Topic: How come the bank failure destroy the wealth??? - page 5. (Read 8896 times)

I believe, monopoly is caused by lack of regulation, and once it established, it will last generations, since the later comer will not have enough accumulation of capital/resource/knowledge/credit etc... And, due to the limitation of resource and space on the planet, most of the monopoly will last even longer once it established


I do not favor a planned economy, to make the game rule fair to every one is more interesting.  Unfortunately, everyone was not born the same, so its actually a question if it is possible to make game rules that are fair to everyone

Money is not only an exchange medium, but also a temporary storage of wealth. People can 'store' some of their wealth in money, stocks and bonds, in order to postpone acquisition of what you call 'real wealth'.

You are right when you state the house itself does not change during a 'crisis' (whatever the exact scientifically economic definition of that may be), but it's value on the market does. So there will be people in the 'consumer class' who acquired a house for 5 and are (forcibly?) selling it for 3, or end up with a value of 3 but with a debt of 5.
This price changing mechanism simply transfers wealth from the consumer class to the bankers class.

Same with inflation, in the sense of inflating the money supply.
If a bank prints money, the bank can spend it by loaning it to a consumer, who now owes the bank and spends it at the original value. After spending, the money supply has increased with the spent amount, say x%, so now the money for all consumers has a value of x% less than before that money was created and spent. That is a transfer of wealth from the consumer class to the bankers class, and, through the interest due, from the original consumer to the bank.

These are in my view the mechanisms through which the wealth of the consumer class is transferred to the bankers class.

Yes.  But it kinda depends on what you mean by "everyone".  And by "comfortable".  And who the hell is going to be satisfied with the "current technology level"?


Which isn't a bad thing.  As long as they are unable to use violence (aka, government) to prevent competition, they have to remain the best, or they won't stay on top for very long.  This means they won't abuse their monopoly position, unless we give them the power to.

There are a few exceptions, such as where a monopoly is natural.  For example, not everyone can build their own road, rail, power or communication network in the same place.  Some regulation seems necessary there, but hard core libertarians would disagree on that point.


For a static, unchanging world where every day was exactly the same as before, I'm pretty sure that we could eventually develop an excellent planned economy.  But people die, and new people are born, and preferences change from day to day, and the world changes around us.  The only way to cope with that sort of changing world is to decentralize, and let each man make their own decisions to create their own futures.

+1

One clarification I would like to make is that the BUBBLE DESTROYED ACTUAL WEALTH.

It also caused "fake wealth" to be wiped off the books but the countries recourses (labor, intelectual capital, raw resources) were improperly aligned.

During the house boom more houses were built than necessary.  Since all aspects of the economy compete for resources other areas of the economy were undeveloped.  Companies had to compete against massive increase in mortgages (considered low risk) to raise capital.  Companies which are labor intesnive saw their availability of labor decrease as construction firms expanded.  Companies using natural resources similar to housing saw their input costs rise.

When a bubble occurs it diverts resources away from parts of the economy which HAVE SUSTAINABLE GROWTH.

So the wealth lost includes that opportunity cost, the wealth never created in other parts of the economy.  Then the bubble collapses and the bubble wealth is "marked to maket".  Granted that bubble wealth never existed but it has a psychological impact when it returns to normal.


A hypothetical example.

Say with optimal efficiency the US economy would have grown by 4% real GDP growth from 2000 to 2008.  The boom made it look like the economy was growing at 4.5% but in reality priced with realistic valuation on housing maybe it was only growing at 3.8%.

Now the difference between 4.5% and 4% that is imaginary value lost BUT the difference between 3.8% and 4% represent misallocation of resources.  The economy grew less that is COULD HAVE and that is true wealth destroyed. 

Worse this misallocation of resources has a lingering effect.  Say someone went into construction rather than trucking, another guy started a housing company instead of a landscaping company.  Another guy became a Realtor instead of an accountant.  All individual sob stories but on a macro economic basis you have a lasting misallocation of resources.  It will take time (time the economy is operating less efficiently) for those misallocations to be absorbed.  So we also lose future wealth (difference between economies potential growth and actual growth).




 

simple example of mal-investment:
A bought a house from B at 3 million and wish it to rise in value, but it actually dropped to 2 million, A lose 1 million

In this example, I just see it as a speculation game: A think the value of the house will rise (thus make the value of money less), so A exchanges money for house. But B think the value of house will drop (thus make the value of money more), so B exchanges house for money. When the house price dropped to 2 million, B still holds 3 million and he now can buy 1.5 houses; A hold the house which only worth 2 million

Looking at the total,  before and after house price change, A+B always holds one house and 3 million. If we take money as the measurement of value, then total value changed from 6 million to 5 million, 1/6 wealth were destroyed. But if we take house as a measurement of value, then total value changed from 2 house to 2.5 house, the wealth increased by 25%!

