Mick and Gerard discuss the banking crisis...

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Mick is a gardener – a fictional gardener to be sure but he could be real. Mick cuts grass, trims bushes, digs over and plants up flower beds and, for doing this, gets paid by grateful customers. Being an honest citizen, Mick tots up all he earns in a little book and subtracts from that the amount he spends – on diesel, maintenance and insurance for the pick-up, on gardening gloves, on the fuel for the mowers, on sharpening the tools (and replacing them when they’re broken or worn) and on a host of other bits and bobs he buys to do the job.


When he buys stuff for customers, maybe bedding plants or some compost, Mick adds a little margin for his trouble. Not a lot or else folk would stop asking him to buy things. And this is carefully recorded in his little book.

Once a year Mick gives the book (and a shoebox filled with receipts and so forth) to Gerard, his accountant, so the tax can be done. Gerard checks Mick’s adding up and subtracting, adds in a little advice (‘you do know you can claim for that, don’t you’) to justify the £300 he’s charging Mick (who will, of course, dutifully write that amount into his little book). Once all the form filling is done, Mick has a bill for taxes which he pays since, being sensible and organised, he’s set aside a little each week in anticipation of this tax bill.

With this done, and by way of thanks, Mick takes Gerard down to the pub for a celebratory (if the paying of taxes can ever be a celebration) pint or two. And they get to talking like you do when you’ve had a beer.

Now Mick knows that Gerard – unlike him – is an educated bloke, been to university and accountant school, knows some long words about money. And Mick, who as a good citizen, makes sure he watches the news most days, asks Gerard about the banking crisis. After all, not only is Gerard an educated bloke, but he’s an accountant. And that means money. Gerard must be able to explain what all went wrong.

However, Gerard isn’t at all sure. For him, the bank is just a place through which money flows – mostly away from him and his clients. For sure, Gerard knows about borrowing – paying a price for having something now rather than waiting until we can afford it was the way Gerard’s shopkeeper dad always described it. And he knows that the banking crisis is something to do with borrowing. Or rather, the consequence of borrowing – debt. So he tells Mick this.

Now Mick, too, understands borrowing and debt. He’s got a mortgage – not a big one – and he had to take out a loan to buy the pick-up he uses for work. Mick appreciates how borrowing means that – at a price – he can have something now, like the pick-up or somewhere to live that he would otherwise be unable to afford. But he has another question for Gerard: “where does the borrowing come from,” asks Mick?

Gerard takes a long sup of his pint – he would have sucked on the stem of his pipe but they banned that in pubs – and thinks. “Did you ever watch Jimmy Stewart in ‘It’s a Wonderful Life”, asks Gerard?

“Oh yes,” said Mick, “one of my favourite films – a Christmas classic!”

“Good,” replied Gerard, “then you’ll remember the scene with the run on the bank when all the Savings & Loan customers crowd in to get their money out?”

“Absolutely, and at the end Jimmy Stewart and the others dance round the room with Papa Dollar and Mama Dollar in a wire paper tray!”

“Well during that scene, George Bailey – he’s the Jimmy Stewart character – explains to the crowd that the money isn’t in the bank, it’s in other people’s houses and businesses. It’s been lent out and these folk are paying it back with a little added as the price of having the money before you’re earned it.”

“Oh yes,” smiled Mick, “and George used his wedding cash to pay out on the run and the Savings & Loan stayed open.”

“Correct, correct,” Gerard leant back on his chair beginning to relish the explanation, “the problem is that modern banks – unlike that in the film – have made a really big bet. They’ve bet that everyone won’t arrive at once asking for their deposits back and have lent £10 for every £1 they have on deposit. In effect they’ve magicked 90% of the money we use from out of thin air.”

“But people still pay back,” Mick was fascinated by this exposition, “so the new money isn’t a problem until that stops?”

“Yes, or until people want to take more money out. You need another pint?”

“I think so,” Mick’s mind was spinning a little – he could see how his little business worked. And even how the bank’s role in lending money worked – but how could they lend so much?

Gerard returned from the bar and Mick was straight in, “but how could the bank take such a big risk, make such a massive bet?”

“I think,” said Gerard, “that it’s to do with deposit protection. In the film, the deposits were at risk, people stood to lose their savings if the bank closed. Today, the Government guarantees the deposits in banks – your and my money simply isn’t at risk so the bank can take whatever big bet it wants with the money.”

“So it wasn’t just the banks, it was government too,” spluttered Mick.

“And there’s more,” explained Gerard, “not only did government guarantee the deposits so banks could lend £10 for every £1 they had on deposit, most of that extra money wasn’t lent to folk like you to buy pick-ups and houses but was lent to the government. The same government who set the rules that made the lending possible.”

“Now you’re losing me,” Mick frowned, “the government gets all those taxes from people like me, why does it need to borrow?”

“You know you keep that little book, the one you give to me once a year so I can prepare your accounts and your tax return?”

“Yes.”

“You know how you’re very careful to make sure that what you take in exceeds what you spend?”

“Absolutely, I’d go bust otherwise.”

“Well the government doesn’t think it has to do that..."

"You what?"

"...most years in recent times governments, here in Britain, in the US and in Europe, have spent more than they raised in taxes. I know that’s hard to comprehend given how much we pay in tax – nearly half of all we earn – but governments didn’t think they had to worry because they’d set the rules so those nice banks would provide the cash. Government simply borrowed more and more each year.”

“So the government fixed the banking system so the banks could lend more, then borrowed that money to fill in the hole in their budget? Sounds like a criminal enterprise to me! Why did it go wrong?”

“Just like in the film, people started wanting their money out. The banks all lent money backwards and forwards between them – like a carousel with dollars on. One day some of them decided to stop the carousel, to stop passing the money round.”

“And…?”

“The system seized up. Banks were threatened, for a minute the whole thing looked like it might collapse. But the governments had a plan, instead of getting the banks to create new money by lending £10 for every £1, they would simply make up some new money of their own, give it to the banks and then borrow it back.”

“Sorry, say that again,” Mick was amazed

“Yes,” said Gerard, “they called it ‘quantitative easing’ but all it did was provide cash for the banks so they didn’t have to stop lending. And the government needed that lending, not to help your business like they said, but because otherwise they’d need to make big cuts in public spending or have a huge increase in taxes.”

“So let me get this right, the government allowed banks to lend more money than they had on deposit by protecting those deposits, then when people wanted their money out, the government printed more money and put it into the banks so the same government could go on borrowing? Where do we live, fairy land?”

The mournful sound of the pub bell sounded as the landlord called time.

“Guess I’d better scoot,” said Gerard, “been great talking and thanks for the beer.”

“Cheers," said Mick, “I’m hoping for some afters so I’ll stick around. There’s a couple of people here I’d like a word with and the place needs all the cash it can earn to keep going. One last question.”

“OK.”

“So all this inventing of money by the banks and the government,” muses Mick, “at some point it has to be earned by someone doesn’t it?”

“I suppose so. Probably us. We’ll be paying a load of taxes just to pay the banks back for lending the government all that money the government gave to the banks to keep them lending.”

Gerard smiled wryly, stood up and left. Mick was left wondering. Maybe Gerard was wrong, perhaps the chatty bloke on the telly from the Bank of England was right and we’ve nothing to fret about, there’ll be some hard times but it will turn out OK. But maybe not, maybe if all the money goes on paying back yesterday's debts, if the government keeps on borrowing and even printing more cash, maybe we’ll never pay it back. And that would be wrong Mick thought. We have to pay our debts.

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