Virtual money?

kim_ley

I have read in various places that the money banks lent out never existed...

‘The modern banking system manufactures money out of nothing,’ said Lord Josiah Stamp, former director of the Bank of England, in 1937. ‘The process is perhaps the most astonishing piece of sleight of hand that was ever invented.’

:eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek: :eek:
if that is the case then how did the credit crunch come about?
If it didn't exist surly they have nothing to lose?

What do you know about this / is your opinion?

dopester

Yawn.

http://en.wikipedia.org/wiki/Fractional-reserve_banking

kim_ley

what are you yawning at??

themanbearpig

This subject is fairly elementary for most people on this board!

Money is borrowed from the future, and they lend it to us with interest. Banks are a part of the elite, and are allowed to lend money that doesn't exist.

Masomnia

themanbearpig wrote: »

This subject is fairly elementary for most people on this board!

No need to be condescending.

kim_ley

I understand that I just think the whole credit crunch was made on purpose!!! If the money doesnt exist where did the problem arise?

shaven-monkey

kim_ley wrote: »

I have read in various places that the money banks lent out never existed...
if that is the case then how did the credit crunch come about?
If it didn't exist surly they have nothing to lose?

What do you know about this / is your opinion?

Fractional reserve banking is based on the fun idea that a bank can create money out of nothing based on a multiple of its' assets.
Recently it became fashionable to reclassify a debt owed as an asset.
Some americans made a lot of money reclassifying bad debts as good assets. Banks sold each other these "special purpose vehicles".
The banks loaned money to each other using these bad debts as assets, the banks then loaned money to us using the borrowed money as assets.
Someone says "hang on a minute...." and the whole chain of made up money collapses.
Because the supply of money was increased by something like 300% or more the value of assets purchased using loans also rose 300% or more.

Banks are insolvent all the time by nature of their business model but as long as the depositors don't demand all their money at once it all ticks over nicely. Unfortunately for the banking sector, a lot of their depositors were other banks who had realised their special purpose vehicles were worthless.
Real money is demanded to repay the debts, turns out the money isn't there. Banks collapse, other banks check and discover their cupboard is also bare apart from some IOUs from shifty american blokes. They threaten to steal all the money from their depositors (us) to pay off their debts and the government gives in, providing them with substantial amounts of "real" money that's made up by borrowing from future revenues (future taxation) to prevent the banks from stealing all our money right now. It's a neat scam.
Add to this the exciting world of investment banking, where shifty blokes in suits borrow money to gamble on the stock market thus driving up the prices of stocks finding they can no longer borrow vast amounts of cash. They suddenly can't artificially inflate the prices of stocks, so the markets undergo a correction and you've wiped out even more virtual money in the form of people's pensions and savings (which again are counted by banks as assets to loan against)

Whether it was intentional or not is between you and your aluminium beanie.
If you have no assets other than material ones (house, food, gold bullion) then you're fine.
If you've got savings then you've been screwed.
If you're in debt then you are going to be screwed.

I may be wrong, i frequently am.

socrates

I remember the supposed nutter David Icke going on about this very subject ages ago - and he was ridiculed.

Not that I am one of those that believes everything he says but he does talk some sense on a variety of subjects.

drbeat

The more people who know about the Fractional Reserve System the better. Please don't ridicule those who have only just discovered this scam - unless they post in chav-txt-speak of course!

PasturesNew

Think of money like this:

If I have no income, but I have a credit card and we go out shopping. You spot a coat you want that is £100 but you have no money "Put it on your card, I'll pay you back" you say, so I do. And you start to pay me back £10/month for 12 months, which pays my credit card bill.

Then my other mate goes out shopping with me (and my card) and they spot some boots at £100 and they have no money so ask me "Put it on your card, I'll pay you back", so I do. And they start to pay me back £10/month for 12 months.

That is banking. So there I am, no money. Credit card bill comes in 2x£100 on it - and they want £17 from me. You both give me £10. I pocket £3 and as my bonus (all bankers get a bonus) I buy myself a pint with that £3.

Month 2 ... the same.
Month 3 ... the same.

Month 4 - neither of you can pay me the £10, you want me to wait a month and you'll probably pay next month's on time.

But my card bill comes and I can't pay the £17. All the spare £3s have gone on beer, so I can't make up the difference.

My card gets cancelled.

Then you both call me to go shopping ... and you both spot a lovely holiday for £100 you want me to put on my card "you'll pay me £10/month for 12 months apiece". Only I can't. My card doesn't work.

That's how money gets invented - and the credit crunch.

Although if I'd been doing this with 10 friends (as per fractional reserve banking), I might have got away with getting my free beers for longer.

WTF?_2

kim_ley wrote: »

I understand that I just think the whole credit crunch was made on purpose!!! If the money doesnt exist where did the problem arise?

You have to remember that although banks can't create money, they can create 'bank credit' which is under normal circumstances pretty much the same thing.

If you can convince a bank of your ability to pay back a loan, they can give you bank credit. The bank doesn't need to have actual money to the value of the credit that they give you - they are allowed to leverage their capital assets quite considerably. I think they generally need only 7% or so of their liabilities to be covered with their own assets under international agreements, so they could have loaned out maybe 15x the value of their asset base. Essentially the bank have created money from thin air based on your promise to pay them back from future earnings. They get to keep the interest as profit.

However, thanks to all the financial chicanery that was going on through much of the last decade, they didn't even stick to that generous amount of leveraging. Those 'new financial instruments' allowed them to take it off their balance sheets thus allowing them to create even more credit - thus making even more profits ..... until the system went into reverse when the US sub-prime market imploded. Now they are facing massive leveraged losses.


In a nutshell, the problem arose because the greed of the banks was allowed to go unchecked by the governments and their financial regulatory authorities. More money was created than was sensible, it's not all going to be paid back and hence many banks stand to go bust. Being as enormously leveraged as they are that's very bad news indeed as it implies the destruction of large amounts of capital.