The solution to the crisis - a revolution

• Fractional reserves

The rebuilding of the financial stability of Europe's economy was approached from the wrong end, by trying to deal with the effects rather than the causes of the crisis which was brought about by the vortex caused by unshackling of the monetary flows as they traveled down the roads opened by globalization, deregulation, the development of information technology and of financial instruments.

For 13 years, the "big shots" of pan-European finance under the aegis of the Bank of International Settlements (BIS) have been trying, stumbling into each other, to manage the financial crisis - which, having been caused by the intellectuals, is unlikely to end soon! -and to pave the way for the monetary union which they are ruling over towards a truly competitive positioning of the Euro against the dollar in the world of finance. More concretely, under the aegis of two cosmopolitan authorities, the Basel Committee on Banking Supervision(1) (BCBS) and the European Banking Committee (EBC), three programmatic agreements were negotiated and completed: the Basel I Agreement (1998 - the Cooke ratio is introduced intended to mitigate the counterparty / credit risk by preserving a quota of capital of 8% of the total loans granted), The Basel II agreement (2004-2008 - the Mac Donough ratio is introduced, which is intended to complement the Cooke ratio - and establish measures to cover /counter operating and market risk) and The Basel III Agreement (2010 - the introduction of unified provisions intended to increase the quality, consistency and transparency of capital resources, cover counterparty risk, increase of capital buffers, dynamically calibrate loan multipliers, reduce pro-cyclicality through complementary capital requirements and controlling risk through stress tests, the adoption of a standard rate of liquidity assisted by a structural rate of liquidity over the medium and long term).

Under the aegis of other two authorities in the field of pan-European "banking", the Committee of European Banking Supervisors (CEBS) and the Capital Requirements Directive-Transposition Group (CRD-TG), the three agreements were complemented by three European directives - Capital Requirements Directive amendment (CRD) - dedicated to the consolidated functional and operational implementation of their provisions in the EU (including in non-Euro states), CRD II (2006-2009) concerning the provisions stipulated in the Basel I agreement (the unified requirements concerning the own funds of the banking institutions, large exposures, the qualitative standards concerning management and the securitization of the liquidity risk), CRD III (2009) concerning the provisions of the Basel II Agreement (the accounting requirements concerning the own funds of the banking institutions, the securitization of exposures and the remuneration policies) and CRD IV (2010) concerning the provisions of the Basel III agreement (the minimal liquidity requirements, the increase in the quality, consistency and transparency of the core capital, the calibration and re-calibration of the loan multiplier - the leverage effect, the countering of the counterparty risk, the measures to strengthen the counter-cyclical stability of the system by setting up - capital buffers - sized based according to the "stress VAR" scenarios, the unification of the prudential measures etc.) which - being merely palliatives only serve to maintain, through an unprecedented suite of regulations, the financial crisis in its inexorable continuity, and at the same time, the uncertain position of the Euro on its reference market and in its venal relations with the other major sovereign currencies in Europe (the Swiss Franc and the Sterling pound).

Why are all these constant new regulations that are intended to strengthen the security and the stability of the financial system, the setting of basic standards when it comes to prudential control, the dissemination and promotion of the best banking practices and for the oversight and promotion of international cooperation in terms of prudential control needed?

The direct, blunt, answer is extremely simple: because, in order to remove the causes which generate these crises - the fractional reserve system (2), the creation ex-nihilo of scrip money (credit) and the "hedging" industry - would result in an implosion of the unorthodox (essentially para-economic)component of the financial economy and, implicitly, of the profits (undue and all the more immoral) which it generates, a solution which, in the vision of the international and transnational finance (the latest imperial power to enter the conflict of) is unconceivable!

In an attempt to simplify the sacred notions that the bankers, their political emulators, the experts in the field, the know-it-alls and the opinion makers on their payroll, are willingly spreading about the financial economy, I call it "the usurers' economy", it must be said that overall - and openly - we are talking about the historic evolution of loan sharks and their trade.

There is a certain predisposition to non-communication with the civil society which starts with the "bank secret" and continues with the clever concealing of the fact that the - often times excessive - efficiency of the banking system comes from monopoly, from mechanisms - I would vulgarly call venal - and from the exploitation of the banking principles. Who can explain the fact that the profitability of the banks far exceeds that of the real economy?! That for the most part, the profits come from legalized financial engineering which has very little to do with the exploitation of their own capital and of the income and savings of the population entrusted to banks in the form of deposits?!

