Why Private Bank Money Creation is Dangerous

The financial cycle refers to a co-movement between asset prices and bank lending. While asset bubbles can definitely emerge themselves (just look at the recent Gamestop and Bitcoin stories), thanks to positive feedback loops that are inherent to these markets, when the banks join in … you better hide because that’s when they can get truly dangerous.
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The Narrow Corridor: States, Societies, and the Fate of Liberty: amzn.to/3gr6pSV
Money Changes Everything: How Finance Made Civilization Possible: amzn.to/3mt3xbY
Adaptive Markets: Financial Evolution at the Speed of Thought: amzn.to/3sCkS3a
House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again: amzn.to/3gqXNeZ
The Third Pillar: How Markets and the State Leave the Community Behind: amzn.to/382Agwo
There are two elements to the financial cycle story:
1) The first is that of rising asset prices, primarily houses, but also stocks.
2) And the second is that of rising debt to GDP. Or increased bank lending.
The biggest and most recent episode of a financial cycle happened in the United States and it started … right around 1996. In this year both the level of debt compared to the size of the economy (also known as credit to GDP) and inflation adjusted house prices started to pick up. And up and up they went. And as they went up… the people were happy, the sky seemed the limit. If you want to get rich, just buy a house.
And the banks? They were more than willing to lend. After all, if a borrower could not repay the loan, he or she could sell the house. Since the price could only go up, the house sale would always yield enough money to repay the loan….
Now at the same time, it so happened that the economy was doing really well. Even a big stock market crash in 2001 could not stop the party. After that stock prices also started to pick up until….. in 2006 house prices started dropping. Then in 2007 stock prices followed, and in 2008 everything came crashing down and the world faced its biggest banking crisis in a hundred years.
Currently banks are far better regulated and are less likely to have pumped up asset prices such as those of stocks like Tesla, and Nvidia, but also about crypto assets like Bitcoin and Ethereum.
This video has been inspired by work from economists at the Bank for International Settlements such as Claudio Borio. I'm also using it in a course that I am teaching at the University of Groningen called International Financial Markets that I teach with prof. Dirk Bezemer.
Want to know more? Watch the video, or read it all in the script here: www.moneymacro...
Narrated and produced by Dr. Joeri Schasfoort (University of Cape Town)
/ joerischasfoort
/ joeri-schasfoort

[@abhishek.chakraborty]

A really underappreciated channel imparting much needed financial education 🙏 I hope your channel subscription grows exponentially in future 👍

[@MoneyMacro]

Thank you!!

[@salimhendrawansyah882]

Yes from Indonesia I am agree... very proud of u. And you know I am also put so much interest in "what is money? How the economic works? " Since I was child. Now I am a cardiologist... But KZbin could give me so much knowledge and it brings me to your channel... Good to see u

[@owennilens8892]

Considering this video is on asset bubbles I think you've missed the opportunity to do a poll with plenty of relevant keywords to help you in the KZbin algorithm. You could still do it. It is trendy to do so now.

[@MoneyMacro]

I can't .... you need to have 1000 subscribers for that. Hehe bummer.

[@owennilens8892]

@@MoneyMacro bah! what a bummer indeed!

[@devinbowman5782]

@@MoneyMacroJan 27, 2021: 34000 subscribers Dude you have come such a long way in such a short time. Not to mention I only discovered your channel through one of your polls regarding EE on I think inflation.

[@MoneyMacro]

@@devinbowman5782 yeah ... When the algorithm kicks in.... It truly kicks in :)

[@sdprz7893]

@@MoneyMacro loool this aged well, how’s 35 thousand sound instead?

[@DanHaiduc]

Thank you for creating your channel and posting these videos! I find it hard to stop watching. Your content is amazing and wellresearched!

