Defaulting banks - where will it stop?

[David Guyatt]

The situation certainly is as the above writer said "a crisis of confidence" - but that is not a new thing.

As the former deputy chairman of the Bank of England, and (now long since retired) chairman of the ill-fated Midland Bank, Sir Kit McMahon, once uttered on television, banking is a "confidence trick".

Yup. That sums it up very nicely

Sooner or later "con-men" get caught out. That's what we're witnessing now, I think.

The thing we forget more often that not is that it's our money bankers play with everyday anyway. Banks simply shuffle our money around to other banks in order to earn interest on theirdaily surpluses, or pay interest to other banks by borrowing our money on the interbank market to cover their daily shortfalls.

This, in a nutshell, is what banking is about at it simplest level.

It's always our money they play with. Always has been.

Where things differ from the past - even 30 years ago - is that we're now completely locked into their system. We couldn't get all our money (supposing we have any to begin with) out of their system now no matter how hard we tried. The days of stashing your wealth in five pound notes under the mattress are long gone.

In other words, our money really is their money. They just let us place our name on it to keep us dumb but happy and every month or so, they send us paper thingy's called statements, that pretend to show us how wealthy we are (or not).

But our money is really their money. See.

They play with it and sometimes they loose it. When they loose it they take your name off the money and stop sending you paper thingy's. They can no longer lend it or borrow it. I's gone. Whoosh! Tough. Work longer and harder, eat less, get cold in winter. And maybe, one day, you'll have some more money they can play with and send you paper thingy's to keep you dumb and happy.

But they still pay themselves huge salaries and bonuses from... wait or it... your money which is their money really.

Let's not forget that.

And the real key to the events of these months past is that they have simply stopped shuffling our money around between each other - because, they say, they don't trust any other bank - because there's no transparency anymore. And so they say they don't dare lend our money amongst themselves anymore.

But there's never has been any real transparency. That's the whole point of banking. If there was any transparency, then, for example, simple rich banking folk like Bernanke and Paulson would actually know how much extra of our money they needed to give their banking chums to keep them smiling. But they don't really know how much it will take. Because there's no such thing as transparency in banking (anymore than there's any regulation).

So let's scratch transparency from the list of excuses.

So the question I want answered is why did they suddenly stop shuffling our money - that really is their money - to each other?

Why did a shuffling system that has happily been chuffing along for hundreds of years, suddenly stop earlier this year?

After all, all our money - and theirs too - is still locked inside their banking system. It hasn't disappeared, it hasn't evaporated due to a hot summer, and nor has it been kidnapped by aliens. It's in the same place it's been in for decades past.

The shortage ("illiquidity" in banking argot) is not because there's a shortage of our - or their - money.

The just won't shuffle it anymore.

They call this a transparency problem.

I call it a devious-greedy-bastard strategy.