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Walmington on Sea needs you to do your duty

Walmington on Sea wants you to borrow money now. It's your
patriotic duty.

Walmington on Sea Wants You to Borrow and Buy Now

As far back as 7 years ago, on Tuesday, 26 February, 2002, 08:49
GMT the BBC published this article entitled "A scandal waiting
to happen?
" in which Sir Howard Davies, then chairman of UK
regulator the Financial Services Authority, was quoted warning
about the perils of dealing with toxic financial instruments.
During a speech on insurance regulation, Sir Howard remarked:

"One investment banker recently described synthetic CDOs to me
as 'the most toxic element of the financial markets today'. When
an investment banker talks of toxicity, a regulator is bound to
take a heightened interest."

A year later this inconvenient regulator with "a heightened
interest" was getting in the way of this new way of pumping up
the money supply via the backdoor, and had often been reported
warning of the asset bubble in property in the UK. So, in true
Yes Minister fashion, Sir Howard Davies was shunted off to a new
job at the London School of Economics

Pumping up the money supply was the way elections were bought in
the Thatcherite past, and making the Bank of England independent
was supposed to stop that. But under Tony a more suitable
regulator was appointed to the FSA, one who would not complain
about the city and would instead focus on "consumer matters"
where the government had made it clear that it thinks the
regulator should concentrate their attentions. Leave the city
alone was Tony's message. Business as usual for the then Blair
government. The madness continued unabated.

When more than a couple of factors like interest rate rises and
bad debtors started to trigger problems in the system the
predicted problems arose. Why did our governments, particularly
in the US and UK deliberately let this happen? Stupidity? Or
electoral convenience? The governments were warned repeatedly,
from every direction whether it be by regulators, the media,
politicians like Vince Cable or businessmen like Warren Buffett.
So there is no excuse, there is no way they can credibly say
that nobody saw it coming.

But we now need to put that behind us and find ways to fix it
for them, and all of us. We now need the politicians to create a
market where there is something we can have confidence in buying
or investing in. Stocks and shares are not looking likely for
most folk for a while. Property is possible even probable for
most in time, and there is money sitting on the sidelines
waiting for the slump in that market to bottom out in Walmington
on Sea.

Green energy is also something the government could create the
market conditions for folk to borrow and invest in. Certainly
here in Portugal the government has made it very attractive for
folk to invest in small scale generation like wind and solar.
The annual returns on such investments are of the order of 15%
which means it's something banks are eager to finance. And
borrowing to do so is now very cheap. Perhaps Walmington on Sea
should follow suit.

Even if ordinary homes are suffering, up market property on the
Silver Coast here in Portugal is a much better investment
opportunity than it is in Walmington on Sea. But how does
borrowing more and spending or investing more to get out of debt
actually make sense where you are?

On a bank's balance sheet, savers are liabilities, and debtors
are assets. So the more good debtors they have, the more good
assets a bank has. The more savers they have, the more
liabilities (creditors) they have.

Capital is different, that is the bank's own money (now
admittedly mostly yours) which is held in roughly 8% proportion
to cover anything that might go wrong with this potentially
fragile relationship between the assets (mortgages) and
liabilities (deposits).

The cash in our economies is now little more than a system for
measuring +/- debt and a means for you, or the bank, to book a
profit (or loss) on creating and managing your debt. There is
relatively little cash in the form of notes in the system, most
money is in the form of debt and credit. It's all numbers in
computers and on balance sheets. In this system debt and credit
is the real money. This money is supposed to be as good as gold,
and until recently most of us believed it was.

Confidence in existing debt and credit is what keeps the system
going and allows new money to be created and growth to occur.
When new debt is created, new money is literally created as if
out of thin air. Banks are the people allowed to issue loans and
create this new debt in a highly favourable ratio to them.
Technically, we non economists call this system a "licence to
print money" :-) They call it fractional reserve banking.

In the modern world paper money has no intrinsic value. We can't
all go back a couple of centuries or take to the hills with our
farm animals and a few nuggets of gold. So we work with the
system we currently have. Surprisingly, this apparently mad
system has worked remarkably well for donkey's years (since the
end of the gold standard) depending totally on our confidence in
it. It allows a cautious and moderate bank to "print" or create
roughly six pounds (more or less) of new money for every cash
one that you deposit.

This is why the recovery is best financed if it is you borrowing
and helping the banks to create this new good money and not
financed by cash withdrawn from saver's bank accounts.

It is of course unfairly tough on pensioners, but it is seen as
actually better for the nation state or the world economy if
those of us who are savers are left suffering on the sidelines
feeling insecure about investing anywhere but guaranteed bank
deposits. In this way the banks can create new safer and more
sound debt (money) in a six to one ratio with the cash money
deposited by small savers.

So lots more of this new sound money is thus created, and this
helps to replace or cover over the cracks in the system, caused
by the toxic debt that is going to have to be written off.

Under the 1988 Basel Accord, banks with international presence
are only required to hold capital equal to 8% of the risk-
weighted assets.

It's much the same under Basel II which uses a "three pillars"
concept - (1) minimum capital requirements (addressing risk),
(2) supervisory review and (3) market discipline - to promote
greater stability in the financial system

This mad hatter's tea party of a system could hardly be
described as "market discipline" but it could still go on to
become a better regulated one. It can be rescued, and it will
recover if we all have the confidence to go and borrow wisely
and spend.