So, only when measuring the wealth in money's form, you get that strange " wealth destroyed" conclusion

Good question

If the farmer is very poor, it will be easy for him to get the incentive, he need to continuously sell his products to get money, and buy other things he want

Actually, all classical economics are based on the assumption that the farmer's incentive is kept forever due to that human's desire is endless

But, if the farmer is very rich, it will be much more difficult for him to get enough incentive to work

So, chasing for profit is the last incentive for a rich society?

Questions for this statement:

Do you really need a very high efficiency to give everyone a comfortable life, at the current technology level?

And, free competition always end up with monopoly, due to difference of each organization's capital/resource/intelligence etc... winner take it all. So, if you are already at the monopoly situation when it comes to money and financial, why do you want to start the whole process again (and bring chaos into society)?

As mobodick said above, regulated monopoly could be very efficient, but anyway I don't see the need for higher efficiency, all these efficiency talk only suits a society in low technology level


For many enterprises, they have the ability to produce enough utilities and services for everyone, but they can not do that, just because they have to sell the product/service for a profit, and the consumers do not have enough money. Money and its distribution is the problem here, not the technology

So how do you give the farmer the incentive?


How do you deal with the mess afterwards?

IMO you would need to keep prices as stable as possible. Which would mean offsetting the contraction in Horizontal Money(Credit Money) with an expansion in Vertical money. The expansion in vertical money would offset the unemployment and related suffering caused by the Horizontal Money contraction. If prices are not kept reasonably stable then it is harder for economic participants to plan ahead, which may lead to significant malinvestment. Furthur, whenever the financial system is disproportionally distorted by a subset of economic participants, then prices in the economy will not reflect their actual relative worth. This is what actually causes the malinvestment too begin with.

The sources of such distortion varies depending upon who you ask. Some say there is too much regulation, some say too little. However, given that the financial system is formed on the basis of common ownership, then all participants of the financial system should have an equal say in how price information flows through the financial system. Therefore the value of any regulatory framework upon the financial system should be judged on this basis, that is, how well does it allow participants to equally decide how price information flows through the financial system.

That's bullshit.
It all depends on the type of goods or services we are talking about.
Fierce competition means banks will fall over and people will lose money all over the place.

The thing is that some goods or services benefit from being sold/distributed through a monopoly.
You wouldn't want the bank you have your savings on to be outcompeted by another bank so that you lose your money.
It would be a hassle to have savings in a bank account.
Another problem happens when there is no more room for differentiation but the competition is fierce.
This will give incentive to the organisation to cut some corners or otherwise cheapen their service.
This can leads to a degradation of the product and can lead to a downward spiral of ever decreasing quality.
Furthermore, it can lead to a splintering of the market and too much (false) choice for the consumer.
This is not always in the interest of society.

So there are markets that benefit enormously from competition and there are those that benefit from centralization and monopolization.

And with such 'natural' monopolies i would say that since the monopoly is granted by society (because it's the most beneficiary form) it should have some control over it.
The problem is, of course, that the people we give the power to control these monopolies need to be controlled (and held accountable) themselfs by society. Otherwise they will act as the monopoly itself.
Monopolies can be usefull to society, but need to be controlled by society.

bullshit.

the mess (at least in the us) was caused by massive deregulation of the financial industry. here was a reason why we didnt have a boom and bust economy for several decades after the great depression....it was called the glass-steagal act.  after being slowly weakened (and eventually repealed) from years of government pandering to their corporate handlers, we end up where we are now...fucked.

dont believe me? look up the percentage of subprime loans previous to and after the repeal of G-S. in case you are unaware, subprime lending practices (and the bundling and sale of those loans as junk securities) were THE MAJOR cause for our economy failing. 

very good post. Putting value on anything is capatalism.... how could anything have any value if everyone was happy with what they have right now? All you need is food and water- those are the only 2 things that have real value.

Thanks


And the worst is that's not only statistics to please economists. During the boom, it becomes easier to invest in the long term. Many new investments start. These investments hire people, create capital and all that. The "prosperity feeling" goes beyond silly statistics: people really feel they're getting richer, while actually it's the other way around.

Messing with prices is really bad. We base a lot of our decisions on them.

