Steve Keen says that the banks have created a ponzi scheme and people have even been encouraged to take on interest only mortgages by telling them their houses with double in value in 5 years and so they well get their money back. But where will they live if they sell their house? Will they go back to live with their parents, use the money to travel the world, or go and rent somewhere to live? Its hardly a desirable situation for most people.
I guess people could use the profit they have made as a deposit on a house and then get a standard mortgage, but Steve Keen says that the housing market is bottoming out and profits may be non existent.
When asked if the people who take on such risky mortgages are just as guilty as the banks for playing the market, Steve Keen says no, they have been mis-sold, and it should be treated no different to any other ponzi scheme, or racket.
Video embedded.
https://www.rt.com/shows/renegade-inc/438036-trump-us-war-crisis/
As we all collectively endure the ‘Maybot,’ global housing markets, the humble Trump, trade wars, currency crises, QE, QT, and Ponzi schemes, it’s possible to believe that we’re all going mad when actually it’s the system we labor under that is utterly crazy.
Almost all the trust capital that mainstream media once protected has been fritted away with half-baked explanations that don’t match our experience of the world.
Host Ross Ashcroft calls on the insights of Steve Keen, an economis
20 comments:
Keen is talking nonsense. For every dollar owed to a commercial bank, there is someone with a dollar deposited at the bank. Ergo on balance, the fact that debts are higher now than ten years ago won't have much effect.
Banks do lend when they can issue a loan to someone able to pay back that loan and the interest.So no dollar for dollar link with the bank as an intermediary. Banks create IOUs out of nothing, and they only need to satisfy the capital requirements. Money deposited at the bank are part of their reserves.
“Banks create IOUs out of nothing, ”
But in the prior sentence you just said there is an income requirement??
Which one is it?
You could say “out of nothing!” about any abstraction ( if you were attempting to reify the abstraction...rather than simply just employ the abstraction...)
“Out of nothing!” is dumbing it down....
Matt, when the loan is given, the bank will add a number, i.e the amount, to your account. When the loan is payed back, this number will be scrapped. What stays is the interest and it will be part of their profit.The imposed Capital Requirements of the banks are the Basel ones for stability reasons
“this number will be scrapped”
More reification... no thanks ... don’t need it...
US not under Basel:
“The Basel accords are not formal treaties and the members of the committee do not always fully implement the rules in national law and regulation. One prominent example of this is in the United States. We had not implemented the Basel II revisions for our commercial banks by the time of the financial crisis, which put any such changes on hold. “
https://www.brookings.edu/research/basel-iii-the-banks-and-the-economy/
US uses Leverage Ratio.... Capital:Total Assets
Keen is partially wrong about people being "so loaded with debt." While they might have a lot of debt, servicing the debt is at the lowest point in 40 years. Look here.
https://en.m.wikipedia.org/wiki/Reification_(Marxism)
“Hypostatization refers to an effect of reification which results from supposing that whatever can be named, or conceived abstractly, must actually exist, an ontological and epistemological fallacy.”
"IOUs out of nothing". Yes but the money produced from thin air is spent and ends up in other accounts. So for every additional $ loaned, there'll be an extra $ deposited.
However, total loans won't equal total deposits: there's base money to think about. E.g. if the Fed gives me $X when I sell them Treasuries as part of QE, I deposit that at my commercial bank, which in turn deposits the money at the Fed. There is no loan to correspond to that.
Hope that's right. Probably not....:-)
“Keen is talking nonsense. For every dollar owed to a commercial bank, there is someone with a dollar deposited at the bank.” ~ Ralph Musgrave
Wrong. Banks do not lend out deposits. Banks create loan money out of thin air. This is how banks are able to continually drive up housing prices and debt bondage.
“Ergo on balance, the fact that debts are higher now than ten years ago won't have much effect.” ~ Ralph Musgrave
A higher rate of indebtedness has no effect? This error is based on the previous error about bank lending.
“Banks do lend when they can issue a loan to someone able to pay back that loan and the interest. So no dollar for dollar link with the bank as an intermediary. Banks create IOUs out of nothing, and they only need to satisfy the capital requirements. Money deposited at the bank are part of their reserves.” ~ Wies de ridder
CORRECT.
“I say idiotic things in the hope of getting attention.” ~ Fatt Stanko
CORRECT.
“When the loan is given, the bank will add a number, i.e the amount, to your account. When the loan is payed back, this number will be scrapped. What stays is the interest and it will be part of their profit. The imposed Capital Requirements of the banks are the Basel ones for stability reasons.” ~ Wies de ridder
CORRECT. “Scrapped” means that loan money is destroyed as it is paid back. There are two ways that money is created: bank lending and government spending. There are two ways that money is destroyed: paying off a bank loan and government taxation.
Since banks create loan money out of thin air, banks lend as much as the housing market will bear, since this generates higher bank profits in the form of interest payments. This is why housing prices, indebtedness, and homelessness keep increasing.
“Keen is partially wrong about people being ‘so loaded with debt.’ While they might have a lot of debt, servicing the debt is at the lowest point in 40 years.” ~ Mike Norman
I am very skeptical about that FRED chart. Student loan debt is catastrophic. “Payday loan” operations continue to multiply. Housing prices keep skyrocketing. Wages are not keeping up with the rising personal debt load.
“People are so loaded with debt that they have no purchasing power which also drags down the economy.” ~ Kaivey
One of the purposes of the “national debt crisis” hoax is to distract the masses from the private debt crisis by focusing on the [non-existent] “public debt crisis.” The media also distract the masses by focusing on Trump and the Russia-gate hoax.
