Where did all the money go.

Godge · 08-11-2011 03:51PM

Scofflaw wrote: »

Yes, but they weren't left holding a parcel of money. They were left holding a parcel of land now worth a fraction of its former price, and owing the bank for the money they borrowed to finance the purchase of that land.

In terms of "where's the money gone?" the answer is not "the developer". It's the developer's "money" (wealth) that has disappeared.

So it's not the case that the money was going round the system there. What was being transferred in one direction was assets, and in the other direction debt, because, as antoobrien says, developers leveraged the proceeds of sales to make bigger purchases.

Farmer A sells a parcel of land for €1m to developer B, who borrows €900k to do it. Developer B sells on the parcel to developer C for €5m, who borrows €4.5m to do it. Then comes the crash, and the land drops in value to €200k. If we just look at that chain we'd say that Farmer A and Developer B did well. But - and I don't think this is unrealistic - Farmer A used his €1m to build a really fancy house on his land plus another house for his daughter, which together are now worth only €400k, while Developer B used his €4m profit to get into a €20m development which is now worth next to nothing (call it €1m), borrowing a further €6m to do so.

Which means that it works out like this:

|Cash|Assets|Debt|Lost Equity
Farmer A|0m|€0.4m|€0m|€0.6m
Developer B|0m|€0.5m|€6m|€4m
Developer C|0m|€0.2m|€4.5m|€0.5m

Bizarre, right? Everyone has lost out. That's because what happened was that the assets in question were hugely mispriced, and the bank created money in the form of debt to match the valuation of those assets. But it was never liquid money, and when the assets were revalued in the crash, all that was left was the debt.

I'd certainly accept that the Farmer did best there, and I think there has been a huge transfer of wealth to those who were in possession of desirable land before the boom - but because they were usually at the very start of the chain, they didn't make that much - and if they were foolish, they borrowed against the supposed value of their assets rather than selling them outright.

cordially,
Scofflaw

A good example and one that was no doubt replicated in real life.

The one I heard, from a reliable source (and I posted about this a few months back) was very similar except that the farmer bought shares in Anglo and AIB with the money, so everyone got wiped out.

recedite · 08-11-2011 03:54PM

antoobrien wrote: »

There's something the two of you are missing - the money never physically existed. It was a set of numbers on a computer system somewhere.

Yes, I know that "money" is simply a notional system of keeping track of credit. And equally I know that where there is debt, there is a matching credit.

recedite · 08-11-2011 03:58PM

Godge wrote: »

The one I heard, from a reliable source (and I posted about this a few months back) was very similar except that the farmer bought shares in Anglo and AIB with the money, so everyone got wiped out.

The person who sold the overpriced bank shares has the money.

ianuss · 08-11-2011 04:01PM

recedite wrote: »

The person who sold the overpriced bank shares has the money.

Not unless they decided to stockpile cash, which is unlikely. Most people would reinvest in whatever.......stocks, land, commodoties etc etc.

davoxx · 08-11-2011 04:08PM

antoobrien wrote: »

There's something the two of you are missing - the money never physically existed. It was a set of numbers on a computer system somewhere.

exactly ... it never existed ... do you know what else i don't miss? my ferrai that never existed ...

if it never existed, how can they expect it paid back?

but it think what you meant to say was that it was created ... and now that money is somewhere else ...

recedite · 08-11-2011 04:09PM

ianuss wrote: »

Not unless they decided to stockpile cash, which is unlikely. Most people would reinvest in whatever.......stocks, land, commodoties etc etc.

If the "stocks, land, commodoties etc" maintained their value, that's where the money is.
If the "stocks, land, commodoties etc" lost their value, then somebody in the stockmarket profited from the "play" and that's where the money is.

davoxx · 08-11-2011 04:12PM

[QUOTE=Scofflaw;75363275
Bizarre, right? Everyone has lost out. That's because what happened was that the assets in question were hugely mispriced, and the bank created money in the form of debt to match the valuation of those assets. But it was never liquid money, and when the assets were revalued in the crash, all that was left was the debt.[/QUOTE]
how can everyone loss?

even if they created the money in the first place, they still would not loss out, they would just return to zero ...

the problem with your example is that it is not a closed system ...

ianuss · 08-11-2011 04:15PM

recedite wrote: »

If the "stocks, land, commodoties etc" maintained their value, that's where the money is.
If the "stocks, land, commodoties etc" lost their value, then somebody in the stockmarket profited from the "play" and that's where the money is.

