A proximate cause was the rise in subprime lending. The percentage of new lower-quality subprime mortgages rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.[2][3] A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages.[4] These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.[4][5] Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.[6]

After U.S. house sales prices peaked in mid-2006 and began their steep decline forthwith, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending.[2] Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

Here is a telling sentence from the book: “How Clinton’s calamitous Homeownership Strategy was born, nurtured, and finally came to blow up the American economy is a story of greed and good intentions, corporate corruption and government support.” A phrase like “blow up the American economy” is not the kind of cautious, specific analysis we expect from Morgenson or Rosner. And here is yet another example: “…the home ownership drive helped to plunge the nation into the worst economic crisis since the Great Depression.”

Such assertions have been red meat to columnists David Brooks of The New York Times and George Will of The Washington Post, who were apparently yearning to blame government action, not regulatory inaction, for the crisis. Wrote Brooks: “The Fannie Mae scandal is the most important political scandal since Watergate.” Wrote Will: James Johnson, the head of Fannie Mae from 1991 to 1998, “may be more culpable for the peacetime destruction of more wealth than any individual in history.”

In fact, as abundant data show, Fannie and Freddie’s affordable lending programs had virtually nothing to do with the recent crisis. The crisis was caused by Wall Street’s bad bets on complex securities based on subprime mortgages. These bets were mostly placed during the mid-2000s.

Although Morgenson and Rosner provide some fine examples of mortgage brokering chicanery, they spend far less time discussing the reckless practices of private offenders than those of the government programs they eagerly chastise. Most of their animus is aimed at the GSEs, particularly Fannie Mae, the organization formally known as the Federal National Mortgage Association, and James Johnson, the Fannie Mae CEO and consummate political insider....
A new and serious debate is needed about how to reform and reconstitute the GSEs. But it cannot be informed by misleading analysis and over-the-top rhetoric.

What do you guys think of this as the reason for the Economic crash:

en.wikipedia.org/wiki/Subprime_mortgage_crisis

According to Graeber, the people who control the government are A) creditors, and B) will do anything to boost stock prices. But - as anyone who reads the news should know - the main thing the government does to boost stock prices is to lower interest rates and/or print money. And yet creditors are very angry about this, first of all because they fear that money-printing will cause inflation (which erodes the value of the debt they hold), and also because they can't get much of a return on the money they lend in the future. If you don't believe me, read The Economist or Fox Business complaining about how low interest rates hurt savers (i.e. creditors).

So the government's efforts to boost stock prices are actually making creditors very mad. The interests of stockholders and creditors are at odds. Why doesn't Graeber seem to know this?

In fact, this small inconsistency turned out to be a canary in a coal mine. The more I read over Graeber's arguments, the more I realized that many of his ideas about debt seem either contradictory or confusing.

How can I extract wealth from the powerless? Inquiring minds want to know.

OK, so here's a pragmatic question. As a newly minted finance professor who writes blog posts defending the Efficient Market Hypothesis, I am now a card-carrying member of America's white-collar mafia. I'm a member of the 1% in spirit (if not actually in income or wealth). So I want to know: How can I pull off the feat with which Graeber credits the creditor class? How can I get rich extracting wealth from the poor and powerless by lending them money?

Well, one thing I could do is to lend some poor people money, and make money off of the interest payments when they pay back the loan. Am I then extracting wealth from them? Well, maybe. But if they were willing to take out the loan, and willing to pay me back - if they intended to pay me back from the very beginning, and followed through - then didn't they benefit somehow from borrowing the money? Maybe they got a house out of the bargain, or a car. In any case, I charged them for a product, and they paid for the product, knowing what they were getting.

Did I really "extract wealth" from them? And if so, does a grocery store "extract wealth" from me every time I buy a grapefruit?

OK, so instead suppose I lend the poor people more than they can afford to borrow. I trick them on the terms of the loan, offering them a low "teaser" rate that balloons after a few years, and I conceal this in the fine print and lie to them and tell them that they'll be able to pay it back. (This is certainly possible.) So then they default on the loan. They go into bankruptcy, their house gets repossessed, etc. So they lost out.

But didn't I lose out too? After all, I didn't get paid back! I took a loss! Not a very good method for extracting wealth, it seems to me.

OK OK, new idea. Suppose I sell poor people an exploding loan that they'll never be able to pay back, then package this loan off and resell it to Goldman Sachs. When the poor people default, Goldman Sachs takes a hit and I'm in the black. Money extracted!

But did I extract the money from the poor people, or from my fellow One Percenters at Goldman Sachs? Remember, the poor people took a hit from the bankruptcy, but in the meantime they got to borrow some money and not pay it back, due to the protection afforded them by bankruptcy law.