Since the appearance of usury, that is since money was perversely turned from "fiduciary means of exchange" into a "commodity" - a perversion caused by the scarcity of money created and venally maintained by the Governments in office - up until the end of the 20th century, inventors in the field merely confined themselves to developing financial engineering tools and financial and banking instruments, by merely grafting changes to the original element, the classic usury!

The turning of currency into commodity - concretely, the creation of the institution of the financial markets as a sophisticated platform for trading papers, equities and venal means of exchange! - undoubtedly represented an opportunity to brilliantly diversify the markets (financial and monetary) and implicitly the dimensions of power.

Obviously, the emancipation of finance and the growth of its power in ancillary areas did not replace open conflict (military belligerence); it just develops it, on another imperial dimension.

As the financial vectors developed, monetary transactions (which are by their very definition interested in the present in the immediate future!) - amid the neo dogma- (be it liberal or conservative) which wants to merge political and economic power, have become a vector for establishing the hegemony of the financial markets over the real economy, a mob which cornered the strong demand for growth emanating from the real economy, first of all by depleting the capital flows which they are mobilizing of any substance, through their prioritization of trading of money and securities.

The gaining of independence of the financial market and the development of the risk instruments are seriously detrimental to the capitalization of cash flows specific to the real economy. More concretely, in the process for increasing the solvency of the firm demand to maximize the rate and volume of profits derived from the financial resources coagulated into power centers, maintenance mechanisms have been adopted which defy the standard practices to finance loans - using their own capital and the deposits attracted (created out of savings by postponing current consumption) and which, by cosmopolitization, have led to the paradigm of "deposits create loans" being replaced with the neo-liberal paradigm "loans create deposits".

We are talking first about the adoption of the fractional reserve lending system, about the creation of money "ex-nihilo" and through the monetization of securities [the secondary market created and maintained through the "open market" operations conducted together by major (supra-national) banks, central (sovereign) banks and commercial banks (private or government bonds)] and, secondly, by derivatives and securitization products [the market for instruments intended to ensure/transfer risk attached to risk capital]!

We are in fact talking about the disappearance of the connection between currency and the production of commoditized currency for the credit market (monetary and financial).

The immediate consequences of this course of action - which is a very serious reason for concern! - was successfully concealed until now, first and foremost by:

- eliminating any discrepancies from the environment of financial transactions;

- the resorption of the lags in the settlement of trades;

- the invention of new instruments (the 3rd and 4th generation of derivatives) and of new functions (the demographic development of hedge-funds, of funds of funds, securitization etc.);

- the resuscitation of the institution of sovereign debt (which was specific to the post war periods!);

- the institutionalization of various movements intended to oversee credit (e.g. abandoning the discount fee and focusing on the use of of the policy rate, the policy rate for the lending facility, the interest rate for the deposit facility etc.) and to control (destroy) the currency surplus found outside the central banks (sterilization operations);

- the monetization of credit as an "emergency" solution towards restoring liquidity on the "ailing" monetary market (which actually represents an "ex-nihilo" creation of money, which is first and foremost possible because the central bank has the right to conduct open market operations on the interbank market);

- the deregulation of the exchange environment targeted towards connecting financial flows prior to the "de facto" conclusion of the trades.

Amid the conclusion of the adoption of the "fractional reserve" mechanism as the foundation of the cinematic regime (functional and operational) of the institution of credit in the interbank system (a flagrant contradiction compared to the demand for monetary stability), the venal logic which has been established as the foundation of the economic debauchery of the lending process, with unconditional political support, also supported by the floating exchange rates has definitively sparked "the beginning of the end".

Doesn't the fact that the lending industry gave way to the hedging industry - which serves to ensure transfer risk suggest anything?

Countering economic/financial market risk, the so-called "hedging", is actually made through venal contracts to ensure/transfer risks which are traded on dedicated financial markets (primary and/or secondary) and come...at a cost!

In the speculator's view, the object of "hedging" are the generically called "derivative contracts" which are negotiated and traded on term markets and which can be classified as derivatives (futures or forwards) and in options ("options" contracts). The widely used instrument in the international and transnational practice is the CDS contract, "Credit Default Swap", which, strongly promoted and measuring solvency in basis points - has become extremely important for banks (in evaluating the cost of transferring credit risk to investors) as well as to the private credit markets in the process of financing supplier credit and sovereign debt.

