Re: The Mission of Banks is to Cause Debt!
Banks create debt at the jump because the currency we used is based on debt.
Except it isn't - not really.
There's a common belief that Debt is an Asset. And that is why the crashes happen. Debt is, in fact, an expectation of an asset. The value depends entirely on the probability of that debt being realised...
So we have banks lending to people with no hope whatsoever of paying back the loan. If you believe that Debt = Asset, the bank now has an asset worth what it paid, as well as an ongoing revenue stream from sevicing the debt. All good, right?
But if you now look at the expectation, the bank's asset is entirely worthless[1], and the ongoing revenue stream merely increases the book value of the asset without increasing the near-zero probability of that asset ever being realised.
And this is why the banking crash happened - banks threw their money down the toilet whilst paying salesmen to do so. Someone should have paid more attention in Statistics classes. Debt is not synonymous with Asset, so getting customers to take on debt does *not* mean your assets increase. The macho-sounding "Ninja Loan" is a good example of this...
I have no idea how to tell the bankers of the world that they don't understand money. But someone needs to.
Vic.
[1] In the event of a secured loan, such as a mortgage, the value might not decrease to zero, as there is the sale value of the security. But if the loan is secured against, say, a house in a housing bubble, that value doesn't match the debt - and the more reposessions that occur, the more that disparity dominates :-(