Actually no, money is a liability of the banking system, credit is an asset. But credit can create money and usually does so in the first place, my point is that securitisation allowed banks to extinguish the money they had created when they extended credit for long term asset purchase.Credit is money.
Actually no, money is a liability of the banking system, credit is an asset. But credit can create money and usually does so in the first place, my point is that securitisation allowed banks to extinguish the money they had created when they extended credit for long term asset purchase.
This is the unsatisfactory nature of these e-debates. I am claiming the total opposite. I am claiming securitisation created credit without creating money and therefore Chris' argument that it was failure to control money supply which caused the crisis is unfounded.You imply money was being created by the banks. It was not.
In a non-fractional reserve gold standard an extra 10 nuggets of gold would have to be produced before the securitised mortgage could be purchased, resulting in a backed increase in the money supply to 20 nuggets. Only fractional reserve banking allows for new money to be created out of thin air that is then used to buy a securitised mortgage fueling a credit bubble. Credit expansion beyond the money supply is impossible in a non-fractional reserve gold standard.Bank lends 10 nuggets of gold to A. A buys house from B for 10 nuggets of gold. Bank securitises A's mortgage and sells it to B for 10 nuggets of gold. And so on and so on, infinite credit expansion on the same money supply.
Of course the monetary inflation led to the inflation of asset prices. You are ignoring the most fundamental laws of economics, i.e. supply/demand relationships. An increased supply of money increased the demand for products; some more than others, with real estate and now government bonds having seen the greatest demand increase. Yes, houses are generally bought on credit, but credit expansion beyond the supply of money (backed by something) is inflationary.I agree with the thrust of this comment but asset price inflation had little to do with money supply expansion, rather it was to do with long term credit expansion, as described above. In simplistic terms people do not buy houses with the coins in their pocket they buy then with long term credit.
Yes indeed, but the slicing and dicing was done mainly by Fannie and Freddie, which are US government entities. And the purchasing of the securities was only made possible by adding money into the system that could then be used to buy them.The slicing and dicing of asset backed securitistion backed by fancy PhD math was the root cause of the global financial crisis. It was a failure of the free market, of human nature, not of government intervention and certainly not of fractional reserve banking.
The only way that credit can expand is through a reduction in the reserve requirements or an increase in the money supply, which are controlled by governments. Both of these took place, and in regards to mortgage backed securities the leverage was allowed to drop to 2% as they were AAA rated. Your argument would only hold true if individual banks were allowed to add to the monetary base or 0% reserve banking were allowed.This is the unsatisfactory nature of these e-debates. I am claiming the total opposite. I am claiming securitisation created credit without creating money and therefore Chris' argument that it was failure to control money supply which caused the crisis is unfounded.
I mustn't have explained the example correctly. In my economy there are only 10 nuggets of gold. This is placed in a bank by its owners, i.e. it is capital. The bank lends those 10 nuggets to A on a long term loan. A gives the 10 nuggets to B for a house. The bank sells B a piece of paper promising him 10 nuggets if and when A pays the bank back. The bank is back were it started. The extra credit it has created is between two non bank agents and has nothing to do with the bank.In a non-fractional reserve gold standard an extra 10 nuggets of gold would have to be produced before the securitised mortgage could be purchased, resulting in a backed increase in the money supply to 20 nuggets.
This is exactly where your example falls apart based on a 100% reserve gold standard. This very action you describe here is the creation of a piece of paper backed by nothing other than an assumption and promise.The bank sells B a piece of paper promising him 10 nuggets if and when A pays the bank back.
And I'm not saying that commercial banks were not to blame. But this is where we have disagreed many times, in that FRB is at the heart of the problem, as governments have proven themselves to be completely and utterly incapable of controlling FRB.In fractional reserve banking what happens is that B does not buy that piece of paper but simply deposits it back with the bank. And the point is a deposit in a bank is money i.e. B thinks he can get his 10 nuggets back at any time. The bank is in a fundamentally different position from where it started. If it wants to lend some of those nuggets a second time it will be engaging in FRB. Nothing wrong with that of course provided it is controlled.
BTW I am not saying governments and monetary authorities were not in part to to blame but I am arguing that FRB was not the root cause of this crisis.
I think we are in agreement here. What off bank balance sheet securitisation facilitated was credit expansion without iincreasing deposits i.e. money supply. This process is perfectly feasible and indeed would be encouraged by a non-FRB standard. It was this process and not the money supply which caused the asset bubble.But the important thing is that both loans are fully backed by non-demand deposits. And within a non-fractional reserve gold standard, credit expansion would not be possible on demand and demand like deposits, so the result is not inflationary.
I think we are in agreement here. What off bank balance sheet securitisation facilitated was credit expansion without iincreasing deposits i.e. money supply. This process is perfectly feasible and indeed would be encouraged by a non-FRB standard. It was this process and not the money supply which caused the asset bubble.