This is why interest rates are being reduced to such low levels.
The idea is that borrowers will emerge and invest or spend to
help get the merry-go-round going again. There are plenty of
savers now suffering on low interests rates to provide the cash.
The liquidity trap theory is that because we are reluctant to
spend in hard times, a little fiscal stimulus of governments
spending our money will initially prime the pump, and we, the
people who can borrow, will then start to kick in and invest or
spend with confidence and get the pump flowing again.

Your country, wherever you are in the world, needs you to borrow
wisely and buy stuff in order to help create new and good bank
balance sheet assets (your debt). I'm referring only to "you"
the people who have demonstrable means to make you a safe bet
for a bank to lend to. The more you borrow wisely the more good
assets you create, on and off the balance sheet, the healthier
the world economies and banks will all look.

You can Do it

The more you buy stuff which creates jobs, as in the
construction industry, or now in green energy, the healthier the
economy is. Do it with borrowed money, which you can afford to
pay off, and the healthier the bank's balance sheet looks too.

In our hypothetical economy of Walmington on Sea which is now a
fairly comfortable fractional reserve banking world with the
pound as its currency, the banks are allowed to lend in a ratio
of let's say, in simple terms, six debtor pounds to one saved
pound. (the financial ratio varies depending on the regulations
in force

So for every six pounds you pay off your mortgage, the bank can
afford to lose a saver with a pound, and vice versa for every
pound withdrawn somebody needs to pay off six pounds of debt. So
this is why some of you must keep saving, and the others must

For every pound you save they can lend six. In Walmington on Sea
the currency is pounds, but it's the same in dollars, euros or
whatever your preferred currency is.

A pensioner deposits 20k and the bank can lend someone 120k,
which lets somebody buy an average house, and creates lots of

But you see the first and most obvious problem? If you take six
thousand pounds out of your savings account and pay off six
thousand pounds from your mortgage, their balance sheet is now
way out of kilter. They lent 36 thousand based on your six
thousand savings. But you only paid off 6 thousand of debt when
you withdrew your savings. So they now need to call in 30
thousand in other people's debts to even out the permitted ratio
on the balance sheet.

Worse still, what if you remove the savings and don't pay off
your mortgage, but put it under your mattress. They now have to
shed assets on their balance sheets (calling in other mortgages)
by a substantial multiple. In this hypothetical example 6 x 6 =
36 thousand pounds.

If anything goes wrong with our confidence in the banking system
it doesn't take long for this multiplication effect to send even
the healthiest of banks into a spiral of asset decline. Hence we
have regulations on the amount of capital they have to keep in
proportion to the amount of debt (mortgages) they have taken on.

Think therefore what it does to unhealthy banks with lots of
potentially bad debts when it all goes pear shaped. And that's
what we now have to recover from, a totally pear shaped economy
because the unwise and powerful decided that this capital
requirement slows down a bank, and a slow bank makes less profit
than a fast bank.

So to speed things up, and theoretically to protect themselves
at the same time, the banks were permitted to sell on and share
their debts with other banks using systems of collateralised
. There is an alphabet soup of acronyms like CDO to describe
these mechanisms.

If they could sell the debt to someone else they then have to
hold less capital themselves. So they can lend more, do more
deals, with less of their own capital forced to sit doing
nothing. Less money invested to turn a bigger profit.

If another bank or institution buys someone else's debts in the
form of a CDO or similar they can show it on their balance sheet
as an asset. Remember a debt is an asset and a deposit is a

The system went wrong because bankers printed an alphabet soup
of collateralised debt. They created a paper only asset bubble
which was, in effect, printing funny money. The more funny money
a banker printed by doing these pass the paper parcel deals the
bigger the bonuses the bankers were paid.

This funny money, because it's "securitised debt" shows on
other banks books as an asset. (Sometimes a different division
of the same bank - I'm sure you see the danger there!). It was a
confidence trick which like a Ponzi scheme escalated to become a
gaping hole in the world economy just waiting to implode, and
those who perpetrated and permitted it ought to be prosecuted.

Despite governments being warned by the regulators and others,
(in the UK as far back as 2002 at least), of the dangers of this
bubble of unregulated funny-money debt, governments didn't do
anything about it. Thus they created the mess, and now we have
low interest rates to encourage us to borrow more and cover it
up by way of fixing it. The profits on new good money created
will pay off the losses on the old toxic money.

Your country needs you to rescue the economy

But until your government gets their act together and inspires
the necessary confidence in your country, it's up to you. Your
country needs you to help get the world out of a potential
"Liquidity trap" caused by low interest rates, while they go
around dropping their helicopter money as a fiscal stimulus.

Whatever your asset or investment choice, your country needs you
to borrow money as soon as possible and get on and invest it. And
by so doing you will be creating the much needed jobs which will
eventually pay for it all.



Is the irony of the Dad's Army and Kitchener posters intended?




Healthy borrowing by everyday folk and responsible organisations creates good money. That good money is needed to fix the mess made by those in power who printed money by lending irresponsibly.

The situation does seem somewhat ironic.



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