The Western Governments Interest Rate That Keeps Everyone Pinned Down

[Kathryn]

I agree.

Some people just don't have brains, but think they know everything and everybody who try to tell them they are wrong about somthing they just don't listen. They onlt listen to the people who are saying what they like to hear. For example "yes, you can borrow the money to buy that very expencive house"

Some people are silly enough to think that the people at the bank are there to help them and not mainly to make money for the bank. I am sure there are plenty of nice people who work at banks who would not lend money to people who can not afford it, but there are plenty more who will.

We can argue about wether people who trust the people at the bank are stupid and thus put th blaim on the loan takers, or if they are being mislead and thus blaim the people at the bank, but either way "The whole problem is that banks are lending money to people who don't understand the risks involved."


Just did.

Did you just buy a house? If so, YAY and good luck to you!

 

[lunakilo]

Did you just buy a house? If so, YAY and good luck to you!

Yes, a very nice house

And 'only' had to borrow 2/3 of the price of the house since I had the money from selling the apartment I lived in before to cover the first 1/3 of the price.
And yes, that money was borrowed at 4%

Both my husband and I have pretty 'safe' jobs, but there is always the risk that we both loose our jobs at the same time and not be able to find new ones and in which case we would not be able to pay back the loan. But that is a risk I understand and which I feel is small enough that I am willing to take it.

 

[Kathryn]

Yes, a very nice house

And 'only' had to borrow 2/3 of the price of the house since I had the money from selling the apartment I lived in before to cover the first 1/3 of the price.
And yes, that money was borrowed at 4%

Both my husband and I have pretty 'safe' jobs, but there is always the risk that we both loose our jobs at the same time and not be able to find new ones and in which case we would not be able to pay back the loan. But that is a risk I understand and which I feel is small enough that I am willing to take it.

Sounds like you made a good financial decision. All I would add to that would be maybe short and/or long term disability insurance (not sure how that works in your country), and DEFINITELY a savings account that would tide you over for 3-6 months at the least.

I know you are excited about your house! I am fifty years old and though I've owned my own home for the majority of the past 20 years, I started small and modest, and my current home has "only" 2500 square feet. I know that depending on where one lives, that sounds either small or large - but around here it's just a little over average size.

When we were looking for a home, we looked at some larger ones, but honestly, I don't see the necessity for more space. It's just the two of us on a daily basis, but we do have overnight company pretty regularly, since we have five grown kids and seven grandkids.

I just want something well built, comfortable, functional, and pleasant. Luxury is not something I'm particularly interested in at ALL.

 

[lunakilo]

Sounds like you made a good financial decision. All I would add to that would be maybe short and/or long term disability insurance (not sure how that works in your country), and DEFINITELY a savings account that would tide you over for 3-6 months at the least.

Spoken like a true sales person
I have no idea what a short/long term disability insurance is and why that particular type of insurance is more important than any other.
I do have an insurance for if I loose the ability to work if that is what you mean.
And my notice of termination from my job is the standard 3 month, so I will not at least 3 month in advance if we are heading for trouble.

I know you are excited about your house! I am fifty years old and though I've owned my own home for the majority of the past 20 years, I started small and modest, and my current home has "only" 2500 square feet. I know that depending on where one lives, that sounds either small or large - but around here it's just a little over average size.

When we were looking for a home, we looked at some larger ones, but honestly, I don't see the necessity for more space. It's just the two of us on a daily basis, but we do have overnight company pretty regularly, since we have five grown kids and seven grandkids.

I just want something well built, comfortable, functional, and pleasant. Luxury is not something I'm particularly interested in at ALL.

My first home was 16 square meters (which I think is about 180 square feet) room with a sink and a shared kitchen and shower. Rented of course
My current home is about 150 square meters (about 1700 square feet) and I don't see how I could possibly manage more than that.
All that cleaning

That is about a factor 10 increase in the size of my home in 20 years, cool

 

[Aquitaine]

Given the rediculous cost of houses in the UK nowadays, I'm honestly considering just buying and owning a Motor-Home (or RV as you Yanks call it). That way I can travel the World and still have a "Home" at the same time ^_^

 

[dust1n]

Stupid or mislead by the bank. The latter is probably the case in most cases.

