Global financial system implosion begins

[darkfibre]

Speech by the PM of Iceland accepting the inevitable. This is terrifying stuff

http://eng.forsaetisraduneyti.is/ne...s today their main weakness.[/QUOTE] Glug.

 

[bendeus]

I can faintly hear the swelling of rousing martial music, and I'm sure I saw some flags waving...

I can picture pitchforks, burning effigies and thousands of angry nordics, who have just remembered how their ancestors dealt with complex situations

 

[bendeus]

I managed to persuade my missus to withdraw the half of the equity she had from her house sale from Icesave about a week ago. Rumour now has it that the Icelandic government is refusing to guarantee the deposits of foreign savers in their banks.

There again, where the fuck is safe?

 

[Diamond]

Just as darkness falls for the winter...

But seriously, if they do go down the toilet then I say we make a mad dash North and bring them under the aegis of the British Imperium. Territorial aggrandisement to appease those on the right of the political spectrum and abundant supplies of renewable energy to satisfy those on the left. What with a subservient population and greater lebensraum, the economy would probably receive a timely boost too. What's not to like?

 

[TomPaine]

Only it's not the government of a country promising to pay the bearer based on future tax revenue

But really that isn't the case with regards to the pound or US dollar either and the government promising to pay the bearer. Take the $ for example. The Federal Reserve, which for it's government sounding name is actually a private bank. They pump the currency into the market much of it produce from thin air, but at a cost to US taxpayers. For every $ they create for the US economy they charge for it. I believe I am right in saying not a single dime of US income tax is actually spent on anything put paying back the Fed and national debt.

The Libertarian party have an interesting section on this with regards to the BoE:

http://lpuk.org/pages/manifesto/economy/monetary-reform.php

Where Does Money Come From?
Most people think that the government creates all of our money by printing banknotes, and minting coins. But that is not the case. Let's start by looking at where the government gets its income from.

Government Income
Banknotes are printed by the Bank of England (BoE) on behalf of the government. The BoE then sell those notes at face value to commercial banks, who use them to fill their cash machines and to hand over to us when we withdraw money from our bank accounts. The profits from the sale of these notes by the BoE (known technically as seigniorage) is passed straight back to the government, and netted the Treasury the sum of £2.3 billion in the tax year 2007/081.

The second source of government income is well known and hated by us all—taxes.

Finally, the government gains income through borrowing. If insufficient funds have been brought in through seigniorage and taxation to meet the government's spending commitments, it sells bonds. Bonds are the equivalent of a government IOU, and promise the holder that the government will buy them back at a future date for the value of the bond plus some predetermined interest.

Raising money through selling bonds has a huge downside, though. It means that the government incurs debt. And, like the rest of us with debts (on a credit card, for example), the government ends up paying a sum of money each year simply to service those debts. Government estimates for 2007/08 put the figure that it will have spent on servicing its own debts last year at a staggering £30 billion2—over 20% of the total amount of income tax that we all paid!3


Money From Thin Air
Currently, around 97% of the 'money' in our economy isn't in the form of notes that you can fold, or change that weighs down your pockets—it's in the form of credit (or debt, depending upon which side of the transaction you are standing). So the real question to be asking if we want to understand where our money comes from is how all of this debt appears?

Our commercial banks create money as debt, effectively from 'thin air'.

Imagine a person paying, to keep the example straightforward, £100 in notes or coins into their bank account. Now, bankers know that most of the time, most people leave their money in their bank accounts; we tend to pay for goods with our debit cards, or by writing cheques to one another. Consequently, if a bank has just received £100 in cash it knows that there is little chance that the depositor is going to come along and ask for it back at any moment.

Knowing this, banks only keep on hand a certain proportion of deposited funds; the amount that they reasonably expect they will need to cover any requests for withdrawals. The amount is termed the reserve ratio, and for any funds deposited, a bank will solely keep the amount of the reserve ratio on hand, and lend out the remainder. The whole process is known as fractional reserve banking (FRB).

So, to carry on our example, if the bank that person paid his £100 into maintained a reserve ratio of 10%, the bank would accept the £100 deposit, keep £10 on hand, and lend out the remaining £90.

But what happens to that £90 loan? The individual or business who takes it from the bank will probably not just spend it straight away, but deposit it into their bank account. If they do so in cash, the whole process can start again. Assuming that their bank also maintains a 10% reserve ratio, the bank will accept the £90 deposit, keep £9 on hand, and lend out the remaining £81.

And so the process continues. In fact, if fully worked through the system, that original £100 deposit will end up having 'created' a total of £1,000 that can be spent in the real economy.

In accounting terms, no money is actually created. If each borrower were to pay back their loan in sequence, the debts would unwind until we were left with our original £100 deposit at the first bank. This is why those who defend the existing system will tell you that no new money is really created.

What these folks conveniently overlook, however, is that in real terms, as opposed to accounting niceties, new money has appeared—it's in your hands, and you can spend it. And as long as new bank deposits are being made, the process above can continue.


