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http://www.telegraph.co.uk/money/main.jhtm.../ixcitytop.html

'City faces meltdown if debt crisis hits'

By Edmund Conway, Economics Editor

(Filed: 12/07/2006)

The City could face a financial meltdown if the debt bubble bursts, with over a year's worth of bank profits - £40bn - potentially being wiped off balance sheets, the Bank of England warns today.
The Bank is issuing a stark warning about the potential damage a credit crunch and a collapse in asset prices could cause to the economy and financial system.
It says that a sudden jump in borrowing rates - potentially caused by a further surge in the oil price - could cause a 2pc fall in economic output and wipe out banks' annual profits, estimated this year to top £40bn.
In a worse-case scenario, a sharp fall in credit conditions worldwide would have devastating consequences for Britain, the Bank warns.
It could cause a 1.5pc contraction of the UK economy, a 25pc fall in house prices and a 35pc drop in commercial property prices over three years, according to the scenarios mapped out by the Bank. Other major countries would suffer similar effects, it says.

Amazing shot accross the bows of No. 11 from Mervyn and the lads. Could this spell more time to spend with the family for Mervyn or will it open the door for Tony to sack the Miracle man now that the fruit of all that borrowing for HPI and MEW is ripening?

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Bursting debt bubble could send dominoes toppling
# 'City faces meltdown if debt crisis hits'
If you've been under the impression that it's only those with massive mortgages who should be worried about Britain's debt bubble, think again.
The Bank of England has delivered a wake-up call to the City, mapping out how directly its institutions will be affected as well. In its six-monthly Financial Stability Report it sets out a collection of "what-if" scenarios to assess the consequences of a major financial crises.
One statistic in particular shows precisely how exposed the City is to the bursting of the household debt bubble. At the beginning of 2001, our banks were not lending customers any more than the total amount of deposits they held. By the end of 2005, banks were lending customers £500bn in cash which simply wasn't in the vaults. Should customers default on their loans, these banks could be in trouble, having to resort to borrowing chunks of money at penal interbank rates.
This is known as systemic risk: a domino effect to you and me. It is how the collapse of the hedge fund Long-Term Capital Management in 1998 caused serious dents in the balance sheets of some of the biggest investment banks in the US.
The Bank is also uneasy about the recent rise in corporate debt, and the jump in borrowing linked to private equity deals. An unexpected rise in interest rates around the world could make life more difficult for these borrowers.
Coincidentally, Barclays Capital also published its take on global financial risks yesterday. The biggest worry? You guessed it: rising interest rates.
damian.reece@telegraph.co.uk

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Yes - I read this article with amazement this morning. So reminiscent of lots of bearish posts from 2 years back.

25% drop in house prices over 3 years. That'll be the national average. I'm standing by my prediction that some areas (eg Stoke) will fall by up to 70%. Other areas will hardly fall at all.

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"One statistic in particular shows precisely how exposed the City is to the bursting of the household debt bubble. At the beginning of 2001, our banks were not lending customers any more than the total amount of deposits they held. By the end of 2005, banks were lending customers £500bn in cash which simply wasn't in the vaults".

RB - could that £500bn be the yct?

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There's more:

Bursting debt bubble could send dominoes toppling
# 'City faces meltdown if debt crisis hits'
If you've been under the impression that it's only those with massive mortgages who should be worried about Britain's debt bubble, think again.
The Bank of England has delivered a wake-up call to the City, mapping out how directly its institutions will be affected as well. In its six-monthly Financial Stability Report it sets out a collection of "what-if" scenarios to assess the consequences of a major financial crises.
One statistic in particular shows precisely how exposed the City is to the bursting of the household debt bubble. At the beginning of 2001, our banks were not lending customers any more than the total amount of deposits they held. By the end of 2005, banks were lending customers £500bn in cash which simply wasn't in the vaults. Should customers default on their loans, these banks could be in trouble, having to resort to borrowing chunks of money at penal interbank rates.
This is known as systemic risk: a domino effect to you and me. It is how the collapse of the hedge fund Long-Term Capital Management in 1998 caused serious dents in the balance sheets of some of the biggest investment banks in the US.
The Bank is also uneasy about the recent rise in corporate debt, and the jump in borrowing linked to private equity deals. An unexpected rise in interest rates around the world could make life more difficult for these borrowers.
Coincidentally, Barclays Capital also published its take on global financial risks yesterday. The biggest worry? You guessed it: rising interest rates.
damian.reece@telegraph.co.uk

Which means that if we all went to the bank and demanded our savings money - the banks would simply collapse - or they would have to do something to reverse the situation - like raise interest rates to incentivise us to keep it in deposit.