[@Ausfailia]

Australia is currently heading towards the downswing in my opinion, lending has hit record highs along with record high house prices, yet interest rates are rising next year

[@owennilens8892]

Your channel really deserves more attention 👍 😉 #AssetBubble #ShortSqueeze #WSB #GME #Bitcoin #Housing #Markets

[@owennilens8892]

And #Bubble

[@owennilens8892]

Okay I now get Bubbles&Co bathrooms ads... I deserved that... 🤦‍♂️

[@MoneyMacro]

@@owennilens8892 Thanks Owen!! Will add some of those.

[@MoneyMacro]

Also, the gamestop story is super interesting! Adding a quick take on that now.

[@scotthurrell8733]

One of the best channels on YT. Well done! Keep going

[@19billdong96]

“When the banks get involved, things can get truly out of hand” Fed: *Hey can you turn down the money printer for a second? I can’t hear what this guy is saying!*

[@treyquattro]

that futuristic-looking bridge is in Buenos Aires Argentina BTW

[@marten73]

I think the vast majority of home buyers are aware that prices won't go up forever. Instead it's the renters who consider the housing prices and the (unrealized)profits as unfair and who seem to think that owning a house is financially secure and forget how the housing crisis a decade ago ruined many households, especially when they lost their jobs or got a divorce in that period.

[@jamesclarke2789]

Well, I guess the guy in the video was referring to people who buy properties on a speculative basis, rather than those who simply want to buy a property to live in. While the capital gains are an unrealized profit that only exists on paper for the owner until the property is sold, it's still a form of significant economic value even before the property is sold, with significant distortionary impacts for the broader economy, including on those renters of whom you seem to dismiss so easily. Housing unaffordability never has just been about housing unaffordability itself in terms of its economic impacts. The ways in which it has distorted allocative efficiency of both capital and labour across the broader economy means that housing unaffordability continues to be an iron weight on the capacity of an economy to achieve lasting productivity gains and the type of economic growth that improves living standards. In the longer term, that negatively impacts everyone, including the renters...

[@XaharYoutube]

THANK YOU very much for this video... always thinking about to produce a published paper [requirement for my PhD study] on housing price and credit creation. This video gives me a very good idea on what research can be done on a smaller scale for my upcoming paper.

[@shushirakawa3182]

Wouldn't it be much better to tax the money out of the economy rather than raise interest rates? Hypothesis: When you are borrowing money, you are basically renting money from the bank. You need some economic growth to cover the fees. Population growth is going down and other factors drive deflation. If you raise interest rates by too much then you have to lower them again. Probably deeply negative. Thought experiment: EE mentioned "shorting the dollar" through borrowing. If borrowing really is shorting, that would imply that people who accept x% interest loans also expect the value of the dollar to go down by x% each year. Assuming you borrow, interest is directly responsible for creating an inflation expectation if there is no growth to back it up. After all, the economy can only grow nominally (more dollars, same quantity of goods). The other implication is that the profit margin banks put on top the central bank interest rate puts a price floor for inflation if interest rates get stuck at 0%. Inflation has to be at least as high as the profit margin of the bank. The other interpretation is that shorting the dollar with 5% interest at 2% inflation forever means I expect that interest on the loan goes down over time until it is negative enough to break even or negative enough to be profitable. Conclusion: Either way high interest eventually ends up with lower real interest rates (interest - inflation) and low real interest rates lead to high real interest rates forming a cycle. It might be better to stay at 0% forever and tax inflation out of the economy which eliminates the need for cycles.

[@hemiedwards217]

yep hiking interest rates is an utterly dumb way to control prices in the economy. It would actually be much better to manage the economy through taxation, but this flies in the face of economic and political orthodoxy. It's something that MMT advocates. Targeting interest rates is excessively focused, particularly since it disproportionately impacts the construction sector, which is especially sensitive to interest rate costs. When construction contracts, it will inevitably lead to rising house prices, since there is less housing available on the market to buy.

[@PalfraDK]

Something that has been puzzling me is if the amount of debt and the amount of money is balanced? If you take a loan you typically need to pay more money back because of interest, and since less money is created than the amount of debt, this leads to an ever increasing unbalance between debt and money? Where does all this debt go - is there some "debt-sink" and what is it? If not won't ever increasing debt lead to eventual collapse?