If you go to the bank for a loan and a polite person in a suit tells you that taking out the loan will be no problem because ... <insert banko-babble that no ordanary mortals understands> ... and you know your neighbor took out a similar loan last month and he seems to be doing all right, then you are probably going to trust the nice person and take the loan so that you can buy the stuff you want.

This is the bank being evil, not the practise of taking interests being evil.

The whole problem is that banks are lending money to people who don't understand the risks involved.

IF those 1.2 million didn't go bankrupt, another huge portion would. This is a result of interest rates. No one seems to be addressing that when I speak of it.

All money is created through loans. All loans have interest rates. All loans must be paid back + interest rate. If 100 loans are made for 100 grand each, and the interest rate is seven percent, when the 100 loans are paid back with interest included, there is still 700,000 dollars that will never be paid off. If 7 of those original 100 never made a payment, then seven people will foreclose, but that's unlikely. If 50 people paid up to 107,000 ($5,350,000), this leaves 50 people trying to pay off the same amount with only ($4,650,000). Therefore, people can not help but go bankrupt (in this case, at least 7 percent of the loans). This has nothing to do with people being stupid, nor about any particular bank being evil. This is built directly in the interest rates and loans, nothing more.

 

[lunakilo]

IF those 1.2 million didn't go bankrupt, another huge portion would. This is a result of interest rates. No one seems to be addressing that when I speak of it.

All money is created through loans. All loans have interest rates. All loans must be paid back + interest rate. If 100 loans are made for 100 grand each, and the interest rate is seven percent, when the 100 loans are paid back with interest included, there is still 700,000 dollars that will never be paid off. If 7 of those original 100 never made a payment, then seven people will foreclose, but that's unlikely. If 50 people paid up to 107,000 ($5,350,000), this leaves 50 people trying to pay off the same amount with only ($4,650,000). Therefore, people can not help but go bankrupt (in this case, at least 7 percent of the loans). This has nothing to do with people being stupid, nor about any particular bank being evil. This is built directly in the interest rates and loans, nothing more.

11 people live on an island

1 banker and 10 farmers.

Frarmer 1 has grain, farmer 2 to 10 do not.

Farmers 2 to 10 decide to borrow $10 each from the banker in order to buy all the grain farmer 1 does not need.
They promise to each pay $11 back to the banker at the end of the year.
Farmer 1 takes the $90 from farmers 2 to 10 and keeps enough grain to grow enough for him self and no more.
Farmer 2 to 10 grows a lot of grain.

Then comes harvest.
Farmer 1 has enough to eat and $90, so he is happy.
The baker has no grain, so he buys some grain for $12 from farmer 2 to 10.
Farmers 2 to 10 now pay $11 to the banker, they have each earned $1 and have food on the table and grain for next season, so thay are happy
And the banker has food on the table so he is happy too

Everybody is happy so what is the problem?

Yes the numbers don't add up you say, the banker payed $12*9=$108 but only got $11*9=$99 so he is missing $9.
But he has not promised anybody this money so he has no problem. And he has food on the table and didn't lift a finger to get it so

So you see all loans can be payed back.

There are many risks invloved of couse. What if farmers 2 to 10 can't sell the grain they grow and pay back the banker. Then they have a problem.
Or if the crops fail so that the farmers only have enough for them selves. Then the banker has a problem, he has no food and starves to death and the island has no bankers woohoo

 

[dust1n]

11 people live on an island

1 banker and 10 farmers.

Frarmer 1 has grain, farmer 2 to 10 do not.