Keeping The Merry-go-round Turning
And what allows the entire process to continue is our central bank—the Bank of England. Remember the bonds that the government sells to raise additional funds, the Treasury IOUs? Well the BoE will, from time to time, buy bonds in the market. To pay for its purchases, the BoE genuinely does create money from thin air, and credits the seller's account with money that it has just decreed should exist.

This process injects new money into the economy, which spreads about and ensures that the fractional reserve system described above never grinds to a halt.

If it wishes to, the BoE can use the same process in reverse; selling Treasury securities and destroying the money the purchaser pays. In this manner, the BoE has a crude control mechanism available for determining how much money exists in our economy at any one time.

The BoE also sells money to the commercial banks. These banks buy money at one rate, then loan it out to their customers at a higher rate, pocketing the difference.

The above is, of necessity, a simplified explanation of how FRB operates, and the role played by the central bank. The Bank of England do not appear to have ever produced a layman's guide to these processes, but the US Federal Reserve has. Although several years old now, this document is still a good guide to the operation of a fractional reserve system, and largely applicable to the regime in the UK as well as the US. If you wish to look at the technical detail for the UK system, the Bank of England's Handbooks In Central Banking series of publications, and in particular Handbook #24 (Monetary Operations), is a good place to start.

And whilst the above is a simplistic version of the processes at work, remember that much of the complex language and obscure practice of the banking industry is designed to mask its operations from public scrutiny. At its heart, it is a simple fraud: central banks genuinely creating money from thin air, and commercial banks lending money that's not rightfully theirs to loan. As the famous economist JK Galbraith once noted: "The process by which banks create money is so simple that the mind is repelled."

TomPaine

 

[Diamond]

Glug.

If I remember rightly from this evening's newsnight our banks' liabilities are thrice our GDP, while our personal debt levels (casts pointy finger around the boards populace) are something like 150% of our GDP. So we're pretty highly leveraged too.

 

[bendeus]

Just as darkness falls for the winter...

But seriously, if they do go down the toilet then I say we make a mad dash North and bring them under the aegis of the British Imperium. Territorial aggrandisement to appease those on the right of the political spectrum and abundant supplies of renewable energy to satisfy those on the left. What with a subservient population and greater lebensraum, the economy would probably receive a timely boost too. What's not to like?

And fish...........more fish than you could swing a cat at!

 

[Diamond]

But really that isn't the case with regards to the pound or US dollar either and the government promising to pay the bearer. Take the $ for example. The Federal Reserve, which for it's government sounding name is actually a private bank. They pump the currency into the market much of it produce from thin air, but at a cost to US taxpayers. For every $ they create for the US economy they charge for it. I believe I am right in saying not a single dime of US income tax is actually spent on anything put paying back the Fed and national debt.

The Libertarian party have an interesting section on this with regards to the BoE:

http://lpuk.org/pages/manifesto/economy/monetary-reform.php




TomPaine

You won't be getting anywhere with those C&P's fella, have some common sense.

 

[TomPaine]

You won't be getting anywhere with those C&P's fella, have some common sense.

I though it was a fairly basic guide that people might find interesting to read at the moment?

TomPaine

 

[Diamond]

I though it was a fairly basic guide that people might find interesting to read at the moment?

TomPaine

That's what the link's for tho. The prose stuff is supposed to be your own thoughts and opinions.

 

[TomPaine]

Ok no problem, it was partly to save people having to follow the link unless they wanted to read more . Anyway point taken.

TomPaine

 

[bendeus]

I found it useful.

HTH

 

[yield]

If I remember rightly from this evening's newsnight our banks' liabilities are thrice our GDP, while our personal debt levels (casts pointy finger around the boards populace) are something like 150% of our GDP. So we're pretty highly leveraged too.

The USA's total debt is worse. $54 Trillion according to Forbes in February. Roughly 400% of GDP.

 

[Diamond]

I could be wrong but I think that figure you have is for the Federal Government's debt whereas the figures that I saw tonight (which unforunately I can't seem to find on the newsnight website) were referring to the liabilities of the national banking systems as well as personal liabilities (presumably businesses and the rest of the economy too) for the populace as a whole.

I seem to remember that they plotted the comparative liabilities on a graph with personal debt on the X-axis and banking debt on the Y-axis. We were, compared to our developed world competitors, off the scale...significantly more indebted than the Yanks.

 

[A Dashing Blade]

As an FYI - every time Darling/Brown use the phrase "will do whatever it takes" the trading floor here is erupting with derisory laughter. This is not looking good imo.

 

[big eejit]

As an FYI - every time Darling/Brown use the phrase "will do whatever it takes" the trading floor here is erupting with derisory laughter. This is not looking good imo.

Glad they find it so amusing. Tho their laughter is at least a recognition that they've fucked things up so badly that the government is indeed powerless to do anything to rescue the situation.

 

[Kid_Eternity]

As an FYI - every time Darling/Brown use the phrase "will do whatever it takes" the trading floor here is erupting with derisory laughter.

Why?

This is not looking good imo.

In what sense?

 

[TomPaine]

I'm glad I'm not working at the Wharf anymore, how many people have been canned already?

TomPaine

 

[pinkychukkles]

Audio from the SEC meeting back in 2004 where they abandoned a requirement for investment banks to have a certain amount of capital and thus let them leverage themselves up, up, up and away.....

