Question - Where did the money come from that we now owe vast amounts of ?

Pacing Mule · 09-09-2010 03:16PM #1

I'm just wondering if anyone can explain in laymans terms what the sequence of events was that led to the current massive debt levels of Anglo etc.

In simplistic terms lets say 10 years ago pre the big property boom there was a certain amount of money in the economy. Property prices shoot up and borrowing is advanced for these properties. There was a certain amount of money in the Irish economy which had to have been added to which presumably means the Irish banks borrowed themselves from funding sources outside of Ireland. The Irish banks lend the money to developers and indeed ordinary householders, the property prices tank, developers and householders default leaving banks with assets far less than the outstanding loan amount that the bank themselves took out in the first place.

Assuming all of this is accurate and this seems to be accurate for a number of countries, not just Ireland, who ultimately created / advanced the money to fuel the bubble ? I understand that Irish banks owe German banks and they might owe Spanish banks who might owe Irish Banks etc etc etc but somewhere along the way there was a lot of money created to fund the property price explosions.

Somewhere along the way money was created - I can't imagine for a minute that there was enough money lying idle in investment accounts somewhere to finance all of it. So if the money was created and balanced by huge debt to the creator of the money is it too simplistic to say that the body responsible should for want of a better word tear up the debt, take the added money out of the economy, devalue all loans tied to this money all the way down the chain to the banks and their customers and start again from a point equivelent to a few years ago ?

oppenheimer1 · 09-09-2010 03:37PM

This is a very simplistic answer, but the beauty of the fiat currency is that money can be effectively imagined out of nothing.

Pacing Mule · 09-09-2010 03:44PM

oppenheimer1 wrote: »

This is a very simplistic answer, but the beauty of the fiat currency is that money can be effectively imagined out of nothing.

That's what I thought had happened tbh.

So the governments / IMF / European Central Bank whomever it acutally was made up this money to fuel the upsurge in prices in exchange for debt. Why therefore can't the excess debt be written off to bring what is owed back on par with the assets it is financing across the board ?

thebman · 09-09-2010 03:56PM

I think that is what has to happen but the basic idea is to minimise the amount of this that has to occur by applying pressure to repay the existing loans.

It will be written off as bad debt I guess what can't be paid which is basically the same taking it out of the system.

It then effects the borrowers credit rating as they took out loans they couldn't repay so they misvalued their business/assets and their rating reflects this.

I ain't no expert however.

zielarz · 09-09-2010 09:45PM

There is a fundamental flaw in the way the banks operate today.
You can read about it here:
http://en.wikipedia.org/wiki/Fractional-reserve_banking
The problem is that banks are allowed to keep only fraction of deposits in their reserve. This allows them to effectively produce money, increase the amount of money available in the economy. The interesting thing to note is that literally every bank is bankrupt. Imagine a very simple situation, person A deposits 1000 euro, bank keeps say 100 euro (10%) in the reserve and lends 900 euro to B. Person A wants to withdraw a 1000 but the bank is missing 900!

Fluffybums · 09-09-2010 09:58PM

First published in the British satirical magazine "Punch" on April 3, 1957
...and, 50 years on, nothing's changed:

Q: What are banks for?

A: To make money.

Q: For the customers?

A: For the banks.

Q: Why doesn't bank advertising mention this?

A: It would not be in good taste. But it is mentioned by implication in
references to reserves of
£249,000,000,000 or thereabouts. That is the
money they have made.

Q: Out of the customers?

A: I suppose so.

Q: They also mention Assets of £500,000,000,000 or thereabouts. Have they
made that too?

A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?

A: Not at all. They lend it to customers.

Q: Then they haven't got it?

A: No.

Q: Then how is it Assets?

A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?

A: Yes, usually £500,000,000,000 or thereabouts. This is called
Liabilities.

Q: But if they've got it, how can they be liable for it?

A: Because it isn't theirs.

Q: Then why do they have it?

