Let's be honest: the banking system is now fully dysfunctional. It has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine.

HuffPost readers, I know, are smart and on the button when it comes to bankers and their wicked ways. But how many Americans understand how broken and defective the banking system as a whole has become? For the crazy facts are these: bankers now borrow from their customers and from taxpayers. They are effectively draining funds from household bank accounts, small businesses, corporations, government Treasuries and from e.g. the Federal Reserve. They do so by charging high rates of interest and fees; by demanding early repayment of loans; by illegally foreclosing on homeowners, and by appropriating, and then speculating with trillions of dollars of taxpayer-backed resources.

A report out today, "Where did our money go?" from the London-based new economics foundation ( declaration of interest: I am a Fellow of NEF) -- reveals that net lending to households and firms is negative. British banks are currently borrowing £12 billion ($18bn) a month to maintain existing levels of activity. According to the Bank of England, by 2011 they will have to borrow £25 billion ($39bn) a month -- and the Bank is sceptical they can continue to raise that level of funding.

According to the Bank of England UK banks are not alone in facing a significant refinancing challenge. Global banks are estimated to have around US$5 trillion of medium to long-term funding maturing over the next three years, and 'the scale of competition for funds in global markets' is intense.

By borrowing from the real economy, and then refusing to lend, except at high rates of interest, bankers are effectively performing a lobotomy on the real economy. They are cutting critical credit connections to and from the vital 'cortex' -- the region of the economy responsible for investment and the creation of jobs. Without a sound banking system and cheap, carefully regulated credit, the public and private sectors will not invest in e.g. green jobs or infrastructure. Output will continue to plummet, and unemployment and poverty to rise.

The banking system was invented in 14th century Florence, 16th Century London, and 17th century Amsterdam -- to create and disburse credit. We learned nearly five hundred years ago that a sound banking system could do just that, stimulating trade and other forms of economic activity. The effortless and almost costless creation of credit by both central and commercial banks creates deposits and savings -- and not the other way around.

This is contrary to the archaic ideas of the 'classical' economists (for which read: the Chicago School). Deposits and savings are not the result of economic activity; nor is Quantitative Easing. Instead they are the result of credit creation -- which can then be used to finance investment and jobs. Today, as NEF's report shows, thanks to the persistence of archaic, neo-liberal economic theories of finance, the banking system has frozen lending and been turned on its head.

Instead of lending into the economy, bankers are borrowing from the real economy.

Lunatic asylums are rightly discredited. Their treatment of patients was often barbaric and ultimately ineffective -- so they were consigned to the dustbin of history.

Like the asylums of yesteryear, banks are no longer fit for purpose. Their treatment of businesses and households is blunt and brutal. Built on monetary theory as outdated as Victorian lunatic asylums, the banking system is likely to implode again. That is why governments are cutting back on spending, and shoring up funds -- fully expecting another banking bailout. The governor of the European Central Bank declared as much in the FT on 5 September, this year.

What can Huff Post readers do? Get out of the 'veal pen' and refuse to cede the battleground to Tea Parties. In other words, organise, don't agonise.