“Steve Keen says that the banks have created a ponzi scheme and people have even been encouraged to take on interest only mortgages by telling them their houses with double in value in 5 years and so they will get their money back.” ~ Kaivey
During those five years, all housing prices will rise. Therefore any profit that people make will be eaten by the increased price of whatever house they buy after the five years.
Since few people can afford to buy a house, people rent apartments. In every major American city (no exceptions) developers are madly building apartment complexes. Everywhere. Meanwhile rent prices keep rising, as does the number of homeless people. Bankers and private debt are a cancer that grows and grows until the cancer destroys nations and empires.
The USA is no exception.
@ Ralph Musgrave:
Upon reflection, I think you may be correct, and that I am in error. When a bank makes a loan, someone gets the loan money (e.g. a car dealer or a house builder). That someone puts the loan money in a bank. Hence we say that, "Bank lending creates deposits." (Government spending also creates deposits.)
That said, I don't think everything is fine for average people. It seems to me that the gap between the rich and the rest keeps widening.
Steve Keen has a chart that spans over a hundred years showing the ratio of private debt to GDP, and after 1980, when Thatcher deregulated the financial sector, the ratio goes from 60% to 200% of GDP in year 2010 and then it comes down again to about 160% today. So the private debt ratio to GDP is less today, but Steve Keen's chart shows that it's still historically too high and he says it should come down to 60%. So, it depends what time frame you use when looking at the charts.
@ Konrad
Do you know, Konrad, I remember buying a flat which was part of a converted house which had been turned into six separate dwellings. Within a few years the flats had doubled in value and everyone was so jubilant about all the money they had made, but i said to them that the house they intended to one day buy had shot by roughly the same percentage and really they are now poorer than they were before because houses had become even more expensive and out of reach. But human nature being what it is, they never took much interest in what I said and continued to brag about how much money they had made.
And I bet, like me, they got stung over and over again as they climbed up the property ladder as homes became more expensive. Today, they probably feel rich and vote Tory, but i bet, like me, they never had much money to spend throughout their lives.
They probably ended up with an average 3 bedroom house which might be worth £400,000, or so. So now they most likely feel that they are part of the gentry; part of the landed. You only live once, and yet they would have worked nuts all their lives servicing their mortgage making the bankers very rich indeed. They've been stung, and yet they are so stupid they think they did well. They don't realize how the system was rigged to extract every last penny out of them which turned them into workaholics.
Ralph ". For every dollar owed to a commercial bank, there is someone with a dollar deposited at the bank"
Yes, Horizontal money nets to zero. But the total size of the horizontal system can be larger or smaller. Anything larger than the size needed to fund capital development (productivity increasing activities) it seems can be inflationary; there is a trade-off on effective demand between Vertical and Horizontal money in other words. A leveraged private sector and overly large finance sector will go hand in hand with a small (non functional finance) vertical sector etc
Hi Clint,
I don't fully understand what you're saying, so I'll just make a couple of comments which probably don't to the heart of what you're saying. First, I don't see what's wrong with loans which don't "fund capital development": e.g. what’s wrong with one person with cash to spare lending to another who wants a mortgage which they’ll use to buy an EXISTING house? There’s no capital development there, i.e. no new houses are built, but I can’t see what’s wrong the latter activity.
Second, the latter type of lending will not significantly reduce lending for capital development. I.e. if banks spot a series of viable loans to “capital developers”, those banks can just create the money to lend out of thin air. The fact that they’ve recently loaned a fair amount to buy existing houses is near irrelevant.
Hi Ralph, you wrote: “what’s wrong with one person with cash to spare lending to another who wants a mortgage”
nothing, but a great deal of lending isn't from “cash to spare” but the creation of new promises to pay (new credit-money, aka Horizontal money). When banks create credit-money then yes, then it needs to be for productivity increasing purposes. If the Horizontal part of the currency system grows larger than that needed for capital development, then the FIRE sector grows, and usually this (for both economic and political reasons) goes hand-in-hand with a reduced public sector (Vertical money spent in/created).
Keen's “credit impulse” , the change in the change of the rate of private debt growth, matters for achieving a balance of price level and private:public economic activity. You wrote above
_“Keen is talking nonsense. For every dollar owed to a commercial bank, there is someone with a dollar deposited at the bank.“_
But Keen is pointing out a very important aspect of the economy for achieving functional finance and a healthy financial sector and healthy household debt levels, how they all relate. Not nonsense at all :)
Finance capital (FIRE) makes its profit from financial rents rather than productive contribution. Finance capital creates the horizontal money supply through credit extension.
It is the interest of finance capital to keep government issuance low in order to maximize private credit and therefore increase rent extraction.
Based on Minsky's financial instability hypothesis, private credit becomes increasingly more risky over a cycle.
The higher the private credit to public credit ratio, that is, the more private credit, the more precarious the Ponzi stage is for the economy.
Then after the crash, public credit greatly expands while private credit decreases.
This is a dumb way to run a monetary production economy.
Functional finance addresses that.
Finance capital doesn't like functional finance but rather "sound" finance in order to keep rents and their profit high.
Tom, I just got to that bit in Randy Wray's book on Minsky. You stole my thunder. Yes, one of the major issues is how fragile and unstable the financial sector is, and the huge damage it will do in a few years when it implodes again. It goes without saying that Washington will bail out the finance sector but they almost certainly won't do enough to stop a dangerous tsunami of debt deflation drowning an already pummelled working class and a struggling but ever decreasing middle class.
YUGE trouble ahead. Hopefully, it'll start before the next general election, take Trump down and ensure loony Pence is also finished. Perhaps one of the other Sex in the City soft porn gals can do better than the ginger gubernatorial primary candidate and make it to the Oval Office. Perhaps the one who looks like a horse and is married to Inspector Gadget?
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