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Asteve

Activist

Posts:930

01/07/2007 6:13 AM	Alert
Bankula: "worrisome derivatives commentary in today’s FT" Can you give me an URL, please? I've been reading about the operation of derivatives markets since Christmas, and - to be honest - I find the idea both fascinating and terrifying. In principle, the ideas are sound - essentially they allow someone to hedge their bets to reduce exposure to risk. For example, if I were competitively setting the price of a cruise for next year that needed a million litres of marine diesel, the prospect for volatility in the fuel market could make the difference between significant profit and being bankrupt. In such a situation, one might approach a derivatives trader and buy an option to buy a million litres of fuel at a fixed price next year. If I want an option to buy at a cheap price, relative to today's expectations, it will be very expensive - whereas if I only want an option to buy at a relatively expensive price, it will be cheap. The value of the option will fluctuate over the year - and, on expiry, if the fuel is cheaper than my option, I throw the option away. If fuel is more expensive, my option is valuable... I can either demand the fuel at the option price - or I can (more likely) sell the option certificate to offset the inflated price of supply from my regular supplier. Options are special types of futures (where the owner can decide to throw the agreement away if they choose - hence "option") - derivatives (a collective name for all this kind of stuff) are all about speculation - sometimes this is used for "insurance" (to reduce risk) - and sometimes to make a profit by taking risks. It is possible to go "Long" or "Short" in any derivative... Short is a bet that, for a given future date, the value of something (a currency, a stock, a cow, etc.) will be less than a given amount. Long is the opposite bet - i.e. that the price of the thing will be more than a given amount. There are several notable things about derivatives - especially in the UK - which, incidentally, is (AFAIK) particularly active in derivative trading... which, I understand, is attributed to less regulation here than in other markets [please don't ask for details, I don't know.] * Short trading is not usually available to the general public. This is one of the few ways one can profit through the failure of business/currency etc. George Soros decided to "Short Sterling" in 1992 (with a $10billion bet) - this lead to "Black Wednesday" and the subsequent house price crash as interest rates rocketed. While I can't blame Soros for his rational behaviour, I do question the morality of profit from betting that you can pick the looser rather than a winner... especially when your bet may influence the market itself. * Derivative trading can expose, in principle, unlimited levels of risk. If I were, for example, to sell options to buy petrol at £2/litre in one year, the chance I'd need to pay anything is low (it is unlikely that we will see annual doubling of this commodity price) and I might consider this risk so minimal that I ignore it. If, however, there's an unexpected disaster and fuel becomes essentially unavailable, the option I've sold remains a liability – a MASSIVE one. If someone offers to sell fuel at a £1m per litre, I must subsidise buying at that price for every option I've sold. There are, in principle, unlimited risks in selling options. * Derivative trading is done using "margin accounts" - a margin account on an equity which is considered "stable" need only needs deposits to cover a tiny fraction of the maximum risk of long-term liabilities. Margin accounts are "settled" every evening - I would not be surprised if loans are used to cover margin "calls" from time to time. It is interesting to note that exchange rates between western currencies (for example) have been extremely stable in recent years... I would be unsurprised if this leads to permission to trade in currency derivatives with extremely small (historic) margins. * Many derivative trades are OTCs (i.e. Over The Counter trades). One advantage of this is that, in principle, I can buy a derivative in anything I like in any proportions. One consequence of that flexibility is that market regulation is essentially impossible. While a stockbroker can look at the regulated Stock Exchange and see who is buying what, at what price, and in what quantity; and there are public records of all trades by directors in their own companies – with strict criminal law against insider trading – none of this information is available for the OTC derivative markets. Hence, I can invest in OTCs without raising suspicion... and, as I can buy OTC trades in anything – I can make trades (which would otherwise have informed the market about negative sentiment) secretly – even if I'm a