Capital Is Not Credit

So, I didn't pay any attention whatsoever to markets or currencies or anything like that for all of last week, and I don't seem to have missed a thing.  How can this be?

These things have become completely detached from reality.  That the IRS is the muscle for gangster government is news to no one who has a functional brain cell.  That the news media is essentially the information ministry of the financial oligarchs is hardly shocking.

But I did realize or at least manage to articulate to myself why I sometimes sound uncomfortably like some leftists and anti-corporation, union types.  The problem is not free markets or free enterprise, corporations that mine, manufacture, and otherwise produce goods and services.  Those work.

What doesn't work is the banking system which runs not on assets but on debt, generating speculative "wealth".  A bank should be able to loan only money that it actually has.  My local bank can theoretically and legally loan several times the amount of money in my accounts based on what I have deposited.  The multiplier should be 1.  As Denninger is fond of saying, you need that "one dollar of capital". 

The banks can hold money as actual cash deposits or in the form of titles on property or equipment that has been purchased with borrowed money, but there should have been money to borrow and the collateral should roughly translate back into that amount of cash if it is sold.  This is why lenders used to require down payments on mortgages and car notes -- to cover depreciation and other market loss factors.  But, shoot, if you are creating money out of thin air, who needs anything down?  It's all bogus so it might as well be thoroughly bogus.   

This has been going on for a hundred years, since the creation of the Federal Reserve System, and it has been getting progressively more distorted.  We had a slight and brief reset in the early '80s with very high interest rates when some debt was cleared from the system, but basically we have been living in bubble-land in a big way for the last forty years.  Credit is not capital.  You do not generate capital by making a loan.

Until we get back to a reality-based understanding of capital as money saved above expenditures rather than the amount of credit one is allowed, we are never going to have a sound and sustainable economic recovery.