Is the world on the verge of another financial crisis?

Is the world on the verge of another financial crisis?:
What Britain’s most famous bank whistleblower can teach us.

December 4, 2014

In October I journeyed to London to visit with my new friend Paul Moore, the so-called ‘HBOS Whistleblower.’ In 2004, Paul a corporate lawyer and former risk manager at the UK bank HBOS (Halifax Bank of Scotland), the largest mortgage bank in the UK at the time. Paul came to public attention as a whistleblower in the banking crisis of late 2008 as a result of having been dismissed from his position as head of the bank’s financial risk management in 2004 after warning his employers that they were taking excessive risks. This was at a time before the banking crisis of 2008 when Lehman Brothers collapsed and the US stock market plunged 777 points on September 30, 2008.

Paul ultimately demonstrated that the risks to HBOS and the entire financial system of England were, indeed, real. As he admitted to me ‘I was just doing my job to protect the bank against systemic risk!’ Paul blew his ‘risk alert’ whistle for he saw that HBOS was in danger of collapse and was ultimately forced into a merger with RBS (Royal Bank of Scotland) in 2008, which in turn was ultimately bailed out by a multi-billion-pound infusion of capital from the UK Treasury.

Both HBOS and the UK financial sector ignored Paul’s risk warnings in 2004 and in 2008.

I asked Paul: Do you believe anything has changed in terms of financial risk since the HBOS and Lehman Brothers crisis of 2008? He answered unequivocally: No!

He explained that since the 2008 crisis the debt risk both in the UK and the US has only grown worse. Let me explain.

Most people don’t comprehend that we are living in a protracted debt crisis which has no solution and no way out. The problem is that the majority of money (about 98 percent) in today’s economies of the US, the UK, Canada and Europe is debt-money primarily generated by private banks when they issue loans.

The problem is that the sum total of these debts has grown exponentially since the end of World War II. In the US the total amount of debt outstanding is nearing $60 trillion. The problem with this situation is that the debts outstanding throughout the world can never be repaid no matter how much the economy grows. To make matters worse there are more dangerous risks associated with financial derivatives – a more exotic form of debt – that in the multiple of trillions. Legendary investor like Warren Buffet has warned that the global derivative exposure is a ticking nuclear time-bomb.

There is no way out of this dead-end debt street except for two possibilities; one is a catastrophic global financial collapse. Second, is the possibility for a courageous act of declaring an international debt jubilee; the forgiveness of all outstanding debts and the rebuilding of a global money system not based on debt.

The date of a future financial collapse is impossible to predict just as September 30, 2008 was impossible to forecast.

What is interesting is that September 30, 2015 will be exactly 7 years since the 2008 crash. In ancient Jewish times prior to their exile in Babylon in 585 BC the Jews had economic laws (based on what Moses had been instructed by God) that called for the forgiveness of all debts every 7 years (the Sabbath year) and the redistribution of wealth every 49 years to the original 12 tribes of Israel. Jews seem to have understood that failure to adhere to these teachings of debt forgiveness and the equitable distribution of wealth had consequences; some have termed these consequences the Shemitah.

What can we learn from the ancient Israelites and apply to today’s global debt and growing wealth inequity crisis?

The problem with our debt-based money system is that debt accumulates over time through the effect of compounding interest on ever larger amounts of outstanding debts. In the US the amount of total outstanding debt has been doubled roughly every 7 years since the 1950s. In 1950 the amount of total outstanding debt was $425 billion ($2,792 per capita); by the end of 2012 it had reached $58.8 trillion ($187,371 per capita). This represents a whopping 13,731 percent increase over 62 years. In contrast, the US economy only grew 5,142 percent over the same period.

The debt situation in Canada is not much better. In the second quarter of 2014, total debts outstanding (personal, government, business, financial institutions) in Canada was $5.64 trillion or $158,695 per capita. Equifax Canada today released new figures that shows Canadians are more in debt than ever — a staggering $1.513 trillion in personal debts. Excluding mortgages, average debt held by Canadians has increased 2.7 per cent to $20,891.

Some might say: surely these debts will eventually be repaid. Not so. The historical records show that in the US the total debt outstanding has been doubling approximately every 7 years since 1950 and no matter how much the GDP and economy grows, debt is growing faster.

What’s worse is this growing mountain of debt demands increasingly higher interest payments to service the previous outstanding debts. Interest payments suck life-energy from the economy by taking up a significant portion of every dollar we make. I’ve estimated that interest payments on the total amount of US debt of $58 trillion is approximately $0.36 on every dollar American’s spend on goods and services in the economy. This means that the average American will spend about a third of their working life working just to repay interest payments debt that is fundamentally unrepayable.

At the heart of this crisis is the level of ignorance amongst the vast majority of people about the nature of money. Most people assume that the government produces the majority of our money supply by printing money. Not true. Private chartered banks create 98% of the money supply in the US, Canada and the UK. Ask some British parliamentarians.

Last week the nature of money creation was the subject of a lively historical debate in the British Parliament in London. Not since 1844 has there been a national debate about money. Parliamentarians publicly admitted that they had no idea that the majority of the nation’s money supply is created by private banks when they issue loans. Most thought the Bank of England created the money supply. Private banks use a money-creation process called ‘fractional reserve banking’, issuing brand new money (at virtually no cost) in the form of debt (loans) many times greater than funds on deposit. For every one dollar on deposit at a bank, roughly $100 dollars (or more in Canada) of brand-new debt money is created. Banks literally have a monopoly on the creation of money.

While the British debate is encouraging (and should be happening in Ottawa and Washington) the truth is no one has a clue what to do next about the current situation and how to defuse the ticking debt time-bomb.

Will the debt time-bomb go off sometime in 2015, seven years after the 2008 crisis, plunging the world into a potential economic dark age? Or will global financial leaders recognize the economic wisdom of the ancient Jews and declare a global debt jubilee and consider a new system of sovereign money without debt? Who is going to blow the whistle this time?

Mark Anielski is a Canadian economist and author of The Economics of Happiness: Building Genuine Wealth (New Society Publishers, 2007).