Hopefully by now it is a bit clearer how the banks work – that is if you were not already enlightened! But let’s reduce it to some simple numbers and you will see just how profitable it is for banks to lend money. Before that, sit down, pour a stiff drink and don’t get too upset. This has been going on for years!
Suppose you borrow £10,000 over 4 years – to buy a car for example. Assume that the bank will charge you 8% per annum interest – probably as good as you can get in the UK at the moment for an unsecured loan. A repayment calculator will show you that the monthly payment for this is about £244.13 and that you will pay in total £11,718.24 with £1,718.24 of this being interest.
Of course as far as the customer is concerned, they just see the 8% or so and this seems reasonable. If you borrowed the money from under Uncle George’s mattress, you would of course want to pay him some interest because he couldn’t use the money – he would be ‘out of the money’ as they say.
But the profitability for the banks is a completely different kettle of fish.
Under fractional reserve banking, all the bank actually has to have to lend this money is 10% of the sum. So in order for the bank to write this loan, they have to have only £1,000 – the rest is created in the belief that you will pay it back, which you do because otherwise you will get a bad credit score and end up like Greece.
What is the real interest charged – the rate that the bank sees on the actual money that they have to commit to your loan? Again back to the rate calculator and you will see that the interest charged by the bank based on the actual money lent, or £1000, is an eye-watering 292.95%! And of the total repayment of £11,718.24, all but £1,000 is interest. You don’t believe me? Do the sum yourself – there are enough online interest calculators available. First calculate the monthly payments for the loan then copy that number back into the calculator altering the amount lent from £10,000 to £1,000.
What would the interest rate have been before the big crash of 2008 – when the banks only had to have 3% at call? Again a little sum shows you that it is 976.52%. Do you see why the banks just ‘lurve’ fractional reserve banking?
Do the same with mortgages. Suppose you have a £100,000 repayment mortgage at 4% over 20 years – quite a modest one for the UK. This works out at £605.98 a month. Now realise that because the actual money that the banks had to have was just £10,000, the real interest rate is revealed as 72.72%. Nice, hey? Before the crunch it was 242.39%.
Now to credit cards – but first freshen that drink or make it a double.
Consider a card balance of £10,000 with a monthly rate of 2% as quoted. Suppose only the minimum payment is made and this barely covers the interest so the balance hardly changes – it happens! The apparent interest rate is just 26.8% – steep but that is the rate charged by many cards. Let’s forget the trivial amount they charge the shopkeeper as well – although at up to 5% that is not chicken feed to hard-pressed traders.
What is the real interest rate? A simple calculation shows that the real interest rate is 791.6%! And before the crunch – are you still sitting down – it was 45,839%. Yes, over 45 thousand percent! Phew!
Put this another way. In ONE YEAR they multiplied their money 460 times. And in this very simple scenario, you still haven’t paid a penny of the debt. Nice one.
Imagine you are a bank. You spot a credit card – not a person’s but a system that has a lot of card holders. Now generally about half of accounts are cleared every month – boo hoo (well the banks still make from the traders so no tears please!). But assume that all these customers are rolling their balances over. What is that book worth? Even if they pay the full amount, suppose £1billion, they can then do what they like because credit cards are essentially unregulated. Maybe the card is charging 1.2% a month which amounts to 15.4% a year, a ‘reasonable’ credit card interest rate. That will amount to 289.6% a year or 2.9 times the money. Now suppose the bank is a little hard pressed and wants to make some money to repay Uncle Sam or whoever has bailed it out with the taxpayers’ hard earned cash. So over 12 months it doubles the interest rate for no real reason. The return jumps to 1221% or 12 times so hello £12 billion. Bye bye Uncle Sam – keep the government out of our books please! Can you think of such examples? Because I can!
Which of these types of lending do you think that banks prefer? Well credit cards, particularly judging by my junk mail. But the truth is – with fractional reserve banking they love all lending. It’s what feeds their massive profits.
At the moment they are not lending so much, partly to shore up their walls in case the worst happens – after all they don’t want to be caught with their trousers down again – but I suspect more because they are playing with us. They have the only game in town so they are threatening to take their ball away. Of course if they don’t lend, they will take a hit on all their investments but there is enough fat for them to take a lending holiday, reduce their tax bill and, best of all, it gets the politicians down on their knees begging them to lend. What a nice position to be in!
Yet of course banks don’t actually make anything, they don’t dig any oil out of the ground, carry out life-saving operations, invent new gadgets, grow the food, care for old people, sweep the streets or have anything to do with the goods and services that are – or have become – essential to life. No, they just handle the money that enables these things to be done. So they are essential as I showed last week but we have got it all out of balance – it’s not so much money that makes the world go round but money that puts the banks completely in charge. And do you wonder that financial institutions have ended up owning everything, including us? This is why the banks must be brought in from the heat, why some sort of control must be exerted upon them and why I have made the suggestions in my earlier posts.
Is it any wonder that people are fed up with the banks and have taken to the streets, even in Britain where a complicit government has not exactly helped? Do you expect your government to do anything about it?