Economy going down
1.
I doubt many of you have missed that we're in somewhat of a global economic crisis. And for you who did miss it... we are. Now, you all being more or less human, I suspect your first reaction at this point is to ask “who's to blame?” and, well, I don't blame you. It would be horribly nice if we could just point at something, say that's to blame, remove it, save the economy and go home for a nice cup of tea and maybe a few buttered scones. Unfortunately, we can't, and the reasons behind our economy's recent stint down the hill are far more complex and more then a little hard to understand. Still, it'd be a hell of a short post if I didn't try.
A lot of people put a fair bit of blame on the sub-prime mortgages, and I have to agree. Now, a sub-prime mortgage is when a bank allows a more high risk loaner, who would ordinarily not qualify for a loan due to the high risk of not being able to pay back, to borrow money any way. Which seems like a pretty stupid thing to do, until you take into account the fact that the bank charges a far higher interest rate, thus gaining more money in the long run. Of course, it still feels kind of like a gambit, and you'd think the banks are still taking a big risk. Which is true, but they didn't quite see it that way.
Because when the banks came up with the idea, the economy was on the rise so fast you'd think somebody shoved a rocket up it's unmentionables and the banks... well, the banks had more money then they knew what to do with. On top of this, housing prices were climbing like mad and people were looking to buy, even the poor ones. So the banks figured that if they lent the poor people money to buy houses and made them put those same houses up as security, they couldn't lose. Because if the loaners could pay, they got their money back, plus a fat interest. If not, well, they got a house that was worth far more then the money they'd put out to get it.
And to be honest, this could have worked. Had the rise kept up, the banks would have gotten their money and a bunch of people would have gotten some nice houses. Economy would have gotten a little boost. 'Course, profit like that is probably gonna make you want to do the same thing again, so I suppose the sub-prime mortgages were doomed to go down eventually, inevitably.
Problem is, the market changes. Eventually, people stop wanting to buy houses, inflation kicks it, economic recession makes an appearance and the growth... stops. Suddenly people aren't earning quite as much as they used to and those big, fat interest rates become just a little too steep to handle. And so people, well, they give up the houses they put up as collateral. Except those houses aren't worth close to what they used to be, and certainly don't increase in value as the banks put countless more homes out on the market, increasing availability and thus decreasing value.
The banks don't even cut even. And, well, banks losing money is sort of a problem. Because their money is, well, it's really OUR money, right?
And I'm not just talking about American bank customers. No. See, the banks decided to sell these loans, or rather the profit from them, as securities. Which essentially meant that people bought a stack in the loans, and the supposed future profits from them. And not just people, but companies, other banks in other countries. And suddenly, like a big game of dominoes, what started as a not so minor problem in the American economy suddenly turns into a very much major issue for the entirety of the western world. And, to be honest, much of the eastern one too, seeing as how we're the ones buying all their oil and cheap, pirate brand sneakers.
Of course, the Sub-prime mortgage crisis is not the only reason we are where we are. No, there's inflation, recession, diminishing economic growth and just plain old lack of demand all helping to put a lid on the economy. And, this is natural. Growth can not be sustained indefinitely, which the banks unfortunately forgot in their hunt for profit, and the economy will inevitably begin to cool off and slow down, stabilize. It goes in waves, has for the last hundred or so years. So it's only a matter of time before it picks up again.
Of course, what does this stuff mean, for me? Sure, it sounds all fancy and stuff, but will it even affect me? Well, for once, I suspect my video game hobby (addiction) will get a tad bit more expensive, though if the economists who speculate that the video game industry will weather this storm better then most are right, I'd barely notice the change. Still, I'd probably notice how more then a few businesses would go bankrupt and how goods and services both experience a rise in cost.
Of course, I'm glad I'm not China, which has 40% of it's economic income flowing from international export. And, with our economy backpedaling, we're gonna cut down on production and import, meaning that a lot of Chinese middle-class workers are gonna lose their jobs and go back to being lower class. Personally, I'm wondering if there's gonna be an angry uprising or if China will act aggressively to save the financial status of it's large middle class. Either could and probably would have far-reaching consequences for the world, and I suspect neither option is especially pleasant.
2.
This is not the first time the economy's decided to go head first into the abyss, nor, do I suspect, will it be the last. The great depression of the 30's and the bursting of the dot-com bubble both have a few things in common, and there are certainly things that could be learned from studying them. BUT! The main problem here comes from one, very simple, thing. Imaginary money. Or rather, debt as an acceptable form of currency.
