Money Matters

Article by Bill Kruse
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When you get a 'loan' from the bank...

there's no loan, not as you or I would know it. There's no actual transfer of funds. The money that appears in your account as a deposit is created by the bank, literally from nowhere. This is where most of the money in the world has come from, it's how money gets born, if you like. This money creation is usually conditional upon your prior agreement to eventually hand that new money over to the same bank that, with the aid of your signature, created it, together with some more money too (interest). Most people have absolutely no idea this is how banking works.

As The Smoke Clears... Chris Waller 2009

With one ear cocked towards the television news last night, I heard a commentator describe the current economic hiatus as "the worst in a hundred years." That may well be the case in terms of the sheer sums of money involved but we have yet to see whether the social consequences will be worse than those of the Depression. The numbers now freely thrown around defy the imagination; whereas once politicians spoke of hundreds of millions and occasionally billions, we are now in the realm of hundreds of billions and even trillions. America is said to have committed $2 trillion (2 x 1012) to underwriting its financial institutions and the motor industry. Britain has similarly assured sums amounting to 1.3 trillion, equal to annual GDP, with a further 750 billion in reserve.

Reading the runes, one feels that we are almost at the end of the financial stage of this crisis; there cannot be many more banks left to go bankrupt - but don't hold your breath. As recriminations fly, comment in certain sections of the press has been directed against what is identified as 'the failure of free market financial capitalism'.

I contest this view. This is not due to the failures of the free market, but to the lack of free markets, at least, free markets as propounded by Adam Smith. Though Britain, like America, likes to present itself as an inveterate champion of free markets, a closer look at the facts tells a very different story.

The Credit Crunch Millstone

Article by Larry Nunn

Several times in recent weeks I have heard people scoffing at bankers and suggesting that as a profession bankers are now more reviled than estate agents and second-hand car salesmen. Bankers it would seem are to blame for the current credit crisis and the directors of our British banks are not deemed worthy of the bonuses that would accrue to them during the normal discharge of their duties.

Popular belief is that the credit crisis has been caused by reckless lending on the part of bankers everywhere. The term 'sub-prime lending' has been banded about as a generic description of this reckless lending in which bankers are alleged to have loaned money to people who could never have been judged capable of repaying the debts incurred - but what is the truth? What collective insanity overcame the banking world and caused the current crisis?

Sub-Prime Lending In The UK

Firstly, while there has been a loosening of credit restrictions over several decades in the UK and while the total of both national and consumer debt is higher than at any time in our history, there has not yet been a massive wave of loan defaults in this country and certainly nothing has happened on the domestic consumer front that could be blamed for the collapse of Northern Rock and the demise of Bradford & Bingley and HBoS. Yet the British public have been stunned by these events and the subsequent announcements that our banks have desperately low cash reserves, such that their liquidity ratios are so out of kilter that they are terrified of lending to each other and disinclined to lend further to the public either.

Members can discuss this and other articles on the economics forum at International Mensa.

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