Nice analogy of ‘basic banking’ as this is – it’s just a shame that the more esoteric elements of the unreal world of banking can’t be fleshed out in such a straightforward analogy – balls after all are real objects, money isn’t – and banks create more of it out of thin air, lend it to people, charging them interest, and thereby make more of it for themselves —- any ideas how you turn that into an easily understandable analogy?
Obviously the fact that it’s not so easy to convert that idea, let alone hedge funds and credit default swaps, into easy-to-understand analogies that led us to the economic mess we’re in at the moment, amongst other things of course.
Oh and ss with so many outstanding resources – the source of the lovely cartoon was from a friend at work, whose ‘hippy friend’ had posted it on Facebook – It just had to be shared…
Not sure about an analogy, but think about this. The Fed/Treasury loaned something around $7 trillion to banks and other financial institutions in 2008/2009 as a result of the “financial meltdown”. The logic of this was that “we needed liquidity” and we needed an “injection of capital” into “the markets”.
The claim was that in order to address the economic downturn we needed to make credit available to borrowers, i.e. businesses and home owners. So they claimed that in order to do this the government needed to lend money to banks so that banks could then loan it out to borrowers. In essence, they claimed that the banks were simply providing a means to an end, and the end was providing credit to borrowers.
Think about how stupid this is.
If the objective was to help out borrowers then why didn’t the government just lend the money directly to borrowers at those low interest rates? Instead they loaned the money to banks at less than 1% interest and allowed banks to loan it out to borrowers at any interest rate they wanted!
Money is effectively the “commodity” that banks have. What the government did was the equivalent of “helping the economy” “creating” $7 trillion worth of cars out of thin air and giving them to car dealers and allowing them to sell them and keep whatever they could charge above the base price, then repay the government only the base price, like giving them $7 trillion of cars that cost $15,000, letting them sell the cars for anywhere between $16,000 and $25,000 each, and keep everything they charged over the $15,000, only having to pay the government back the $15,000.
Now think a little about this. If the government gave trillions of dollars worth of cars (that they created out of thin air) to car dealers, then car manufacturers would be screwed. Who is supposed to be the ones supplying money to the banks? Savers. So interest rates on savings devices, savings accounts, money markets etc. dropped to near zero because the banks no longer needed to borrow from savers, they got their product form the government, just like auto dealer wouldn’t need to buy cars from car markers if they got a bunch of “free” cars form the government.
But the thing is, the policy of providing cars on loan for free to auto dealers for them to sell would primarily benefit auto dealers, no one else, it would effectively just be the same thing as giving them free money. If the objective were really to benefit people the government would just have sold all of the cars to people directly at $15K each instead of giving them to a middle-man whose main role is just marking up the price and taking a cut.
What the government really did was, in the name of “stimulating the economy and providing credit to borrowers”, it gave a free product to middle-men and allowed them to take a cut in order to get back enough money to cover their massive losses.
It’s like, oh, I just bet $10,000 on roulette and lost, so now someone says, okay, I know you need that $10K, so I’ll loan you $100K and let you play craps (a conservative, relatively easy to win game) until you get your $10K back, then you can repay me my $100K.
The banks tanked the economy and caused massive losses for average people, then the government loaned them trillions of dollars for essentially free in order to let them use that money to recoup their losses by charging interest to the victims of the banks actions!
Better yet, what happened is like a c4sino that invented a new game, and then the c4sino lost billions on the new game, so then the government came in and lent them for them to use to recoup their billions by running more games in which the house had guaranteed winning odds.
FYI: The screen software for this blog has blacklisted the word c.a.s.i.n.o.