But my point is that the profits are continually reinvested, as in non-stop. Cashing out of positions would generally only be a short term option. There is little point in having large sums of cash just sitting around. By not reinvesting you are leaving yourself open to opportunity costs.

recedite · 08-11-2011 04:31PM

SBWife wrote: »

NAMA has carried out "enforcement actions" which have resulted in the underlying property assets being transferred to NAMA. The developers in these cases still owe the original value of the loan less any amounts NAMA recovers from selling the enforced upon properties.

Nobody expects that debt to be repaid, and it will be discharged automatically a certain number of years after bankruptcy. In the unlikely event that they repay it, I think there was some talk in the early days of Nama about some mechanism whereby the banks would be looked at again in 10 or 20 years and asked to refund some of the recapitalisation money. This would make the taxpayer slightly less of a sucker if it happened.

recedite · 08-11-2011 04:33PM

ianuss wrote: »

But my point is that the profits are continually reinvested,

You keep telling me what the profits were reinvested in, and I'll keep telling you where the money is, but sadly it grows tiresome now....

ianuss · 08-11-2011 04:39PM

recedite wrote: »

You keep telling me what the profits were reinvested in, and I'll keep telling you where the money is, but sadly it grows tiresome now....

Indeed. Where exactly do you think this money is, under a mattress somewhere?

SBWife · 08-11-2011 04:48PM

recedite wrote: »

Nobody expects that debt to be repaid, and it will be discharged automatically a certain number of years after bankruptcy. In the unlikely event that they repay it, I think there was some talk in the early days of Nama about some mechanism whereby the banks would be looked at again in 10 or 20 years and asked to refund some of the recapitalisation money. This would make the taxpayer slightly less of a sucker if it happened.

I'd didn't say the expectation was that it would be repaid. I said it continued to be owed.

There are also two levels of bankruptcy to consider, that of the development company and those of the developer who in many cases had personal guarantees on the loans. In time the individual cases will go though the courts and/or individual settlements will be negotiated.

But for the moment the developers continue to owe the monies as set out in the original loan documentation.

The recapitalisation was structured as a preference share issue by the banks and purchased by the government. These shares could theoretically be called by the banks in the future and the government could receive a return on the recapitalisation in this way.

SBWife · 08-11-2011 04:52PM

ianuss wrote: »

Indeed. Where exactly do you think this money is, under a mattress somewhere?

How about the money was all invested in Anglo shares which were being sold by hedge funds run by Goldman Sachs. So all the money is in the pockets of the bad guys at Goldman.*

*Not necessarily my belief but it seems to satisfy the rubes elsewhere so why not here?

nesf · 08-11-2011 05:01PM

There's a second component to what Scofflaw was talking about, the velocity of money in the economy.

As an example, imagine A has €100, B and C have nothing. So our money supply at the start is €100.

A buys some stuff from B for €100, then B buys some stuff from C for €100.

The total amount of money that has been spent is €300 even though we only had €100 to begin width.

Now imagine there is a recession. So A buys €50 off B and B buys €25 off C and everyone saves the excess. The total amount of money that has been spent is €75 even though €100 is in the system.

Now, under normal conditions this isn't a problem because the banks will lend out the saved money to (say) C and C goes off and spends it increasing the amount of money being transacted in the system. But in a recession like this one the banks won't do that so the savings are held as capital against losses.

Now, in both scenarios we have an identical money supply €100. But the amount of money for transactions is €225 less in the recession, so it appears like there is less money in the system.

Now, on top of this we have a smaller money supply now than we did in the boom years, and very few people are spending a lot, so we have a much more magnified effect going on that makes it seem like a load of money has just disappeared.

That make sense?

SBWife · 08-11-2011 05:13PM

You're describing the reverse of the multiplier effect (which isn't called the divisor effect?) which is in essence why the credit crunch has had such an impact on the "real" economy worldwide.

davoxx · 08-11-2011 05:16PM

nesf wrote: »

That make sense?

i think i understand what you are saying.

are you saying that the money has not vanished and that A is hoarding it?

nesf · 08-11-2011 05:18PM

SBWife wrote: »

You're describing the reverse of the multiplier effect (which isn't called the divisor effect?) which is in essence why the credit crunch has had such an impact on the "real" economy worldwide.

I think it's simpler to just use the velocity of money as a term here but they're one and the same really, just different ways of looking at the same thing.

nesf · 08-11-2011 05:20PM

davoxx wrote: »

i think i understand what you are saying.

are you saying that the money has not vanished and that A is hoarding it?

