blog: everyone should watch this

[nikos]

here's the comment area for today's blog post found at
http://zabkat.com/blog/09Nov08-recent-d ... crisis.htm

[desslok]

The next thing I watched is called "Money Masters". You can check it out on many video streaming sites. It's a whopping 3-hour movie.

[RickyF]

This video is simplistic and sometimes wrong in its assertions. Money does not spring sui generis as this video would have us believe.

For example, using the video's example:

The bank with $1,111.12 of capital and no deposits making a $10,000 loan would immediately default on the check issued to the borrower.

The $10,000 loan check would have been deposited elsewhere and that bank would have required that the originating institution make good on the check, which it could not do since it only had $1,111.12 in its possession. Without acquiring more funds either liabilities, such as deposits or loans from others, or additional equity capital, the lending bank will default on its $10,000 loan check. The default will set in motion a series of negative consequences, ultimately resulting in the asset, for which the loan was made, being repossessed.

This simple mistake in the assumptions used in the video invalidates much of what it presents.

Money is simple to use, complex to understand, easy to spend and hard to come by for most of us.

[Kilmatead]

The $10,000 loan check would have been deposited elsewhere and that bank would have required that the originating institution make good on the check, which it could not do since it only had $1,111.12 in its possession. Without acquiring more "real" funds either liabilities, such as deposits or loans from others, or additional equity capital, the lending bank will default on its $10,000 loan check. The default will set in motion a series of negative consequences, ultimately resulting in the asset for which the loan was made being repossessed.

To be fair, the video was referring to Reserve Requirement Ratios, which (as your referral to "real funds" confirms) is how (it asserts) most people assume monetary institutions work in a real/logical/rational world, i.e., the ratio is equated to Gold on deposit, which is the way things used to work.

The video's example is asserting that the Reserve Requirement Ratio is now based merely to existing money on deposit, not Gold.

Thus, because the first bank is "allowed" to say the account holds $10,000, the second bank accepts that cheque as legitimate, and uses the $10,000 as "real money" which it isn't.

Unfortunately I am not an economist, nor do I claim to understand such things, so don't take that as my opinion; I was only clarifying what the video's example was based on, and why, indeed, it does assert precisely that the solipsistic approach of sui generis applied to banking is a bad idea.

Either the "Reserve Requirement Ratio" works like this, or it doesn't.

I will readily admit to not quite comprehending what Wiki has to say about how the RRR actually works.

It will be noted that Enron adopted the "mark to market" approach to financing, which allowed it to declare it's quarterly sums not on real figures, but on the proposed profits from any given signed deal - whether that money materialised or not.  Obviously, sooner or later, those sorts of [legal, but not logical] approaches in "creative finance" come back to bite the originator.

There was a quote somewhere in the (above) Money as Debt video about how during the child's game of musical chairs, there are no losers as long as the music keeps playing.  Apparently the music has stopped.  America is now being repossessed, and China wants it's $10,000 back.  To the rest of the world, it rather looks like the US only has $1,111.12 of capital left.

Curious, that.

For those interested in downloading that video (instead of just watching it as stream) and other philosophically related videos, check out http://www.theyliewedie.org/ressources/ ... eos-en.php

Of particular interest is The Corporation, another Canadian film with some real historical facts to blow your mind.  (I found it rather disturbing that it's "not against the law [in the US] to falsify the news."  Which explains a lot, when the predominant form of education in the modern age is media based.  A dodgy idea if ever there was one.)

[RickyF]

To be fair, the video was referring to Reserve Requirement Ratios, which (as your referral to "real funds" confirms) is how (it asserts) most people assume monetary institutions work in a real/logical/rational world, i.e., the ratio is equated to Gold on deposit, which is the way things used to work.

I don't have to be fair but...

The video not only refers to reserve requirements but to how money is created. They give the idea that banks can create money at will, which although it seems that way these days, they cannot.

The reserve requirement, another name for leverage, is an attempt to create an underlying layer of equity risk. This way the bankers are not only risking other people's money but also the bank's equity.

Related comments on the US $700 billion bank baleout fund follow:

Unfortunately, Treasury Secretary Paulson's baleout negates this basic principle of capitalism, i.e. that risk and reward are joined and related. The US taxpayer, through the Treasury, is protecting the equity in large financial institutions, thus the stockholders have no risk!

This will ultimately incent the managements of these financial institutions to gamble even more than they did in the years leading up to the worldwide financial meltdown.

The use of the baleout funds to help these institutions acquire other, smaller institutions, thereby concentrating the financial system in fewer and larger banks put the system at even greater risk to another AIG-type disaster. We should be breaking up the large institutions, diversifying the financial system risk. We are not.

[nikos]

so we have an economist in our midst? respect!

i do not agree with the guy's view that "banks create money out of thin air" either but IANAE. But the striking observation concerns the total money in the sytem and that unsustainability argument he advances

so a bank loans 10K and expects to get back 10K+interest. But the real money in the system is 1.1K. So where does the interest come from? Only from further debt! So we have an exponential spiral that cannot go on for ever.

so the system as a whole, morality and fairness aside, is doomed to collapse by construction. Even in an ideal world where everyone paid back their loans

[Robert2]

Even if we are no economics experts, we can use common sense.

What could be expected when the virtual assets that were bought and sold on the world financial markets represented 50 times the value of the available real-world assets?
What could be expected when whole populations went on a credit binge and borrowed up to 7 times their global annual revenues?
And what can we expect when, as the WWF's Living Planet Report recently pointed out, “growing demands on natural capital -- such as forests, water, soil, air and biodiversity -- already outstrip the world's capacity to renew these resources by a third”?

As Thomas Walkom of the Toronto Star wrote, “All worked on the venerable principle of leverage: putting in a little in order to earn a lot. Alas, as we should have remembered from the `30s, leverage only works when the economy is going up. When things start to falter, a leveraged asset can become an intolerable millstone. In the end, the private equity companies and sub-prime mortgage buyers were doing much the same thing: borrowing money they couldn't afford to repay, in the hope that whatever assets they purchased would keep rising in value.

It was a gigantic Ponzi scheme that couldn't possibly last. And it didn't.”

Here are two other topical remarks by Dr. Ron Paul (Republican member of Congress from Texas) and Thomas L. Friedman. They say it all in a nutshell:

“There's one bubble, the housing bubble, which is inside of - or a symptom of - a much larger bubble, the credit bubble. That bubble is so big that it represents almost the entire growth in the US economy for the last seven years.
The funny thing about capitalism is that you need capital to play. When the bank-vault is full of nothing but worthless mortgage-backed securities (MBS) and overvalued junk bonds; the whole thing goes belly-up fast. That appears to be the case with Lehman Bros, the century-old Wall Street warhorse that has joined the long procession of underwater banking establishments now ambling lemming-like towards the cliff. Lehman had a great go of it during the boom times when all it took to make oodles of money was a predictable flood of low interest credit from the Fed and a compliant ratings agency that would stamp every crappy securitized pool of mortgages with a big Triple A before hawking it to some gullible investor in Shanghai or Heidelberg. Lehman travails are not much different from anyone else in the banking fraternity. The problem is that the entire system is under-capitalized and over-leveraged. When Bear Stearns went down last year, it was levered at a ratio of 26 to 1. When Hedgie Carlyle Capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally subsumed by the US Treasury; the two behemoths were levered at a whopping 80 to 1, which is to say that they had a paltry one dollar capital cushion for every $80 they had loaned out. That's no way to run a business. They would have continued on the same erratic path---buying up toxic mortgages and MBS from people who had no chance of ever repaying their loans--had they not been taken into federal "conservatorship", which is a fancy way of saying they were insolvent. Treasury Secretary Henry Paulson unwisely attached a 6 inch-wide money-hose from the bowels of the Treasury to Fannies front office so the two mortgage giants could continue to teeter-along at taxpayer expense regardless of the fact that the securitization business model has completely broken down and foreign investors--including China--have already started cutting back on their purchases of GSE debt. This is no laughing matter. The $700 billion US current account deficit is financed through the generosity of foreign investors who are getting increasingly jittery about sinking money into a system that looks more like casino-poker all the time.
Capitalism does not exist without capital and debt is not, has never been and will never be a form of capital. Only now are we seeing the more dire implications of an economy without capital.”

