Broke bank mountain

“During the 17th century, Scottish investors had noticed with envy the gigantic profits being made in trade with Asia and Africa by the English charter companies, especially the East India Company. They decided that they wanted a piece of the action and in 1694 set up the Company of Scotland, which in 1695 was granted a monopoly of Scottish trade with Africa, Asia and the Americas. The Company then bet its shirt on a new colony in Darien – that’s Panama to us – and lost. The resulting crash is estimated to have wiped out a quarter of the liquid assets in the country, and was a powerful force in impelling Scotland towards the 1707 Act of Union with its larger and better capitalised neighbour to the south. The Act of Union offered compensation to shareholders who had been cleaned out by the collapse of the Company; a body called the Equivalent Society was set up to look after their interests. It was the Equivalent Society, renamed the Equivalent Company, which a couple of decades later decided to move into banking, and was incorporated as the Royal Bank of Scotland. In other words, RBS had its origins in a failed speculation, a bail-out, and a financial crash so big it helped destroy Scotland’s status as a separate nation.”

– From ‘It’s Finished’ by John Lanchester, in the London Review of Books.

For the last two weeks, Channel 4 has been running a documentary series, ‘Bank of Dave’, in which down-to-earth Burnley van magnate Dave Fishwick has attempted to establish his own bank. (You can watch his David vs Goliath struggle here.) The premise sounds plausible: offer depositors 5% interest (as opposed to circa nothing); attempt to prime the pump of the local economy by lending to credible small businesses otherwise ignored by the High Street majors; give any profits after overheads to charity. But as the irrepressible Dave soon discovers, getting a new banking licence in the UK isn’t easy.

‘Bank of Dave’ has obviously been, albeit inadvertently, deliciously well-timed, arriving on our television screens accompanied by increasingly shrill coverage of interest rate rigging and then money-laundering by large commercial banks. And the man himself is comedy gold: an effervescent self-made northern millionaire with a penchant for bananas and a healthy disrespect for banks and the UK regulator.

In a brief exchange after Episode 1, Nick Reid on twitter suggested the show was “naïve populism” and voiced a concern about Dave’s desire to bypass regulation and lend on “intuition”. The second charge is easy to address: it’s Dave’s own money, and if he wants to risk it on “intuition” then he should be free to do so; the desire to bypass regulation is an understandable response from any red-blooded entrepreneur to the spirit of non-engagement apparently practised in the show by the FSA. As to the first, well, yes, the show and its protagonist are unashamedly populist, but the criticism seems to conflate the medium with the message. This wasn’t ‘The Ascent of Man’, after all. And the problem with banking is that it’s a deathly dull topic that covered in almost any other way would have viewers switching off in droves. If Dave Fishwick’s battle to establish his own High Street banking business has made even one individual think about why our financial system is currently what it is, and how it might be better, it has not been a waste of anyone’s time.

What’s frustrating about the banking debate is how narrowly focused most contributors are. Critics of the commercial banks loudly vent their outrage at the covert manipulation of interest rates, for example. But almost nobody thinks to question the overt manipulation of interest rates on the part of the Bank of England under its current governor, “Sir” Mervyn King.

It is generally accepted that the central bank should be allowed to set interest rates. Since UK base rate is now being held at 0.50%, explicitly to help the banking sector at the expense of all non-bank members of the population who are unable to earn an economic return on their savings, one might ask why we take this official rate manipulation for granted. (One would also ask why the economically critical business of saving is being so offhandedly crushed in the name of banking expedience.) Why, for example, do we need a central bank at all? A typical if feeble answer is that we need a lender of last resort. To which the answer is: why? Why do we need a government-appointed entity to support banks that get in over their heads (see RBS, above)? A typical answer is that if our banks start failing, our society starts going down the toilet. (It already has, but never mind.) So now we have the worst of all possible worlds.

