I remember a lot of hype in the dot-com era around that
"In 2001, Flooz.com was notified by the Federal Bureau of Investigation that a Russian-Filipino organized crime syndicate used $300,000 worth of Flooz and stolen credit card numbers as part of a money-laundering scheme, in which stolen credit cards were used to purchase currency and then redeemed.[2][3] Levitan has stated that fraudulent purchases accounted for 19% of consumer credit card transactions by mid-2001."
CDO-squared (CDOs of CDOs) were a problem. If you took those 60 dog-shit loans, mixed them together, and created 10 high quality loans out of them, problems began to occur.
Even then, it wasn't the CDO-squared that collapsed the whole thing. It was the CDS: the "insurance" (so to speak) on the CDO-squared that made things go haywire.
Go through enough layers and you eventually hit an insurer that has zero chance of being able to cover all of the losses of everyone. It could be CDS of CDOs of CDOs, or coins being backed by other coins.
Thankfully the average person is less affected by crypto losses than mortgages, or in the case of the depression, stocks.
The number of big-name banks whose actions are questionable [1] - if not actually criminal - is astonishing.
[1] As reported by insider papers like the Financial Times.
I remember a guy bragging about helping another firm backdate its books to get bail out money. He was bragging. Still remember his name and how he got his pill head daughter a Cush company paid job in London.
In hindsight, it should have been structured like government insurance servicers: subject to random and regular audits, with $$$ fines if they turn up anything fishy.
If you don't want corruption, engineer a system where not being corrupt is more profitable...
Don't forget through all of that madness Moody's was rating utter crap as AAA
https://en.m.wikipedia.org/wiki/Credit_rating_agencies_and_t...
The truly pernicious part is the self-financing spiral. Banks issued mortgages, which deposit cash in the home seller's account. Seller puts the cash into a money market fund. MMF gets short-term interest by financing AAA-rated securities. EU banks use this financing to buy senior tranches of MBSes. These MBS purchases allow banks to issue more mortgages by freeing up their capitalization.
Like, zero-sum alchemy will only generate small frauds and relatively limited losses. You need large amounts of leverage and some kind of self-financing spiral to generate catastrophic de-leveraging events.
https://www.cnbc.com/id/25195425
It's amazing how the government somehow managed to successfully pin all the blame on corporations for problems it helped cause. From wikipedia: https://en.wikipedia.org/wiki/Subprime_mortgage_crisis
"Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities."
Of course, it was the government itself that pressured banks to make these loans in the first place. From https://www.appeal-democrat.com/thomas-sowell-government-cre...
"All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money."
Financial firms has been making tons of money during decades of increasing wealth inequality. Sure, let's talk about these congressional acts, but not going to put a lot of blame on relatively small programs that required these firms to throw back some scraps.
https://www.investopedia.com/articles/economics/09/financial...
"The seeds of the financial crisis were planted during years of rock-bottom interest rates and loose lending standards that fueled a housing price bubble in the U.S. and elsewhere.
It began, as usual, with good intentions. Faced with the bursting of the dot-com bubble, a series of corporate accounting scandals, and the September 11 terrorist attacks, the Federal Reserve lowered the federal funds rate from 6.5% in May 2000 to 1% in June 2003. 4 5 The aim was to boost the economy by making money available to businesses and consumers at bargain rates. e result was an upward spiral in home prices as borrowers took advantage of the low mortgage rates. 6
Even subprime borrowers, those with poor or no credit history, were able to realize the dream of buying a home. "
The repeated story of our government's behavior in the financial sector is:
1) act with supposedly good intentions
2) Mess everything up
3) Blame the mess on someone else and call for more government action to clean things up.
