Wednesday 9 May 2012

30 years of failure to undo: part one.

As the people of Europe shuffle through the wreckage of the Great Bust of 2007, compounded by the fairyland economics of the Euro, has anyone yet properly worked out what went wrong, and apportioned the blame. After all, the costs of trying fix it are very real and being paid, so what are we paying for? Where has the "missing" five trillion dollars gone? Who managed to trouser it all?

...or do they?
As QI might have it, the reality is that even now, "Nobody Knows".

Just as money can be created from nothing by "quantitative easing", so it seems the opposite applies.

One generally plausible theory is that the money was initially "created" in the form of mortgages on over-valued property that were handed out to blue collar voters by order of Bill Clinton - without any realistic hope of ever paying them off.

Here's an explanation from Investopedia:

If John Doe buys a house and takes out a $400,000 mortgage loan with a 5% interest rate through Bank A, the bank now holds an asset - a mortgage-backed security. Bank A is now entitled to sell the asset to another party (Bank B). Bank B, now the owner of an income-producing asset, is entitled to the 5% mortgage interest paid by John. As long as house prices go up and John continues to pay his mortgage, the asset is a good one.


If, however, John defaults on his mortgage, the owner of the mortgage (whether Bank A or Bank B) will no longer receive the payments to which it is entitled. Normally, the house would then be sold, but if the house price has declined in value, only a portion of the money can be regained. As a result, the securities based on this mortgage become unsellable, as no other party would pay for an asset that is guaranteed to lose money.


So the short answer to the question to "what happened?" is that mortgaged property values in the US fell by $5 trillion. Meaning that those who got paid the originally inflated values for land and buildings are the net beneficiaries. Caveat emptor applies, so there has been no effort to track back to the source and ask for it back.

Since large chunks of the risk exposure had been laid off to gullible banks around the world, attracted by the unsustainable rates of interests on offer, the default problems were spread far and wide outside the US.


Cash: remember what that looked like back in the day?
This point to note here is that interest on capital is money that is created by the sort of fiscal magic that bankers have loved over the ages: there is no product or service involved. It just magically "becomes due".  No wonder bankers love the idea of being left alone to get on with "fractional reserve" banking where banks are able to lend using "money" that they don't actually have in the vaults: and so interest is payable to them on "assets" that doesn't actually exist.


Arguably all forms of "rent" simply conjure cash from thin air in this manner, but rent is more traditionally paid against the "loan" of very tangible asset owned by another. In the case of a mortgage, the tangible asset is taken over by the lender as security/collateral.  So a mortgage amounts to paying rent on money rather than bricks and mortar. Rental is simpler and more versatile as it is easier to change lease agreements than any process involving transferring freeholds.


Taxes and "duties" are taken by governments in the form of extant cash assets and any default will result in your assets being seized and turned into cash at auction. But "distress sales" are far from optimal for the distressed - generally realising no more than 10p in the £.

And all that collected tax cash is then paid in various way to shore up failed banks, and thus save the businesses of bankers whose bad judgement and propensity to take absurd risks and pay themselves huge salaries, started it all.

Got it?

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