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Thread: Who or what creates money?? Debt maybe?

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    Lightbulb Who or what creates money?? Debt maybe?

    Bear in mind:
    a) the phenomenal rise in national (public and private) debt over the past 5-10 years, and the seemingly inexhaustible supply of credit.
    b) the power of the banks and banking sector when compared to other sectors that (for example) make real stuff.
    c) The enormous payouts that exiting banking executives inevitably receive
    d) Economic growth(linked to amount of money in an economy): 3% year on year is far from a flat rate in absolute, it is exponential (bit like compound interest)

    Creation of money is a real thought provoking (and long 47m) google video on where money comes from.

    I fully expected that the Bank of England created or authorised the creation of all money, and that all banks and building Societies universally lent money purely on the collateral that they, themselves, owned.

    It seems that (at least some) banks actually create money whenever a loan is taken out (based on that loan), [see Fractional-reserve bankingand, although that 'created money' is destroyed again as it gets paid back, apparently the interest on that loan isn't.

    So if, as the story says, that the amount of money in the economy is, essentially, determined by the amount of debt .... and that the health of an economy is based on the amount of money in that economy .... then ....
    how long before the entire monetary system totally collapses?? [Eastern philosophy would point to the current financial problems as being indicative of serious, underlying, fundamental discordance)

    Also, strangely enough, usury (or the charging of interest on a loan) was, in antiquity, a forbidden practice!!! I wonder how many credit card companies would be in existence if this was still the practice??

    Maybe it's all sh*te or an anti capitalistic conspiracy.... any thoughts?? [clearly I would take the opinions of anyone in the banking sector with an exceedingly large mountain of salt!... for my popcorn
    ... obviously]


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    bigdjiver (18th-October-2008)

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by Magic Hans View Post
    Also, strangely enough, usury (or the charging of interest on a loan) was, in antiquity, a forbidden practice!!! I wonder how many credit card companies would be in existence if this was still the practice??
    Usury is not, properly, the charging of interest. Usury is charging excessive interest.

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    Re: Who or what creates money?? Debt maybe?

    If the theory is correct, then we are no longer living in a capitalist society.

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    Re: Who or what creates money?? Debt maybe?

    With respect ...

    Quote Originally Posted by Wikipedia
    Usury (pronounced /ˈjuːʒəri/, comes from the Medieval Latin usuria, "interest" or "excessive interest", from the Latin usura "interest") originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest.

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    Re: Who or what creates money?? Debt maybe?


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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by Magic Hans View Post
    Bear in mind:
    a) the phenomenal rise in national (public and private) debt over the past 5-10 years, and the seemingly inexhaustible supply of credit.
    3 or 4 years ago you could get £25,000 of the MBNA at 0% APR for 6 months and 0% fee

    If you were clever you could make money on these deals (put £25,000 in high interest deposit account) and pay it off before the promotion expired and it went to a standard 18.9%

    What happens is the offers dry up the rates go higher and people donít pay off all the card and start paying higher and higher APRs

    If this was to happen consistently then people would be forced to start paying back debt rather then going on another holiday or buying a new sofa they donít need

    When the MBNA want 23.9% off me , I said bugger that paid the whole lot off. Then they go and offer 0% for a year, it comes with a fee but I think we have a long way to go yet

    How can people borrow on their credit cards sometimes 4 or 5 times more then what they earn in a year !!

    Blame is both ways

    For the economy Debt is good when it can be paid back

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    Magic Hans (19th-October-2008)

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    Re: Who or what creates money?? Debt maybe?

    Where to start. Most of that is fairly ill-informed babble that has little to do with reality.

    Firstly, "money" is not real. The material value of a banknote is basically 0; the same applies for any monetary instrument. The formal money supply is usually split into three: M1, M2 and M3. M1 is cash held outside banks and near cash, like chequing account balances. M2 adds saving deposits and a few other financial instruments. M3 includes more certificates of deposits.

    Money is a concept, created and supported by a variety of institutions - principally, the legal institutions of a given nation. The legal value of a monetary instrument is either determined or structured by these institutions. In the UK, the Bank of England indirectly controls the money supply, primarily through manipulating a key interest rate (this has been common practice since the 80s in most mature, capitalist economies; other practices, such as gold standards and Keynesian control).