[@MoneyMacro]

No. It's a very common question. But, no basicaly debt is fixed in time. But interest is an income payment. But, there are many other income payments as well. E.g. banks pay their employees who buy bread etc. In other worrds, if entrepreneurs have some banker clients then yes the entrepreneur pays interest to the bankers. But, the bankers also buy stuff with the entrepreneur. So, debt doesn't need to increase because of interest payments. ,

[@PalfraDK]

@@MoneyMacro Not sure that answers what I meant to ask. Okay maybe what we call debt doesn't increase, but a banker expects you to pay back the debt and (usually) a positive amount due to interest in addition. But what is the original source of that additional money to pay the interest supposed to come from in a world where money is created from debt? So e.g. imagine a new world with just a banker and a loan taker starting from 0 debt and 0 money initially. The banker gives a loan of 100 thereby creating 100 units of money and 100 units of debt and expects this 100 units of money back to cancel the debt and 10 units of money in interest at the end of the term. At the end of the term the loan taker pays back the 100 money units but the 10 money units to pay the interest does not exist because the banker only created 100 units of money to begin with, which can only cover the initial debt? Therefore the only way to get money to pay the interest is to take another loan and then a cycle of increasing debt is going? At least if this is the only way that money can be created?

[@super8mmo]

Argumentos muy simplistas.

[@krissp8712]

I'm coming back after the latest FTX crypto for more information about speculation, the positive feedback loop in the asset market seems absolutely bananas crazy to me!

[@krissp8712]

Also I love the tinfoil hat guy stock photo to represent "irrational people" - that's hilarious!

[@Vexxed]

Great video, however, I disagree with one statement. Austerity doesn't make things worse. It forces unprofitable companies to go out of business. Genuinely good companies who create value for consumers and are conservative with their finances simply can't compete with businesses who only survive on credit and spend illogically. It is necessary to force companies following poor practices out of business. This is the good that comes with austerity.

[@didi059x7]

WRONG Austerity makes things worse. And it has been demonstrated in Europe. The sole European country not to implement austerity was Belgium,, because it had no government for almost TWO (!) years. And.. Belgium was the FIRST European country to get out of the crisis!!!!

[@Vexxed]

@@didi059x7 I'd be happy to engage with this if you can explain why, rather than making statements. Can you explain why austerity makes things worse? Can you explain why the government continuing to spend increasing amounts of money makes things better?

[@MoneyMacro]

This discussion touches on an interesting point and that is austerity is a blanket term. In some cases (like we saw in Europe) the implementation is horrible for the economy. This only makes sense if you look at the economy as a circular system. Say you find yourself in a credit bubble gone bad ... The problem then is that in this case there is a negative feedback loop... Demand drops a lot ... Making good & bad companies going out of business. In this case, bad austerity would be cutting social security because you add to the negative feedback loop. Good austerity is also possible though. E.g. if the government is really corrupt and you cut spending that disappears into elite (perhaps your bad company) pockets (That don't spend this money or may even funnel it out of the country). So, it matters what you cut spending on. But since most recent austerity was bad austerity ... I made this simplified statement :)

[@Vexxed]

@@MoneyMacro Yeah, I can agree with this.

[@gavasiarobinssson5108]

Banks employ the smartest people? Hm......

[@mikkelnpetersen]

So buying real estate right after a crash, keeping it for a couple of years, then selling when the price have gone up enough, should be a smart business venture? but it takes a lot of starting money. (Not financial advice, just an oberservation)

[@ZuraDzuliashvili]

That's just the new way of saying buy low sell high. How long you hold just depends on the asset class and type of trading

[@thusspokezarathustra]

Irrational expectations. Joe made a heap on his 'investment' so can I. The market collapses when someone decides the market is too expensive or leasing is cheaper than ownership. This results in a Minsky Moment when markets correct - momentarial rationality clears the market of speculation. Speculators are 'late investors' entering an overheated market close to the market collapsing.

