The Land of The Thieves - Chapter 5
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Episode 2: Zero point Two Percent of Human Population on Earth (2)
“The bank then lends the money to a fourth person, the fisherman. The fisherman spends it to buy the newest boat from a fifth person, the boat builder. The fifth person takes the hundred dollar bill to the bank, saves it. And so the sophisticated banking cycle continues—”
“—So, how many hundred dollars are now in the bank record? Three hundred dollars? You are wrong. The money grows to infinity because more and more people are involved in the savings and loan mechanism. Without regulation, the bank must set aside a certain percentage as a reserve, the multiplier effect is unlimited. In fact, come on, how much is the true value of money guaranteed by gold reserves? Yes, only a hundred dollars, then what about the other thousands of dollars? It’s only on paper. It’s really on paper, in bank records, in each other’s wealth records—”
“—The city’s economy is growing beyond measure. All productive sectors are competing to report transaction profits. The situation has run safely for decades. By Year 10, the circulation of the money in the entire town reaches one billion dollars, and the situation gets complicated, only a few people control the money. They are the super-rich people, who continue to greedily increase the nominal value of their wealth. Never satisfied—”
“—Say, in that year, there were a thousand people in the city who borrowed money to buy a house, we will call it ‘home loan’. The money borrowed from the bank was paid to the masons to build a house, and it turned out that the masons did not save the money in the bank, but instead spent it on their daily needs. A bank that is controlled by a few rich people thinks hard, if this is the way it is, how slowly they would increase their wealth. The money does not immediately return to the bank’s coffers, there is no money that can be circulated again, again, and again. Without money, the interest system doesn’t work, their wealth slows down. Avian, Mr. Smith comes up with an even more brilliant idea. He creates a beast called securitization. How? All the housing loans, which in total there are a thousand letters of credit agreement, are collected together, then considered as a product, such as a thousand pieces of tempeh or a thousand goats, then sold to the owner of the money, the super-rich people, in exchange for a percentage of interest that is paid each month plus installments. Nobody is interested? Easy, just raise the interest rate, add the spices like promise everything is safe and guaranteed. If there are problems, the houses can be used as collateral—”
“—Smart idea! Of course, it’s brilliant. The bank, which was short on cash, quickly came back with money. A lot in fact, not only as lenders but now also as ‘customers’ for the buyers of the securitization assets. The idea works beyond measure. With the proceeds from selling a thousand letters of credit agreement, the bank is free to extend the next credit to the townspeople. The bank receives payments from customers every month. The money is used to pay the holders of securitization assets. Everything is controlled, everything is fine so that without realizing it, the asset which is basically just a sheet of paper ballooned beyond measure—”
“—The prices of the properties shoot up, the commodity prices get out of control. It is also because of the emergence of other derivative financial transactions, Mr. Smith creates futures transactions: oil or wheat that needed six months to be bought now, so the money could be circulated everywhere, into many times. And boom! Thousands of housing loans suddenly go into complete default, people begin to think that prices are no longer rational. Commodity prices fall like a roller coaster, and chaos ensues all over—”
“—Banks cannot collect credit from townspeople, while the owners of securitization assets have started to ask for repayment. Panic, the townspeople panic, the boat builder and the engine maker rush to get money from the bank, even though the money has already been loaned to the tailors and fishermen. There is no money in the bank, only lending and borrowing records. Gold Guarantee? People forgot that it’s only for the first hundred dollars. The position of the bank is wedged, top-down. It doesn’t take a genius to conclude that it’s just a matter of time when all the securities will be in freefall, there’s no price anymore. The asset securitization crisis is spreading everywhere—”