Please, make some effort, at least read what I just said above and try to understand it. It's the same regulators you're asking "help me!" to that created this whole mess.

Sure, banks and corporations benefit a lot from all this, and will benefit even more if more "government control" is created. The financial sector is probably the most regulated of all economic sectors. The most important financial unit, money, is a state monopoly, and a major price in finance, the interest rate, is decided by a state agency. And all that central planning isn't helping, quite on the contrary.
There's no regulation more efficient that that of free competition. State regulations create barriers to entry that kill competition. No wonder why big banks have made huge profits for years and, yet, you don't see hundreds of new banks being opened every day... that's what would normally happen in a profitable market sector in which there is no barrier to entry: competition would come from all over, trying to also get a share of that profit. The increase in competition would increase the offer, thus decreasing the price without changing the inherent costs of that economic activity. In other words, profits (price - costs) would decrease down to the average profit level of all other economic activities.

Stop trusting governments (which, let's always remember, are organized armed groups which force people to finance them) to solve all your problems. Instead, they'll just create more.

Another thought related to saving:

One gold miner found a small piece of gold, he use that piece of gold to exchange for several bag of bread from a farmer, and he eat those bread for one week

After one week, farmer still holds the gold, but there is no bread, since farmer think that he could use that gold to buy same amount of bread 

This means: Farmer need some incentive to continously produce the bread, otherwise there will be inflation 

how was wealth destroyed?

welp, amongst other things, property values plummeted; leaving many underwater on their mortgages. companies went under, and 401k's/IRA's/ etc were wiped out. jobs (including high skill jobs like engineering) were lost en masse....

soooooo, yeah....






banks and other corporations fucked the US....but we need _less regulation of corporations....

right.

That is exactly most of the people think, not those from economy school. Because this, we can say that wealth is destroyed if there is a rate hike (money destroyed by central bank)

Now I have a better view!

Imagine a simple game:
First year,  A sell his house to B for $3 million
Second year, B sell the house to C at $4 million
Third year, C sell to D at 5 million

In this process, the amount of money required for transaction increased so much that bank must provide them bigger and bigger loans, thus lots of money must be created to facilitate the trades, and wealth is created from newly provided loans for this bubble (or bad investment, but you can never tell in forehand, if the price continously rise, then it is a good investment!)

Then, at certain point, most of the people have joined the game and bought a house, there is not enough new buyers join the game to keep the price hype, at the same time, FED has realized this might be a bubble and start to tighten. Then the house price will fall back to 4 million and 3 million. It's this tighten really detroyed the wealth (or money), what we see after 2008 is the consequence of tightening during 2007, but the wealth is already destroyed in 2007

I remember a story: One guy spend holiday with his wife, he got up early in the morning, went to cassino and bet 1 dollar on number 7 of the roulette, he were super lucky and hit 7 four times in a row and won 1.6 million dollar, and at the last bet he lost it all. He return to his wife and said that he just had a dream. His wealth is created and destroyed in one morning

I suppose in a market-based economy, everything produced is for sell and exchange for money. And most of the things produced will be vanished/degraded quickly (compare to money). For most of the product, if you produce it and store it, it will lose value quickly, no matter if it is consumed, this is the issential difference of saving goods and saving money. If more products are produced and consumed everyday, the economy is stronger

Of course people can produce something just for the purpose of store, like gold, but the incentive is really small if most of people's life is enough secure and comfortable

No, money is not wealth.  Money can buy wealth, and you can sell wealth for money.  But money is not wealth.

Thomas Jefferson wrote about it as "ficitcious capital" being used to finance speculative and questionable enterprises.  THe public is gives the appearance that wealth was being created.  Bad Mortgages temporarily driving the speculative boom in houseing for example.  then when the correction occurs at some point, they all scream about the wealth being lost or destroyed.

Just like my 7th grade english teacher explained it when I asked about the great depression, "but i don't get it, where did all the money go during the great depression."  his answer was that it never really existed in the first place.

so yes, the MSM will report about wealth 'destruction' when these bubble unwind.  instead is more like the 'fictitious' bank adn investment capital pyramid falling apart, destroying the ILLUSION of wealth. 

And this idea is so hard for people to get.  there's real wealth and honest enterprise out there, and then there are those who create the appearance of wealth back by fiction or fraudulent arrangements where they are a con man, and the common folk who get sucked it are the mark.

But you are absolutely right, real wealth is created when people set out to produce and trade their labor and talents to produce and consume all the niceties of modern life.