[@zanmatoshin877]

How far is it to the next economic crash? All the money printing is making me nervous and I expect a crash at any moment.. housing prices are going up, theres an economic stimulus to support it. But once that runs out and rents go up don't we have a new housing bubble on our hands?

[@koksionglee7978]

On what central banks do to tame down the cycles - fiscal policy. Fiscal policy as mentioned is not only about how government spend but also how it implements taxation, isn't it?

[@MoneyMacro]

Yes it is about spending and taxation both

[@koksionglee7978]

Thanks for sharing your knowledge. You have a very interesting channel...

[@travcollier]

I don't think central banks really have much say in fiscal policy. In representative governments, it really comes down to what gets/keeps the party in power... So what enough votes demand.

[@shintsu01]

What kind of correction can we expect in NL? 40-50%

[@MoneyMacro]

If I knew .... I wouldn't be on KZbin ;) ... In all seriousness the system is too complex to make these types of predictions.

[@Anonymity4LDAF]

So where are we today in the financial cycle?

[@Kr10n1]

Would you agree on the conclusion that effectively governments are fixing the problems they themselves created by allowing money printing ?

[@-haclong2366]

Here in the Netherlands banks are extremely strict with mortgages and because of that a native asset bubble wouldn't occur and if it did occur wouldn't cause as much foreclosures as in those U.S.A. While this severely increases inequality it also adds financial stability. I genuinely don't know which system I prefer.

[@Jajalaatmaar]

Except we now get fucked because people with access to credit, like big investing companies, can borrow enough money to pay the high housing prices. While normal citizens are restricted to lower loans by the stricter mortgage rules. However, the interest rate is now so low that monthly payments are ofter much cheaper than renting. Yet you can't get access to the mortgage because of the rules. In addition, America requires partial downpayments (like 20% of the total loan) before you can get a mortgage. Holland allows 100% of the loan to be financed (and used to allow up to 110%, speculating on a price rise). Now you are rent-squeezed by Blackstone and Prins Bernhard because they know you need a roof over your head and that they can charge high rents because you can't get a mortgage anyway. Free money for them.

[@muqsitmohammed1177]

Algorithm brought me here

[@MoneyMacro]

Thank you Algorithm and welcome to you :)

[@muqsitmohammed1177]

@@MoneyMacro thnx Nice video btw

[@somnitek]

Wait, "...meat gets so expensive it makes you wanna become a vegetarian..." -- for reals? Soooo, I'm the odd man out in thinking "...meat gets so expensive, it makes me wonder if we should maybe try eating people -- I mean... there's plenty of them, and aside from being a bit stringy and needing a lot flavor dress up and..." -- for reals?? Oh damn. Well... you learn something every day, don't ya? ;-)

[@JR-mr1tw]

Spot the German in the comments :|

[@inferno0020]

This video has pointed out a concept that 90% of "economists" refuse to talk about: rational behaviors for individuals and rational behaviors for the banks are completely different things

[@crimsonguy8696]

​@@ThomasVWorm😂😂😂 Purpose of the market is to facilitate the exchange of goods and services. Purpose of individuals and companies it to make profits... By making products and services for the market, lol. At least, in a free market. In a mixed economy with licensing, regulations, government oversight, and insurance to risk by the state, things are different. More ways to make profits than through market exchange, usually bureaucratic lobbying being a go-to. If the state is going to interfere in the market, then we'll pay them to interfere on our behalf. That sort of thing.

[@xx133]

⁠@@crimsonguy8696no, the what a bank does rationally is in the best interest of its shareholders, it does not concern itself with systemic risk that could undermine the entire economy or society. Without government regulation do you think we wouldn’t have climate change? Do you think we wouldn’t have pollution? Do you think corporations wouldn’t enslave children? Do you think that corporations wouldn’t implement corporal punishment on or kidnap employees? Every regulation we have is written in blood, they are there because people fought-against capital owners-and died for them. Learn about the bloody history of capitalism, then you’ll understand why your comment is detached from reality.

