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Post by unlawflcombatnt on Jul 12, 2007 19:16:16 GMT -6
Here's a link to an interesting, 47 minute video on how banks create money. As described in the 1st few minutes of the video, most money is created by banks and other financial institutions through loans, not by the Treasury Department's printing press. video.google.com/videoplay?docid=-9050474362583451279
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Post by jeffolie on Jul 13, 2007 15:36:56 GMT -6
The first 60% of video is good. The authors use communist Teolstoy as part of the solution. Using 'value' as the new exchange of money is totally unrealist as value is not objective.
The video totally ignores the money as derivatives. Money as debt is only 15% of liquidity whereas derivatives as money is at least 85% of liquidity.
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Post by unlawflcombatnt on Jul 13, 2007 17:13:26 GMT -6
I think the main point of the video is to show how banks create money from loans, and how the bank multiplier and fractional reserve system works.
Derivatives are well beyond the scope of the video.
I'd really welcome someone's posting of a good explanation on how derivatives work.
It would add a lot to this section.
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Post by jeffolie on Jul 13, 2007 17:48:05 GMT -6
The term derivatives can be vague. Futures, options are derivatives. Essentially a derivative bets on the movement in price of something concrete or conceptual. It can be a bet on who gets nominated for the Democrats, on if the S&P 500 goes up or down, on a series of bonds will pay off as promised, and a bet on the volativity of an index. The key is in the leverage and the ability of the counterparty to make payment as the losing bettor. There are derivative about derivatives.
Most derivatives are opaque which is a financial term meaning nobody knows what the price of the derivative is. Most derivatives are not even traded on stock exchanges, or for that matter on any exchange at all. They are marked to models that can be agreed upon but are not always agreed upon by derivatives dealers. Each party sometimes believes it is profitable at the same time which is obviously impossible. But each party may declare it has this profit as an asset which it can use as collateral to borrow or lend upon.
No one regulates derivatives (except OTC traded derivatives). It is the wild, wild world that hundred of Trillions are bet across the globe arranged by dealer making huge fees. Warren Buffett calls them 'weapons of mass financial destruction'. As a simple example, Orange County, California went bankrupt investing in very complex derivatives regarding the movement of certain interest rates after it made 20+% profit for 4 years straight.
Hedge funds love derivatives because of the fee structure that makes the hedge fund managers hugely rich. Some hedge fund managers make $Billion per year. The manager gets to keep 2% of the assets undermangement AND 20% of the profits while risking nothing personally. All the risk goes to the hedge fund investors.
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Post by jeffolie on Jul 13, 2007 18:32:17 GMT -6
There are, however, a number of investors - for example, central banks and pension funds - that rely only on the rating agencies for their information. Thus they fail to act when the markets start moving, and are forced to act when the rating agencies admit that the quality of the bond is actually lower than was previously thought. These investors are called "hogs" in the market - they are fattened up and then slaughtered. Of course, it is also important to note a perverse incentive structure that exists in all this. Employees of investment banks are among the best paid in the world, with specialists in fast-growing areas such as derivatives commanding seven- and eight-figure (US dollar) annual salaries. www.atimes.com/atimes/Global_Economy/IG14Dj01.html
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Post by unlawflcombatnt on Jul 13, 2007 20:37:49 GMT -6
Thanks for the explanation. I think the key point is
Derivative holders can use the "model-created" wealth as collateral to borrow or lend more money. So they can use this artificially created money to "create" still more money through loans.
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