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An international fraud in Banking
You must be surprised at the title of this article but it is truly a saga of a big fraud perpetuated by big business in collaboration with ruling people all over the modern world where modern economic system is in vogue. This fraud is directly related to the corruption we find in all sophisticated modern societies. The more civilized we call our self the more we become corrupt and the way this corruption is justified is really shocking. I know you do not understand what I mean by all these comments but you will soon appreciate me as you proceed with this article.
Before I proceed to get to the actual matter let me first discuss about our banking system so that you will be able to get the points I want to hint at in my essay later.
History of economic activity of the human society shows that trade was the first thing where people began to do exchange of merchandise and there currency came to be accepted as the most convenient means of transaction. Then came, production of merchandise, which required capital. Also capital was required for the trading in regular way. This is how Capital became an important ingredient of all commerce. In due course, some people who were lucky enough to have big fortune such as kings, knights, land-lords and big traders became money lenders for that purpose and they charged interest or (rent) in some other cases they were working as sleeping partners in the trade or production activity. That way these rich people began to add to there fabulous wealth and grow richer. Around 17th and 18th century in Europe industrial revolution took place. Concept of mass production and almost every type of wholesale business activity was encouraged. It was soon found that wealth in any one’s power is not enough to supply money to these activities and the question of raising additional funds through people’s participation was considered. This was seen in the Europe around 17th century. In all other countries industrial revolution was not effective, so there all business activities were on comparatively small scale; money was supplied by rich people in their individual capacities to all activities which included along with trade and production, wars to conquer other lands and hoarding of goods!
There are records in the annals, of kings borrowing large funds from big money-lenders to wedge wars on neighboring countries and having lost the war gone bankrupt; giving large concessions to those money-lenders for their activities. Over all experience of this business of money lending was good and more money was required to grow business at home as well as in colonies where Europeans had ventured. Concept of Bank was immerging simultaneously in all European countries and by record I may say that Switzerland was one nation in Europe where modern Banking became prevalent first. May be since measure money lenders were stationed in that country.
The word bank also means dependable. Very rich money lenders appealed to common people to put their hard earned earnings with them and for that they were promising to pay some small interest. In a way, it was an appeal for public to contribute for larger lending to big business indirectly. Until that time common people were keeping their savings at home earning nothing by way of interest. The idea was supported by the believing public and at Switzerland they were not cheated and the idea became popular all over Europe and then in US. Soon bankers realized that just savings accounts are not safe and they introduced time bound schemes so that money was not removed from the banks for some specific period; they were called fixed deposit or some similar term. That became very successful. Business of Banking grew with that and more big Bankers came up with more Banks all over the world where Europeans settled with colonization. We must understand that by introducing fixed deposit scheme Banks were actually borrowing money from the depositors. As business of Bank grew some bad elements entered in it and caused some problems and so governments were required to make laws to protect interests of depositors.
Banks were investing their deposits in business in two ways. As loan and as sleeping partnership. As loan they were entitled for only a small interest at annum rate but as sleeping partner they were entitled for share in profit as much as about 30 to 33 %, this was found more advantageous and many Banks were inclined to do that investment. Banks benefited. Many good Banks passed on that earning to the small depositors and that encouraged “common man”; they invested more money as FD and the business grew.
While business of Banking was evolving other method of investment to attract money of “common man” were coming up. Some businessmen involved in manufacturing activity desired to get money as equity partnership and appealed to that “common man” so that they assure certain return, more than what banks would give. Attractive brochures and other propaganda tactics helped them achieve it and we see that the concept of limited companies immerged. Now “common man” had two options for keeping his money; either as FD or as shareholding. Over the period laws were formulated to give protection to this “common man” on both these investment patterns.
Where the trouble started?
People’s increasing confidence in these two ways of investment encouraged some bad element in the market to take disadvantage of that faith and with support of political and at times judiciary they commenced to cheat “common man” by reducing interest on his investment (FD etc.); that was to keep more money with the banks for the benefit of vested interests. As this was seen, unscrupulous element at the share market reduced dividend on shares and this went on to the extent that smooth money movement was hindered. Very large amount of money was stacked up in some few hands who were not spending that and so the finance pool began to dry up. This is first sign of recessionist tendencies in the market. Greed for more money and hoarding it was the cause. This was possible because political people, ruling class and so called pundits of economics were benefiting out of that. Their argument was; excessive funds with these few are available for us. If common man gets this money it will not be available as bribe or corruption payments to these people. This mentality in these strategically placed people spoilt the situation all the more.