You should read "Wealth, Poverty, and Politics." It really is illuminating to learn at an academic level how wealth has been produced throughout history and some reasons why it is distributed unevenly.
https://www.amazon.com/Wealth-Poverty-Politics-Thomas-Sowell...
a: all property that has a money value or an exchangeable value
b: all material objects that have economic utility
I'm not sure what' you're talking about with regards to "ensuring" or "guarding" it. But in general, wealth is produced in various forms by people. That's generally the goal of work! Just as important, wealth decays over time. And, like with everything else in this universe, everything related to the production and maintenance of wealth is unevenly distributed, including:
1) Physical resources
2) knowledge and skills
3) cultural and moral values
4) geopolitical landscape
5) personality and personal productive capacity
6) social circumstances
7) dumb luck
Given that none of this is evenly distributed between individuals, groups, nations, etc., it's absurd to expect wealth to be evenly distributed, even in a hypothetically just world. In fact, based on what we know, we should expect differential wealth to be a simple and indisputable fact of life.
In a functioning economy, people earn money by creating value for others. This generally means that even as the rich get richer, so do the poor. It is hardly disputable that capitalism has done more to lift more people out of poverty than any other economic system. Also, because wealth decays, to maintain wealth one must invest it to produce more of it. It is through this investment that society can benefit as a whole.
The problems with wealth redistribution include:
1) By taking wealth from people who know generally able to best produce it, you reduce their ability to invest wealth to produce more of it. All of society suffers for this as overall wealth decreases for everyone.
2) When giving wealth to people who aren't producing anything, they take the wealth and spend it without creating any more wealth. Overall wealth decreases for everyone. It is hardly disputable that welfare programs in Western countries have led to far more dependence and far more able-bodied people not working than before these programs existed.
It is not an accident that wealth redistribution makes countries poorer, ultimately harming the poor that the redistribution is meant to help. We should be focusing less on wealth equity and more on wealth production and maintenance.
https://www.northwood.edu/afeu/when-free-to-choose/how-to-en...
One of the preconditions of the level of prosperity we experience today is government stability and essentially British or Western European laws and cultural and Christian values. As those things erode, prosperity decreases. And, there is a great threat of worldwide prosperity taking a nosedive on many fronts, including the global ESG movement, WEF great reset, socialist/communist/fascist/authoritarian government movements, etc. We are very fortunate to have experienced the overall wealth that we do today, and, unfortunately, it's probably only going to get worse from here the way things are going.
I’ve been beating this drum for more than 10 years. The big story of the financial crisis is that while there was fraud and corruption at the margins, the bulk of the economic dislocation was caused by well intentioned people making good faith decisions that in hindsight proved very foolish. People who had no business buying a home or taking out that loan were. Banks were making the loans not just because there was a global capital glut chasing returns, the credit tranching structures were working, and the ever rising house prices hid any risk. No one in the industry had seen house prices broadly go down in generations. In retrospect there were a number of systemic issues that now seem obvious, but having been there it wasn’t that obvious at the time.
I agree with that. But that comes about because we've arranged our economic activity into monolithic 'corporations' that are immortal, have the legal status of persons, and are compelled to chase shortsighted profit above all else, show no remorse, and any moral wrongdoing is just a slight financial risk to be approached like any other monetary risk.
All the humans working for the oil industry today are making good faith decisions but together they work for a massive unstoppable inhuman juggernaut that is destroying our climate while fighting every attempt to rein it in with every means possible at its disposal.
And yes I can call corporations greedy. They have demanded to be treated as people in the courts of law so I'll judge them as people
Capitalism is great, but it only works when founded on a strong moral framework. Christianity served that purpose for the history of capitalism. However, once you abandon or corrupt your morality, then you'll see the majority of corporations do evil things, no matter whether they claim to only care about profits, or whether they claim that they also want to save the environment and bring about equity, inclusivity, or whatever Marxist Utopian ideal is in vogue at the moment.
The public has been treating their Senators and Representatives like celebrities.
Electoral turnovers flush corruption; we really need to stop being ruled by pudding brains with no skin in the future game who LARP concern while doing nothing but living easy: https://www.nber.org/papers/w29766
And the government didn’t force banks to buy loans from originators who were known to fake documents, and then give them 120 LTV loans.
Money. They need some g/d m/fing money. Maybe they need it as arms-length loans on legitimately illiquid capital. Maybe they need underpriced loans for the risk of the business. Maybe they just need a giant dump of free cash.
But it’s money they need. To weasel it away as “liquidity” is to assume something you probably have no way of knowing until later.