Securitisation is what spread the US housing debt problem abroad, which caused the global melt down even in countries like Germany that had no housing bubbles. Iceland was affected as it bought too much into the US mortgage and international debt market. Ireland, Portugal and Spain ended up in a mess because their citizens could suddenly borrow huge amounts of money at interest rates way below what was paid prior to the euro. Greece created its own mess through government debt and fiddling the books (very entertaining article by Michael Lewis here: http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010)I'm not convinced that securitization is such a fundamental reason for the current mess even if it seemed that way in the immediate aftermath of start of the credit crunch. The state of Iceland, Ireland, Spain, Portugal and Greece, for example, can hardly be blamed on securitization. These bubbles were all inflated by traditional banking activities conducted very imprudently. I don't have numbers but my feeling would be that in the overall scheme of things the amount of credit created this way would dwarf that created through securitzation
But I also struggle to accept that FRB is a completely flawed concept; it would be hard to understand why the world is so much better off than it was say 40 years ago if its practice were so damaging. Not that 40 years is completely arbitrary. Some random figures I found comparing 1970 to 2010: world GDP has increased over 20 fold since 1970 in USD PPP. Funnily enough gold costs over 20 times as it did then. As does oil. However in terms of consumer purchasing power the dollar has only dropped to under a fifth of its 1970 value. So yes fiat money looks like a poorish store of value compared to gold but it's use hasn't destroyed the world economy.
I'm not convinced. First of all you will have to be more specific about what you mean by the word "securitization". Since we're discussing banking, I assume you mean the securitization of debt? But to make sense of your statements above, I have to assume you don't want to blame certain forms of debt securitization (various flavours of bonds) which have been traded for centuries?Securitisation is what spread the US housing debt problem abroad, which caused the global melt down even in countries like Germany that had no housing bubbles. Iceland was affected as it bought too much into the US mortgage and international debt market. Ireland, Portugal and Spain ended up in a mess because their citizens could suddenly borrow huge amounts of money at interest rates way below what was paid prior to the euro. Greece created its own mess through government debt and fiddling the books (very entertaining article by Michael Lewis here: http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010)
On a global scale I believe securitisation played a huge role, but it was not the source of the problem in every country.
2.7% growth over 40 years is not at all a shabby performance. It has led to a dramatic improvement in the quality of life as measured by every major quality of life index. The ups and downs are not very comfortable but perhaps that (volatility) is the price that has to be paid.According to the Fed's own website the dollar has devalued almost 6 fold since 1970, which makes the 20 fold increase in GDP only a 3 fold increase, which is about 2.7% per annum. And that is far far less than what politicians like to pat themselves on the shoulder for.
Now take into account that fractional reserve central banking based on fiat currency has always been at the heart of financial crises and that there have been at least 4 major crises in the last 40 years. It is a constant centrally created boom bust cycle that causes hardship mainly to the taxpayer, especially the average person on the street.
Despite its popular association with Dickensian images, I view the industrial revolution as one of the most uplifting and glorious developments in human history. I doubt there had been such a spurt in economic growth and improvement in the human condition since the discovery of agriculture. (Before that perhaps since our evolutionary ancestors started exploiting fire.) The discovery of agriculture did not lead to everlasting economic growth but resulted in a massive spurt (or spurts as it's practice spread around the world). Similarly it is unreasonable to expect the industrial revolution to deliver everlasting growth.If you compare say the last hundred years of fiat currency to the hundred year period of the non-fiat currency of the industrial revolution you will see a far greater increase in the overall wealth of people in real terms. And this in a much more stable and sustainable economic environment.
I will have a look if I get the chance.I would highly recommend you read Rothbard's "What has government done to our money" before you make up your mind on the fallacy of FRB: http://mises.org/money.asp
And also the more in-depth "The mystery of banking": http://mises.org/mysteryofbanking/mysteryofbanking.pdf
Yes, I meant the packaging of debt to be sold on as an "investment" grade product. Bonds are indeed a completely different thing.I'm not convinced. First of all you will have to be more specific about what you mean by the word "securitization". Since we're discussing banking, I assume you mean the securitization of debt? But to make sense of your statements above, I have to assume you don't want to blame certain forms of debt securitization (various flavours of bonds) which have been traded for centuries?
Actually it is quite abismal when you compare it to the improvements enjoyed during the industrial revolution. The ups and downs were not as profound during the industrial revolution, and more importantly you did not have to fear the devaluation of your savings in your lifetime.2.7% growth over 40 years is not at all a shabby performance. It has led to a dramatic improvement in the quality of life as measured by every major quality of life index. The ups and downs are not very comfortable but perhaps that (volatility) is the price that has to be paid.
I agree with you on the importance of the industrial revolution on the wellbeing and wealth of people in general. It is now often stated that the industrial age was followed by the information age of the 20th century. The important thing to note is that these "revolutionary" times were not brought on by governments. In the case of the industrial revolution it was an even more hands off time where there was little to no government intervention.Despite its popular association with Dickensian images, I view the industrial revolution as one of the most uplifting and glorious developments in human history. I doubt there had been such a spurt in economic growth and improvement in the human condition since the discovery of agriculture. (Before that perhaps since our evolutionary ancestors started exploiting fire.) The discovery of agriculture did not lead to everlasting economic growth but resulted in a massive spurt (or spurts as it's practice spread around the world). Similarly it is unreasonable to expect the industrial revolution to deliver everlasting growth.
In addition, I don't see the grounds to credit the use of commodity based money for the industrial revolution since humankind had based their money on metal commodities for perhaps 10,000 years before the industrial revolution.
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