    Money exists to provide a medium of exchange. It's tricky to work out how many bags of potatoes a plough horse is worth. Money was created to provide a common language through which to decide how to exchange good and services. We might agree that a plough horse is worth 10 sacks of potatoes. It's easier to work out that a sack of potatoes is worth 100 shillings and, independently, a plough horse is worth 1,000.

    Credit is a bit trickier, but is essentially a mechanism for offsetting the expenses against revenue. I need a plough horse to plough my field so I can grow potatoes. Right now, I have a field and some seed potatoes, but can't make any money out of them. So instead of giving your 10 sack of potatoes for the horse now, I promise you 12 sacks in 4 months. In practice, we use money for that exchange. A banker will give you the 1,000 shillings, you will give them the 1,200 later. You use the 1,000 shillings to buy the horse and sell the sacks of potatoes, to give me my money back.

    Usury is far too complex to get in to now. The modern definition usually applies it to excessive interest. The prohibition against usury was religious (it's in Exodus, if you're really interested). In the middle ages, Christians were prohibited from charging any form of interest; but Jews were not, so Jews became money lenders (this played no small part in the foundations of anti-semitism; and the still persistent involvement of Jews in the finance sector). Today, lending money for interest is still prohibited under Islam (it's called riba); Islamic banks are creating quite imaginative ways of working around this.

    Fractional reserve banking is not a new practice: the fact someone doesn't know about is merely a comment on their own ignorance of finance. The Wiki explanation is fairly simplistic (and only refers to banks using money that was deposited with them). When a customer deposits money in a bank, the bank then uses that money to make more money. In practice, banks tier will use deposits in a variety of ways, which carry varying levels of risk and return. Banking legislation will determine certain aspects of that risk profile (ie a reserve ratio will force a certain amount to be preserved as cash or other secure monetary instruments). Other aspects are up to the banks to control. They do so through a variety of means: loans, securities, derivatives, hedges, and so on. As they use this money, it effectively multiples the money available. They attempt to create a balanced profile, where they offset risk and return. The important one is mortgage backed debt securities.

    That the banks use this money is not new: it's been going on for hundreds of years.

    What went wrong was the assessment of risk associated with mortgage backed securities. That is effectively a collection of mortgages bundled together and sold on the capital markets. Typically, these are very low risk investments: people don't default on their mortgages very often. So banks use these as a low risk/return investment to offset their higher risk investments. They are also linked in to hedges and so on. But a bunch of these mortgages were far higher risk: loans to people who are unable to repay them. When the sub-prime mortgage market collapsed last year, the financial institutions involved lost a relatively small amount of money. But this had two far more serious, interconnected effects.

    Firstly, it exposed the risks in the mortgage backed securities, radically shifting the risk profile of the financial institutions. This causes a couple of big problems: it seriously messes up the balance sheet (shifting a couple of big items from asset to liability) and it increases the interbank lending rates. The former means they have to adjust their portfolio, which takes time. The latter makes it harder to get short-term credit that they use to fund the operation.

    Secondly, it causes a drop in the (over-inflated) housing market. This reduced the value of peoples homes, which put them in much tougher positions. If you borrowed 90% of your houses value on a two year fixed rate that you could afford. Now, the house is worth less than the amount you still owe and you have to refinance; the bank's are now charging a higher interest rate, which you can't afford. Thus, mortgages that looked like low-risk a few years ago are now much riskier. This magnifies the first affect.

    Neither of these have a great deal to do with fractional reserve banking. This looks like little more than the usual, luddite appeal to revert to a gold standard, dressed for the current crisis. Not so much a conspiracy theory as simple financial ignorance.

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    bigdjiver (19th-October-2008), philsmove (16th-October-2008)

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post
    .

    In the UK, the Bank of England indirectly controls the money supply, primarily through manipulating a key interest rate (this has been common practice since the 80s in most mature, capitalist economies; other practices, such as gold standards and Keynesian control).
    Interesting summary which misses a few key facts , however one point

    The money supply has dried up LIBOR is 2% points above base rate

    Banks are scared to lend

    Should we fully nationalise and say Capitalism has failed ?

