This interview with Rafi Faber discusses my recent article on how bank credit is created out of thin air and why the entire system is close to collapse.
You were asked how bank runs can lead to bank failures. You answered with two examples:
1.Borrow Short , lend long. Banks take in short term deposits and may invest those in long term investments. So if someone asks for their deposit back, but they can't realise their long-term investment then they go bust. This is where the Central Bank as "lender of last resort" should step in and save the bank IF the long term investment (e.g. in UK Government Gikts -haha) is really worth what was paid for it.
2. If loans go bad/can't be repaid. You gave this as a reason for how a bank could go bust. However, if the "credit" was created from nothing/thin air, how can a "borrower's" default lose the bank anything? Presumably they will have had some interest and repayments against the "thin air credit creation" so how does a failure to "repay" the rest of the thin air credit creation make it go bust? I don't get it
Thanks again for coming on!
On another point in the interview:
You were asked how bank runs can lead to bank failures. You answered with two examples:
1.Borrow Short , lend long. Banks take in short term deposits and may invest those in long term investments. So if someone asks for their deposit back, but they can't realise their long-term investment then they go bust. This is where the Central Bank as "lender of last resort" should step in and save the bank IF the long term investment (e.g. in UK Government Gikts -haha) is really worth what was paid for it.
2. If loans go bad/can't be repaid. You gave this as a reason for how a bank could go bust. However, if the "credit" was created from nothing/thin air, how can a "borrower's" default lose the bank anything? Presumably they will have had some interest and repayments against the "thin air credit creation" so how does a failure to "repay" the rest of the thin air credit creation make it go bust? I don't get it