Cyprus-Forum.com

[Paphitis]

Robin Hood,

thank you for your detailed and considerate response.

We are quite fundamentally opposed in our views of the Banking System and Capitalism as a whole.

I am aware of the Fractional Banking System. It is a system which is necessary, and the Banks know that they only need to maintain a fraction of funds as "reserve" to cover their customer's daily needs and also, there is new money always rolling in replacing the funds that are withdrawn. The remainder is loaned to other customers wanting to buy homes or for business.

It is literally a Merry Go round, and the Banks are doing what I have been quite successful at doing for years now.

I rely on the Banking System for my families financial well being. I have made a lot of money over many years by using their money. My experiences with well over half a dozen Financial Institutions over the last 2 decades has been positive. Every time I ask for money, they have obliged with little restrictions. The amounts of money I have borrowed from them is eye watering. I have been described as a mad man, but I have always been willing to take a punt and a risk.

My liabilities peaked in 2010. I have now managed to restructure with the Banks assistance. During the last couple of decades, I have managed to buy and keep on buying Real Estate and other Commercial Properties that provide my family with good residual incomes. The holding are all split over many companies which I own, and 2 Trusts.

So I have faith in the system which has made my family money. I have also made one or two bad decisions as well, which have lost me some money. You got to shrug those off. You can't win them all.

Basically, the Banks are doing what I do but on a much larger scale. If I knew anything about Hedge Funds and Derivatives, then I might get into that if the risk was manageable, but since I do not know what I am doing, I just stick to property and a few shares.

Depositors make cash deposits to Banks, and I come along and ask the Banks to borrow this money so I can buy this or that. The Banks give me this money, and the money is likewise mine. I invest it, hopefully make good capital gains out of it, and all I need to do is make sure that my installments are made on time. Great arrangement as far as I am concerned, especially since I have been fortunate or lucky enough to make some great gains. And in that time, I have also been fortunate enough to buy my toys, and just enjoy my life. I do not allow things to get so far out of hand whereby it effects my lifestyle or my ability to live a normal ad healthy life.

Let's face it. In my experience I have never seen a Financial Institution go to the wall. I have never experienced one needing a "Bail In" except in Cyprus. I have experienced them make obscene profits year after year, which is fine in my book. They are in important factor, and just like they have helped me achieve some goals, they also fund business big and small, which in turn provide employment to millions of people.

The system works very well, and I do not believe the Fractional Banking System will be the "downfall". Money is a commodity and it needs to circulate.

Everyone gets out of them what they want. Some people just want to park their money there. That's fine. These people are looking for a safe haven and the Banks are as safe as you can get except in Cyprus where things have been turned on their ear. They are a necessary part of the money chain.

[Robin Hood]

Paphitis.
We are actually not that far apart!

Capitalism is the only basis for our society but, it cannot be uncontrolled. It is simple fact that the fractional reserve system allows banks to create money out of thin air in an almost uncontrolled fashion. With the ability to create 97%+ of ‘money’ through the banking system as debt it means that we will never be out of debt. Another aspect is that the money being created, as you have demonstrated, is going into property and financial ‘products’, only a small percentage is going into the wealth creating industries that will create jobs to reduce unemployment and start the process of wealth generation.

It is literally a Merry Go round, and the Banks are doing what I have been quite successful at doing for years now

I don’t really think that with the current economic situation ‘successful’ is a fair description? They have created an ever increasing mountain of debt which the banks profit from, the more debt they create the more money they make and unfortunately most of it remains within the banking and financial system, or property, rather than the wealth creating economy.

Basically, the Banks are doing what I do but on a much larger scale. If I knew anything about Hedge Funds and Derivatives, then I might get into that if the risk was manageable, but since I do not know what I am doing, I just stick to property and a few shares.

It was relying on these financial experts, a reputable and internationally known bank, that virtually wiped out my pension. It was this event that made me realise that I knew nothing about money. I learned and was appalled at what I discovered. I took on the bank (it was not made easy) and won .... to a degree ..... they paid compensation but nothing like the amount I lost. I then realised that, like me before I educated myself to it, 99% of people had no clue as to how money is created or how banks operate, as some Statesman said “If the people found out how the banks operated ........ there would be revolution tomorrow!”. And he was right, that is why you find little about it until you look for it and to do that you need to have an interest in doing so .... most people do not have any interest in finding out until, things go wrong for them, they lose and then it is too late.