bank. It is my opinion that the rise in derivative trading is intimately related to debt and M4 expansion. While I've drawn no conclusions yet, I think it relevant that many "Tier 1" commercial banks now engage in substantial derivative trading operations... these can be _very_ risky if any mistake is made or someone hasn't properly polished their crystal ball. Why is this relevant? We have government policy of ensuring a low CPI (i.e. Inflation – explicitly excluding ownership of housing, traded equities and debt) – which is used, in turn, as a tool to keep wage inflation artificially low relative to the money supply and the real costs experienced by ordinary people. Especially for housing (an essential for quality of life) this results in exacerbated poverty and an increased dependence on state support. I think it _extremely_ relevant that, since 1992, we've had government policy of "low inflation"... and, since 1997, government policy of low interest rates too. This is spun as being positive – having the effect of "growth" which most people assume means that we are getting richer. Nothing could be further from the truth – but it is a great marketing ploy! Changing the interest rate does not create new "money" per se. with M4 expansion, it simply creates new financial risk. The risk is buried in the paperwork of mortgage holders on their loan accounts; it exists on artificially high prices for traded equities; it is a risk in the difference in real-world values of different currencies (I can not believe that the value of different currencies have been as stable as their exchange rates over the past decade! Footnote 1) The risk is that pensions are worth far less than their face values – and that endowment policies are worth substantially less than the amount required to cover the debts taken on 25 years previously. Paying an excessive price for an owner-occupied house represents accepting the risks taken by the hopelessly optimistic over a decade ago... This is something which only makes sense if one can be even more unrealistically optimistic than people were 10,20,30+ years ago. It is subjective risk – but risk none the less. It is a risk someone is taking that they're actually worth a lot less than they think. Something very worrying for policy makers is that, if people realise their objective debts, they'll panic and stop spending. If they stop spending, our economy might well collapse... and that would be very politically damaging. Apart from the risk I am required to take in order to buy a property – which I consider essential to my life plans, and for which I've productively worked, without a holiday, my entire life... before someone "bright" tells me to "just rent" – because it is all I can afford... there's another risk I'm taking. My savings are indistinguishable from someone else's credit... We trust banks with our savings... but... say, I deposit £30,000 – this will be lent to home buyers creating £1m in loans. I think of my £30,000 as being "safe" – but it is not. If, say, 4% of borrowers default, the bank has no remaining reserves and my savings can't be withdrawn. If my bank becomes insolvent, I (probably) loose my savings – and my bank (no matter which one I choose, as far as I can see) is far more comfortable with risk than I am! Maybe another bank or the government would step in and take over the failed bank's debts to savers... but, as far as I am aware, I have no such assurance. If the real risk of debt is reassessed, there would be no commercial reason to want to take on the obligations of an insolvent bank. Footnote 1 I was discussing this with a German friend – who rents and saves. In Germany he says that the best interest rate on savings is 3.6% - whereas in Britain the best rate is about 6%. He says he'd like to transfer all his savings to his British account (he used to live here) but the retail costs of transferring funds (from Euros to Sterling and back again) costs about 5% - which eliminates the advantage to him as an individual. Something I find _very_ weird is that British savings accounts are being offered with rates of interest above the Bank of England base rate... this suggests to me that there are financial companies in desperate need of deposits... which, to be honest, is rather worrying in itself. Almost finally... sorry to repeat this – I'd really love any help anyone can offer in explanation... I asked: “I would _really_ like a definitive statement about what meaningful changes “Money Market Reform” actually entails that prevent continuity of statistical data from the bank[Bank of England]. Can anyone else find any material on this?” BTW - I am not a banker... but I'm reading about banking and consider economic theory my amateur pursuit of the moment. I would love criticism of anything I've written by anyone qualified (or unqualified - I'm not proud. :-) )