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by stewart38 View Post
    Interesting summary which misses a few key facts , however one point

    The money supply has dried up LIBOR is 2% points above base rate

    Banks are scared to lend

    Should we fully nationalise and say Capitalism has failed ?
    Given I did mention the increase in interbank rates, I'm not sure what was missed. LIBOR is the primary UK interbank rate; Federal Fund rate is the US equivalent. There are others around the world. I also explained why these rates have increased. The current LIBOR rate is pretty much unrelated to the money supply; it is about credit. Central banks around the world significantly reduced the base-rate. This should have increased the money supply and have reduced the cost of credit; interbank rates usually track slightly above the baserate. This time, it had no affect: this crisis has very little to do with the money supply.

    To leap from the current crisis to 'capitalism has failed' is a long, blind leap. One grounded in ignorance and emotion, not in facts and analysis. What's also completely unstated is what will replace capitalism (nationalising banks would not replace capitalism; it would merely nationalise one sector of an otherwise capitalist economy; other sectors are already nationalised in some countries - the NHS, for example). I'm not even convinced this is a failure of the financial institution. Individual firms have failed. A market failed, but everyone who understands economics knows that markets do fail. It's happened before, even in the financial markets. It'll happen again. Neither of those things translate to a collective failure of finance as an institution (before you ask, I'm using 'institution' in the technical, sociological sense).

    The viable solution is a mixed model, but every economy in the world is already a mixed model. It's not particularly clear that had the banks been nationalisation that this crisis would have been avoided (nationalised banks would still have been run by people who work in financial markets). The question is, do we minimise the risk of market failure by nationalisation or by regulation? I favour the latter, but neither solution is the end of capitalism by any stretch of the imagination.

    The essence of the various bailout plans is to provide capital to banks at a cheap rate and allow them to restore their balance sheets and to provide guarantees against known bad debts. What's less clear is any plan to mitigate against future market failure: specifically to better manage the associated risks.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post
    One grounded in ignorance and emotion,

    Go pick a fight with someone else

    ps the so called experts are re-writing every text book as we speak
    Last edited by stewart38; 16th-October-2008 at 05:28 PM.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by stewart38 View Post
    Go pick a fight with someone else
    That wasn't meant as a personal attack; I'm sorry if you read it that way.

    Ignorance simply means a lack of knowledge (and most people are ignorant about most things - myself included). Emotion isn't a valid basis for any claim.

    I intended to apply those terms to the claim that "capitalism has failed". I also explained why I used them. I never intended them to apply to you personally. An admittedly fine line; I appear to have crossed it, so I am sorry that I caused offence.
    Quote Originally Posted by stewart38 View Post
    ps the so called experts are re-writing every text book as we speak
    Not really. Nothing that has happened has broken any of the basic principles of economics. This is an example of market failure, but market failures. Market failures are a known factor within economic theory.

    A bunch of populist books that tell you how to make millions from XYZ will be redundant, but they are almost universally garbage anyway, so this isn't a big problem.

    It may change some people's interpretation of risk in markets. But risk is a huge field; one that has a lot going on. Nothing has changed the basic principles of risk, only the way risk is assessed, valued and managed. This is hardly a rewriting of the textbooks.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post
    Where to start. Most of that is fairly ill-informed babble that has little to do with reality.
    ...
    ...
    Neither of these have a great deal to do with fractional reserve banking. This looks like little more than the usual, luddite appeal to revert to a gold standard, dressed for the current crisis. Not so much a conspiracy theory as simple financial ignorance.
    Nice comprehensive response.

    However, it also illustrates a point of complexity. Hugely intelligent, I might not be, but fairly well educated I am, and I found that it required all my attention and focus to keep up with your response. In fact, it took alot of my attention to keep up with the video, which was (at least) well presented. (Whether it was factually flawed is a different question.) Does the monetary system have to be complicated? The law system is complicated, and some people do very nicely out of it.

    Would it not seem reasonable for the amount of money in a system to be equal to the amount of assets in that system? (clearly a judgement) And fractional reserves is, quite frankly, worrying. Were I a bank, and primarily interested in filling my coffers, I would try to create as much money as I could! The more money there is, the more that I can make, whether or not inflation erodes it.

    A friend of mine was a bank manager for Lloyds at the time when credit was being pushed. He was obliged to agree to loans that, previously, would have been rejected as a bad risk. This simply raises my suspicions. Clearly, the more transparent a system is, the more difficult it is to manipulate to one's own selfish ends.