Report by Stephen Labaton from the NY Times:
http://www.nytimes.com/interactive/...ia/index.html?scp=9&sq=audio slideshow&st=cse

 

[Kaka Tim]

The analogy of the mortgage packages to a debased coinage is one that makes sense. Far easier to grasp the utter none explanations coming out of the government and the BBC etc.

So all the banks have far less money then are supposed to have becase they were calculating thier assets on a debased currency - shouldn't that be classed as major fraud? And shouldn't the CEOs of all the worlds banks be arrested?

The sezure of their assets could help pay for poverty relief once the new great depression kicks in.

 

[A Dashing Blade]

Glad they find it so amusing. Tho their laughter is at least a recognition that they've fucked things up so badly that the government is indeed powerless to do anything to rescue the situation.

Go look up the word "derisory"

@ Kid E - "not looking good" in the sense that the guys are starting to openly disbelieve that the Govt will "do whatever it takes" let alone do it in time, let alone do anything at all tbh.

 

[yield]

I could be wrong but I think that figure you have is for the Federal Government's debt whereas the figures that I saw tonight (which unforunately I can't seem to find on the newsnight website) were referring to the liabilities of the national banking systems as well as personal liabilities (presumably businesses and the rest of the economy too) for the populace as a whole.

I seem to remember that they plotted the comparative liabilities on a graph with personal debt on the X-axis and banking debt on the Y-axis. We were, compared to our developed world competitors, off the scale...significantly more indebted than the Yanks.

You're right Diamond. That is only Federal debt, my mistake.

Been trying to find the figures comparing nations. No luck so far.

@ Kid E - "not looking good" in the sense that the guys are starting to openly disbelieve that the Govt will "do whatever it takes" let alone do it in time, let alone do anything at all tbh.

<tongue in cheek> It's a free market don't know why they need the Governments help anyway! </tongue in cheek>

 

[pimpsugar]

i welcome this 'collapse' because as i see it, the whole system is like a rigged poker game designed to enrich the few & demean, control & enslave the many.

corporate & financial interests dominate political decision making & it doesn't have to be this way.

the system as it is, is built on illusion & was doomed to fail.

ron paul talks about this.

i would say to people that this necessary & represents the beginning of the end to those who seek to continue to rule over us...

we can have any world we want, anytime & i believe coming events we help us make a better world, where every human being has a right to a home, to food, to live in peace & to live in true freedom where their personal sovereignty is respected.

this system is behind the war OF terror, the stripping away of our civil liberties, the growing inequality between the members of the human family.

it is sick & corrupt & needs to die.

what is important is that we all focus on helping each other through this turbulent time...

http://video.google.co.uk/videoplay...279&q=money+as+debt&ei=_glLSJPHHZDejAKOuOjEDA

 

[big eejit]

Go look up the word "derisory"

.

I know what it means thanks. Maybe you misunderstood my post.

 

[zoltan]

Go look up the word "derisory"

@ Kid E - "not looking good" in the sense that the guys are starting to openly disbelieve that the Govt will "do whatever it takes" let alone do it in time, let alone do anything at all tbh.

depensing on what happens tonight, alot of people will be piling into Banks equity at open tomorrow - cheap of you can hold onto it

 

[david dissadent]

This is what the middle class part of the housing collapse looks like up close.

horrible.

This is what I've been hearing from Americans for about a year and why Ive thought this is gonna be ugly.

This is about the McMansions crash not the subprime crash.

(12 minutes) I really recomend watching this to get a perspective on this crisis and why so many in America are so angry that the banks are getting a bail out.

 

[Crispy]

Some good analysis from Herman Daly in the oil drum today: http://www.theoildrum.com/node/4617

The current financial debacle is really not a “liquidity” crisis as it is often euphemistically called. It is a crisis of overgrowth of financial assets relative to growth of real wealth—pretty much the opposite of too little liquidity. Financial assets have grown by a large multiple of the real economy—paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities. It should be no surprise that the relative value of the vastly more abundant financial assets has fallen in terms of real assets. Real wealth is concrete; financial assets are abstractions—existing real wealth carries a lien on it in the amount of future debt. The value of present real wealth is no longer sufficient to serve as a lien to guarantee the exploding debt. Consequently the debt is being devalued in terms of existing wealth. No one any longer is eager to trade real present wealth for debt even at high interest rates. This is because the debt is worth much less, not because there is not enough money or credit, or because “banks are not lending to each other” as commentators often say.

 

[elbows]

Interesting. And as I assume oil would count as real wealth, this is why Ive thought that they system could not handle the truth about peak oil (if it is in fact the truth). If we have borrowed silly amounts based on future expectations, and those expectations are all wrong, and the god of growth goes on holiday for at least few decades, then splat! And thats not even factoring in the fact that massively over-optimistic future expectations have been massively over-leveraged.

 

[elbows]

Oh our news was so busy with the UKs banking bailout developments that I only just noticed the US stock markets went all to poo again today.

 

[elbows]

Also looks like in the USA the fed is going to deal in commercial paper directly with corporations etc.