How can you repay “money” if no “money” was “loaned” at the outset? If money is “created” to lend to buy a house, and the bank has not suffered a loss, how can they demand repayment with interest?

The notion of repaying a “loan” that seemingly never existed may appear baffling at first glance. However, it stems from a fundamental aspect of modern banking: the creation of money by financial institutions.

Seems hard to swallow, believing you are borrowing money, to discover that loans are created ex nihilo (out of nothing). So how can borrowers can repay money that never existed?

What is the rationale behind banks demanding debt repayment with interest, even though they do not borrow the money from external sources?

Henry Ford, Sr., who said in substance,

“It is perhaps well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Understanding Money Creation by Banks:

Before addressing the paradox of debt repayment, it’s crucial to grasp how banks create money. Contrary to common belief, banks do not merely lend out existing deposits; they have the authority to generate new money through the process of fractional reserve banking.

1. Fractional Reserve Banking:
At the core of fractional reserve banking lies the principle of leverage. Banks are only required to hold a fraction of their deposits as reserves, allowing them to lend out the majority of deposited funds.

For instance, if a bank receives $100 in deposits and the reserve requirement is 10%, it must retain $10 as reserves and can lend out $90. This practice enables banks to expand the money supply by creating new money in the form of loans.

2. Creation of New Money:
When a bank approves a loan, it does not transfer existing funds from one account to another. Instead, it credits the borrower’s account with the loan amount, effectively creating new money in the process. So customers agree to debt repayment of money that are simply figures on one side of an accounting ledger. There is no money.

This newly created money enters circulation, stimulating economic activity and contributing to the expansion of the money supply.

3. Money Multiplier Effect:
The creation of new money by banks initiates a chain reaction known as the money multiplier effect. As borrowers spend the newly acquired funds, they enter the banking system through deposits, allowing banks to further increase their lending capacity.

This iterative process amplifies the initial impact of money creation on the economy, fostering growth and investment.

Paradox of Debt Repayment

Given that banks create money through lending, a perplexing question arises: How can borrowers repay “debt” that never existed in the first place?

The apparent paradox of debt repayment is rooted in understanding of the nature of debt and money creation.

1. Repayment as Transfer of Money:
When borrowers repay loans, they transfer money from their accounts to the bank. This is money that the borrowers have invested their time and “sweat equity” to earn.

While borrowers perceive this transaction as the repayment of a debt, from the bank’s perspective, it merely reverses the process of money creation.

The money (accounting figures) that was created on one side of the ledger, when the “loan”  was issued. Your hard -earned pay-check is then used to deposit into the loan account to simply extinguish the “debt” when the “loan” is repaid.

2. Debt Repayment and Money Supply:
While individual “debt” repayments may reduce the money supply by an equivalent amount, they do not eliminate the overall debt burden in the economy.

As long as new loans are continually issued and existing ones are repaid, the cycle of money creation and repayment persists.

Thus, the repayment of “debts” does not pose a fundamental challenge to the functioning of the banking system or the economy.

Debt Repayment of “Loan” With Interest

Although banks do not borrow the money they lend from external sources, they still charge interest on loans for several reasons:

1. Risk and Opportunity Cost:
Banks incur costs and risks associated with lending, including the possibility of default by borrowers. Charging interest compensates banks for these risks and reflects the opportunity cost of deploying funds for lending rather than other investment opportunities.

2. Profit Motive:
Like any business, banks seek to generate profits from their operations. Interest income derived from lending activities (legalised theft) contributes significantly to banks’ revenue and profitability.

3. Monetary Policy Transmission:
Interest rates play a crucial role in monetary policy transmission, influencing borrowing, spending, and investment decisions in the economy. By adjusting interest rates, central banks can regulate the pace of economic activity and inflation.

Debt Repayment Validation

One crucial aspect is the validation of debt, which ensures that the debtor is being pursued for a legitimate obligation. In recent times,  banks are ignoring requests for validating debts. This raises ethical concerns and legal questions.

Fair Debt Collection Practices Act (FDCPA) is a federal law that outlines the rules and regulations governing debt collection practices in the United States.

Other countries have similar laws (or guidelines). In Australia the National Consumer Credit Protection Act (NCCP) seems to do nothing more than protect the creditors, and enslave the borrowers.

