Unrestricted Banking and Problem Banking

[Das]

I won't say fiat created the economic crash, we could be using bitcoins and still have an economic crash. It's more of an administrative anomaly than something tied to fiat.

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[minor-transgression]

I'll summarize some of the points of these recent posts, because mainstream and
most alt-media reporting seems to skip over important background details.

Bucket shops were banned in 1929 because they were fraudsters. It was too easy
to suck clients in on a momentum trade, and at an appropriate moment, to short
the stock, causing a crash and wiping out clients trading on margin.

The Savings and Loan Crisis (1986-1995) sent many bankers to jail. There were two
other outcomes:
the US government seized toxic loans, and as a consequence of attempting to sell
these at a profit, forced unsafe practices onto the financial sector, and forced
the Ratings Agencies to underestimate risk.
the financial sector moved to protect itself from prosecution, seeking "deregulation"
and "light touch regulation". Besides the removal of Glass-Stegall, the prohibition
on "bucket shops" was removed. Fraud was now legal (again!).

While the deregulation issue was broadly internationally understood, the repricing
of risk and its effects was hidden. Financial instruments rated 'AAA' are
expected to default once in 10,000 years. That number suggests that it is pointless
to insure against default because your counterparty is more likely to fail than the
bond. Initially, there was no market for that insurance (CDO's) because the risk
was correctly priced. That changed, in part because of US government pressure,
beginning with sub-prime.[1]   

In 2004 the FBI was warning that mortgage fraud in America was endemic. 

In 2005, Washington Mutual was reducing its mortgage lending, and in doing so,
its profits suffered, weakening the bank.
"More backers piled in with time, and by May 2005, Mr. Burry closed the first deal on
subprime credit default swaps with Deutsche Bank."
http://dealbook.nytimes.com/2010/03/01/michael-burry-the-man-who-shorted-subprime/

In 2006 John Paulson took an artisan industry and industrialised it. Goldman Sachs,
satisfied itself with its cut of the trade between the buyers and the sellers of CDO's.

The lack of risk of going to jail, and the mispricing of risk mandated by US
government pressure and practice meant that the more toxic the debt, the greater
the likely profits all down the food chain.

http://www.nakedcapitalism.com/2015/12/debunking-the-big-short-how-michael-lewis-turned-the-real-villains-of-the-crisis-into-heros.html
"So it wasntt just that these speculators were harmful, and Lewis gave them a free pass.
He failed to clue in his readers that the actions of his chosen heroes drove the demand
for the worst sort of mortgages and turned what would otherwise have been a "contained"
problem into a systemic crisis."
"Both market participant estimates and repeated, conservative analyses indicate that
Magnetar's CDO program drove the demand for between 35% and 60% of toxic subprime bond demand."
"For the most part, the dealers themselves. Without going into mind-numbing detail, the apparent
risklessness of an AAA instrument hedged by an AAA counterparty (in this case, a monoline)
substantially reduced the capital a dealer needed to support a position. As a result,
holding AAA CDOs hedged by AAA guarantors was treated, on a profit and loss basis on the
relevant dealing desks, as vastly more attractive than finding investors to take the other
side of the trade. In other words, this was massive gaming of the banks' own bonus systems."

Think of it like this: If the government mandated fitting faulty brakes to cars, and then
repealed all the laws relating to speeding and traffic violations, would you be surprised
when a few accidents occur in good weather? followed by massive pileups on motorways when
winter sets in? (It's not just the US Government BTW, they had help).

[1] The Ratings Agencies agreed to change their models in 1997. Within ten years, problems
began to appear: http://www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf
The sort of problem that, according to statistics, as Haldane comments "To provide some context,
assuming a normal distribution, a 7.26-sigma daily loss would be expected to occur once every
13.7 billion or so years. That is roughly the estimated age of the Universe."   
In good times failure rates can be fitted to a normal, gaussian distribution. That model
would seem to be optimistic by a factor of four when the hard times reappear - the "fat tail"
or power law distribution.

