Building on yesterday's blog, I recently got into a long debate today about money and the meaning of life.
It’s the sort of debate I often have after too much wine and not enough arguments.
My friend was having a go at me for working with and supporting the banks, and exclaimed: “how can you justify banks being bailed out by me and my friends as taxpayers, huh?!”
I said it was easy and, after further heated discussion, tried to simplify everything.
As usual, I started out with the discussion that money was created 5,000 years ago by the governing authorities of ancient Sumeria.
It was created because the barter system had broken down.
There was an abundance of goods for some and not enough for others, so anarchy prevailed until the priests invented a way to exchange and trade with something other than goods and service.
Hence, money was created to reward work, pay for surplus and enable trade.
And all was good.
In other words, money is a fiction.
It is a creation of governments to maintain a civilised society.
Now move on 5,000 years and the model hasn’t changed much.
Governments issue money via central banks to control the economy upon which society operates.
The banks trade with the citizens, their firms and governments to enable a smooth transfer between each.
The banks create and manage risk, to further create progress and prosperity for the government and their society.
The fact they create risk is why they are licenced, in order to protect society from any issues.
By this point, the argument had got pretty dull as the dinner table had fallen asleep.
Nevertheless, I ploughed onwards and downwards.
So first, we must remember that money is a fiction.
It is a fiction created by governments to control societies.
The banks are the governments’ instruments for managing the fiction.
And that is why bankers and politicians are joined at the hip:
the more the banks can create a growing and successful economy;
the happier the citizens who are earning more;
the more likely the citizens are therefore going to be to vote the politicians back into government so they keep their jobs;
the more the government encourages the banks to generate more of the fiction of money to support a growing economy;
the more the banks take risks to be nice to the politicians; the more the banks create a growing and risky economy;
and so on and so forth.
Eventually, there will come a day of reckoning which is why economies go through boom and bust cycles.
Come the day of reckoning, most governments can deal with it, by creating a lot of short-term cuts to the economy.
Unfortunately, this time, the day of reckoning hit most governments and their bank pawns, in most of Europe and America.
Although I was now just talking to myself, as the dinner table brethren had left and retired to another room to talk about the Ryder Cup, I ploughed on in dialogue with my rapidly cooling desert (sticky toffee pudding apropo).
So, in summary, the reason why taxpayers have to bail out banks is that banks are run by governments.
They are the pawns of politicians to maintain stable economies, and are there to manage the fiction of money which the government creates to manage societies.
That is why they are licenced by governments and the licence ensures both trust and protection for citizens.
When a bank goes bust therefore, the government is liable for the banks’ failure.
And how can a government fund a bank failure?
Only through taxation of citizens.
Hence, at its simplest level, that is the reason why Cyprus threatened to tax citizens’ savings to save their bank and why our government created fictional money, in the form of Quantitative Easing, in order to save our banks.
It is all a fiction.
But a very important one as, without it, we just barter with each other and revert to anarchy.
Now who stole my spoon so that I can eat this sticky toffee pudding?
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...