This blog post examines the structure by which money is created as debt and the logic behind bank lending. It calmly explores why financial crises recur and how debt underpins capitalism.

No Debt, No Money

Money is ‘debt’. For banks to create money, they must go through the process of ‘lending’. In other words, money takes the form of ‘debt’ and is distributed to many people. This means capitalism can only function normally if there are people who take on debt. And banks earn profits by collecting interest on that ‘debt’. Without ‘debt’, there are no banks.
Ellen Brown, attorney and president of the Institute for Public Finance, stated:

“Money today has nothing to do with gold. Banks inflate the monetary system. That’s what banks do. They must make more loans to create more money in the system. Banks are playing a shell game.”

Marriner Akers, who served as Chairman of the Federal Reserve under the Roosevelt administration, made a similar point.

“Without debt in our monetary system, there is no money.”

In a way, we may have been overly naive about money and debt. We’ve heard the adage “Don’t get into debt; earn your money honestly” until it’s drilled into our heads, yet the reality that our society can only function with debt sometimes feels downright betrayal. Debt, taught as evil, has transformed into a virtue from capitalism’s perspective.
Yet in capitalist society, those with money use this ‘debt’ to make even more money, while those without money are driven to ruin precisely because of this ‘debt’. The ‘subprime mortgage crisis’ that erupted in the United States in 2008 can also be understood within this context.

The Secret of Subprime Mortgages

Before examining this crisis that plunged the U.S. into financial turmoil, we must first clarify the meaning of the term ‘subprime’. In the U.S., individual credit ratings are categorized into ‘Prime (Excellent)’, ‘Alt-A (Intermediate)’, and ‘Subprime (Low Credit)’. Thus, a subprime mortgage loan refers to a home equity loan targeted at low-credit individuals. In other words, loans were extended even to those who lacked sufficient repayment capacity.
This is explained by John Steele Gordon, an American financial historian.

“Most U.S. banks lend out ten times their deposit base. Lehman Brothers, though not a bank but an investment bank, operated with 40 times its equity in borrowed funds. Not 10 times, but 40 times.”

Initially, this structure appeared highly successful. Low-credit individuals with limited funds could purchase high-end homes, then easily make substantial profits by reselling them once property values rose. Especially since loans to low-credit borrowers carried high interest rates, from the bank’s perspective, it was a win-win product that allowed them to recover principal and earn high profits simultaneously.
However, the continuously rising real estate prices eventually began to deflate, ultimately becoming the direct cause of the financial crisis. Professor Raghuram Rajan of the University of Chicago Booth School of Business explains it this way.

“Mortgage loans were the ultimate form of borrowing. Because home prices were rising, people didn’t feel like they were borrowing money. It felt like they were legally tapping into their own assets. As house prices kept climbing, they borrowed the equivalent of that increase. But when prices started falling, there was no safety net. They had already mortgaged their homes. They had already bought houses and cars, and spent money on lifestyles matching those purchases. So even though their incomes hadn’t increased, they fell into the illusion that they were living well.”

As real estate prices fell, people lost the ability to repay not only the principal but even the interest. Cases even arose where selling the house wasn’t enough to pay off the debt. Adding to this, financial institutions created and sold various derivative products based on subprime mortgages as the underlying asset, making the problem even more severe.
This is explained by Eric Maskin, a professor of social sciences at Princeton University.

“Derivatives are financial contracts, and credit default swaps (CDS) fall under this category. They are products that distribute the risk potentially arising from a specific investment among multiple investors.”

As the U.S. economy entered a recession and subprime mortgages became risky, the derivatives based on them turned into worthless scraps overnight. Credit Default Swaps (CDS), which were supposed to compensate the seller if mortgage bonds defaulted, also rapidly became dangerous. A chain of defaults had begun. Many U.S. investment banks and financial institutions had already invested in these derivatives for profit, and these products had even been sold worldwide.
This is according to Professor Raghuram Rajan of the University of Chicago Booth School of Business.