HAL

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Shouldn't that be 'City faces meltdown when debt crisis hits'.

It's a done deal, Japan is raising its base rate this week.

This will likely cause the next wave of stock-market meltdowns,

currency crises, and house market carnage.

When the shit really starts flying I wonder how the banks think they

are going to spin this in a way to make it look like it isn't entirely

their fault.

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Guest mattsta1964

One statistic in particular shows precisely how exposed the City is to the bursting of the household debt bubble. At the beginning of 2001, our banks were not lending customers any more than the total amount of deposits they held. By the end of 2005, banks were lending customers £500bn in cash which simply wasn't in the vaults. Should customers default on their loans, these banks could be in trouble, having to resort to borrowing chunks of money at penal interbank rates.

My understanding is that banks have been lending money against non existent deposits for much longer than this. That's the whole idea of fractional reserve banking isn't it??????

The ratio between what is lent and what is held in reserve used to be about 1:10. Today it is reckoned to be closer to 1:30 which is proportionate to the percentage of debt money in the economy, approx 97%. Apocalypse now! or very soon anyway

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Likewise I could scarcely believe the strength of the language used here. They must be bloody frightened to be saying this. I thought the lending figure was £500million, until I read RB's post and saw that it read £500 BILLION. I had to go back to the original article to check the graph to believe it. That's a staggering sum.

Oh blimey. This is starting to look really serious unfunny sh1t. I have for long had a vague feeling the banking system was getting unsafe - now I can see I was right. The stone walls look thick and secure, but my savings are not held in stone. Some of them are held in gold and silver and I think I am going to buy some more before the price creeps up any more.

Edited by malco

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Jebus!

Why does it take nearly 2 years for the BoE to mention what posters were saying here?

I think this is the reason why a long term stagnation in the property market is unfeasible, especially when most (92% according to ARLA) expect capital apreciation of their assets. A small fall would simply snowball - it's just that snowball isn't quite at the top of the mountain, yet.

Also, this is why interest rates should have never been reduced. The debt growth is unsustainable, and their will be a point when that debt growth slows. When that happens the economy will fall into recession, and the above scenario pans out. It's not a question of 'if', it's 'when'!

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Guest Alright Jack

My understanding is that banks have been lending money against non existent deposits for much longer than this. That's the whole idea of fractional reserve banking isn't it??????

The ratio between what is lent and what is held in reserve used to be about 1:10. Today it is reckoned to be closer to 1:30 which is proportionate to the percentage of debt money in the economy, approx 97%. Apocalypse now! or very soon anyway

Yes, I was surprised to read that too as it goes against much of what I had accepted about todays' banking system. But really it is SO MUCH WORSE than this because actual bank reserves are not the only thing they call deposits. Banks are invested in all kinds of things, say they hold some stocks, a bomb canister load of derivative contracts and a load of junk bonds (UK household debt for instance :lol: ). All these things have a current market value which are added as reserves I suppose... What happens under such conditions that these valuations evapourate?

I am no banker (a w@nker maybe I hear you all say!) so I can't vouch for the accuarcy of my statements.

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Guest mattsta1964

Yes, I was surprised to read that too as it goes against much of what I had accepted about todays' banking system. But really it is SO MUCH WORSE than this because actual bank reserves are not the only thing they call deposits. Banks are invested in all kinds of things, say they hold some stocks, a bomb canister load of derivative contracts and a load of junk bonds (UK household debt for instance :lol: ). All these things have a current market value which are added as reserves I suppose... What happens under such conditions that these valuations evapourate?

I am no banker (a w@nker maybe I hear you all say!) so I can't vouch for the accuarcy of my statements.

Nobody is gonna tell us the truth. It is simply too awful to contemplate. It wont just be the housing market that suffers. It's the whole global financial system that will collapse.

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My understanding is that banks have been lending money against non existent deposits for much longer than this. That's the whole idea of fractional reserve banking isn't it??????