Farmers 2 to 10 decide to borrow $10 each from the banker in order to buy all the grain farmer 1 does not need.
They promise to each pay $11 back to the banker at the end of the year.
Farmer 1 takes the $90 from farmers 2 to 10 and keeps enough grain to grow enough for him self and no more.
Farmer 2 to 10 grows a lot of grain.

Then comes harvest.
Farmer 1 has enough to eat and $90, so he is happy.
The baker has no grain, so he buys some grain for $12 from farmer 2 to 10.
Farmers 2 to 10 now pay $11 to the banker, they have each earned $1 and have food on the table and grain for next season, so thay are happy
And the banker has food on the table so he is happy too

Everybody is happy so what is the problem?

Well 1.) This isn't 700 AD. 2.) They money the banker had doesn't actually hold any value. Where did this banker money come from? Did he collect paper notes and deem them a certain value? 3.) Again the banker produces money from nothing in order to purchase wheat, but in real life, in order to take out more money for the banker to eat, he would have to take out $12x9 again, with yet another interest rate. So, not only did the banker make up $198 out of nothing, not $108. In your example the banker pays for the grain of the farmers without collecting on his debts, which makes no sense. As you are about to say, the banker collects $99, in reality he lent out not only the original $90 to farmers, but also the $108 to himself in which he purchased the grain 4.)follows as such...

Yes the numbers don't add up you say, the banker payed $12*9=$108 but only got $11*9=$99 so he is missing $9.

The banker doesn't just accept a $9 dollar loss. And since he money came from no where in the first place, the didn't actually loss anything, besides a few paper notes. The whole scheme left a banker at a $117 dollar loss, though he has grain now. Each farmer has $1 and grain. We've already established the price of grain is $12 bucks, so there isn't really win for the farmer here. If their wheat supply didn't replenish itself, they would have to take out another loan for more wheat. Which means the losses become greater and greater.

Also, the $9 isn't forgotten about. It is, essentially, public debt at this point.

But he has not promised anybody this money so he has no problem. And he has food on the table and didn't lift a finger to get it so

I'm sure the 10 farmers feel real great about that, you know with 10-12 work days and all.

So you see all loans can be payed back.

Only because you threw in another 108 bucks out of nowhere, that the banker took out to purchase the wheat. In real life, that 108 bucks is also a loan, and also has an interest rate on it.

There are many risks invloved of couse. What if farmers 2 to 10 can't sell the grain they grow and pay back the banker. Then they have a problem.
Or if the crops fail so that the farmers only have enough for them selves. Then the banker has a problem, he has no food and starves to death and the island has no bankers woohoo

Your whole situation only works if bankers can just print themselves money with no interest rates. Bankers don't get to print their own money and then just spend it...

 

[Penumbra]

Well 1.) This isn't 700 AD. 2.) They money the banker had doesn't actually hold any value. Where did this banker money come from? Did he collect paper notes and deem them a certain value? 3.) Again the banker produces money from nothing in order to purchase wheat, but in real life, in order to take out more money for the banker to eat, he would have to take out $12x9 again, with yet another interest rate. So, not only did the banker make up $198 out of nothing, not $108. In your example the banker pays for the grain of the farmers without collecting on his debts, which makes no sense. As you are about to say, the banker collects $99, in reality he lent out not only the original $90 to farmers, but also the $108 to himself in which he purchased the grain 4.)follows as such...



The banker doesn't just accept a $9 dollar loss. And since he money came from no where in the first place, the didn't actually loss anything, besides a few paper notes. The whole scheme left a banker at a $117 dollar loss, though he has grain now. Each farmer has $1 and grain. We've already established the price of grain is $12 bucks, so there isn't really win for the farmer here. If their wheat supply didn't replenish itself, they would have to take out another loan for more wheat. Which means the losses become greater and greater.

Also, the $9 isn't forgotten about. It is, essentially, public debt at this point.



I'm sure the 10 farmers feel real great about that, you know with 10-12 work days and all.



Only because you threw in another 108 bucks out of nowhere, that the banker took out to purchase the wheat. In real life, that 108 bucks is also a loan, and also has an interest rate on it.