It was particularly dubious in the case of FTX, whose assets were in popular cryptocurrencies, which are traded every millisecond. You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago! Just not at the price you need it to be.
“No, no, the fair market price is actually much higher, it’s just that there’s only one guy who would actually buy it all right now!” No. Stop. We already have a word for an asset that exactly one person wants to pay a positive price for: worthless (because they only have to outbid everyone else).
Sorry, /rant
In my case I deposited some USDC coins and have asked them to return said USDC coins but it seems no. I think theft is a more accurate term. As in we stole some customer funds to gamble with and having lost them need more funds to cover it up. Not really "liquidity".
If a bank holds short term debt, due in one week, but a customer is withdrawing funds now, the bank needs liquidity — they need dollars today, and all they have is dollars next week. If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money. There are many ways a financial company can fail, and lumping them all together as “money” loses all nuance and understanding.
If you agree with that, you're agreeing with my original comment, even and especially if you (correctly) believe that some problems are rightly called "liquidity crises".
As it turns out, FTX was not merely illiquid; no amount of time or low-interest loans would have coordinated the cash flows, and yet every apologist was happy to identify the core deficiency as one of "liquidity", rather than honestly say what they could reasonably have known, at the time, from their perspective: no money, with specifics to be filled in later.
>If a dealer owes a customer 500 BTC that they’re trying to withdraw today, they need liquid Bitcoins, not money.
Even granting the tenuous propositions that Bitcoin isn't a money nor could be purchased therewith, the right diagnosis still wouldn't be "they don't have enough liquidity", but rather "they don't have enough Bitcoin", since the former is specifically making a (bold, overconfident) assertion that the exchange is good for the money if only they could get a few loans. That assertion was false, and almost certainly lacked sufficient basis from its proponent even at the time.
this is extremely stupid. you can't just sell arbitrary amounts of coin without moving the market a ton and paying a fortune in slippage. they do need liquidity.
You can absolutely find a buyer instantly! At about the same price it traded for five minutes ago, actually scratch that, it even worse, it is that price MINUS SLIPPAGE! Just not at the price you need it to be.
> I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.
I suppose he was right ;)
https://www.bloomberg.com/news/articles/2022-04-25/sam-bankm...
And if they do, they must have equity value to back it up - aka, the bank's share holders lose value _first_ when shit hits the fan, before customer deposits. Then lastly, the gov't has put up guarantees on the deposits in case bank equity cannot cover customer deposits when shit hits the fan.
Crypto has none of the above - so basically, it is exactly what happened in the early days of the US financial system - i'm talking in the 1800's!
Let's hope all those celebrities who made adds got paid in real cash!
At this point it looks like Tom Brady is going to be playing football well into his 50s.
What FTX did is much worse. They spent their customer’s money on stupid shit like the Miami Heat stadium, political donations, and charity work (which was legitimately really good but not their choice to make), and then replenished their own coffers by making their own crypto out of nothing and assigning it to themselves. They essentially stole their customer’s money.
While there's a ton of nuance here, in the general case it doesn't work how you've implied.
When you take out a mortgage, the bank doesn't take a bunch of money other people have deposited. It's literally created out of thin air and marked as a liability on their balance sheet. This is how the majority of money is created in a fractional reserve banking system.
Nope. This is the toy model of money and banking taught in high school.
When a bank makes a loan, it creates money. The fact that there are stabilising deposits is a fortunate convenience. This is why leveraged finance is inherently unstable. The BoE had a good paper about this.
The bank must reach some level of capital requirement to make this loan. In other words, if the bank does not have enough reserves, they cannot make this loan.
The bank can use customer deposits as part of their reserves. They can also borrow from another bank (presumably, paying them interest). Lastly, i think central banks also have a reserve borrowing method (but not sure about this).
No, they don’t. We force them to through fiat. But credit isn’t created from money—credit is money. Left to their own devices, financial systems create as much credit as the market will bear, then the market shifts, money vanishes and voila, a panic.
"we force them through fiat", is just the same as "we force everybody to not murder and steal".
