Re the book "Accounting Perversion in Bank Financial Statements: Root Cause of the Ongoing Global Financial Crisis" by Professor Michael Schemmann, PhD, CPA, CMA. January 2012. From the foreword with permission by IICPA Publications:
The current global financial crisis began in 2007 as a so called "liquidity crisis" or "credit crunch". The central banks of the United States and Europe avoided the breakdown of the payment system by making trillions of dollars, pounds and euros of their high-powered central bank money available to the private commercial banks. In October 2009, The BBC put the figure at $11 trillion ("Find out how the $11 trillion was spent - Summary," BBC 25 October 2009.) The bailout continued beyond 2009, and the amount is higher yet, today.
"Having been a banker for fifteen years, and eventually a university professor of accounting and finance," writes the author, "I have followed the events daily, asked the questions, and I believe come up with the answer of what lies at the bottom of the pile of complexity. What lies at the bottom is very simple, "so simple that the mind is repelled" to use the words of John Kenneth Galbraith (1875) in his book: Money. Whence It Came. Where It Went. "
When the Italian mathematician, Luca Pacioli (1494) published his treatise ""Particularis de computis et scripturis" (About accounts and other writings) it was the first published book on present-day double-entry bookkeeping, a historic document that was a bestseller at its time printed on the Gutenberg press, providing a detailed description of Venetian bookkeeping. The treatise is contained in his work "Summa de arithmetica, geometria, proportioni et proportionalita". Pacioli did not foresee that his science would one day help to create the units of account by thousands of accounting offices calling themselves banks and used as in lieu of money to the almost total exclusion of any other source of money. How was this possible?
Prime Minister Robert Peel tried to control the private banks's so called money creation by the Bank Charter Act of 1844, but the banks magnificently succeeded in circumventing the act by creating deposits and issuing cheques to their customers to use in lieu of their bank notes. (John Maynard Keynes. 1913. "Indian Currency and Finance.")
" 'The sound principle for regulating the issue of a Paper Circulation,' wrote the Secretary of State, 'is that which was enforced on the Bank of England by the Act of 1844.' In England, of course, bankers immediately set themselves to recover the economy and elasticity, which the Act of 1844 banished from the English system, by other means; and with the development of the cheque system to its present state of perfection they have magnificently succeeded."
The question remains, says the author, can such banks creating credit units of account by double-entry bookkeeping enjoy the public trust under banking regulations based on audited financial statements? "I have looked at the generally accepted accounting principles applied by banks and find them in violation of GAAP. "In a nutshell, to quote Professor Richard A. Werner of the University of Southampton's School of Management. (Werner, R.A., Letter to the Independent Commission on Banking in London, 4 July 2011.)"
Writes Professor Werner: "There is no such thing as a 'bank loan' -- as lending and borrowing refer to the transfer of an item. Instead, banks create new money through the process of credit creation. This is how the money supply is created and allocated in the UK and other economies."
In saying so, the able professor is overly generous, because what the banks create are units or points which they name dollars, euros, or whatever, but money the banks don't have (except 2% of total assets, may be); the central banks have it.
If there is no loan, no money, then there is no asset. And if there is no asset except one so created by prohibited self-dealing without a cost basis, that asset shown on the balance sheet must be removed.
An asset is removed by writing it off against income in the income statement, reducing retained earnings, turning equity capital into a whopping deficiency because the liabilities masquerading as "cash in bank" for the depositors cannot be re-classified and must be allowed to stand as such, interchangeable perhaps with legal tender at the beck and call of the depositors to the extent that the banks have legal tender in their vaults.
The result of this masquerade is also the title of the book "Accounting Perversion in Bank Financial Statements. Root Cause of the Ongoing Global Financial Crisis." The Appendix includes material referred to and material required for further self-study.
"The Global Financial Crisis of 2007 to perhaps 2012 -- or whenever the system is finally fixed -- is blamed on the credit rating agencies Standard & Poor's, Moody's and Fitch who certified pools of sub-prime mortgages as investment grade, on corporate psychopaths who took over Wall Street (the BBC's latest of 3 January 2012), the absence of banking supervision and capital inadequacy, all of which I believe," writes the author, "is very much beside the point that turns the issue that our Global Financial System is kaput because of a misconception of what is money of the quality of legal tender, not bank-created points called dollars, euros, yen etc. classified as demand deposits that masquerade as liquid money, and are everything else but money. Thomas Jefferson, Irving Fisher, John Maynard Keynes, John Kenneth Galbraith are cited and would agree -- and I believe Mervyn Allister King, the present long-serving Governor of the Bank of England."
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