Banking - Does the system work?

[Sammeh]

Okay, basically, a long time ago there were two Temples. (This is an example btw) These temples, were strictly for knights, who were quite rich. Now, as you may know, the currency back then was made of gold and silver. These are very heavy, so, a knight would have to lug the stuff around when he goes traveling.

So, some genius invented a system, where you brought all your gold to this temple, and gave it to the templars there. In return, they would give you a piece of paper stating who you are, how much money you have and so on. So, the knight would travel with a light piece of paper, rather than god knows how heavy bags of gold. When he arrives at his destination, he would go into the temple there and present them with his piece of paper, and he would withdraw his money. So far the system works, right?

Eventually, the temples start giving out more notes than what the other temple has in it's vault. And problems occur, people lose money and the temples go bust, and they are landed in the situation we are in today. Does the system still work? Well, if this happened frequently, no, but seeing as these things happen in quite few and far between incidences, and there is no other alternative, you could argue that the system does work.

Now, it wasn't as big a problem then as it is now, because this wasn't happening in the millions on such a large scale. And sure, the economy recovers. But surely, a system that the whole world uses, HAS to work. Right? Well, in my personal opinion this case doesn't. However, is there a better way? There might be, but not that I know of.

ITT:
We discuss weather or not the banking system today works, and discuss possible ways of a potential alternative that works a lot better.

[Al6200]

The US government controls how much money the banks can loan out, and they're the only ones who can print it, so such a risk doesn't really exist. The problem today isn't that banks are pulling money out of thin air, it's that they were financing all of their investments on debt (to make the largest gains), but then suffered immensely when the market took the slightest down turn.

Before they controlled it banks couldn't give out more than they had gold for in their vaults (printing more would obviously be fraud).

[RaharuHaruha]

At 9/26/08 08:39 PM, Al6200 wrote: The US government controls how much money the banks can loan out, and they're the only ones who can print it, so such a risk doesn't really exist. The problem today isn't that banks are pulling money out of thin air, it's that they were financing all of their investments on debt (to make the largest gains), but then suffered immensely when the market took the slightest down turn.

Before they controlled it banks couldn't give out more than they had gold for in their vaults (printing more would obviously be fraud).

That's what banks are designed to do. That's how they make money, and that's why they're able to give you interest in your bank account.

Banks today DO CREATE MONEY simply by lending. Every time any bank loans money to people, they are borrowing the money from the FED or another bank. The FED creates the money (it's not paper but it's still money) and then collects interest. When the loan is paid off, all that money is paid back and destroyed. However, the interest is never destroyed. So banks really DO CREATE MONEY.

That is why the FED lowers interest rates when the economy is bad. They want to create money. The idea is: if enough people loan money, the money will eventually make it to the people, and the people will spend it, and the economy will become good again. The end result is people make more money. Then prices start to rise. Then the economy becomes bad again, and that is the general business cycle.

The reason we're in this mess right now is because banks have a regulated limit on how many loans they're able to write. They're supposed to only write loans equal to 10 times (10 to one) the amount of actual physical money they own. Bear Sterns had a 33 to one ratio (I think). That's not really a big deal. Banks can do that and still survive, but since they started writing so many subprime loans, and so much of the loans they created were defaulted on, they fell hard. Remember, everything on wall street is done in advance. All they care about is that BS wrote 30 million mortgages, and once they found out that it was bad, all they cared about was that BS had 30 million bad mortgages - hence the huge stock plunge.

The next big problem is going to occur when one of the big ones goes down. So far banks like J.P. Morgan and B of A are getting huge. They're like Exon mobil - too big and too powerful. I see bail outs the next time something like this happens, too.

[Coherent]

At 9/26/08 08:39 PM, Al6200 wrote: they're the only ones who can print it, so such a risk doesn't really exist.

Well to an extent. It is true that paper money is printed by a branch of the government called the mint. However this is not the sole way that new money enters the economy. Banks under US law are allowed to loan out about 9 times as much money as they actually have in their vault (and they do). The actual value to support this money comes from the assets that could be liquidized in case someone were to default on their loan.

So while this money isn't printed paper money, it still is new money which enters the economy via the private industry and not the mint.

[devilchrono]

The system works only to create more and more debt by increasing the outflow of cash with no gold to back it up. They loan out legal tender which means that paper in your hands is literally just that paper.

[Healthy]

In such a crisis there would be an economic bail out to stabilize this problem. And the person in charge of the banks(Government) would have a smart leader(Not BUSH) who would think about how they would go around stabilizing banks that seem to be crashing.

Not to mention that money is nothing more then paper that indicates value which the government controls, not the banks.

