That Money-Thing Thread

[tacticslion]

Here's the discussion so far! You guys should delete the other stuff in that other thread!

In other news, Occupy Wall Street has broken money itself (http://www.theguardian.com/commentisfree/2013/nov/13/occupy-wall-st-debt-buying-heart-capitalism).

It turns out you can buy debt for 5% of its value, just like that. Why didn't everyone know that? It's clearly a loophole begging for abuse. If Alice loans Bob a dollar, Charlie can borrow the dollar from Bob to buy Bob's debt from Alice for 5 cents and then write the debt off; then they repeat this manouver 100 times, multiplying their money until Alice, Bob and Charlie each have a credit of $31.60. Or, like the Strike Debt group has done, you can raise 600 000 dollars and cancel debts worth 15 million dollars for 2 693 people.

The cracks are showing. The chains are breaking. We may free ourselves from the slavery of money in our lifetime.
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That's not really how it worked.

You're able to buy the debt for that low because it's coming from people who are likely not to be able to pay the debt off. The banks who own it want to make SOMETHING back for the money that they lost by loaning it to the person, so they unload the debt onto some other sucker for 5%, and the other person does what they will with the debt to try to make their money back (Or in the OWS case, forgive the debtors).

If Charlie could buy Bob's debt from Alice for so cheap, it's because the debt wasn't getting paid off, and you can bet that Alice is not going to loan Bob any more money.
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Clearly I'm not an economist. But I bet if Alice in this scenario was a bank she could set the terms for selling her loans more at her discretion if you see what I mean. The point is that moneylending is bullshit and when we start seeing through that I'm curious what's going to happen to the economy.

Meanwhile, I'm happy to report it seems my local newspaper has gotten in the spirit of reporting good news, or at least reporting them much more nicely than they could if they wanted to grab reader attention by the tried and true doctrine of negative spin. Today's headline says "386 children saved in child porn bust".
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No.

Okay, here's how it works.

You have a good job, and you want a house, so you go to the bank and take out a loan for 100,000 dollars, as you are currently making 5,000 a month, and the payments are ~1000 a month at 2.75% APR. You can totally afford this and will have your house paid off in about 10 yrs.

Awesome for everyone. The bank gets about 30 grand more than they lent you, you get a house, and at 5,000 a month that $1000 isn't a big thing.

However, five years down the road you've still got around 50k to pay off and your company just eliminated your position. You now end up working part time at a fast food place (after a year of unemployment), for a bit over minimum wage raking in about 600 a month. You refinance down to about $200 a month payments, and still miss those.

It's now going to take another 25 years to pay it back WITHOUT interest. With interest. . . well you're probably going to die first. Not only that, but you're missing payments left and right, and you're probably going to have to file for bankruptcy.

Your bank realizes this, notices that you're no longer living in your nice house, have had to sell your nice car, etc. You've got very little of worth.

They'd be lucky to get $2,500 out of you. So their solution is to try to sell your debt for anywhere from $2,500 to $5,000, and make it somebody else's problem. Maybe the people who buy it can get $5,100 out of you, maybe they break even, maybe they come up short. From the bank's perspective, they're probably coming up short (unless they forgive a large portion of your debt so they can refinance it down to an affordable amount and interest rate that ends with them making a profit, and there are companies that do just this).

Now, the reason a bank wouldn't just set the sale price at 5% and lend to another bank and back and forth?

Well, firstly, because that money didn't just appear out of nowhere. Banks can't print money, and the government isn't going to give them a bunch.

Here's what would ACTUALLY happen if they did that:

Bob is broke.
Alice has a dollar.
Charlie is broke.

Bob borrows a dollar from Alice. Charlie borrows a dollar from Bob, and buys Bob's debt from Alice for 5 cents.

Alice now has 5 cents, Charlie has 95 cents, Bob has nothing.

Alice then buys Charlie's debt for 5 cents.

Alice now has 0 cents, Charlie has 95 cents, and Bob has 5 cents.

Notice how no wealth was actually created?

Let's say Bob and Charlie are broke but Alice has $10.

Bob borrows a dollar from Alice, Charlie borrows a dollar from Bob and buys Bob's debt from Alice for 5 cents.

Charlie has 95 cents.
Bob is Broke.
Alice has $9.95.

Alice buy's charlie's debt and. . .

Charlie has 95 cents.
Bob has 5 cents.
Alice has $9.90

So they repeat the above, Alice -> Bob -> Charlie buys debt, and then Alice buys debt.