(But didn't Goldman get bailed out by the government when this happened? Sure, but Goldman actually paid the taxpayer back for that bailout, and Goldman's shareholders - One Percenters - took the hit.)

OK OK OK. NEW idea. Suppose poor people could borrow money for 3% if they knew where to look. but they don't know where to look, so I lend them money at 22%. The people pay me back, but they end up paying a lot more than if they had only known they could borrow at 3%. So by tricking them into thinking that 22% was the best interest rate they could get, I extracted wealth from them.

This seems like a good scheme. Can people be tricked? Of course they can - otherwise "con man" wouldn't be a real job.

This scheme sounds like a winner. But it makes me wax philosophical. Was it the debt that extracted the wealth, or the trick itself? If I sell people a crappy car that breaks down two days after they drive it off the lot, does that mean that cars are a tool for extracting wealth from the poor? Or does it mean that deception in general is a tool for extracting wealth from the poor, and crappy cars, like crappy loans, are just one kind of crappy product that people can be tricked into buying?

Well, maybe I'm splitting hairs here. Maybe I should just stop philosophizing and bend my mind to the task of tricking people into paying higher interest rates than they have to...But it certainly seems to me that Graeber is a bit unclear on exactly how debt "extracts" wealth.

In fact, this small inconsistency turned out to be a canary in a coal mine. The more I read over Graeber's arguments, the more I realized that many of his ideas about debt seem either contradictory or confusing.

So the government's efforts to boost stock prices are actually making creditors very mad. The interests of stockholders and creditors are at odds.

Its a fucked up system. Don't expect anything about it to make sense. It doesn't.

Money is always created out of “thin air”.

So Krugman has got to have this banking business all wrong. Whatever deposits you make into banks are almost entirely deposits of bank IOUs. It is all bank money. Where did it come from? Well, from banks. Where did they get it? They created it. How? Thin air.

Look at it this way. You can write an IOU to your neighbor: “I owe you five bucks”. It is your financial liability and your neighbor’s financial asset. Where did it come from? Thin air.

Did you have to get cash first to write the IOU? No. Do you have to have $5 in cash in your pocket to write the IOU? No.

Now, you do have to “redeem” your debt at some point. Your neighbor presents your IOU to you for redemption and you cough up the cash, or you write a check on your bank deposit, or you provide something else of value that is mutually acceptable. When you satisfactorily redeem yourself, your neighbor hands back your IOU and you tear it up.

In this process, you “created money” out of “thin air”; the “money” was your IOU denominated in dollars. (The money you created is destroyed when you repay your debt.)

Now, you might object: but how can that be money? It was just my debt held by my neighbor. It didn’t circulate. The neighbor could not buy anything with it. Yes, that could be true.

On the other hand, it is conceivable that you are well-known and trusted across your entire neighborhood. In that case, the neighbor holding your IOU certainly might be able to pass it in payment for her own IOU to another neighbor (a “third party”). In that case, this other neighbor can present it to you for redemption. Or, your neighbor might hire a local kid to mow the lawn—and then the kid presents it for redemption. So, at least in theory, your IOU could circulate to pay debts or to buy services.

As Minsky always said: anyone can create money; the problem is in getting it accepted.

yozhik

There is no money.
The debt is created by using US - you and me ... without our signature - the ONLY item of value - then the banks can not create anything.
They do not have the funds without us.
They do not "give" anything to the agreement.
They simply take your signature and exchange it for promissory notes; you are both the creditor and the debtor.
The bank is merely the "middle man".
Fractional banking allows them to turn your signature into promissory notes.
The promissory notes do not exist before your signature creates them.
So how can the bank be deemed the lender?
Think about it. Why is it called "your loan"?
Surely if it was lent to you, it would be called "your borrow".

You walk into a bank.
The bank has X amount of promissory notes available in its deposit accounts.
You apply for a loan.
You give your signature.
HEY PRESTO ... an account is opened with some zeroes and ones in it, representing the value of your signature.
None of the banks assets were utilised in the process.
If the bank used any of its assets, their would be a true bookkeeping entry - a transfer of assets to you.
Next time you communicate with the bank - ask them to see the bookkeeping entry, showing this transfer of assets, from them to you.
If the bank did not transfer anything to you - why do you owe them anything?
Possibly a small agent's fee, for handling the paperwork involved in turning your signature into promissory notes ... but nothing more.
You certainly do NOT owe them the principal ... the principal was created by realising the value of your signature. It is all an illusion.

You simply transferred value from you, to YOU.

