Where did all the money go.

nesf

recedite wrote: »

Technically money is not wealth, but at the end of the day I think we can all agree that the property bubble scam resulted in a massive transfer of wealth from the public purse (the taxpayer) to private persons.

Having said that, many of those private individuals are taxpayers, or maybe pension funds run for the benefit of ordinary taxpayers. So there is some overlap.

Lets look at the biggest losers; ordinary taxpayers who stayed away from bubble investment gambles, but still end up covering the losses for the next 30 years.

The biggest winners; anyone who sold land or shares and converted the proceeds into something tangible, or perhaps stashed the cash in the Isle of Man.
Also a speculator who defaulted on a loan and now spends the winter living in a villa in Tuscany as a tax exile, flying in and out of Baldonnel airport in his private plane without any passport control, so nobody knows where he is actually resident. (No person in particular)

Well I think David McWilliams had a point (this is rare enough for me to say) when he described the property bubble as a massive transfer of wealth of young adults (say under 40) to the previous generation (people 50+ that could afford to downsize now that their kids are gone). Most of the developers seem to have lost the game of musical chairs and went in for one more development too many and are now facing massive debts. The big winners were those who sold the underlying land or (in the main cities) large urban properties.

On the flip side you see the older generations being screwed by the wealth they held as bank shares disappear overnight practically. I wonder how many of the older property selling generation got caught out here after they invested a substantial amount of their money into bank shares or pension funds highly exposed to the stock market.

psychward

Sometimes it looks like moneylenders imagined the money then after they gave it to us they ''un-imagined'' it and then they used the imaginary debt to buy up our assets cheaply. Result for them is they end up with dirt cheap assets. Result for us is bonded serfdom paying back unpayable debts as there doesnt exist enough physical money to repay the debt. Way out for us might have been to beat them at their own game , establish our own debt free bank with all the capital we gave to private stockmarket gamblers etc and then use the principles all banks work by and ''imagine'' our own money based upon the real deposits in the debt free bank.

recedite

MungBean wrote: »

Or do you literally mean that the bank created credit out of nothing ?

Can or did banks create credit without the actually money to back them up ?

yep, they're allowed to do that because they have a charter. A charter is a licence issued by the king which allows his friends to fleece the peasants :pac:
So they create the money, keep lending it out, all the while collecting the interest payments as profit.

MungBean

recedite wrote: »

yep, they're allowed to do that because they have a charter. A charter is a licence issued by the king which allows his friends to fleece the peasants :pac:
So they create the money, keep lending it out, all the while collecting the interest payments as profit.

I see.
I probably sound like some thick student who just doesnt get it but its some fcukin confusing. I think the question has been answered from every angle and some of it has sunk it because of that though. Money wasnt ours, it was borrowed, it was spent in this economy, had to be paid back out of this economy, money wasnt even money it being credit and debt, lots of people left broke and in debt including the state as the credit flow stopped and debt came due.

We end up with devalued assets and a mountain of debt to show for the growth and prosperity over the years as the money passed through the economy and out the other side with profit attached.

Still too simplistic I know but its the best I can do without an economics degree.

@nesf "Where has all the wealth gone" may have been a more apt question. My train of thought for the question was. Bondholders gave banks money. Banks gave developers money. Developers spent money. State pays it back. Thinking whoever the developers gave the money to either has it still or gave it to someone else.

But alas tis not that simple it seems.

Scofflaw

MungBean wrote: »

I'm Sorry if I'm missing the entire point but I have to ask.

You say the banks "created" the money. What do you mean by that ? Do you mean that as you go back from Developer to bank to bondholder to investments or whatever that the "money" ceases to be cash somewhere along the line and is nothing more than the trading of assets ?

Or do you literally mean that the bank created credit out of nothing ?

Can or did banks create credit without the actually money to back them up ? The bonds we all talk about were not given to developers but used to pay other maturing bonds and the banks lent based on what it thought it could cover rather than what it actually could ?

Did they lend money they never had or never would I suppose is what I'm asking. The money lent to Developer B and C was credit with that bank and nothing else ?

They literally loaned money they didn't have. That's the system we have these days for creating money. Most people know that what the mint prints is now only a small fraction of the money in the system, but I think many believe that the supply is still produced somewhere central - the Central Bank, basically.

In fact, commercial banks create money. They allowed to lend multiples of the actual "money" (reserves) they have to hand - hence the description "fractional reserve banking". So if the capital ratio is 1:10, they can lend €100 for every €10 they have in reserves. They don't have to, and the fact that they reduce their lending in recessions means that they are literally creating less money, and there is therefore a smaller money supply.

