Originally posted by k-string
So what are we seeing now? Is it that people don't want loans any more so the money supply is contracting? Is the rate of debt increasing too much
faster than the rate of money creation?
i think, and this is an i think kind of thing, that what has basically (
) happened is that about 20 years ago some bright spark in the banks
came up with an idea. instead of waiting until a debt matures to collect the interest why not sell the debt to investors and release capital now.
these debts were put on the open market for a price that would be, for instance, the debt +2%, on maturity the investor would get the debt +4%.
naturally, the debts were bought and the practice spread.
this became standard practice, and as you can imagine, because the banks no longer needed to worry about the safety of the loan they were giving, they
no longer worried to much about checking to see if the loan could be re-payed, it didn't really matter to them if it was paid or not, this time
tomorrow they'ld have sold off the debt anyway.
this is where it get really twisted, the biggest buyers of any banks debt were other banks, it was really just a way to massage the books, if you sold
ten debts you got $50 and if you bought ten debts you made $50 (although over time,) so the bank just made $100, woohoo.
all the same, the value of a debt is dependent on how risky it is, so to get the best price for a riskey debt it would be buried in a package, and
everybody bought these packages, and sold them, and bought them back, and split them up and shuffled them about a bit and sold them on again.
everything carried on nice and rosy for a bit and then the housing market crashed and people started to default on the risky debts, but the problem
was that with all the shuffling and shaking and ducking and diving, no-one knew which banks owned which debts exactly, some of them didn't even know
for sure which debts they owned, so they all got a bit paranoid over who owed what to whom and who exactly was in danger of losing what.
we'll leave that for a second to stew and i'll explain how a bank operates. a bank takes money from savers and lends it to borrowers, and as long as
the borrowers keep paying and the savers keep saving, the bank makes money on the difference in interest it pays to the savers and takes from the
borrowers. the thing is, savers tend to save at a steady rate, and borrowers tend to pay the money back, and most people only have a small percentage
of their money in cash at any one time anyway.
because of all this, it is possible for banks to lend more than they actually have, basically by lending the same money to two different people. this
is a legal practice and it is what is ment by saying there is no money, only debt.
this is all smoke and mirrors, and the only way to make it work is to borrow the money to make a loan, so one bank borrows from another and borrows
from another and so on.
it's a house of cards, it relies on everything being just so if it is to stand up.
back to the paranoia, what has happened is that banks don't know which of the other banks is a good debtor and which is a risky debtor, and because
they need to actually get the money back that they lend to other banks, they can't sell the debt, they are unwilling to lend to each other. if they
can't borrow from each other, they can't lend to me or you, so we can't buy stuff, so businesses don't make a profit, so they can't save, so the
bank has less money to lend and so on, until the house of cards collapses.
the only way to stop the thing collapsing right now is to get the banks lending to each other, to get the money moving about a bit, but it's still
just a house of cards, and at this stage it's a really big and complex one, so it's bound to collapse sooner or later.
bet your sorry you asked now.