oh dear oh dear. No end in sight. 0% here we come

Generali

Dithering_Dad wrote: »

The majority of the money banks lend out is not connected with the amount they have under deposit. Basically they're lending you your own money, with interest (i.e. your future earnings that they take each month via your repayments). The money they lend to you is created from thin air.

Someone posted an excellent youtube vid about this (http://www.youtube.com/watch?v=vVkFb26u9g8) on Monday. I only got as far as episode 2 of 5 before I got too annoyed to continue.

This basically explains why we're in such a mess now. The banks lent out more than they had on deposit, there was a run on the banks and they didn't have enough actual cash to pay the depositors so the government stepped in to bail them out with our cash. Except that cash doesn't exist either - it's all our future taxes... and so it goes on :eek:

The thing is with fractional reserve banking is it's just how banks work and it's the only way they can work. If you want to have a system which involves credit (farmers growing food for you or retailers being able to import stuff) then fractional reserve banking is at the heart of it.

Most farmers aren't that rich. How do they finance buying seeds and not getting a return until the seeds have grown? How can retailers afford to buy stuff and only sell it when you happen to rock up looking for an 80th birthday present for dear old Auntie Mabel who could really do with a few more lace doilies?

Banks have lent out more than they have on deposit in the UK since the Lombardis rocked up to London.

Austin_Allegro

paulmx3 wrote: »

i cant see this fascination they have with lowering interest rates to get the economy moving,surely that will just further promote what got the country in this mess in the first place,ie people spnding money they dont have,and what i mean by that is extra money that people now have due to rates being so low,it is not sustainable and i dread to tink of the mess we will be in when rates have to go back to there more realistic 5% or so and not forgetting when rates where 15%,that would bring the fear of god into most households yet it is a real possibilty.

its going to be painfull either way so why not just be realistic about it.

I guess the government would rather down the 'more debt' route, as it's vaguely possible that something will come along to create wealth, such as finding oil in the Pennines or the whole of France being destroyed by a meteorite or something.

The alternative to pouring more debt down the engorged throat of the British economy is for everyone to have the mother of all economic hangovers with the country turning into something like Russia - a disaffected urban population living on the pittance of dole and crime, and the rest scraping by on self-sufficiency in the countryside.

I am afraid the British would rather commit suicide en masse than face something like that!

tomstickland

I'd guess that for most people their mortgage is the primary debt. Loads of people are on fixed rates, so lowering doesn't help at all.

Kev09

socrates wrote: »

BoE are not even in the game - they are pawns.

How is it that one minute they are keeping things on hold or increasing and all of a sudden drop,drop,drop like mad.

They were told what to do by the powers that be.

Who are the powers that be?

Thrugelmir

Dithering_Dad wrote: »

The majority of the money banks lend out is not connected with the amount they have under deposit. Basically they're lending you your own money, with interest (i.e. your future earnings that they take each month via your repayments). The money they lend to you is created from thin air.

Someone posted an excellent youtube vid about this (http://www.youtube.com/watch?v=vVkFb26u9g8) on Monday. I only got as far as episode 2 of 5 before I got too annoyed to continue.

This basically explains why we're in such a mess now. The banks lent out more than they had on deposit, there was a run on the banks and they didn't have enough actual cash to pay the depositors so the government stepped in to bail them out with our cash. Except that cash doesn't exist either - it's all our future taxes... and so it goes on :eek:

Banks raise capital funds from 3 sources to lend. Depositors, Shareholders and Wholesale markets.

The reason that banks cannot repay all depositors on demand is that they they borrow short and lend long ( eg mortgages).

The government had to bail out the banks as the wholesale money markets froze. As no one knows who holds the worthless paper issued by Lehmans etc. To comply with Accounting and Banking Regulations the banks have had to write down the value of the toxic assets to a value of 20% of cost. It is forecast that a lot of these investments will realise nearer 60% to 70% of value upon maturity.