That's the point about the example I gave. The 'money' involved doesn't exist at the start - all the money in the system is the cash capital of the two developers (€600k). By the end of the example, the bank has literally created another €14-15 million and pumped it into the system. You can call it debt, or you can call it credit, but what it is is money.

cordially,
Scofflaw

davoxx

so in summary, we are not talking about the appearance of money in the 'system', but the debt, which was created from thin air as there was never ever any money actually printed for it.

total = 0

B gives A a loan of 5

total = 5
B has 5 (owed to him by A) = 5
A has 5 and owes B 5 = 0
X will end up paying A 5 (for services/products/bailout)
X is not included in the calculations ...


so in summary, again, the money never went anywhere it is still there at the places that created it the first instance ...


see how having a gold backed currency would stop this nonsense ...

ei.sdraob

davoxx wrote: »

see how having a gold backed currency would stop this nonsense ...

Fractional reserve banking existed under gold and gold standard too all the way up to 70s, and yes they also had booms and busts

antoobrien

I think we need an explanation of the concept of leveraging, which is fundamental to the issue of the disappearing wealth/money. I'll try explain this with a simple example (health warning the figures are illustraitve).

I have €500, which I deposit in the bank @ 1%, along side 1,999 other people - totaling €1m. The bank then uses this (the reason they invited us to deposit out money) to generate loans of €5m in loans @ 3%. This is typically done by issuing bonds which attracts investors (say @ 1.5%) - backed up initially by our €1m in savings, later the the loans (because the loans don't exist yet). This practice is called leveraging. The bond may be a set of deposits held by another bank, a pension fund etc. The bank makes profit in the difference between the interest rate paid to the deposit & bond holders vs the interest rate on the loans, as well as administration, account & loan fees etc.

Total capital (read money) in the system is 1m - apparent capital in the system is 6m.

For simplicity saw we have 10 loans of €500k for 20 years, backed up by houses (not unrealistic in 2007). The loans for the houses are the collateral for the bonds. The loans & bonds are issued in the form of electronic transfers or negotiable instruments (cheques or drafts) for the value of the loan (customers are not given briefcases full of €100 or €500 notes).

Assuming everybody pays, in the first year the bank is paid €257,500 by its 10 customers. This is used to pay interest to the bond holders & depositors.

The bond is repaid according to a schedule - depending on the term of the bond. To keep things simple here we'll assume a 1 year, single payoff bond (Anglo did something like this). When the bond comes due (matures) the banks can:
roll it over and continue paying interest at the original rate (with the agreement of the bondholder, otherwise it's considered a default)
buy another bond to pay off this one (possibly at a better rate for the bank, meaning higher profit)
or pay it off altogether from funds (if available).

The system works fine as long as everyone keeps paying. There ends up being a bit more money (for arguments sake say €1m) in the system after 25 years. The banks will have say 300k profit, not €5m more, because the bank has paid this amount back to the bondholders they borrowed it off. The home owners end up with their houses, which are worth €500k - but don't have €500k in their pockets after the fact. The developer who sold the houses will have had to pay for materials, wages, fees, taxes etc so they might make €50k profit from the transaction. So the real amount of money will be something like €2m. There's certainly not 500k sitting out there in 10 bank accounts (and this is assuming no re-investment) as pure profit.

The problems start when the customers start being unable to pay at the same rate - or not at all. Let's say half our customers lose their jobs, can't repay and hand back the keys. This happens after 3 years of repayments, so there's approx €440k outstanding on the loans, At the same time the value of the asset backing up the loan decreases by 50% (assuming the bank can sell it), so the assets baking the loans are worth €250k. The bank is still liable for the €5m value of the bond they issued (just like a deposit a bond is a contract) not the €2.5m the assets backing it up are worth.

In this case we have apparently "lost" €950,000 in capital from the system within 3 years, despite the actual amount of capital - the deposits of 1m - going up by 3%.

davoxx

ei.sdraob wrote: »

Fractional reserve banking existed under gold and gold standard too all the way up to 70s, and yes they also had booms and busts

not saying that they would not have ... just hoping that the fact that you need gold to back up the virtual currency that money has become, would limit the amount of virtual currency out there ...

to be honest it all boils down from the banks ability to 'make' money from creating debt ...

antoobrien

davoxx wrote: »

not saying that they would not have ... just hoping that the fact that you need gold to back up the virtual currency that money has become, would limit the amount of virtual currency out there ...

to be honest it all boils down from the banks ability to 'make' money from creating debt ...

That didn't prevent 1929 from happening, and they did it the exact same way as we did it now.

davoxx

antoobrien wrote: »

That didn't prevent 1929 from happening, and they did it the exact same way as we did it now.

the wallstreet crash? that was a different issue ...

hinault

recedite wrote: »

Technically money is not wealth, but at the end of the day I think we can all agree that the property bubble scam resulted in a massive transfer of wealth from the public purse (the taxpayer) to private persons.