The ratio between what is lent and what is held in reserve used to be about 1:10. Today it is reckoned to be closer to 1:30 which is proportionate to the percentage of debt money in the economy, approx 97%. Apocalypse now! or very soon anyway

Mattsa,

the banks don't lend against non-existent deposits exactly: they always lend a very large fraction of the money that is on deposit with them - new money is introduced into the economy via the multiplier effect, rather than explicit money creation. Here is how it works:

I deposit 1000 in the bank

bank has 1000 to lend. Call the reserve requirement 3%.

bank lends 970 - this eventually finds its way back to bank in form of deposits

97% of 970 is lent - finds its way back to the bank

97% of 97% of 970 is lent....and so on....

...if enough lending can be done a multiple of money in the economy is created which is the reciprocal of the reserve requirement (i.e. if requirement is 10%, then x10 money is created).

This model of banking allows net money creation, whilst forcing the banks to compete for deposits. It can be considered fraudulent in that the same money is being lent again and again - but it is a difficult question as to whether it is fraudulent - I am still trying to work it out! I began by reading Rowbotham on this subject, unwisely thought he was telling me the truth, and have since wised up. I would suggest Bernard Lietaer's "The Future of Money" as something more accurate and interesting.

Anyway, there still exists a serious issue with the debt-money model we use today - the INTEREST required to service a loan is NEVER created by the banking system. In effect if a bank lends you £100,000, it expects you to go out into the world and find this £100,000 plus the interest on it - even though the money required for the interest is NEVER created. Therefore the money supply always operates from a position of scarcity which promotes competition. It also seems to mean that on aggregate, society must either go into debt, or effectively become serfs to the bankers, exchanging their labour for the money required to service the interest. This is of course exactly what has happened now, bankers being at the top of the pile socially and financially.

I think there is a case for monetary reform (full reserve?), but it does help to get the facts right: the banks don't create money from nothing (I thought they did once - I was mistaken)...but the banking sector as a whole does through multiple relending of deposits.

The answer is simple: don't get into debt with these people.

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Yes, I was surprised to read that too as it goes against much of what I had accepted about todays' banking system. But really it is SO MUCH WORSE than this because actual bank reserves are not the only thing they call deposits. Banks are invested in all kinds of things, say they hold some stocks, a bomb canister load of derivative contracts and a load of junk bonds (UK household debt for instance :lol: ). All these things have a current market value which are added as reserves I suppose... What happens under such conditions that these valuations evapourate?

I am no banker (a w@nker maybe I hear you all say!) so I can't vouch for the accuarcy of my statements.

That's a bit bearish for you isn't it?

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Guest mattsta1964

Mattsa,

the banks don't lend against non-existent deposits exactly: they always lend a very large fraction of the money that is on deposit with them - new money is introduced into the economy via the multiplier effect, rather than explicit money creation. Here is how it works:

I deposit 1000 in the bank

bank has 1000 to lend. Call the reserve requirement 3%.

bank lends 970 - this eventually finds its way back to bank in form of deposits

97% of 970 is lent - finds its way back to the bank

97% of 97% of 970 is lent....and so on....

...if enough lending can be done a multiple of money in the economy is created which is the reciprocal of the reserve requirement (i.e. if requirement is 10%, then x10 money is created).

This model of banking allows net money creation, whilst forcing the banks to compete for deposits. It can be considered fraudulent in that the same money is being lent again and again - but it is a difficult question as to whether it is fraudulent - I am still trying to work it out! I began by reading Rowbotham on this subject, unwisely thought he was telling me the truth, and have since wised up. I would suggest Bernard Lietaer's "The Future of Money" as something more accurate and interesting.

Anyway, there still exists a serious issue with the debt-money model we use today - the INTEREST required to service a loan is NEVER created by the banking system. In effect if a bank lends you £100,000, it expects you to go out into the world and find this £100,000 plus the interest on it - even though the money required for the interest is NEVER created. Therefore the money supply always operates from a position of scarcity which promotes competition. It also seems to mean that on aggregate, society must either go into debt, or effectively become serfs to the bankers, exchanging their labour for the money required to service the interest. This is of course exactly what has happened now, bankers being at the top of the pile socially and financially.

I think there is a case for monetary reform (full reserve?), but it does help to get the facts right: the banks don't create money from nothing (I thought they did once - I was mistaken)...but the banking sector as a whole does through multiple relending of deposits.

The answer is simple: don't get into debt with these people.

That's a very interesting reply. Thanks for that.