Your whole situation only works if bankers can just print themselves money with no interest rates. Bankers don't get to print their own money and then just spend it...

Depending on what sort of bank you're talking about, banks often don't get their money from nowhere.

GE Capital, for example, gets money by issuing bonds at one interest rate, and then makes loans to small businesses at a higher interest rate.

A thrift, like Hudson City Savings Bank, collects deposits from people and pays them a low interest rate (they're borrowing from the depositors), and then uses most of that money to make loans to home owners, at a higher interest rate.

Banks, in general, operate on the principle that they borrow money at one interest rate, and lend money at a higher interest rate.

So in the farmer example, it's more like several farmers deposit their money with a banker, and then the banker loans money to a smaller number of farmers that are expanding their operations, making capital expenditures, etc. The bank is the flow-through entity for the farmers, and collects a profit for its services.

It's basically at the top of the system where the money supply is expanded or contracted. A typical bank, on the other hand, is just a business; if they could just print money out of nowhere they wouldn't bother to have a business. They need to collect money to lend money, and make a profit.

 

[lunakilo]

Well 1.) This isn't 700 AD. 2.) They money the banker had doesn't actually hold any value. Where did this banker money come from? Did he collect paper notes and deem them a certain value? 3.) Again the banker produces money from nothing in order to purchase wheat, but in real life, in order to take out more money for the banker to eat, he would have to take out $12x9 again, with yet another interest rate. So, not only did the banker make up $198 out of nothing, not $108. In your example the banker pays for the grain of the farmers without collecting on his debts, which makes no sense. As you are about to say, the banker collects $99, in reality he lent out not only the original $90 to farmers, but also the $108 to himself in which he purchased the grain 4.)follows as such...



The banker doesn't just accept a $9 dollar loss. And since he money came from no where in the first place, the didn't actually loss anything, besides a few paper notes. The whole scheme left a banker at a $117 dollar loss, though he has grain now. Each farmer has $1 and grain. We've already established the price of grain is $12 bucks, so there isn't really win for the farmer here. If their wheat supply didn't replenish itself, they would have to take out another loan for more wheat. Which means the losses become greater and greater.

Also, the $9 isn't forgotten about. It is, essentially, public debt at this point.



I'm sure the 10 farmers feel real great about that, you know with 10-12 work days and all.



Only because you threw in another 108 bucks out of nowhere, that the banker took out to purchase the wheat. In real life, that 108 bucks is also a loan, and also has an interest rate on it.



Your whole situation only works if bankers can just print themselves money with no interest rates. Bankers don't get to print their own money and then just spend it...

My example is silly.
In real life I am sure that an island with 11 people would get by fine without bankers

The point is money has no value by it self, and bankers do conjure up money out of thin air. It is what they do.

The system only works (when it works) because the value of stuff in the world is not constant. The amount of wheat is not constant. Wheat turns into more wheat (at least on good years).

When you go to work and work you help increase the value of stuff in the world. Maybe not directly, but you do something that someone else uses for something that produces something which increases the value of stuff in the world.
I think some people call this economic growth

You get payed and make you payments on your house and the farmer grow wheat some of which you also buy and eat and everybody is happy.

As long as you can create growth the system can work, if not well, that is the end of capitalism

 

[Penumbra]

The point is money has no value by it self, and bankers do conjure up money out of thin air. It is what they do.

A typical bank borrows money and then lends that money.

 

[lunakilo]

A typical bank borrows money and then lends that money.

A typical bank borrows money and then lends that money to people who spend is and the people who recieve it puts it back into the bank and the bank lends it out to someone else who spends it and the reciever puts back into the bank which lends it out to someone who...