In the current economic system, banks make money. And I'm not talking about earnings, I'm talking about pulling money out of thin air to lend out, as authorized by the various world governments. Most of us think electronic money acts as representative of cash stored in bank vaults, and that cash in turn for gold or silver stored in federal reserves. This is not true. The money we lend from banks have no physical representation, but is instead representative of debts society at large owes the bank. And this is no secret, it's out there, fully admitted. Problem is, as Marshall McLuhan said, “Only the small secrets need to be protected. The big ones are kept secret by public incredulity.”
The money in your pocket is not, like the money of old, representative of gold. It is instead representative of the interest owed to the bank, and the bank makes up more of it every time somebody gets a loan. And they can make up as much of it as they want, as long as they stay within something known as the Fractional reserve requirements. Which states that they are only allowed to 'make' money at a ratio against the actual money that their customers have deposited into their bank. At a Fractional reserve requirement of 9:1, a bank with a 100 dollars worth of deposit can loan 900 dollars worth of money that it simply makes up. Now, the problem is that, in the closed system of our economy, the make believe money of one bank increases the deposit in another and vice-versa, creating an ever escalating increase of deposited money and thus an increase in the money they can lend.
Now, when we want to pay back a loan to the bank, which requires interest, we turn to the public economy to get that money. Problem is, all the money in the public economy comes from the bank, which means the money we use to pay back is the interest of somebody else's loan. In a system where all money comes from the bank's loans, how can we be expected to pay back the loans plus the interest they demand? The answer, we can't. Imagine you have a pool, which is the principal, the money you and everybody lent. Also all the money in circulation, in other words. Then you have a second pool, a bigger one, which represents the principal plus interest, what the banks want back. Now imagine trying to use the water from the first pool to fill up the second one... Doesn't work does it?
Only way to make it work is to borrow more money, increasing the first pool but at the same time increasing the second one, which grows even bigger then the first one because of the added interest.
The economy is, in other words, dependent on the commercial banks to give regular injections of more money to make it work. Money which they get from people loaning. During the great depression, people stopped loaning, money dried up, the economy sunk like a stone.
If you ask me, the main lesson we need to learn is that an economic system dependent on people loaning more and more money just to work isn't sustainable, and the sub-prime mortgage crisis is a perfect example, on a small scale growing bigger, on what can happen to our economy when the upwards spiral of lending and indebtedness goes wrong. What we, more then anything, need to learn from this and other, previous crises is the flaws inherent in our monetary system, and become loud enough about our dissatisfaction to spur our governments and our people into doing something to fix it, which would require a new economic system.
A while back I mentioned who to blame. Well, you can certainly blame the sub-prime mortgage crisis, but you should really be blaming the banks, for profiting and perpetuating a system of economy that constantly demands more money then currently exists.
3.
Rothstein speculates that, had the United States used a more socialistic model for education, health care and segregation, the entire thing could have been avoided. He has some points.
Education, certainly. Had the loaners had a little better education within the spheres of math and economy, they might have been able to more critically assess their ability to pay the loans back. Of course, a problem arises when you think about the fact that, the banks do they same. Every time you go get a loan, they check your credit history, your job, your salary. They check all these things and make sure you have the capacity to pay back, with a healthy margin in case of 'rainy days'. The Sub-prime loans were aimed specifically to people WHO FAILES THESE CHECKS! Now sure, a healthy education might have dissuaded some of these people from taking the loans, but the problem lies not in the loaners being unable to assess the risks but in the banks, for being fully able but instead taking massive risks despite knowing them, and then piling on even more interest on top, further decreasing the loaners ability to pay back. Along with using clever language and initially low, but mobile, interests rate to mislead the loaners into thinking the end interest would be far, far lower then it actually was.
As I said, education would certainly have helped but this was a highly skillful lie that would have followed more then a few of us, even here in well-educated Sweden.
His points about social security and public health insurance certainly rings true. Both would have decreased the costs to the loaners, which would have given them more money to sink into the banks. The question is, would the difference have been great enough, in large enough numbers, to make any real difference? This is a mathematical and statistical question I have no way near the qualification or time to properly research and calculate, but it's something worth keeping in mind.
But if this IS true, why would the government choose this time to cut back on the two things which, if Rothstein is right, would best serve to prevent the wave of foreclosures from echoing in our country? Even I, an anarchist, have a hard time believing the government is really THAT stupid. Then again, I certainly have no problems assuming they're willing to screw the public to put more money in the pockets of people who contribute to the election campaigns.
And well, our own economic crisis in the 90's certainly shows our socialistic system is not immune to similar ills.
He seems, to me, to be missing the real point. Namely, that this has nothing to do with liberalism. It doesn't, because a liberalism system functions just as well as a socialistic one in the long run. Not at all. These are, to me, the symptoms of our inherently flawed economic system. Socialism, liberalism... they're all playing around in the same diseased pool. They're doomed to get sick.
