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 Some of THE best reporting on the current economic crisisModerators: Moderators Jump to page : 1 Now viewing page 1 [25 messages per page] | View previous thread :: View next thread |
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GreenJello |
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| belle vie |
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Veteran Posts: 168   | I thought you might like this. It explained it all over 50 years ago, and in only one page. Will we ever learn  First published in "Punch" on April 3, 1957: Q: What are banks for? A: To make money. Q: For the customers? A: For the banks. Q: Why doesn't bank advertising mention this? A: It would not be in good taste. But it is mentioned by implication in references to reserves of $249,000,000,000 or thereabouts. That is the money they have made. Q: Out of the customers? A: I suppose so. Q: They also mention Assets of $500,000,000,000 or thereabouts. Have they made that too? A: Not exactly. That is the money they use to make money. Q: I see. And they keep it in a safe somewhere? A: Not at all. They lend it to customers. Q: Then they haven't got it? A: No. Q: Then how is it Assets? A: They maintain that it would be if they got it back. Q: But they must have some money in a safe somewhere? A: Yes, usually $500,000,000,000 or thereabouts. This is called Liabilities. Q: But if they've got it, how can they be liable for it? A: Because it isn't theirs. Q: Then why do they have it? A: It has been lent to them by customers. Q: You mean customers lend banks money? A: In effect. They put money into their accounts, so it is really lent to the banks. Q: And what do the banks do with it? A: Lend it to other customers. Q: But you said that money they lent to other people was Assets? A: Yes. Q: Then Assets and Liabilities must be the same thing? A: You can't really say that. Q: But you've just said it! If I put $100 into my account the bank is liable to have to pay it back, so it's Liabilities. But they go and lend it to someone else, and he is liable to have to pay it back, so it's Assets. It's the same $100 isn't it? A: Yes, but.... Q: Then it cancels out. It means, doesn't it, that banks haven't really any money at all? A: Theoretically...... Q: Never mind theoretically! And if they haven't any money, where do they get their Reserves of $249,000,000,000 or thereabouts?? A: I told you. That is the money they have made. Q: How? A: Well, when they lend your $100 to someone they charge him interest. Q: How much? A: It depends on the Bank Rate. Say five and a-half percent. That's their profit. Q: Why isn't it my profit? Isn't it my money? A: It's the theory of banking practice that......... Q: When I lend them my $100 why don't I charge them interest? A: You do. Q: You don't say. How much? A: It depends on the Bank Rate. Say a half percent. Q: Grasping of me, rather? A: But that's only if you're not going to draw the money out again. Q: But of course I'm going to draw the money out again! If I hadn't wanted to draw it out again I could have buried it in the garden! A: They wouldn't like you to draw it out again. Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be glad if I reduced their Liabilities by removing it? A: No. Because if you remove it they can't lend it to anyone else. Q: But if I wanted to remove it they'd have to let me? A: Certainly. Q: But suppose they've already lent it to another customer? A: Then they'll let you have some other custome's money. Q: But suppose he wants his too....and they've already let me have it? A: You're being purposely obtuse. Q: I think I'm being acute. What if everyone wanted their money all at once? A: It's the theory of banking practice that they never would. Q: So what banks bank on, is not having to meet their commitments? A: I wouldn't say that. Q: Naturally. Well, if there's nothing else you think you can tell me....? A: Quite so. Now you can go off and open a banking account! Q: Just one last question. A: Of course. Q: Wouldn't I do better to go off and open up a bank? ------------------------------------------------------ | ||
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| GreenJello |
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| belle vie |
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Veteran Posts: 168 | |||
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| belle vie |
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Veteran Posts: 168 | Hello Greenjello and Jim As for Abbot and Costello, were that the situation was as funny  Instead, these bankers and others seem to act like those two comics but we literally now do not know "who's on first" in this economic disaster. Right on Jim about Marie Antoinette. But somehow, I don't feel, personally, that someone similar to a modern Paris Hilton had many deep feelings about the less fortunate. Did you see Sofia Coppola'a film on the subject? It got mixed reviews here sometimes because the French were not too pleased with a rock version of the sacred Marie. I did not see it particularly because I do not like pink macarons supposedly created for her. | ||
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| Arun |
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| Hi everyone, Just came across this little story on economic 'bubbles' that I'd like to share: ------------------------------------------------------------------------------------------------------------------------------- Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around. 1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar. 2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar. * The net asset of the country now = 3 dollars. 3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars. *A has a loan to C of 1 dollar, so his net asset is 1 dollar. * B sold his land and got 2 dollars, so his net asset is 2 dollars. * C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar. * Thus, the net asset of the country = 4 dollars. 4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar. * B loaned 2 dollars to A. So his net asset is 2 dollars. * C now has the 2 coins. His net asset is also 2 dollars. * The net asset of the country = 5 dollars. A bubble is building up. (5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A. * As a result, A has got his debt cleared and he got the 2 coins.. His net asset is 2 dollars. * B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.. * C loaned 2 dollars to B, so his net asset is 2 dollars. * The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation. (6) Everybody has made money and everybody felt happy and prosperous. (7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more." ( A also thought the same way. (9) Nobody wanted to buy land anymore. * So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars. * B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar. * C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating. * The net asset of the country = 3 dollars again. (10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper.. B's net asset is still 2 dollars, his heart is palpitating. (11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now. * A owns the 2 coins, his net asset is 2 dollars. * B is bankrupt, his net asset is 0 dollar.. (He lost everything) * C got no choice but end up with a land worth only 1 dollar * The net asset of the country = 3 dollars. ************ **End of the story; BUT ************ ********* ****** There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared. A few points worth noting - (1) When a bubble is building up, the debt of individuals to one another in a country is also building up. (2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss. (3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar. (4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt. (5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw. (6) When the bubble was in the growing phase, everybody made money.. (7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash. ( As in the case of land, the above phenomenon applies to stocks/Bullion/ Crude Futures as well. (9) The actual worth of land or stocks depend largely on psychology. | |||
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| GreenJello |
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| belle vie |
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Veteran Posts: 168 | It did not go any where since it did not exist--they say, but some pockets are deeply hidden. | ||
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| greengoddess808 |
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