well I really do think there is a conspiracy at work in all of this. the conspiracy has been mounted by the extremely wealthy, to convince the much larger number of middle-class voters that maintaining a situation where the super-rich can pay themselves enough money to own jets and islands is called 'freedom'. These are probably the same people who have convinced us all that 'climate change really isn't a threat' by mounting a brilliantly sophisticated campaign against climate change scientists. So yeah there are conspiracies afoot. But at the end of the day, the only way to deal with the world situation is to own it, to take responsibility for whatever happens.

---------- Post added 05-08-2010 at 11:32 AM ----------



actually here in Australia, we have made a pretty good job of regulating the financial sector. Earlier this decade there was a lot of pressure to follow the US lead and completely deregulate. If that had been done, the 4 big aussie banks would have been in dire straights in 2008. As it is, the Australian banks are among the most secure in the world and a model for everyone else, while subject to very sensible prudential regulation. So it can be done.

I am coming in here with a big thick spade, rather than a subtle scapel and clearly do not have sufficient knowledge on this stuff to debate in any manner of critical depth, but with that said....

Part 1 - Basic Intro - Needing the Grubby Stuff
In general, when the nation-state needs money it has two manners in which to go about getting the stuff.

• tax & cuts
  
  
• borrow from the Central Bank, IMF etc
  
  

When a bank hands out money, it is given in the form of a loan and one must repay this debt with interest.

Part II - Who owns and what does a Central Bank Do?
Most Central Banks, the IMF etc, are not directly managed by governments. Not in Europe. Not in the U.S.A. They are controlled by members of the banking community. Banks are businesses. They exist to make a profit. Banks make a profit from the interest on loans. Central banks and the IMF keep accounts with governments & commercial banks. Because private interest will predominately dictate banking policy, these banks effectively decide what-it-will-be, when-it-will-be, where-it-will-be, how-it-will-be and who-will produce what. Obviously, these banks approve certain projects and policies and deny others. Guess which ones?

Part III - Banks Create Money Out of Nothing
Most people believe that banks lend money, but that is extremely misleading. Cutting a little complexity for the sake of brevity, in effect what a bank does when it loans you or a nation-state money is to type a given set of figures in to a computer for your account. That's it. This game is known as the Fractional Reserve System, which is just a snobby way of saying: Banks don't lend money, they create debt. The money loaned to you or the nation-state is created out of nothing.

Part IV - Fractional Reserve 1.01
createsThere are subtle complexities when it comes to loaning governments dosh, things like the issuing of bonds, securities, papers, and so on, but you get the idea. In general, the government does not have the right to issue the money that circulates within its borders, but has to borrow that money with interest from a central bank.

Part V - Things Get Messy When Loans Are Repaid
fractional reserve system that someone, or some market entity, be this you, an industry, or government, is left short, and thus, needs to borrow more. The only way interest can be paid is for more loans to be taken out. In the particular loans are paid off, but overall, in the long run, people, industries and governments must keep on borrowing.

Part VI - The Irony
A modern economy needs money. Why? So that goods and services can be exchanged. However, if there is too little money goods and services are not sold, prices fall and this is deflation. On the other hand, if too much money is available, itself a commodity, it becomes too cheap, its buying power is diminished and inflation sets in. The act of modern economic policy is to try to balance these two undesirable effects of the economy.

On the grand scale of things, if there were no debt creation there would be hardly any money in circulation. Put simply, no debt creation, no money. Today, just about every single dollar, euro, or pound in circulation is someone's debt.

Everywhere, the whole world round, there are millions of people, thousands of industries, hundreds of governments scrambling about to find the money to pay back the loan and the interest from a pool of money which only contains the loan. It is impossible for everyone to do both, because that money simply doesn't exist.

Part VII - The Government Ruse?
So, unless more money is created there will set in economic stagnation and depression, industry foreclosure and bankcruptcy, and more people out of work, and more misery, and the such. To avoid this situation, more and more new debt money needs to be created. As economic indebtedness becomes ever more greater, so too the need to create ever more money. A spiralling mountain of debt creation.

Fractional Reserve is a structural feature of the economy and is part of the reserve system as first introduced in 1694 by King William of England to fight a war. When it comes to the state, quite simply, the borrowing of money from a central bank or IMF results in a class of general elite borrowing money from and for private banking and financial interests and concerns per se and tax the population to pay the interest. It is the perfect ruse. A domestic and foreign welfare and subsidy handout to the elite and wealthy.

Thank you - very informative post.

What is bothering me is the recurrent feeling that the financial system could come crashing down and stop working altogether, and there is an economic collapse. Not a downturn, or even depression, but collapse. I believe this came close to happening in September 08, in the week Lehmann's collapsed. When the banking system collapses, what happens? Nobody has spelt this out, but I think what happens is that the banks close, the ATMs are all turned off, and suddenly there is no money in circulation. If that happens, law and order would be very difficult to maintain. Public services and utilities would be extremely hard to maintain. It is a nightmare scenario.