    In a simple monetary system, derivatives wouldn't exist. What a fab way to confuse the layman. How many people work in the financial sector, and what tangible end benefit is derived? It seems to me that all these deals done for immediate to short term gain (and end of year bonus) simply creates large unstable towers of Babel which, at some point in the future, are certain to collapse.

    Ok, I fully admit my bias, but I still feel that our monetary system is not sustainable, and it will all implode dramatically in 4-8 years time

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by Magic Hans View Post
    Would it not seem reasonable for the amount of money in a system to be equal to the amount of assets in that system? (clearly a judgement)
    In short, no. Not even close. In fact, it's not actually a sensible statement. What is an asset is arbitrary (is a pebble an asset? It depends on the context.) The monetary value of any asset is also arbitrary. In a capitalist economy it is determined by the buying and selling behaviour within the markets that constitute that economy.

    Quote Originally Posted by Magic Hans View Post
    And fractional reserves is, quite frankly, worrying. Were I a bank, and primarily interested in filling my coffers, I would try to create as much money as I could!
    Factional reserve banking has been going on for a long time - a little over 200 years. What it does is increase the overall liquidity in the system (which is quite different from increasing the overall cash in the system). Fractional reserve banking occurs when banks lend money. Removing it would eliminate private credit: it would be impossible to get any sort of bank loan. Without credit, you would not be able to offset your expenses to match your income.

    You may think that we're in a credit crisis now. Eliminating credit by making fractional reserve banking illegal would destroy the financial system. The majority of business would fail and investment in economic growth would be eliminated. At present, the economy has frozen; that change would collapse the economy. Society would survive, because that's what society does. But the pain that everyone would go through would be extreme and the society that does survive would be very different.

    This is an idea that's been around for a while. It's one of the many weird and wacky libertarian ideas that is based on a very poor comprehension of basic economics. These ideas tend to surface whenever the market sneezes. They have no merit.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post
    ... These ideas tend to surface whenever the market sneezes. They have no merit.
    Ideas can be dangerous things. As has been demonstrated the system is chaotic. Seemingly insignificant happenings can have vast consequences. This well presented argument on google has now got the means of circulating the world, reaching even the backwater of a dance forum. It is one more straw on the confidence camel's back. In a different metaphor it may be a tiny pinprick, but the economy has been likened to a bubble or a balloon.

    If, as the article claims, money is effectively being amplified by the banking reserve system and there are positive feedback elements in the system, the system can be expected to either run away to destruction or oscillate uncontrollably.

    If lending money drives up the price of property, and the rising value of property allows more money to be lent using it as security we have just that sort of money amplifier. If what has been said about the reserve ratio is right then the current circumstances should have been predicted.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by bigdjiver View Post
    If what has been said about the reserve ratio is right then the current circumstances should have been predicted.
    Unfortunately, most of what has been said is not right. The current circumstances were predicted (predictions that were largely ignored; this is one of the features of a market bubble). The cause of this market failure is not because credit was created. It was because credit was created on the basis of bad risk.

    The above argument is based on a biased interpretation of economics designed to arrive at a single conclusion. It's not particularly strong reasoning.

    The monetary system used to be tied to an asset: gold. That was one of the major causes of the great depression and hamstrung various governments' ability to respond to the market failures of the depression. The governments that dumped the gold standard in the early 30s basically avoided the depression.

    Let me give you a simple consequence. Removing the ability of private banks to issue credit would mean that home ownership would be limited to the extremely rich. The rest of us would be required to rent from the few who had enough capital to actually buy a house.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post
    In short, no. Not even close. In fact, it's not actually a sensible statement.
    .... in your opinion. And that's ok. I'll not take this statement as a judgement of the sensibility of the source of the statement ..... ie me.

    Quote Originally Posted by geoff332 View Post
    What is an asset is arbitrary (is a pebble an asset? It depends on the context.) The monetary value of any asset is also arbitrary. In a capitalist economy it is determined by the buying and selling behaviour within the markets that constitute that economy.
    So, an asset is determined by buying and selling ..... supply and demand, right? So the value of an asset is determined by market conditions and so not arbitrary(3), but would also have to be determined or judged by someone and so is arbitrary(1)


    Quote Originally Posted by geoff332 View Post
    Factional reserve banking has been going on for a long time - a little over 200 years.
    I don't doubt the fact, and maybe it is essential to modern civilised existence, but clearly not to existence per se. I'd like to think that there may be a better way of doing things. Maybe there isn't.