But - what stops banks from creating infinite money? There is a byzantine system of rules laid out by the Basel Accords and national regulators within that. That system limits the activities a bank can conduct, lays out rules for the way it must go about business it can conduct, and sets capital requirements.
There is nothing close to a full reserve and the system is not defined in those terms. Rather, there are ratios. If you have so many AAA rated treasuries posted with your central bank, then you can grow your balance sheet by X. But for B rated investments, you can only grow your balance sheet by Y. When a commercial bank issues a loan, it literally creates money.
The fact that a bank takes an illiquid asset - your promise to pay them back - and turns it into a liquid claim on themselves is not creating money out of "thin air". Your promise to pay the bank is not "thin air" as you will quickly find out if you break your promise.
I assume they would know.
Everyone always brings up the fact that banks create money out of thin air when issuing loans. Nobody ever mentions that the inverse happens again at the other side.
I'm not sure how much it's because everyone just parrots the factoid that "banks create money" without understanding it, or they are deliberately trying to mislead people into distrusting the banking system.
When a bank lends money to you, it's net neutral. A $100,000 mortgage creates a -$100,000 position on the bank's liabilities list and a $100,000 deposit in your bank account. They create $100K in new money to fund this loan collateralized by both the reserves on deposit at the bank and by the property which you purchased. As you repay that balance, the money that was created to fund your loan blinks out of existence. It is the constant origination of new loans and the constant repayment of old debt which defines the supply of money in the economy - which is why interest rates matter. Neat huh.
I would argue that your balance is both an asset and a liability as defined by your bank's reserve requirements. Your mortgage is net neutral to the bank except for the interest paid on it, which is an annuity of sorts with a net present value offset by the difference between projected recovery rates and your risk of default. The value there is itself created in the origination and underwriting process.
We'll I'll just ask two: Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fine, but the bank is creating money out of thin air, where does the cash come from if lots of people do the same?
Follow up: more realistically, I wire money to the seller, what actually happens between the banks? It seems like bank A creates money from nothing and sends it to bank B, what is stopping bank A from sending out an infinite amount of money to other banks?
the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it.
If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper.
> I wire money to the seller
Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks).
> what is stopping bank A from sending out an infinite amount of money to other banks?
The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).
I thought "reserve" literally meant to set aside part of your assets.
If I have to set aside, X% of the money I create, how does that stop me from creating infinite money? I just create enough to reserve part of it.
but you cannot create enough, because before you created, you did not have enough reserve to legally create the loan. The newly created loan cannot be part of the reserve to which you count towards your original reserve requirement to qualify to make the new loans!
otherwise, this would just be a loophole in the reserve requirement laws.
And these monies are not cash - they are loans. If these loans default, and the bank somehow cannot collect the collateral for it, the bank will lose equity. Aka, the shareholders of the bank takes the loss. If this loss is great enough, the bank becomes insolvent. That's why banks do not lend to risky people, or takes a larger collateral.
On a financial statement of a real, 120 year old bank on sec.gov, loans are in the asset section of the "Consolidated Statements of Condition". The deposits are in the liabilities section, and there are no negative numbers in either part.
>and a $100,000 deposit in your bank account.
Is that what happened the last time you applied for a mortgage?
Only the central bank can create money out of thin air.
To take a very simplistic example, let's say we start with an empty economy, no money anywhere. The central bank creates 100 out of thin air and buys something from an individual. That individual places the money as deposit with bank A. Now bank A has 100 deposit liabilities, and 100 cash (deposit at central bank).
Now another individual can borrow from bank A and place the money with bank B, so now bank A has a 100 deposit liability and 100 loan asset. Bank B has a 100 deposit liability and 100 cash asset (deposit at central bank). This is the money multipler, m2 = 300, 100 in bank A, 100 in bank B and 100 at central bank, whereas the central bank only has created 100 of m1. However bank A cannot make a new loan out of thin air, it doesn't have cash anymore. The capacity to make loans is with bank B, where the cash is.
It is not the case that banks can make loans with no consideration for their funding and liquidity position, just by creating two accounting entries, only the central bank can do that.