So the bank actually use the same money several times

[youtube]ArfPytAoeZ0[/youtube]
http://www.youtube.com/watch?v=ArfPytAoeZ0

[youtube]jFrpeaaSWjQ[/youtube]
http://www.youtube.com/watch?v=jFrpeaaSWjQ

 

[Penumbra]

A typical bank borrows money and then lends that money to people who spend is and the people who recieve it puts it back into the bank and the bank lends it out to someone else who spends it and the reciever puts back into the bank which lends it out to someone who...

So the bank actually use the same money several times

Yes, they maintain a continuous process, and they need not wait for deposits to come in, as long as they're meeting their requirements. In a sense, banks are allowed to count their chickens before they hatch, but it does not mean they literally just print all the money they want at the bank level; over the long term the money they lend comes from the money they borrow.

In that sense, it's not a this->then process of borrowing and then lending. It's about maintaining a balance sheet of assets and liabilities, with both constantly revolving. Their liabilities are the deposits or bonds, because that's money they are borrowing that they owe back. Their assets are the loans that they've lent out and that they will get (mostly) back. A legally run standard bank has more assets than liabilities; their equity is positive.

So in other words, if everyone goes to the bank at once, the bank wouldn't have nearly enough money to give it all back. However, if somehow the bank could instantly recall all its debts, then it could pay all the money back. Each bank under this scenario has real equity.

The alternative to fractional reserve banking would be to pay the bank to hold your money rather than to let the bank pay you to hold your money.

 

[Kathryn]

spoken like a true sales person
I have no idea what a short/long term disability insurance is and why that particular type of insurance is more important than any other.
I do have an insurance for if I loose the ability to work if that is what you mean.
And my notice of termination from my job is the standard 3 month, so I will not at least 3 month in advance if we are heading for trouble.

Yes, that sort of insurance is what I was talking about.

My first home was 16 square meters (which I think is about 180 square feet) room with a sink and a shared kitchen and shower. Rented of course
My current home is about 150 square meters (about 1700 square feet) and I don't see how I could possibly manage more than that.
All that cleaning

That is about a factor 10 increase in the size of my home in 20 years, cool

You go, girl!

 

[dust1n]

Depending on what sort of bank you're talking about, banks often don't get their money from nowhere.

GE Capital, for example, gets money by issuing bonds at one interest rate, and then makes loans to small businesses at a higher interest rate.

A bond is a loan isn't it? When GE Capital issues bonds for credit, who are they issuing the bonds to? Private parties who then loan GE capital the money? Where did that money come from first? It had to be issued out be the federal reserve at interest. The fact that interest is compounded through several different people doesn't change the fact that the money to pay off the original interest doesn't exist until more money is created (elsewhere) through loans with an interest rate.

A thrift, like Hudson City Savings Bank, collects deposits from people and pays them a low interest rate (they're borrowing from the depositors), and then uses most of that money to make loans to home owners, at a higher interest rate.

Depositors only have money in the first place because the money was entered into the system via loans from the national reserve. They may have made that money working or through investment, but they money they made came from someone who had to originally take out the loan with the interest rate. When the loan is remade at a higher interest rate again, the interest rate again is just compounding the fact that those interest rates will never be paid off by all who take out a loan.

Banks, in general, operate on the principle that they borrow money at one interest rate, and lend money at a higher interest rate.

Which will lead to the problem described in previous posts.

So in the farmer example, it's more like several farmers deposit their money with a banker,...

How? Where did the several farmers get the money to deposit money into a bank in the first place?

...and then the banker loans money to a smaller number of farmers that are expanding their operations, making capital expenditures, etc. The bank is the flow-through entity for the farmers, and collects a profit for its services.

Which is just compounding the fact that the original interest will never be paid off, and that the interest of all parties taking out loans through the banks will definitely never be paid off, resulting in inevitable bankruptcy.

It's basically at the top of the system where the money supply is expanded or contracted. A typical bank, on the other hand, is just a business; if they could just print money out of nowhere they wouldn't bother to have a business. They need to collect money to lend money, and make a profit.

