Without a doubt, it all depends on when. Thanks for the comment.

- Jonny

The thing is that the US Banks are also backed by the US Government, thats the problem.

Banking systems have been around for a very long time and they play a key role in the overall money game definately and we can’t live without them these days. As you say though, it is about due diligence when picking a bank and this comes first and foremost from having a strong financial intelligence and understanding how the game is played.

Thanks for the comment man.

- Jonny

And although storing wealth in Gold or Silver is a very sensible idea, don’t discount banks completely. Remember banks have been around for a very long time – outlasting Governments, many recessions and a couple of depressions. Its about choice and doing due diligence on the bank and whats behind it.

My advice is just stay away from any U.S bank

In the UK not a single bank was sunk by bad credit decisioning. The worst losses from UK mortgages in the worst case economic scenarios resulted in losses of something like £100bn to all UK banks (according to stress tests and MLAR data) which simply wouldn’t have been enough to have the effect that running out of cash did.

Simplistically, banks lend money at say 4% and borrow it at 3.5%. The spread funds their admin costs. The trouble was that the US and UK (in fact almost everywhere except Germany) in the west wasn’t saving enough to meet the credit demands of those economies. So money was taken from other sources -Securitisation – in itself this isn’t the problem – after all, spreading the risk of lending across a broader base than simply one bank is unarguably a good idea. The problem was that the Ratings Agencies were so conflicted by their fee structures that they rated crappy pools of loans as good in exchange for continued mandates.

Second, big banks then used the approval of the ratings agency’s ratings to buy huge slugs of other banks’ originated debt which they didn’t understand or really do due diligence on. The principal/ agent problem meant that managers at the banks were remunerated for short term profits (which these pools offered because they were mostly sub prime mortgages on monstrous interest rates) rather than the long term existential risk that they posed to the financial system. Loads of people made a fortune from these loans.

The ultimate problem was therefore the breakdown of the relationship between the suppliers of capital to acquire the pools of loans, and those charged with managing their money, and the Ratings Agencies’ complicity being used to short- circuit the principle of caveat emptor.

You and I are both too young to remember credit rationing – but decades ago, when you wanted to buy a house in the UK, you had to go and see your bank manager, and he decided if you got a loan or not. The trouble was that he didn’t have that much money to lend, so hardly anyone got a mortgage.

If you’re happy to sacrifice the principle of a homeowning democratic society as a societal “good”, then chuck securitisation away. But no young person or person with any bad credit history will ever get a mortgage in the west again.

But if you’re coming down on securitisation for it’s own sake, then you need to also look at the far larger industry of re-insurance – I imagine the denizens of Bermuda and Zurich will take you to task then!

Don’t obfuscate with futures, IPOs and derivatives – they are symptoms, not the cause!!

Great to have a debate on the topic.

I would not necessarily say that basing the system on gold would be any better, after all, without the increased money supply through credit world society would not have been able to grow as quickly as it has. That being said, the fiat system we are in at the moment is grosly unfair and greed based on confidence and excessive monetary supply not backed up by anything of value is problematic.

Gold is not simply a traded commodity like money. There is a finite amount of it in supply, unlike money which can be increased in many ways. Other precious metals such as uranium can also be used as a storage medium for value but none are as easily assessable or in such large demand as gold.

What sunk banks WAS bad decisions as well as the greed of lenders and borrowers. In the ever quickening race to invent more creative money vehicles and ways of creating money from nothing we got excessive fractional reserve banking practices which leveraged money over 30 times and more, combined with sub prime morgatage scams where a big game of hot potato was played with d and e rated products cleverly disguised as “AAA” investments and then the whole derivatives markets which are an abomination. Couple this with futures, short selling, fixed IPO’s and insider trading and actually the whole monatary systems of which banking plays the biggest part is highly complex and highly corrupt.

Only one very small part of where banks make their money relies on fractional reserve banking or “people not taking all their money out at once”.

Feel free to get a discussion going and thanks for the comment.

You’re overview is a bit simplistic I’m afraid. For banks to make money they have to lend out more than they take in and they always have. It’s a business model which relies on trust and confidence – and sadly that is in short supply now because they have really abused the trust they were given.

What sunk banks in the UK wasn’t bad decisions, but a shortage of cash. Because Brits are such bad savers, UK banks were reliant on the international money markets for liquidity. Once these dried up (because crappy US loans were being used as collateral for complex products that no one understood, so confidence evaporated when no one knew who was holding the worst of the loans) lots of UK financial infrastructure became unstable.

Banking is risky, yes, because their business model relies on people not all taking their money out at once, but it should be sustainable. After all, the idea of capital reserves are that even with very large banks the proportionate size of your ball (!) grows with the size of the bank and most of the time, people don’t all need their money at once.

Argue that the ball should be bigger, or that the bank should be smaller so that it doesn’t represent a systemic risk, but don’t throw the banker out with the bathwater.

Otherwise, I love your work.