Britain is officially back in recession. Double-dipping

[Mecky]

A refreshing view, from the Tory press.

 

Time to start investing to get out of this mire

 

http://www.telegraph.co.uk/news/politics/georgeosborne/9226293/George-Osborne-can-stop-the-rot-but-only-by-spending-as-he-slashes.html

 

Investing in what?

[MrSmith]

Except that businesses that supply you with stuff generally have the actual stuff. Banks were lending money that they didn't actually have - when enough people couldn't repay* enough money to plug the hole left by lending non-existent money, it fell through. I think we have every right to blame them for doing that, particularly since we were then forced (by governments) to give the banks vast sums of our money to plug the holes they created.

 

*'repay' isn't strictly correct. For people to repay it, real money would have had to have been paid to them in the first place. This was pretend money, and money isn't even real in the first place!

 

Most of the money that exists didn't exist until it was lent into existence, and government decide through regulations what a bank can lend into existence.

Without banks lending money into existence business would be able to expand and employ people.

[I1L2T3]

Most of the money that exists didn't exist until it was lent into existence, and government decide through regulations what a bank can lend into existence.

Without banks lending money into existence business would be able to expand and employ people.

 

That's actually not true. Money can be created in the shadow banking sector and off balance sheet by banks. The government has limited control over that creation. Until of course it all goes wrong and de-leveraging by banks and other institutions means it all has to be converted into real money. All those complex financial instruments are created with the expectation that they can be converted to real money when required. What happens when so many financial instruments that turn out to have no value are created that their total 'value' exceeds the amount of money the government has created?

 

Not a test but if you really understand what has gone wrong over the last 20-30 years you'll be able to answer the question pretty easily.

[MrSmith]

That's actually not true. Money can be created in the shadow banking sector and off balance sheet by banks. The government has limited control over that creation. Until of course it all goes wrong and de-leveraging by banks and other institutions means it all has to be converted into real money. All those complex financial instruments are created with the expectation that they can be converted to real money when required. What happens when so many financial instruments that turn out to have no value are created that their total 'value' exceeds the amount of money the government has created?

 

Not a test but if you really understand what has gone wrong over the last 20-30 years you'll be able to answer the question pretty easily.

 

Government doesn't create money, that’s the job of the banks, if the government wants to stimulate the economy it can borrow money which is created by the banks, money is also created every time someone borrows money from the banks. Money pops into existence when government, business and people borrow it into existence, but all the money (IOU's) are created by banks. Governmnet set the rules that limit the amount banks can creat.

[Mecky]

Government doesn't create money, that’s the job of the banks, if the government wants to stimulate the economy it can borrow money which is created by the banks, money is also created every time someone borrows money from the banks. Money pops into existence when government, business and people borrow it into existence, but all the money (IOU's) are created by banks. Governmnet set the rules that limit the amount banks can creat.

 

No it isn't, that's the job of the Royal Mint and don't ever forget it. What you mean is how can you get your grubby hands on other peoples' money.

[MrSmith]

No it isn't, that's the job of the Royal Mint and don't ever forget it. What you mean is how can you get your grubby hands on other peoples' money.

 

Don't they just print it?

[Tony]

No, nothing is printed, who would you give it a suitcase full of tenners to?

 

Basically, they buy back loans from the people who have lent money to the government. This means that those people have money to spend again, and so it gets recycled into the economy from the back door, trickles down, blah, blah, blah.

 

There are a few other ways such as lending money to banks who then lend it on, trickles down, blah, blah, blah.

 

Basically, QE is a recognition of a credit crunch like we have now.

[I1L2T3]

Don't they just print it?

 

The BoE manages the money supply as far as they can but they are not in complete control.

 

Imagine you produced MrSmith widgets and MrSmith widgets were considered to be of a certain monetary value, e.g people traded them and speculated in them with the ultimate expectation that MrSmith widgets could be converted to real money at some point.

 

Now imagine that MrSmith widgets were not that valuable at all, they were being traded at prices that were well in excess of their underlying value. The bottom falls out of the MrSmith widget market and many institutions are left with many worthless MrSmith widgets, but reliant on the continued trade and speculation in MrSmith widgets to stay solvent. If the government/BoE deemed that the institutions with the MrSmith widgets were too big to fail because of the impact on the rest of the economy they might decide to purchase or guarantee the MrSmith widgets in order to keep those institutions afloat. They might 'print' more money to buy the toxic MrSmith widgets.

 

For MrSmith widgets subsititute complex financial products (CMOs, CDOs, derivatives etc...) and consider the institutions in the example above to be banks or insitutions in the shadow banking sector.

 

The banks have created and traded complex financial instruments to well in excess of their value. To stay solvent the merry go round of creation, trading and speculation has to continue. The banks know that if it stops they will fail, the value of the instruments they have created is way beyond the real monetary value. But they know that the ultimate backstop is the government/BoE and by extension the public. In effect they have created money outside of central bank control and they know that the complex financial instruments they have created will most likely ultimately have to be converted to real money at our expense if they fail. Queue QE.

[MrSmith]

The BoE manages the money supply as far as they can but they are not in complete control.

 

Imagine you produced MrSmith widgets and MrSmith widgets were considered to be of a certain monetary value, e.g people traded them and speculated in them with the ultimate expectation that MrSmith widgets could be converted to real money at some point.

 

Now imagine that MrSmith widgets were not that valuable at all, they were being traded at prices that were well in excess of their underlying value. The bottom falls out of the MrSmith widget market and many institutions are left with many worthless MrSmith widgets, but reliant on the continued trade and speculation in MrSmith widgets to stay solvent. If the government/BoE deemed that the institutions with the MrSmith widgets were too big to fail because of the impact on the rest of the economy they might decide to purchase or guarantee the MrSmith widgets in order to keep those institutions afloat. They might 'print' more money to buy the toxic MrSmith widgets.

 

For MrSmith widgets subsititute complex financial products (CMOs, CDOs, derivatives etc...) and consider the institutions in the example above to be banks or insitutions in the shadow banking sector.

 

The banks have created and traded complex financial instruments to well in excess of their value. To stay solvent the merry go round of creation, trading and speculation has to continue. The banks know that if it stops they will fail, the value of the instruments they have created is way beyond the real monetary value. But they know that the ultimate backstop is the government/BoE and by extension the public. In effect they have created money outside of central bank control and they know that the complex financial instruments they have created will most likely ultimately have to be converted to real money at our expense if they fail. Queue QE.

 

So the banks created something that no one understood and other institution still bought it.

Wouldn't banking regulations have prevented that?

[Tony]

Yes it would have prevented it. A simple rule of "no loan shall exceed the value of the security" would have been plenty.

 

A child could have spotted it a mile off but our last government was quite content to let them get on with these new derivative instruments because it brought the illusion of prosperity. In fact I firmly believe that Brown thought that this was the new Nirvana that would keep him in power for years to come.

 

Then came the Mexican $16k pa strawberry pickers with $750k mortgages, closely followed by the credit crunch, closely followed by... well you know how the story goes.

 

Amazingly, there are people who want to do it all over again, but this time with government money.