Smoke, mirrors ... and how a handful of missed mortgage payments started the global financial crisis

[DogPoundPup]

We are witnessing what the commentator Martin Wolf of the Financial Times calls "the disintegration of the financial system". But how did we get here? How did a few dodgy sub-prime mortgages in American inner cities lead to what is beginning to look like the collapse of capitalism?

This is the great unanswered question in the midst of this extraordinary crisis, as banks implode one after the other across the world. We hear endless talk these days about "de-leveraging", "derivatives", "collateralised debt obligation" and "credit default swaps" most of which is completely incomprehensible - and very often designed to be. A lot of what has been going on is essentially fraudulent. But underneath all the jargon is a fundamental truth about banking: that it is based on a kind of confidence trick.
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It's called "fractional reserve banking". Alone among commercial institutions, banks are allowed to create value out of nothing - in other words, they are allowed to lend out money they don't have.

To explain more fully: at any one time a bank may have, say, £1 billion in assets, but it will have lent out at least £10bn. That £10bn will yield interest, earning money for the bank - but it's interest on money the bank doesn't actually own, that is not based on deposits in its accounts. Magic. Money for nothing.
http://www.sundayherald.com/news/heraldnews/display.var.2457240.0.smoke_mirrors_and_how_a_handful_of_missed_mortgage_payments_started_the_global_financial_crisis.php

[bemildred]

1. Yeah. Right on.

And history has many examples of the fact that if you allow people to create money for nothing, they will always create way the heck more of it than is good for you, or them, or the economy. The core issue here is non-regulation and deregulation. I myself am sort of stupefied that we have allowed the nation's money to be a private fiefdom of a few bankers, who can hardly be called in any sense "public servants."

One of the things that annoys me about the bailout is that the Congress STILL insists on doing it through these weasels, when the government has the power to take direct action, to lend, to restructure loans, to do whatever it thinks necessary. But the government is so hopelessly brainwashed and subservient to these robber-barons that it will cause their own demise rather than rebel and resume its sovereign power to rule directly.

[Dont_Bogart_the_Pretzel]

2. I agree. Anyhow, I thought bush was "lame duck"

and he still gets what he wants :wtf: