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From CheDet.cc

THE BANKING SYSTEM AND THE FALSE ECONOMY
By
Dr. Mahathir Mohamad
on April 25, 2009 10:11 AM | Permalink | Comments (0) | TrackBacks (0)
(This is the second instalment in a series on the trends that led to the present financial crisis)
///1. Another contributor towards the per capita and GDP of the rich countries is the banking business.

2. Banks are apparently allowed to lend more money than they have, sometimes as much as ten times more. When they lend this money which they do not have, it became their asset on which interest can be earned.

3. Effectively they are creating money and earning profits from the money they have created.
4. Real businesses cannot do this. They cannot sell what they don’t have nor earn income from services they don’t provide. Doing business is therefore far less lucrative than banking. If the per capita and GDP excludes bank earnings then they should not be as high as is shown.

5. Because banks can lend more money than they have, the tendency is to lend as much as possible. In many rich countries banks offer to lend even when the clients are unable to pay.

6. If the banks lend 10 times more than the money they have then their profit must exceed the sum they would expect if they lend only the money they have from capital and deposits.

7. This extra money they earn is not real because it is “created” by the bank out of thin air. Nevertheless the profits earned from this money would be part of the banks profits and therefore the dividends for the shareholders. In the end they would contribute to the per capita income and GDP.///– TDM

The money earned by the bank either as interest or services cannot be less real than the money earned from selling APs. Except of course money gained from APs require no effort though those who paid to acquire APs might be out of earnings through blood, sweats and hard work, though there are also easy money through corruption.

The banks in Malaysia work almost exactly the same as those in other countries. Through NEP, Malays owned more of the equity capital in banks and financial institutions than those owned by other races. It has gone beyond the 30% requirement, and the government has politicised the issue of banking licenses.
Banks is said to loan to others money they do not own, but banks are as responsible for the money loaned out as if these were borrowed from other individuals. The banks have to be responsible for bad debts, and the bad debts are the cause of the financial crisis started in 2007 and continuing.

It is clear to all that the financial crisis of the west are hurting ordinary people around the world. The ordinary people would prefer that the financial crisis had not started so that they can obtain their meals, and keep their jobs. It is true that those who managed financial flows might earn more than those who are involved in producing goods and other so-called real services, but the ordinary people have not cultivated the willingness to suffer the fate now just so that the financial firms and banks in the west collapse. The only person in this world who is happy to see financial crisis is TDM who thinks that he has found a way to criticise the west. The others would have preferred that the financial system continued to work. The contraction of the world economy now shows that the supply of goods and services and the consumption thereof would not have been at the scale just before the financial collapse. The question one should ask is would the people prefer a expanded economy made possible by banks lending money they did not own, or the contracted economy where trades were conducted on barter goods-exchange without a common currency, the US dollar which allows USA some advantages over other countries?

///8. Banks also issue credit cards. The credit card holders expend far more than the money they have with the banks. The excess money is regarded by the banks as loans which may be charged a hefty interest of up to 18 per cent.

9. Since credit card holders often hold credit cards from several banks, the amount spent in excess of the money they hold with the banks would be very considerable. These bank loans from credit cards would again exceed the real money or assets of the banks.

10. The banks consider that even if some credit card holders fail to pay up, bank earnings from those who do pay would exceed the loss from non-payment.

11. The credit cards have effectively become money created by the banks. The earnings of the banks are therefore not from real money held in the form of capital or deposits. Yet the interest on loans via the credit cards would add to the profits of the banks. They would boost the share prices of the banks and contribute towards the profits of investors and eventually increasing the per capita income and the GDP of the country concerned.///–TDM

Credit card holders might be required to pay up to 18% per annum in interest but that would be much smaller than the amount demanded by loan sharks. Besides it is much more convenient to have the card facility than to ask for loans from the sharks.
The advent of credit card since four decades ago has facilitated trade and it has no doubt increased the velocity of money movement, and hence GDP growth.

Like all advancement in science, technology and facilities, the people can choose not to use them. There are people who do not trust ATM for cashing on their bank accounts. The banks are free to continue providing ATM services but they should not stop account holders cashing over the counter. Similarly, those who find credit card a problem to maintain are free not to use them.
Credit cards are issued by banks in Malaysia too. So GDP of Malaysia has also included income by the banks from credit cards transaction because the national accounts of Malaysia are compiled based on SNA 1993.