Of course they do, because they took the money from the federal reserve, which loans out money at the interest rate. The interest rate changes to help the supply expand or contract, but that doesn't change the fact that the only way the interest rates can ever be fully paid off is by issuing more loans with interest. This assumes infinite population growth and infinite resources, which we are now finding is not the case. So when growth stops, people can't repay loans. Since growth can't continue forever, it's inevitable that loans will fall through. The people who could do nothing about this (essentially, the last ones to pay their loans off) will always come short. Even when infinite growth was still taught to be the case, there was never a time when we were able to pay back all loans and all interest.

 

[dust1n]

My example is silly.
In real life I am sure that an island with 11 people would get by fine without bankers

The point is money has no value by it self, and bankers do conjure up money out of thin air. It is what they do.

The system only works (when it works) because the value of stuff in the world is not constant. The amount of wheat is not constant. Wheat turns into more wheat (at least on good years).

When you go to work and work you help increase the value of stuff in the world.

Labor creates nearly all value in the world. Nearly every resource requires labor to make it into a valuable object.

Maybe not directly, but you do something that someone else uses for something that produces something which increases the value of stuff in the world.
I think some people call this economic growth

You get payed and make you payments on your house and the farmer grow wheat some of which you also buy and eat and everybody is happy.

As long as you can create growth the system can work, if not well, that is the end of capitalism

But that's the problem. Not only has growth been enough to allow all people to pay of all loans and interest rates, but infinite growth is not a possibility anyways because we live in a finite world. The fact that interest rates exist does not to exacerbate this problem.

Bankers do create money out of thin air, but they can't do so and then spend it as it never happened. That was the problem with your example. Banks are subject to the same interest rate problem and that is just continued and made worse by the time home loans are made.


EDIT: Another problem with the metaphor is that it makes no sense why a banker would go through all that effort to pay $12 bucks per wheat, when he could have done so for $10 from farmer A in the first place.

 

[dust1n]

So in other words, if everyone goes to the bank at once, the bank wouldn't have nearly enough money to give it all back. However, if somehow the bank could instantly recall all its debts, then it could pay all the money back. Each bank under this scenario has real equity.

But that's the problem, because the bank will never be able to instantly recall all its debt because there isn't enough money from the ones indebted to them to ever pay them back, unless some sort of infinite growth situation is going on. Since there isn't and never will be, bankruptcy is inevitable, regardless if the bank instantly recall its debts or recalls it over the span of a thousand years.

 

[Penumbra]

A bond is a loan isn't it? When GE Capital issues bonds for credit, who are they issuing the bonds to? Private parties who then loan GE capital the money? Where did that money come from first? It had to be issued out be the federal reserve at interest. The fact that interest is compounded through several different people doesn't change the fact that the money to pay off the original interest doesn't exist until more money is created (elsewhere) through loans with an interest rate.

Depositors only have money in the first place because the money was entered into the system via loans from the national reserve. They may have made that money working or through investment, but they money they made came from someone who had to originally take out the loan with the interest rate. When the loan is remade at a higher interest rate again, the interest rate again is just compounding the fact that those interest rates will never be paid off by all who take out a loan.

Which will lead to the problem described in previous posts.

How? Where did the several farmers get the money to deposit money into a bank in the first place?

Which is just compounding the fact that the original interest will never be paid off, and that the interest of all parties taking out loans through the banks will definitely never be paid off, resulting in inevitable bankruptcy.

Of course they do, because they took the money from the federal reserve, which loans out money at the interest rate. The interest rate changes to help the supply expand or contract, but that doesn't change the fact that the only way the interest rates can ever be fully paid off is by issuing more loans with interest. This assumes infinite population growth and infinite resources, which we are now finding is not the case. So when growth stops, people can't repay loans. Since growth can't continue forever, it's inevitable that loans will fall through. The people who could do nothing about this (essentially, the last ones to pay their loans off) will always come short. Even when infinite growth was still taught to be the case, there was never a time when we were able to pay back all loans and all interest.

The money simply represents a fluid exchange item.

