Debt Based Ecnomy

[Rival]

I have a passing interest in economic affairs after having been 12/13 during 2008 and being a bit obsessive about it ever since. I learned a few major things but the most important is that we live in a debt-based economy (loans make money) and a high risk banking environment due to such practices as:

-Subprime mortgages
- CDOs/CLOs.
What Are Collateralized Debt Obligations (CDOs)? (thebalancemoney.com)

The latter are basically mortgages that are sold bundled to a bank by a mortgage company which therefore doesn't care if these mortgages are ever actually paid, with the first being individuals and the second being companies/corporations. These make bubbles that burst, essentially, yet we keep doing it and we keep legalising it.

Why is this? From a serious, non-partisan economic POV, is there any gain from this for the average person long-term rather than the banks etc? Is there any other kind of viable, multinational economy?

 

[Secret Chief]

I have a passing interest in economic affairs after having been 12/13 during 2008 and being a bit obsessive about it ever since. I learned a few major things but the most important is that we live in a debt-based economy (loans make money) and a high risk banking environment due to such practices as:

-Subprime mortgages
- CDOs/CLOs.
What Are Collateralized Debt Obligations (CDOs)? (thebalancemoney.com)

The latter are basically mortgages that are sold bundled to a bank by a mortgage company which therefore doesn't care if these mortgages are ever actually paid, with the first being individuals and the second being companies/corporations. These make bubbles that burst, essentially, yet we keep doing it and we keep legalising it.

Why is this? From a serious, non-partisan economic POV, is there any gain from this for the average person long-term rather than the banks etc? Is there any other kind of viable, multinational economy?

A great scene from one of my favourite films.

 

[PureX]

Language warning ... classic George Carlin 'the shocking truth' ...

 

[icehorse]

Why is this? From a serious, non-partisan economic POV, is there any gain from this for the average person long-term rather than the banks etc? Is there any other kind of viable, multinational economy?

I'll claim it's because it's a great way for oligarchs and kleptocrats to fleece the rest of us. Sure, there are many other approaches, but they're not as profitable for the .00001% ers.

 

[Rival]

I'll claim it's because it's a great way for oligarchs and kleptocrats to fleece the rest of us. Sure, there are many other approaches, but they're not as profitable for the .00001% ers.

In the end it didn't work for even the banks; Northern Rock; Alliance and Leicester; Lloyds TSB; Lehman Brothers; Bear Stearns.

 

[Shadow Wolf]

In the end it didn't work for even the banks; Northern Rock; Alliance and Leicester; Lloyds TSB; Lehman Brothers; Bear Stearns.

Here in America they're still around. Even AIG, who was discovered to have behaved entirely inappropriately with bailout money the execs used for vacation, is still around.

 

[Revoltingest]

Debt is very useful to lubricate an economy.
However, government regulators should do
a better job of regulating to achieve....
- Reduced probability of a crash
- Less onerous regulation in situations of low risk.
- Reduced incentive for highly leveraged loans.

 

[Rival]

Here in America they're still around. Even AIG, who was discovered to have behaved entirely inappropriately with bailout money the execs used for vacation, is still around.

They exist here, too.

 

[Rival]

- Reduced incentive for highly leveraged loans.

Could you elaborate on this? Thanks.

 

[Revoltingest]

Could you elaborate on this? Thanks.

One thing I noticed during the economic crash
that followed 2001.9.11 was that people who
had loans exceeding 90% of appraised value
was that as businesses contracted, & workers
suffered, houses fell in value. They became
"under water", ie, the loan balance was more
than the home was worth. They couldn't sell
if they needed to move where the work was.

If one had a private lender, instead of federal
(eg, Fannie Mae), a troubled borrower might be
able to re-negotiate the loan, & escape with no
debt. But federal lenders won't negotiate, so
people went bankrupt.

I had some commercial properties in hot water,
but fortunately, my lender (the British government,
which owned RBS, & wouldn't negotiate) sold my
loans to a private company. They made money,
& I got a discount to enable refinancing with a
local lender.

 

[Yerda]

I recommend Bernard Lietaer's The Future of Money and Graeber's Debt: The First 5000 Years for more on debt-based currency and economy.

All money is debt. Modern fiat currencies are created by fractional reserve.

 

[Brickjectivity]

...The latter are basically mortgages that are sold bundled to a bank by a mortgage company which therefore doesn't care if these mortgages are ever actually paid, with the first being individuals and the second being companies/corporations. These make bubbles that burst, essentially, yet we keep doing it and we keep legalising it.

Why is this?...

From time to time the government will wish to increase the amount of available money in circulation and so might put pressure onto banks to do so. One way banks might respond is by making more risky loans. The government also may allow banks to pursue very risky loans. These loans create tradable debts, which temporarily act much like extra money in the economy. 'Repackaging' them and 'bundling' them means selling a contract for more then one. This also is a little bit like extra money, these contracts, too can be traded and repackaged further, like bunding small boxes into larger ones, and those into shipping containers, and those into ships etc.