    Quote Originally Posted by geoff332 View Post
    You may think that we're in a credit crisis now.
    Well, thankfully I'm not. But a significant number of people seem to currently be living on next month's wages. In a world where anything is possible, and the job market lacks the stability of decades past, this is decidedly imprudent, if not irresponsible. I'm currently doing work of a debt advice organisation, and their workload is certainly not decreasing.


    Quote Originally Posted by geoff332 View Post
    Eliminating credit by making fractional reserve banking illegal would destroy the financial system.
    I'm sure it would, and certainly would not suggest it. If, as you seem to believe, we are simply in a cycle, and nothing is particularly out of control, then the system will continue to recover, improve, stabilise (temporarily), worsen into recession, until it recovers again. Part of me hopes that you are right.

    If it is how I suspect, and the video illustrates, the monetary system will eventually shake itself to it's own destruction, and shake the foundations of our society.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by Magic Hans View Post
    So, an asset is determined by buying and selling ..... supply and demand, right? So the value of an asset is determined by market conditions and so not arbitrary(3), but would also have to be determined or judged by someone and so is arbitrary(1)
    By Arbitrary, I mean there is no innate value in an asset. Throwing a couple of definitions at me doesn't change the substance of my claim: linking the money supply to the 'value' of assets is a meaningless statement. The value of assets is not determined by the asset, but by the market. When money has been linked to an asset, it was done by arbitrarily fixing the value of gold.
    Quote Originally Posted by Magic Hans View Post
    I'm sure it would, and certainly would not suggest it.
    Except that you did suggest it:
    Would it not seem reasonable for the amount of money in a system to be equal to the amount of assets in that system?
    Linking the money supply to any asset base would eliminate credit. That approach has crashed the world economy once and I can be sure it would crash it again.

    There are problems with the current system - quite a few of them. But this sort of empty analysis only serves to distract from a more substantive analysis, critique and way forward.

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    Re: Who or what creates money?? Debt maybe?

    I've enjoyed your debate so far very much (though I admit to not reading every word of it!).

    My two pennyworth maybe won't add much to your discussion but here goes.

    I too have been shocked by reports of the level of bonuses paid to bank executives (Leyman brother reportedly having paid 31Bn $ out in the last few years, the same amount of mony as they were said to have been drawn into liquidation by according to Private Eye). Even so recent declarations by government minister or others about the need for new banking regulations or controls on bonuses seemed just as incongruous to me. Doesn't "free enterprise" mean banks or other employers must decide remuneration levels for themselves?

    Can I add a new element or reference, not directly connected with the current credit crunch crisis though - the writings thirty years ago of a man called JŁrgen Moltman:
    A Christian declaration on human rights

    Quote:
    "It is not possible to increase basic economic rights at will simply by responding to increased demands, because economic growth is determined by ecological limits. The human struggle for survival and world domination cannot be carried out at the expense of nature, since in that case "ecological death" would anyway prepare the way for the end of human life altogether."

    Moltmann's paper was drawn up in response to a request by "The World Alliance of Reformed Churches" meeting in 1971.

    Quote:
    "Attention needs also to be given to the rights of future generations of the world, since there is the perpetual tendency to think in terms of the gratification of immediate needs, at the expense of those who will come after us."

    I was reminded of these papers I'd found whilst exploring the subject of human rights by a radio 2 presenter this morning discussing the credit crunch and whether the building of a new supermarket in his town was a good thing or not. He said that although most people recognised that small shops and local businesses would most likely suffer as a result those same people would also be found filling the isles of the same supermarket (so there is a difference between what we all say and what we end up doing).

    Trying to link all this to the credit crunch now it seems to me government's do try to boost business confidence, with varying degree's of success. For example Norman Lamont was said to cause drops in confidence in the Pound whenever he appeared on TV talking about the economy whilst Ken Clarke could steady markets perhaps. Then there has been New Labour and declarations that they had ended "boom and bust" which everyone feels will hang around their necks like an albatross at the next election - however, it isn't entirely certain that people will choose to blame them or hold them solely responsible.

    In the great depression during the 1920's/1930's the idea of extending credit as a way of stimulating demand was seen as very far sighted, so hire purchase agreements were created or came to the fore I believe.

