The nature of Bubbles

I’m into week three of writing a blog and as I look into other blogs I become more aware of how much I don’t know, but I guess that is the nature of knowledge.  I need to simplify the problem, so that I have some clue about what is taking place, and what I see is a fairly simple equation.  The banks don’t print money; they lend money to people and organisations with the intention of making profit.  They aim to lend to people who can themselves make profit or service their debt.  At present, they have been seen to be guilty of making terrible lending decisions and their portfolio is riddled with potential bad debts from people, organisations and countries who cannot meet their obligations.  As regards lending to countries (and Greece is very much in the news at present), Germany says that the banks must allow for the majority of their loans to Greece as being bad.  The sticking point is that the French banks have lent more to Greece than anybody else and as such are against this proposal.

And so we come to the solution that will be agreed upon this week at the meeting of European leaders.  The banks will be asked to increase their reserves, which effectively limits their lending and at the same time increases their cover against bad lending decisions.  At the same time a European fund will be set up to help countries that have problems in repaying their debt.  And how will this be achieved?  The countries, Europe and the World will print more money so that Bank’s ratios can be improved and rescue funds set-up.

This is nothing less than another bubble that can only delay the inevitable and which is a continuation of the reason why the problem appeared in the first place.  This problem is not being solved; it is being passed forward without thought to the future.  The only way that a policy of this nature could possibly work would be where growth was equal or greater than the amount of money being invented.  In the current climate, we are entering a recession, and the money created will end up, down the line, as further bad debts to the banks who made the loans in the first place.

If we have a soft landing now, then the ultimate landing will be that much harder.

Willie Giles 25/10/11