Depositors make cash deposits to Banks, and I come along and ask the Banks to borrow this money so I can buy this or that

.
Wrong! As I explained, the money they give to you as a loan is created as a loan. Before you took out the loan the money did not exist.

Let's face it. In my experience I have never seen a Financial Institution go to the wall

Lehman Bros? They don’t go to the wall because you and I bail them out. When they make money they keep it, when they lose we top up the kitty. If you could find a bookmaker that will pay out if you lose as well as when you win, we could all be as rich as bankers.

I have never experienced one needing a "Bail In" except in Cyprus.

That of course is the new norm, certainly in the EU financial and banking system. Cyprus didn't need it, it was imposed by holding a gun to the Presidents head! They have just put this legislation on the EU statute books ..... no more ‘bail-outs’ only ‘bail-ins’ from now on!

I have experienced them make obscene profits year after year, which is fine in my book. They are in important factor, and just like they have helped me achieve some goals, they also fund business big and small, which in turn provide employment to millions of people.

That is the problem! The make big profits without creating wealth because the profits they make go back into the financial system to create even more money. They amount they use to fund MSE is a small percentage of the total, most of goes into housing and their own financial products.

Money is a commodity and it needs to circulate.

I agree but, it has to be perpetual money which circulates and this is only possible if the creation of money is in the hands of responsible Government. The money created by banks, as I said before, originates as debt and has to be repaid with interest. If more money needs to go into the economy the only way at present is to borrow it from the banks ..... which are private companies. At present it is a closed loop originating from bank and eventually returning to the banks where the created money then ceases to exist. Money fed into the system from the government is perpetual as it eventually returns to the government and is put back into circulation without having to borrow (no debt) and without having to pay interest.

They (Banks) are a necessary part of the money chain.

Again, I agree but only the commercial banks and operated the way MOST people think they operate, with the fractional reserve at 100% but excluding investment (Casino) banks which are more a gambling house than a bank. Therefore the two have to be separated as they were before Investment and Commercial Banks were merged.

As I said ...... an interesting subject? As you can see by the lack of replies .......... it is a subject people seem to have no knowledge of or no interest in!

I am sure you will find the following an interesting explanation (a lecture but not an academic type lecture). 'Positive Money' have produced many simple videos about the money system. Most are just a few minutes long but are still worth a view.

http://www.positivemoney.org/our-proposals/video-reforming-the-monetary-system/

[Paphitis]

We are actually not that far apart!

Capitalism is the only basis for our society but, it cannot be uncontrolled. It is simple fact that the fractional reserve system allows banks to create money out of thin air in an almost uncontrolled fashion. With the ability to create 97%+ of ‘money’ through the banking system as debt it means that we will never be out of debt. Another aspect is that the money being created, as you have demonstrated, is going into property and financial ‘products’, only a small percentage is going into the wealth creating industries that will create jobs to reduce unemployment and start the process of wealth generation.

I do not agree Robin Hood. What you are saying is in my opinion unsubstantiated rhetoric from sectors that oppose the system that effectively works very well.

In most countries, Banking is strictly controlled and Governed by Central Banks. This Bank effectively is the Government. It is not an enterprise. They get Government to legislate, protect consumers, and control the Banks from doing risky investments. That is the general idea, until one day, the US Government decided that it was good policy to allow every American the right to achieve home ownership or "the great American Dream". So there were millions of "non performing" loans, which created a glut of property on the open market as people were handing in their keys to the Banks, resulting in property prices falling resulting in heavy losses.

These Central Banks set fiscal policy, interest rates, and control the rate of inflation. Only these Central banks can print money to keep Government in business and pay for things like welfare, health, social services, law enforcement, education etc etc. Other Commercial Lenders DO NOT! However, Commercial Lenders do borrow this money from the Central Bank at very low interest rates as well as rely on their depositor Balance Sheet.

They have created an ever increasing mountain of debt which the banks profit from, the more debt they create the more money they make and unfortunately most of it remains within the banking and financial system, or property, rather than the wealth creating economy.

