This seems like a good solution but it could also open a can of worms for politicians. What would happen to people's 401k savings? What about the real estate market?
long live deleveraging down to 3/1; banks ought to return to serve wealth creators in the real economy and the distinction made between wealth generation in the real economy and easy monetary gain from gambling and cheating on the money markets
Your plan could never fly because those banks that were not throwing caution to the wind during the housing run-up would be crushed by the competition from your pristine new banks. BAC and Citi certainly deserve to be crushed but there are a number of smaller banks that were behaving themselves. How would your plan distinguish one from the other?
But help those big banks such as Citi is almost the same thing. They help the big ones not to fall and to stay big. Sure both things are bad but I just wanted to point this out.
I have a better idea: we should sell off southern California, sell Hawaii, New Jersey, 1/2 of Florida (keep the keys), Illinois. Then we end Nafta and restart our manufacturing base. One industry we should start is a high tech fence.
I think the FED should buy gov't bonds instead this way increasing the money supply and generating inflation. The dollar would devalue, import would go down, export would go up, balance of payments would be fulfilled, jobs created. Lending to failing banks is indeed a waste of taxpayers money.
It is amazing how nonchalantly Sal mentions how banks can loan a new homeowner $200,000 to buy a home when the bank only has $20,000 on deposit and then charges 10% interest. The original consideration for the loan would be repaid in one year. The solution to the problem would be to outlaw that process by the bank and allow everyone to quash their loan if they repaid the 10% reserve. It all sounds like fraud to me and it would keep the FED from foreclosing on all mortgaged property in the US.
That doesnt make sense. In that scenario the bank gave away $180,000. You do realize to "lever" up the banks borrow money? Banks don't create money from thin air. Banks create loans that they exchange for future cash flows (mortgages, debt obligations...). Those cash flows are assets that the bank can sell or borrow against..
Sal pointed out that "$700 billion creates $7 trillion in new loans". Debt is created out of thin air which forces the debtor to find the money to pay it.
Its called leverage. There is something called a multiplier effect that allows the banks to lend the same dollar approx 8x. So they lend it create a security sell it o borrow against it, then lend it again. Investment banks dont have the ~8x restriction. He say's ~10x his but that is not accurate because commercial banks have to have 12% of the money that they have lent in reserves at the end of each day. For the multiplier that 12% is called M1 money and is regulated by the Federal Reserve.
Well, you did have quite substantial inflation, but that never made it to the headlines, because the official inflation indices have been gimmicked with since around the time of Ronnie Raygun, by - say - excluding food and energy (which have gone up, up, up...).
And, of course, as you point out, a lot of this newly minted money has gone into your current accounts deficit with China et al, who re-paid much of it to various third-world countries in exchange for resources to fuel China's industrialisation, which went to pay off dollar-debts to the IMF et al, which ultimately destroyed the money (by deleveraging the developing countries in question).
Sal, I have no financial educational background at all, but I immediately had the attitude before seeing your video, that the government should allow solvent banks to continue to run while allowing bankrupt banks to fall. I assume this is the idea of capitalism, sort of a survival of the fittest, where the bigger animal eats so to speak the weaker one. Is government trying to do this bailout for personal reasons or are they really not aware that this bailout isn't aimed in the right direction?
Bankruptcies are not cheap, something Conventional Capitalist Wisdom tends to ignore, or at least neglect. In particular, when dealing with insitutions whose main claim to generate value is their know-how, very expensive or even virtually irreplacable knowledge can get lost.
Of course, in the case of Wall Street, all economic considerations are probably trumped by the fact that many of these people paid fat bribes - sorry, generous campaign contributions - to a lot of highly placed people.
The reason banks are not loaning is because they have to many bad loans on the books. They need the Fed money to cover up deliquent construction and development, deliquent primary and secondary mortgages from stock holders and investors.
And lets not forget about the Redneck plan, otherwise known as the republican plan. It combines 8 years of ingenious economic policy of building up the leverage on an existing asset bubble in stocks. This time we allow banks to leverage to the hilt and off the balance sheet. We sprinkle fear on top of that and fabricate the idea that we can spend our way out of bubbles and recession. If it fails, we still collect some 40 odd% of the vote.
