[GJM] Campaign for paying the Principal only

[chris cook]

Dear Robert


> It is ludicrous that governments in the rich  world seem powerless to curtail interest charged by banks especially when one realizes that they still can
> make profit from the principal being paid off.

You share a  misconception with several on this list.

When Banks create the principal as a "loan", they simultaneously create a matching "deposit".

When a "Loan" is repaid a Bank gains nothing from it: it merely extinguishes the credit created in the first place. The bank credits the borrower's account and debits its account with the bankling system. Nothing accrues to the Bank's profit and loss account.

A Bank makes its profit from the difference between the Interest received from borrowers and that paid to depositors on the pool of money it has created.

So does a Credit Union, which takes in Deposits and lends them out again.

The difference is that Credit Unions are not in the business of credit/money creation - they are lending PRE-EXISTING credit/money. So the pool of funds available, and hence their income is relatively small.

A bank on the other hand creates credit/Money as a multiple of their capital base and therefore is able to pocket the difference on a large pool of deposits and loans.

However, if loans go "pear-shaped" a Bank takes a hit against its retained Capital - and it does not take a very high default rate for a Bank to be in real trouble: this depends on quite how high the multiple is of loans against the capital base.  This multiple is of course what the Basel Accord is all about.

Best Regards

Chris Cook



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