I wouldn't exactly call a residential mortgage a gamble.
Not the loan for my car either, the bank has first priority in both and demands I insurance them for the full value and for all eventualities.
The original comment that I answered is technically false if there exist a single mortgage that isn't a gamble.
Now, if only a single such mortgage existed you’d still have a point, but the fact is millions of loans are given and paid back every year without any complications at all: there is plenty of income and plenty of security for very many loans.
IIRC, what Lehman did was to deliberately trade in bundles of sub prime loans.
“There’s no risk here” is what causes financial crises and bank runs, which is the larger point.
It means the bank can be sure to recover their money and their costs.
That isn't a gamble.
If you loan someone money to buy a house, you are betting that either they will be able to pay or that the market will appreciate enough that all of the costs of foreclosure and resale will be less than the sale price of the house.
Both things being false at the same time in 2008 ruined Lehman brothers because they had the same thought you’re expressing here. Their gamble didn’t pay off.
During the subprime crisis, the entire US market went down by 30% and in some places sales basically halted for months. Many thousands of people lost homes, and almost all of them had equity on paper before the bubble popped.
Individual actions also matter. Maybe the reason you can’t pay your bank is because you developed a mental illness or drug problem, and they now need to replace a large amount of damage before anyone will pay what you paid.
Those aren’t constant high risks but they are why smart bankers calculate the odds and plan for what they’ll do when something inevitably goes wrong.
Just because the odds are currently in their favour, doesn't make it not a gamble.
Cryptocurrencies were meant to put an end to such things. Ironic how corporations ended up reinventing it all on top of crypto. Exchanges are everything that's wrong with this space.
Exchanges have provided the necessary convenience for mass adoption, providing a way to get your magic beans in exchange for real money without much hassle. Decentralized systems are inherently more complicated than centralized ones and have a harder time gaining traction in the general population (see Mastodon's adoption in the wake of Twitter's turmoil).
Crypto is Gentoo. Centralized exchanges are macOS. There's a reason about 10 people use Gentoo. Most people couldn't care less about recompiling their kernel by hand every 10 business days even if when you squint at it from across the room it could be better. They just want to use their computer. Ditto people wanting to etch their recovery phrase onto aluminum and hide it under their birdbath. Blaming the user will only get you so far.
> Cryptocurrencies were meant to put an end to such things.
There's a boatload of very good reasons they didn't and won't. I'm not saying they'll disappear, I've been around this space for like 7 years. I know better than to plant the flag. With that said, there's no reason more people will proportionally use crypto in real life - in the fullness of time - than use Gentoo in real life. What that translates to in price, who knows, and frankly who cares?
Yeah, well, Communism was meant to put an end to poverty and class injustice. Brexit was meant to restore glory to Britain. The Catholic Church was mean to put an end to vice. Things don't always do what they say on the tin.
As the Bible puts it: "For every tree is known by its own fruit".
Specifically, if the fruit seems consist of nothing but speculative bubbles and billion dollar frauds then that may be the true nature of the tree.
Exchanges are the space. Without them, there's no way for people to buy into the system with real money in the first place!
Exchanges are popular because it's easy, and also it allows you to trade _fast_. And then the exchanges figured out that they could be holding onto your cash and/or crypto, rather than, you know, actually be _just_ a location for which exchanges happen.
Of course there is: mining. It's a very simple proceds: fiat => energy => processor => cryptocurrency.
Yet another thing that failed. Everyone was supposed to be able to mine cryptocurrency using their own computers. Instead things got so competitive that massive centralized operations using specialized hardware became the norm.
Yup. Just yet another bank leveraging its fractional reserve. They just can't resist, can they? Actually I'm not even sure they're fractional in the case of cryptocurrency exchanges. Wouldn't be surprised if they were gambling with their entire reserves.
As usual, Levine put it best: “the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet” [1].
Before one is insolvent, illiquidity and insolvency are circular questions of asset value. After the fact, it shouldn’t take someone more than a few minutes to come to a conclusion. (There is a deeper discussion on the folly of accepting as collateral assets correlated with confidence in oneself. I recommend reading the article.)
[1] https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...