Where do banks get the money for mortgages from?

The simple answer is that they don’t have it. They check your credit record, decide you’re OK, type some numbers into a computer and suddenly you owe them a significant portion of your income for 25 years, plus interest. This little scam (well, enormous scam) is called fractional reserve banking.

It doesn’t mean that banks are ‘in charge’ though – this is just one of many tools to funnel money from the general population to the richest people in the world (other tools include compound interest, stock markets, political donations, the lobby industry and soon, TTIP – Google it, you’ll be horrified). Money brings power, and so they are able to skew the game to make sure the money keeps flowing. We work, they get richer.

Watch this extremely entertaining history of banking, and how the fractional reserve system developed. Whether or not you agree with its proposed solutions, the explanation is pretty sound. For a shorter explanation, see this article – the Story of Money, about how we got to this point.

Here’s a (very) simple overview:

Let’s say the fractional reserve rate is 10% (here’s a list of the rates in different countries – fractional reserve is now standard throughout the entire global banking system). If the rate in a country is 10%, or 10:1, and if someone founds a bank by depositing a $10,000 reserve at the central bank, they can then loan out ten times that amount to their first customer. That first customer can then take his or her $100,000 to buy something, and the seller can then deposit that $100,000 in their bank. The seller’s bank then considers this ‘real’ money (although it was originally a loan) and they can keep $9,091 of it in reserve and lend out $90,910 (i.e. ten times the amount kept in reserve). This new loan gets deposited in another bank, and the process continues until, eventually, over $1 million is created from the original reserve deposit of $10,000.

NB: this wouldn’t be the case if the original $100,000 was loaned between people with no banks involved – it would still be $100k, because once loaned out, it couldn’t be used by the lender. If on the other hand, the $100k is deposited in a bank (in effect a loan to the bank), the depositor can still use it.

If you think we’re making all this up by the way, see here for an explanation from an investors website. Hilariously, even on this site, all the comments at the bottom point out that the system is entirely corrupt!

The upshot is that if you take out a bank loan or mortgage, that money won’t really exist anywhere – it’s created as debt. Almost all money in existence is created by banks, as debt, by typing numbers into computers.

This causes three problems:

1. It concentrates money at the top of the corporate / financial system, and because money brings power, it prevents real democracy.
2. It causes the global economy to balloon (1920s, 50s and 80s), then burst (30s, 70s and 2008). These periodic slumps cause ordinary people to suffer job losses, repossessions, poverty – but those at the top are not affected financially. The luxury yacht market booms in times of ‘austerity’.
3. The periodic booms are causing the ecology we need to survive to degrade towards collapse. And because economists don’t tend to know anything about ecology, they don’t know how dangerous this is. Economic crashes are ugly enough, but a global ecological crash could well be terminal.

Even if you don’t own a credit card or have a mortgage, you can’t avoid falling into the debt of huge corporations. Here’s a hypothetical situation. The government need a billion pounds to fight a war. They go to the treasury, and ask it to produce a billion in government bonds or gilts (exactly the same as IOUs). Private companies (insurance companies, banks etc.) buy these IOUs and voilà – ordinary people are in debt to huge corporations; and if they get too greedy, and are in danger of collapse, the goverment will bail them out with more of our money. Then a lot of unaware people move their money from small banks, mutual societies and credit unions to the huge corporate banks, because they know they’ll be bailed out if they fail. Governments could make money out of nothing if they wanted to, rather than allowing private interests to do it via the fractional reserve system, and then we wouldn’t be in debt to them. But they can’t do it because they don’t have enough power – the private companies want to keep on doing it, and they have more power than governments.

We think that we should be having a conversation about how to end fractional reserve banking. It’s unlikely to happen under this system however, because this system is controlled by the same people who are benefiting from it. You can make an important protest by moving your money out of banks.

We’ll blog more in future about how to avoid mortgages – via communities, land co-ops and trusts, housing co-ops, self-build, narrowboats and even garages.

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NB: update – there is no longer a fractional reserve system in the UK. See here.