Monopoly money in real life (aka: "Banks")

My last blog discussed the nature of money and concurrently the "ownership" and rights to create money.  When money is created by banks and private institutions and is able to be used as a commodity, it becomes a transient and elusive.  Without the control of it's supply by a real national bank (no, not a central bank) it operates in patterns that destabilise the economy it serves (a view that is supported by the paper referenced in my last blog).  

The current method that private institutions create money is by fractional reserve banking (FRB).  This method of money creation can be described as "optimistic" at best, and more glibly, it is little more than the idea of handing out Monopoly money but for real life purchases.  FRB is basically creating money out of thin air (or electrons anyway - all this banking is done electronically now).  It is essentially wonga.com but on a global scale.  You take out a loan (from a central bank or another private institution) then spend ten times the money that you were given, and hope that in the meantime no one calls you up looking for the other 9/10ths of the money until you have made some profit from it.  Another way to imagine it is the same way that multiple credit cards and 0% balance transfers can be used to juggle debt - but the banks do this with trillions.  Feel free to look this up, it's on wikipedia. 

FRB, the housing bubble and associated mortgage backed financial instruments are the tools that made the current form of recession possible.  I won't go into detail about these  here as they are better discussed in another blog.  What I did want to explore is some proof to my last blog's assertions - a real life example of the "destabilising effect" that Monopoly money have.  

I recently came across an article in The Atlantic that had some fascinating data about the collective worth of the Eurozone banks.  I submit it as an example of the above problems with  money creation since it throws up some appalling conclusions that should not happen in a well run and believable world.

Lets us assume that common sense dictated what happens in the world.  If we were to imagine then, the worth of the banking sector of the Eurozone, we would imagine something pretty substantial.  After all, the Eurozone is one of the largest economic blocs in the world.  If were to continue this thought experiment and compare the Eurozone's to other financial markets around the world, we would assume that intuition would give us some sensible ideas as to how they would stack up.  So when the article asks, would you believe that the Eurozone's financial sector is smaller than Australia's, most of us would say; "No, I don't believe it."

What?  Really?!

Well, there it is.  I am actually quite stunned by all this.  I find it terrible and obvious that this roller-coaster-like image of global finances is largely caused by the "virtual" Monopoly money that is ubiquitous in our economies.  It is even more terrible to understand that this small graph is a representation of the actual economic turbulence that is making life miserable for millions of people in around the world.  

I don't like recessions.  I don't like banks acting like gambling addicts.  I don't like rich institutions having access to powers that they cannot use responsibly, and I definitely don't like to see graphs like this one.  A graph that shows the result of this recklessness in crazy, reality-bending clarity.