The last months have been turbulent, and as most I also got involved to pay more attention to the economical system.
Lehman Brothers in September 2008
I have been criticizing the stock market and banking system since I realized how they function - but of course all the criticism from experts and "anti-globalism" groups has been futile until . . yes, until it was just about to collapse as in September and October 2008 with the bankruptcy of Lehman Brothers
Right now the bonus system, complex derivatives and loose financial regulations are blamed for the collapse of the financial system, but I like to shed some light of the very basic how a bank function and what happens when banks sell each other a mortgage or when they reinvest into each other without actual investing into anything but themselves:
- you own 100 euros (apprx. 150 US dollars) and you bring it to the bank 1 to get interest
- bank 1 takes the 100 euros, keeps 10 Euros (10%) as it is supposed to do according regulation and reinvests 90 Euros, e.g. into another bank to get more interest than it has to pay you, this is bank 2
- bank 2 takes higher risks and gives more interest, and takes those 90 Euros, 9 Euros are kept, 81 Euros are reinvested into bank 3
- bank 3 takes higher risks and gives more interest, and takes those 81 Euros, 8 Euros are kept, 73 Euros are reinvested into bank 4 . . .
Now, in real world there are 4-5% taken within each bank for processing, this is how profit is made, let's see how this looks like then:
- bank #1: 100 taken, 10.00 kept, 5.00 profit, 85.00 reinvested into
- bank #2: 85.00 taken, 8.50 kept, 4.25 profit, 72.25 reinvested into
- bank #3: 72.25 taken, 7.23 kept, 3.61 profit, 61.41 reinvested into
- bank #4: 61.41 taken, 6.14 kept, 3.07 profit, 52.20 reinvested into
- bank #5: 52.20 taken, 5.22 kept, 2.61 profit, 44.37 reinvested into
- bank #6: 44.37 taken, 4.44 kept, 2.22 profit, 37.71 reinvested into
- bank #7: 37.71 taken, 3.77 kept, 1.89 profit, 32.05 reinvested into
- bank #8: 32.05 taken, 3.21 kept, 1.60 profit, 27.24 reinvested into
- bank #9: 27.24 taken, 2.72 kept, 1.36 profit, 23.15 reinvested into
- bank #10: 23.15 taken, 2.31 kept, 1.16 profit, 19.68 reinvested
So, what happened 10 banks create out of your 100 Euros a total of 555.06 Euros, and made a total profit of 26.77 Euros together. This means, from your 100 Euros this system created a total of 581.83 Euros, not bad!
Isn't this a miracle? They are actually "making money"! And note, by law only the federal banks of each nation or conglomerate which creates their own currencies are permitted to print money, speak "make money" - here, by the very system how private banks are permitted to work they are creating speak "print" money.
So, this how a bank makes profit, and how a bank makes money.
Now, just imagine the first 100 Euros isn't actual money, but a mortgage of a house and it increases the "worth" every year as it did in the USA - and in April 2008 the mortgages fall down steadily because the "bubble" blasted.
All the banks which "made" money from that supposed "bad" mortgage now cry: "we lost money" - but this is complete false: they never made that profit (money) at the first place, and all their losses now are money they pretended to have made. To support this system with actual money which relates to a real value means you actually devalue that actual money, you literally burn your money.
Since the banks "made" (printed) money with they way they can operate, they will trigger an inflation (inflation is when there is more money than goods, e.g. pricing of the goods increases to match demand and availability) - so, when money is now used to support this system, more money is taken (printed) this time from the federal banks and they actually print money out of nothing (without actual backing up by gold or another stable availability/demand product), and put it into the banking system - burning more money into a flawed banking system.
Do you know why these banks were able to increase profits much faster than the real economy, or were able to cash out millions of bonus to hundred thousands of bankers? Now you know, they are really "made" money.
This all would be truly hilarious if all people would be bankers, each one would make money this way, but this is not so. And you know, the money is a belief system, that those 100 Euros mean anything real is your belief, and those who accept those 100 Euros.
In a way we have it in our hand to create wealth for everybody - because that crisis which is occuring now (2009/03) is also fake, as fake as the banking profits - the profits of the past, and the financial and economic crisis are false beliefs into a flawed financial system.
There is wealth provided by this very Earth, there is sufficient space, there is sufficient food and water - but we seem cannot distribute properly, e.g. perhaps "profit thinking" and other inherent wrong motives prevent us. Yes, in this sense, such system has to collapse which isn't sustainable and only short-sighted on short-term profits.
We require to rethink our motives to work, contribute and share; and realize money is a tool to value things, and we better value things which makes sense to people, preferable to most or all people and not just a minority set of people, like bankers.
