EVER WONDERED where home loans come from? It’s worth a moment’s thought. A bank extends someone a line of credit amounting to hundreds of thousands of dollars – but from where? Where does the money come from? Is there a vast vault somewhere, filled with cash, like Scrooge McDuck’s money bin? Does the bank simply lower a big basket into the pile and haul up a home loan?
No. In reality, home loans are book entries – nothing more. The bank assesses its clients’ credit worthiness, fixes a repayments schedule, and, over the next fifteen-to-twenty years, in addition to recovering the loan, charges them an eye-wateringly large sum for the privilege of using its purely nominal capital.
So, in the beginning, there’s a book entry, and, by the end, the bank has taken thousands of dollars of its client’s very real cash, cancelled its book entry, pocketed the interest, and started the process all over again with a new generation of dupes – oops! – I mean clients.
Home loans are, therefore, a kind of wager. The bank bets on the debtor’s ability to repay, with interest, a sum of money which, strictly speaking, it does not possess. Since most human-beings are decent sorts, who almost always keep their word, this is a pretty safe bet on the bank’s part. Indeed, if we’re being truthful, the risk of the bank losing on the deal is negligible. (After all, it holds a mortgage on the house!) In fact, you could even argue that it’s the debtor who, through years of honest toil, creates his or her own home loan – while, simultaneously, paying the bank a small fortune for being generous enough to believe that its client was good for the money.
This is a monstrous sort of power, made even more frightening by being placed in private hands. Surely, the ability to financially enslave a reasonably large chunk of the population (mortgage, literally translated from the Old French, means “a death-dealing pledge”) shouldn’t be entrusted to just anyone. If someone’s going to create money out of thin air, and charge people to participate in the conjuring trick, then, surely, that someone ought to be the state?
That is certainly what a great many New Zealanders used to believe. Which is why, thirty years ago, the state used to own the Bank of New Zealand, the Post Office Savings Bank and the Rural Bank. It also, almost certainly, explains why a state-owned institution called the State Advances Corporation could finance couples into their first home at an interest rate of three percent.
The singular advantage states enjoy over both individuals and private institutions when lending money is immortality. Citizens, real and corporate, come and go but the citizenry lives forever. In practical terms, this means the state can afford to extend credit on vastly longer time horizons than any private financier. It also means it can lend with far greater assurance than the largest private bank. Being the institutional expression of its citizens’ collective needs and interests, the state is really only lending to itself.
In Our Own Interest: The First Labour Government availed itself of Reserve Bank credit to construct thousands of state houses for the nation's homeless citizens, creating thousands of new jobs in the process.
Back in the late 1930s, the first Labour Government used precisely this argument to finance its massive state housing programme. The Reserve Bank of New Zealand lent millions of pounds to the Government at nominal interest rates on the security of the thousands of homes it was about to build, and the rentals those houses would provide to the treasury for decades to come. It also knew that by setting such a construction programme in motion, and by using New Zealand sourced materials wherever possible, thousands of new jobs would be created, and that the men and women who were hired to do those jobs would pay taxes to the state instead of drawing welfare payments from its dwindling coffers.
Was the credit advanced to the Government by the Reserve Bank ever repaid? Nobody’s quite sure. What we do know, because they stand all around us, is that thousands of houses were constructed for New Zealand families to live in, at rents they could afford, and that thousands of New Zealanders found jobs that paid them a living wage and freed them from the dole. Some might say that if these achievements are considered as interest on its loans, then the Reserve Bank, and the nation for whom it acted, got a very good return on its investment.
Surveying the global havoc wreaked by the world’s privately owned financial institutions, I am moved to inquire whether any of them should ever again be permitted to create money out of thin air. And looking at the huge number of homes that need to be built in Christchurch and around New Zealand, perhaps the best place to turn for the financial resources required to build a fair and prosperous future – is to ourselves.
This essay was originally published by The Press on Tuesday, 5 June 2012.