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Author Topic: How come the bank failure destroy the wealth???  (Read 8334 times)
johnyj
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October 06, 2011, 02:04:54 PM
 #1

There is one thing always confused me: People always say that financial crisis destroyed trillions dollar worth of wealth

Based on general economy definition, only consumable goods and services are wealth, money is just a medium of exchange. So, if a house used to worth 5 million now worths 3 million, the actual wealth (the house) do not change, it is just the price of the house changed, and I think this price change are mainly caused by two things: money supply and people's desire

In my opinion, only war or natural disaster can really destroy wealth massively, any kind of financial loss is just a illusion, since people mistakenly think that money is wealth

The real question is: The country as a whole did not lose any wealth in the financial crisis, but why many people are getting poorer and the real tangible and consumable products are getting less produced?




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October 06, 2011, 02:09:20 PM
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LOL, AWESOME question.

 Learn how modern money really works.  (http://alturl.com/e4hu5) Ctrl-F : 1. What is Money?

How can a State(Country) that creates its own currency run out of Money?? It can't.
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October 06, 2011, 02:26:58 PM
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Well it's like when bitcoins were at 30$ and now they are at 5$, you didn't lose any bitcoins but you are poorer.

As for banks it's also "socialize the losses and privatize the profits"
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October 06, 2011, 02:31:42 PM
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paper money is of less value now that it was before the crisis and if you have savings or investment in paper money then your wealth is decreased.


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October 06, 2011, 03:16:31 PM
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I believe that no wealth has been destroyed, they just destroyed the fiction wealth they created out of nothing


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October 06, 2011, 03:17:35 PM
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There is one thing always confused me: People always say that financial crisis destroyed trillions dollar worth of wealth

Based on general economy definition, only consumable goods and services are wealth, money is just a medium of exchange. So, if a house used to worth 5 million now worths 3 million, the actual wealth (the house) do not change, it is just the price of the house changed, and I think this price change are mainly caused by two things: money supply and people's desire

What happens is that people realize the lost, which has already been done in the form of wasted resources. These resources were employed in bad investments, which had not enough returns.

Bad investments occur all the time, but when they occur massively like in an boom-and-burst, that's because something interfered with prices, making people take decisions they otherwise would not. (if prices were a correct indicative of supply and demand).

The major cause of such massive bad investments today is cheap credit created through inflation. Central banks create new money and buy debt bonds with it. Buying debt is the equivalent of lending. They increase the supply of money available for lending, without any actual increase in savings (resources, not money). With this cheaper credit, people will make loans they otherwise would not, and investments that wouldn't take place spontaneously now happen. These investments will not have the amount of actual resources they need to complete - remember, only new money was created, that doesn't magically create resources as well. When these investments start to fail, people will "realize" their lost. The actual lost happened when resources were wasted on investments that were not worthy it.

In the example of the $5 million house, if somebody paid that price for it, it means he traded much more resources (the results of his labor) against this house than s/he needed to. That's the lost: you worked much more than you needed for the house. All that work was wasted (lost).

The real question is: The country as a whole did not lose any wealth in the financial crisis, but why many people are getting poorer and the real tangible and consumable products are getting less produced?

As I explained above, the actual lost did not happen during the crises, it happened before, during the boom, when resources were being wasted on bad investments. The crises is the moment when people realize their mistakes. And the recession is the period in which society as whole reorganizes itself, mainly the capital structure. For example, in this particular real state crisis, too much capital and labor was directed towards real state building. Such capital and labor must be reallocated to activities that better suits society's more urgent needs. This reallocation is never easy: neither capital (means of production) nor people can easily change functions - some times they just can't. So, during this time, there will be poverty, unemployment and so on. And the total production capacity of society will probably be smaller, since lots of capital will be lost, as well as labor.