It's more that everyone in the system is saving more money now out of their disposable income than they did back in 06 say. The result is that far less money is transacted in the system making it appear that the amount of money in the system is smaller than in 06 even though (this is not the case here) the actual money supply could stay the same.

Look up the Paradox of Thrift if you want more info on what I'm describing.

davoxx · 08-11-2011 05:33PM

nesf wrote: »

It's more that everyone in the system is saving more money now out of their disposable income than they did back in 06 say. The result is that far less money is transacted in the system making it appear that the amount of money in the system is smaller than in 06 even though (this is not the case here) the actual money supply could stay the same.

Look up the Paradox of Thrift if you want more info on what I'm describing.

okay, so it is a different thing you are talking about so.

this thread is about where did the vast sums of money (that we now owe to the banks) go, right?

antoobrien · 08-11-2011 05:41PM

davoxx wrote: »

this thread is about where did the vast sums of money (that we now owe to the banks) go, right?

it was used to leverage funds for new projects, re-invested and effectively lost.

nesf · 08-11-2011 05:41PM

davoxx wrote: »

okay, so it is a different thing you are talking about so.

this thread is about where did the vast sums of money (that we now owe to the banks) go, right?

I interpreted it as where all the money that used to be in the system went. The banks are part of that.

davoxx · 08-11-2011 05:48PM

antoobrien wrote: »

it was used to leverage funds for new projects, re-invested and effectively lost.

by lost do you mean destroyed? or sitting in an account?

this concept of loss eludes me to be honest ...

davoxx · 08-11-2011 05:51PM

nesf wrote: »

I interpreted it as where all the money that used to be in the system went. The banks are part of that.

ok, but not the velocity of money, that is a different issue right?

the fact that people are not spending is different to the loans that need to be paid back ... and it is where the money for these loans ended up i think we are trying to address here ...

damn .. i really wish i could just create money and give people loans and then get a bail out when they can't pay it back ...

nesf · 08-11-2011 06:52PM

davoxx wrote: »

ok, but not the velocity of money, that is a different issue right?

the fact that people are not spending is different to the loans that need to be paid back ... and it is where the money for these loans ended up i think we are trying to address here ...

damn .. i really wish i could just create money and give people loans and then get a bail out when they can't pay it back ...

The money ended up in people's pockets and in businesses accounts. You can split it varying ways, either as profits for developers, cash sums for people selling houses, wages for contractors and workers on sites etc. All filtering out to the national economy through people spending or investing it (or the banks using it as capital to lend out more money etc).

The overall money supply in the system has only gone down by 17 billion Euro (latest M2 figure (M2 = all cash, all normal deposit accounts, all long term fixed deposit accounts and Post Office Account savings) is 180 billion, in December 07 it was 197 Billion).

To break down these numbers there used to be: 85 billion in overnight deposits, while now there is 81.5 billion. Think about that, we generally speaking have the same amount in normal deposit accounts as we did back in 07, there isn't much money at all missing here. On longer term fixed deposits there's a drop of nearly 20 billion while Post Office savings have almost doubled in the same period to 2.4 Billion from 1.3 Billion.

The vast majority of the money that was in our system at the end of the boom is still there. Most of the change in money supply comes from people taking money out of Irish banks and putting it into foreign banks (UK or whatever). The difference between now and 06 is that both people and businesses have much tighter purse strings because they're nervous about hitting a really bad patch. The money hasn't disappeared, what's massively changed is the number of transactions involving that money. This is what is shutting down businesses and costing people jobs. All exacerbated of course by the banks not giving out credit to people (so all that money in bank accounts is effectively dead money and unproductive).

10000maniacs · 08-11-2011 11:07PM

Where has all the money gone?
It was never there in the first place.
Our banks borrowed from bigger international banks. We borrowed from the Irish banks to buy property. The property developers borrowed from the Irish banks to build property. Where has all the money gone? What money are you talking about?

Scofflaw · 08-11-2011 11:17PM

davoxx wrote: »

by lost do you mean destroyed? or sitting in an account?

this concept of loss eludes me to be honest ...

I think it eludes a lot of people, which is why there's such widespread conviction that all the money that has disappeared is stashed somewhere, and the only real question is who has it.