Our banks are already failing, in the sense of no longer functioning according to the principles of offering an economic rate to depositors and offering economic funding to borrowers. (See references to Bank of Dave, above). The last government was too chicken to nationalise the most egregious culprits, so we have ended up with a handful of quasi-nationalised but putatively still private banking group zombies that appear to be being run for the sole purpose of being granted dollops of money that they are free to hoard whenever the Bank of England deems it appropriate to depreciate our currency some more. So if our banks were small enough and free to fail, a) we would have no need of the Bank of England and b) we would have no need for banking guarantees. Banking deposit agreements would simply come with a giant ‘Caveat Emptor’ on them, and depositors might be able to start earning a positive real interest rate on their savings again.

Abolishing the Bank of England and its core functions (or in the US, the Federal Reserve, as Congressman Ron Paul has repeatedly urged) would have the happy and non-trivial side effect of reintroducing something akin to sound money into our economy, rather than a) live with permanent inflation and b) have our entire economy held hostage by an unquestioning submission to private banks that have shown they do not necessarily have anyone’s interest at heart other than those of their own senior employees. One would call the bankers scum-sucking bottom-dwellers, were it not that that would be an insult to scum-sucking bottom-dwellers.

One hopes that Dave Fishwick’s somewhat quixotic campaign to establish a “new type of bank” (i.e. one that lends) will trigger a wider debate. But what is urgently required is an appreciation of how our monetary system works by members of our parliament. One suspects that such understanding is not widely distributed within Westminster. When MPs start to appreciate how and why our entire economy is being held in thrall by a narrow and dysfunctional banking elite perpetuated by a dysfunctional and inherently inflationist state central banking money monopolist, they may start to appreciate why a growing number of investors are seeking protection from the activities of their very own banking and financial regulators.

If you would prefer that the Bank of England did not attempt to destroy our currency and economy through permanent QE, feel free to write to your MP along these lines. Feel free to send him or her a copy of Murray Rothbard’s ‘America’s Great Depression’, which shows in straightforward terms how politicians’ attempts to “solve” recessions by continually taking the soft political option (or by pursuing highly selective “stimulus” inevitably paid for by some or other disenfranchised part of the electorate) end up exacerbating and lengthening them. Feel free to include a link to Jörg Guido Hülsmann’s excellent history of money creation and associated currency debauchery on the part of the state, The Ethics of Money Production (PDF).

And raise a glass to Dave Fishwick. Dave, do you have any idea what you’ve done?

This article was previously published at The price of everything.

10 Comments

  • Paul Marks says:

    The Darien story used to be well known – but there an inablity to draw lessons from this failed “public-private partnership” with its grant of monopoly and promise of government backing drawing in investors.

    Many years later (later 18th early 19th centuries) there were large scale projects in the Highlands and other parts of Scotland – roads, canals, ports and so on. To try and copy England – accept….

    In Scotland it was done by government (in theory London based govnerment – but Scottish policy was determined by leading Scottish families) taking the lead – and a (modern sounding) mixture of private and public finance.

    The roads and so on were weill built (often by Thomas Telford) – but the plan was a economic failure, the Highlands remained depressed, and all that was “achieved” was the bankruptcy of those landowners who had gone into partnership with the government – some tried to save themselves by desperate measures (one reason for the “Highland Clearances”), but went bankrupt anyway.

    This failure seems to have no impact on elite Scottish opinion – as can be seen when one of the leading members of the Scottish elite was made Governor General of India. His vast projects (roads, telegraph….) had noble aims, but had to be paid for.

    And it was the taxes that were needed to pay for his grand projects that were the real cause of the Indian Muntiny – although he was out of India by the time it broke out.

    As for the Bank of Dave…..

    Having made critical remarks about some Scots I will counter balance them with a positive sentiment.

    As Adam Smith said – I am very wary of those who claim to be trading for “the public good” (sincere or not).

    Show me how “Dave” profits from his actions HIMSELF and I might listen to what he has to say.

  • Tim Price says:

    By definition an act of apparent philanthropy is not profit-making. (I note there’s also a book out.) But why assume he’s out to make a fast buck ? He’s a van salesman, not a banker. Naive populism or not, the documentary raises some important questions that I hope will be developed in popular discourse.

    • Paul Marks says:

      You mistake me Mr Price – my fear is that he is NOT out to make a buck.

      If he wants to give money away from a productive business that is one thing.

      But a business (in this case a bank) that is run to “stimulate the local economy” – is a misguided idea, as Adam Smith pointed out.

