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MikeG63

How To Prevent The Next House Price Crash

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Lets put some facts together
1) When commercial banks make loans, they create new money by typing numbers into a computer. Don't believe me? Here it is from the Bank of England:
http://www.bankofengland.co.uk/publications/Pages/news/2014/051.aspx#

Here it is in practice: Granny deposits £100 cash into the bank. Builder comes along for a loan of £90. Bank thinks 'we're good for it', types £90 into his account and notes a liability of £90 to make the books balance. Granny withdraws £100. Builder withdraws £90. Et Voila! Now £190 exists where before it was only £100. In practice, only a few pounds of Granny's deposit was actually required to give the bank confidence in its reserves.
2) The bank could put this new money into the productive economy, but that's risky, so the bulk of it goes into property as it's asset backed.
3) Higher house prices create greater mortgage revenue. Banks are incentivised to loan into asset bubbles.


The effects:
* Commercial banks create new money and pump it into property, inflating house prices. The average house in 1974 cost £10k, and today it's £180k, according to Nationwide index, that's an increase of 1600%. You folks know this.
* 97% of the money in the UK is debt to a bank. Quoting Mervyn King, “House prices are a matter of opinion whereas debt is real.”
* Private profit seeking companies get to decide where the new money goes: no social motives, no environmental concern, no long term outlook.
* property owners feel good because their house is worth more, but it's still only worth one house. When interest rates rise, their standard of living will drop because they will return every day to the same house but with higher bills.


The cure:
Prevent private companies from printing electronic money using computers. Parliament has already done this once for paper money, it can do it again.


How you can help:
Sign the Government e-petition:
http://epetitions.direct.gov.uk/petitions/64050
Just reading it won't help. You have to enter your name, address and an email, which are not published. This is what elevates an e-petition from a blog to an opportunity to influence MPs, and that was how change was effected last time. And if you are at all worried about signing, isn't that what you thought banks did? Loan money from savers to borrowers?

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I want the next crash to happen.

This bigger the better, and the more over indebted people that are evicted and lose their nonjobs is the kind of crash to get me salivating.

I look forward to the day this nation suffers financially and the scum politicians realise that England is a pointless little country and they are pointless excuse for human beings.

Edited by Corruption

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I want the next crash to happen.

This bigger the better, and the more over indebted people that are evicted and lose their nonjobs is the kind of crash to get me salivating.

I look forward to the day this nation suffers financially and the scum politicians realise that England is a pointless little country and they are pointless excuse for human beings.

So, what's your big plan for surviving this carnage? I don't have a house or any debts but I can't be sure that I will be in a great position after a big crash....

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So, what's your big plan for surviving this carnage? I don't have a house or any debts but I can't be sure that I will be in a great position after a big crash....

Well ive been to places like Athens, Bangkok during and straight after their respective crashes and the world hadnt imploded.

And as i work in the oil industry i can get work and earn decent wages pretty much anywhere.

As the price of property would crashi could afford an OK house which would mean im far better off than i am now, as would most working class people under 40/45.

Edited by Corruption

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1) When commercial banks make loans, they create new money by typing numbers into a computer. Don't believe me? Here it is from the Bank of England:

http://www.bankofengland.co.uk/publications/Pages/news/2014/051.aspx#

Here it is in practice: Granny deposits £100 cash into the bank. Builder comes along for a loan of £90. Bank thinks 'we're good for it', types £90 into his account and notes a liability of £90 to make the books balance. Granny withdraws £100. Builder withdraws £90. Et Voila! Now £190 exists where before it was only £100. In practice, only a few pounds of Granny's deposit was actually required to give the bank confidence in its reserves.

Haven't you just described a bank run? If both parties try to take their money out in cash as you describe, the bank won't have enough cash on hand to pay them both.

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Haven't you just described a bank run? If both parties try to take their money out in cash as you describe, the bank won't have enough cash on hand to pay them both.

Yes, the only thing preventing a bank run is the bank's reserves of cash from which it provides the 190GBP, which is why banks must have a certain amount of cash in reserve to cover such situations.

