## Friday, March 06, 2009

### overly simple

I literally had to draw a diagram on a piece of paper but I think i'm starting to get it.

So

Person A has 10,000 in cash..they go to a bank and hand it over into their checking acct.

Builder B builds a house

Person C want to buy the house.

Based on the 10,000 in despoits the bank lends Person C 100,000

Person C give the money to Builder B

The Builder B puts "the money" in the bank.

So the Bank now has \$110,000 in desposits....BUT really has \$10,000 in actual money

So there's a real house, and there's a real \$10,000 in cash.

But the other \$100,000 doesn't really exist...its a promise from Person C for future labor.

The loan is actually between the BuilderB and PersonC, with the bank acting as the enforcing or insurance agency at a ridiculous ( IMO) fee of like a 200% mark-up.

So if circumstances lead us to the point where person C can't pay the debt. Then the bank has a house and \$10,000, but owes out \$110,000. So if the reaction is well fuck the bank that its problem for writing a stupid loan....then what happens to the BuilderB and PersonA both of whom are owed a total of \$110,000 ?

The first thing that comes to mind is "WTF doesn't the builder just sell ( or rent) the house directly to the person and forget the bank ?"

And I can see how in this model, something needs to be done to prevent total catastrophy...but what is going to be done to prevent this from happening again ? Shouldn't we be looking at what's wrong with this model and take the steps necessary to make sure it doesn't happen again ?

And finally, the role of the bank really seems to be to help people get shit they want RIGHT NOW in exchange for paying for it later. But they're doing that with no more security ( actually you could contend less security) than the person promising to pay them ! If the bank has actual money to loan out, that sounds reasonable, but it doesn't appear that's the case. Its a promise on a promise....and sadly backed up by a promise from the government. Thats bullshit obviously.

What should happen is that we should take our lumps, get through this, and learn as a country to only buy those things that we can afford and to only lend out resources that only exist in the here and now. That will be a difficult transitition until people are able to accumulate that wealth. But such a system should also force a decrease in prices or at least an increase in purchasing power as the banks cut of the action decreases. I suspect all of that will mean a static economy, but really, don't recent events this prove there no sustainable alternative ?