Now for the darker side: How about Japan, China & Taiwan who own 80+% US debt form a joint venture and take over the US. They then enslave all citizens and make them work back for their freedom and work back those houses the good ol' fashioned way for 5 years. The Investment bankers get 5 extra. This will reunite US citizens and reignite patriotism and the whole system gets purged of all the cholesterol that caused the stroke. Asia can then sell back America via an IPO. Everyone wins.
Sovereign default, massive devaluation and inflation (the latter two being possible by virtue of y'all having mostly US$-denominated debt). Problem solved.
The problem isn't your *debt* to China. The problem that prevents this scenario, and the fact that means that China has y'all by the balls, is your *current accounts deficit.* But that doesn't get talked about as much, because the CA deficit is caused by asset stripping by your oligarchs, whereas sovereign debt is caused by govt. spending.
Here is a plan. How about the US declares itself a banana republic outright and also launches the US dollar the the new world carry trade currency. So foreigners with real savings rates and positive equity can borrow money cheaply in the US for the next few years to come because they know the $ is going to depreciate. The money is used to fund real economies around the globe and the new carry trade will restore faith in America's banking system because banks will be lending to people who can pay
Great videos.Thanks.Not enough room to make detailed reply.Disappointed at proposed solution.Changes nothing.Just starts the debt-based, fiat, Fractional Reserve Banking System from zero again.Still has a private organisation printing the peoples money.Debt can never be paid off.
Worst part is maintaining the growth paradigm.See my video response.Can't continue the exponential expansion.Mathematically impossible.So when do you agree to stop growth and maintain status quo? What system to keep SQ?
I waited 28 years to have this opportunity to see this ecxellent video(s) and of course it also helps that I am living here in California, and I see these turbulences in 2nd time in my life. First I was unable to comprehend. Thanks. I am not going to die as a stupid man. :-)
This is all well and fine (Bailout 14 & 15), however it is all totally meaningless.
The Bush administration and congress have their own plans, clearly by what happened last week. There were some senators & congressmen who voted against the bailout, we are all being sent down the river and we don't even have a boat much less a life preserver. They don't care about the people of this land. There are many great minds in this country but without revolution we have nothing.
Absolutely splendid videos ( all 28 of them),although what about the $55 trillion CDS market, are we going to see any more of that effect the economy (ies!) or has the destruction already happened.....
Great videos.......very very informative, although what about the $55 trillion credit default swaps( I think that's the number) , so basically we are seeing a sub prime mortgage crisis due to the CDS's and are we going to see more inspite of the $700B infusion ? Secondly why are companies like GS and GE selling preferred shares (was is it due to frozen credit markets or bcoz they lack any kind of capital/cash)?
Sal,Excellent series. I like your math (limit sin(x)/x) video too. My concern is if the oil producers shift from payment in dollars to euro (0% dollars) or basket (<100% dollars) of currency. This will reduce the dollar demand and reduce the reinvestment into the US. Resulting in further credit reduction. Because our external investors can invest somewhere at a better value. Thanks.
If you find a time to explain some macroeconomic processes and problems (as you did here for a while, with money and goods/services pools), it would be fantastic.
I'd love to learn about what does printing money actually mean and when it is bad; and the relative currency courses - where do they come from? What is the cause of change?
And one more - gold and petroleum - what is their significance to the economy?
Good theory. But is it unrealistic to think these "new banks" could become logistically functional in a timeframe that would fend off the credit market contraction/disappearance?
So you think they have to use a Jumbo jet to drop money ? Dont forget, the dropped money can be transfered instantly back to China or Soudi Arabia. From the new banks it would be hard to do.
I am sorry can you explain to me again how lending money, that the US tax payers simply do not have, to these financial institutions will help those same tax payers maintain a line of credit????
I just can not make sense of this type of plan.
I do not understand how taking money from x and give it to y=x line of credit, to insure x has flexible credit????
I mean the tax payers are how the government gets money right? Also we see that business owners in general have a poor record for increasing investments within the nation because the greater return can be achieved by seeking the lowest labor costs.
Heh, great video, I'm gonna love those next videos on inflation. Makes a lot of sense what you say, of them keeping injecting money but the total amount shrinking. But, are you sure it's shrinking? aren't the monetary aggregates increasing? I heard one guy say something really weird, but I can't explain it... Bank lend 300k to guy that buys house. the seller deposits those 300k, which generate 10 times more money in the system. Even if the mortage is worth 0,there's still more money than b4,no?
which they generated from thin air, so, they aren't really at a loss there. And the house still exists so it is only air money that is obliterated and not wealth. And it's not really obliterated since it got deposited and made it possible for 10 times more loans, so only a part of the total air cake vannished. There is still more money than before the loan of 300 000 usd, because of the loans made after it.