I doubt many of you have missed that we're in somewhat of a global economic crisis. And for you who did miss it... we are. Now, you all being more or less human, I suspect your first reaction at this point is to ask “who's to blame?” and, well, I don't blame you. It would be horribly nice if we could just point at something, say that's to blame, remove it, save the economy and go home for a nice cup of tea and maybe a few buttered scones. Unfortunately, we can't, and the reasons behind our economy's recent stint down the hill are far more complex and more then a little hard to understand. Still, it'd be a hell of a short post if I didn't try.
A lot of people put a fair bit of blame on the sub-prime mortgages, and I have to agree. Now, a sub-prime mortgage is when a bank allows a more high risk loaner, who would ordinarily not qualify for a loan due to the high risk of not being able to pay back, to borrow money any way. Which seems like a pretty stupid thing to do, until you take into account the fact that the bank charges a far higher interest rate, thus gaining more money in the long run. Of course, it still feels kind of like a gambit, and you'd think the banks are still taking a big risk. Which is true, but they didn't quite see it that way.
Because when the banks came up with the idea, the economy was on the rise so fast you'd think somebody shoved a rocket up it's unmentionables and the banks... well, the banks had more money then they knew what to do with. On top of this, housing prices were climbing like mad and people were looking to buy, even the poor ones. So the banks figured that if they lent the poor people money to buy houses and made them put those same houses up as security, they couldn't lose. Because if the loaners could pay, they got their money back, plus a fat interest. If not, well, they got a house that was worth far more then the money they'd put out to get it.
And to be honest, this could have worked. Had the rise kept up, the banks would have gotten their money and a bunch of people would have gotten some nice houses. Economy would have gotten a little boost. 'Course, profit like that is probably gonna make you want to do the same thing again, so I suppose the sub-prime mortgages were doomed to go down eventually, inevitably.
Problem is, the market changes. Eventually, people stop wanting to buy houses, inflation kicks it, economic recession makes an appearance and the growth... stops. Suddenly people aren't earning quite as much as they used to and those big, fat interest rates become just a little too steep to handle. And so people, well, they give up the houses they put up as collateral. Except those houses aren't worth close to what they used to be, and certainly don't increase in value as the banks put countless more homes out on the market, increasing availability and thus decreasing value.
The banks don't even cut even. And, well, banks losing money is sort of a problem. Because their money is, well, it's really OUR money, right?
And I'm not just talking about American bank customers. No. See, the banks decided to sell these loans, or rather the profit from them, as securities. Which essentially meant that people bought a stack in the loans, and the supposed future profits from them. And not just people, but companies, other banks in other countries. And suddenly, like a big game of dominoes, what started as a not so minor problem in the American economy suddenly turns into a very much major issue for the entirety of the western world. And, to be honest, much of the eastern one too, seeing as how we're the ones buying all their oil and cheap, pirate brand sneakers.
Of course, the Sub-prime mortgage crisis is not the only reason we are where we are. No, there's inflation, recession, diminishing economic growth and just plain old lack of demand all helping to put a lid on the economy. And, this is natural. Growth can not be sustained indefinitely, which the banks unfortunately forgot in their hunt for profit, and the economy will inevitably begin to cool off and slow down, stabilize. It goes in waves, has for the last hundred or so years. So it's only a matter of time before it picks up again.
Of course, what does this stuff mean, for me? Sure, it sounds all fancy and stuff, but will it even affect me? Well, for once, I suspect my video game hobby (addiction) will get a tad bit more expensive, though if the economists who speculate that the video game industry will weather this storm better then most are right, I'd barely notice the change. Still, I'd probably notice how more then a few businesses would go bankrupt and how goods and services both experience a rise in cost.
Of course, I'm glad I'm not China, which has 40% of it's economic income flowing from international export. And, with our economy backpedaling, we're gonna cut down on production and import, meaning that a lot of Chinese middle-class workers are gonna lose their jobs and go back to being lower class. Personally, I'm wondering if there's gonna be an angry uprising or if China will act aggressively to save the financial status of it's large middle class. Either could and probably would have far-reaching consequences for the world, and I suspect neither option is especially pleasant.
2.
This is not the first time the economy's decided to go head first into the abyss, nor, do I suspect, will it be the last. The great depression of the 30's and the bursting of the dot-com bubble both have a few things in common, and there are certainly things that could be learned from studying them. BUT! The main problem here comes from one, very simple, thing. Imaginary money. Or rather, debt as an acceptable form of currency.
