Scuse me guv, can you spare 700 billion?

[daveyb]

Ok, so we all know by now that the US government needs to make available $700bn dollars to buy out the bad debt in the financial markets.

But....if its that easy, why didn't they do it before.

Does anyone here know what the downside of doing this could be? Inflation pressure?

[w_n_s]

house prices will probably never return to normal. Peoples wages will never catch up to their cost of living.

We're all doomed and civil war will break out in the most civilised countries.

Rules will be passed by governments crushing our freedoms.

It'll be 1984 before you know it, you mark my words.

[daveyb]

Yes, I follow that wns, but...is there a downside? ;)

We get tons of coverage on tv, but not much spelling out the pros and cons.

[Mattie F]

The crazy thing is - where do the government get the money from? They borrow it from..... yep, the banks - the very institutions whose irresponsible lending created the problem in the first place!

It's just another load of debt/deficit spending saddled on the masses.

The problem with so called "Bank Created Money" is that whilst the money is created, the interest payable on it is not created and so you basically have a system where it's impossible to ever pay off all the debt.

[daveyb]

Don't they just go and print another 700 billion notes, in effect? (not literally).

I thought this sort of thing went hand in hand with hyperinflation though? (eg Zimbabwe)

I'm trying to imagine Georgey Bush sticking his bank card into the ATM, and punching in 700 billion now....

[bh1]

Don't they just go and print another 700 billion notes, in effect? (not literally).

I thought this sort of thing went hand in hand with hyperinflation though? (eg Zimbabwe)

I'm trying to imagine Georgey Bush sticking his bank card into the ATM, and punching in 700 billion now....

He wouldn't remember his PIN.

[daveyb]

Good point.... a letter then from George ?

Dear Mr Banker

Can I have 700 billion on the never never. I promise to pay it back someday, honest.

Yours
G Dubya

ps Fifties will be fine

[Born2Bwild]

The crazy thing is - where do the government get the money from? They borrow it from..... yep, the banks - the very institutions whose irresponsible lending created the problem in the first place!

It's just another load of debt/deficit spending saddled on the masses.

The problem with so called "Bank Created Money" is that whilst the money is created, the interest payable on it is not created and so you basically have a system where it's impossible to ever pay off all the debt.

They are sold to the market in the form of bonds and treasury bills. What will effectively happen is that they (the Government) will swap good debt for bad - but they better get something in return like a stake in the company.

[ozric99]

Apparently these institutions are so important to the health of the economy that letting them go tits up would plunge us even further into a recession. So, my question is "Why are they private for-profit companies in the first place?"

On the one hand letting them go bust would be somewhat cathartic for a vast swathe of the population, but on the other hand those that have raped their way through the economy have already disappeared with sackfuls of our money so it would be pointless.

Welcome to the United Socialist States of America.

[paulsaz]

Good point.... a letter then from George ?

Dear Mr Banker

Can I have 700 billion on the never never. I promise to pay it back someday, honest.

Yours
G Dubya

ps Fifties will be fine


pps just send the bill to president obama/palin

[daveyb]

They are sold to the market in the form of bonds and treasury bills. What will effectively happen is that they (the Government) will swap good debt for bad - but they better get something in return like a stake in the company.
I understand this.

And, to be honest, issuing government backed securities like this sounds good in theory. But it must have limitations.

Eg, our government issue gilts etc, so why did they go down the PFI route to finance hospital and schools upgrades? Surely, government instruments would work out better value?

I shall have to dig out the Ladybird book to government economics, sigh.

[GavinT]

The problem with so called "Bank Created Money" is that whilst the money is created, the interest payable on it is not created and so you basically have a system where it's impossible to ever pay off all the debt.

Exactly. If you ask me, the whole modern financial system is basically a whopping huge pyramid scheme. :cuckoo:
It's only kept going because of the sheer 'belief' that you would eventually get 'your money back' plus some interest.

Money as Debt (http://www.moneyasdebt.net/).
Or here for Google Video version (http://video.google.com/videoplay?docid=-9050474362583451279).

[Shamaniac]

Exactly. If you ask me, the whole modern financial system is basically a whopping huge pyramid scheme. :cuckoo:
It's only kept going because of the sheer 'belief' that you would eventually get 'your money back' plus some interest.



That's the best and most spot-on summary of financial economics that I've ever come across. 10/10.

Better than Keynes, Friedman and the whole fog-throwing bunch. I'm serious.

:thumbs::thumbs::thumbs::thumbs::thumbs::thumbs::thumbs::thumbs::thumbs::thumbs:

[FishBoy]

they better get something in return like a stake in the company.

Bush will be hoping for a stake in Fannie?

[Mattie F]

Don't they just go and print another 700 billion notes, in effect? (not literally).

No - they can only borrow interest bearing money into existence from the banks. Well, they can actually print off debt free money i.e. currency as the Bank of England does (which the banks then buy from them) but this only makes up a very small percentage of all the money that exists. The rest is created by the banks.

There is one tiny country though whose government never borrows money, instead printing off whatever is required for government projects and then spending that money into the economy. That country is Guernsey:

http://www.webofdebt.com/articles/in...ure-crisis.php


I thought this sort of thing went hand in hand with hyperinflation though? (eg Zimbabwe)

Well, that doesn't happen in Guernsey because money is only produced sensibly and to pay for services. You get inflation if too much money is chasing too few products/services - if the money you create is used to provide more products/services then it's fine.

Don't forget though that private banks create billions in new money every year and whilst that hasn't affected price inflation too much, it certainly has created property price inflation big time.