As we have seen Banks were investing their money with business in two ways, as loan and as sleeping partnership. As sleeping partnership a big share of profit was going to the banks and that disturbed many callous businessmen. They contrived through various tactics by introducing themselves in the board of directors of the Banks and made Banks to give money as loan instead of as sleeping partnership. In our country as well as in other places such as US, this happened since there were no proper controls to protect interests of “common man”. Some fake associations were created by vested interests in the name of Bank depositors as well as shareholders and a false alibi thus given that all things are in proper shape! These fake associations created by vested interests in the name of bank depositors and shareholders were to support all the nefarious plans of them (vested interests) so that in the books of law it always appeared that everything is in order! The fraud on all the three, Banks, share holders and Bank depositors had begun. Corrupt bureaucrats at all levels are party to it. In books of accounts of banks big profits were shown. In a way that justified this policy but; what is profit? We shall discuss concept of profit soon on this blog.
How it affected money pool?
When common man’s share in the profit was reduced by this method less money came in the market for purchase of merchandise. Sell was reduced and it had created a vicious circle of recessions in small as well as big markets all over. So called “experts of economics” did not realized that sharing profit with Banks was not a disadvantage but it was the correct way to encourage money cycle. Money cycle means money given was actually money taken in other place. Extreme greediness was sabotaging money cycle!
In US people were forced to put their savings in stock market instead of Banks by contrivance of various so called economic sciences developed by experts appointed by Big business which is now called MNCs. Many Universities were mixed up in the racket to give a bogus science of economics to justify investment in shares and further to encourage gambling.
Comparison between Bank and Stock
This study is important to understand the basic trick big business did to fool people with the help of those so called expert economists. Supported by unaware and trusting politicians in US. As economic activities expanded, a careful system to control finance was required; and for that a stable base of economic activities was expected. By laws of natural economics Banks were the most reliable but schemy gamblers with the help of their stooge economists convinced the government that stock market is better; and unfortunately, careless or callous or innocent politicians believed it and the center of economics was shifted to stock market. Occasionally money was used to satisfy some snooping elements in the government. Ever since, economics of the world is in continuous fluctuation. The condition most suitable for the gamblers but not for over all economics. As in US and other places in Europe this shift was exercised, people were also forced to put their money in stocks. As “common man” is never well versed in this gambling; he began to loose his money to more skilled operators. No body bothered but the situation was deteriorating and finally last straw was put in the cart of economics and the cart has broken down. Market crashed. No body is ready to accept the guilt and governments is trying to justify all the mistakes with more stupid economic explanations.
Let us understand how banks are more reliable than stock market
For that we should know how banks are expected to give loans. There are two types of loans normally given by banks. The first one is; loan to profiting activity such as manufacture, stocking commodities, working capital, fixed capital are activities where purpose is to make profit. They are called profit loans. The second is non-profiting and in that loan for education, ailment, house or car and such purchases. They are called non-profit loans. Banks were supposed to lend money to profiting activities at a rate which will be high and that covers bank share in the profit as sleeping partners. Called sleeping partnership rate. Banks were expected to earn their income through this money lending. Interest rates as high as 40 % for stocking commodities and then as low as 25 % for other profiting activities were expected and when they were prevalent Banks were in good position and the overall economy was stable. As for non-profit loans interest rates were kept low; in some banks they were kept at no profit no loss level and in other banks there were at the minimum, about 8 % per annum. This arrangement was very suitable and kept the economy in good stead. The idea behind this dual rate was such that Banks make good profit in profit-loans and charity to non-profit loans for the benefit of society. When Bank finance was not available businessmen raised loans in black market at much higher rates and still profited. This was possible because Bank interest rate is at annual while business trade cycle is usually much smaller (monthly or so), as a result in one year they could make more than two or three returns and in the year, that way traders could easily manage these higher rates. In the first return Bank interest was recovered and in the later returns they profited.
After Banks were nationalized; today this two tier loan system is no more prevalent and interest rates are not related to what purpose of loan it is. This must be reverted and the two tier loan interest system be introduced again. I do not know of Bank interest rate in US but even there if this two tier system is introduced we will see that the failing economy of US will pick up in a short time. Strong Banks and excellent Bank to Depositor relations are the center of this policy. These days Banks worry of borrowers more than the depositors; not realizing the fact that number of depositors is always larger than that of the borrowers. And also Banks are forced to neglect or don’t care for the interests of the depositors who are the base of every Bank. It is like hitting at its roots. All this is to a great extent responsible for the miserable condition of economics and market today.