Charlie now has $1.90
Bob has 10 cents.
Alice has $8.00

Etc. etc. on into infinity.

Second, notice what is happening to Alice's money? It's disappearing.

A bank attempting to run with this would just result in the bank who had the most money losing money/profits. It'd be terrible business for them.

Thirdly, forgiving debt never, ever, creates a money surplus. You can't get a credit of 30 dollars, because you can only be forgiven for what you borrowed from someone else. The most you can get from forgiving a debt is breaking even.

Bob borrows a dollar from Alice, Charlie borrows the dollar from Bob, buys the debt and forgives it. . . That doesn't mean that Bob made a dollar. It just means that Bob no longer owes Alice (or Charlie) money.
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No shit you can't create money out of nothing but moving money around. The idea is to create the illusion of money, credibility, with which you can buy stuff that you can't actually afford. Which doesn't actually work in the long term. Which shows capitalism for the shortsighted fantasy it is. I know I'm not explaining myself very well but it's like we're speaking different languages here. How about we talk about what the Strike Debt group is doing that is news instead of the thing I made up.
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Money isn't an illusion, its a standardized unit of measurement for a bartering system.

Look get on minecraft, get the equivalent exchange mod, call the unit of measurment the dollar and you'll understand what money actually is.
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While I do like to call money an illusion, comparable for instance to meters, another unit of measurement that only works as long as we agree that it exists, this isn't a question of semantics. An illusion of money is an illusion of money. Pretending to be rich in order to scam people is a thing that happens.
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If a man trades 100grams of silver for 10grams of silver that has been worked into jewelry he has not been scammed. He has compensated the other person for the time and skill he applied to the material which has increased its value.

Banks work by trading currency for risk. Interest is determined by a very complex mathematical calculation that determines the percentage chance the lendee will fail to repay the debt. Compounded by the time the bank will be short that money

A simple example. If I loan you 100 dollars and there is a 90% chance you will pay me back than a repayment 110 is fair.

The Posts in the Good News Thread relevant to this discussion!

Enjoy!

[Magus]

Moneylending when regulated is fine. It's the fact that they had variable rate loans and mortgages with massive interest rates they they gave out to people they knew couldn't afford them, and then sold the toxic assets to other banks knowing they were toxic.

If the government were responsible, it wouldn't allow credit card companies to charge 23% interest, as it is utterly unreasonable. But the the government is comprised of enough incredibly irresponsible people that refuse to make laws regulating that it is allowed to occur.

Money isn't so much the illusion, the illusion is it has an intrinsic value. It's value is based on currency markets and the economy. The American dollar buys more than the Mexican peso because the currency market says so (plus the gigantic difference in GDP, of course). Saying money itself is an illusion is far too simplistic, though.

[Aerozord]

Moneylending when regulated is fine. It's the fact that they had variable rate loans and mortgages with massive interest rates they they gave out to people they knew couldn't afford them, and then sold the toxic assets to other banks knowing they were toxic.

what kind of business sense does that make? Lets sabotage our own revenue stream and sell responsibility to other companies thus destroying our reputation for the sake of a slash and burn profit gain? Banks are by their nature long term business models based on profits they wont see for decades. Look I've personally spoken with venture capitalists, business consultants, and VPs of banks. Any business trying such tactics get black listed pretty fast, no one wants to do business with a lender that just backstabs its clients. In fact its one of the biggest problems where I live since about 50 years ago this is what caused my home towns economic collapse and it is still trying to get rid of that stigma in the business world

Now maybe you are saying they are stupid and would do it anyways, but then they run out of people willing to take those toxic assets and implode because they burned all their bridges.

I am admittedly assuming you aren't an affluent businessman with insider knowledge, but if you know a bank is doing this dont you think any bank, financial advisory, investor, consultant, or entrepreneur worth their salt knows it too and would avoid buying assets from said bank?

[Krylo]

Aero, they literally did it. It's a big part of why they all needed bailing out.

And they do it because the people making the money aren't going to be with the banks for decades.

[Aerozord]

I will need some elaboration on the specifics here, since from what I can gather mortage rates are the lowest they have ever been (http://www.freddiemac.com/pmms/pmms30.htm).

[Krylo]

You remember the huge economic collapse when a lot of banks were bailed out by the government a few years back?

A key component to that was deregulation of how bad a loan could be for banks to take it, and banks bundling bad loans together into packages, which made them look more profitable than they really were, and basically selling bad loans back and forth.