[@crimsonguy8696]

@@xx133 government regulations follow norms of social acceptance. If a society doesn't want child labor, most child labor will already be done away with before any regulations are drafted. It's rare that the government does the "right thing" before the public is willing to accept and support that call; and if the public is already of that disposition, the market will cater to it often before the government, if only because of the lag time of election cycles.

[@xx133]

@@crimsonguy8696 FALSE! A-historical. Every regulation was fraught with blood and suffering. It wasn’t the “market” that decided. It was the people that rose up and revolted. By the way all of the examples I gave you occurred in the US and throughout Europe, and all of those freedoms and more that you enjoy were fought for by socialist and communist movements in the US and throughout Europe. The market utterly FAILED, that’s why the regulations were introduced. When capitalism started, it actually eroded people’s rights and reduced living conditions. In the US capitalism was referred to as “waged slavery”. The social norms argument is insane, there were wars and revolutions throughout Europe over the poor treatment of workers in capitalism. How do you think communism became so popular? I recommend just listening to the audiobook “the communist manifesto” by Karl Marx so you get a peek into the sentiments felt by workers during that time. His book was released during worker’s revolutions that swept throughout Europe. There are dozens of examples like this, it’s the reason why after capitalism UTTERLY failed in the 1930s no one could call themselves a capitalist and be taken seriously. You were either a communist, socialist, fascist or democratic socialist-that lasted for decades. Oh and all of the economic instability following the Great Depression that lead to people searching for answers to why they were suffering and how to ameliorate that suffering and choosing fascism-an economic system that protected capitalists from workers, and violently reinforced hierarchies that existed under capitalism, which led to genocide and WWII-where was your market then?

[@n.selevics9588]

great effort put into editing

[@MoneyMacro]

Debt to GDP has definitely increased during the pandemic. Many people are looking at markets in disbelief right now. Why are they so high? I think large part of the answer is in monetary and fiscal policy easing. Since interest rates couldn't be moved much further, all central banks have re-started their QE programs. Also, governments all over the world have been spending a lot to offset reduced consumer spending. I think consumer spending is down (not up) in most countries. See e.g. here for the Netherlands: www.cbs.nl/en-gb/news/2020/52/household-spending-6-5-percent-down-in-october Hehe, sadly, I have not found a way to connect Perusall to KZbin.

[@jaundice27]

good quote - "economists are not trained to deal with markets with positive feedback loops"

[@GameMonst3rz]

Can't wait for the bubble to pop, might give me a chance to afford a home...

[@astartes8621]

Bold of you to assume that the rich wont come swooping down and outbid you on a supposedly discounted house.

[@misterlich2826]

@@astartes8621 This is why we need to tax land, look up Land Value Tax Rich people won't just infinitely profit off of shitty property they bought at a discount if we tax the underlying value of land itself rather than the property built on top of it - whether you have a skyscraper or an empty plot of land, the land has theoretical (and practical) value, tax that, then you're incentivized to properly use land to its maximum, and it's much harder to just have these slumlord millionaires who own shitty low-value properties because the value of the land itself will be taxed, not the value of a shack built on top of it. (Also only a small percentage of homes/houses/land gets bought by random rich people who don't actually put the land to use, this is largely a fiction that you read about on r/antiwork or r/latestagecapitalism or other garbage forums)

[@detrockcity3]

@@misterlich2826 no one should read r/antiwork or r/latestagecapitalism. btw, how many late stages of capitalism are there going to be? they’ve been saying this for like half a century.

[@misterlich2826]

@@detrockcity3 Even longer, it's a phrase that started with Marx I think, it's a dumb phrase. My response is usually "late stage? I just got here, we're still early as fuck."

