The period 2002 - 2007 marked irrational confidence.
What most people don't understand because they are never told is that money is debt. A bank has a million pounds. It lends all of it to me in exchange for a piece of paper called a loan agreement where I promise to pay it back plus interest. This piece of paper is a debt. As such a bank is allowed to call 8/9ths of it an asset. So it can lend out 8/9ths of a million pounds to someone else. They are compelled by international banking rules (BAsle II) to keep that ratio of 8/9th's intact. Guess what happens to the loan agreement (debt) for £900k... it is used to issue £720k of new loans. Which spawns £648k of new loans, which spawns.. you get the idea. Your £1m loan turns into a multi million pound lending frenzy.
But if you go bust or suddenly pay back the original £1m. All the other loans need to be recalled if Basle II deposit ratio rules are to be respected
These rules are currently being flouted and the regulators are ignoring this under pressure from the governments who are owned by the banks..
Leverage.
Money is debt.
Now the problem comes when people start NET paying off their debt rather than getting deeper in it.
If I repay the bank the million that I owe them and don't take out another loan then the maintain their capital adequacy rules (Basle II) they need to cancel £8 million of loans. It was my loan agreement for £1m that allowed them to lend another £8m and stay within the rules.. This is how banks create money out of thin air.
Banks are not afraid to lend to each other. Banks have the money to lend to people.
What banks are terrified of is people paying back their debts. Debt deflation. Or writing off their debt contracts by going bankrupt.
For every £1 written off or paid back the banks have to shrink their loanbook by 9 times.
Money is debt.
There is nothing easier than making money out of thin air if you are a bank. Which is why banking licenses are so rare, so fought over, so lucrative and so connected to political influence.
They don't even tell you that they don't teach any of this in school. They don't want you to know how banks and money works and what it is.
The biggest lie the devil ever told was that he didn't exist.
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