      Also we are back to our old “friend” the idea that banking is there to “stimulate the economy”, not to lend out real savings to people likely to pay them back (with interest).

      Of course David may not run his bank this way – but then he should not use this language.

  • Paul Marks says:

    In short – a bank is not (and should not be) a charity.

    Money lending is a business – and a grim one.

    Often the most decent thing a banker can do is to say “NO” to people looking for a loan.

    How do you attract savings?

    By offering two things.

    As much security as you can.

    And.

    As high interest rates as you can.

    These two things are in conflict. As (for example) local councils who went for high interest rates from banks based in Iceland did not seem to understand.

    As the people who are prepared to offer the highest interest rates for loans (so that one can offer the highest interest rates to the savers) tend to be the people least likely to pay the loan back.

    They are the DESPERATE people – otherwise they would be able to get money at a lower of interest.

    All of the above tends to get forgotten in a world of “deposit insurance” and “credit expansion” (government led or not).

    The money lender is no longer seen as hard, flint like, figure.

    But that is what a money lender SHOULD be like.

    For the nice illusions collapse eventually.

    Sooner or later what Kipling called “The Gods of the Copybook Headings” turn out to be real.

  • Tim Price says:

    I think we are destined to disagree: part of the point of his endeavour is for the bank to be a not-for-profit concern. If you don’t believe in this as a concept there’s not much more to be said.

    • Paul Marks says:

      I think you are right about agreeing to disagree Tim.

      I do not know the details of this project (if I did know the details I might be supportive of it) – I just hate the noise around it.

      “Helping the community” and (even worse) “stimulating the economy” is not what money lending should be about.

      And a banker lends out (mostly) the savings of OTHER PEOPLE (their own savings make up a small percentage of the total).

      So how is this going to work?

      If he is being kind – i.e. lending out money at a lower interest rate (or with less security) than other banks, then he is ripping off the savers who entrust their money to him.

      For they must then have lower interest rates (and a higher chance of losing their money).

      Unless the whole thing is NOT a real savings lending operation.

      If it is a “credit expansion” and “deposit insurance” outfit then I understand (and duely vomit).

      As for “non profit”.

      That is a small percentage of turnover.

      And there already are nonprofit lenders.

      The Cooperative Bank (well at least no shareholders).

      The remaining mutual Building Societies.

      And Credit Unions.

      This scheme appears to be a television stunt. Although, I repeat, I do NOT know the details (so it may be just being presented in a very unfortunate way – with lots of talk about “helping” people and other stuff that a money lending is NOT about).

      An honest money lender (especially someone who is lending out money that is mostly not his own) should NOT be a popular person.

      Even if they are “non profit” they should be regarded as evil skinflints by the “local community”.

      If they are not regarded as evil skinflints – then they are not doing the job correctly.

      A bank manager who is regarded as friendly and generious……should be dismissed at once.

      Of course that is old style banking.

      The modern sort of banking is very different.

  • Paul Marks says:

    It is sometimes very CRUEL for a banker to grant someone a loan.

    Remember it is not (mostly) the banker’s money that he or she is lending out – so one CAN NOT forgive the loan (not while their are assets one can take).

    The person can not pay back the loan?

    Then one must be prepared to take his home (and so on) and throw him and his family out on the street.

    Not prepared to do that?

    Then do not grant the loan in the first place.

    This is the point.

    Deciding to grant a loan is about looking someone in the eye and explaining that they MUST pay back this money with interest. And making a judgment that they can and will do that (based on the facts – and on a judgement of their CHARACTER).

    It is CRUEL to be friendly with someone one is granting a loan to (calling them by their first name – rather than “Mr….” and so on). As this gives them the impression that you are their friend.

    A banker is NOT the friend of a borrower (can not be) – the borrower is someone you may have to throw out on to the street (with their family) and that must be kept in mind.

    I repeat – forgiveness is simply not an option (not while their are assets one might take) because the money lent is mostly NOT the personal savings of the banker who is making the loan.

    Obviously the above applies to loans for consumption (buying a house and so on).

    But it also applies to business investment.

    “I want to build up my business – I have dream….”