[@CeoLogJM]

Royally "unlucky"

[@kenmoretoast]

for years I've heard that banks are more heavily regulated after the GFC, but i couldn't tell you what any of those regulations are. might be a good topic for another video

[@Ikbeneengeit]

Great video, especially interesting to hear about positive feedback loops and recent behavioral economics thinking. Thanks

[@MoneyMacro]

Glad you enjoyed it!

[@rifleman4005]

A few comments: What you failed to mention was that in the years proceeding the housing crash the credit quality of the mortgage plummeted. They were giving mortgages to anyone who could fog a mirror. What many banks were doing was not holding the mortgages like in the past but packaging the mortgages as CDO and selling those to investors. So they were incentivized to write as many loans as possible. Tough luck investors. As for the stock crash it primarily affected grossly over priced tech stocks and not the other sectors of the economy. While not in the scoop of the video, so do government deficits increase the price of assets. Your downswing on the price of houses frequently corresponds to the increases in interest rates. Your comment about fiscal policy is something of a joke as politician like to spend during ALL phases of the cycle. Your comments about bitcoin is an example of FOMO or fear of missing out. See real estate prices. As bitcoin has no real backing it is based on expectations

[@HeThinksThatIThink]

Thanks for your work

[@muneebbasit2314]

Hot rational competitors... royally unlucky..

[@neznaboh]

So now it seems comes the time when we get royally ... unlucky.

[@nokuhobune]

Nonono buy high sell low

[@verybrd]

So is there a housing bubble or not? The way you described it, there should be. Just looking at the behavior of house owners in my area over a couple of years in the Netherlands. I notice that the people haven't changed that much. But the cars in their driveways have become way more expensive compared to 10 years ago and there is an insane amount of remodeling going on. Not only new people, but also people that have lived there for years. They are spending a lot more, because they assume that the value increase of their home can be spend as cash. While their jobs or income did not change that much. Isn't that a housing bubble?

[@dlam626]

Thanks!

[@michaelb4546]

Subbed good job bro

[@hugobegin]

Very informative, thanks!

[@MoneyMacro]

You're welcome!

[@cryptofacts4u]

The banks have been deregulated since 2008 in America at least

[@hemiedwards217]

This is why governments are providing so much stimulus during economic contractions since 2008. Central bank monetary policy was a weapon against working people and worked to encourage the capitalist class to offshore their production to countries like China where there was more license to strongly discipline working people. Stable consumer prices are intended to render labour unions redundant, because there is no longer anything to battle over. Most labour action occurs during periods of rising prices. What's the point of paying labour dues to unions when there's little fear that the value of one's wages will decline? The added benefit is stable prices allows middle class property owners to continue to service their overvalued mortgage debt. The capitalist class won the class war, so there is now much less hesitancy in delivering government stimulus to mitigate the worst impact of an economic crisis. Liberal politicians are reduced to handwringing about inequality, while conspicuously doing nothing about it lol. They don't care about actual people, they just don't want asset values to fall. That's why they developed pointless responses like quantitative easing, which does exactly nothing except creating scarcity of the collateral that banks need for their lending.

[@M0stlyHarmless9]

One note on central banks and interest rates- the natural overnight bank rate without government action is 0%. This is because the primary source of reserve drain from the banking system is 1) the Treasury selling bonds and 2) the central bank selling Treasury bonds, neither of which are necessary for government spending. Without this, the bank rate drives to 0% (or the support rate paid by the central bank) as the supply of reserves expands via government spending and interest on reserves paid by the central bank.

[@AndrewOng]

Please stop using stock footage. It wastes my attention on fake visuals instead of your ideas. I would use a diagram and put your face in the corner so that there’s still something moving on the screen

[@noneofyourbizness]

how else to hedge against the devaluation of your (all major) currency through "money printing" (QE) ?

[@dannykusuma2431]

Why do you let money creation in financial market? It will obviously lead to inflation of asset prices, which drive the positive feedback loop.

[@ddicin7759]

The concision with which you convey your concepts is remarkable. You have a gift for teaching, my friend.