Hope I've made it clearer instead of even more confusing. Cheesy
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October 06, 2011, 03:28:47 PM
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There is one thing always confused me: People always say that financial crisis destroyed trillions dollar worth of wealth

Based on general economy definition, only consumable goods and services are wealth, money is just a medium of exchange. So, if a house used to worth 5 million now worths 3 million, the actual wealth (the house) do not change, it is just the price of the house changed, and I think this price change are mainly caused by two things: money supply and people's desire

What happens is that people realize the lost, which has already been done in the form of wasted resources. These resources were employed in bad investments, which had not enough returns.

Bad investments occur all the time, but when they occur massively like in an boom-and-burst, that's because something interfered with prices, making people take decisions they otherwise would not. (if prices were a correct indicative of supply and demand).

+1

Also, try to keep the ideas of wealth and capital clear in your mind.  Invested capital can multiply the wealth created through work.  If capital is misinvested, that capital is wasted right away, but it won't be obvious until the dreamed of gains fail to appear.  Bad signals and denial can keep those losses off the books for months, years, or even decades.

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October 06, 2011, 06:32:57 PM
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There is one thing always confused me: People always say that financial crisis destroyed trillions dollar worth of wealth

Based on general economy definition, only consumable goods and services are wealth, money is just a medium of exchange. So, if a house used to worth 5 million now worths 3 million, the actual wealth (the house) do not change, it is just the price of the house changed, and I think this price change are mainly caused by two things: money supply and people's desire

What happens is that people realize the lost, which has already been done in the form of wasted resources. These resources were employed in bad investments, which had not enough returns.

Bad investments occur all the time, but when they occur massively like in an boom-and-burst, that's because something interfered with prices, making people take decisions they otherwise would not. (if prices were a correct indicative of supply and demand).

Good question (for once) and even better answer.

People dont realize that bubbles are destructive because resources are used in a bad way and are squandered. In this sense there is no difference on burning resources for nothing, destroying them in a war or using them to produce something people dont need (f.e. excessive housing). But because bubbles produce an increase in GDP some economist argue that the economy is growing, when in reality the increase in GDP is not real economic growth, just the result of economic activity that squanders resources.

People is poorer because part of what was produced was not what people needed. Less useful production = we are poorer.
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October 06, 2011, 06:36:29 PM
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I never thought about  it that way...

Interesting...

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October 06, 2011, 09:15:01 PM
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Another answer besides the more in depth discussions above is that when a bank fails, anyone holding money in that bank is basically screwed out of their money.  Sure the FDIC insures some of it, but if you had $2,000,000 sitting in a bank that went under, you'd be looking at a 95% loss of your savings.  This is not very common though because people with money don't typically do something as irresponsible as put it all in a savings account.  Funny times we're living in.  Putting your money in the bank is a risk while stashing silver under your mattress is smart.  Wink
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October 06, 2011, 09:40:14 PM
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People need a better way of figuring out what individuals need to lead a fulfilling life, on a global scale, and put that plan into action.  Simply equating happiness (contentment, success, emotional / spiritual fulfillment, whatever you refer to it as -- that common thing that we all as humans seem to strive for, BEYOND food water and shelter) with obtaining raw wealth or power has proven ineffective.  There are good ideas / solutions to the problem that have been around for a while and probably should be revisited and worked with:

-  BF Skinner's Technology of Behavior
-  Thelema
-  Venus Project

I don't subscribe to any of the above outright, but I do recognize them as daring ideas that contain potential for pioneering.  One other such daring idea was the concept of digital crypto-currency, which someone ran with and resulted in the pioneering potential that is Bitcoin.

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October 07, 2011, 03:10:07 PM
 #12

Bad investments occur all the time, but when they occur massively like in an boom-and-burst, that's because something interfered with prices, making people take decisions they otherwise would not. (if prices were a correct indicative of supply and demand).

The major cause of such massive bad investments today is cheap credit created through inflation. Central banks create new money and buy debt bonds with it. Buying debt is the equivalent of lending. They increase the supply of money available for lending, without any actual increase in savings (resources, not money). With this cheaper credit, people will make loans they otherwise would not, and investments that wouldn't take place spontaneously now happen. These investments will not have the amount of actual resources they need to complete - remember, only new money was created, that doesn't magically create resources as well. When these investments start to fail, people will "realize" their lost. The actual lost happened when resources were wasted on investments that were not worthy it.