“Many European institutions purchased highly toxic mortgage-backed securities from U.S. institutions because they were rated triple-A. By their oversight standards, they appeared problem-free. Even with low interest rates, they delivered above-average returns, so everyone was enthusiastic, and the products spread rapidly. But in the end, they all vanished. They were bought solely because of the triple-A rating. Many also bought them because someone in the field assured them they were safe. A great many people purchased them without fully understanding the risks or receiving proper explanations.”

At the time, the size of the credit default swaps (CDS) held by Lehman Brothers Holdings alone reached $800 billion. Converted to Korean won, that meant approximately 900 trillion won was exposed to risk, making the ripple effect inevitably beyond imagination. Ultimately, Lehman Brothers Holdings, one of the top five U.S. financial firms, went bankrupt.
American financial historian John Steele Gordon offers a similar explanation.

“In the mid-1990s, there was a housing bubble, a sustained rise in home prices. Many people felt they had become wealthy because they held assets rapidly increasing in value. So they borrowed more money through second mortgages or increased spending, believing they had substantial assets. And they saved almost nothing. They felt their net worth was increasing for free as their home values rose. But like all bubbles, it eventually burst. The market became flooded with homes for sale, and people increasingly failed to meet their debt obligations. Signs that something was wrong began to appear. Home prices started to fall. Home prices are still below their 2007 levels. The fallout affected other areas of the economy. The drop in home prices caused consumption to plummet sharply.”

A system for bankers, by bankers

The responsibility for this entire situation can be placed on the banks that expanded lending even to low-credit borrowers who lacked the ability to repay. However, the point we must carefully examine here is that this was not simply a mistake or misjudgment by the banks.
With inflation at its peak and money flooding the market, banks had no choice but to turn their attention to low-credit borrowers to survive.
Just as a regular company must continuously sell its products to sustain its business, for a bank, its product is ‘loans’. The bank as a business can only operate if there are always people to take out loans. However, as money became excessively supplied in the market, people with good credit no longer needed to rely on bank loans. Consequently, banks had no choice but to expand lending even to those without money, continuing to sell their product.
And when real estate prices fell, people unable to repay their debts began to emerge in droves. This marked the full-fledged start of the deflationary phase we commonly call the global financial crisis. The situation in our country is not significantly different. Our fathers’ generation lived believing that house prices only ever went up. This was because they lived through the ‘summer’ season of the economic cycle. Yet now, we are witnessing with our own eyes the sustained decline of real estate prices.
All these phenomena can be seen not merely as issues of ‘economic downturn’ or ‘recession,’ but as problems structurally inherent within the capitalist system itself. As Ellen Brown, president of the Public Banking Institute in the United States, has stated, we are destined to live within a “private banking system for bankers, by bankers,” not a democratic system.
Why do financial crises recur? Why do problems show little sign of resolution? Why do real estate prices struggle to recover? Why can’t the younger generation find stable jobs? The root cause of all these questions must be sought within the capitalist system itself. Debt that never diminishes no matter how much we repay—we are ultimately bound by an inescapable chain of indebtedness.
In capitalist society, banks lending money even to those incapable of repayment is never an act of “consideration for the socially vulnerable.” It is not a choice born of compassion, nor is it a benevolent act to aid low-credit individuals facing harsh realities. This entire process is an inherent law within the capitalist system, and simultaneously a ruthless principle driving the vulnerable toward mutual destruction.
Song Hongming, author of 『Currency Wars』, states the following in his book:

“Financial conglomerates discovered severe bubbles forming during the overheating of the economy. This phenomenon was also an inevitable consequence of flooding the market with excessive money. This entire process is akin to financial conglomerates raising fish in an aquarium. They injected massive amounts of currency into economic entities by flooding the market with money, much like pouring water into an aquarium. When money flows freely, people from all walks of life work day and night, driven by greed to earn more, creating wealth. This resembles fish in an aquarium absorbing various nutrients and gradually gaining weight. When the financial conglomerates realize the harvest season has arrived and begin draining the aquarium, the fish can only wait for the moment they are caught and eaten.

What reality do we face within this principle of capitalism? It is struggle. The way of life known as ‘endless struggle’—constantly competing to survive in a harsh world—ultimately dominates us.