Hey guys,
I have found this video which made me think a lot:
http://www.youtube.com/watch?v=vVkFb26u9g8&feature=relatedThe video demonstrates the process of money generation:
1) A recipient asks a bank for credit.
2) Therefore the recipient has to take mortgage from the bank for the own car or house
3) The bank now has security in case the recipient doesn't pay back the credit
4) The bank can grant 9 times the credit value one investor has invested
One would suspect the bank lends the money only it got from investors previously. One party has to pay interest, the other gets interest and the bank receives the margin.
This would be acceptable. But in reality the bank can grant 9 times the credit value one investor has invested, as only one of 10 investors claims his money back at a time. So a bank can spend much more money than it actually possesses before it gets ILLIQUID.
And even worse: The process of money creation is recursive!
5) One recipient takes the created money to pay a car
6) The seller puts the money (which is actually a credit) on his bank account.
7) The bank has new deposit and is more LIQUID
The bank grants 9 times the credit value of this deposit - which again is a credit!!
9) repeat at 5)
And on each credit the bank earns interest. But not the investor.
Neither does the money exist that banks spend, nor does the money exist to pay back the interest.
Please correct my mistakes;)!!!
Now my question:
10) It is criticiesed that banks "create" money. Usually one would trade goods. Banks create money like someone else produces a chair or something. I see the problem that there are no goods trades as the recivient does not pay with his house or something else. But banks COULD take the house and so it IS a VALUE behind the "created money". Banks also have the risk of losing their mortgaged house as it might burn down sooner or later.
Is this so bad? How else should a bank create money?
11) Banks live of the interest for their granted money. The money to pay the interest has never been created so it cannot be paid back.
But something a bank has to live of? What could be an alternative? The video mentions that only the government should be allowed to create money. It pays companies to build roads, schools and so one and this way put money on the markte. It would also grant credits and earn the interest. The richer the government becomes the less will be the taxes or the more money it spends on new infrastructure to put the money back into the market.
12) Banks do multiple, recursive money creation. The money not existing to pay back the interest on the credits rises extremely.
This process should be forbidden!!! Or not? On the other hand this allows componies the receive lager credits and grow faster! Much faster!!
This is not too bad, is it?
Cheers
Harm
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