[@EstevanValladares]

Never understood why people think the circular logic that "Economics is what Economists do because what Economists do is economics". Although it is true that the science is made by those who engage in it, Economics is not what economists do if the concept of an Economist is a person who "does economics". To make it clear, it is just replace to another profession: "Teaching is what teachers do. What A, SOME, or even a Majority of teachers do might not be teaching (specially in the West)". Economics has the tools to study "irrational" and "rational" decisions alike, and it can even quantify the level of irrationality as to make a model in which irrationality can be predicted. Saying "economists" assume rationality, or "only work with rationality" is not accurate. I can bet no physicist will take that it is true the joke about the "spherical chicken in the vaccuum", the same way no economist will really think economics is about "economies of immortal clockwork orange agents".

[@antoniocolasnieto8330]

Absolutely fantastic channel. Love it. Thank you.

[@mikebaker2436]

Economists: "We will base our theories on the assumption of the rational individual." 10% of that population: "The moon landing was faked."

[@steved8053]

You're assuming banks always make rational decisions. Many factors go into their decision to do what they do with non performing assets. Loss mitigation falls 3-4 on the list, sadly. OMG it's a hot potato, let's get it off our books.... Therein lies great opportunities....

[@arroxas]

High finance made-easy. Thank you.

[@brandonbagwell7676]

Kenesian economists are the definition of moral hazard. I'd rather have an economy that is predictable, than an economy on a roulette wheel spun by unelected bureaucrats.

[@paxundpeace9970]

Data ain't facts. Data is just data. Without a context it is just nothing.

[@anjaseidl4003]

Does "Klumpeneffect" also have to do with it?

[@jaymills1720]

Rates have been rising and loans are still growing. Not sure low rates cause more lending.

[@rahmaankhan6234]

Assset prices are at the highest they’ve ever been, and debt to GDP is also at the highest it’s ever been….

[@1stGruhn]

While I don't disagree with what was covered, another major factor that contributed to the housing crisis was the fact that Clinton's administration required banks to make a set percentage of mortgages to low income (typically high risk) individuals. The deal was that the banks make the loan but could sell the mortgage to offset their risk. These sales were then repacked into mortgage backed securities, mixing high risk loans with lower risk ones in an attempt to dilute the risk, and were then further resold to investors. The neglect to show the government's involvement was the major failure in the movie "the big short".

[@epelly3]

It's like we're Icarus but every 10 years or so

[@morganoox3838]

I have a question. How much is a home worth, if nobody can afford to buy or rent it?

[@xenuone509]

Canada: Sweats furiously

[@DonutSurprise]

Very good video, even after watching many other (also well made) explainers on the topic.

[@MoneyMacro]

Thanks! Very happy to hear that.

[@lakeguy65616]

When I was a student, the Fed (controlled/manipulated/influenced) the economy by raising or lowering reserve requirements for federally regulated banks in the US. Lowering the Reserve Requirement increased the money that banks could lend. Raising had the opposite effect. Back then, the Fed didn't dictate interest rates through the federal funds rate, unlike today. I can't remember the last time I've seen an article about the Fed changing the Reserve Requirement. Am I mistaken or has something changed?

[@user-ks1hp2pb5g]

Reserve requirements don't influence or control the MS though.

[@williamjacobs]

Effective March 26, 2020, the Board reduced reserve requirement ratios on all net transaction accounts to zero percent. When I saw that, I asked myself, "but wouldn't that mean...?" And, yes. Yes it did.

[@williamjacobs]

@@user-ks1hp2pb5g Explain, please.

[@GhostOnTheHalfShell]

Lending itself is another positive feedback asset. Inflation is little more than an overhead like home maintenance costs. Lenders make money off of demand for credit and they are happy as long as they are being paid. The question is why such unstable dynamics are permitted or supported by law. Why is interest used as a tribute mechanism to lure hoarded “cash” back into circulation? It is price unstable, demanding a floor inflation (to safeguard against deflationary spirals because it is a “stick”) and a tax / tribute collected by wealth that may or may not address inflation. Why not use demurrage?