“Never has one generation spent so much of its children’s wealth in such a short period of time with so little to show for it as in the Bush years. Under George W. Bush, America has foisted onto future generations a huge financial burden to finance our current tax cuts, wars and now bailouts. Just paying off those debts will require significant sacrifices. But when you add the destruction of wealth that has taken place in the last two months in the markets, and the need for more bailouts, you understand why this is not going to be a painless recovery.
The Bush team leaves us with another debt — one to Mother Nature. We have added tons more CO2 into the atmosphere these last eight years, without any mitigation effort. As a result, slowing down climate change in the next eight years is going to require even bigger changes and investments in how we use energy.”

[Kilmatead]

For those interested, the author of the aforementioned film has posted a Disputed Information in Money as Debt text addendum for his critics.

It proves, if nothing else, that this stuff is a lot easier to learn from an animated film than by reading dry text, but it does address certain issues detractors have raised.  Oversimplification aside.

There also appears to be a sequel in the works, though no release date is given.

And the Recession continues, unabated...

[nikos]

can't this guy explain anything in less than 10,000 words?

[pschroeter]

After watching this I'm still confused, but I am a lot less confused. Very well done too.


http://vimeo.com/3261363?pg=embed&sec=&hd=1

[nikos]

i'm having second thoughts about all these "simplified" explanations. Something that sounds "obvious" may not be so. Take the "greedy bankers interest cannot be repaid" idea that at least got me excited. In the same vein when I sell xplorer2 as a raw producer, the system takes on a black hole? where does that money come from? the same place where bankers interest come from.

i'll probably be dead and still won't have a clue about the general money system and its faults  :(

[desslok]

In the same vein when I sell xplorer2 as a raw producer, the system takes on a black hole? where does that money come from? the same place where bankers interest come from.

This part is a different vein from "Interests can't be repaid." Bankers' interests are created out of "thin air." Well, actually they take advantage of customers' deposits.

On the other hand, no monetary reformists argue that people shouldn't receive payment for actual goods and services they provide. So don't worry. Please keep working on your product  

[Kilmatead]

i'm having second thoughts about all these "simplified" explanations. Something that sounds "obvious" may not be so.

Wildly out of context, but Richard Feynman's o-ring example pertaining to the Shuttle Challenger breakdown was elegant, simplistic, and blunt.  Not bad for a theoretical physicist more used to communicating in quantum mechanics.

Sometimes the "obvious" is germane.

[Robert2]

Here is a topical article by Paul Krugman (Nobel Prize of Economics):

March 2, 2009
Op-Ed Columnist
Revenge of the Glut
By Paul Krugman
Remember the good old days, when we used to talk about the “subprime crisis” — and some even thought that this crisis could be “contained”? Oh, the nostalgia!

Today we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. We’re living in a world of troubled borrowers, ranging from shopping mall developers to European “miracle” economies. And new kinds of debt trouble just keep emerging.

How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come.

The speech, titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go.

Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies.

Still, much of the global saving glut did end up in America. Why?
Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases, nations whose assets have evaporated but whose debts remain all too real. And these debts are an especially heavy burden because most of the loans were denominated in other countries’ currencies.

Nor is the damage confined to the original borrowers. In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed — and that has taken a terrible toll on the industrial heartland. Similarly, Europe’s bubbles were mainly around the continent’s periphery, yet industrial production in Germany — which never had a financial bubble but is Europe’s manufacturing core — is falling rapidly, thanks to a plunge in exports.

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that’s how we got into this mess. And we’re still looking for the way out.

Copyright 2009 The New York Times Company

[nikos]

it gets even better with quantitative easing, eh?  :shock:
http://www.independent.co.uk/news/busin ... 25947.html

and i thought COM programming appartments and thread safety was hard to understand!