Of course, this 'fractional reserve' system only works as long as everyone doesn't pull out their money at once.

What's worse is that the builder then deposits his 90GBP in his bank who then lends out 80GBP to a fisherman. So the original 100 is now 270 !

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In reverse order, yes, yes, and no. How do you get to advanced editing to quote just the relevent sections not the whole post? Previously I've used BB codes but I don't see the option for "/quote".

Yes, that's the current fractional reserve banking system, but it's much worse than the textbook 10%. At the time of the crash reserves were average 2% IIRC, which means the £100 Sterling, let's call that 'real' money, was promised out to 47 other people turning it into £4800 total, with 0-15% interest, so the arduous work of typing numbers into a computer on the back of your £100 earned the hard way, the banks gain say £300 *per year*. Did you think those figures in your savings account are money? They are just an IOU on an IOU on an IOU....

And Yes, that's why it didn't take much to cause a global bank run. They took all the reward, you the taxpayer picked up the downside and now you guarantee the risk up to £85k per depositor. If you'd like that to change, see the petition link in post #1. If you'd like the system to crash and burn again, and it will sooner or later, then definitely don't put your name in support of a solution. London's elite property is already in a bubble so we're on the way....

No, that won't cause everything to crash and burn. There are well renowned economists who support such a move, including for example some of the IMF. A crash is what Goldman Sachs would like you to believe though. The mechanism is approximately to convert existing IOUs into transactional money backed by the BoE, and then give everyone the choice whether their deposits are safe BoE money or gambling deposits owned by banks, as they all are today.

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Prevent? Petition should read 'provoke'.

I guess the leading UK economic commentator of the Financial Times got it wrong then? He seems to be of the opinion that the crash will happen *unless* we take action to strip banks of the power to print electronic money. Action like this really:

http://epetitions.direct.gov.uk/petitions/64050

FT post is free but requires registration, so here are some highlights.

Title: "Strip private banks of their power to create money"

"The giant hole at the heart of our market economies needs to be plugged.

Printing counterfeit banknotes is illegal, but creating private money is not. ... It could – and should – be terminated."

...

"Banks create deposits as a byproduct of their lending. In the UK, such deposits make up about 97 per cent of the money supply. Some people object that deposits are not money but only transferable private debts. Yet the public views the banks’ imitation money as electronic cash ..."

...

"[irving] Fisher [famous economist] argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well."

...

"The state, not banks, would create all transactions money, just as it creates cash today."

http://www.ft.com/cms/s/0/7f000b18-ca44-11e3-bb92-00144feabdc0.html?siteedition=uk#axzz30PY2Lbn2

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This assumes debt is a problem. It is not. Banks and private individuals have a much better track record of creating money in appropriate amounts compared to the state.

Worrying about debt is like worrying about antimatter, it cannot be paid off without cancelling out the same amount of money. The only place debt can end up is down the back of the BoEs sofa, leaving us in the same place as if they had created ir in the first place.

The only problem with debt is if people forget what it is...

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Banks and private individuals have a much better track record of creating money in appropriate amounts compared to the state.

Which might be more convincing as an argument if not for the fact that the state is the one bailing out the private banks.

The idea that private banks allocate capital in a socially optimal way is a fantasy- what banks do is take the shortest path to profit- which means doing most of their lending to fund the purchase of existing real estate assets, which then inflate and eventually lead to a crash-see recent history for details.

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Lets put some facts together

1) When commercial banks make loans, they create new money by typing numbers into a computer. Don't believe me? Here it is from the Bank of England:

http://www.bankofengland.co.uk/publications/Pages/news/2014/051.aspx#

Here it is in practice: Granny deposits £100 cash into the bank. Builder comes along for a loan of £90. Bank thinks 'we're good for it', types £90 into his account and notes a liability of £90 to make the books balance. Granny withdraws £100. Builder withdraws £90. Et Voila! Now £190 exists where before it was only £100. In practice, only a few pounds of Granny's deposit was actually required to give the bank confidence in its reserves.

2) The bank could put this new money into the productive economy, but that's risky, so the bulk of it goes into property as it's asset backed.