My wife tells me not to think about things like this, because it is too depressing. I don't want to be alarmist, but I also don't want to be asleep at the wheel. After the 2008 crisis, the world went back to business as usual much too fast for my liking. 2009 was kind of unreal - it started with everyone muttering 'depression' and ended with everyone breathing sighs of relief, as if everything could just go back to being like it was. But I think there are very deep structural problems with the world economy. I don't like the conspiracy theories, but at the same time, I don't think the citizens are being told the truth. And I also think a lot of people don't understand the problems we are facing. It amazed me during the 08 crash the number of so-called experts who were taken completely by surprise.

I am encouraged by the fact that the Greek government has actually bitten the bullet. I think the Greeks deserve a lot of sympathy and support at this point. I hope it is firewalled at this point, and some sensible analysis and real reform be introduced before the whole system reaches a complete crisis point.

---------- Post added 05-08-2010 at 12:47 PM ----------

Postscript: the reforms that need to be undertaken must be conducted by disinterested parties. Disinterested parties are those who don't stand to gain financially from the decisions being made. By definition, this cannot include the banking sector.

That is like saying we are going to remform the healthcare system without talking to the doctors.
Financial reform should be undertaken by informed parties and people from the financial sector are in many ways the most informed parties.

A healty and robust financial services sector is vital to the growth of any economy (read employment, credit and growth in wealth). We have already done the centrally planned and controlled versus the market experiement (not once but multiple times) and the winner is regulated markets.

The federal reserve system is designed to prevent financial collapse not to create it. The two directives to the financial reserve system are control inflation and promote economic growth and full employment. Acheiving those ends can be competing and conflicting goals. More people have been lifted out of poverty in India and China since they adopted market reforms and modern banking systems than in decades of government control of banking and markets. You have it all wrong.

True there have been excesses, a lack of governmental oversight, and government underwriting and now bailouts of excessive risk. A government takeover of the financial services sector is not the solution. No private sector entity should be allowed to big "too big to fail" or to pose " a systemic risk to the economy at large". It is largely the intervention of federal reserve banks which prevented a complete meltdown of the credit sector, and the domino like failure of otherwise sound financial institutions due to "runs on the bank" and "lack of liquidity". Federal Banks do not create "money out of thin air" and expansion of the money supply is crucial to a growing economy and during illiquidity economic crisis.

Im no expert in this but some of this is counterproductive and misinformed.

I agree with that. I don't think Government should be running the economy, but elected representatives must have oversight of the financial system lest de-regulation amounts to open slather for the smartest and richest.

I think the best economic system is laissez faire economic liberalism, but something has to be done to counteract the ability of the commercially most powerful concentrating all power in their hands and then rigging the system in their favor. Liberalism is one thing, having the world economy run by corporations is another.

And surely after what the world has been through the last 3 years it must be clear that something is dreadfully wrong with free market capitalism the way the game is now played. And it ain't over yet, not by a long shot.

[QUOTE=jeeprs;161539] I agree with that. I don't think Government should be running the economy, but elected representatives must have oversight of the financial system lest de-regulation amounts to open slather for the smartest and richest. [/QUOTE] Don't get me wrong I believe in regulated markets. Unregulated markets are subject to concentration of economic power, monopolies and booms and busts of catastrophic proportions. You cannot however remove profit motives and incentives from a market system and expect it to efficiently and effectively allocate resources. There is legitimate difference of opinion regarding the degree, the type and the extent of governmental regulation of markets which maximizes wealth generation and economic growth. In general a growing economy benefits all; even if some benefit more than others. The distribution of wealth in a society is also a matter of legitimate opinion difference. Perfectly even distributions of wealth tend to prevent the concentrations of capital necessary for new investment and creation of new industries and businesses. Too great of inequalities of wealth tend to generate social divisiveness, conflict and political instability.


[QUOTE=jeeprs;161539] I think the best economic system is laissez faire economic liberalism, but something has to be done to counteract the ability of the commercially most powerful concentrating all power in their hands and then rigging the system in their favor. Liberalism is one thing, having the world economy run by corporations is another. [/QUOTE] I cannot for the life of me understand why governments allow corporations to become "too big to fail" or to represent "a systemic risk to the economy". To allow 2 or 3 large corporations to dominate an entire economic sector is virtually tantamount to a government sponsored monopoly. In such situations corporations do not even have to conspire to fix prices; they just have to keep track of their 2 or 3 competitors (no illegal price fixing meetings are even necessary). Those are not markets and they do not display the features of market based efficiencies and allocations of resources. Hopefully one of the results of the recent crisis will be a downsizing of banking institutions and other critical economic entities.
Corporations big enough to bully countries and governments around are of questionable market economy value.

