Pyrpolizer wrote:We pummeled on this subject ad nauseam and we only covered the issue whether Banks create new money from the process of loans out of thin air or not.
Depending on how each one of us binds the terms "new money" and "out of thin air" in a meaningful thought, ends up to a different view on the matter, but that's ok I think.
I 'd suggest we stop at this point and go one step further.
What are the problems with the existing system?
I will go first
a)People's lifetime savings /deposits to Banks run the risk of getting wiped off
b)Sets the Banks at a position that drive the economy to boom and burst cycles
c)Destabilizes the economy. The Banks lend too much when they shouldn't, and lend too little when they should do the opposite.
d)The process of the Banks going Bankrupt is way faster than any procedures of the Central Bank to detect it
Fell free to comment or add your own list of problems.
I understand the only way out of these problems is for the Central Bank to issue new currency for every new loan and destroy currency for every loan getting paid back. Banks would then be required to have 100% or near 100% liquidity.
We have safely deduced that the notion of creating money from thin air is every misleading. It is the most annoying falsehood.
Depositors are suppose to be given Capital Guarantees up to a certain amount. It probably changes between different jurisdictions.
I remember when the ECB decided that Bank Accounts in Cyprus should be levied. Immediately afterwards, the US Federal Reserve, Chinese Central Bank and Reserve Bank of Australia Governors came out with a release from their Governors that this outcome was very concerning for the banking Industry globally. They warned against the precedence and the loss of confidence this would cause to the Banking Industry. They did not criticize Cyprus, but rather the ECB which they believed to be a failed experiment and that the EU should recognise this and work towards Capitalizing the Banks to protect depositors. They were against the levies.
They also came out to say that such a practice will never occur in their jurisdictions. Never say never but that is what they said.
The Boom/Bust cycle is basically the by product of people and business, not so much the Banks. However, there are a few things Banks can do such as:
1) reduce interest rates to stimulate the economy and encourage borrowing and spending,
2) increase interest rates to slow down an economy if a bubble develops.
They can do that to a certain point, but ultimately it is what people and business do on a micro scale. Confidence is a contagion (remember that term?)
Rather than Banks lending too much, I prefer to say that people generally borrow too much. but if it were not those levels of borrowing, the economy wouldn't grow as fast either. it's a catch 22.
Banks going bankrupt is a very rare thing. It's just unlucky that 2 fairly big banks of Cyprus went bankrupt in a small economy like Cyprus. A situation which was also completely STUPID too, because most of their investment and exposure was in Greece.
WHY is the the question to ask!
Why not buy US, Australian, UK, Canadian, NZ or Chinese bonds? Because they were not Greek? Split the money everywhere, and put 10% in high risk stuff like derivatives, and the rest in Bonds paying almost nothing. At least the certificates will always be paid out and safe.
They should have been more diversification, and less exposure to Greece.