The Australian Financial Complaints Authority (AFCA) is a membership based corporation relying on fees from Banks and Financial Institutions … So why bit that hand that feeds you?

One of the key provisions of the FDCPA is the requirement for debt validation. This means that if a consumer requests verification of a debt within 30 days of being contacted by a debt collector, the collector must provide proof that the debt is valid.

Failure to do so can result in legal repercussions for the collector, including the cessation of collection efforts.

However, there have been reports of banks and financial institutions disregarding these requests for debt validation. So does AFCA. Four months later, AFCA have still failed to address concerns about a major bank failing to validate alleged debts.

This raises serious ethical concerns, as it suggests that individuals may be pursued for debts that are not properly substantiated.

Not surprising, since Banks control Governments. (Who is really calling the shots?)

Such behaviour not only violates the FDCPA but also erodes trust in the financial system and undermines the rights of consumers.

Ignoring Requests For Debt Validation

The consequences of banks ignoring requests for debt validation can be far-reaching. Firstly, it places undue pressure on individuals who are being pursued for debt repayment that may not be valid.

This can lead to emotional distress and financial hardship, especially if the debt in question is disputed or inaccurate.

Moreover, it perpetuates a culture of unfair and unjust debt collection, where individuals are not afforded the opportunity to challenge the legitimacy of the debts they are being asked to repay.

From a legal standpoint, the implications of ignoring debt repayment validation requests are significant.

In 2020 “Bates v Post Office” (2020), the Post Office agreed to settlement of £57.75 million for 550+ sub postmasters wrongfully accused of false accounting or theft.

The FDCPA provides clear guidelines on the steps that debt collectors must take when a consumer requests validation of a debt. Failure to comply with these requirements can result in legal action and monetary penalties.

Additionally, it tarnishes the reputation of the banks involved and exposes them to the risk of litigation and regulatory sanctions.

Ethically, the practice of demanding debt repayment without validation raises fundamental questions about fairness and integrity.

Debt repayment and collection should be conducted with transparency and respect for the rights of the debtor. In reality, the strong-arm of the banks rule the roost.

Collateral Damage

By sidestepping the obligation to validate debts, banks not only breach legal requirements but also betray the trust of the individuals they are pursuing.

During the Royal Commission into Banking in Australia, senior executives of the major banks admitted these breaches. For a few million dollars “slap on the wrist” fine …

It’s more like “collateral damage” necessary to bulldoze through the breaches while the banks continue to make huge profits.

This erodes the ethical foundation of the financial industry and undermines the principles of accountability and justice.

In light of these concerns, it is essential for banks and financial institutions to uphold the principles of ethical debt collection. This includes respecting the rights of consumers to request validation of debts and providing clear and accurate information when doing so.

Transparency and accountability should be the cornerstones of debt repayment and collection practices, ensuring that individuals are treated fairly and justly throughout the process. Yet, these principles are being ignored.

Bates v Post Office Debt Repayments

Bates v Post Office is a recent landmark case in UK. The exact number of sub postmasters who were jailed or bankrupted as a direct consequence of the Post Office’s actions is difficult to ascertain definitively.

However, it is well-documented that a significant number of sub postmasters faced serious financial hardship. Some being wrongly convicted and imprisoned due to discrepancies in their accounts…  The result of errors or faults in the Post Office Horizon software accounting system.

In the banking sector, Bates v Post Office principles have profound implications for the treatment of bank customers, emphasizing the need for transparency, fairness, and accountability.

By upholding these principles, banks can foster trust, strengthen customer relationships, and contribute to a more resilient and ethical financial system.

Furthermore, regulatory bodies and consumer protection agencies play a crucial role in upholding the standards of ethical debt collection.

And “duty of care” to monitor and investigate instances of debt collection practices disregarding debt validation.

By enforcing the provisions to hold errant banks accountable, regulatory bodies can safeguard the rights of consumers. Without doing so, they risk the integrity of the financial system.

Banks demanding debt repayment without validation is a troubling trend that raises serious ethical and legal concerns.

It undermines the rights of consumers, erodes trust in the financial industry, and violates the principles of fairness and transparency.

Upholding the standards of ethical debt collection is imperative.  It is the duty of banks, regulatory bodies, and consumer protection agencies to uphold the laws.

Yet, it seems, in the real world, banks do not care. Because whoever controls the money supply, controls the laws.