The art of leverage: a study of bank power, money-making and debt finance

Abstract

There are two main theories of banking which seem to be incompatible by nature. According to the first, banks intermediate money through their credit infrastructure but are not themselves able to create new money. By contrast, the second argues that banks do create money out of nothing in the process of lending their credit. Significantly, despite their contrasts, both theories conceptualize banking in functionalist terms as the financing of other people’s indebtedness. In so doing, they relegate to the side-lines the fact that banks are in the business first and foremost to ‘make money’ for themselves as they leverage their unique market position as dealers of other people’s debts. The article thus investigates the phenomenon of modern banking as the art of leverage. After showing the specificity of bank leverage relative to other forms of leverage across society, it delineates the fundamentals of a political economy of banking, money-making and debt finance. Finally, the article turns to an analysis of how contemporary banks make money and at once weave the infrastructure of financial markets through leverage-enhancing techniques rooted in repurchase agreements.