What precipitated the financial crisis still engulfing the world was a severe shortage of cash by leading banks. This article will try to shed a little light on what has actually happened, as opposed to what we are told by the media.
The lending frenzy of the last few years culminated in the lending of large sums of money by banks and mortgage institutions to down-and-outers and no-hopers with no chance of ever repaying the money. Part of the reason they did this may be put down to political pressure from politicians who saw this as a chance to increase their own popularity with down-and-out voters.
Another reason may be that the original lenders made some initial profit from each deal and then sold the toxic debts as part of a "package" of debts that included some that were not so toxic. They sold them to all kinds of financial institutions, including overseas banks, hedge funds, and pension funds. The racket could therefore be carried on for much longer than if the original lenders had to deal themselves with the toxic nature of the loans, and face the consequences.
Because of this shuffling around of thousands and thousands of mortgage accounts, the fact that the overwhelming majority of them were falling further and further behind with the monthly payments was lost, as focus was kept on the perceived value of each package as it was traded from one financial institution to another.
By the time the extent and severity of the problem became apparent it was far too late. Finance houses and banks had carried on lending their fictitious money, based on the assumed value of these so-called assets, and had thus made the problem ten or twenty times worse. Don't forget Merrill Lynch had lent over 30 times its entire capital base in toxic loans. That doesn't count the loans that weren't toxic. That was undoubtedly because the more of these loan packages they bought, somehow the greater their capital base became and the more they were able to carry on lending. "Every loan creates a deposit", right?
It was therefore only a matter of time before the inverted pyramid collapsed. When it did, the problem was world-wide. But it was not just the USA that had lent to bad debtors. The same thing had been going on in the UK, and many other Western countries (though it's nice to be able to blame the "US sub-prime mortgage market" for the crisis). As we all now know, the entire international banking system has had to be bailed out with loans and buy-outs totaling at least a trillion dollars ($ 750 billion in the USA and $ 250 billion in the UK alone).
Has this bailout helped people recover their repossessed homes? Has it helped lift the threat of repossession from millions of families? Evidently not. In the UK, half a million families face the threat of being evicted from their homes, at the rate of 120 a day. With house prices set to fall from their peak by 20 per cent by December 2009, this means that most repossessed houses will be sold by the mortgagee bank at a loss. The bailout package is to ensure that these banks can claim the shortfall back from the government, ie the taxpayer.
So ordinary folk are having to pay for the greed and stupidity of banks by having their jobs and businesses on the line, their home in danger of being taken from them, and having to pay higher taxes to protect the banks' profits.
That deals with where all this extra money is going to. But there is another question that has to be answered – Where did all this extra money come from?
The controlled media will just tell us that it is coming from the taxpayer, or even from future generations of taxpayers. In a way they are right here, as present and future taxpayers will certainly be paying for all this folly, but that answer doesn't deal with the actual mechanics of how the money is created in the first place.
To say it's created by government borrowing is only half the story. Who does the government borrow this money from? From either their central bank – the Federal Reserve or the Bank of England, or whatever the central bank is in the country concerned – or on the international money market. So who lends this money? Did it exist before this crisis? Where was it being kept? How long has it existed?
That's where the whole racket falls down. The money is created out of nothing by the international banking system and lent to governments to lend to banks. It's certainly a new twist on the old system. And it gives even more power to the shadowy figures, the " Superclass ", that pulls the levers of world politics and decides the fate of millions.