bankenstein

Activist

Posts:105

02/07/2007 2:35 AM	Alert
Reply to Asteve First, thanks for several informative and intelligent posts on this and other threads. A few points arising from your last post on derivatives etc. General members of the public can go short using either CFDs (Contracts For Difference) or spread betting. There are several reputable providers of these services, for example IGIndex and CMC Markets. I believe that the government guarentees 90% of the first 30,000 pounds deposited at any high street bank or building society, though I might be out of date on this. Moral: if you are fortunate enough to have large cash savings then spread the money around in amounts not exceeding 30,000 pounds in any one institution. Alternatively, buy NS&I index-linked savings certificates, which, unlike index-linked gilts, have a built-in insurance against deflation - they cannot decrease in accrued value. Lastly, don´t forget good old physical gold. Krugerrands or sovereigns should always buy you a bag of flour!

Asteve

Activist

Posts:930

02/07/2007 3:31 AM	Alert
At the risk of falling into the trap of mutually back-patting, Bankenstein, there was some very interesting information there. I was aware of the concept of “Spread Betting” – though I’d mainly dismissed it (on account of the name) as “gambling” - i.e. a zero sum game with costs. I’d never heard of CFDs – but I will be investigating that to expand my general knowledge. I maintain that these “investments” are far less accessible to the public than savings accounts, pensions, ISAs etc… There is a significant barrier of entry that would dissuade most members of the public from involvement. I am very interested to discover more about exactly what government guarantees these days about deposits. Does it matter if it is instant access or term deposit? Would it make any difference what rate of interest is paid on the account? I’d definitely like to know what the actual limit is… is £30K set in stone, or does it alter each year? Where would I find out more? NS&I is also interesting. I note that they’ve been advertised on the TV recently… I thought it a _very_ weird advert. Can you pass comment on why they paid Alan Sugar’s favourite charity for him to tell us all to buy NS&I? I cynically wondered if it was because we’d all think him selfish and greedy – so do the opposite of anything he recommends… remembering, as we do, his past “bargain” low-quality products that fleeced the average-Joe to build his fortunes. Finally, on gold, I have to admit, this commodity confuses me. Gold used to be valuable hundreds of years ago because it could be used to make watches and fill teeth… and, as it is difficult to find, it started off valuable. Then its value arose became its worth as a currency – not for any intrinsic purpose. Then, after the abolition of the gold standard, it was sold as jewellery – because it was seen as being flashy (because, historically, gold was all kept in vaults.) Today, I can find absolutely no purpose for gold – so, I’m bemused why it is still valuable. Just like for natural diamonds, the value seems utterly subjective. If our economy crashed, I wonder, would anyone care to be paid in gold? I doubt it... or, are there enough people out there who are so dazzled by its shine they would exchange useful commodities for it?

Bankula

Concerned Citizen

Posts:35

02/07/2007 4:08 AM	Alert
Gold just fits the bill of an investable item: * It's liquid, readily saleable * Compact, £100k of baked beans would need a warehouse * Non-degenerative. i.e. those baked beans will go off * Of a form resistant against devaluation by changes in the supply. i.e. permanent rarity, as in gold, diamonds, or with transient rarity requiring a significant lead time. New copper/uranium mines taking some time to come on line etc. Anything fitting these criteria would be a contender for invesment. Legal rights to things, such as futures, are also attractive. Soft commodities appeal to me at the moment but I am looking for alternatives. Gold is also useful just in case Mr Brown has a wealth tax raid when there's no more scope for conventional taxation. But to do this you have to hold it yourself and who would you trust to sell the genuine item? Could you trust any buyer not to switch coins? Would the buyer be who they say they are, or an agent of the crown? "Is this declared, sir?" It's not for me but it not hard to see why the bad boys like their gold!

Asteve

Activist

Posts:930

02/07/2007 4:19 AM	Alert
Bankula says "It's liquid, readily saleable" - and that I can't deny. What I'd like to know is "Why?" It makes no sense to me that it should be saleable, since it is not especially useful in todays' world. BTW - I'm far more interested to establish the extent to which the government underwrite savings.... :-)

Bankula

Concerned Citizen

Posts:35

02/07/2007 4:32 AM	Alert
For no other reason than rarity and that the values we place on things are nothing more than agreements between ourselves of a value. Hence the 'promise' in our currency notes. There is agreement between many people about the value of houses yet as our head banker said, that's just a matter of opinion. These values are way above the value of the constituent bricks. It's easier to see in barter. A cabbage may be worth 10 carrots in one particular harvest; but to assign a monetary value. Well that's just our agreed opinion, no?

Magrathea

Activist

Posts:435

02/07/2007 6:17 AM	Alert
Bankenstein wrote: “Yes, I can write my own IOUs and sell them to whomever. I am the borrower and the purchaser of my IOU is the lender. This is straightforward person to person lending on which we seem to agree. If the IOU holder comes and demands that I redeem the IOU immediately, when I have spent the money that I took for it, then I am in trouble. The bailiffs can be called.” You are missing the point that the sale of the IOU is made over time I sell you an IOU and you pay me for it over time..(say 25 years) During the mean whilst, that IOU may come to my door and I have to pay This means that I have opened myself up to a risk, that I may not be able to reimburse the iou or that you may fail to pay me. Bankenstein wrote: “If I buy a bank’s IOU then I am the lender and the bank is the borrower.” It’s quite arguable that that is the case if you pay for the loan immediately; so what? most bank loans don’t work out that way. “Money directly represents purchasing power, through which it indirectly represents wealth. Ideally, and as I think we would agree, the money supply should be maintained in direct proportion to wealth, thereby negating both general inflation and deflation. Increasing real wealth does indeed tend to increase the money supply, but the relationship is not directly causal and is seldom in proportion. Hence inflation and (less often) deflation.” Here is really why it all goes horribly wrong - Loans are taken out by people who feel they can repay and large loans tend to be taken out by people who feel they can increase their efficiency sufficiently to make the entire arrangement of profitable to them “I know I must pay interest on this loan, but I can increase my profits sufficiently, With the loan, to offset those payments and make this a winner for me.” If loans are made in response to the possibility of increased production (as above) then there is little problem. The problem is, one of the ways people can make a loan worthwhile to them is through the holding of rising real estate prices. The thing is, the act of holding real estate does not encourage the new production warranted by the loan taken out to hold it. In fact it does the opposite by increasing people’s costs it discourages production. So of instead of many of the loans taken out being used to create or encourage new production they are instead being used to simply ring-fence the already available production off other people using the holding of real estate. This is problematical because the new production needed to repay these massive loans is not created in the exchange of real estate; in fact, the rally in real estate prices makes production more and more difficult and ‘investing’ in real estate more and more attractive, it also, of course, pushes up people’s borrowing requirement. Of course, a point is reached when it becomes obvious that the loans cannot be repaid and the economy fails.