Yes the Banks do buy a lot of Government Bonds. These types of investments are usually regarded as safe havens. For example, a Bank that lends the UK or US Government some money, will do so at very low interest rates. The Banks are basically using this as their way of parking huge amounts of Capital with little return.

A US Government Bond or Treasury Bill is only worth about 1% per year.

It was relying on these financial experts, a reputable and internationally known bank, that virtually wiped out my pension. It was this event that made me realise that I knew nothing about money. I learned and was appalled at what I discovered. I took on the bank (it was not made easy) and won .... to a degree ..... they paid compensation but nothing like the amount I lost. I then realised that, like me before I educated myself to it, 99% of people had no clue as to how money is created or how banks operate, as some Statesman said “If the people found out how the banks operated ........ there would be revolution tomorrow!”. And he was right, that is why you find little about it until you look for it and to do that you need to have an interest in doing so .... most people do not have any interest in finding out until, things go wrong for them, they lose and then it is too late.

I'm really sorry to hear that Robin Hood. I hope you bounce back from that.

Banks sell a lot of products including Super Funds. I have elected 100% Australian and International Shares for mine. When you do that, you have to accept the good years with the bad. I am reasonably young, in in good years you get anywhere between 15 and 20%.

Wrong! As I explained, the money they give to you as a loan is created as a loan. Before you took out the loan the money did not exist.

I do not agree.

The money did exist either from Depositors, or the open credit market which means that the Banks borrowed it from another lender or the Central Bank itself. That is why money has a cost even for the Bank since they must pay interest to either the Central Bank, other lenders or depositors at the official rate.

When they lend it, that is when the money physically disappears! The Bank no longer has it. They rely on the fact that you must eventually pay it back with interest (their profit). The money however does not disappear from the Bank's Balance Sheet as an asset, and on my Balance Sheet as a Liability (debt). Wouldn't it be great if it did?

Lehman Bros? They don’t go to the wall because you and I bail them out. When they make money they keep it, when they lose we top up the kitty. If you could find a bookmaker that will pay out if you lose as well as when you win, we could all be as rich as bankers.

Lehman Bros has gone Bankrupt!

Laiki will go Bankrupt!

That of course is the new norm, certainly in the EU financial and banking system. Cyprus didn't need it, it was imposed by holding a gun to the Presidents head! They have just put this legislation on the EU statute books ..... no more ‘bail-outs’ only ‘bail-ins’ from now on!

You are not the first to say this, but I have yet found any source or evidence of this "new norm" on the EU Statute Books.

A bail in is always possible because in every country, Capital Guarantees only cover a certain amount. It is about 100,000 in Australia. So big depositors could be in for a nasty surprise should a big Bank fail, which is very unlikely because they just keep making enormous profits.

No Bank wants to fail. They want to make money or profit for their share holders.

That is the problem! The make big profits without creating wealth because the profits they make go back into the financial system to create even more money. They amount they use to fund MSE is a small percentage of the total, most of goes into housing and their own financial products.

They have created a lot of wealth for many people and businesses.

I never would have achieved anything without them, because as you know very well, money breeds money.

The old wives tails about saving is all bullshit! Yeh you can save a bit but so what. You could also borrow and make a lot more.

I agree but, it has to be perpetual money which circulates and this is only possible if the creation of money is in the hands of responsible Government. The money created by banks, as I said before, originates as debt and has to be repaid with interest. If more money needs to go into the economy the only way at present is to borrow it from the banks ..... which are private companies. At present it is a closed loop originating from bank and eventually returning to the banks where the created money then ceases to exist. Money fed into the system from the government is perpetual as it eventually returns to the government and is put back into circulation without having to borrow (no debt) and without having to pay interest.

I think we have already established that Banks are unable to print or create money. Only the Central Bank can and they are also the Banking Industries regulator, and they set interest rates as well as control inflation. This Bank is effectively the Government, otherwise known as The Treasury or Central Bank. Government is however unable to interfere with or influence their decision making process, but Government is allowed to formulate Acts and Laws which the Central Bank must then enforce.