I'm not sure how to say it any better than many of the "10 times more loans" also have a value of zero and the banks still owe the money to someone.
Additionally, a lot of the borrowed money was in the form of equity loans for consumptive purposes and was spent on luxury goods that have no value today - ostentatious home remodels, big SUVs, over priced dinners, expensive clothes, vacations, etc. Further, some idiots took out equity loans to invest in the stock market and/or multiple houses.
why not 50 banks for each state, with 50B each, for a total of 2.5T @ 2:41?
rachelmac8 6 months ago
Comment removed
bekahbaugh 6 months ago
Government capitalizing banks.... bad idea. [Kahn fail]
Let banks fail and new banks start.... good idea.
tnekkc 8 months ago
KhanAcademy Forum
when will we see this^ ?
RobertW1809 1 year ago
This seems like a good solution but it could also open a can of worms for politicians. What would happen to people's 401k savings? What about the real estate market?
It would be great to have a discussion on this.
java0317 1 year ago
long live deleveraging down to 3/1; banks ought to return to serve wealth creators in the real economy and the distinction made between wealth generation in the real economy and easy monetary gain from gambling and cheating on the money markets
aw18678 1 year ago
Math solves EVERYTHING!!!!!!!
crumcon 2 years ago
no debt = no money..how pathetic
blumyztikk 2 years ago
Your plan could never fly because those banks that were not throwing caution to the wind during the housing run-up would be crushed by the competition from your pristine new banks. BAC and Citi certainly deserve to be crushed but there are a number of smaller banks that were behaving themselves. How would your plan distinguish one from the other?
clif9710 2 years ago
They'd have to at least extend the guarantee to any qualifying bank.
ananiasacts 2 years ago
But help those big banks such as Citi is almost the same thing. They help the big ones not to fall and to stay big. Sure both things are bad but I just wanted to point this out.
ewertoza 2 years ago
I have a better idea: we should sell off southern California, sell Hawaii, New Jersey, 1/2 of Florida (keep the keys), Illinois. Then we end Nafta and restart our manufacturing base. One industry we should start is a high tech fence.
mellydad 2 years ago
I think the FED should buy gov't bonds instead this way increasing the money supply and generating inflation. The dollar would devalue, import would go down, export would go up, balance of payments would be fulfilled, jobs created. Lending to failing banks is indeed a waste of taxpayers money.
aszabo1234 2 years ago
It is amazing how nonchalantly Sal mentions how banks can loan a new homeowner $200,000 to buy a home when the bank only has $20,000 on deposit and then charges 10% interest. The original consideration for the loan would be repaid in one year. The solution to the problem would be to outlaw that process by the bank and allow everyone to quash their loan if they repaid the 10% reserve. It all sounds like fraud to me and it would keep the FED from foreclosing on all mortgaged property in the US.
JimUntershine 3 years ago
That doesnt make sense. In that scenario the bank gave away $180,000. You do realize to "lever" up the banks borrow money? Banks don't create money from thin air. Banks create loans that they exchange for future cash flows (mortgages, debt obligations...). Those cash flows are assets that the bank can sell or borrow against..
schmokay 3 years ago
Sal pointed out that "$700 billion creates $7 trillion in new loans". Debt is created out of thin air which forces the debtor to find the money to pay it.
JimUntershine 3 years ago
Its called leverage. There is something called a multiplier effect that allows the banks to lend the same dollar approx 8x. So they lend it create a security sell it o borrow against it, then lend it again. Investment banks dont have the ~8x restriction. He say's ~10x his but that is not accurate because commercial banks have to have 12% of the money that they have lent in reserves at the end of each day. For the multiplier that 12% is called M1 money and is regulated by the Federal Reserve.
schmokay 3 years ago
Well, you did have quite substantial inflation, but that never made it to the headlines, because the official inflation indices have been gimmicked with since around the time of Ronnie Raygun, by - say - excluding food and energy (which have gone up, up, up...).