From the point of view of sophisticated transfer, we are talking about "securitization"(3), namely, the conversion of the risk element (e.g. a financial asset - a receivable from its own portfolio) in the form of a negotiable financial instrument ( "Asset-Backed Security", ABS), with the effective sale of the original asset or one which transfers only the risk tied to the asset in question (synthetic securitization).

The paradigm shift occurred with the changing and moving of the center of gravity of the usurers from the actual credit industry to the hedging instruments industry.

The increase in prevalence of derivatives based on the volume of effective loans (at the end of 2010, CDSs alone had a market with a notional value (4) of over 80,000 billion dollars $ - almost 30% higher than the world's GDP (5), the excesses of the financial markets (toxic assets derived from securitization, index-based derivatives etc.) has turned them from vectors of financial instability (demonstrated first and foremost by solvency or liquidity crises or, in the case of the bankruptcy of a bank, by the domino effect in the environment in which the bank in question operated) into causes of economic recession, and perhaps of worldwide economic depression!

• Cui bono?

In my opinion, since the real solution can only be the destruction of the surplus money created "ex-nihilo" which serves as debt, maintaining the fractional reserve system doesn't serve anybody! Nor the states which are close to sovereign "default", nor commercial banks which are part of the disaster (6), nor central banks which, as a "lender of last resort" will be made into scapegoats at the expense of the taxpayers, and not even the major financiers, because the tearing down of the financial system to rebuild it later is harmful to the profit-based industry it rules over!

• The core of the problem

The post-modern interpretation of the usurer used by American finance, and by the great transnational finance, namely the huge disconnect between the volume of loans and that of deposits and the banks' own capital (as proven by their own accounting records) continues to draw proselytes.

The maintaining of the fractional reserve lending, which basically amounts to monetizing confidence is and will remain ill-boding, because,

- on one hand, the constant focus on the short-over the long term in lending will be extremely harmful, in the form of "supplier credits" (once they reach critical mass they will result - in the long term - in the collapse of the welfare of the population!);

- on the other hand, increasing liquidity of the demand for long term profits by the "naked" financing of the sovereign debt (through the "ex-nihilo" creation of currency enhanced by leverage) isn't understood and usefully treated to fight cyclicality, in other words it does not acknowledge the fault condition, which it merely postpones.

In fact, the ongoing financing of sovereign debt by creating money "ex-nihilo" actually acknowledges - which is extremely serious - not the state of collapse of the countries in question, but rather the depletion of the capital of banks and of the private savings entrusted to banks and to non-banking financial institutions for profit (7) (the bank deposits of the population and their capitalization by the investment funds, including - and all the more dangerously - by pension funds!), as they were spent on acquiring sovereign debt (medium and long term sovereign debt!).

In fact the struggle - with uncertain odds of success - expressed by the agreements negotiated in Basel and the Directives of Implementation in the EU (CRDs) has resulted in the liquidity crisis generated by the exacerbated use of the primary liquidity truly available - far above the supportability of the banking systems involved - as a resource to finance the loans granted and set up as sovereign debt. The fact that crazy minds are already imagining mechanisms and supranational authorities that would manage the crisis, including by limiting the sovereignty of countries which have accrued sovereign debts, is no longer a surprise.

• Exiting the crisis

Overall, the creeping of the hedging instruments and the seizing of the capabilities to finance the real economy through a loan market created by the transnational development of the hedging industry have turned the banking market from an alternative financing source for the real economy, into a colossal empire which vitiates to the core the capitalization of production flows of the real economy and the allocation of the final economic result, as well as political decision making. Not to mention the disservice to the capital market which it acerbically competes with in its process for the financing of the real economy!

The measures being taken on a local and transnational level - the massive injection of liquidity, capitalization through forced nationalizations or by the subrogation of sovereignty, the inter and transnational agreements for the reconditioning and completion of regulations (Basel and CRD) do not tackle the root of the problem. In my opinion, by failing to use adequate means to address the root of the problem, the measures which are being enacted preserve the infection with the virulent germs which generated the crisis and only postpone the denouement with unpredictable consequences.

In my opinion, I must emphasize, the need to prevent the liquidity crisis from turning into an unforgivable solvency crisis (sovereign defaults) is the equivalent of an exercise in futility if the essential causes aren't approached, unless the failure of fractional reserves and of the mechanisms and instruments which this system has birthed isn't accepted, and also, the restoring of the private banking deposits and of the liquidity of capital which back the shares of pension funds.