The interest on the loan, because it is never created, has to come out of the economy of course. And people wonder why money is so scarse and why it is such a rat race out there. The answer to the shortage of money is simple. Lend even more! LOL! Utter Madness! How can we be so naive and ignorant that we have allowed this to happen. It's terrifying. My flat is going on the market this month. I'm out of this madness for good. Thank god I don't have any unsecured debts, credit cards etc

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the banks don't lend against non-existent deposits exactly: they always lend a very large fraction of the money that is on deposit with them - new money is introduced into the economy via the multiplier effect, rather than explicit money creation. Here is how it works:

I deposit 1000 in the bank

bank has 1000 to lend. Call the reserve requirement 3%.

bank lends 970 - this eventually finds its way back to bank in form of deposits

97% of 970 is lent - finds its way back to the bank

97% of 97% of 970 is lent....and so on....

It is plainly obvious from what you've said there that the bank would be

relending/recirculating the same money. No new money would be

introduced into the economy.

A good way to really learn what a total scam fractional reserve

banking is to study its origins. The Goldsmiths realised they could

make extra profits by lending out gold receipts for gold they didn't own.

The problem with this was the occasionally there would be a 'bank run',

and angry depositors would learn that bankers had been betraying their trust.

Nowadays the scam is much more sophisticated, you have a central bank

setup as a 'lender of last resort', ready to bail out any banks which

suffer a 'bank run', or whatever modern equivalent crises (e.g. LTCM).

And an army of highly-qualified bankers, being paid millions to

make the system look respectable with complex systems and jargon.

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That's a very interesting reply. Thanks for that.

The interest on the loan, because it is never created, has to come out of the economy of course. And people wonder why money is so scarse and why it is such a rat race out there. The answer to the shortage of money is simple. Lend even more! LOL! Utter Madness! How can we be so naive and ignorant that we have allowed this to happen. It's terrifying. My flat is going on the market this month. I'm out of this madness for good. Thank god I don't have any unsecured debts, credit cards etc

Mattsa,

You are indeed right - there seem to me to be two essential routes for society as a whole to get the money required to repay the interest:

1) Go into more debt (as indeed seems to be happening) - thereby prolonging the inevitable;

2) Exchange labour/goods/services with the bankers for the money required to service the interest.

Actually I think 2 seems to happen much more - after all bankers are bloody rich. In simple terms, bankers don't create the interest required to service their loans (say £100 over the lifetime of the loan) so we are forced to work for the banker (indirectly or directly, it doesn't matter, the result is the same) to get the £100 required to give back to him in interest. This is also why banks like long terms on their loans - the longer the term, the more interest is paid. This recent taste for IO mortgages really is debt-slavery in it's purest form.

It is a clever way of riding the backs of the working masses. On the other hand the current system does force the banks to compete for deposits (which they can then reloan) - therefore they offer free banking, interest on accounts (although some are shameful give crap interest!) etc. It is probably true that as a depositor you should get a better deal from fractional reserve banking than from full reserve. The difference between the rate they give depositors and the rate they lend at is of course the source of their profit. Consumers refusing to put up with shit deposit rates would be a big step to reducing the piss-taking that banks currently do, and reducing their profits.

However I read recently that the banks are not that bothered about deposits/savers anymore, because they are just going to the money markets to make up the money they need. This is a large reason why all RB's posts about Japan IRs are so important: banks have been getting huge amounts of 0% IR Jap money and then relending it - this seems cheaper than competing for deposits! However, it is coming to an end. Rates up!

Our debt and interest-based monetary system has been very successsful in promoting competition and economic expansion, but I am not sure it is sufficient now. Alternative models for money exist which I think are definitely worth a try.

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I've just noticed that the BBC haven't got an article about this on their website, yet most others have.

I wonder why this is? Answers on a postcard!!

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It is plainly obvious from what you've said there that the bank would be

relending/recirculating the same money. No new money would be

introduced into the economy.

A good way to really learn what a total scam fractional reserve

banking is to study its origins. The Goldsmiths realised they could

make extra profits by lending out gold receipts for gold they didn't own.

The problem with this was the occasionally there would be a 'bank run',

and angry depositors would learn that bankers had been betraying their trust.

Nowadays the scam is much more sophisticated, you have a central bank

setup as a 'lender of last resort', ready to bail out any banks which

suffer a 'bank run', or whatever modern equivalent crises (e.g. LTCM).

And an army of highly-qualified bankers, being paid millions to

make the system look respectable with complex systems and jargon.