ThatIsNotDeadWhich 3 years ago
And, of course, as you point out, a lot of this newly minted money has gone into your current accounts deficit with China et al, who re-paid much of it to various third-world countries in exchange for resources to fuel China's industrialisation, which went to pay off dollar-debts to the IMF et al, which ultimately destroyed the money (by deleveraging the developing countries in question).
ThatIsNotDeadWhich 3 years ago
Fantastic explanation. Thanks. I am also really looking forward to the inflation videos.
SebastienBoisson 3 years ago
Very much looking forward to your inflation/deflation videos.
Also, get your solutionvideos to Obama!!!!!!
emilianopickett 3 years ago
Sal, I have no financial educational background at all, but I immediately had the attitude before seeing your video, that the government should allow solvent banks to continue to run while allowing bankrupt banks to fall. I assume this is the idea of capitalism, sort of a survival of the fittest, where the bigger animal eats so to speak the weaker one. Is government trying to do this bailout for personal reasons or are they really not aware that this bailout isn't aimed in the right direction?
sertraline322000 3 years ago
Bankruptcies are not cheap, something Conventional Capitalist Wisdom tends to ignore, or at least neglect. In particular, when dealing with insitutions whose main claim to generate value is their know-how, very expensive or even virtually irreplacable knowledge can get lost.
Of course, in the case of Wall Street, all economic considerations are probably trumped by the fact that many of these people paid fat bribes - sorry, generous campaign contributions - to a lot of highly placed people.
ThatIsNotDeadWhich 3 years ago
Hey Sal,
Why did you take down Bailout 13 and 14? I think the series is really great! Thanks so much for your insight.
groundcontrolcz 3 years ago
Sal, in your opinion, what are the chances of strong dollar devaluation and double digit inflation rates?
hyemp3s 3 years ago
Sal,
Excellent series!
The reason banks are not loaning is because they have to many bad loans on the books. They need the Fed money to cover up deliquent construction and development, deliquent primary and secondary mortgages from stock holders and investors.
ad2181 3 years ago
And lets not forget about the Redneck plan, otherwise known as the republican plan. It combines 8 years of ingenious economic policy of building up the leverage on an existing asset bubble in stocks. This time we allow banks to leverage to the hilt and off the balance sheet. We sprinkle fear on top of that and fabricate the idea that we can spend our way out of bubbles and recession. If it fails, we still collect some 40 odd% of the vote.
bryandunn0214 3 years ago
Now for the darker side: How about Japan, China & Taiwan who own 80+% US debt form a joint venture and take over the US. They then enslave all citizens and make them work back for their freedom and work back those houses the good ol' fashioned way for 5 years. The Investment bankers get 5 extra. This will reunite US citizens and reignite patriotism and the whole system gets purged of all the cholesterol that caused the stroke. Asia can then sell back America via an IPO. Everyone wins.
bryandunn0214 3 years ago
Sovereign default, massive devaluation and inflation (the latter two being possible by virtue of y'all having mostly US$-denominated debt). Problem solved.
The problem isn't your *debt* to China. The problem that prevents this scenario, and the fact that means that China has y'all by the balls, is your *current accounts deficit.* But that doesn't get talked about as much, because the CA deficit is caused by asset stripping by your oligarchs, whereas sovereign debt is caused by govt. spending.
ThatIsNotDeadWhich 3 years ago
Here is a plan. How about the US declares itself a banana republic outright and also launches the US dollar the the new world carry trade currency. So foreigners with real savings rates and positive equity can borrow money cheaply in the US for the next few years to come because they know the $ is going to depreciate. The money is used to fund real economies around the globe and the new carry trade will restore faith in America's banking system because banks will be lending to people who can pay
bryandunn0214 3 years ago
Great videos.Thanks.Not enough room to make detailed reply.Disappointed at proposed solution.Changes nothing.Just starts the debt-based, fiat, Fractional Reserve Banking System from zero again.Still has a private organisation printing the peoples money.Debt can never be paid off.
Worst part is maintaining the growth paradigm.See my video response.Can't continue the exponential expansion.Mathematically impossible.So when do you agree to stop growth and maintain status quo? What system to keep SQ?
Fractional1Reserve 3 years ago
I waited 28 years to have this opportunity to see this ecxellent video(s) and of course it also helps that I am living here in California, and I see these turbulences in 2nd time in my life. First I was unable to comprehend. Thanks. I am not going to die as a stupid man. :-)
Misuci 3 years ago
This is all well and fine (Bailout 14 & 15), however it is all totally meaningless.
