What if you found out your banker, you know, the OLD definition of such, the guy who is entrusted with your savings, had been going to Vegas and playing blackjack with your account? Would you be cool with that?
What if he was playing blackjack with a group of other bankers? Would that make it a little easier to understand? Let's say 10 others.
Say each of these bankers had $100,000 of yours and your neighbors money (these would be small banks, you see). The stakes seem too... low... they think. Hard to get rich with such low stakes. Flobert, named for the famous frenchman, and a heck of a banker, brings and lights up a tasty crack pipe during the game.
"Let's Raise The Stakes, boys!" says Flobert, while passing the pipe.
"But we don't have that much money, 'Bert", whines Schlick, another banker.
"You're a small thinker, Schlick. We're all good for it, let's raise the pot, say 40 times".
Soon, these guys are playing for tens of millions. How much fun! All with only $100 grand of other people's money and credit from one another for $4 mil.
So let's take inventory now... Each banker has a REAL $100k, so $1,000,000 in total assets around the table. Each banker has borrowed $4,000,000 on their $100k, and each paid one another $20,000 to "insure" against someone pulling their money out of their bank. Best of all, these bankers give themselves bonuses on total money earned at blackjack. These bankers are playing for themselves, really, Sure, they have to pay interest on the $100k they each have, and interest on the money they borrowed, but if they win, they win big! If they lose, well, they are only out the $100k they are entrusted with.
Let's say that four families withdraw their money from their bankers... $400k. Whoops. $16 million of the $40 million now on the table disappears, according the rules the bankers set up...
"Well now, you boys owe me $16 million", says the guy with most of the chips. It's not that they have made this pot any bigger really, because this game is a ZERO SUM GAME. The only way it grows is to attract more money into the ZERO SUM GAME. It's not like investing in businesses that create goods and services and actually increase the amount of money.
"We don't have it... and we really don't have anyway of really getting it, so you guys are screwed".
The way it should end up is that the depositors get their money back, and the ridiculous money "created" by the players disappear. Except. Except that the players sucked out the real money as bonuses over the course of the blackjack game.
Credit Swap Derivatives. Need to be a Smart Guy to play that game. Smarter than Adam Smith, who has called Bullshit on it all. Maybe Congress is much smarter...
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