In the current economic system, banks make money. And I'm not talking about earnings, I'm talking about pulling money out of thin air to lend out, as authorized by the various world governments. Most of us think electronic money acts as representative of cash stored in bank vaults, and that cash in turn for gold or silver stored in federal reserves. This is not true. The money we lend from banks have no physical representation, but is instead representative of debts society at large owes the bank. And this is no secret, it's out there, fully admitted. Problem is, as Marshall McLuhan said, “Only the small secrets need to be protected. The big ones are kept secret by public incredulity.”
The money in your pocket is not, like the money of old, representative of gold. It is instead representative of the interest owed to the bank, and the bank makes up more of it every time somebody gets a loan. And they can make up as much of it as they want, as long as they stay within something known as the Fractional reserve requirements. Which states that they are only allowed to 'make' money at a ratio against the actual money that their customers have deposited into their bank. At a Fractional reserve requirement of 9:1, a bank with a 100 dollars worth of deposit can loan 900 dollars worth of money that it simply makes up. Now, the problem is that, in the closed system of our economy, the make believe money of one bank increases the deposit in another and vice-versa, creating an ever escalating increase of deposited money and thus an increase in the money they can lend.
Now, when we want to pay back a loan to the bank, which requires interest, we turn to the public economy to get that money. Problem is, all the money in the public economy comes from the bank, which means the money we use to pay back is the interest of somebody else's loan. In a system where all money comes from the bank's loans, how can we be expected to pay back the loans plus the interest they demand? The answer, we can't. Imagine you have a pool, which is the principal, the money you and everybody lent. Also all the money in circulation, in other words. Then you have a second pool, a bigger one, which represents the principal plus interest, what the banks want back. Now imagine trying to use the water from the first pool to fill up the second one... Doesn't work does it?
Only way to make it work is to borrow more money, increasing the first pool but at the same time increasing the second one, which grows even bigger then the first one because of the added interest.
The economy is, in other words, dependent on the commercial banks to give regular injections of more money to make it work. Money which they get from people loaning. During the great depression, people stopped loaning, money dried up, the economy sunk like a stone.
If you ask me, the main lesson we need to learn is that an economic system dependent on people loaning more and more money just to work isn't sustainable, and the sub-prime mortgage crisis is a perfect example, on a small scale growing bigger, on what can happen to our economy when the upwards spiral of lending and indebtedness goes wrong. What we, more then anything, need to learn from this and other, previous crises is the flaws inherent in our monetary system, and become loud enough about our dissatisfaction to spur our governments and our people into doing something to fix it, which would require a new economic system.
A while back I mentioned who to blame. Well, you can certainly blame the sub-prime mortgage crisis, but you should really be blaming the banks, for profiting and perpetuating a system of economy that constantly demands more money then currently exists.
3.
Rothstein speculates that, had the United States used a more socialistic model for education, health care and segregation, the entire thing could have been avoided. He has some points.
Education, certainly. Had the loaners had a little better education within the spheres of math and economy, they might have been able to more critically assess their ability to pay the loans back. Of course, a problem arises when you think about the fact that, the banks do they same. Every time you go get a loan, they check your credit history, your job, your salary. They check all these things and make sure you have the capacity to pay back, with a healthy margin in case of 'rainy days'. The Sub-prime loans were aimed specifically to people WHO FAILES THESE CHECKS! Now sure, a healthy education might have dissuaded some of these people from taking the loans, but the problem lies not in the loaners being unable to assess the risks but in the banks, for being fully able but instead taking massive risks despite knowing them, and then piling on even more interest on top, further decreasing the loaners ability to pay back. Along with using clever language and initially low, but mobile, interests rate to mislead the loaners into thinking the end interest would be far, far lower then it actually was.
As I said, education would certainly have helped but this was a highly skillful lie that would have followed more then a few of us, even here in well-educated Sweden.
His points about social security and public health insurance certainly rings true. Both would have decreased the costs to the loaners, which would have given them more money to sink into the banks. The question is, would the difference have been great enough, in large enough numbers, to make any real difference? This is a mathematical and statistical question I have no way near the qualification or time to properly research and calculate, but it's something worth keeping in mind.
But if this IS true, why would the government choose this time to cut back on the two things which, if Rothstein is right, would best serve to prevent the wave of foreclosures from echoing in our country? Even I, an anarchist, have a hard time believing the government is really THAT stupid. Then again, I certainly have no problems assuming they're willing to screw the public to put more money in the pockets of people who contribute to the election campaigns.
And well, our own economic crisis in the 90's certainly shows our socialistic system is not immune to similar ills.
He seems, to me, to be missing the real point. Namely, that this has nothing to do with liberalism. It doesn't, because a liberalism system functions just as well as a socialistic one in the long run. Not at all. These are, to me, the symptoms of our inherently flawed economic system. Socialism, liberalism... they're all playing around in the same diseased pool. They're doomed to get sick.
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