The great cock and hole swindle
It's taken me about 9 months of reading, to get this straight - but I think this is worth sharing.

OK...So 'all money is loaned into existence'.

This means before you asked to borrow some, it didn't exist.

Right.

When you want 100K for a house, they tappetty tap, and the money pings into existence, pegged against your house 'value' - that's the 'balance scales' Your house and how much you want to stay in it on one side, the money on the other.

Here's the catch. They want, at the end of the year, more money back than they created. And if you don't repay capital, they get more demanding every year, that's compound interest.

Where do you get that extra money from? Well.. you get it from someone else who's just taken out a loan, further down the pyramid. So far, so good.. but *they're* now down the amount they paid you, plus they've got to pay their own interest. Rinse and repeat.

The more people take out loans, the larger the pyramid becomes, and the more ragged the 'bottom' edge - once banks run out of people who are reliable, heads down repayers, they *have* to start lending to flakey feckers, or everyone else runs out of money.

It's a massive ponzi scheme, and it's always game over when risks of lending (the interest rate charged is the risk, the odds of you repaying) exceed the ability to repay. The lower down the pecking order you go, the quicker this happens.

We have been played, the only way these schemes end is with the little fella holding an empty bag.

There are three options.
Repay
Default
Change the rules

The first one is not possible, the second two end in war.

Buckle up.

Refs:
www.chrismartenson.com/crashcourse
theautomaticearth.blogspot.com/
market-ticker.org/
(Countryslicker, Fri 17 Jul 2009, 12:51, 28 replies)

"Where do you get that extra money from? Well.. you get it from someone else who's just taken out a loan, further down the pyramid."
Could you explain the mechanics of this one, please? Do you mean someone borrowing in order to buy from you, or what?
(Frozen_Banana Shaved against the grain; thoroughly unrewarding., Fri 17 Jul 2009, 12:57, closed)

My theory of the credit crunch
If I'm wrong with this, please explain why. I know it's a simplistic argument, but I think that banks, and specifically the greed of those who run them, are to blame for the current financial crisis.

So here's the sequence of events, as I saw them:

House prices started to rise, as the demand increased. This was due to a number of factors, including such things as immigration, because of a buoyant labour market in the UK. Fine. But then people complained that they couldn't afford to buy a property because they were being priced out of the market.

The banks, seeing that there was money to be made, then thought, "Sod it, we'll lend people 125% of their new house's value, even if that's 5 times their income".

So more people could afford more money for houses, and property price inflation became worse. Eventually, the bubble burst (all the sub-prime mortgage lending, and buying of debts etc was unsustainable and it all came crashing down) and the banking system all but collapsed.

Now, as I see it, had the banks not given out such large mortgages, then many people wouldn't have been able to afford houses at the original asking price. But the chances are that this would have caused a fall, or at least a stagnation of house prices, such that houses would have been affordable with realistic mortgages.

Discuss.
( K2k6 has a proper job these days, Fri 17 Jul 2009, 12:59, closed)

There's something to this.
Note, though, that this means that the problem has to do with people expecting the system to perform unreasonably, not with the system itself.
( Enzyme is powered by sunlight, Fri 17 Jul 2009, 13:04, closed)

True
But if the system hadn't performed to their expectations there would be less of a problem now, albeit much wringing of hands at the time.
( K2k6 has a proper job these days, Fri 17 Jul 2009, 14:02, closed)

house prices rose
because money was being given away at low rates in the US and it was 'invested' in housing - not because of demand, unfortunately. Demand is what people are ready, willing *and able* to pay. The 'able' bit was enabled by the US gvt low rates.
The banks gambled on an ever increasing market and were taking commissions for the parcels of debt.
Yes the banks lent irresponsibly, but people also borrowed unfeasibly. We get stiffed with mortgages worth more than houses [Japan had 95% drops, av. house price sold in May in detroit $6k, expected drops in the UK up to 90%], they get bailed out. By us. Bend me over, hold the lube.
(Countryslicker, Fri 17 Jul 2009, 13:48, closed)

"expected drops in the UK up to 90%"
You are officially mad. Try 25% from top of market...
(stalinism, Sat 18 Jul 2009, 14:35, closed)

watch
this space...
Yeah who wants to believe that?. We're already down 20%, and we've +4x this contraction to go, all the alt-As and Ninjas in the US yet to fall over will bring down most of the rest of the banks, and with it the ability to buy houses with credit. Check down the back of your sofa, and in your back pocket. If/when we get bank runs, that's what houses will go for..what you've got left, under your control. Who'd have believed you could now buy a house for $750 in detroit 5 years ago? Certainly not the banks who leant the money....
(Countryslicker, Sat 18 Jul 2009, 21:19, closed)

Indeed
The monetary system you are refering to which we are all bound with is called fractional reserve banking, it's where the bank can loan 9 times what it owns.