It used to represent gold, and now just represents itself. Each individual bank is expected to stay in positive equity- more assets than liabilities. But from a money-supply standpoint, the money supply can expand or contract, based on high-level decisions in a country. But expanding the money supply doesn't directly expand the value of all goods and services, so money becomes worth less. So the economy consists of more dollars, each of lesser value, for the same total value.

The system doesn't necessarily rely on continued growth (although a lack of growth combined with increasing population would be a wholly separate problem), but instead relies on continued activity. The banks just want money to keep changing hands. If activity were to gradually decrease, total bank equity would gradually decrease. It only becomes an issue if everything goes wrong at the same time, and if banks are improperly run.

But that's the problem, because the bank will never be able to instantly recall all its debt because there isn't enough money from the ones indebted to them to ever pay them back, unless some sort of infinite growth situation is going on. Since there isn't and never will be, bankruptcy is inevitable, regardless if the bank instantly recall its debts or recalls it over the span of a thousand years.

But as previously described, each legal bank has more assets than liabilities.

The entire economy contracting at once would obviously be catastrophic for the economy, but the point is, that the legal institutions are not operating on negative equity.

The money supply does not represent all liquid money. It represents all value, which includes illiquid things like houses. So there is enough money to be paid back, but a considerable portion of that money exists in things like houses and land.

 

[dust1n]

The money simply represents a fluid exchange item.

It used to represent gold, and now just represents itself. Each individual bank is expected to stay in positive equity- more assets than liabilities. But from a money-supply standpoint, the money supply can expand or contract, based on high-level decisions in a country. But expanding the money supply doesn't directly expand the value of all goods and services, so money becomes worth less. So the economy consists of more dollars, each of lesser value, for the same total value.

The system doesn't necessarily rely on continued growth (although a lack of growth combined with increasing population would be a wholly separate problem), but instead relies on continued activity. The banks just want money to keep changing hands. If activity were to gradually decrease, total bank equity would gradually decrease. It only becomes an issue if everything goes wrong at the same time, and if banks are improperly run.

I see. Give me a bit to mush this one over.

But as previously described, each legal bank has more assets than liabilities.

The entire economy contracting at once would obviously be catastrophic for the economy, but the point is, that the legal institutions are not operating on negative equity.

The money supply does not represent all liquid money. It represents all value, which includes illiquid things like houses. So there is enough money to be paid back, but a considerable portion of that money exists in things like houses and land.

But then isn't this the problem? If the money has to be paid back, and there isn't enough liquid to do so, isn't that what results in the foreclosure?

 

[Penumbra]

I see. Give me a bit to mush this one over.

Sure.

In the meantime, one way to think of it is to think of an individual bank, and what would happen to that bank if business opportunities were to shrink. A bank run, or a large simultaneous series of loan defaults would kill an uninsured or over-leveraged bank, but a more gradual reduction in deposits, and a more gradual reduction in loan demand, just means the bank slowly fades away. It has positive equity, so over time, both assets and liabilities dissipate on the balance sheet until the bank doesn't find it worthwhile to be in business anymore, at which point its assets and liabilities could be acquired by another bank.

But then isn't this the problem? If the money has to be paid back, and there isn't enough liquid to do so, isn't that what results in the foreclosure?

Depends on what kind of problem you mean.

The system itself is not a problem unless for some reason all value had to be liquidated simultaneously, which makes no sense. Much value is indeed illiquid, and money just represents that value.

Micro and Macro economics are rather separate forces here. People don't go into foreclosure due to there not being enough money in existence. They go into foreclosure for any number of reasons, though often revolving around a loss of a job. Factors that increase the likelihood are include things like a consumer buying a house that requires two incomes to support (so if either partner loses their job, it's a problem), or bankers getting greedy and lending money to people who can't really afford it.

Fractional reserve banking isn't a problem, or unsustainable, in and of itself. Though if it's performed incorrectly, it can indeed make the system fragile.