Again, I agree but only the commercial banks and operated the way MOST people think they operate, with the fractional reserve at 100% but excluding investment (Casino) banks which are more a gambling house than a bank. Therefore the two have to be separated as they were before Investment and Commercial Banks were merged.

As I said ...... an interesting subject? As you can see by the lack of replies .......... it is a subject people seem to have no knowledge of or no interest in!

I am sure you will find the following an interesting explanation (a lecture but not an academic type lecture). 'Positive Money' have produced many simple videos about the money system. Most are just a few minutes long but are still worth a view.

http://www.positivemoney.org/our-proposals/video-reforming-the-monetary-system/

Yes it is an interesting topic. People should get more involved and try to understand some of the basics. I am no expert and I don't pretend to even know much other than a few basics which most people don't even bother with. My experiences has made me for instance try and get a better understanding of my consumer rights in order to protect myself. The Financial Services Act is very important to anyone that will borrow even if it is a mere Credit Card.

Banks are effectively unable to keep 100% of all depositor funds. They MUST rely on a fractional system, and recycle most funds into lending products. If they did not do that, they would not profit, since all they have is a 100% liability or debt which they must pay interest on. The economy would also grind to halt and no one would be able to do anything. No jobs, no economy, just economic oblivion and depression.

The major Banks form other businesses, which in turn become their "Casino" arm. The public has no access to this Pty Ltd. Only about 10% or less of the Banks funds are fed into this subsidiary, which in turn are invested in risky high return hedge funds. The Bankers that work in these areas are extremely talented and analytical minds and are very well paid professionals. Should this arm lose all its money, then the theory is that the Big Parent can consume and sustain the losses.

As to all the other "expert" opinions, I am very suspicious of alternative agendas. They are all very eager to tell us why the system is bad, but they offer no alternative. They also come up with a lot of bogus crap.

[supporttheunderdog]

On the mountain of debt, according to press reports non performing loans in Cyprus amount to about EURO 26 billion. That is to close to Euro 26,000 or more for each and every person in Cyprus, all owed to the banks and coops. I would not rule out consequences not just on debtors but the whole economy.

[Robin Hood]

On the mountain of debt, according to press reports non performing loans in Cyprus amount to about EURO 26 billion. That is to close to Euro 26,000 or more for each and every person in Cyprus, all owed to the banks and coops. I would not rule out consequences not just on debtors but the whole economy.

Taking your figures as absolutely 100% correct ......... let me expand your argument a bit!

In very simple terms; the €26bn you have stated is ONLY the NPL’s which I believe represent something like 40% (?) of the total Bank loans portfolio. If that is true (let’s assume it is) then the total loan portfolio of the Banks is around €65bn. Of course some of that will be accrued compound interest but we will ignore that and consider only the total debt.

That €65bn in turn means that the level of debt per head of population in Cyprus, and that’s every man/woman/child/pensioner etc. is roughly around €65k per person? (i.e. debt divided by population)

Nobody ever seems to ask the very simple question ....................... WHERE DID THE BANKS GET THAT SORT OF MONEY FROM IN THE FIRST PLACE?

Think about it!

Even now it appears they are trying to shuffle things around to cover up the true level of these NPL’s? What a bunch of thieves they are that run the banking system, not just in Cyprus but Worldwide?

[GreekIslandGirl]

On the mountain of debt, according to press reports non performing loans in Cyprus amount to about EURO 26 billion. That is to close to Euro 26,000 or more for each and every person in Cyprus, all owed to the banks and coops. I would not rule out consequences not just on debtors but the whole economy.

You've made a few assumptions there. Firstly, you haven't taken into consideration those loans which ARE performing and could help write off the bad loans or minimise their effect. And secondly, the bad-performing loans may not all be internal; some are likely to be foreign-owned debts and so equating that figure per head of Cyprus' population may not reflect reality.

[Robin Hood]

On the mountain of debt, according to press reports non performing loans in Cyprus amount to about EURO 26 billion. That is to close to Euro 26,000 or more for each and every person in Cyprus, all owed to the banks and coops. I would not rule out consequences not just on debtors but the whole economy.