This is the best description I've heard on how money is created, it closely parallels what people here have been telling me.
www.economonitor.com/lrwray/2012/04/02/k...it-comes-to-banking/

www.economonitor.com/lrwray/2012/04/02/k...it-comes-to-banking/

Actually what I see is that almost everyone who goes to the bank takes cash out! Banks supply cash, they do not receive it in order to make loans. So how could that work? Because whenever banks need cash to meet withdrawal, they do not turn to depositors, rather they call up the Fed. The Fed trucks cash to the banks to stock the ATMs. In turn, the Fed debits bank reserves held at the Fed (these are just the private banking system’s “checking account” held at the Fed).

Now what if a bank is short reserves—will the Fed refuse to send the cash? No. The Fed lends reserves to cover the cash needs. Otherwise the bank would have to close its doors—refusing to meet demands for cash—which would scare the bejeezus out of other depositors and lead to runs on banks. So except for occasional hiccups you do not find the ATM machines shut down or bank doors closed due to cash shortages. Indeed, all money and banking texts that I know of insist that the nonbank public determines the supply of cash—since banks promise to supply it on demand, the Fed provides banks with all they need to meet withdrawals.

It is the Fed that brings the wheelbarrows of cash to the banks—NOT depositors. And the Fed supplies cash NOT so that banks can make loans. Rather, the cash is to cover withdrawals from deposits.

Oh, where does the Fed get the reserves it credits to bank “checking accounts” at the Fed? Out of thin air—keystrokes. Where does the Fed get the green banknotes it trucks to the ATMs? Out of thin air—keystrokes instruct the printing press to print more.

Do you notice a pattern here? Money is always created out of “thin air”.

The way yozhik and others tell it no one but the bank gets anything of value at all from the process which is total fecking horseshit.

wake_up_bomb wrote:
About a month and a half ago i came across a prominent financial advisor to corporations (and the gillard governement) talking up the economy in Australia, despite a long run of interest rate cuts by the Oz Fed which indicate otherwise.

He was prominent on twitter pushing his case, and well the cynic in me figured he was helping his mates try and convince the masses to take on more debt. Because the thing is, the people here are taking on less and less at the moment. (hence the drop in the cash interest rate, to convince them otherwise)

So i pulled out the economist debt clock and he didnt have much to say after that!

So i pulled out the economist debt clock and he didnt have much to say after that!

Just an update, I have now witnessed this same economist putting it out there that debt is a good thing and not an issue, which I found amusing because it is quite a backflip from denying there was no debt when i posted up the above back then.

I was suprised to see quite a few people on his case about increasing debt levels, I guess he had to change his tune, or he was told to by his 'advisors' or something.

Very lame, and they must actually think no one notices either... while it is true many dont, the kind of people, business people, investors, employers, people who are savvy with finance and so on, well they do notice.

I truly do think that many politicians and those around them actually think the rest of us are all stupid if we havent gone and got a finance or law degree and become a politician/crown representative or a banker... i mean they are kind of right in a way i must admit but they are beginning to look ridiculous to us retards at times recently.

Yozhiks posts always make me die a little inside and regularly actually facepalm in real life.

Banks loan money in whatever form - those who have taken the loan can then realise it into something tangible such as a house, car, holiday etc without the need to save up the sum piecemeal as their labour/time is paid for. It is exactly the same principle as getting stuff on 'tick' from the corner shop - you get something upfront and pay for it later or a bit at a time.

He is right in a way about transfering value from you to you only he neglects to mention that the transfer is not based on current value - otherwise you would not need a loan - rather it is based on future value - you are cashing in on future earnings. It just so happens that to facilitate that transfer a currency that people accept and have faith in is used.

If I wish to buy a house I am unlikely to find someone willing to sell it to me for £100 a week for the next 35 years - they want the money upfront and in total - the bank therefore loans that total with interest - you get the house - the seller gets their account credited with the cost of the house and the banks have you by the balls until you pay off the loan and interest and own the house outright. The way yozhik and others tell it no one but the bank gets anything of value at all from the process which is total fecking horseshit.

That the banks then go on to speculate using the loans people have taken out and have a heart of stone when it comes to people who have hit a difficult patch is a totally different argument - banks are there to make profit off of our need and greed.

May 7, 2013
The central bank unexpectedly cut the cash rate by 25 basis points to 2.75 per cent at its monthly board meeting on Tuesday, a record low in the cash rate setting era.

"These rates are possible because the government has (had) in place a responsible fiscal policy over the past five and half to six years," Mr Swan told reporters in Canberra.

The central bank unexpectedly cut the cash rate

Nick Leeson is NOTHING compared to these guys so why did he go to jail ffs?

andyh wrote:
He aint in the club ofc.