I did work on Wall St. after graduating college, but I think Yanis Varoufakis, the former Finance Minister of Greece, former economist-in-residence at Valve, academic, author, and self-described “radical lefty” did a better job than I ever could describing the modern Financial System at a talk he gave in Boston last year:

“The beauty and ugliness of Finance, of Banking, is that it is a Magical process. Because once we moved from the [Feudal] Landlord to Edison and Henry Ford, it became impossible to finance Capitalism simply via the accumulated Wealth of some rich person. There was never enough money in the hands of any financier to provide Edison with the money he needed in order to set up his networked firm. So you needed banks to conjure up money from nothing…

There is a common fallacy in popular culture that banks operate like vaults. Whereby you and I put our savings in, and somebody else borrows money that comes from our savings. And that the banker makes money from the difference between the Interest rate that he pays us for depositing our money into his vault, and the Interest rate he charges the borrower.

That is not what is going on.

If you go to a bank tomorrow morning and you get a loan, the money is going to come out of thin air. The bank will create it out of nothing. It’s really very simple. You get $100,000…what will happen is someone just types $100,000 into your bank account….the hope of the banker is: you are going to use this money productively, earn money from the loan, and then you will give the banker back the money that will tie up that lose end. With Interest.

To the extent that this works, it really works magnificently.

It’s a bit like a banker being a specially gifted Magician who has a very long arm and can push that arm through the timeline. He pushes his hand into the future, grabs value that has not been created yet, snatches it from the future, brings it to the Present, and hopefully you do productive things, and you create the value that will repay the Future.

But once they learn the beauty — the glory — of doing this, they are in a privileged spot. Because they can take value from the Future, bring it to the Present…and because they are the mediators between Future and Present value they are ultra rich and central in societal processes. Political processes.

If you do this and it works, why not do more of this?

Keep snatching more value from the Future, and more, and more! At some point the Present can no longer produce the value that it needs to produce in order to repay the Present. At that point, those of us who have borrowed money have no capacity to repay it, a recession beings, people that work for us lose their jobs, they cannot repay their own loans, and then suddenly the book of the bank is full of loans that are “non-performing”.

At that point, if you and I, or those of us who have some money in the bank, realize that this is happening, we panic, we rush to the bank — this is a bank run — we ask for the cash — the cash is not there! And then you have the financial crises that we had in this country and in Europe from the 1840s onwards.”