    That is wonderful – but the businessman must understand that you WILL get payment (principle and interest) and will do anything that you need to do to get that repayment (or as much of it as the borrower has in assets – down to their underwear).

    Again friendlyness is actually cruelity – a false impression of being a friend must NOT be given.

    And if there is a large doubt that the money can be repaid the kindest thing is to NOT grant the loan.

    The person may leave the office curseing – but, actually, the banker has SAVED them.

    Unless there is a “modern” banker down the street who is only to happy to be “friendly” and grant the loan.

    Such kindess is actually cruelity.

    As will been seen especially over the comming year (and so on).

  • Robert Sadler says:

    I too have concerns about a not-for-profit bank. It seems hard to believe that either Dave is doing it out of the goodness of his heart or that such a “business” would be successful in the long run. I would have concerns about lending money to such an organisation.

    That said, I do not think that depositors should earn interest. On the contrary, I think they should pay the provider for the guaranteed safe-keeping of their money. Services already exist for this purpose. If one wants to earn a return on their money, then they can lend it instead, with the knowledge that there is a risk of loss. Again services exist for this purpose.

    Dave’s project appears to be doomed to failure if only because his bank (not-for-profit or not) appears to be set up using the same fraudulent model as larger commercial banks. And even without a central bank, it will still contribute to inflation and the business cycle.

    • Paul Marks says:

      If one takes the literal meaning of the word “deposit” (as, for example, with a grain deposit storage place – or whatever) then depositors should certainly not earn interest, and should indeed pay the organisation looking after the money.

      However, if bank is not keeping the money in the vaults but is LENDING IT OUT, then the people who gave the money to the bankers (for safekeeping) deserve to be paid interest. Although, by accepting the interest, they ACCEPT THE RISK (i.e. the risk of LOSING THE MONEY if the borrowers do not repay their loans).

      Of course modern bankers are not really honest money lenders – they are into (deep into) the credit expansion scam. I.E. lending out money that does not really exist.

      Banker-friends try to pretend that this is not really lending out more money than was ever really saved, by claiming that borrowing and saving are an “idenity” (equal BY DEFINITION). This is about as straight as me saying that I am Winston Churchill, British Prime Minister from 1940 to 1945 and 1951 to 1955 – and when challenged with the truth that I am NOT Winston Churchill, saying “Paul Marks and Winston Churchill are an idenity – we are the same BY DEFINITION”.

      Others invite one to consider a water bottle, or water generally – pointing out that water (as well as money) can be saved.

      This is quite correct – although book-keeping trick “water” is about as straight as credit expansion (credit bubble) “money”. Saving water that DOES NOT EXIST will certainly not save a person from dying of thirst. And trying to finance borrowing by credit expansion rather than real savings will undermine an economy.

      Still good news – I will be paying for my current account from October.

  • Paul Marks says:

    As is obvious from my comments I am not a Banker Friend, however some of the attacks on bankers are absurd.

    For example, the demand for interest on money whilst at the same time demanding that no risks are taking with the money – that is an IMPOSSIBLE demand (“what about government debt…” – if people, at this time of day, still regard government debt as “zero risk” then…. well words fail me).

    If you want zero risk you should indeed be paying the banker (not demanding interest). And then real “deposit insurance” (i.e. insurance against fire, flood, theft and so on) can come into play.

    I am reminded of the people who complain about dishonest financial advice.

    When asked how much they paid the adviser, personally, for their advice the complainers sometimes say “oh – nothing”.

    Such complainers do not deserve “compensation” – they deserve a slap round the head (to knock some sense into them).

    There is a old saying “you can not con an honest man”. That is not actually true (in that honest people are conned), but it is certainly normally the case that a con victim tends (when one looks into it) to have been greedy, someone looking for “an angle” (something for nothing, a special deal…. whatever).

    Con artists (fraudsters) are always on the look out for such people – and “one is born every minute”.

    If something seems to be too good to be true – then it is not true.

    And if an investment is “too complicated to explain to you….” – then it is a fraud.

    The complicated mathematics and technical terminology (financial “cant”)that is used has the same basis in reality that “magic” mumbo-jumbo and hocus-pocus has.

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