But it really doesn't work like that. If you look at the example I gave, the final scores were:

|Cash|Assets|Debt|Lost Equity
Farmer A|0|0.4|0|0.6
Developer B|0|0.5|6|4
Developer C|0|0.2|4.5|0.5

I'm not quite going to stick to the details, because you're specifically interested in where the money is "lost". Now, before anything happened, the system looked like this:

Snapshot 1|Cash|Assets|Debt|Lost Equity
Farmer A|0|€1m|0|0
Developer B|€0.1m|0|0|0
Developer C|€0.5m|0|0|0

That is, Farmer A has land valued at €1m, Developer B has €100k in cash, and Developer C has €500k in cash. The total cash money in the system is €0.6m, and the assets are valued at €1m.

Let's take snapshots as we go along:

1. Developer B wants to buy Farmer A's land. He goes to the bank, and the bank agrees to lend him the balance of the money to buy the land. The bank, by doing so, creates €900k.

2. Developer B pays Farmer A for the land.

Snapshot 2|Cash|Assets|Debt|Lost Equity
Farmer A|€1m|0|0|0
Developer B|0|€1m|€0.9m|0
Developer C|€0.5m|0|0|0

Now the total cash money in the system is €1.5m, assets still valued at €1m, loans €900k. The only cash money that has actually changed hands is €100k - the other €900k of the farmer's money was created by the bank.

That's very important, by the way. The bank has created 'money' in the form of debt equivalent to nearly the value of the assets in the system. And they'll do it again.

3. Developer C wants to buy the land from Developer B. The land is now valued at €5m, not €1m. So Developer C goes to the bank and borrows €4.5m, using his €500k cash as a deposit. Again, the bank simply creates that money.

Snapshot 3|Cash|Assets|Debt|Lost Equity
Farmer A|€1m|0|0|0
Developer B|€5m|0|€0.9m|0
Developer C|0|€5m|€4.5m|0

There is now €6m in cash money in the system, assets of €5m, and loans of €5.4m.

4. Developer B uses his €5m to pay off his loan (plus interest of €100k) and to buy into a shopping centre project. He borrows an extra €6m on the strength of his existing €4m, to give him a 50% stake in the project.

So now in theory we have assets worth €15m in the system, cash of €1m, and loans of €10.5m. The system has a positive balance of €5.5m (cash + assets > debt).

5. Now comes the crash. The land held by Developer C is revalued at €200k. The shopping centre project won't ever come to pass, and the residual value of the property, permissions etc is €1m, of which Developer B owns half, or €500k.

So, suddenly, there are assets worth €700k in the system, cash of €1m (we'll leave it with Farmer A), and loans of €10.5m. The system has a negative balance of €8.8m.

That's a huge destruction of wealth (€14.3m), but where did it all go? The answer is simple - it was never there. Instead, the assets were over-valued by €14.3m. They're now worth €700k between them, but they were being valued at €15m. The difference - €14.3m - is the "money" that has been "destroyed".

Evidently, there are beneficiaries from the whole business. Farmer A, in this scenario, has €1m under his mattress. And the banks are owed €10.5m - sure, maybe they'll never collect it, but in theory they're entitled to it. If Developers B and C spent the rest of their working lives paying back the banks, that money isn't actually lost.

So in another sense, the answer to "where's the money" is "in the banks, if they could only collect it".

cordially,
Scofflaw

recedite · 08-11-2011 11:25PM

nesf the "money" you are talking about is the total amount of credit and/or debt issued. So, as people pay off their debts it will tend to contract, often leading to a liquidity problem.
What we were talking about earlier was money as wealth, and where it went to.
If I take out a bank loan and lend the money to my brother, then money has been created and is circulating, but neither of us is any richer unless he does something useful with it.

MungBean · 08-11-2011 11:40PM

Scofflaw wrote: »

*All that jazz*

cordially,
Scofflaw

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 ?

nesf · 08-11-2011 11:56PM

recedite wrote: »

nesf the "money" you are talking about is the total amount of credit and/or debt issued. So, as people pay off their debts it will tend to contract, often leading to a liquidity problem.
What we were talking about earlier was money as wealth, and where it went to.
If I take out a bank loan and lend the money to my brother, then money has been created and is circulating, but neither of us is any richer unless he does something useful with it.

Edit: I'll rephrase my post actually, sorry for any confusion.

Money and wealth are not the same thing. I addressed the thread title, "where has all the money gone?", perhaps the thread title should have been "where has all the wealth gone?"

recedite · 09-11-2011 12:31AM

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)

Where did all the money go.

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