I create a loan for £10,000 pounds the bank pings it into existance if they have a £1,000 asset. Once I pay £100 installment they can then loan another £1,000 to some other mug based on my installment.

This system is just fkd.
(Doogie Talons, Fri 17 Jul 2009, 13:01, closed)

It's
Actually worse than that... fractional reserve banking happens *after* this - the bank takes what it assumes to be an asset - and loans against it. The CDOs underpinning these are fraudulent and the leverage limit was taken off - used to be 10:1 - now it can be up to 80:1. The money/credit created as a result is counterfeit. We're about to find that out.
(Countryslicker, Fri 17 Jul 2009, 13:43, closed)

You've been reading the Goat's posts, haven't you?
Money is just a carrier of value.

To continue your housebuying analogy, when you get the loan, all that happens is that someone with liquidity offers, in effect, to make the transaction on your behalf. In return for this service, a fee is levied. Perhaps it's a one-off; more often, it's in the form of interest.

This does not get more demanding every year. Imagine a loan of £100, at 10%. That means that, if you don't pay anything back, the bank will say (in effect) that they're simply going to add the service charge to what you owe them already. This makes sense: by not paying the service charge, you're (in effect) being lent more by the bank. (That is, they're agreeing to cover the cost of your £100 house, plus the cost of the loan.) At the end of the year, then, you'd owe £110 - the original capital plus the service charge. Go through the cycle again, and your debt will rise to £110 at 10% - that is, 110% of the £110, which is £121. And so on.

The rate stays the same. It's the debt that gets larger, if you don't repay enough to cover the fee. (I'm ignoring the part of the interest rate that corrects for inflation for simplification purposes.)

There's nothing pyramidic about it - or shouldn't be, anyway. For sure, a bank couldn't handle it if all savers withdrew all their money at once, but that's simply the difference between solvency and liquidity.

EDIT: I think.
( Enzyme is powered by sunlight, Fri 17 Jul 2009, 13:02, closed)

two
sep issues here.. compound interest fucks you if you can't repay the capital, as your debts become exponential eventually ..watch this space.

The pyramid is that you have to get the extra cash to service your debt from somewhere, and that somewhere is someone else. If you don't pay off enough, your debt goes up, but the money isn't there to pay it off.

When another debtor pays you some of their created money to pay your interest, they have less money to service theirs..so they have to get it from someone else further down the chain. This is the pyramid, the ponzi.

Check this post, it's far more eloquent than I could ever be.

theautomaticearth.blogspot.com/2008/11/debt-rattle-november-26-2008-from-top.html
(Countryslicker, Fri 17 Jul 2009, 13:31, closed)

Don't bother with that article
It is millenarial, sophomoric fantasy material. Lots of end-of-the-world predictions padded with irrelevant examples and non-sequiturs.

Here's a prasee for you:

In dodgy former Soviet-block countries like Albania in the '90s the banking system was a bit crap, so people threw their money at organised crime syndicates who operated Ponzi schemes supplemented by arms and drug dealing. They collapsed. There have been lots of asset bubbles in the past and they've all burst. Various empires have ended because they got too big. Therefore (big jump forward, all together now) we are witnessing the end of the world.

CountrySlicker, you'll get a far more entertaining apocalyptic lob on in any one of a million zombie books or nuclear war novels (try On The Beach by Nevil Shute). This stuff is rubbish and boring and it's not even well written.
( Scrumper, Mon 20 Jul 2009, 17:29, closed)

All this
On a day when US exposure so far looks like being $23.7 trillion dollars, not the .7 trillion they've fessed up to previously. Oh and our debt, at $799 billion, is a record. Your timing, like your spelling, is impeccable. But before you criticise one of the most eloquent writers I know for not writing well,

How do you spell précis again? Have you ever seen it written down before, or was that just your best phonetic guess?

Apropros of that, how much credence should I give you and anything you subsequently write?

Yeah I agree I'm stretching a point for dramatic affect, but meh, it's not that tenuous. Capitalism requires fresh blood and new debtors to survive, that much is true.

So..let's see, writer's credentials: Stoneleigh is both a biologist and a lawyer, Ilargi is a finance industry insider. Doesn't guarantee anything but it's a start eh.

Predictions:

They accurately predicted the oil price collapse last September when el Gordo was going cap in hand to the Saudis *in August* begging for them to pump more, implying he didn't expect a decrease in oil prices any time soon, neither did his economic advisors. They also went against the consensus of "the oil drum."

