We’re heading for another crash!

Posted By on January 25, 2018

Without all the hype and fancy labels, what happened in the Global Financial Crisis that averted a worldwide crash?

To put it in layman’s term, prior to the last global finacial crisis, the banks sold each other loans that were bad. Banks were lending more money than they could secure. So they wouldn’t get caught out with bad loans, they divided these up into parcels and sold them on to other banks and finacial institutions. This cross selling became so convoluted it concealed the fact that these loans were dodgy. The fact that these loans came from some of the worlds top banking institutions gave them credibility and the investors confidence, hiding the fact the loans were not backed by enough assets.

Meanwhile the banks, having sold these bad investments to each other, had money from the sale, which they used to fund even more lending. Banks don’t just lend the money they actually have in their vault; they lend more. If they have a thousannd dollars deposited into their vault, they can lend at least $10,000. Their daily business will bring in enough deposits to cover the difference. In many countries the government puts a limit on this reserve to lending ratio through the Reserve Bank..

Unfortunately the USA is different. Their Federal Reserve (supposedly the equivalent to a Reserve Bank), which most people assume is a government organisation, is actually a privately owned institution, owned by the big bankers – the guys behind the dodgy loans!

The Federal Reserve was setting the Reserve to Lending ratio for the banks. It was like the fox guarding the henhouse. Everyone was telling each other, “That loan is good because the lender is a big bank – too big to collapse.”

To some extent this was correct. When the day of reckoning came and investors realised that the interbank lending was dodgy, the Obama government realised if the big boys folded because they couldn’t pay up or were sued for fraudulent loans, the USA Dollar would crash. Since the US dollar underpins world trade as the major trading currency, they decided to give money in the form of a guarantee, to the banks to prop up the dodgy interbank lending.

Of course it couldn’t be called the “prop up the dodgy banks funds”, so they named it “Quantitative Easing”, just to make it sound less desparate. To prevent the effect of a large sum of new money flooding the market and diluting the value of the dollar, Quantitaive Easing was done in several stages.

All of this activity treated the symptoms of the financial crisis but not the cause. Today we have a world economy that is still based on debt that no-one can afford to pay. We circulate currency with a value based on confidence alone. Prior to the 1970s, the US Dollar was based on their gold reserves. With their attempts to cope with global inflation, they kept increasing the value of their dollar until some bright finance official did the sums and realised they didn’t have enough gold to pay for the dollars in circulation. Their solution was to drop the Gold Standard, the link between the dollar and gold.

So today we have banks with underfunded loans to each other (Interbank Lending) based on a currency that gets it’s value from the Federal Reserve – a private company owned and run by the same banks giving out those loans, telling us the loans are good.

While all of this keeps spiralling higher and higher, the top end of town is making money on the investments and playing along with the charade, convinced they will see the crash early enough to get out and keep the profits. They are all falling for the same, “they are too big to collapse”, trap that caught everyone in the global financial crisis. It’s only a matter of time before someone with influence starts asking a few questions and the whole house of cards will come crashing down. This time the US economy cannot fund an ongoing Quantitative Easing programme. Donald Trump’s government has not focused on balancing the books, just running up more and more debt.

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Mimenta.com is the online voice of a collection of consumer advocates working independently to represent people who would otherwise be unheard. We speak for those who are bullied by corporations and don't realise they can have a say.


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