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Peak Credit A Flight to Simplicity

Peak Credit A Flight to Simplicity. Chris Cook – BarCampBank London 5th July 2008. What is a Bank anyway?. It is a “Credit Institution”. It creates Interest-bearing Credit (or “Debt”). …which is >97% of the Money we use. Money created as interest-bearing loans…….

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Peak Credit A Flight to Simplicity

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  1. Peak Credit A Flight to Simplicity Chris Cook – BarCampBank London 5th July 2008

  2. What is a Bank anyway?

  3. It is a “Credit Institution”

  4. It creates Interest-bearing Credit (or “Debt”)

  5. …which is >97% of the Money we use

  6. Money created as interest-bearing loans……

  7. …is immediately deposited into the system

  8. A Bank is also a Credit Intermediary – or “Middleman” Borrower Bank Lender £ £

  9. ….but what does a Bank really do?

  10. A Bank guarantees borrowers’ credit…

  11. ......and charges “Interest” for their use of this Guarantee…

  12. …deducts from that the Interest paid to Depositors…

  13. …plus its operating costs and any defaults by borrowers..

  14. …and aims to make a profit…

  15. The Credit Pyramid Bank Credit Capital

  16. Demand for Credit has been high…

  17. ….from property buyers and investors..

  18. …from hedge funds and “Private Equity”..

  19. ….and Banks started to “outsource” their implicit Guarantee….

  20. ….“freeing up” and making best use of their Capital….

  21. …totally – by “securitising” debt and selling it to investors….

  22. …temporarily – using “Credit Derivatives”….

  23. …and partially – using “Monoline” credit insurers

  24. Result- a Bigger Credit Pyramid Credit Investor Capital Bank Capital

  25. …with Risk “Diced and Sliced”… Credit Investor Capital Bank Capital

  26. …so that no one knew where the risk lay…

  27. What is Credit anyway? ?

  28. Credit is an IOU and comes in two flavours…

  29. ….“Trade” Credit from a Seller to Buyer backed by Value….

  30. ….and Bank-created Credit supported by their Capital….

  31. Credit is “Deficit-based” finance

  32. ….essential for the creation of productive assets……

  33. ….such as buildings, wind turbines, and software……

  34. The problem comes when credit is created to buy existing assets……

  35. ….typically secured by a legal claim over the asset……

  36. ….resulting in “deficit-based” but “asset-backed” credit….

  37. ….such as loans secured against property (ie mortgages)….

  38. ….which are the source of over two thirds of dollars and sterling ever created…..

  39. …and therefore of asset price “Bubbles”….

  40. John Law created the first such Bubble in 1718

  41. …and they have never stopped since…

  42. …until last year we saw the culmination in the US of the “Mother of all Bubbles”….

  43. …since when Banks have been asking themselves….

  44. …is the risk with me?

  45. ….or with the hedge fund I dealt with?

  46. …and they are thinking….

  47. ….if this is what OUR balance sheet looks like…..

  48. …what does everyone else’s look like…..?

  49. So Banks now charge more for their implicit guarantees…..

  50. ….and are much more discriminating in relation to counterparty risk…..

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