[morefngdbs]

At 9/27/08 01:38 AM, devilchrono wrote: The system works only to create more and more debt by increasing the outflow of cash with no gold to back it up. They loan out legal tender which means that paper in your hands is literally just that paper.

;;;;;;
While we've been off the Gold Standard for awhile now, paper money has on many occassions become worth well , worth as much as the paper you wipe your ass with.
Look at Zimbabwe just this past year...100 billion Zimbabwean dollars would buy 3 EGGS !
Germany in the late 1920's , it took several wheel barrows of German deutsch marks to buy 1 wheel barrow of coal. So people used to burn money to stay warm...it was cheaper than coal !
But factors were different then than they are now.

I don't know if any of you are familiar with the Japanese Governments bail out of Japans banking sector about 4 or 5 years ago.... It was to the tune of 300 + Billion dollars. The sad part to this storey is that they are in the same type of trouble again.
When does it become "too much" . eventually you have to come to a place where there is no longer anything that can be done & you have to go through the hardship of collapse of the whole system , that the greed & corruption by the Financial sector has caused.

[Diederick]

At 9/26/08 06:54 PM, Dsmano wrote: Okay, basically, a long time ago there were two Temples. (This is an example btw) These temples, were strictly for knights, who were quite rich. Now, as you may know, the currency back then was made of gold and silver. These are very heavy, so, a knight would have to lug the stuff around when he goes traveling.

So, some genius invented a system, where you brought all your gold to this temple, and gave it to the templars there. In return, they would give you a piece of paper stating who you are, how much money you have and so on. So, the knight would travel with a light piece of paper, rather than god knows how heavy bags of gold. When he arrives at his destination, he would go into the temple there and present them with his piece of paper, and he would withdraw his money. So far the system works, right?

Eventually, the temples start giving out more notes than what the other temple has in it's vault. And problems occur, people lose money and the temples go bust, and they are landed in the situation we are in today. Does the system still work? Well, if this happened frequently, no, but seeing as these things happen in quite few and far between incidences, and there is no other alternative, you could argue that the system does work.

Now, it wasn't as big a problem then as it is now, because this wasn't happening in the millions on such a large scale. And sure, the economy recovers. But surely, a system that the whole world uses, HAS to work. Right? Well, in my personal opinion this case doesn't. However, is there a better way? There might be, but not that I know of.

ITT:
We discuss weather or not the banking system today works, and discuss possible ways of a potential alternative that works a lot better.

Fortunately we then invented the wheel and banks could move gold from one bank to the other, whichever was short on the precious metal. Banking is good, because it can loan people funds to start great businesses, and it keeps our money safe while at the same time available everywhere you go. So far everything works, but how deep into banking do you want to go?

[Bonkwee]

The banking system works when it is operated correctly. The banking system is not what is causing the problem right now. Stupid people are what caused the problem.

[Glowstick-warroir]

At 9/28/08 04:47 PM, Bonkwee wrote: The banking system works when it is operated correctly. The banking system is not what is causing the problem right now. Stupid people are what caused the problem.

Bonkwee is right.

Banking allthought not perfect, works. After all, side a jumble or two, it's been working for 100s of years.

But, what get's it all fucked up with when who ever is doing the lending isn't accountable for his or her losses. Or they assume that the goverment will pick up the bill no matter what. Because if then they can just take as meny risks as they want, keep the ones that hold profit, and let some one else pick up the toxic assets.

And, yes, banks do encourage inflation, they also encourage consumerism on things likes cars and houses. They are credited for most of the economic grow though the 70s and 80s and early 90s.

[JudgeDredd]

There's always a certain irony in that the ppl who fear their bank may collapse, and by taking their money out before there's a rush on the bank are actually the smart ones, yet by their very actions they also help precipitate the collapse that follows.

It's kinda like the proverbial rats on the sinking ship that have to get clear of the ship's own down-vortex sucking them under. You might be a rat, but you're a rat still breathing.

[Der-Lowe]

At 9/27/08 02:23 AM, Healthy wrote: In such a crisis there would be an economic bail out to stabilize this problem. And the person in charge of the banks(Government)

No, Fed.

would have a smart leader(Not BUSH)

Not Bush, Bernanke.

At 9/28/08 10:59 AM, morefngdbs wrote: I don't know if any of you are familiar with the Japanese Governments bail out of Japans banking sector about 4 or 5 years ago.... It was to the tune of 300 + Billion dollars. The sad part to this storey is that they are in the same type of trouble again.

Japan's economy entered a severe economic stagnation because they didn't act quickly when a speculative bubble burst.