"Where Does Money Come From?, co-authored by Positive Money's resident expert Andrew Jackson, explains exactly how money is created in the UK, based on over 500 original documents from the Bank of England and other banking authorities.

"With a foreword by one of the leading authorities in banking, Prof Charles Goodhart, this is the most comprehensive and authoritative guide to how money is created ever published, and reveals that most of the textbooks are very much out of date."    Positive Money

The authors discuss in detail what banks do, and confirm the widespread ignorance of a complex and arcane world.

They rightly point out that a knowledge of fractional reserve banking offers an incomplete understanding of how banks create money, which ...

... is only very weakly linked to the amount of reserves they hold at the central bank.

At the time of the financial crisis, for example, banks held just £1.25 in reserves for every £100 issued as credit.

Banks operate within an electronic clearing system that nets out multilateral payments at the end of each day, requiring them to hold only a tiny proportion of central bank money to meet their payment requirements ...

Focussing on the reserve requirement problem, the Basel III 'rules' set out ...

... a new key capital ratio of 4.5 per cent, more than double the current 2 per cent level, plus a new buffer of a further 2.5 per cent.

Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses, so the rule sets an effective floor of 7 per cent.

The new rules will be phased in from January 2013 through to January 2019 ...

Carne Ross, writing in the Guardian, is underwhelmed ...

... behind the self-congratulatory rhetoric, a more disturbing picture is evident.

It turns out that almost all banks will easily meet these supposedly stringent requirements.

Many impartial experts do not think Basel III is sufficient to prevent another credit crunch.

Academics from Stanford University and the Max Planck Institute regard Basel III's equity requirements as "dangerously low" ...    Gdn

Carne Ross goes on to point out that Switzerland "has unilaterally imposed far higher capital requirements on its banks", a move ignored by the EU, UK, and US where the bank's whingeing about Basel III is treated seriously, because - under the terms of their Faustian Pact with governments - the banks blackmail with threats to move out, and worse, argue that higher capital requirements are a threat to growth:

Whenever there is a prospect of more stringent rules, banking advocates rise as one to claim hysterically that economic growth will be dramatically cut, costing millions of jobs, just as our economies are struggling out of recession ...

The fact that the banks have already cost 'millions of jobs' is not the sort of riposte that comes readily to the likes of George Osborne, and other politicians looking for jobs in boardrooms when the electorate tire of their faces.    Ind

Nor is the Banking Commission up-to-speed on the reforms needed to bring banking under democratic control.

Its focus on separating the retail and 'casino' aspects of banking is a crucial, but insufficient, aspect of reform.

The Basel III approach to recapitalization of banks misses the elephant in the room: bank's power to create new money at the press of a button.

The authors of 'Where does money come from?' reach into the key area of banking that governments and regulators ignore, probably because growth is perceived to be the only route out of the very debt which is the banks' raison d'étre:

The power of commercial banks to create new money has many important implications for economic prosperity and financial stability.

We highlight four that are relevant to the reforms of the banking system under discussion at the time of writing:

1.Although useful in other ways, capital adequacy requirements have not and do not constrain money creation, and therefore do not necessarily serve to restrict the expansion of banks’ balance sheets in aggregate.

In other words, they are mainly ineffective in preventing credit booms and their associated asset price bubbles.

2.Credit is rationed by banks, and the primary determinant of how much they lend is not interest rates, but confidence that the loan will be repaid and confidence in the liquidity and solvency of other banks and the system as a whole.

3.Banks decide where to allocate credit in the economy.

The incentives that they face often lead them to favour lending against collateral, or assets, rather than lending for investment in production.

As a result, new money is often more likely to be channelled into property and financial speculation than to small businesses and manufacturing, with profound economic consequences for society.

4.Fiscal policy does not in itself result in an expansion of the money supply.

Indeed, the government has in practice no direct involvement in the money creation and allocation process.

This is little known, but has an important impact on the effectiveness of fiscal policy and the role of the government in the economy. [PM]

Thus, banks are no longer the servants of the economy, but determine those areas of the economy most likely to generate the greatest profits.

Property and financial speculation are, by their nature, short-termist - and volatile - activities, and least likely to generate sustained employment.

The authors are entirely right to highlight the fact that governments have abandoned control of the money supply; the Bretton Woods system's collapse in 1971 signalling the start of its phenomenal expansion. FMS

Apart from the appalling consequence of the de facto privatisation of the money supply which we now see all around us, Chinese banker Gao Xiqing pinpointed the cultural problem created by the 'rewards' - which the fiat money system confers on bankers, and only bankers - and the impact of such 'rewards' upon the career choices of the brightest school leavers, and therefore the wider impact on the rebalancing of Britain's economy away from 'bubble' finance.    Gdn

About Wall Street jobs, wealth, and the cultural distortion of America:

I have to say it: you have to do something about pay in the financial system. People in this field have way too much money. And this is not right.

When I graduated from Duke [in 1986], as a first-year lawyer, I got $60,000. I thought it was astronomical!

I was making somewhere a bit more than $80,000 when I came back to China in 1988.

And that first month’s salary I got in China, on a little slip of paper, was 59 yuan. A few dollars! With a few yuan deducted for my rent and my water bill.

I laughed when I saw it: 59 yuan!

The thing is, we are working as hard as, if not harder than, those people. And we’re not stupid.

Today those people fresh out of law school would get $130,000, or $150,000. It doesn’t sound right.

Individually, everyone needs to be compensated. But collectively, this directs the resources of the country. It distorts the talents of the country.

The best and brightest minds go to lawyering, go to M.B.A.s. And that affects our country, too!

Many of the brightest youngsters come to me and say, “Okay, I want to go to the U.S. and get into business school, or law school.”

I say, “Why? Why not science and engineering?”

They say, “Look at some of my primary-school classmates. Their IQ is half of mine, but they’re in finance and now they’re making all this money.”

So you have all these clever people going into financial engineering, where they come up with all these complicated products to sell to people ...

The Atlantic December 2008

As Larry Ellliott has pointed out, the deregulation of financial 'services' under the terms of Margaret Thatcher's so-called 'Big Bang' played a key role in the de-industrialisation of Britain, which has created an economy which was unable to offer its young people full employment before the credit crunch.    BBC NEWS

Big Bang's shockwaves left us with today's big bust