For awhile it made mad money, and the people who got out while they could basically made off like bandits, however when that fell through like it was always going to fall through, the actual banks themselves went to hell, and it took tons of government bailouts in 2008. The economy is still recovering.

[Magus]

What Krylo said. That was the main cause of the bottom falling out of the housing market, and the collapse of companies like Lehman Bros. Lehman Bros. owned literally tens of billions of dollars in toxic assets they had been sold by other mortgage-lending banks.

Speeches from people like Lloyd Blankfein since then show that they haven't learned their lesson, either.

[Loyal]

Do you guys have any particular sources/books you'd recommend for learning about this sort of thing? Google/Wikipedia are only taking me so far, but I suspect I may simply be asking the wrong questions.

[Magus]

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

The U.S. subprime mortgage crisis was a set of events and conditions that led to a financial crisis and subsequent recession that began in 2008. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. These mortgage-backed securities (MBS) and collateralized debt obligations (CDO) initially offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused massive defaults.[1] Several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.

http://en.wikipedia.org/wiki/Too_big_to_fail

http://en.wikipedia.org/wiki/Too_Big_to_Fail_%28book%29

[Azisien]

http://www.imdb.com/title/tt1645089/

Not sure what the documentary left out, but I was pretty angry by the end of the movie.

[Krylo]

mortage rates are the lowest they have ever been (http://www.freddiemac.com/pmms/pmms30.htm).

I'd also like to take a moment to respond to this directly, and point out that low mortgage rates are a symptom of an ailing economy. Mortgage rates get dropped when the economy is doing poorly to convince more people to take out mortgages.

This does two things: Firstly, it creates income for the banks in a time when they would otherwise get much less as people are less willing to take out loans when their finances are less secure.

Secondly, it puts liquid assets (that's cash monies, yo) in the hands of the middle and lower classes.

The reason the Federal Reserve doing that is important, is because when the lower/middle class have liquid assets they buy things. Cars, food, TVs, whatever they might need and/or want. In the process of doing this, those things need to be produced, transported, and sold.

This means that jobs are less likely to be cut from the industries people are buying from with their mortgages, and may even be created, which, in turn, injects more wealth/money into the system to circulate and helps to pull a country out of economic collapse.

It's also important to understand this because it demonstrates neatly why:

A: Trickle Down Economics are ridiculous. Not even the rich REALLY believe in it or they'd have no need to decrease mortgage rates in times of economic pain/recovery. It's something they sell to the people to justify their having such an obscene percentage of the country's wealth and never having it taken from them to pay for public works or social care systems.

B: Why money lending itself is important. It's not that it's an evil practice. In fact, money lending is incredibly useful to our economy and society, and, when used for good, can do a lot to aid both. It's the lack of oversight that allows banks to get too big to fail and the greedy people at the top of most (if not all) of them.

[tacticslion]

In the Bible, at least, I find it interesting that Usury was strictly forbidden. In general, now - unless economic necessity demands otherwise - it seems to be the "standard" thing for lenders of all stripes.

(Not all, just standard.)

[Magus]

Well usury in Biblical terms was charging any interest, from what I understand, or at least that's how it was interpreted through the Middle Ages. I think it probably wasn't a correct interpretation because Jewish lenders charged interest (which was a small part of the reason for anti-Jewish sentiment during that time period, although obviously xenophobia was the main component).

They still call stuff like loansharking (charging exorbitant interest) usury in various laws of the U.S.

UNLESS you're a bank or credit card company charging 30% or something. Then it's suddenly okay.

On the other hand loansharks charge like 200% after like a month or something and also break your legs.

[tacticslion]

Well usury in Biblical terms was charging any interest, from what I understand, or at least that's how it was interpreted through the Middle Ages. I think it probably wasn't a correct interpretation because Jewish lenders charged interest (which was a small part of the reason for anti-Jewish sentiment during that time period, although obviously xenophobia was the main component).

They still call stuff like loansharking (charging exorbitant interest) usury in various laws of the U.S.

UNLESS you're a bank or credit card company charging 30% or something. Then it's suddenly okay.

On the other hand loansharks charge like 200% after like a month or something and also break your legs.

In every class I've ever taken, it's always been, "excessive or unjust" interest rather than "any interest whatsoever", though Wikipedia (http://en.wikipedia.org/wiki/Usury) notes that certain groups take it the way you explained above.

Of course, Wikipedia (http://en.wikipedia.org/wiki/Loans_and_interest_in_Judaism) actually has an interesting article that mostly leans toward the "no interest at all" interpretation (and a really interesting article, besides).

In any event, loansharking is bad. :)