[@c.j.8644]

Always interested watching videos from Schiffer’s like yourself!

[@Rob-fx2dw]

There is no coincidence that bank lending for housing beginning to get out of control in 1996 and after. The catalyst for it was the case against Citi Corp. - The 1994 case of Buycks-Roberson v. Citibank Fed. Sav. Bank. That along with encouragement of government and institutions such as Fannie Mae and Freddy Mac which created a situation where banks were afraid of doing what they had previously by risk assessing people who they thought could not pay back the mortgages. Without those factors there would have been very few sub prime mortgages.

[@jipeh]

What can we, as individuals do against the financial cycle?

[@ResandOuies]

This positiv feedback loop is especially strong with the banks, since beside the possibility of making a lot of profit, there's also near zero risk. If the boble pops and assets loses a lot of value, you just have to make sure that you've grown to large on that boble to be allowed to fail, and get bailed out.

[@ryanconners3048]

This simple, short video explains such a huge, complex, wide ranging issue, so well! Great stuff!

[@whaha]

Zelden zo'n genuanceerde video gezien over de financiële cyclus. You really make very easy to understand videos. If only most people would watch this, there would be more interest in monetary reform.

[@harmhoeks5996]

What if you just keep printing currency (monetary policy)?

[@damjanmiklos]

I have to strongly disagree, that in the previous btc crashes the banks were not involved therefor it was not caused by an overusage of credit , because basically the crypto exchanges acted as banks giving out loans since you could easily invest with even 100x leverage therefor the exchanges acted as banks which caused a mass liquidation.

[@user-wr4yl7tx3w]

for me, these shorter videos with specific lessons are the best format.

[@nadavblanck3462]

Great video as always

[@vaibhavadukoori6392]

This is a wonderful video, can you please make an update to this in the context of the Evergrande crisis

[@MoneyMacro]

Yes! It will be posted in 30 minutes :)

[@DiederikCA]

In the Netherlands, it feels like the housing bubble is caused by some shortage, but also the capital inflows from large investors. Im not entirely sure, but it seems to me that the latter group is not properly regulated. It seems like they are borrowing, and theyre allowed to do so on the premise that the underlying value of the assets is increasing. Except, this is a positive feedback loop that may stop once those housing prices start decreasing by an external shock. Any thoughts?

[@MoneyMacro]

Yes, I think what we are seeing in the housing market today is more complex than a credit fuelled boom. I plan to do an in depth analysis on it in the future.

[@DiederikCA]

@@MoneyMacro Thanks for your response! Which part do you believe is credit fueled? Whats puzzling to me is the fact that regular household borrowing is tightly regulated, and their incomes havent increased, and yet prices have increased some 50% over the past few years. Either housing was massively undervalued, or we are in some interesting appreciative spiral.

[@MoneyMacro]

​@@DiederikCA You are right. Credit is now much tighter than it used to be in NL. You also have this unique effect where a part of the population (perhaps the part that typically buys houses and doesn't rent them) had a lot of money to spend due to being stuck at home. Then, there seem to big supply shortages. Interest rates are extremely low as well, which impact house prices as an investment good... In other words, I really have to do more research on the specifics before I can give you an estimate.

[@DiederikCA]

@@MoneyMacro Thanks again for answering deliberately and concisely! I appreciate the honesty: avoiding to comment outside your expertise.

[@Jajalaatmaar]

@@MoneyMacro Looking forward to your analysis!

[@lakeguy65616]

another great video. You and Economics Explained are masters of your craft!

[@noneofyourbizness]

10:29 re: conclusion the banks are only now getting involved in the bitcoin market. seems we can expect then that that asset market is about to get "truly out of hand". i for one am happy to continue to ride the bubble as i need a hedge against the inflation caused by QE and 'stimulus' payments.

[@tedpaulus]

Ummmm….so I’m with you for part of this. But the proper solution is not regulation of banks …it’s actually letting them die if they take too much risk. Regulation is only prolonging the inevitable