A: It has been lent to them by customers.

Q: You mean customers lend banks money?

A: In effect. They put money into their accounts, so it is really lent to
the banks.

Q: And what do the banks do with it?

A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?

A: Yes.

Q: Then Assets and Liabilities must be the same thing?

A: You can't really say that.

Q: But you've just said it! If I put £100 into my account the bank is
liable to have to pay it back, so it's Liabilities. But they go and lend it
to someone else, and he is liable to have to pay it back, so it's Assets.
It's the same £100 isn't it?

A: Yes, but....

Q: Then it cancels out. It means, doesn't it, that banks haven't really any
money at all?

A: Theoretically......

Q: Never mind theoretically! And if they haven't any money, where do they
get their Reserves of £249,000,000,000 or thereabouts??

A: I told you. That is the money they have made.

Q: How?

A: Well, when they lend your £100 to someone they charge him interest.

Q: How much?

A: It depends on the Bank Rate. Say five and a-half percent. That's their
profit.

Q: Why isn't it my profit? Isn't it my money?

A: It's the theory of banking practice that.........

Q: When I lend them my £100 why don't I charge them interest?

A: You do.

Q: You don't say. How much?

A: It depends on the Bank Rate. Say a half a percent.

Q: Grasping of me, rather?

A: But that's only if you're not going to draw the money out again.

Q: But of course I'm going to draw the money out again! If I hadn't wanted
to draw it out again I could have buried it in the garden!

A: They wouldn't like you to draw it out again.

Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be
glad if I reduced their Liabilities by removing it?

A: No. Because if you remove it they can't lend it to anyone else.

Q: But if I wanted to remove it they'd have to let me?

A: Certainly.

Q: But suppose they've already lent it to another customer?

A: Then they'll let you have some other customer's money.

Q: But suppose he wants his too....and they've already let me have it?

A: You're being purposely obtuse.

Q: I think I'm being acute. What if everyone wanted their money all at
once?

A: It's the theory of banking practice that they never would.

Q: So what banks bank on, is not having to meet their commitments?

A: I wouldn't say that.

Q: Naturally. Well, if there's nothing else you think you can tell me....?

A: Quite so. Now you can go off and open a banking account!

Q: Just one last question.

A: Of course.

Q: Wouldn't I do better to go off and open up a bank?

simplistic2 · 10-09-2010 10:57AM

Fluffybums wrote: »

Q: Wouldn't I do better to go off and open up a bank?

This is the problem.And if the government didnt throw people in prison for setting up alternative currencies then there would be NO huge boom bust cycles as for instance when the ecb was keeping rates artificially low people would just switch to a different local currency forcing the bigger banks to stop printing and avalanche of cheap money.

The problem is over regulation.

hinault · 10-09-2010 11:06AM

Pageant Messiah wrote: »

I'm just wondering if anyone can explain in laymans terms what the sequence of events was that led to the current massive debt levels of Anglo etc.

In simplistic terms lets say 10 years ago pre the big property boom there was a certain amount of money in the economy. Property prices shoot up and borrowing is advanced for these properties. There was a certain amount of money in the Irish economy which had to have been added to which presumably means the Irish banks borrowed themselves from funding sources outside of Ireland. The Irish banks lend the money to developers and indeed ordinary householders, the property prices tank, developers and householders default leaving banks with assets far less than the outstanding loan amount that the bank themselves took out in the first place.

Assuming all of this is accurate and this seems to be accurate for a number of countries, not just Ireland, who ultimately created / advanced the money to fuel the bubble ? I understand that Irish banks owe German banks and they might owe Spanish banks who might owe Irish Banks etc etc etc but somewhere along the way there was a lot of money created to fund the property price explosions.

Somewhere along the way money was created - I can't imagine for a minute that there was enough money lying idle in investment accounts somewhere to finance all of it. So if the money was created and balanced by huge debt to the creator of the money is it too simplistic to say that the body responsible should for want of a better word tear up the debt, take the added money out of the economy, devalue all loans tied to this money all the way down the chain to the banks and their customers and start again from a point equivelent to a few years ago ?