Having said that, many of those private individuals are taxpayers, or maybe pension funds run for the benefit of ordinary taxpayers. So there is some overlap.

Lets look at the biggest losers; ordinary taxpayers who stayed away from bubble investment gambles, but still end up covering the losses for the next 30 years.

The biggest winners; anyone who sold land or shares and converted the proceeds into something tangible, or perhaps stashed the cash in the Isle of Man.
Also a speculator who defaulted on a loan and now spends the winter living in a villa in Tuscany as a tax exile, flying in and out of Baldonnel airport in his private plane without any passport control, so nobody knows where he is actually resident. (No person in particular)

Good post.

I do know of someone who sold a plot of land and put the proceeds in to Anglo shares and AIG shares. Their proceeds were wiped out.

antoobrien

davoxx wrote: »

the wallstreet crash? that was a different issue ...

Not really, fundamentally the same cause - creating money out of nothing.

davoxx

antoobrien wrote: »

Not really, fundamentally the same cause - creating money out of nothing.

i disagree, it was over assigning value to stock.
no money was created or lost.

people bought stock for 10 and found that the value fell to 1 lost 9
the person who sold it sold it for 10 still had 10

all that happened was A sold to B and A's asset was worth less than paid for.

it is a simpler more closed system.

Slozer

ei.sdraob wrote: »

Fractional reserve banking existed under gold and gold standard too all the way up to 70s, and yes they also had booms and busts

So it seems that the problem is not what we use for money but the way it is created/issued.

ei.sdraob

Slozer wrote: »

So it seems that the problem is not what we use for money but the way it is created/issued.

Actually the problem is with the braindead idea of bailing out banks and private companies and taking on their liabilities when they should fail under own weight if they decided to go on the wild side.

Nothing wrong with fractional reserve banking itself, this "innovation" is partly responsible for the modern world, the problems lie with some banks going wild on credit pumped by central banks under political direction and then the same politicians deciding to bail em out and take on their problems when it all goes wrong

3-4 years into the crisis and we still have people who are not able to comprehend what exactly has led us here, and whats worse all of this can and will happen again

HivemindXX

Scofflaw wrote: »

..the fact that they reduce their lending in recessions means that they are literally creating less money, and there is therefore a smaller money supply.

Actually, if I'm correct, if the money they loaned out is repaid and the bank doesn't lend it out again at the same multiple they are not just creating less money they are destroying money.

Perhaps I'm over simplifying but the way I think about it is this. If my house was worth €200k in 2000 and then €600k in 2006 and then €200k again in 2011 I am not sitting here wondering where my €400k went and who has it.

antoobrien

davoxx wrote: »

people bought stock for 10 and found that the value fell to 1 lost 9
the person who sold it sold it for 10 still had 10

all that happened was A sold to B and A's asset was worth less than paid for.

In both cases it happened with borrowed money - there was no capital basis behind it.

davoxx

antoobrien wrote: »

In both cases it happened with borrowed money - there was no capital basis behind it.

actually .. i see what you are saying .. regardless of the asset, or how it was over valued, the "created" money was injected into the system causing the stock/property/other bubble ...

okay in that sense i agree ...

davoxx

so the simple answer is stop banks printing their own money.
stop them lending the same money out twice.

think of coins of gold ....
if i lent the bank 10 coins, how can they loan out 11 if they had none to start of with?
change it to euro, and problem solved ... just print more ...

recedite

Economist Richard Douthwaithe has been writing a series of articles on economics and the money supply in a construction magazine for the last few years.

One of his more interesting ideas is to have an energy based currency. Instead of backing your money with gold, you back it with energy. So if you have an oil well or a wind farm in your back garden, that literally becomes a goldmine, or a money printing machine.
He points out that the big credit crunch coincided with a sharp rise in oil prices in 2008.

In this article he points out that the fractional reserve system does indeed encourage asset bubbles. He has also been saying Ireland will eventually default, which I don't necessarily agree with.

In this one he goes into the energy currency idea. Generally he is trying to devise a steady state economy ie one without the constant boom/bust cycle that we seem to be trapped in.

anymore

MungBean wrote: »

Right. Fair bit to take in from that but I think I'm starting to get it.

Problem arose with short term borrowing and long term loans, this put the banks in a position of not being able to pay maturing bonds as the repayment from the property market begin to slow as sales dropped and the market stalled.

Although the actual money borrowed by the banks and lent to developers has gone through the system as money does and has been spent on crap, and food and other things related to living above your means the money in relation to the banks/developers is still there in the form of debts.