Banking has been around for centuries. Though only in the past 15 years or so has the distinction between investment and retail banking become cloudy. As previously there was a clear dividing line.

beaujolais-nouveau

Kev09 wrote: »

Handing out free money and telling people go spend!!!!!!!!!!!!!!!!!!!!!!!!

They did this in Tasmania,

the Federal Government's first economic stimulus package, which delivered $8.7 billion dollars in cash payments to Australian pensioners, carers and low-income families.

and the recipients appear to have splurged $4 million of it in slot machines.

Opposition leader Will Hodgman says some of the stimulus money ended up in poker machines.

"It could in Tasmania, as this information says, be compounding a gaming problem or a gambling problem amongst some Tasmanian people," he said.

The Greens' Nick McKim agrees some people are not spending the federal money as Prime Minister Kevin Rudd intended.

"Certainly there is a risk that some of the cash payments that are coming down the line will end up in poker machines," he said.

Mr McKim says the State Government has had 10 years to do something about problem gamblers, but has done nothing.

"The biggest addict to poker machines in Tasmania is the State Government," he said.

http://www.abc.net.au/news/stories/2009/02/10/2487136.htm
Australia - Pokies soak up stimulus package
Tuesday 10 February 2009

Dithering_Dad

Generali wrote: »

The thing is with fractional reserve banking is it's just how banks work and it's the only way they can work. If you want to have a system which involves credit (farmers growing food for you or retailers being able to import stuff) then fractional reserve banking is at the heart of it.

Most farmers aren't that rich. How do they finance buying seeds and not getting a return until the seeds have grown? How can retailers afford to buy stuff and only sell it when you happen to rock up looking for an 80th birthday present for dear old Auntie Mabel who could really do with a few more lace doilies?

Banks have lent out more than they have on deposit in the UK since the Lombardis rocked up to London.

Sorry, should have made it clear. I am not opposed to this sort of banking, what made me mad was that as the banks grew (in the cartoon utube vid), central banks appeared to prevent runs on local banks and in return for this aid, the local banks agreed to be subject to govenment banking regulations. The failure of the banks has more to do with the government regulations failing than anything else - had they been tougher then the greed spiral would not have been allowed to flourish.

Thrugelmir

ginvzt wrote: »

If the rates drop to 0, you can forget about letting any mortgages and there will be no savers putting money in the banks and banks will have no money to lend! I think I'd better keep my money in the socks than put in the bank at 0% (they already are nearly there for some savings anyway) and risk the bank going bust.

Savings rates and mortgage rates are not directly linked to the BOE base rate.

All a bank or lender has to do is make a margin between the rate it borrows and lends at. So could offer savers 2% and lend at 6% for example.

The remaining mortgage lenders in the UK probably want to reduce their exposure to the UK housing market at the moment. LloydsHBOS has 30% of the mortgage market so doesn't a larger market share.

The time is ripe for the return of the traditional old fashioned building society.
Of which only a few remain. Lending conservatively to their own savers in their own communities.

maninthestreet

We heading for some sort of catastrophic event, in line with the Catastrophe Theory, creating what physicists would call a 'singularity'.

Generali

Dithering_Dad wrote: »

Sorry, should have made it clear. I am not opposed to this sort of banking, what made me mad was that as the banks grew (in the cartoon utube vid), central banks appeared to prevent runs on local banks and in return for this aid, the local banks agreed to be subject to govenment banking regulations. The failure of the banks has more to do with the government regulations failing than anything else - had they been tougher then the greed spiral would not have been allowed to flourish.

It seems better to me that you severely restrict the size of banks so that if a few go bust now and again there's no systemic problem. If people lose money when the banks go bust then so be it. If you lend money to someone in return for a rate of interest (or services in the case of a current account) then you're taking a risk.

This whole thing about the greed of bankers is a bit of a red herring in my opinion. If your employer said to you it would be possible for you to quintuple your income if you took a small risk individually which was perfectly legal and indeed approved by the industry regulator would you do it? You would and you know you would.