Tun Dr Mahathir bin Mohamad wrote in his Weblog about The Banking System and The Fasle Economy.
This is the second installment in a series on the trends that led to the present financial crisis.
1. Another contributor towards the per capita and GDP of the rich countries is the banking business.
2. Banks are apparently allowed to lend more money than they have, sometimes as much as ten times more. When they lend this money which they do not have, it became their asset on which interest can be earned.
3. Effectively they are creating money and earning profits from the money they have created.
4. Real businesses cannot do this. They cannot sell what they don’t have nor earn income from services they don’t provide. Doing business is therefore far less lucrative than banking. If the per capita and GDP excludes bank earnings then they should not be as high as is shown.
5. Because banks can lend more money than they have, the tendency is to lend as much as possible. In many rich countries banks offer to lend even when the clients are unable to pay.
6. If the banks lend 10 times more than the money they have then their profit must exceed the sum they would expect if they lend only the money they have from capital and deposits.
7. This extra money they earn is not real because it is “created” by the bank out of thin air. Nevertheless the profits earned from this money would be part of the banks profits and therefore the dividends for the shareholders. In the end they would contribute to the per capita income and GDP.
8. Banks also issue credit cards. The credit card holders expend far more than the money they have with the banks. The excess money is regarded by the banks as loans which may be charged a hefty interest of up to 18 per cent.
By Tun Dr Mahathir bin Mohamad, the former Prime Minister of Malaysia
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