Moneyweek - British interest rates & debt....are we all doomed?

IronWolf

It's not really a case of banks lending out too much. Afterall, there are regulations in place that stop them lending out more than that allowed by their BOE deposits.

The problem is that lending money has risk of default, and when you lend out money and too much of it defaults you now end up reserves that don't adequately cover you for day to day operations, as happened with Northern Rock. You then need emergency loans from the BOE or other private banks in order to stay solvent, as by their very nature banks assets are illiquid and long term and unable to be converted to cash especially in a crisis.

QE simply buys illiquid assets from banks freeing up their assets into cash to keep them solvent and increase the loans they can make (also increasing the gross "money" supply). Usually the BOE is the only institution willing to buy these instruments as there is no interbank market for them anymore as they're all trying to increase liquid assets at the same time.

Jegersmart

SavingFish wrote: »

My understanding was that there was a fractional reserve level that was considered 'safe', for example 3% - That is, the commercial banks were to lend out no more than 97% of deposits they took (whether from central banks, savers, money markets etc...)

The banks that were being irresponsible went well below this level, say lending out 99.9% of deposits. When the 'depositors' asked for their money back, the banks didn't have the necessary reserves, couldn't raise money from anywhere else quickly enough and subsequently failed.

If the banks were allowed to fail, this would have set off a domino rally effect where debts were called in/defaulted and the other banks would fail one by one in a chain. Hence the central banks felt compelled to intervene.

It sounds like you're implying that they were lending out over 100% of their deposits? I don't think that's right?

Let me put it this way even though this is hijacking the thread (again). If you only held 3% capital against your debts/liabilities/whatever on a personal level, how much or little would need to go wrong for that to be a major problem for you?

I suggest you start a new thread?

J

SavingFish

IronWolf wrote: »

The problem is that lending money has risk of default, and when you lend out money and too much of it defaults you now end up reserves that don't adequately cover you for day to day operations, as happened with Northern Rock.

Makes sense

So on paper they met the 'safe' fractional level, but when the level of defaults ramped up it wasn't enough, and the 'irresponsibility' that everyone talks about comes from the banks lending out money to people who were at too high a risk of defaulting in the first place?

(There are a lot of subtleties. I have no training in economics whatsoever, but I do try to keep vaguely informed instead of just ranting at bankers/politicians/the world from a position of ignorance (not a comment targeted at anyone on this thread I hasten to point out)).

SavingFish

Jegersmart wrote: »

Let me put it this way even though this is hijacking the thread (again). If you only held 3% capital against your debts/liabilities/whatever on a personal level, how much or little would need to go wrong for that to be a major problem for you?

I suggest you start a new thread?

J

Well it clearly did go wrong, and I certainly never claimed it wouldn't.

I was just replying to JohnRo though, so please don't accuse me of thread hijacking.

The topic of British debt (and whether we are all doomed), is an incredibly complex one which probably can't be answered without an understanding of what that debt is and who owes what to whom.

(Unfortunately that's so convoluted that I doubt anyone could definitively answer the OP's question without a crystal ball).

Macca37

I would like to thank everyone for their contributions to the thread. It has certainly sparked a good deal of debate! I think the most important thing I will take away from it is that Money Week are probably exaggerating the risk of economic catastrophe befalling the UK at least in the short to medium term.

I did feel it was very Daily Mail/Express in its delivery style and I appreciate the comments from various people alerting me to the fact that this indeed is their forte.

:-)

sabretoothtigger

Money Week are probably exaggerating the risk of economic catastrophe befalling the UK at least in the short to medium term

Big headlines are used to sell a product of some kind often. Like they'd do a report on HMV or whatever, not that they know much just it draws in people

They may not be exaggerating but UK wont be falling in isolation and the main thing they dont know the timeframe, we could be stuck in stasis for years before it moves either way

rpc

JohnRo wrote: »

The simple fact is that no one, any where knows exactly what the hell they're doing.

With all the derivatives and complex products that are now available - I think you are right. I don't believe even the traders that create/buy/sell these products really know how they affect economies and what their future behaviour might be.

Beyond that, any discussion on fractional reserve banking MUST address the definition of money. FR banking does not increase the amount of currency in circulation (M0/MB), it does increase the balance sheets of practically everything/everyone it touches (M4).

The real question (aligned with my observation on derivatives) is that if you unwound the looser definitions of money supply, who would end up owing how much and to whom? Fractional reserve banking does create huge paper debts, but it also creates massive paper assets and there is a very complex web tying us all together. I'm not entirely sure that many people (if anyone) know the real answer to this so quoted numbers about "real debt per capita" and so on are mostly (IMHO) nonsense.

Jegersmart

SavingFish wrote: »

Well it clearly did go wrong, and I certainly never claimed it wouldn't.

I was just replying to JohnRo though, so please don't accuse me of thread hijacking.

The topic of British debt (and whether we are all doomed), is an incredibly complex one which probably can't be answered without an understanding of what that debt is and who owes what to whom.

(Unfortunately that's so convoluted that I doubt anyone could definitively answer the OP's question without a crystal ball).

At this stage we are all guilty of hijack, you should take some responsibility for your own actions imho.

In any case, some things are complex about this but I still maintain that a system based on money (i.e. debt) with interest applied creates scarcity and competition and ultimately defaults by its very nature - i.e. there is more "money" owing than there is in "existence". Perhaps some of these terms are slightly misused, however I believe that the whole system has to fail at some point - it is not a question of "if" but "when". Of course, this may take a very long time though......

J

sabretoothtigger

FR banking does not increase the amount of currency in circulation (M0/MB), it does increase the balance sheets of practically everything/everyone it touches (M4).

If I have any account I can go to the ATM and turn it to cash, so Im not sure stressing its not circulation as an argument against inflation matters.
Consumer spending and demand is quite low, inflation is still there anyway

CPI

SavingFish

Jegersmart wrote: »

In any case, some things are complex about this but I still maintain that a system based on money (i.e. debt) with interest applied creates scarcity and competition and ultimately defaults by its very nature - i.e. there is more "money" owing than there is in "existence". Perhaps some of these terms are slightly misused, however I believe that the whole system has to fail at some point - it is not a question of "if" but "when". Of course, this may take a very long time though......
J

As a thought experiment...

Throw all debts and assets into one huge computer database, then unwind everything such that you have only have two groups.
- Members of group A have a positive balance (they are owed money).
- Members of group B have a negative balance (they owe money).
This includes individuals, companies, banks, governments, everyone.

No doomsday, everyone knows where they stand.

It would never work in real life.

But it would be nice think that if everyone in power (either running the banks or in government) was completely selfless you could slowly unwind the mess. Sadly self interest will make it very hard to move backwards.

Maybe self preservation will be enough? If capitalism and subsequently society collapses you wouldn't want to be a politician or a banker.

I'd rather be an optimist than a doomsayer.