[lister storm]

I won't say fiat created the economic crash, we could be using bitcoins and still have an economic crash. It's more of an administrative anomaly than something tied to fiat.

banks and the never ending printing of the money created it, thats why i hate the economic system we have at the moment, i hope it will change in the future though

[bitbunnny]

Banks always were and always will be thew main cause of all economic crises in the world. And they are still running this world, so at the moment I don't know what could changew that. Bitcoin, unfortunately, can't..

[ontrackk]

I won't say fiat created the economic crash, we could be using bitcoins and still have an economic crash. It's more of an administrative anomaly than something tied to fiat.

well it kinda was because of the money we have right now thats why i want bitcoin to replace all the banks and fiat we have at the moment

[takingthis4]

I won't say fiat created the economic crash, we could be using bitcoins and still have an economic crash. It's more of an administrative anomaly than something tied to fiat.

actually, fiat and nothing else created the crrash we had and i think the crash but bigger one will happen any time soon, it is really crazy

[minor-transgression]

"Be not afraid of greatness. Some are born great, some achieve greatness, and some have
greatness thrust upon them" - Shakespeare

A day or two back, I'm told that we are now in a "post-heroic Age". This in the context
that we are more likely to die in a household accident, such as falling off a chair,
than in a terrorist attack. Add to this threats such as organised crime, drug trafficking,
sex slavery, paedophilia, as headlined by the main stream media, and one would assume that
the mass of the population is traumatised into fear of its own shadow. Ever wondered
why they carry out polls to find out what scares you most?

It's time to raise your eyes from this dark path and stare into the abyss nearby. Does that
frighten you? Those of you still with me are probably asking. which abyss?
there are so many? This one: "Stability" ... OK, dive in.

For most of recorded history, 0 < beta + alpha. The population increased, and they found better
ways to make stuff. The economy grew. The times when that didn't happen were dark times:
the fall of the Roman Empire; the Black Death, ...  you get the picture. Hence the willingness
of politicians to talk about "growth" and "stability". Their audience translated this as
more jobs, and more money, and that's what they voted for: Infinite Growth.

But, Central Banks cannot create babies, nor even an increase in the economically active
population. They might have contributed to an increase in innovation and productivity by
ensuring that the most inefficient abusers of capital got pushed into creative destruction,
but signally failed to do that. They cannot directly improve productivity or innovation.
Which begs the question: Absent some magical event, what are the chances of both productivity
and population growth turning down in the none-too-distant future? Quite high, perhaps, see here:

http://sustainable.unimelb.edu.au/sites/default/files/docs/MSSI-ResearchPaper-4_Turner_2014.pdf

The paper follows up work carried out 1972-1974 "Limits to Growth", finds that the "Business as
Usual" scenario is followed reasonably closely up to the date of publication (2014) and expects
a decline in world industrial production to begin soon. And if growth continues, the collapse
will be steeper and deeper.

I'm inclined to believe that the outcome will not be as dire as some forecast. However, the
point is made that we cannot expect 0 < beta + alpha to prevail much longer. What happens
as we transit this trajectory? The world's economies move into instability, with unpredictable
interactions. If the central banks were well prepared with low debt and plenty of munitions,
they might be of some help. Frankly, they look like a liability.

I'm thinking that this is hard to take in, that economics as we know it, free market capitalism,
could just stop working. Maybe one word will explain : RATIONING. Got it? Everything falling
into place? Good. Any Questions? Confirmations?

I do expect one or more financial "events" before we get to that point. Whether we get a repeat
of 2008, maybe better, maybe worse, remains to be seen. The last event saw a transfer of wealth
to the one percent. Next time there will be many more people with little to lose.

"Be not afraid of greatness", as this New Age of Heroes gets thrust upon our newest generation.
The New Heroic Age.

[BobK71]

This is the central banks' strategy at this point:

Maintain what's left of the asset bubble until:

1. Big growth comes from somewhere.  This is the preferred path.  Growth doesn't have to be a giant technological breakthrough; it can be a big, newly industrialized country (or countries) coming on stream to provide real goods and services to support the financial assets already or about to be issued.