[QUOTE=jeeprs;161539] And surely after what the world has been through the last 3 years it must be clear that something is dreadfully wrong with free market capitalism the way the game is now played. And it ain't over yet, not by a long shot. [/QUOTE] No it is not over yet. The world international monetary system and the central banks (including the US Federal Reserve) have responded well to the first phase of the crisis. Without these systems the results would have been far worse. Financial services and banking are critical to a healthy economic and economic growth. Economic growth is critical to job creation and to wealth generation. It is not a zero sum game. The barter system, the gold standard, paper money, are all less efficient and effective than the current electronic banking system.
Federal Reserve Banks do not generate money "out of thin air" at least not responsible central banks. It is true members of the Federal Reserve system often come from the banking and financial services sector but that is where the experience and expertise is. Ben Bernanke came from academia.

The second phase of the crisis will come in the form of the huge debts which have been accumulated by individuals, business entities and federal governments. These debts are a burden on continued economic growth. These debts have been undertaken in the unrealistic notion of continuous upward and uninterrupted growth in prices, stock values, revenues, taxes and profits.

The problem in Greece is not corporations. The problem in Greece is government debt, government spending and deficits, and irresponsible government management of taxes, revenues and expenditures. It is the market which is forcing Greece to be accountable. Markets are an important and necessary feature of the world economic system for markets will do what governments will not do, make politicians face up to economic reality, close inefficient businesses and industries and take risks in investing in new technologies and business opportunities. (creative destruction).

Do not kill with taxes and regulations that which has generated most of the worlds wealth, technology and innovation (markets) and that which allocates resources (both natural and human) in the most effective and efficient manner (markets). There is a role for markets and there is a role for governments. Finding the proper relationship is a continuous act of rebalancing and reassessment.

"Trust" as in "honest" or "trust" as in "competent"? I would disagree with both, but in the second sense, the idea is preposterous. In the first sense, the idea is merely clearly false.

It is that attitude that has brought us to these dire straights, though. You will trust big business, even though you have no influence on what they do, but you won't trust your elected representatives, even though they are answerable to the electorate.

This is why I think that people like yourself have been subject to a very effective propaganda campaign. The super-rich have convinced the middle class that government is dangerous and your salvation lies with a deregulated financial sector. You're the one who has been duped in all of this.

I trust (competence) big business a hell of a lot more than I do government. The reason is that people have a powerful incentive to be competent when their self-interest is involved. But insofar as trust (honesty) goes, I trust business no more than I do government. You really have to distinguish between those two kinds of trust; honesty and competence. As for government being dangerous, as we kids used to say, "If it had a brain, it would be dangerous". Of course, the Greek government turned out to be dangerous, and no one ever accused of having a brain.And the Obama government (let alone Obama) will equally never be thought to have a brain, either. Obama is an android: a vote gathering android.

I have considerable respect for Barrack Obama. He strikes me as intelligent, articulate, and supremely capable. I have read from the Audacity of Hope and I believe he has stayed true to his ideals. For many people, is one of the few bright spots in a very dark world. He hasn't started wars on the basis of trumped up evidence or subverted the rule of law like his predecessor. And he can give a whole speech without mangling the English language. I know you won't like to hear that but I don't regard these statements as hyperbole.

But I am glad to hear you say that you trust business no more than government. I think an ideal world would consist of a lot of small businesses, local markets, with vigourous competition between individuals, companies, and countries on a level playing field. But I can't ever see it happening.

---------- Post added 05-08-2010 at 07:25 PM ----------



I agree with everything you have written in this post. The unique challenges the world is facing are unprecedented. Nothing like these challenges has ever happened in history. What is needed above all else is a sense of co-operation and the ability to see common interests. Whether this happens remains to be seen but everything is at stake.

I did not quite say that. What I said that when "trust" is understood as confidence in honesty, I trust business no more than I do government.

But, what I also said was that when "trust" is understood as confidence in competence. I trust business far more than I trust government. I suppose I agree with those who are being forced to lend Greece money. They demanded that Greece begin privatizing much that has been socialized. They too have little confidence (trust) in the competence of government to do anything that absolutely cannot be done by the private sector. It is clear that business has an abiding interest is being competent. Self-interest. But government does not, since, as the Obama regime shows so well, people can win office without manifesting any competence. Hell, as Obama demonstrated, you can win a formerly prestigious award for nothing at all.

You really should distinguish between trust in honesty, and trust in competence.

Why does EU inject money into some totally incompetent idiots? ..it's beyond me.

Ok I have a friend from Greece who says that the economic crisis is not as bad as the media portrays it. Any thoughts?

Because they are incompetent idiots? People always get just the governments they deserve. Look at the United States now. Greece in about a decade.

---------- Post added 05-08-2010 at 11:48 AM ----------



I hope your friend is right. But riots and deaths in the street seem to me fairly bad. But maybe your friend has different standards. It is true that what is now happening in Greece is not as bad as what happened during the Russian revolution, or the French revolution. And it certainly is not as bad as a large asteroid colliding with Earth. Things can always be worse, but that is not a particularly good reason to suppose that things as they are, are not bad. Anyway, they are bad enough in Greece so that I hope that the United States doesn't become like Greece. Vain hope, with the present regime!