It gets tedious after a while, reading all the political and media spewing espousing the need for an apolitical solution to an economic – and legal- problem. Superlatives are everywhere: “financial Armageddon”, “global meltdown” “catastrophic failure”….ad nauseam.
Yeah, it’s kinda fun watching history being made, and even more fun attempting to make sense of it. All this talk about the need to protect assets, to ensure credit markets don’t freeze and the risk of sharp inflation - even though SAW suspects that the term “inflation” is a misnomer. It’s probably sharp depreciation in purchasing power caused by too much US Dollars aka Funny Money swilling around.
And talking about Funny Money and credit, exactly what is seizing up? Here’s one theory from a simple lawyer. What is seizing up is the grossly over-inflated, exponentially grown, debt- based supply of money that was, literally, created, out of thin air without reference to anything else.
Whilst greed, fraud, conspiracy and tacit governmental approval are all in the mix, SAW suspects that the (presently legal) practice of Fractional Reserve Banking was exploited to the Nth degree with monstrous effect.
If Customer A deposits $1,000 in the bank, the bank has the legal right to lend the majority of that $1,000 to someone else. So the bank might lend say, $900 to Customer B. That is recorded as an electronic transfer of funds into Customer B’s bank account. Therefore, it is technically a deposit of $900.
That allows the bank to then use that “deposit” of $900 to make a loan of the majority of it to Customer C. So, Customer C might get a loan of say, $800. That would also be by way of an electronic transfer of funds into his account and would technically be regarded as a “deposit” of $800.
Again, the bank would lend the majority of that $800 dollars, say, $700 to Customer D….and the process would be repeated ad infinitum.
All this money (technically “currency” not “money” – there is a difference) is created out of thin air without reference to any underlying asset values. It operates solely as a debt-based creation i.e. the more debt that is created, the more money can be created out of thin air for lending. On that view, the creation of sub-prime mortgages made perfect sense. They were the perfect debt-creation vehicle upon which Fractional Reserve Banking could grow exponentially – and did.
And those sub-prime mortgages were subsequently, sliced, diced, repackaged and resold as “Asset Based” or “Mortgage Based Securities” to Investment Banks and Hedge Funds.
The simple point being made is that the money supply, created out of nowhere and based entirely on debt, was so outrageously large that it bore no relationship to the value of goods and services in the real economy. Putting it another way, the actual hard core assets did not exist to support that level of lending.
If that is correct, the widespread practice of shoving the exotic, and now toxic, debt instruments Off-Balance Sheet (and in many cases Offshore), also made perfect sense. Bringing them onto the Balance Sheet would result in an erosion of actual bank capital –which is exactly what is now happening. That explains the reluctance of banks to lend to each other and the recent spike in LIBOR.
Which is why a US Federal Government Bailout is such a lousy idea: the US Dollar is nothing but a debt-based fiat currency. In its crudest terms, the bailout is debt compounding debt.
Perhaps what we are now seeing is not a credit crisis, but a spectacular and necessary implosion of the debt bubble contracting to a level where the debt is backed by capital assets. Will there be severe restrictions on personal and commercial borrowing in the near term? Yes.
Will there be a change in Wall Street’s mentality? Dream on. People got filthy rich on this scam.
What’s a bet they created this situation up to this point plus the frantic requests for a bailout, in order for the next instalment of their grand scheme to kick in? SAW finds it impossible to swallow the notion that Wall Street is spiraling out of control or has been caught by surprise.
© 2008 Sanjeev Aaron Williams All Rights Reserved
Yeah, it’s kinda fun watching history being made, and even more fun attempting to make sense of it. All this talk about the need to protect assets, to ensure credit markets don’t freeze and the risk of sharp inflation - even though SAW suspects that the term “inflation” is a misnomer. It’s probably sharp depreciation in purchasing power caused by too much US Dollars aka Funny Money swilling around.
And talking about Funny Money and credit, exactly what is seizing up? Here’s one theory from a simple lawyer. What is seizing up is the grossly over-inflated, exponentially grown, debt- based supply of money that was, literally, created, out of thin air without reference to anything else.
Whilst greed, fraud, conspiracy and tacit governmental approval are all in the mix, SAW suspects that the (presently legal) practice of Fractional Reserve Banking was exploited to the Nth degree with monstrous effect.
If Customer A deposits $1,000 in the bank, the bank has the legal right to lend the majority of that $1,000 to someone else. So the bank might lend say, $900 to Customer B. That is recorded as an electronic transfer of funds into Customer B’s bank account. Therefore, it is technically a deposit of $900.
That allows the bank to then use that “deposit” of $900 to make a loan of the majority of it to Customer C. So, Customer C might get a loan of say, $800. That would also be by way of an electronic transfer of funds into his account and would technically be regarded as a “deposit” of $800.
Again, the bank would lend the majority of that $800 dollars, say, $700 to Customer D….and the process would be repeated ad infinitum.
All this money (technically “currency” not “money” – there is a difference) is created out of thin air without reference to any underlying asset values. It operates solely as a debt-based creation i.e. the more debt that is created, the more money can be created out of thin air for lending. On that view, the creation of sub-prime mortgages made perfect sense. They were the perfect debt-creation vehicle upon which Fractional Reserve Banking could grow exponentially – and did.
And those sub-prime mortgages were subsequently, sliced, diced, repackaged and resold as “Asset Based” or “Mortgage Based Securities” to Investment Banks and Hedge Funds.
The simple point being made is that the money supply, created out of nowhere and based entirely on debt, was so outrageously large that it bore no relationship to the value of goods and services in the real economy. Putting it another way, the actual hard core assets did not exist to support that level of lending.
If that is correct, the widespread practice of shoving the exotic, and now toxic, debt instruments Off-Balance Sheet (and in many cases Offshore), also made perfect sense. Bringing them onto the Balance Sheet would result in an erosion of actual bank capital –which is exactly what is now happening. That explains the reluctance of banks to lend to each other and the recent spike in LIBOR.
Which is why a US Federal Government Bailout is such a lousy idea: the US Dollar is nothing but a debt-based fiat currency. In its crudest terms, the bailout is debt compounding debt.
Perhaps what we are now seeing is not a credit crisis, but a spectacular and necessary implosion of the debt bubble contracting to a level where the debt is backed by capital assets. Will there be severe restrictions on personal and commercial borrowing in the near term? Yes.
Will there be a change in Wall Street’s mentality? Dream on. People got filthy rich on this scam.
What’s a bet they created this situation up to this point plus the frantic requests for a bailout, in order for the next instalment of their grand scheme to kick in? SAW finds it impossible to swallow the notion that Wall Street is spiraling out of control or has been caught by surprise.
© 2008 Sanjeev Aaron Williams All Rights Reserved
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