You've made a few assumptions there. Firstly, you haven't taken into consideration those loans which ARE performing and could help write off the bad loans or minimise their effect. And secondly, the bad-performing loans may not all be internal; some are likely to be foreign-owned debts and so equating that figure per head of Cyprus' population may not reflect reality.

I asked a question in the post prior to yours ........ do you know the answer? By your reply above and with all due respects, I don't think you do.

Nobody ever seems to ask the very simple question ....................... WHERE DID THE BANKS GET THAT SORT OF MONEY FROM IN THE FIRST PLACE?

Where the loans are made geographically and to whom is irrelevant. The NPL's are 'bad assets' because the Bank is unlikely to see the loan repaid nor will it get its interest. The 'PL's' are 'good assets' because they are being repaid along with the interest. PL's will not pay off the NPL's, they will only pay off the original loan. If all the loans the Banks have are paid off it will mean that the Commercial Banks have no income, as their assets will have dropped to near zero and they rely purely on the interest on debt to make their money! Commercial Banks have to have debt to operate

Think about my question and tell me where you think the Banks got the money from. I will be interested to read your answer. Seriously!

[GreekIslandGirl]

On the mountain of debt, according to press reports non performing loans in Cyprus amount to about EURO 26 billion. That is to close to Euro 26,000 or more for each and every person in Cyprus, all owed to the banks and coops. I would not rule out consequences not just on debtors but the whole economy.

You've made a few assumptions there. Firstly, you haven't taken into consideration those loans which ARE performing and could help write off the bad loans or minimise their effect. And secondly, the bad-performing loans may not all be internal; some are likely to be foreign-owned debts and so equating that figure per head of Cyprus' population may not reflect reality.

I asked a question in the post prior to yours ........ do you know the answer? By your reply above and with all due respects, I don't think you do.

Nobody ever seems to ask the very simple question ....................... WHERE DID THE BANKS GET THAT SORT OF MONEY FROM IN THE FIRST PLACE?

Where the loans are made geographically and to whom is irrelevant. The NPL's are 'bad assets' because the Bank is unlikely to see the loan repaid nor will it get its interest. The 'PL's' are 'good assets' because they are being repaid along with the interest. PL's will not pay off the NPL's, they will only pay off the original loan. If all the loans the Banks have are paid off it will mean that the Commercial Banks have no income, as their assets will have dropped to near zero and they rely purely on the interest on debt to make their money! Commercial Banks have to have debt to operate

Think about my question and tell me where you think the Banks got the money from. I will be interested to read your answer. Seriously!

A long time ago I decided money was an abstract concept (much like bitcoin is now) and somewhat like the energy in the universe which just converts from one form to another neither being destroyed nor created. So there are these numbers (infinite) which bankers tap into and pass around like energy packets. It doesn't interest me enough.

[supporttheunderdog]

"g"IG's answers on economic matters are nearly always illuminating, in one way or another. One had for example the comments about the Greek haircut only affecting the interest and not the capital, when it was a major scalping of the capital. Note, I am not saying that the Greek Junk bond issue was the cause of the *anking crises we now have, but I would suggest it was a symptom of chronic mismanagement by the *ankers now well illustrated by the NPL issues, and involving what is probably something of a property bubble. The *ankers should for example never have lent to developers on the basis of properties already built and supposedly sold, only on the security of developments not completed. For other businesses eg retailers, did they have a proper look at the business plans and the ability of the borrower to repay out of earnings? 26 billion makes the Orphanides collapse seem small beer. And Robon hood is right. It does not matter who the loan is to or where the borrower is domiciled, but if made by a Cypriot bank the biggest risk is once again to the rest of Cyprus, as happened with BoC and Laiki.

The figures btw come from The Farmagusta Gazette reporting on information released by the central Bank. The report suggests some 39% of loans in the commercial sector valued at just over 20 billion are NPL, while 44% in the Coop sector, or just under 6 billion, are defined as NPL. That makes total debt around 60 billion. Are the banks going to need more by way of bailout over the 10 billion? Will some go to the wall?

I would not bet on any early release from capital restrictions until the NPLs are restructured. Who would want to trust any more of their money than that had to, to our *ankers.

[GreekIslandGirl]

Lots of waffle from stud who is once again stumped! What have any of these iffy extrapolations of yours to do with "The End of Britain" ?