In the example of the $5 million house, if somebody paid that price for it, it means he traded much more resources (the results of his labor) against this house than s/he needed to. That's the lost: you worked much more than you needed for the house. All that work was wasted (lost).

As I explained above, the actual lost did not happen during the crises, it happened before, during the boom, when resources were being wasted on bad investments. The crises is the moment when people realize their mistakes. And the recession is the period in which society as whole reorganizes itself, mainly the capital structure. For example, in this particular real state crisis, too much capital and labor was directed towards real state building. Such capital and labor must be reallocated to activities that better suits society's more urgent needs. This reallocation is never easy: neither capital (means of production) nor people can easily change functions - some times they just can't. So, during this time, there will be poverty, unemployment and so on. And the total production capacity of society will probably be smaller, since lots of capital will be lost, as well as labor.

Hope I've made it clearer instead of even more confusing. Cheesy

That's a great view, I think most of the economy schools are taking this view, academically it is quite nice

I have a different view

When people sell product and get money, they save the money, but they did not save the value (the product was consumed or degraded), money was hold as a "proof of work"

It's easy to see: Saving do not increase the society's consumable resource, it just increased society's "proof of work"

So, in the example of the $5 million house, A paid B $5 million to buy the house, there are $5 million worth of "proof of work" transferred from A to B, but the real wealth is only that house, those $5 million worth of "proof of work" do not correspond to enough tangible wealth in the society

Same house could worth 5 million one year and 3 million another year, but the house do not change, only the exchange value of the house changed

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October 07, 2011, 07:42:58 PM
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That's a great view, I think most of the economy schools are taking this view, academically it is quite nice

I have a different view

When people sell product and get money, they save the money, but they did not save the value (the product was consumed or degraded), money was hold as a "proof of work"

It's easy to see: Saving do not increase the society's consumable resource, it just increased society's "proof of work"

So, in the example of the $5 million house, A paid B $5 million to buy the house, there are $5 million worth of "proof of work" transferred from A to B, but the real wealth is only that house, those $5 million worth of "proof of work" do not correspond to enough tangible wealth in the society

Same house could worth 5 million one year and 3 million another year, but the house do not change, only the exchange value of the house changed

The saving happened when he made the product but didn't consume it himself, not when he sold it.

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October 07, 2011, 08:20:45 PM
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It might be my opinion and I'm different than others' in this forum, but money is wealth. Real Wealth.

Do you consider gold wealth? Well, Gold is just a kind of material with high demand. The same for money. The same for a car. It's just a set of materials linked together, and they work  Wink

Well, so money is real wealth. But like wealth (Gold or Silver), money don't get destroyed or banks don't destroy it. What happened is that banks were investing their money in various mediums like stocks, bonds, loans, investments... When the crisis happened and the value of these investment decreased, banks faced bankruptcy and many banks did go bankrupt.

So if you consider the bank and what it does as a wealth, then yes, it got destroyed by the crisis (that started for whatever reason).

But for this part of your post

Quote
People always say that financial crisis destroyed trillions dollar worth of wealth

All I can say is that people says lot of stupid/non-sense things.
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October 07, 2011, 11:06:27 PM
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Thomas Jefferson wrote about it as "ficitcious capital" being used to finance speculative and questionable enterprises.  THe public is gives the appearance that wealth was being created.  Bad Mortgages temporarily driving the speculative boom in houseing for example.  then when the correction occurs at some point, they all scream about the wealth being lost or destroyed.

Just like my 7th grade english teacher explained it when I asked about the great depression, "but i don't get it, where did all the money go during the great depression."  his answer was that it never really existed in the first place.

so yes, the MSM will report about wealth 'destruction' when these bubble unwind.  instead is more like the 'fictitious' bank adn investment capital pyramid falling apart, destroying the ILLUSION of wealth. 