2. Big war or terrorism happens.  The current condition is a de-facto continuous injection of pain into vulnerable populations until something breaks.  The US-led West will ride in shining armor to bring 'final' defeat to terrorists and/or tyrants.  And it just happens that such a great victory will allow the US to dictate the postwar financial order (as in 1945,) get the level of financial repression it wants (as the post-1945 Bretton Woods system moved the world further from the gold standard to the dollar standard,) and blame any 'financial irregularities' on the conflict.

3. If neither 1 nor 2 materialize before the asset bubble must collapse, then wipe out all debt.  The most likely method will be 'helicopter money.'  (Really big amounts, not the timid QEs so far.)  This will push inflation so high that past debt will no longer be constraining central bank and government stimulus efforts.  Finally, as during 'normal' times, the public will believe in the authorities' determination and ability to generate inflation, and they will start spending and lending on their own.  This financial reset will be the last resort since it won't do any good to the reputation of the assets issued by the elites.

Granted, this is not on the same long-term basis on which your trajectory of civilization is being discussed.  And I am absolutely no fan of the modern system.  But the elites are not yet at their wit's end, at least in the medium term.

[InSilva]

The easiest way to define money is as a value-exchange. It's the denominated amount of a widely circulated currency (gold, currency, BTC) for which one party is willing to trade for a set amount of goods, services or labor to a counter-party. The difference between currency and "hard coin" is that currency has zero intrinsic value. Gold has intrinsic value, so does BTC. Even labor goods and services have intrinsic value. The problem for BTC in general is that since the public can't hold it in their hands, and because it's only existed for a short period of time, to them it has no intrinsic value.

[BobK71]

The easiest way to define money is as a value-exchange. It's the denominated amount of a widely circulated currency (gold, currency, BTC) for which one party is willing to trade for a set amount of goods, services or labor to a counter-party. The difference between currency and "hard coin" is that currency has zero intrinsic value. Gold has intrinsic value, so does BTC. Even labor goods and services have intrinsic value. The problem for BTC in general is that since the public can't hold it in their hands, and because it's only existed for a short period of time, to them it has no intrinsic value.

The difference between hard and soft money is not 'intrinsic value,' whatever that means.  The difference is 'who gets to say what value it has.'

With state-issued money, the public authorities get to say, and therein lies all the perverse and destructive incentives.

With non-state-issued money, no matter what determines the money's value, the authorities do not get to say.

And that, it turns out, is the most important attribute, in the real world.

[yayayo]

The difference between hard and soft money is not 'intrinsic value,' whatever that means.  The difference is 'who gets to say what value it has.'

With state-issued money, the public authorities get to say, and therein lies all the perverse and destructive incentives.

With non-state-issued money, no matter what determines the money's value, the authorities do not get to say.

And that, it turns out, is the most important attribute, in the real world.

That is undoubtedly an important attribute. However in the past there has been state-issued money in the form of gold and silver coins that had intrinsic value because of the precious metal content. Of course also in this case the value was somehow standardized, i.e. fixed. But I think it's fair to say that these forms of currency where at least partially "honest" compared to what we have today with unlimited debt-driven growth of the monetary base.

I agree with you that we need a free market for money. That means the state monopoly of money creation must be abolished and everyone should have the right to issue his/her own money as he/she sees fit. The market forces will quickly distinguish between good and bad money and fraudulent forms of money will loose acceptance sooner or later.

Fortunately we have Bitcoin, which is private money and a perfect first step in ending the parasitic age of debt-based governance and central banks.

ya.ya.yo!

[dragunfly]

I won't say fiat created the economic crash, we could be using bitcoins and still have an economic crash. It's more of an administrative anomaly than something tied to fiat.

i think it actually did because fiat is really bad and it is making the inflation bigger and bigger, thats why i like bitcoins more than just regular fiat

[BobK71]

... in the past there has been state-issued money in the form of gold and silver coins that had intrinsic value because of the precious metal content. Of course also in this case the value was somehow standardized, i.e. fixed. But I think it's fair to say that these forms of currency where at least partially "honest" compared to what we have today with unlimited debt-driven growth of the monetary base.