DrDoom,

No, this is not right I am afraid: new money is generated by the method I describe. here again is how it works - say 90% of an original deposit of £1000 is lent (say to buy a car) - the person who has then sold the car to the person who took the loan deposits his £900 in the banking system - 90% of this money can then be loaned. This is then deposited; then this is loaned....etc. etc. The balance sheet of the bank looks like this:

deposits loans

1000.0 900.0

900.0 810.0

810.0 729.0

729.0 656.1

656.1 590.5

590.5 531.4

531.4 478.3

478.3 430.5

430.5 387.4

387.4 348.7

348.7 313.8

313.8 282.4

282.4 254.2

254.2 228.8

228.8 205.9

205.9 185.3

185.3 166.8

166.8 150.1

150.1 135.1

135.1 121.6

121.6 109.4

109.4 98.5

98.5 88.6

88.6 79.8

79.8 71.8

71.8 64.6

9353.9 8418.5

(I have not gone through to the end but far enough to illustrate) - the figures in bold are the totals - note that there is now roughly equal amounts of deposits and loans. There are now approx £9000 of loans and £9000 of debts in the economy - all from an initial deposit of £1000. Money has been created, but not from 'thin-air' exactly...rather from the confidence trick that is FRB. This is exactly the method you describe that was used by the early goldsmiths.

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a heartless hand on my shoulder. push and its over. alabaster crashes down.

6 months is a long time.

i tried living in the real world instead of a shell, but i was bored before i even began.

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Do you know what Capital adequacy (the Basle criteria) is?

I asked what the minmum reserve is on David's site, and got that answer. (I'm currently reading about it, but i'd like to read everyone's opinion).

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The BoE doesn't issue this type of stuff unless its really worried. Whilst cheap credit flows in from international money markets IRs are worse than useless. High IRs will simply create a bigger profit differential and spur on the carry-trade. The BoE is therefore effectively powerless...?

"The Bank of England is also increasingly concerned about the complex and risky financial instruments devised by banks and hedge funds, of which little is known."

So the current M4 figures could be wildly wrong.

Globalisation is a double edged sword. :ph34r:

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"One statistic in particular shows precisely how exposed the City is to the bursting of the household debt bubble. At the beginning of 2001, our banks were not lending customers any more than the total amount of deposits they held. By the end of 2005, banks were lending customers £500bn in cash which simply wasn't in the vaults".

RB - could that £500bn be the yct?

I believe the YCT (ZIRP---zero interest rate policy) will have a substantial impact on the economies who have benefited from cheap loans from Japan. I also believe the Japs are painfully aware of what is likely to happen as soon as they begin tightening as we have seen in recent weeks where the government has warned the bank to leave the rates where they are. The Japs have to balance the consequences for themselves of ZIRP against the collateral damage done to the world's economies if they begin to hike.

What is Japan going to do? They will eventually have to hike or face ruinous inflation and they have been there done that in the 1980's. Perhaps they will simply see IR hikes as a bitter pill for everyone to swallow as the necessary medicine to correct the global imbalances that have arisen because of cheap credit.

I simply see the ruinous effects of overborrowing and asset inflation in this country and my former place of residence, the US. The largest asset bubble of all time, HPI, cannot survive because the banking system cannot continue to feed it with the level of IR that the market needs to sustain itself (ever decreasing rates would be required as the level of debt increases). HPI must continue to grow or collapse. As it has hit the ceiling due to tightening credit it must collapse. If Gordon wants to keep the bubble inflating he will have to lower IR, hope enough borrowers come forward to buy at the top of the market and pray that unemployment does not get any worse. By so doing he may buy himself another couple of miraculous years but at the price of a far worse correction later on. I think he will be forced to take action now and follow his mate Ben down the path of hiking and hope the HPC can be contained to around 25-30% as in the Great Crash of 1989.

It will be interesting to see how the markets react on Thursday as Japan makes the decsion that will affect us all. I wouldn't be at all surprised if they back off and leave it until August. Its a terrifying position to be in.

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Whilst cheap credit flows in from international money markets IRs are worse than useless. High IRs will simply create a bigger profit differential and spur on the carry-trade. The BoE is therefore effectively powerless...?

That's the problem, central banks are much less powerful than they once were. they can just watch things unfold. They can play around with they short term interest rates but the markets don't really care. that's what greenspan called a conundrum.

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Likewise I could scarcely believe the strength of the language used here. They must be bloody frightened to be saying this. I thought the lending figure was £500million, until I read RB's post and saw that it read £500 BILLION. I had to go back to the original article to check the graph to believe it. That's a staggering sum.

Thats about the same amount the goverments gets from us each year in taxes and what do we get in return.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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