Why does it act like money? It acts like money, because it attracts buyers who pull money out of one place or another to get the product. Perhaps they pull this out of stocks they own or out of gold in a safe. The point is, these tradeable debts cause money to move -- which increases the number of people employed by business. That is the whole game: employment.

Moving money equals more money. Money that circulates increases employment. Money that is hidden in a hole is not moving, and for purposes of employment and taxes that money is gone. So how do you get people to use their money? That is the trick.

Anything can be in a contract, unless it is illegal; because the government enforces them. This means that the language of a mortgage can state that the debt can be transferred. You might also have a mortgage which promises no such transfer, but you have to insist upon it and refuse to accept anything else. Therefore in the eyes of the law people who accept subprime mortgages have agreed to whatever is in their mortgage contract. Legally speaking subprime mortgage homeowners brought this upon themselves, even though the banks created the conditions and lured them in while knowing (through Statistical data) that they were unlikely to repay.

 

[Heyo]

Why is this? From a serious, non-partisan economic POV, is there any gain from this for the average person long-term rather than the banks etc? Is there any other kind of viable, multinational economy?

Bubbles and bursts are a natural conclusion of debt-based money. While "money" can grow exponential, real values can not. The trick is to keep the hot potato going around and being careful to not catch it when it bursts.

 

[Shadow Wolf]

Bubbles and bursts are a natural conclusion of debt-based money. While "money" can grow exponential, real values can not. The trick is to keep the hot potato going around and being careful to not catch it when it bursts.

And this is where I'm reminded this is not, by any means or stretch, among the natural sciences. It's a social science, not much different than anthropology but with an entirely different lens it sees society through. I began to realize how true this is when I began learning about investing, and especially paying attention to what "the pros" are saying. And they get it wrong and are just as prone to hopes and knee jerks in their predictions as anyone else. Sometimes I wonder if despite their insights if they may even be worse at it with what appears to be a high degree of certainty when they've cast read their chicken bones.

 

[Nimos]

I have a passing interest in economic affairs after having been 12/13 during 2008 and being a bit obsessive about it ever since. I learned a few major things but the most important is that we live in a debt-based economy (loans make money) and a high risk banking environment due to such practices as:

-Subprime mortgages
- CDOs/CLOs.
What Are Collateralized Debt Obligations (CDOs)? (thebalancemoney.com)

The latter are basically mortgages that are sold bundled to a bank by a mortgage company which therefore doesn't care if these mortgages are ever actually paid, with the first being individuals and the second being companies/corporations. These make bubbles that burst, essentially, yet we keep doing it and we keep legalising it.

Why is this? From a serious, non-partisan economic POV, is there any gain from this for the average person long-term rather than the banks etc? Is there any other kind of viable, multinational economy?

We have had negative interest in Denmark for some time (think it is over now) but during that period you had to pay the banks for letting them "borrow" your money if you had more than X amount. How great a business is that.

"If you lend me 1000 dollars and then pay me 10$ a month for doing so, then we are in business"

I don't know a lot about economics, Ill be the first to admit that, but something seems extremely screwed up in this system when something like that is even possible.

 

[Heyo]

And they get it wrong and are just as prone to hopes and knee jerks in their predictions as anyone else. Sometimes I wonder if despite their insights if they may even be worse at it with what appears to be a high degree of certainty when they've cast read their chicken bones.

That has been tested. I don't remember if academic or some other group but they recorded the predictions of professional analysts from various banks and compared them against an average of complete noobs ("crowd intelligence"). The crowd performed almost always better.

 

[Shadow Wolf]

That has been tested. I don't remember if academic or some other group but they recorded the predictions of professional analysts from various banks and compared them against an average of complete noobs ("crowd intelligence"). The crowd performed almost always better.

Doesn't surprise me. Those such as Friedman Milton, for example, his writing seems to suggest a certainty in his views, as though he were a astronomer writing an article about the gravitational effects the sun has on passing by comets. The existence of a planet was accurately predicted based on that math, and we have the formulas to describe what we see in the Cosmos. Those such as Hayek have none of that but so many failed predictions that Al Greenspan apologized for how wrong he was when he read his tea leaves and how bad it actually turned out to be for the economy.

 

[Heyo]

Doesn't surprise me. Those such as Friedman Milton, for example, his writing seems to suggest a certainty in his views, as though he were a astronomer writing an article about the gravitational effects the sun has on passing by comets. The existence of a planet was accurately predicted based on that math, and we have the formulas to describe what we see in the Cosmos. Those such as Hayek have none of that but so many failed predictions that Al Greenspan apologized for how wrong he was when he read his tea leaves and how bad it actually turned out to be for the economy.

Yep, macro economy, as a "science" is even less precise than meteorology. And for the same reason, both are complex systems.