MikeB

First Timer

Posts:18

03/07/2007 12:51 PM	Alert
Forum members may find the following couple of documents of interest: http://www.newmatilda.com/policytoolkit/policydetail.asp?policyID=463 http://landru.i-link-2.net/monques/MMM.pdf

REI

Activist

Posts:413

04/07/2007 4:15 AM	Alert
bankenstein & Money Reformer are largely correct when they make the case that money is created without real assets backing the money. Money out of air. A multiple of the reserves on deposit, etc. Lets assume for a second that few people understand this. What does any of the above have to do with house prices? The reserve system is not new. When house prices were at the most affordable point in 1996 we had the same system. When the market was crashing in 1989-1992 we had the same system. The reserve system has existed through most of the time that people point to when they say houses used to be affordable, that their parent or grandparents could afford to get on the ladder, etc. Housing affordability seems to be a rather recent issue. People talk about the lost generation of FTBs which implies we are talking about 1 generation; maybe 5-10 years. How did people become priced out based on the fractional reserve system? Suggestions that we need to reform a system that we have used successfully for decades just to help a generation get on the housing ladder feels very heavy handed. I enjoy the discussions on how money is created. I just do not see much mileage coming out of the discussions if people want to address housing affordability.

Money Reformer

First Timer

Posts:13

04/07/2007 1:25 PM	Alert
Dear REI, The money creation process impacts upon house prices in much the same way that someone smacking you in the face causes your nose to bleed. It is direct, immmediate and very, very painful. Contact me on info@moneyreformparty.org.uk or 01227 751724, give me a postal address and I will send you a FREE copy of the DVD Money As Debt. The reason why mortgages were lower before the mid-1980s is that before period banks did not lend for mortgages in a big way. They left it to the mutual building societies who could not create money. So the amount of money in the housing market was limited to the amount of collective savings. In the past 20 years, banks have steadily pushed more and more money into the housing market when they create it as mortgages! That is about as direct, immediate and painful as it can get! Love and kisses, Anne Belsey

REI

Activist

Posts:413

05/07/2007 5:14 AM	Alert
Posted By Money Reformer on 07/04/2007 1:25 PM The reason why mortgages were lower before the mid-1980s is that before period banks did not lend for mortgages in a big way. They left it to the mutual building societies who could not create money. So the amount of money in the housing market was limited to the amount of collective savings. In the past 20 years, banks have steadily pushed more and more money into the housing market when they create it as mortgages! That is about as direct, immediate and painful as it can get! Love and kisses, Anne Belsey Anne, I have seen the YouTube version of the DVD. I mentioned that earlier on this site if not this thread. Thanks for the offer. For the group, explain how a mortgge from a bank creates money and a mortgage from a building society does not create money. Are you saying that building societies have a 100% reserve requirement?

Magrathea

Activist

Posts:435

05/07/2007 1:30 PM	Alert
Rei wrote: "What does any of the above have to do with house prices? The reserve system is not new. When house prices were at the most affordable point in 1996 we had the same system. When the market was crashing in 1989-1992 we had the same system. The reserve system has existed through most of the time that people point to when they say houses used to be affordable, that their parent or grandparents could afford to get on the ladder, etc. Housing affordability seems to be a rather recent issue. People talk about the lost generation of FTBs which implies we are talking about 1 generation; maybe 5-10 years." Well observed. I would add, though, that real estate has in fact, more or less, been a problem since it's inception. Restricting the money supply will leave real estate speculation to 'professional' speculators' and confine a larger portion of the population to renting. Will it make houses more affordable to working people? Not a lot.