In essence, you're correct.

In simple terms, one man's credit, is another mans bank deposit.
But with credit being diced/spliced and the value of that debt being subsequently squared (x2) and perhaps even cubed (x3) and subsequently sold off to another institution, attempting to match debt becomes very complex.

But your question stands.

Scofflaw · 10-09-2010 03:29PM

Pageant Messiah wrote: »

I'm just wondering if anyone can explain in laymans terms what the sequence of events was that led to the current massive debt levels of Anglo etc.

In simplistic terms lets say 10 years ago pre the big property boom there was a certain amount of money in the economy. Property prices shoot up and borrowing is advanced for these properties. There was a certain amount of money in the Irish economy which had to have been added to which presumably means the Irish banks borrowed themselves from funding sources outside of Ireland. The Irish banks lend the money to developers and indeed ordinary householders, the property prices tank, developers and householders default leaving banks with assets far less than the outstanding loan amount that the bank themselves took out in the first place.

Assuming all of this is accurate and this seems to be accurate for a number of countries, not just Ireland, who ultimately created / advanced the money to fuel the bubble ? I understand that Irish banks owe German banks and they might owe Spanish banks who might owe Irish Banks etc etc etc but somewhere along the way there was a lot of money created to fund the property price explosions.

Somewhere along the way money was created - I can't imagine for a minute that there was enough money lying idle in investment accounts somewhere to finance all of it. So if the money was created and balanced by huge debt to the creator of the money is it too simplistic to say that the body responsible should for want of a better word tear up the debt, take the added money out of the economy, devalue all loans tied to this money all the way down the chain to the banks and their customers and start again from a point equivelent to a few years ago ?

In brief, banks create money. The amount of money they are entitled to create is limited to a specific multiple of their assets - that's "fractional reserve banking", and coming back to the Punch sketch, banks do indeed bank on everyone not demanding their money at once, since they can't ever meet that obligation, given they're lending out ten times what they actually have.

Once a bank has lent out a billion, though, that money has gone into the economy, unless the customer(s) receiving the loans have not yet drawn them down. In the case of a development loan for fifty million, say, that money has already gone into the economy as payments to contractors, purchase of land, etc. Tearing up the debt does nothing but prevent the bank getting that money back - it will not take it back out of the economy as such.

cordially,
Scofflaw

dan_d · 10-09-2010 06:00PM

And a run on a bank essentially screws a bank completely, as it means that all depositers withdraw their cash at once - meaning the bank is left with less than nothing, as it had used the deposits/current accounts to lend elsewhere, often lending greater amounts than they actually have in reserve.(confused, but hope it makes sense!!)The customers of a bank could actually be the cause of it collapsing.

thebman · 10-09-2010 09:11PM

Scofflaw wrote: »

In brief, banks create money. The amount of money they are entitled to create is limited to a specific multiple of their assets - that's "fractional reserve banking", and coming back to the Punch sketch, banks do indeed bank on everyone not demanding their money at once, since they can't ever meet that obligation, given they're lending out ten times what they actually have.

Once a bank has lent out a billion, though, that money has gone into the economy, unless the customer(s) receiving the loans have not yet drawn them down. In the case of a development loan for fifty million, say, that money has already gone into the economy as payments to contractors, purchase of land, etc. Tearing up the debt does nothing but prevent the bank getting that money back - it will not take it back out of the economy as such.

cordially,
Scofflaw

Realistically though money is a representation of "things" and the house is now worth half what it was. The equation does need balancing.

This can be applied to everything of course as demand drives prices and your left with at situation in which you are trying to have enough money to represent the value of things in what is a chaotic system and you have an impossible task.

In such a system, corrections are necessary when things have clearly gone out of balance like we have now.

Question - Where did the money come from that we now owe vast amounts of ?

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