Whats been spent is irrelevant with the actual debt being owed back by people/business's in the country (fair whack of it residing in NAMA) who's assets dont currently cover the debt being the "money". The money is coming back around but its being paid very very slowly, and although it has been spent and the bonds covered it is still a debt payable to the state so the money hasnt just been written off.

So when people say "where did all the money go?" The answer is it has been filtered through the system, majority of it heading elsewhere, en route it paid for the growth of the country, jobs, housing market, increase in standard of living and we are still waiting for it to come back in the form of payment to debts owed to NAMA (for the most part).

Or am I still misunderstanding ?

http://www.channel4.com/programmes/the-flaw/episode-guide/series-1/episode-1

Check out Channel Four to see if they are rerunning 'The Flaw' which explains the whole sub prime saga in the US. ( It was on More 4 last night.)

nesf

HivemindXX wrote: »

Actually, if I'm correct, if the money they loaned out is repaid and the bank doesn't lend it out again at the same multiple they are not just creating less money they are destroying money.

No the amount of money in the money supply stays the same. The only way to destroy money is for the central bank to sell bonds. That takes money out of the economy and replaces it with IOUs that repay at set percentage rate.

What happens in your example is the rate of increase of the money supply stagnates if the bank doesn't relend the money.

nesf

Scofflaw wrote: »

They don't have to, and the fact that they reduce their lending in recessions means that they are literally creating less money, and there is therefore a smaller money supply.

No, what happens is the money supply stops growing. i.e. during the boom we had double digit growth in the money supply for most of the years of it. Now we have much smaller growth and in some cases decreases as people put their money overseas.

nesf

davoxx wrote: »

so the simple answer is stop banks printing their own money.
stop them lending the same money out twice.

No the answer is tighter regulations on how much money the bank has to keep in reserves for X amount of money left out. Which is exactly what the new Basel Accord is doing.

Scofflaw

ei.sdraob wrote: »

Actually the problem is with the braindead idea of bailing out banks and private companies and taking on their liabilities when they should fail under own weight if they decided to go on the wild side.

Nothing wrong with fractional reserve banking itself, this "innovation" is partly responsible for the modern world, the problems lie with some banks going wild on credit pumped by central banks under political direction and then the same politicians deciding to bail em out and take on their problems when it all goes wrong

3-4 years into the crisis and we still have people who are not able to comprehend what exactly has led us here, and whats worse all of this can and will happen again

Sure - fractional reserve banking is fine in and of itself, and as you say, largely responsible for the modern world , at least in the sense of the massive growth in prosperity. The markets, if you like, can move money to opportunity, but cannot create money to match opportunity. Being able to do both is highly effective when properly directed.

cordially,
Scofflaw

mistermouse

Given all the 'intellegence' that came out during the Presidential Election, we still don't know where the Northern Bank sterling money is so Ireland isn't great at knowing where money goes, and I doubt that many in Government actually know where or who the Bond Holders are really.

On a side point, there are lots of people making very good money from the recession, Receivers and solicitors are a prime example. On a day to day level these fees are costing businesses money and the tax payer also.

irishh_bob

mistermouse wrote: »

Given all the 'intellegence' that came out during the Presidential Election, we still don't know where the Northern Bank sterling money is so Ireland isn't great at knowing where money goes, and I doubt that many in Government actually know where or who the Bond Holders are really.

On a side point, there are lots of people making very good money from the recession, Receivers and solicitors are a prime example. On a day to day level these fees are costing businesses money and the tax payer also.

solicitors have been hit extremley hard by the rescession , sure half of them lived off property deals during the boom , the number of unemployed young solicitors is frightening

Climber

I think we've missed a crucial point here.

If we follow the cash there is an obvious answer to the original question.

Cash > Bond holder > Irish Bank > Irish property purchaser > Seller of Irish property.

So, it's obvious that some of this money has ended up in the hands of people who sold their overpriced property/land during the boom.

From my undertanding it is the Shinners who are arguing that these people should be made hand back over (some of) this cash through the guise of a 'wealth tax'.

Discuss

irishh_bob

Climber wrote: »

I think we've missed a crucial point here.

If we follow the cash there is an obvious answer to the original question.

Cash > Bond holder > Irish Bank > Irish property purchaser > Seller of Irish property.

So, it's obvious that some of this money has ended up in the hands of people who sold their overpriced property/land during the boom.

From my undertanding it is the Shinners who are arguing that these people should be made hand back over (some of) this cash through the guise of a 'wealth tax'.

Discuss

theese people have already met thier tax liabilitys in the way of capital gains etc , they have no obligations