Thursday, September 29, 2011

Financial system gets less stable

When you go out to buy your next television set, it is likely that you end up with something better than your existing TV sold for the same price. Like many things around us, man made systems tend to improve over time - if you take Boeing's newest aircraft, The Dreamliner, you will expect that to be build with more safety features than the old Boeing 747.


There is however one exception, our financial system - it seems to get less stable with each passing year and generates crisis, turmoil and recessions much more often that in the past yet we seem to accept this all encompassing system because most of us are born into or do not really understand what goes on in the banking system. Here is an interesting video that explains quite clear how money is created, how it drives the economy and why we are seeing so many crisis and so much in stability in the current system [Lucky Tan].


Read this article.

7 comments:

silverybay said...

We are just "economic digits". Pls watch this video as well to understand why we are where we are today, this unending financial mess that never seem to be resolve but just keeps getting from bad to worst.

http://www.youtube.com/watch?v=ZY8ScOAgPAk&feature=BFa&list=ULD71aiYq7jeM&lf=mfu_in_order

Anonymous said...

I think this documentary is trying to misled its' viewers.

It said that banks can create money out of thin air. This is not true. Only centre bank of a country can create money out of thin air, but the country run the risk of dpereaciating currency. Only US (Federal Reserve) can print money without the risk of depreciating currency.

Bank can only lend if they have the money from depositors, centre bank or other banks.

Sureesh said...

Actually not all made things tend to improve over time. Because the cost of raw materials have risen sharply over the years, many products are manufactured with cheaper substitutes which makes some products poorer in quality than similar products in the past. An example is HiFi amplipfiers. Amplifiers made 10 to 15 years ago give better sound quality that current day amplifiers because manufacters have to use cheaper materials to make them.

Bankster at work said...

Annon 10:15AM

Banks ARE creating money out of thin air!
They do not follow a strict deposit to lending ratio, where if Bank A accepts $1 deposit it can lend out $1 the next day or immediately.

This is where the regulators create a rule ( in favour of the bank ) allowing the bank to lend up to ( for example) $5.. this means a ratio of 1:5

This is sometimes called the Capital Adequecy Ratio or CAR for short. There are different types of Capital, essentially 3 types.
depending on how liquid it is.

The CAR for each of the 3 types effective this year is 6%, 8% and 10%.
{http://www.mas.gov.sg/news_room/press_releases/2011/MAS_Strengthens_Capital_Requirements_for_Singapore_incorporated_Banks.html}

This means the banks need only keep hard cash on their premises at 10% of their entire deposit that they accepted from anyone.

So what happens to the remaining 90%?? they actually lend out more than 5 times the remaining 90% to homebuyers, business, investment houses and to each other.. that is why they also pay out great great dividends!

do you believe now?

rex said...

rex comments as follows,

From the comments it is quite clear that there is a divide between people who studied Pre University Economics and those who dropped off after Sec. 4.

For anyone who has gone through Economics pre-College, it is clear as day CREDIT CREATION is part of normal operation of a bank. If you dont know then you probably failed Economics at PRe U or else didnt study economics.

Banks do create credit out of thin air. Typically, they take in $1000 cash, and they lend out $9,000 to another person. The extend they do this is governed by the Central Bank of a Country. I like the video link of Lucky Tan. The video likened it to "counterfeit" money!

All this works because banks expect that the guy who take the $9,000 - which is of course not physical cash but just a cheque or electronic place holder..."Counterfeit" "money" would likely receive it as a electronic figure and would be accounted back in his bank book, electronically not cash... and... will at any time ask for only about $500 cash (all other transactions of day to day by the guy who received the $9000 are by electronic means or cheque)/ With the original $1000 cash, it is a breeze for the bank to put $500 in ATM machine to allow the $9000 receiver to withdraw without suspicion. Meanwhile the bank is eagerly waiting for the interest money from the borrowers to top up ATM's money supply cash. Tht's the whole idea of CREDIT CREATION.

The system breaks down only when everybody decide to withdraw more cash then expected.

So to make the system more robust, from time to time, banks must receive real cash in terms of interests charged by house loans, or new fixed deposits. The system will continue to work so long as people are encouraged to take loans, buy goods, etc. because with each such transaction there is real cash (small amount in fact!) to feed the banks to feed the ATM machines to depositers who withdraw real cash.

The entire system is based on a belief that people take out no more cash then necessary for day to day transaction.

The system will collapse if banks stop making loans and people do not save physical cash in banks any more. In which case the banks run out of money to stock up the ATM machines!!

To put it another way, the greater proportion of all wealth "money" accounted in anybody's bank account, is Counterfeit. Which is to say, if everybody go to withdraw what is stated in his bank book, THE ENTIRE ECONOMY WILL COLLAPSE.

With this in mind, you will understand why CPF withdrawal limits keep changing. Can we do anything about it ? No. CPF acts in many ways similar to banks. Don't demand the govt that everyone must withdraw every cent, the entire CPF :bank: will collapse. Take it easy. be careful!

The one hour video of lucky tan link was excellent. Those who missed pre universtiy economics should re-watch the video.

It is not a lie. As reviewd in the video, and i also remember studying it in Harvey's "INTERMEDIATE ECONOMICS" , the Bank of England allowed this to happen for banks to create credit in this way since few hundred years ago How do we change something we dont feel good about, 400 years old? In the video, the writer mention a LETS system (Local Exchange Trading System) which was started by some Australian economists. But it is so complicated i couldn't understand it!!

rex

Anonymous said...

Yes, bank create money from thin air using the fractional reserve system as illustrated by the post made "bankster at work".

The whole banking system depends on LOANS to survive, not deposits. The more loan they give, the more money they make from interest income.

Every currency printed by govt is backed only by one thing, their creditability. The removal of gold standard by Nixon basically allows the fed to print INFINITE amount of money.

When INFINITE amount of money circulates and grow in a FINITE world, it cannot go on infinitely. Together with complex financial instrument(which is nothing more than just paper instrument like currencies), conjured up banks at exponential rate using leveraging,
a systematic meltdown of monumental level is INEVITABLE.

The financial crisis was at bank level back in 2008. Now we are dealing with a crisis at COUNTRY level.

Somethings got to give.

Anonymous said...

The tangible goods you buy are getting better and cheaper but NOT THE INSURANCE PRODUCTS. As a result the insurance companies resort to frighten you with gory scary pictures; to hide the rotten core deep below other useless benefit. Eg..the living policy is getting very expensive and the return is very poor. To hide the poor return and expensiveness the company covers up with features like 3 times sum assured due to accident benefit, retrenchment benefit, extra sum assured in the first 15 years and pay 5 years and be insured for life.The salesmen pitch these secondary benefits now. But isn't the core benefits are what the customers need? But because they are poor they are buried deep below.
So are insurance products getting better and cheaper? No need knowledge of economics you can deduce that they are not when the ceo's and the senior management are paid 6 to 7 figure salaries, right? The agents are paid high commissions and demand higher incentives to incentivise them to work harder. The other staffs also paid higher. So, how to be better when wholelife and endowment insurance are loaded with high costs. Worse is the agents and the company don't disclose but continue to con their customers by waylaying them into buying with misrepresentation and half truth.
The consumers must wake up to these facts about insurance products. The agents and the company are not going to tell you the whole truth because they are NOT interested in your goals but the commissions. They have to MAKE A LIVING by conning you.Is it right? ethical? It is like the robber telling you that he has to make living by robbing people.

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