    Personally I don't feel the need for endless choice of goods in our shops (but would my sense of taste or fashion be satisfied with only a limited choice I wonder). Still, people wastefully choosing to discard items they are fed up with, like those who rip out their kitchen after a couple of years or whatever, I am instinctively against (though how you can legislate for this behaviour I don't know).

    During the House of Lords debate into nationalisation of Northern Rock, six or so months ago, a number of highly qualified former bankers questioned the government's actions, and why they wished the legislation that was being drawn up to include provision for further banks to be similarly treated. They suggested it might mean the Treasury did foresee further need to intervene as has now happened to such a dramatic degree.

    Apologies if this contribution is a bit disjointed but to sum up now all any of us can say about the current crisis, or the worse we can say has to be tempered by considerations as to what might have happened if our governments or banks hadn't tried to stimulate demand. That said, a BBC article recently looked at economic conditions in France or the use of credit in France and pointed out that personal debt there is half UK levels - which certainly sounds more sustainable doesn't it.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by grahamg View Post
    [COLOR=black][FONT=Verdana]
    I too have been shocked by reports of the level of bonuses paid to bank executives (Leyman brother reportedly having paid 31Bn $ out in the last few years, the same amount of mony as they were said to have been drawn into liquidation by according to Private Eye). Even so recent declarations by government minister or others about the need for new banking regulations or controls on bonuses seemed just as incongruous to me. Doesn't "free enterprise" mean banks or other employers must decide remuneration levels for themselves?
    One of the problems with "free enterprise" is that is relies on the market to regulate everything.

    Unfortunately, markets don't actually do a very good job under certain circumstances. Markets work best when there are large numbers of buyers and sellers and where everyone has sufficient information to make their buying and selling decisions. They work badly when dealing with information asymmetry (sellers knows more than buyers) or when dealing with ambiguity, uncertainty or risk. This is the place for regulation: the reason banks have a required minimum reserve ratio is to force them to minimise risk. Banks could exceed the minimum reserve ratio, but very few do (which suggests that the banks are less risk adverse than the regulations require them to be).

    In large part, the credit crisis has been caused by the failure of the capital markets to properly evaluate and assign value to the risks associated with specific funds. There are some very good reasons why this happened (it's a difficult thing to do; it was a bull market, making risk very expensive etc).

    There isn't a country in the world operating a genuine (ie unregulated) free enterprise system. Every country has some form of regulation, because markets are not perfect. In most cases, the debates end up being about the details of regulation: what, how much, etc.

    Quote Originally Posted by grahamg View Post
    During the House of Lords debate into nationalisation of Northern Rock, six or so months ago, a number of highly qualified former bankers questioned the government's actions, and why they wished the legislation that was being drawn up to include provision for further banks to be similarly treated. They suggested it might mean the Treasury did foresee further need to intervene as has now happened to such a dramatic degree.
    Six months ago, it was becoming obvious that the levels of risk had been got wrong. The reason Northern Rock went under was simply due to a run on funds (everyone tried to withdraw their money at the same time). But the sub-prime collapse that preceded had already made it clear that risk was badly underestimated on certain funds. This means the banks needed to re-evaluate their assets and adjust their balance sheet, then respond by improving their asset base to offset the 'unforeseen' risks. All of this takes time, and no-one was willing to buy the bad debts, meaning the banks needed to reduce their lending to balance their books. I'm not sure whether the banks ignored all the warning signs, failed to fully appreciate the risks, or simply didn't have time to tidy themselves up (or something else). This problem hit a crisis when the cost of credit between the banks (the various interbank rates) suddenly went up.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post
    Six months ago, it was becoming obvious that the levels of risk had been got wrong. The reason Northern Rock went under was simply due to a run on funds (everyone tried to withdraw their money at the same time). But the sub-prime collapse that preceded had already made it clear that risk was badly underestimated on certain funds. This means the banks needed to re-evaluate their assets and adjust their balance sheet, then respond by improving their asset base to offset the 'unforeseen' risks. All of this takes time, and no-one was willing to buy the bad debts, meaning the banks needed to reduce their lending to balance their books. I'm not sure whether the banks ignored all the warning signs, failed to fully appreciate the risks, or simply didn't have time to tidy themselves up

    (or something else). This problem hit a crisis when the cost of credit between the banks (the various interbank rates) suddenly went up.
    The reason why Northern Rock got into trouble was other banks stop lending it money ??

    The run on it was a consequence of that

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