Money Reformer

First Timer

Posts:13

06/07/2007 2:44 PM	Alert
Regarding REI's question about the difference between bank and building society mortgages, the slick answer is that 'traditional' mutual building societies lend money, whereas banks grant credit. To lend money one has to have the money. To grant credit (i.e. a promise to pay money) one does not actually have to have any money, merely the reputation that you will redeem your promise. This is made all the more easy for the banks because most people nowadays keep most of their money in a bank account. (Even if you save with a traditional building society or credit union, they place their deposits with a bank.) So when Mr Smith gets a mortgage from bank A, he pays a cheque (or bank transfer) to the vendor's account with bank B. Bank A now owes bank B the amount of the mortgage, but with millions of transactions every day, there will doubless be those wherein bank B owes money to bank A. All this is sorted by the bank clearing system each working day. Banks do not need much money provided that they each agree to process each other's demands for payment. Traditional building societies are not part of this system. Like the rest of us, they have bank accounts and can only lend what's in them.

SquatNow

Activist

Posts:504

06/07/2007 4:11 PM	Alert
The "private banks create money" argument is quite funny, but I've got bored of trying to explain why they don't. To be honest it's irrelevant, the problem isn't money supply it's the fact that the government has been deliberately pushing up house prices to line the pockets of land speculators and delay a recession until after they leave office.

SquatNow - Web site now ready! www.squatnow.com Promoting Social Squatting

Bankula

Concerned Citizen

Posts:35

07/07/2007 5:33 AM	Alert
The "private banks create money" argument is quite funny, but I've got bored of trying to explain why they don't. I have seen your assertions on the subject but no reasoning on this issue. How do you regard then issue of credit and its ‘Mn’ monitoring? I don’t think it’s fair to say that the money supply is somehow inviolate and compare it with energy, for effect. To be honest it's irrelevant, the problem isn't money supply it's the fact that the government has been deliberately pushing up house prices to line the pockets of land speculators and delay a recession until after they leave office. Well that's a bit of a conspiracy theory and the availability of credit/liquidity is far from irrelevant. I am sure that I am no more in favour of high house prices than you but to suggest that the government is deliberately favouring present landlords and damning the future of those outside the market … why would they do that? After all, it is they that will have to foot the bill though the housing welfare system during periods of need and throughout retirement should the general population NOT be able to afford owner occupation. I would rather believe that the government under Blair has been fecklessly unaware of the consequences of ignoring a growing problem.

bankenstein

Activist

Posts:105

07/07/2007 10:08 AM	Alert
Now that Bankula has mentioned conspiracy theories, does anyone have an informed opinion of any of the following? All involve the banking system. a) The Protocols (of the Elders) of Zion. b) The Report from Iron Mountain. c) None Dare Call It Conspiracy by Gary Allen. Hoaxes? Paranoid delusions? Scary realities? (Google them if they are new to you. Also consult Wikipedia.)

unclealbert

Activist

Posts:442

08/07/2007 4:30 AM	Alert
Hi bankenstein, (a) rings a bell (Mr. Icke wrote a book about that sort of stuff, quite an interesting read?) Did you know Princess Diana was a sacrifice and the Q of E is a reptile?

bankenstein

Activist

Posts:105

08/07/2007 11:00 AM	Alert
Hi unclealbert, Please note that my post requested informed opinion. I share your evident skepticism about conspiracy theories in general. However, I am prepared to adopt a critical Popperian approach to apparently plausible and well-sourced material in my attempts to understand this crazy world. I hope that you agree that we should not trivialize our discussions. For the record I do not regard David Icke as a reliable source of information.

SquatNow

Activist

Posts:504

08/07/2007 4:03 PM	Alert
...but to suggest that the government is deliberately favouring present landlords and damning the future of those outside the market … why would they do that? After all, it is they that will have to foot the bill though the housing welfare system during periods of need and throughout retirement should the general population NOT be able to afford owner occupation. lol... no they wont that's the NEXT government. The current government will be retired and living off the rent of the portfolio of houses they bought during the ceaper times with their bloated MPs salary! Come-on guys, this isn't rocket science. At least produce valid arguments!

SquatNow - Web site now ready! www.squatnow.com Promoting Social Squatting

Bankula

Concerned Citizen

Posts:35

09/07/2007 1:34 AM	Alert
I think this thread has now been too diluted with noise. Perhaps Bankenstein can restart a 'money as debt #2' topic, hopefully with more focus on the issue of money expansion, fr etc? Squat, your have fallen into a hole of conspirational thought and I don't think that helps present your case or broaden your own view, though it clearly broadens the exposure of your signature tagline, which is possibly the aim! There are no certainties in politics or economics but we can be reasonably sure that in a democracy successive governments will be unable to sit by while an ever growing mass of voters are denied secure housing, especially by groups of large landlords or which few would care how they are regulated. The govenment can and almost certainly will, since they have done so before, introduce tenancy regulation and force liquidation of property. Quite apart from the social requirement to legislate in this field the economics alone will dictate action in efforts to curb a disturbingly growing housing welfare budget.

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