Quote:
Originally Posted by SpiderMatt
Your explanation has also increased my interest in the book. When I first saw that you were self-publishing a book on the financial crisis I assumed you would be avoiding the subject of the inherent problems of our monetary system, not directly confronting them. This is, of course, what I have come to expect from mainstream media. I'm interested in how you present the material in your book.
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Hmm... I'm not sure how to answer your question to your satisfaction, but let me give it a try.
The book is a novel, so my main purpose is to tell an entertaining, fictional story. I wanted to avoid getting too technical about monetary and banking theory because people get lost so easily. Frankly, monetary system theory is dry, abstract, and confusing.
I've tried explaining such things as fractional reserve banking and debt monetization to people in-person, sitting across a living room or whatever, with only minimal glazing over of the eyes. Usually, I can do so successfully, and I get responses which suggest that they understand what I've explained.
However, 10 minutes later that same person will usually be unable to repeat back to me the things I just explained to them earlier. Again, the main reasons are that the material is so dry, so abstract, and so confusing that it's hard for most people to retain the concepts. It's almost like people experience a form of selective amnesia over the topic, regardless of how interested they are due to the crisis. I remember going through the same confusion myself some 30 years ago when I was first exposed to theory. It took a lot of diligent study before I could finally hold the often self-contradictory concepts involved in my head.
Clearly, this "amnesia" causes tremendous problems when it comes to writing an entertaining story. So, I made a conscious decision. Instead of writing about the technical aspects, I chose instead to summarize the root causes of banking and monetary system flaws. I gave a lot of thought to the overall problem, looked at the history of the problem, and distilled the whole thing down to some very basic, root-level principles which really drive the whole, dysfunctional system. Here's how I summarized them:
I claim that since the earliest days of modern banking dating back to the late 17th Century in Britain (and possibly earlier), banks and governments have engaged in three forms of what I call "legalized fraud." They are:
- Banks lending money that does not belong to the banks
- Banks lending money long-term using short-term funds
- Governments and banks issuing currency backed by nothing but debt and false promises
I maintain that these three forms of "legalized fraud," so-called because they are fraudulent in nature but are considered legal, ethical activity by government authorities, may be found in various combinations at the root of every financial crisis experienced in United States history, as well as nearly all of the financial crises experienced abroad in other countries around the world. If we make these forms of fraud illegal, we will go a long, long way toward eliminating systemic financial crises for present and future generations.
Let me take a moment to clarify each of the items in my list.
Banks lending money that does not belong to the banks
By this I mean that banks take money people deposit in their checking, savings, money market, and CD accounts, and lend it out, keeping a percentage on reserve in order to meet day-to-day demands for cash and transaction clearing. They count on the fact that most of the time people don't need direct use of most of their money, so they can legally "get away" with such behavior.
This is the vital essence of fractional reserve banking. For those who posses a more complete understanding of the theory of fractional reserve banking, obviously I've grossly simplified the concept, but I argue that this is all the average person really needs to understand in order to grasp why fractional reserve banking should be eliminated. By identifying the practice as fraud and then leaving the concept at that, I've given people a very clear reason for opposing it. After all, virtually everyone agrees that fraud is wrong and should be illegal. Most people are aware that banks do this kind of thing. They've just never thought of this particular practice in this light, and they certainly have not associated it with the financial crisis. Yet, without it, the financial crisis could not have occurred.
Banks lending money long-term using short-term funds
By this, I mean that banks take checking, savings, money market, and CD money, all of which are deposited either for available withdrawal "on demand" or to be held at interest for very short terms (three months, six months, etc.). The banks then lend this money out in the form of mortgages (typically 30 years), business loans (typically 1-5 years), car loans (typically 3-5 years), equity loans (various terms), etc.
This second form of legalized fraud is obviously very closely related to the first one I identified, although they're not identical. Again, this is a banking practice most people already know about, but very, very few average people pay any attention to it. Yet, if you think about it, it's not so surprising that banks get into trouble doing it. Rather, the surprise is that they don't get in trouble more often than they actually do! The reasons for this are varied and are beyond the limited scope I've set for the novel, but the point remains the same. This practice definitely helped cause the financial crisis.
Governments and banks issuing currency backed by nothing but debt and false promises
This final practice has been around for centuries. Governments and banks have a long history of debasing the currencies they issue and maintain. The nature of fiat currencies (money that is declared to be money by government decree) contributes directly to this history, as do the other two forms of legalized fraud I identified.
For a time, of course, we were on the "gold standard," which means that gold was set at an official price (about $20.65 an ounce) for many years, and the banks and government promised to redeem the paper for the gold on demand during that period. The problem was that they issued far more paper at that rate than they had in gold on hand to cover it.
If any of us private citizens engaged in any of these three activities, we would be arrested. The small minority of bankers and government officials who "officially" engage in it get rewarded instead.
As with other forms of fraud, legalized fraud is very profitable. After all, those who engage in it don't actually have to earn the money they lend out or issue. The Federal Reserve, like all other central banks these days, issues new currency by simply creating it with the stroke of a pen or a computer key. What a wonderful way to make money! [every pun intended]
Anyway, that's about as deeply as I go into the issue in the novel. I do touch on some of the many consequences of these activities, but that's about it. Let me know if this answers your question.