[ozric99]

Bush will be hoping for a stake in Fannie?

http://ozric.net/300px-KennethWilliams.jpg

[Mattie F]

They are sold to the market in the form of bonds and treasury bills.

Which in other words is a loan i.e. the government borrow some money and pay interest on it over a given period - gilts in this country.

Just wanted to add a classic quote from Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain at the time:

"Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits"

:(

Plenty more here: http://www.moneyreformparty.org.uk/money/about_money/quotes.php

[daveyb]

Thanks for that Mattie. It was useful :)

I have basic following of gilts and the processes you describe (heck I bought gilts in the past) , but its still difficult to ascertain the current and predicted effects of this bad debt purchase.....I wonder if the American public really understand what they are buying into (sic).

Remember before NR collapsed, I remember politicians here standing up and saying "UK institutions are fine, we don't have anything like the exposure the US do".....either they were lying or maybe even worse they didnt really know! I suspect they will keep us in the dark about the detail of the current situation.

[anguk]

Apparently these institutions are so important to the health of the economy that letting them go tits up would plunge us even further into a recession. So, my question is "Why are they private for-profit companies in the first place?"
This is something that I don't understand, if they are a private company with profits being paid to shareholders and huge bonuses paid to the people at the top why is government money being used to bail them out? If a local small business was going bust the government wouldn't step in so why do it for private banks? If the government is spending huge sums to bail them out why don't they just buy the bank then the profits go back into the government pot, or would that be nationalizing banks?

Forgive my stupidity but I've read this thread and tried to understand how it all works but must admit I'm struggling and it's going over the top of my head. :(

[Philc]

So they've failed to stump it up as the Republicans walked out on it all :lol:

Numpties.

[Arthur Fowler]

This is something that I don't understand, if they are a private company with profits being paid to shareholders and huge bonuses paid to the people at the top why is government money being used to bail them out? If a local small business was going bust the government wouldn't step in so why do it for private banks? If the government is spending huge sums to bail them out why don't they just buy the bank then the profits go back into the government pot, or would that be nationalizing banks?

Forgive my stupidity but I've read this thread and tried to understand how it all works but must admit I'm struggling and it's going over the top of my head. :(

It's not so much about bailing out the companies as it is about bailing out the public who would suffer if the companies went bankrupt, or could not afford to pay loans back if interest rates rise substantially.

[Mattie F]

This is something that I don't understand, if they are a private company with profits being paid to shareholders and huge bonuses paid to the people at the top why is government money being used to bail them out? If a local small business was going bust the government wouldn't step in so why do it for private banks? If the government is spending huge sums to bail them out why don't they just buy the bank then the profits go back into the government pot, or would that be nationalizing banks?

Forgive my stupidity but I've read this thread and tried to understand how it all works but must admit I'm struggling and it's going over the top of my head. :(

You’re not being stupid – I’ve worked in financial services (but not banking) for over 20 years and I’m only just starting to get my head around it after a few months of reading.

With banking it’s all a matter of confidence. If depositors are concerned about the solvency of the bank i.e. because they have a bad loan book then the danger is that a run starts (as happened with Northern Rock) and the bank simply cannot give people their money back and the bank folds.

In fairness, any bank would be unable to pay back its depositors if they all wanted to empty their account tomorrow because fractional reserve rules mean they only have to keep a small fraction of the deposit back – say, 10% - the rest is loaned out. However, if people have confidence in the bank and their lending practices then they don’t all suddenly demand their money back.

A bank is declared to be "insolvent" only if it has on its books so many bad loans that it could never raise enough cash to pay off all its depositors. You’ve therefore got to wonder about the solvency of a lot of the American banks especially when you learn (as I did from the BBC website yesterday: http://news.bbc.co.uk/1/hi/business/7631321.stm) that ONE IN TEN mortgages in the states is 90 days or more in arrears. I don’t know that the UK stats are but 10% of mortgages about to go bad in a huge country like the USA is a truly frightening figure.

As for governments buying banks or a stake in them – that is exactly what our lot have done with Northern Rock of course. The money to buy it though has come from loans to the government from other banks whose owners and investors will get rich on the interest we all have to pay on those huge loans in the form of taxes!

There’s a good article here on fractional reserve banking in the states here: http://www.lewrockwell.com/rothbard/frb.html

[gagsy]

Instead of a bailout it'd perhaps be cheaper for the US taxpayer to act as an insurance company. The Government can charge for the privilege and they'd only have to pay if the garbage debts actually turn out to be garbage, which isn't a forgone conclusion. With a credible insurer covering the debts the banks ought to be much happier trading them.

[njc]

It's worth remembering that most/all US mortgages are non-recourse as opposed to recourse mortgages here.

So if someone can't pay their mortgage in the USA, they can just* give the house back to the bank irrespective of whether the value of the house would cover the value of the mortgage. We can't do that as we're still liable for the debt.

*not quite that simple, but you get the idea.

[daveyb]

In fairness, any bank would be unable to pay back its depositors if they all wanted to empty their account tomorrow because fractional reserve rules mean they only have to keep a small fraction of the deposit back – say, 10% - the rest is loaned out. However, if people have confidence in the bank and their lending practices then they don’t all suddenly demand their money back.
http://www.lewrockwell.com/rothbard/frb.html
I worked on a BASEL II feed for a well known bank, and I was led to believe the 10% capital reserve figure is being optimistic. I don't think it's as high as that?

It does help explain why a government is so fearful of high street banks going into freefall though. The chain reaction of people withdrawing their money would soon descend into meltdown.

The 700 billion bailout is clearly a big risk, and might not even happen, but at least it demonstrates some level of direction. By comparison the government response here seems weak.

Some choppy seas ahead one suspects.