Banks Need To Stop Playing Games

Prakari

The current economic crisis in Western economies is a symptom of a debt-based monetary system under the control of private institutions. Until a fundamental change in the monetary system is brought about, cycles of boom and bust will continue and will become more severe as the debt to money ratio increases. No country within this system is immune and this will be illustrated in the coming years by problems with the huge household debt in Canada and the collapse of the construction bubble in Australia. Within the system, solutions based on austerity (as in Europe) and stimulus (as in the U.S.) may mask certain symptoms but ultimately do not deal with the underlying disease.

Unfortunately it could take a decade or longer for the monetary system to change. Reform has to come from the people as our real government, the international banking institutions, are hardly going to give up a system that gives them a complete monopoly over the economies of the world. Imagine if you owned a company that could make credit out of thin air, loan it to people, and then make actual profits on the interest repayments. Not only this but your company could manipulate economies by controlling the credit supply and then bet on outcomes you are manipulating. How willing would you be to give up this monopoly and compete in the real economy? The fight over monetary policy will likely form the basis of the greatest revolution of the 21st century. The most likely country to initiate the revolution will be the U.S. or quite possibly the U.K. The transition to a new monetary system will not be easy in any of these countries as the U.S. government is under the control of Wall Street and the U.K. government is under the control of the City Of London.

Given that a new monetary system could be some time off, are they any banking reforms that would make life more bearable for the average person in the meantime? I would argue that the most powerful reform would be to gradually reduce the amount of credit that banks pump into the virtual economy. By virtual economy I mean the economy of abstract financial products like derivatives, credit default swaps and currency speculation etc. The amount of global money traded in this virtual world is huge. I can’t put a figure on it but it’s safe to assume that it is many multiples of global GDP. The problem for people in the real economy is that while their debt is increasing, more and more money in the real economy is being sucked up by financial institutions as they decide to gamble their profits with each other, rather than re-distributing credit back into the real economy. It would be like a mafia gang robbing a community and deciding to make more money playing poker with other mafia gangs rather than loaning the money back to the people they robbed. From whatever power governments have left, I think there is an opportunity here to not only ensure that the bailout money of banks is lent into the real economy, but that the profits the banks make during the bailout bubble are recycled as credit back into the real economy rather than being transferred to the virtual stock market. Once the bailout bubble completes, the system will ultimately crash again but if you’re going to crash anyway, you might as well travel first class.

ei.sdraob

what is this "new" monetary system you speak so highly of

dan_d

A hugely interesting thread.

For a recent job interview with a private financial company, I was doing a bit of pre-interview research. I have no financial background at all, so I was looking up odd terms - funds, securities, derivatives, hedge funds, that kind of thing. And the amounts of money involved were staggering. Breathtaking. There were national debt and global debt figures quoted that took my breath away, and the global debt was in relation to private funds. The kind of money that will never get paid back, but will just get shifted around and around and around until something goes bust.

The only conclusion I could come to from my brief and naive review is that we have made things far too complicated. And worse, half of what's out there isn't "real". As the OP says, it's in this virtual world. It doesn't exist anywhere other than on computer screens and in excel spreadsheets, but it can bring down banks, businesses and economies. The amounts involved are tremendous, and are very subjective, varying according to the perceived value of assets.

As I researched I found I was looking up terms within terms (as in, I got a definition, found I needed to look up more words in the definition and so on).It just became this huge, jumbled, intrinsically linked jumble of words and money that is bewildering. In itself that's a warning sign - to me anyway. If you can't explain a word, without using other terms, and those terms require the use of the original word for their explanation, then something is wrong.

I know that makes no sense. But in relation to the OP's post, it's got me thinking....what happens next? At some point, it will all come crashing down. It has to. It is just so unbelievably complicated, so many people are involved, so much money is involved and it hasn't exactly been proven failsafe so far.....it has to come down.

And then what??

RichardAnd

dan_d wrote: »

A hugely interesting thread.

For a recent job interview with a private financial company, I was doing a bit of pre-interview research. I have no financial background at all, so I was looking up odd terms - funds, securities, derivatives, hedge funds, that kind of thing. And the amounts of money involved were staggering. Breathtaking. There were national debt and global debt figures quoted that took my breath away, and the global debt was in relation to private funds. The kind of money that will never get paid back, but will just get shifted around and around and around until something goes bust.

The only conclusion I could come to from my brief and naive review is that we have made things far too complicated. And worse, half of what's out there isn't "real". As the OP says, it's in this virtual world. It doesn't exist anywhere other than on computer screens and in excel spreadsheets, but it can bring down banks, businesses and economies. The amounts involved are tremendous, and are very subjective, varying according to the perceived value of assets.

As I researched I found I was looking up terms within terms (as in, I got a definition, found I needed to look up more words in the definition and so on).It just became this huge, jumbled, intrinsically linked jumble of words and money that is bewildering. In itself that's a warning sign - to me anyway. If you can't explain a word, without using other terms, and those terms require the use of the original word for their explanation, then something is wrong.

I know that makes no sense. But in relation to the OP's post, it's got me thinking....what happens next? At some point, it will all come crashing down. It has to. It is just so unbelievably complicated, so many people are involved, so much money is involved and it hasn't exactly been proven failsafe so far.....it has to come down.

And then what??

I once heard that there is technically more debt in the world than their is money. Madness.

This video sums it up in a whimsical manner.

http://www.youtube.com/watch?v=M_3T-Af57Pg&feature=related

Scofflaw

I once heard that there is technically more debt in the world than their is money. Madness.

Debt is money - or, rather, in the current system, debt is what money is. There has been rather more debt than coinage to meet it for several centuries now.

cordially,
Scofflaw

Prakari

ei.sdraob wrote: »

what is this "new" monetary system you speak so highly of

In a previous post I outlined an example of how you could create a debt-free monetary system in Ireland http://www.boards.ie/vbulletin/showthread.php?t=2056211064. This is just one variation. If the current monetary system is to be improved upon, the new system must have two key properties:

1. Money can be created debt-free.
2. The institution responsible for creating new money and controlling its supply should be accountable to the people which use that money.

jimmycrackcorm

I believe that Canadian banks have not been subjected to the financial difficulties as in other countries since this turmoil began. I think perhaps some better regulation is the key.

Prakari

It is true that Canadian banks have high standards for lending. This is why the crash in Canada will be an excellent piece of evidence to support the need for monetary reform rather than just banking reform. Many of the symptoms of a debt-based monetary system are currently present in Canada:

1. One of the highest household debt levels in the Western World (~150% of income)
2. Federal and provincial debt moving into the dangerous territory: http://www.economist.com/content/global_debt_clock
3. An unsustainable rise in house prices over the last decade
4. Canadian bank’s exposure to the derivatives market as insurers

The crash will occur when the credit supply stops growing, triggered by any event that reduces confidence (e.g. big losses in a Canadian bank, stagnant or falling houses prices). This is inevitable as the increase in the credit supply needed to keep growth going would have to be exponential, and exponential growth has a habit of imploding in a finite world (“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist”). I doubt that the crash will be as severe as say in Ireland or the U.S., though if the can is kicked down the road through stimulus it could well be.