Why Banks Do Not Want Loans Repaid or Perpetual Loans

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Executive Summary

Banks want interest-only loans where the principal is never extinguished.
This is to keep borrowers as customers for their entire lives.

Introduction

One of the illusions promoted by banks is that they want all of their loan paid back. This is untrue. Banks desire to create perpetual customers, which means a loan where the principal is never repaid.

This is explained in the following quotation.

It is important to remember that banks do not really want to have their loans repaid, except as evidence of the dependability of the borrower. They make a profit from interest on the loan, not repayment of the loan. If a loan is paid off, the bank merely has to find another borrower, and that can be an expensive nuisance. It is much better to have the existing borrower pay only the interest and never make payments on the loan itself. That process is called rolling over the debt. One of the reasons banks prefer to lend to governments is that they do not expect those loans ever to be repaid. When Walter Wriston was chairman of the Citicorp Bank in 1982, he extolled the virtue of the action this way: If we had a truth-in-Government act comparable to the truth-in-advertising law, every note issued by the Treasury would be obliged to include a sentence stating: “This note will be redeemed with the proceeds from an identical note which will be sold to the public when this one comes due.

To see why, it is only necessary to understand the basic facts of government borrowing. The first is that there are few recorded instances in history of government—any government—actually getting out of debt. Certainly in an era of $100-billion deficits, no one lending money to our Government by buying a Treasury bill expects that it will be paid at maturity in any way except by our Government’s selling a new bill of like amount.”

Source: Creature From Jekyll Island

https://www.scribd.com/doc/54912935/The-Creature-from-Jekyll-Island-G-Edward-Griffin

This same dynamic applies to the IMF when they loan to countries. They don’t want the money paid back, they want the loan to be used as a cudgel to wring concessions out of governments. The IMF expects the money they loan to be wasted or end up in offshore bank accounts.

Why Do Governments Borrow Money?

This gets to a fundamental contradiction. Governments that create their own money through a public central bank do not need to borrow money. They do not need to borrow it from foreign entities or from their citizens. If money is created by a public central bank is not debt, and there is nothing to pay back.

The Bank of England was created when the British Crown became confused into thinking it needed to borrow money to fight the French. The Bank of England was created out of social credit, and was begun with tally sticks, which were just government credit.

The fact that governments either cannot figure this out or are corrupted to hand over their money creation function to a private entity, puts them on the road of needing to borrow their own money.

The Perverse Incentives to Create Unsound Loans

Within this desire to keep the borrow permanently in debt, comes the incentive to create unsound loans as is explained in the following quotation.

Since the system makes it profitable for banks to make large, unsound loans, that is the kind of loans which banks will make. Furthermore, it is predictable that most unsound loans eventually will go into default. When the borrower finally declares that he cannot pay, the bank responds by rolling over the loan. This often is stage managed to appear as a concession on the part of the bank but, in reality, it is a significant forward move toward the objective of perpetual interest. Eventually the borrower comes to the point where he can no longer pay even the interest. Now the play becomes more complex. The bank does not want to lose the interest, because that is its stream of income. But it cannot afford to allow the borrower to go into default either, because that would require a write-off which, in turn, could wipe out the owners’ equity and put the bank out of business. So the bank’s next move is to create additional money out of nothing and lend that to the borrower so he will have enough to continue paying the interest, which by now must be paid on the original loan plus the additional loan as well. What looked like certain disaster suddenly is converted by a brilliant play into a major score. This not only maintains the old loan on the books as an asset, it actually increases the apparent size of that asset and also results in higher interest payments, thus, greater profit to the bank. THE UP-THE-ANTE PLAY Sooner or later, the borrower becomes restless. He is not interested in making interest payments with nothing left for himself. He comes to realize that he is merely working for the bank and, once again, interest payments stop. The opposing teams go into a huddle to plan the next move, then rush to the scrimmage 1- “Banking Against Disaster,” by Walter B. Wriston, The New York Times, September 14,1982.

Source: Creature From Jekyll Island