3) Higher house prices create greater mortgage revenue. Banks are incentivised to loan into asset bubbles.

The effects:

* Commercial banks create new money and pump it into property, inflating house prices. The average house in 1974 cost £10k, and today it's £180k, according to Nationwide index, that's an increase of 1600%. You folks know this.

* 97% of the money in the UK is debt to a bank. Quoting Mervyn King, “House prices are a matter of opinion whereas debt is real.”

* Private profit seeking companies get to decide where the new money goes: no social motives, no environmental concern, no long term outlook.

* property owners feel good because their house is worth more, but it's still only worth one house. When interest rates rise, their standard of living will drop because they will return every day to the same house but with higher bills.

The cure:

Prevent private companies from printing electronic money using computers. Parliament has already done this once for paper money, it can do it again.

How you can help:

Sign the Government e-petition:

http://epetitions.direct.gov.uk/petitions/64050

Just reading it won't help. You have to enter your name, address and an email, which are not published. This is what elevates an e-petition from a blog to an opportunity to influence MPs, and that was how change was effected last time. And if you are at all worried about signing, isn't that what you thought banks did? Loan money from savers to borrowers?

Thanks for letting us know how banking works.

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Which might be more convincing as an argument if not for the fact that the state is the one bailing out the private banks.

The idea that private banks allocate capital in a socially optimal way is a fantasy- what banks do is take the shortest path to profit- which means doing most of their lending to fund the purchase of existing real estate assets, which then inflate and eventually lead to a crash-see recent history for details.

I did not say optimal I said better.

And the bailing out is the point. The bail out is inevitable and costs nothing and mirrors the centak bank creating the stuff in the first place.

All debt must necessarily be bailed out as you put it e eventually

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So HMG mistakenly thinks that an economy can be stimulated by more mortgates - it can't, the new money is locked up - or maybe wants to publish growth in GDP and champion their success. They give the money to private banks who multiply the interest by three or more (because they have little competition) and give it to the public, who buy a roof over their head so they can get that job in a different town. A housing bubble emerges: Carney (sooner or later) raises interest rates, and as with the crash, the banks win and everyone else loses as their mortgage payments went up.

... Alternatively....

Stop the banks creating this debt money, which they mostly pump into housing. New money as required for growth comes DEBT FREE from a sovereign fund, to be put into growth areas such as public infrastructure. Neither debt NOR bailing out is required. See the link re-tweeted in post #13 above for the epetition to sign if you prefer this version of the UK.

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I did not say optimal I said better.

And the bailing out is the point. The bail out is inevitable and costs nothing and mirrors the centak bank creating the stuff in the first place.

All debt must necessarily be bailed out as you put it e eventually

In what way did private banks allocate funds better? As wonderpup says, see recent history for details: tens of millions pushed into real poverty by a global crash, and a drop in real income for some number beginning with billion. Even Mugabe only ruined the lives of about 13M.

Money creation should not be in the hands of private profit seeking enterprises (hence http://epetitions.direct.gov.uk/petitions/64050), nor should it be in the hands of vote seeking politicians. The answer I think is an independent committee that does not benefit directly from the amount of money in supply. They set money creation to match economic growth and the interest rate targets decided upon democratically by Parliament.

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Finding evidence that private commercial banks should be stripped of the power to create money and pump it into the most profitable bubble of their choice is easy:

http://www.dailymail.co.uk/news/article-2656406/Is-house-earning-The-33-areas-increases-property-prices-outstripped-local-wages.html

Each new mortgage devalues your salary by another tini bit. Slow enough so you don't notice, big enough to cause you problems between the crash of 08 and today. I'm working to fix it, my MP is on-side, but I need support:

http://epetitions.direct.gov.uk/petitions/64050

Thanks!