Not bad so far.

In March this year, they predicted a sucker rally, this is what we're currently seeing. When stocks go up on the day that we report the worst debt in history, you know somebody's divorced from reality.

Depressions of this magnitude take years to play out, this one is just getting started. I don't need to convince you, infact, if you carry on as per, that would be great, stops a log jam at the exit.

Oh, and why stop at 'boring', why not add 'and smells of wee'?

P.S. Only 193 people seem to share your misconception that millenarial is a word.

'badly written' eh?

Give me strength.
(Countryslicker, Tue 21 Jul 2009, 16:25, closed)

Oops that's embarassing
Brain death there. Can't believe how stupid "prasee" looks now especially as I know perfectly well how to spell précis. Also, millenarian, not millenarial.

Your rebuttal - as equally confused as the article - appears to be an ad hominem attack based on my mis-spelling of two words. There is more in there, something about oil price "collapse" which as far as I can see hasn't happened; just a correction from an unsustainable peak. I also don't see what the sucker rally proves in relation your biologist's theory; it's actually a contra-indication if you think about it, since plenty of people are getting quite rich off it.

Once again. There. Is. No. Pyramid. The 'ragged bottom' of your imaginary pyramid is emphatically *not* made up of borrowers, it is made up of producers of goods and services.

Finally, as I have never met either of the writers, I couldn't possibly tell you whether they "smell of wee" or not. That is why I stopped at "boring".
( Scrumper, Wed 22 Jul 2009, 13:32, closed)

let's take a step back eh
Tbh I find this medium rather clumsy as a way of conducting myself, I'm not usually this fragmented.
[I also wrote the original in haste and would have framed that better too, not my best]

OK, re oil prices. Many peak oilers were convinced that the $145+bbl was because we'd hit peak oil, and this was because of below ground factors.

Ilargi and Stoneleigh predicted that oil would drop in price when everyone else on the oil drum thought it could only go higher.

They put a temporary bottom under the fall oct 07 - march 09 - and predict a sucker rally from March till this Autumn. Yeah people get rich in sucker rallies, the first ones in and the first out.

I don't understand why you don't see that CDoing a subprime, and then CDO2ing that and then leveraging that 'asset' at anywhere between 25 and 80:1 is not the ragged bottom of the debt pyramid. It's effectively counterfeiting money. The 'asset' is not pegged to good quality reliable payers, we've run out of those.

Perhaps we're talking about different pyramids?

Do you disagree with this? www.chrismartenson.com/crashcourse/chapter-8-fed-money-creation

"All of which leads us to the fourth Key Concept, which is that perpetual expansion is a requirement of modern banking.
In fact we can make a rule: Each year, new credit (loans) must be made that at least equal the amount of all the outstanding interest payments that year. Without a continuous expansion of the money supply, past debts would not be able to be serviced, and defaults would ripple through, and possibly destroy, the entire system.
Defaults are the Achilles heel of a debt-based money system, which we saw in our local banking example in the previous chapter. Because of this, all the institutional and political forces in our society are geared towards avoiding this outcome."

.. and we've also got the small matter of $1.5 quadrillion in derivatives to contend with - where's that cash going to come from? Oh. Yeah, I know about the 'ostensibly a zero sum game' bit. But it isn't really, is it?

Oh. P.S. Are you Mr G. Gecko? ;)
(Countryslicker, Wed 22 Jul 2009, 15:55, closed)

Yes it's not an ideal medium for debate. Better for dick jokes and flaming.
Can't argue that much of the financial engineering that went on was massively misguided and very dangerous. Your CDO squared example is particularly egregious. But the issue wasn't the concept itself, but the huge mis-rating that went on. There's no harm in leveraging an asset up to a multiple consistent with its quality; the problems began when those estimations of quality were hugely overstated, leading to more risk than was expected.

We/they have cocked up in truly epic fashion. I suppose the difference in our opinions is that you think it's terminal, and I don't.

I'd comment more but I'm far too busy asset-stripping a family-run airline ;)

All the best!
( Scrumper, Thu 23 Jul 2009, 12:31, closed)

yep
We shall see eh.