And this idea is so hard for people to get.  there's real wealth and honest enterprise out there, and then there are those who create the appearance of wealth back by fiction or fraudulent arrangements where they are a con man, and the common folk who get sucked it are the mark.

But you are absolutely right, real wealth is created when people set out to produce and trade their labor and talents to produce and consume all the niceties of modern life.

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October 08, 2011, 04:44:59 AM
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It might be my opinion and I'm different than others' in this forum, but money is wealth. Real Wealth.

Do you consider gold wealth? Well, Gold is just a kind of material with high demand. The same for money. The same for a car. It's just a set of materials linked together, and they work  Wink

Well, so money is real wealth. But like wealth (Gold or Silver), money don't get destroyed or banks don't destroy it. What happened is that banks were investing their money in various mediums like stocks, bonds, loans, investments... When the crisis happened and the value of these investment decreased, banks faced bankruptcy and many banks did go bankrupt.

So if you consider the bank and what it does as a wealth, then yes, it got destroyed by the crisis (that started for whatever reason).

But for this part of your post

Quote
People always say that financial crisis destroyed trillions dollar worth of wealth

All I can say is that people says lot of stupid/non-sense things.

No, money is not wealth.  Money can buy wealth, and you can sell wealth for money.  But money is not wealth.

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October 08, 2011, 07:56:08 AM
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The saving happened when he made the product but didn't consume it himself, not when he sold it.

I suppose in a market-based economy, everything produced is for sell and exchange for money. And most of the things produced will be vanished/degraded quickly (compare to money). For most of the product, if you produce it and store it, it will lose value quickly, no matter if it is consumed, this is the issential difference of saving goods and saving money. If more products are produced and consumed everyday, the economy is stronger

Of course people can produce something just for the purpose of store, like gold, but the incentive is really small if most of people's life is enough secure and comfortable


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October 08, 2011, 08:49:52 AM
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It might be my opinion and I'm different than others' in this forum, but money is wealth. Real Wealth.

That is exactly most of the people think, not those from economy school. Because this, we can say that wealth is destroyed if there is a rate hike (money destroyed by central bank)

Now I have a better view!

Imagine a simple game:
First year,  A sell his house to B for $3 million
Second year, B sell the house to C at $4 million
Third year, C sell to D at 5 million

In this process, the amount of money required for transaction increased so much that bank must provide them bigger and bigger loans, thus lots of money must be created to facilitate the trades, and wealth is created from newly provided loans for this bubble (or bad investment, but you can never tell in forehand, if the price continously rise, then it is a good investment!)

Then, at certain point, most of the people have joined the game and bought a house, there is not enough new buyers join the game to keep the price hype, at the same time, FED has realized this might be a bubble and start to tighten. Then the house price will fall back to 4 million and 3 million. It's this tighten really detroyed the wealth (or money), what we see after 2008 is the consequence of tightening during 2007, but the wealth is already destroyed in 2007

I remember a story: One guy spend holiday with his wife, he got up early in the morning, went to cassino and bet 1 dollar on number 7 of the roulette, he were super lucky and hit 7 four times in a row and won 1.6 million dollar, and at the last bet he lost it all. He return to his wife and said that he just had a dream. His wealth is created and destroyed in one morning







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October 08, 2011, 09:05:45 AM
 #19

how was wealth destroyed?

welp, amongst other things, property values plummeted; leaving many underwater on their mortgages. companies went under, and 401k's/IRA's/ etc were wiped out. jobs (including high skill jobs like engineering) were lost en masse....

soooooo, yeah....






banks and other corporations fucked the US....but we need less regulation of corporations....

right.




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October 09, 2011, 07:17:59 PM
 #20

Another thought related to saving:

One gold miner found a small piece of gold, he use that piece of gold to exchange for several bag of bread from a farmer, and he eat those bread for one week

After one week, farmer still holds the gold, but there is no bread, since farmer think that he could use that gold to buy same amount of bread  Grin

This means: Farmer need some incentive to continously produce the bread, otherwise there will be inflation  Cool

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