This document summarizes a chapter from a book about the privatization of money through the banking system. It discusses how banks privately create money through lending and credit, which used to be a public function controlled by the state. Over time, deregulation has given banks more control over money creation and its benefits. However, banks still rely on public trust and liability is still socialized. The chapter argues that uncontrolled private credit creation fueled speculative bubbles and inflation, with costs eventually borne by the public. It examines how securitization of mortgages distributed risk but also fueled greater private money creation.

1. Economics for Activists
Week Three – The
privatization of Money
F2 Building, New Fatima, Rialto
25 June 2013

2. “The process by which
money is created is so
simple that the mind is
repelled.”(John Kenneth Galbraith)

3. Mary Mellor – Chapter Two: The Privatisation of Money
1. Banking and the State
2. Banks, States and Debt
3. Money Creation and the Banking System
4. From Regulation to Deregulation
5. Liquidity and Solvency
6. Innovations in Banking: Securitised Finance
7. Private Good; Public Bad
8. Conclusion

4. “… a tangled interaction between the
market and the state….”

5. The commercial creation of debt has slipped from public
control…

6. The commercial creation of debt has slipped from public
control…
Although not from public liability.

7. The commercial creation of debt has slipped from public
control…
Although not from public liability.
While the capitalist financial system has privatised the
money system, it remains a system of social trust.

8. The commercial creation of debt has slipped from public
control…
Although not from public liability.
While the capitalist financial system has privatised the
money system, it remains a system of social trust.
The market alone cannot sustain it.

11. Page.32
State endorsement of bank debt means that
banks are able to issue liabilities at will.

12. Page.33
Unlike state-issued ‘fiat’ money which, when issued
becomes the property of the receiver to dispose of as
they will, money issued by banks has to be paid back
with interest.

13. Page.33
Unlike state-issued ‘fiat’ money which, when issued
becomes the property of the receiver to dispose of as
they will, money issued by banks has to be paid back
with interest.
Control of money issue passes from the state to the
banking sector and with it the benefits of seigniorage,
that is, financial profit from making loans.

14. Page.37
This creation of credit-money by lending in the form of
issued notes and bills, which exist independently of any
particular level of incoming deposits, is the critical
development that Schumpeter and others identified as the
differentia specifica of capitalism.
If banks could not issue money they could not carry on
their business.
Credit creation is the actual business of banking

18. Page.39
It is clear that in the late twentieth and early twenty-first
centuries, the bank credit creation system was not just
responding to the needs of production but to the demands
of speculative inflation.
Page.40
As states were receiving the product of uncontrolled credit
creation, the public would eventually have to pay the price
in its role as guarantor of the money system.

19. Page.47
Money was seeking a way to make more money, but with
so much ready money available, there was a limit to where
viable investments could be found.
Page.48
Securitisation – ‘originate to distribute’

38. LIQUIDITY AND FINANCIAL ASSETS
Like a real asset, a financial asset may have more than one function. In addition to serving as a store of wealth, a financial
asset may make it possible to transfer risk from one person to another, and may make it possible for speculators to make
"bets" on the fortunes of a particular company.
But these functions are separable. There is no reason why the person who supplies the money for a financial asset should take
the risk associated with the asset. And the risk can be transferred from one person to another independently of any transfer
of the money investment from one person to another.
…a long term corporate bond could actually be sold to three separate persons. One would supply the money for the bond;
one would bear the interest rate risk; and one would bear the risk of default. The last two would not have to put up any
capital for the bonds, although they might have to post some sort of collateral.
- Fischer Black, “Fundamentals of Liquidity” (1970)

39. Residental / Commercial Mortgage Backed Securities

42. Failing to see that commercial money creation was behind
the flood of money in the new financial world, bankers and
financiers congratulated themselves on the amount of
money they were making.
As money markets have grown, bringing together a wide
range of financial organisations including the banks, the
privatised financial system is effectively creating money for
itself.
Mary Melor, The Future of Money (Pluto Press, 2010), p.53

59. Irish Mortgage-Backed Securities listed on Irish Stock Exchange, April 2012
AIB Mortgage Bank (AIB) - €11.87 billion
Celtic Residential Irish Mortgage Securitisation - (Ulster Bank) - €20.6 bn
Phoenix Funding Limited - (KBC Bank) - €11.55 billion
Emerald Mortgages (EBS) - €4 billion
Kildare Securities (Bank of Ireland) - €3.45 billion
Fastnet Securities (Irish Life & Permanent) - €23.774 billion
Lansdowne Mortgage Securities (Start Mortgages) - €729 million
Total listed (of those found) : €75.973 billion
http://dublinopinion.com/2012/04/02/irish-mortgage-backed-securities-initial-notes/
http://dublinopinion.com/2012/04/04/irish-mortgage-backed-securities-part-two/
http://dublinopinion.com/2012/06/08/update-on-amoroin-securities-from-clare-day-td-6-june-2012/
http://dublinopinion.com/2012/09/06/bank-of-ireland-mortgage-backed-securities-april-1988/