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I must say that HPC seems to have a higher level of understanding than most. I have got into some lengthy arguments - often with memebers of financial services - when I raise the issues caused by allowing private profit seeking companies to benefit from creating money from fresh air. I'd say the average view I encounter is that banks are intermediaries, and then the more informed view is the standard textbook money multiplier model, which at least accepts that *someone* creates money. None of those arguments on this thread; yet at the same time no real support on the e-petition. As we head towards 2000 views, I'm interested in the views of anyone who read it and chose not to sign: I can think of a number of possibilities and feel free to add your own:

- do you not believe the problem?

- are you not bothered enough by it?

- do you not believe the petition contains a soluiton?

- are you bothered about putting a name and address into a Gov't website?

- do you think nothing will every be done regardless?

Thanks. Mike.

-----------------------------------------------------------------------------

http://epetitions.direct.gov.uk/petitions/64050

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epetitions seem to be a gimmick with little prospect of creating any legislation. That's not to say anything about the proposal here, just speaking in general terms.

After all, they only trigger the possibility of MPs debating the subject, and many of them are, as we know, completely clueless and/or willfully blind depending on the issue at hand and their party line.

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In what way did private banks allocate funds better? As wonderpup says, see recent history for details: tens of millions pushed into real poverty by a global crash, and a drop in real income for some number beginning with billion. Even Mugabe only ruined the lives of about 13M.

Money creation should not be in the hands of private profit seeking enterprises (hence http://epetitions.direct.gov.uk/petitions/64050), nor should it be in the hands of vote seeking politicians. The answer I think is an independent committee that does not benefit directly from the amount of money in supply. They set money creation to match economic growth and the interest rate targets decided upon democratically by Parliament.

A committee = people = vested interests. No change.

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Thanks for the feedback.

@Joan: Yes, e-petitions are way less effective than the initial promise. In my experience they usually result in a response of the party line. The reason I went in this direction is:

- there isn't a party line per se. The biggest problem with the banking system is lack of understanding. When people were asked who creates money, the majority said Govt or Central Bank. When people were asked whether they would want a banking system where the creation and destination of new money was decided by profit seeking enterprises, the majority said no. Yet the latter is what we have. Until acedimia and public opinion coalesce there will be no change. If there is no change we can expect a property bubble and another financial crash.

- 10k votes forces a Tresury response and raises the topic for discussion and sets a party line on which to vote.

- 100k votes has a fair chance of a debate. My MP Carswell has a Private Members Bill on these lines, but these rarely succeed. However if we can get him backing he can represent an e-petition to the Commons.

@wherebee: yes, always the possibility. However given your locations you should have come across several Asian economies where Govt is in charge of seniourage and it works in favour of the people. This is not a theoretical possibility, it is a tried and tested method.

It's pretty clear that leaving money creation to the markets doesn't work in favour of anyone but private banks. Gov'ts creating money have done better but some go off the rails. Today's UK MPC doesn't have control, they have one lever, interest rates, and they set it to minumum years ago. I don't subscribe to the 'abandon ye hope' methodology, in particular because parliament has legislated on this before. Creating new money is very much a priviledge provided under the UK banking licence, and it's about time we required responsibility for that power, or removed it entirely. I am though open to suggestions for improvements.

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Well, in-spite of opposing vested interests, it seems there is a ground-swell of opinion that thinks the banking industry should put in its place. Steve Baker MP has tabled a debate 'Money Creation an Society' so that Parliament can discuss whether money should be created by private banks for the purposes of their profit, or whether, as I think, it should be under Parliamentary control for the benefit of the people. Money is a man-made concept and Parliament can - as it did last time - change the rules. You can help: just ask your MP to attend the debate; that's all! It doesn't matter which party he is from or what his view are or even whether you agree with them, we (financially aware citizens) need the ruling elite to be educated on money. But you need to act now: the debate is this Thursday 20th. It might be the most important thing you do for your future this weekend, and it's easy. Contact your MP and ask him to attend the debate. You can find his details and email via this link:
http://www.parliament.uk/get-involved/contact-your-mp/contacting-your-mp/
or even tweet:
http://tweetminster.co.uk/mps
Or if you want a pre-written email, the organisation Positive Money has arranged this too:
http://www.positivemoney.org/get-involved/email-your-mp/
Thanks from me, and good job exercising your democratic rights :)

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