The Bush administration and congress have their own plans, clearly by what happened last week. There were some senators & congressmen who voted against the bailout, we are all being sent down the river and we don't even have a boat much less a life preserver. They don't care about the people of this land. There are many great minds in this country but without revolution we have nothing.
gombet 3 years ago
Hmm, you mean 9 to 1, not 10 to 1.
Shadyhunter04 3 years ago
Absolutely splendid videos ( all 28 of them),although what about the $55 trillion CDS market, are we going to see any more of that effect the economy (ies!) or has the destruction already happened.....
amolkh 3 years ago
Great videos.......very very informative, although what about the $55 trillion credit default swaps( I think that's the number) , so basically we are seeing a sub prime mortgage crisis due to the CDS's and are we going to see more inspite of the $700B infusion ? Secondly why are companies like GS and GE selling preferred shares (was is it due to frozen credit markets or bcoz they lack any kind of capital/cash)?
amolkh 3 years ago
Sal,Excellent series. I like your math (limit sin(x)/x) video too. My concern is if the oil producers shift from payment in dollars to euro (0% dollars) or basket (<100% dollars) of currency. This will reduce the dollar demand and reduce the reinvestment into the US. Resulting in further credit reduction. Because our external investors can invest somewhere at a better value. Thanks.
ad2181 3 years ago
i just saw how many interesting videos you have..wow.. you are a very smart person. good job
mylove1618 3 years ago
Thank you Sal, as always!
Waranle 3 years ago
Thank you, Sal. Excellent explanation, as always.
If you find a time to explain some macroeconomic processes and problems (as you did here for a while, with money and goods/services pools), it would be fantastic.
I'd love to learn about what does printing money actually mean and when it is bad; and the relative currency courses - where do they come from? What is the cause of change?
And one more - gold and petroleum - what is their significance to the economy?
These are fascinating topics.
gambuzo 3 years ago
isn't dangerous to create money that isn't backed by anything (gold)? i thought the us government was already bankrupt
jack10133 3 years ago
Good theory. But is it unrealistic to think these "new banks" could become logistically functional in a timeframe that would fend off the credit market contraction/disappearance?
sgentry777 3 years ago
So you think they have to use a Jumbo jet to drop money ? Dont forget, the dropped money can be transfered instantly back to China or Soudi Arabia. From the new banks it would be hard to do.
Misuci 3 years ago
I am sorry can you explain to me again how lending money, that the US tax payers simply do not have, to these financial institutions will help those same tax payers maintain a line of credit????
I just can not make sense of this type of plan.
I do not understand how taking money from x and give it to y=x line of credit, to insure x has flexible credit????
mtheoryrules 3 years ago
I mean the tax payers are how the government gets money right? Also we see that business owners in general have a poor record for increasing investments within the nation because the greater return can be achieved by seeking the lowest labor costs.
mtheoryrules 3 years ago
Heh, great video, I'm gonna love those next videos on inflation. Makes a lot of sense what you say, of them keeping injecting money but the total amount shrinking. But, are you sure it's shrinking? aren't the monetary aggregates increasing? I heard one guy say something really weird, but I can't explain it... Bank lend 300k to guy that buys house. the seller deposits those 300k, which generate 10 times more money in the system. Even if the mortage is worth 0,there's still more money than b4,no?
dakshinamurti 3 years ago
no, because the asset no longer exists and they are liable for the loaned money.
wmacorlando 3 years ago
which they generated from thin air, so, they aren't really at a loss there. And the house still exists so it is only air money that is obliterated and not wealth. And it's not really obliterated since it got deposited and made it possible for 10 times more loans, so only a part of the total air cake vannished. There is still more money than before the loan of 300 000 usd, because of the loans made after it.
dakshinamurti 3 years ago
I'm not sure how to say it any better than many of the "10 times more loans" also have a value of zero and the banks still owe the money to someone.
Additionally, a lot of the borrowed money was in the form of equity loans for consumptive purposes and was spent on luxury goods that have no value today - ostentatious home remodels, big SUVs, over priced dinners, expensive clothes, vacations, etc. Further, some idiots took out equity loans to invest in the stock market and/or multiple houses.
wmacorlando 3 years ago
Ironic that the Fed no longer measures M3.
Shadyhunter04 3 years ago