'Partially honest' seems a fair description, since gold and silver standards (especially when gold coins circulated as currency alongside paper money) did play a role in slowing down the state-driven financial inflation.

But when we talk about what a truly theft-free system looks like, there either are perverse incentives, or there aren't.  The speed of theft, while important, is not fundamentally a factor here.

The metallic standards does incentivize the authorities to issue each additional unit of paper money.  This issuance is free wealth or power for the elites, while the standard holds.

Historically, Britain must count as the best custodian of metallic standards.  Even there, by the eve of World War I, Britain only had 3% of the gold required to redeem its total outstanding paper money.  (The pound took another hundred years to reach its current value, which is 1/230 of its value against gold, under the gold standard.  This is even worse than the dollar, which has shrunk 'only' to 1/64 of its former self by the same yardstick.)

You could say that the public could watch the authorities, and that metallic standards have market forces built in to suppress financial inflation.  All true, but state-driven financial inflation is a social addiction overwhelmingly larger than either force.  The populace, not just the elites, will demand the rules be loosened, at key times, since they too are used to the unearned wealth and comfort.  If, every time I touch alcohol, I eventually become fully-fledged alcoholic, I should probably stay away from any drop of it (and in fact I believe that is the foundation of Alcoholics Anonymous.)

What state-driven bubbles do is that they become so big that they 'must' be kept alive to avoid great pain.  And the only way to keep them alive?  A bigger bubble.

[OROBTC]

...

Everything changes over time.  History shows us that there have been Bad Times (of many kinds, including economic depressions and nasty totalitarian regimes) for millennia.

I'm not really sure how much The Banksters have contributed (again I don't know how much), but it does seem that corruption among banks has always been a big problem.  The old problem of Private Gains / Social Losses has always been with us, and the banks seem to almost always be the beneficiaries (or bank managers anyway).

*   *   *

Re "money", my favorite description splits money into three concepts, IMO this may be the best way to think of money (not as just "one" slippery thing):

1)  Unit of Account (eg, how much a cow is worth)
2)  Medium of Exchange (using money to actually buy that cow)
3)  Store of Value (your unit of money will be worth about the same next year as this one).

The problem with "money" is that there is no money that reliably fulfills all three!  Currency can easily be used for the first two roles, especially No. 2.

But, currency is NOT a good & reliable Store of Value.  Gold is however.  Gold is not as good for Unit of Account nor Medium of Exchange.

[skysblu]

I won't say fiat created the economic crash, we could be using bitcoins and still have an economic crash. It's more of an administrative anomaly than something tied to fiat.

well it actuall did not and you are right, the banks created that, and it is the reason why i hate banks, bitcoin is way better to use

[minor-transgression]

M-T "Everything falling into place?" OK maybe I need to work through this some more.

This isn't a great example, but it is recent.   

http://www.zerohedge.com/news/2016-09-07/gdp-less-meets-eye
"As one easily notices GDP on a per capita basis is more worrisome than when
viewed on a total basis as in the first two graphs. The economic growth rate
per person is currently below one half of one percent. More concerning,
it is below levels seen during the great financial crisis in 2008 and it is
still trending lower. This graph confirms our macroeconomic concerns and helps
explain, in part, why so many U.S. citizens feel like they are being left behind.
Factor in that many of the economic spoils are not evenly distributed, as
assumed in this analysis, but are largely accruing to the wealthy, and the problem
only worsens. As such, the growing social anxiety and trend towards populism,
be it conservative or liberal leaning, will not likely dissipate if the
aforementioned economic trends continue."

Begin by rethinking what the author says, and look at what happened post 2002
when Greenspan inflated the US housing bubble. Then note that graph of ten year
GDP growth rate per capita, and then note that today the figures are almost
certainly lower, and note that the graph is a crude approximation for productivity. 
Except that productivity needs to be measured as productivity per employee not
per capita. Thus as unemployment falls, employment numbers increase, and
productivity falls if GDP stays constant, so the graphed figures should be a
bit optimistic. 

