the bank through simple booking processes as part of the the balance sheet extension effect.
Money creation can be traced back to lax accounting laws and the false interpretation of such laws! This has been confirmed by an open letter from an internationally renowned auditor which included a plea for a complete overhaul of these sets of rules.
Mr. Jain’s answer lets us assume that the Deutsche Bank is planning on increasing the amount of book money in circulation. The risk of inflation and another economic bubble, especially on the so called asset-markets (real estate, shares) will at the very least not be reduced by such practises. It also means that current loan takers and customers are still paying interest on “thin air” loans and putting up real securities in the process.
The exact methods used by commercial banks to induce money creation in the process of giving out loans can be found in the GHZ-Themenpapier "Es werde Geld!" and is elaborated in further detail here ("1. Geldschöpfung über Kredite")
Second Round of Discussion
Just like in the forenoon, the attendees of the afternoon round of discussions were given an opportunity to ask questions for the panel of board members (see above). This round of discussion took a much more European approach to banking regulations.
This time the same individual asked for the microphone yet again and this time used his questions to address issues such as quantitative easing (i.e. increasing the money supply), where he pointed out that in this particular area an ever steadily growing bubble of book money transactions has occurred, which has also been acknowledged by a large number of bankers as being the main culprit in causing the financial crisis and preventing the system from fixing the issue. [Lord Adair Turner] Teufel oder Schulden? http://blogs.faz.net/fazit/2016/02/10/was-ist-schlimmer-schulden-oder-der-teufel-7291/ He then asked whether this phenomenon might have come about with the knowledge and approval of auditing and regulation authorities and what they intend on doing about it.
Mr. Asmussen took it upon himself to answer and went on to admit that the amount of money supplied by the European Central Bank, known as M0 to professionals in the sector, has definitely seen a large increase in order to deal with or at least reduce the impact of the most recent financial crisis. However according to the ECB this did not cause an increase in inflation. He then talked about another quantitative easing scheme, namely M3, which according to him had only grown by a smaller margin. No further increases in M3 would be allowed and therefore this scheme would not pose another inflation risk.
[Wikipedia https://en.wikipedia.org/wiki/Money_supply]
During June 2012 Professor Richard A. Werner also took it upon himself to explain the concept of money creation to J. Asmussen at around the 35:30 mark.
Follow on even on the 12.12.2014 titled "Der Weg zu einem besseren Finanzsystem"
At another event organised by Bündnis90/Die Grünen on the 12.12.2014 titled "Der Weg zu einem besseren Finanzsystem" these topics were brought up again.
The keynote speech for this event was presented by Adair Lord Turner.
Adair Lord Turner used to be the chairman of the British financial conduct authority from 2008 to 2013 and board member of the Bank of England. He specifically pointed out that the only way towards a better financial system can only be discovered once we have acknowledged that private banks make money and not lend it. Others present at the event, including chief economists for KfW and Heleba, confirmed these circumstances as being true once they were pressed on the issue. More information can be found in the Deutsche Bank’s training materials: https://www.bundesbank.de/Redaktion/DE/Dossier/Service/schule_und_bildung_kapitel_3.html?notFirst=true&docId=147694
Where Deutsche Bank thinks the next financial crises could happen?
Central banks unwinding quantitative easing, potential crises in China and Italy, elevated global trade imbalances and a backdrop of populism: Just some of the potential sources of the next financial crisis, according to the latest research from Deutsche Bank.
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