The banks serve the purpose to lend out money to finance long term projects, they are trust brokers; they take your money and invest into the projects they trust (and hope) will make it and give profits, from where they pay you an interest for.
The flawed aspect starts there, when the banks don't actually invest into real world business, but into other banks and financial products (trust into something) again; at the end they serve only themselves, but not the real world anymore. If they want to work disconnected, they shall do so, but when they collapse, that setup should not be fed with real "money" and its trust associated with.
A slight extension of the example above, imagine the 4th bank reinvest the money into the 1st bank, not knowing it came there the first time:
- bank #1: 100 taken, 10.000 kept, 5.000 profit, or 5 cummul. profit, 85.000 reinvested into
- bank #2: 85.000 taken, 8.500 kept, 4.250 profit, or 4.25 cummul. profit, 72.250 reinvested into
- bank #3: 72.250 taken, 7.225 kept, 3.613 profit, or 3.613 cummul. profit, 61.413 reinvested into
- bank #4: 61.413 taken, 6.141 kept, 3.071 profit, or 3.071 cummul. profit, 52.201 reinvested
Subtotal cashflow 370.864 Euros, subtotal 31.866 equity, and cummulative profit of 15.934.
- bank #1: 52.201 taken, 5.220 kept, 2.610 profit, or 7.61 cummul. profit, 44.371 reinvested into
- bank #2: 44.371 taken, 4.437 kept, 2.219 profit, or 6.469 cummul. profit, 37.715 reinvested into
- bank #3: 37.715 taken, 3.772 kept, 1.886 profit, or 5.499 cummul. profit, 32.058 reinvested into
- bank #4: 32.058 taken, 3.206 kept, 1.603 profit, or 4.674 cummul. profit, 27.249 reinvested
Subtotal cashflow 512.257 Euros, subtotal 48.501 equity, and cummulative profit of 24.252.
Let's skip (but still calculate) loop #3 to #7 and show the last significant loop:
- bank #1: 1.057 taken, 0.106 kept, 0.053 profit, or 10.402 cummul. profit, 0.898 reinvested into
- bank #2: 0.898 taken, 0.090 kept, 0.045 profit, or 8.844 cummul. profit, 0.763 reinvested into
- bank #3: 0.763 taken, 0.076 kept, 0.038 profit, or 7.516 cummul. profit, 0.649 reinvested into
- bank #4: 0.649 taken, 0.065 kept, 0.032 profit, or 6.389 cummul. profit, 0.552 reinvested
Subtotal cashflow 663.545 Euros, subtotal 66.299 equity, and cummulative profit of 33.151.
After that your former 100 Euros can't be squeezed out much anymore.
So, each banks lists then:
- bank #1: equity of 20.807, capital of 208.055, plus profit of 10.402
- bank #2: equity of 17.684, capital of 176.847, plus profit of 8.844
- bank #3: equity of 15.032, capital of 150.319, plus profit of 7.516
- bank #4: equity of 12.776, capital of 127.772, plus profit of 6.389
Remember, you only brought 100 Euros to bank #1, nobody worked, nobody created a real added value, and at the end over 660 Euros of wealth listed by the banks together, and made a profit of with it between 6 to 10 Euros by just reinvesting it, and this by taking 5% as commission internally - this way bank #1 doubled the actual profit.
And who has the overview of this, nobody, because money leads no trace, only its immediate giver and receiver is known, but no real trace to recognize the loop and this entire mess.
Now, do we really need to "save" such a system?
The answer is no. It requires a significant clarification and regulation that this self-indulged "money making" (which it is truly) either is isolated from the real economy, or if tied to it then with a clear mission statement (e.g. to serve the real economy) and enforced ethical guidelines.
Now imagine the "Addenum" example above, with a more complex financial product like derivatives (not just a simple deposit of 100 Euros) - you are creating a complex loopback system; just imagine the first 100 Euros is a bet on growth of the 4 involved banks, e.g. bank #1 doubled their managed capital from 100 Euros to 200 Euros, and doubles its profit, that's a 100% growth - that is real growth. Now investors bet via stock markets that they keep making that profit, and invest into that system . . .
It doesn't take much intelligence to realize, nobody can get an overview of this system anymore, unless money gets a full trace, then you will recognize when it loops back, and create feedback loop. And you know what happens when the output is higher than the input, e.g. with a microphone holding to the loudspeaker on a sound system, within moments you get a high pitch tone.
The sound of a crashing stock market . . .
The way to stop that tone, withdraw the microphone from the loudspeeker, and reduce the feedback loop.