As stated in my earlier post, as this trend continues, the US economy moves into
instability. There's a lot of noise in these figures, so deciding when things
like a phase change has happened can only be precisely defined in hindsight.
Maybe Armstrong's 2015.75 applies here, maybe not, the exact date is unimportant.
There are no precedents for this, and I sincerely hope that I have completely
misread the way things seem to be moving.

Japan and some parts of Europe are ahead of the USA. Emergent nations
with growing populations still have well-behaved economies. Think of all this as
an enormous hall with rows and rows of dominoes all falling into place. The
emergent nations' dominoes haven't started falling - yet.

So, when you read "It ain't working", or similar thoughts, know that it also
ain't fixable. But beware -  economists are like medieval doctors, if one bunch
of leeches hasn't worked, moar leeches will be applied.   

Is that any clearer? Maybe re-reading my last 3-4 posts will help?

[Gahs]

The difference between hard and soft money is not 'intrinsic value,' whatever that means.  The difference is 'who gets to say what value it has.'

With state-issued money, the public authorities get to say, and therein lies all the perverse and destructive incentives.

With non-state-issued money, no matter what determines the money's value, the authorities do not get to say.

And that, it turns out, is the most important attribute, in the real world.

And it also turns out that the general public do want to spend any currency that is not issued by the state. That's why crypto is not spreading super fast.

[BobK71]

Re "money", my favorite description splits money into three concepts, IMO this may be the best way to think of money (not as just "one" slippery thing):

1)  Unit of Account (eg, how much a cow is worth)
2)  Medium of Exchange (using money to actually buy that cow)
3)  Store of Value (your unit of money will be worth about the same next year as this one).

The problem with "money" is that there is no money that reliably fulfills all three!
...

Before European states learned paper money, and after China got tired of paper money, most money was silver.  The Chinese didn't even let the state mint coins.  They used ingots of slightly irregular shapes and weighed their silver.  Monetary units were weight only.  There was a lot of cutting and weighing on the street.

This was after the previous system where the state eventually had to use the death penalty against anyone caught transacting with anything other than state-issued paper money.

[BobK71]

And it also turns out that the general public do want to spend any currency that is not issued by the state. That's why crypto is not spreading super fast.

Unfortunately, that is correct.  It's rare that the public rejects the national currency.  When it happens (Germany in 1923, Zimbabwe recently) it represents a catastrophic loss of power by the state and is usually a result of extremely poor policy making.

And why is this?  The state always has a last resort to protect its currency when things go badly against it -- devaluing the state currency against non-state money or hard currencies.  There always exists a level of devaluation, *after* which the state will have enough power to maintain stability.

Under basically competent policies, the dollar has been effectively devalued against gold from $35/oz to $1300/oz over the last 45 years.  Bitcoin may play a similar role to gold in the future, and that may be why the US authorities decided to legitimize it a few years ago.

[BobK71]

...

Everything changes over time.  History shows us that there have been Bad Times (of many kinds, including economic depressions and nasty totalitarian regimes) for millennia.

True, all investments are uncertain, no matter what, but I think state control of money does add a big factor of instability on top of what is natural, over the long term.

I'm not really sure how much The Banksters have contributed (again I don't know how much), but it does seem that corruption among banks has always been a big problem.  The old problem of Private Gains / Social Losses has always been with us, and the banks seem to almost always be the beneficiaries (or bank managers anyway).

The bankers are able to profit from what is, at heart, a state subsidy (heads they win, tails the public lose) because the state allows them to.  Bankers are not responsible for societal welfare -- they are in it only for their own benefit, with no apologies.

The real problem is that the public allows the state to engage in such an arrangement with the bankers.  The top politicians have good personal reasons for doing so -- without the financial innovation from the banks (at least while confidence lasts in the trick du jour,) confidence in public debt would collapse, and then the politicians would be in real trouble.  But voters need not endorse this arrangement.

As the saying goes, fool me once, shame on you; fool me for 500 years, shame on me!