MSE News: Bank charges update: the phoenix from the flames + full Q&A

orc_2

Bob_Roberts wrote: »

.................................................... the people who didn't pay monies back that they had borrowed without asking helped our Banks incur enormous losses..

I'm sorry, but ordinary folk did not cause the problem, Bob.

I believe the main cause can be laid fairly and squarely on the banks firstly and governments (regulators), secondly.

I am no expert and will try to put it in laymans terms:

Banks packaged dodgy loans (securitisation) into interest-bearing bonds (in an endeavour to make more money) and sold these elsewhere (to bidders) ie to other financial institutions. As this removed the loans from the balance sheets it allowed them to lend even more money, money they did not have. The selling was a nice earner as well.

The banks thought, wrongly, that they no longer bore the risk of default on these mortgages (sub prime or toxic) because they had been sold on to other people. But they were "gambling" by buying other securitised bonds which were continually getting repackaged and they ended up buying bad debts from elsewhere, perhaps even debts that were a far higher risk.

Remember though that this process was happening in most financial institutions and was happening incredibly frequently. It got so daft that most "experts" selling packages didn't even really know what debt and what risk was actually in the packages being sold. Equally importantly, they soon did not know what debts they owned and what risk was attached to them. At the same time, they soon realised that they did not know what debts their competitors owned and that became crucially important when banks needed to borrow "liquid" funds and found that other banks would not lend to them.

In tandem with the above was the availability of a raft of new financial products, mortgages etc that were sold, ignoring peoples ability to pay whilst totally unaware of the possibility that house prices might fall.

In essence, in my opinion, the banks are guilty as the cause of the crisis, with the governments and regulators a close second.

They are also guilty in respect of bank charges, mis selling of PPI, etc and hopefully, with some luck, we will see a positive legal outcome to follow in favour of claimants.

Alpine_Star

tifo wrote: »

Is there any way of downloading only the clip and not the whole program, as a transcript is not available?

Should the statement by Mr Falconer be used in a court of law or is it just one person's opinion with no bearing on anthing?

Yes - scroll down the page a bit and click 'Chapter 4'. http://www.bbc.co.uk/programmes/b00p36jw#p005c7wb

Centium5000

Bob_Roberts wrote: »

Just read your response - reality is that Bank uses credit balances I keep on my account to lend to other people i.e. they borrow money from me free of charge and in return give me free Banking. The "Fines" of £35 or whatever are what helped our Banks make enormous profits - the people who didn't pay monies back that they had borrowed without asking helped our Banks incur enormous losses. Incidentally, isn't there a simple legal term for "borrowing" without asking!

This is a very popular misconception and orc has written a good explanation of why the banks lost so much money.

However, there's another side of it - the banks losing all that money is actually by design.

Don't believe me? I don't blame you, this is scary stuff.

Firstly, you think that if you deposit £10 in your bank account, the bank lends this £10 out and the profit they make is the difference in interest right? Wrong, I'm afraid.

The bank can lend your £10 out 12 times or more and charge interest on each of these loans. That might be £120 loaned just from your £10 deposit and at 7% interest (being conservative here), that would be £8.40 interest in year 1.

Usually banks limit themselves to just 2-6 times the amount deposited, but that's still pretty good profit - £4.20 a year at 7%, assuming your £10 is loaned 6 times.

I know it sounds crazy but it's true. This is how money is created in our economy to keep everything moving.

Here are some links that explain it fully:

http://en.wikipedia.org/wiki/Fractional-reserve_banking#Money_creation
http://www.dailyreckoning.com.au/uk-money-supply/2007/10/09/
http://www.marketoracle.co.uk/Article9986.html
http://www.theproblemwithinterest.com/pwi_articles_fractional.htm
http://www.fsa.gov.uk/pages/Library/research/economic/interest/lending.shtml

So, when these charges are applied, far beyond "cross-subsidising" in-credit accounts, they allow banks to take an even bigger share of the money supply.

The charges allow the banks to do this more quickly - it is in addition to interest.

That means the money deposited in your account is worth far less every year as it is a smaller proportion of the overall money in the economy. You'd notice this through inflated prices, except the banks don't spend this money, they keep it so we don't have massive inflation.

When the amount of debt (due to interest) exceeds the amount of money in the economy, it's not possible to pay the debt off. Property is forfeited, the debt is wiped out, the money supply gets smaller, the banks sell the property and we all start again.

Boom / bust / boom / bust etc.

There's one particlar group that controls the cycle and benefits from it.

Now as most people aren't aware this takes place, isn't there a simple legal term for this as well?