In profit loans, Banks appoint their representatives at the director level and that ensures safety to Bank money. Default rate is minimum except only where force majeure conditions happening in the market. This makes Banks very secured. In non-profit loans this is not possible and so there default rate is considerable. Previously, as I was told about 15% funds from the Banks were available for these non-profit loans and rest was kept exclusively for profit loans. This was changed during nationalization of Banks and that made Banks very vulnerable to natural forces in the market. Many Banks have gone bankrupt in the past few years. In US about 85% loans were given to this category of loans (non-profit) and that is the measure cause for the present debacle in US. In India a false argument is presented to justify this excessive percentage on non-profit loans in the name of social justice but in economic arena this argument is not fitting, if government wants to fever some body it should do it at its own cost and cannot misuse Bank funds. I have written about it in my previous article titled, “Legitimate robbery”.
Banks investing in the shares of a Company should not be mistaken with loaning to that Company by that Bank.
Now let us consider the basic nature of a stock market. In stock market there are two types; one is investor’s and the other is of gambler’s; in India we had till recently stock market of the first type and after Manmohan Singh’s so called free economy experiment we are having the second type of stock market namely, gambler’s stock market. Investor’s stock market is always very safe and sells and purchases are done only when share holder wants to sell his stock. Movement is slow and it reflects the true position of the market. The values of the shares in this market are genuine and true indicators of the market position.
As gamblers took charge of this market demat was introduced to do frequent sell and buy of the stocks. Stock prices were artificially raised and they fell when not supported. There is a premeditated arrangement amongst share brokers that keeps this play on. Most of the prices in this market of stocks are not real and so most misguiding about correct position of the market. For example we see that thousands of shares are enlisted on Bombay Stock Exchange but barely 30 companies’ shares are represented in the market. This also makes it clear that any judgment based on these figures is absolutely wrong even then the values in this market are considered to evaluate position of the market! Every thing here is bogus; a gambler’s world is mostly illusory.
How to repair this ill?
Difficult indeed but not impossible, if there is will there always is way out, but to control vested interest who has totally infested all the world of economics all over will oppose any sincere attempt at it, tooth and nail and their accomplice firmly positioned in strategic positions in governments and Banks (CEOs and others) will do every thing to thwart all efforts to throw them (vested interest) out of the system. All sophisticated and unsophisticated methods will likely be used by these people for that. Extremely powerful resolve at the ruling level in the government is essential to achieve the changes I suggest here. To my mind and study, following steps will help solve this problem permanently.
Banks:
To accept the two lending types as profit and non-profit loans and they treated as that. Interest rate on profit loans to be at the rate of sleeping partnership and non-profit loans to be at some considerably low rate acceptable to the Bank conditions. Not more than 15% of the Bank funds will be allotted for non-profit loans. To offer maximum rate at the FD deposits to attract common man to invest his earnings and savings with the bank.
Share market:
To discourage gambling market and encourage investment market all over the world.
While issuing new shares of old or new company if premium rate is applied the company must declare as to how that extra fund is spent, to the shareholders. Auditing of all such funds must be made mandatory and be published in the annual report of the company.
Maximum dividend must be given to the shareholder after keeping funds for reserves. If share holder fails to collect his dividend for whatever reasons the dividend amount be carried forward to next year and not forfeited and sent to government treasury. Company can pay interest on that amount of dividend to the share holder or the new purchaser of that stock. Government has no right to forfeit that amount.
Prior to spending funds out of reserves for development in fixed as well as in working capital, they must be first converted into bonus shares and allotted to the existing share holders. Right of shareholders on that development must be ensured.
As for shares market, above given correction measures must be implemented at all world level for balanced growth of the world economy.
In India we expect SEBI to look into these matters but as per my information this outfit is fully infested with vested interests and become totally corrupt and so any improvement is difficult but I expect US government to do something on these lines to resolve their problem. At present nothing worthy is being tried there and all they do is of not much return. We must change the very pattern imposed on the market by the vested interests to get out of this mess.
Associations formed to look after the interests of shareholders and Bank depositors should be taken to task by people. That will expose their fake subsistence.
Why share market is preferred to Bank finance by management?
Concept of profit and
Whirlpool effects of gambling on shares market are three topics for my study at present, I shall soon come with my findings and we shall see soon.
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