The credit crunch explained

1694

Reaper wrote: »

I don't think that explains it at all. Instead it explains what the National Debt is. A contributing factor maybe but not the root cause. Let me try...

The first step in the crisis was when banks started copying the government and lent out money that they did not actually have. This "Funding Gap" is a recent thing - in 2001 it was zero. Now, to pick just one of many examples, RBS has a funding gap of £160bn.

This was compounded when the money they lent out was to dodgy US sub prime mortgages which had no chance of ever being repaid, but nobody realised until it was far too late.

Now nobody will lend to anybody else for fear they might go bankrupt, so as all those loans they took out come up for renewal they can't find anybody to extend them and they face being declared insolvent.

The government has therefore concentrated on "providing liquidity". That is, lending money to renew those loans or guarenteeing repayment to anybody else who is willing to take them on

That is what the credit crunch is about

The policy of lending money that didn't exist exististed way before 2001. Fractional reserve has been around since gold smiths forged gold certifictes producing 9 for every unit of gold they held. This is how fractional reserve was invented and is practiced by all banks today. When you deposit £100 in a bank, they are authorised to create £900 pounds. This money is created as a loan, and is normally digital these days. As people only use a tiny amount of paper or coin money this is not a problem as the digital money is handed around digitaly. Even when you write a cheque this is just an instruction to your bank to transfer digital money to another bank.

This is why when bank runs occur and people want hard money, it fails the bank. The money only exists digitally.

The banks of course when they create loans of nine times there deposits demand interest on them at a higher rate than they offer savers. Therefore the nation is always playing catch up, working to create the money to pay the interest. Since it is the banks which create and loan only the prinicpal in this fashion and no new money is comming from the mint where can we get the money for the interest, only off someone else who has also borrowed money. When the music stops, someone is left standing.

Watch the video it will explain it better than I can.

1694

Think about this:

Inflation including house prices and share prices has soared. Where did all this money come from? The mint did not mint it. If it was government spending running wild then public services would be in tip top condition.

The problem is the way money has been allowed to be created by banks. Look it up, A PRIVATE BANK CAN CREATE MONEY FROM NOTHING. All it needs is £1 and it can magic £9, and charge anyone who borrows them interest. If there was only £1 in existence to start with plus the 9 created and the bank charges 12% interest on that lent 9, the bank needs to be repaid £10.08 8p more than the borrower can repay even if he has all the money of the orginal depositer as well as what he borrowed. Of course the banks want this scam to last a bit longer so they use compound interest, which slowly adds up to borrowers having to repay more than exists.

This is why the system has crashed everyone is chasing everyone to repay back what is owed and there isn't enough to go around.

wes88

So isnt this an ideal time for the government to play the banks at their own game and make a killing .. as they are solvent and the banks arent? So they can lend, the banks cant borrow .. charge them 15% compound ??

1694

wes88 wrote: »

So isnt this an ideal time for the government to play the banks at their own game and make a killing .. as they are solvent and the banks arent? So they can lend, the banks cant borrow .. charge them 15% compound ??

Yes the goverment could create digital money, or mint fresh money.

Instead they are borrowing more from other banks.

Who ever borrowed there way out of debt?

happywarmgun

1694 wrote: »

Yes the goverment could create digital money, or mint fresh money.

The Robert Mugabe school of economics way....

1694

happywarmgun wrote: »

The Robert Mugabe school of economics way....

How is the govt creating more money any different to a commercial bank doing it?

Here is my letter to the treasury finacial stability team.

Rather than borrow yourself into more debt why don’t you:

Offer a 100% secure govt savings account that offers 0% interest BUT has a double platinum titanium guarantee on it, the panicky public will love this more than the 0% interest deters them.
Use that money as a deposit and then fractional reserve yourself 9 times this amount.
Lend the fractional reserve money to the commercial banks to free up their liquidity.
Charge the commercial banks interest.
Use the interest to pay off the National debt

And save the nation!!!!

You can reduce income tax, increase public spending etc.

1694

Inflation will be pinned at the same, or a slightly a lower level as the government needs the same reserves at the commercial banks do now. Except there will be no interest created for savers

happywarmgun

1694 wrote: »

How is the govt creating more money any different to a commercial bank doing it?
.

Only in that the government is the banker of last resort - and the only thing that anyone has any of that X factor 'confidence' in when it comes to assurance on cash. If it plays the same game as commerical banks it will end up with the same levels of confidence that are currently with commerical banks. Zero. So if it tries to play its cards too soon by minting money then it is a busted flush when it it doesn't work, and to add to woes it has heaped on inflationary pressure onto what little cash there is.

I think the approach of recapitalising banks with public money is the right one (and I speak as someone who has just written off 8000 quid in HBOS shares) - hopefully the US will follow suit. You get confidence back in the banks that they can honour their debts, the cash will start flowing again, and at a later date the government can have a public offering on it's preference shares and get the taxpayers money back.

However, it needs co-ordinated support from all goverments (most particuarly the US) to work as they're all one long chain, and every link needs to have liquidity.