02. Banks

What is a Loan?
A silly question you might think, but bear with me. Take a bank loan for instance. You apply for a loan, or credit from an organisation that has loads of money. Most people think that the bank is lending their own money, but they’d be wrong. The bank simply conjures the money out of thin air. They are allowed to do this by something called the fractional banking system.

Here is a quote from the Bank of England’s Quarterly bulletin, Q1, 2008, p. 103:
“Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’, That is, banks extend credit by creating money.”

Fractional banking means that the bank can lend around ten times the amount of money it holds in deposits. That means for every pound it has from depositors it can ‘invent’ ten pounds worth of loans. Not only that, it can charge interest on this non-existent money. The interest boosts their reserves and they can then lend even more. If you tried to do that you’d be locked up, but the banks, backed by the government, can get away with it. Is it any wonder you get unsolicited offers of loans and credit through your letterbox all the time? To properly understand this, you need to watch the video Money as Debt.

Your nice friendly bank, having pressured you into borrowing from it something it doesn’t have, now becomes a very different beast. They want their pound of flesh and they want it regularly without fail. If you don’t pay on time they will charge you an exorbitant fee for late payment. They will charge you for every letter they send. If it’s an overdraft they slap on a punitive interest rate. It all helps to boost their profits.

Remember – the bank is chasing you for ‘repayment’ of something it did not own in the first place. It’s also been charging you interest on this non-existent money. They cannot lose because they never gave you anything in the first place! The only real money involved in the whole transaction is the money you have earned and which you have given them in repayments, interest and charges. They have been stealing your money.

When things get difficult, instead of being a help in your time of need, the bank sniffs the chance to make extra profit and starts to push you under. You struggle to keep up the payments, but soon the late payment and other charges come to more than your monthly payment and you start on the slippery slope into default.

At this point you might take out a ‘consolidation loan’ to get everything into ‘an easily managed payment’. This might involve giving your house as security – then the bank knows it’s on a real winner. They get the house if you can’t pay. If you don’t have a house, it’s down the route of higher interest payments, or facing the nightmare of an IVA, or even bankruptcy.

This is when the bank bows out gracefully. It doesn’t want its hands soiled with the nasty business of chasing your debt. The bank or credit card company will not take you to court – they hate that kind of publicity. It’s squeezed all it can from you – now it’s time to write off the debt and sell it on to a collection agency.

The bank can’t lose. It’s lent you money it didn’t own in the first place. You’ve made repayments of this imaginary money using real money that you’ve earned. You’ve paid interest and charges using your real money. It then sells your debt to a collection agency for more real money. By this process the bank converts its imaginary money into real money – for every pound of which it can lend out ten more pounds of imaginary money.

Read that paragraph again and make sure you understand it. When it sinks in, the realisation may shock you.

Don’t get me wrong. In the world of business the banks have a role to play. Businesses would not be able to operate without colluding in this immoral mess. Consumer debt is another matter. It’s driven by advertising on all sides convincing us that we ‘need’ the latest car, holiday, washing machine or other consumable product immediately and we can’t get it without taking out a loan or getting credit.

There are hundreds of sites on the internet that advise you to ‘negotiate’. Debt counsellors and solicitors will advise you to contact the lender and come to some arrangement to pay – or they will do it for you for a hefty fee. They are part of the industry and not on your side. I would generally advise you not to listen to them. When you’ve paid their fees, you are still left with a good percentage of the ‘debt’ to pay off. My method goes to the root of the problem and simply extinguishes the obligation.

Negotiation may be a route to follow if you have a short-term problem, but once things have got to a point where it is obvious that you cannot pay the original lender, whether it’s a bank, credit card company or other agency, don’t panic – just stop talking to them. It’s pointless arguing that they’ve lent you money they never had. You may have a good case to take to court (and some people have successfully done just that), but who wants it? Accept that the damage to your credit rating has been done. You now want things to go to the next stage, where you can get the upper hand. Play it smart. Let them issue the default notice and pass your debt to a collection agency.

Learn about collection agencies – the scum of the earth.

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