Hope for the best, but prepare for the worst, at the very least, get out of debt. Oh, and keep some *real* cash under the bed.

cheers.
(Countryslicker, Thu 23 Jul 2009, 15:35, closed)

Try again
Refs: Masters Degree in Economics from University of Durham
( buffet_the_appetite_slayer ٩(●̮̃•)۶ jacked in to the ICE on, Fri 17 Jul 2009, 13:17, closed)

balls
in your court...
Please read the primers on TAE, then get back to me as to why we're not about to hurtle into a deflationary spiral.
Qualifications? Ben Benanke's got qualifications...you will have been taught 'the system', and a chicago/keynesian version of it too methinks.
(Countryslicker, Fri 17 Jul 2009, 13:25, closed)

Wait, what?
Which? Chicago school or Keynsian?

The squeaky pip at the core of the apple of your wrong-ness is your assumption that the actors in your system can only pay off their debts by borrowing money from other people. Since this is fundamentally not the way the world works, your theory does not stand up. It's almost too obvious to state, but just in case you really don't get it, money usually comes in exchange for the production of goods or the rendering of services.

Kids, two things: don't get your education from a wing-nut blog, and don't confuse use of jargon with expertise.
( Scrumper, Mon 20 Jul 2009, 17:02, closed)

A-ha,
But surely the base point here is that the Earth is finite and therefore can't possibly provide enough goods for ever-increasing (exponentially from the sounds of things) debt.

Does no one look at the big picture or have I got it wrong/simplified it too much?
(Shippy likes linebreaks and doesn't care what you think, Tue 21 Jul 2009, 23:46, closed)

that's
the bottom line, yep compound interest = infinite growth in a finite world, something's got to give.
The unstoppable force meets an immovable object.In this triptych the three components are finance, oil and the environment - in that pecking order. The other two will come to bite us when we try to recover but for now the tsunami about to come ashore is financial. We're at the 'ooh look, free starfish' stage.
(Countryslicker, Wed 22 Jul 2009, 10:00, closed)

No!
Compound interest does NOT equal "infinite growth in a finite world." The main reason being that very little of the money in circulation in the world is subject to the effects of compound interest. Most money is spent on goods and services, things that people, companies and governments need to survive.

If every single person, company and government in the world put their money on deposit and never spent any of it on anything ever, you might think you'd see that compound interest would be a problem. But, actually, you would find that interest rates turned negative because nobody would want the money anymore and it would be more valuable now than in the future. The 'problem' you think you've found is inherently self-limiting.

Please widen your reading to include some of the basics of the 'system' before brandishing such a narrowly-held theory.
( Scrumper, Wed 22 Jul 2009, 13:29, closed)

OK
You've settled down a bit, I must admit I was a bit baffled by someone who could use 'non sequitur' yet struggled with prasee, apols for the ad hominems.

The exponential function implicit in compound interest does represent potentially infinite liabilities. All mortgages are subject to compound interest which is why you end up paying back 3x what you borrowed, or there abouts - or why credit card debts 'spiral out of control' when people can only afford the minimum interest, not capital repayments. All those stories of people borrowing 100s, yet owing 1000s?

Most 'money' is not spent on goods and services, it's shuttled around in the shadow banking system, iirc something like 95%+?

You've lost me on your logic in the scenario re 'put money on deposit' - what about the scenario where no one can repay capital and there is effectively no money - not the same thing at all.

At the moment there are more bad bets out there than there is money to repay - I don't see the scenario about everyone "banking" playing out.

Negative interest rates is an interesting one, it's been muted as a possible solution to the deflation we've just hit. I don't see people putting money in a bank when they only get back 98.5% (e.g. with nominal rates of -1.5%) unless this was to guarantee they got *something* back. This would be effectively like paying the bank 1.5% to avoid having to put your cash under the bed. Might be an option in the future.
(Countryslicker, Wed 22 Jul 2009, 15:16, closed)

Oh come on, how does that qualify an opinion?
Which you haven't given anyway, expand on why he's wrong if you want us to listen?
( Brandy_Bumwinkle, Fri 17 Jul 2009, 13:29, closed)

Actually...
I don't think you need even that. I can't remember much about it, but I do remember enough of my A-level economics course to smell something fishy about the OP.
( Enzyme is powered by sunlight, Fri 17 Jul 2009, 13:34, closed)

Not a pyramid, mostly
It's not a pyramid because value = money is being created by companies that some people work for. Manufacturing companies add value to stuff so you get more out than you put in (kind of the principle of investing in a company). I pay my mortgage with the money I earn from a manufacturing company. Now I agree that some service industries are 'creating value' simply by shuffling money around, and that is based on a big pyramid of investments and CDOs and securities and all that stuff. Hence the danger of shutting down manufacturing in Britain (or anywhere else).
(Smale is stuffed, Fri 17 Jul 2009, 14:43, closed)

Thanks everyone....
For teaching me some things....
(aroe_m0rre, Mon 20 Jul 2009, 14:42, closed)