Private fractional reserve banks have been labeled the guilty party throughout this financial crisis. There sins are reckless lending and gambling with other peoples money and getting bailed up at the end.
The government is routinely blamed for not providing and implementing a regulatory environment that would disallow such practices. The people face austerity and an increasingly socialist of fascist governments are being constructed in these countries. The central bank is found as a savior and looks on helplessly as the private banking firms take losses, bankrupting individuals who had assets tied up with the loans they granted.
This picture is obfuscated to say the least. The banks unfortunately are placed in a somewhat prisoners dilemma. As the intermediaries in the credit markets, they are rewarded a spread for the successful entrepreneurial activity of placing funds in those assets that provide the highest rates of growth and return for their depositors and shareholders. This of course exists in a non-inflationary system of banking. Banks today are guided by the wise hand of the nations Central Bank who regulates the volume of credit and money at a given time in the economy. Setting reserve requirements it caps the maximum ability of credit expansion, using open market operations it “smoothens” out short term liquidity issues that might arise and effects the term structure of the nations interest rates.
Banks in this environment are forced to play ball with the central bank. The central bank placing minimum reserves forces banks to lend out more than they have stored liquidity in their vaults. If one bank didn’t engage in this sort of practice, other banks would and take a large share of the loanable market, forcing the prudent bank out of business. The bankruptcy of the prudent bank occurs because it can only make a profit by loaning out the funds that it has stored in its vault, charging a safe-keeping fee for the deposits that haven’t left the bank. The other banks make money by amplifying the returns by expanding a greater quantity of credit to the economy and crowding out the prudent bank with favorable loans, lower interest rates, interest only loans and grace period loans. The banks, receiving excess funds from the central bank merrily go about loaning these funds out to the public, essentially pyramiding these funds out. Business is deceived in expanding production due to a appearance in new savings and consumers feel wealthier, as they are able to borrow at increasingly cheaper rates, refinancing mortgages or borrowing against asset appreciation.
To keep the long story short; when it is revealed that the real savings aren’t really real and that the whole expansion is based on resource redistribution and inflation, the game stops, business contracts, unemployment increases and prices should drop. A recession has begun with the populace having to forced to live a life within their means.
So, who is to blame? The banks who want to increase shareholder wealth and market share? The businesses that want to bring a new product to the market as quickly as they can with the lowest possible cost? Or the consumer who can afford a level of existence previously not reached? Well, none of them, really.
The central bank as the source manipulator has brought this recession. The banks, even though they probably know (I’m giving a lot of rope to the banks here) that pyramiding loans would weaken their capital positions and solvency, are forced to comply, because they would be forced out of the market with more expansionary banks. The expansionary banks are safe, as they are always protected from a default from the central bank.
Unfortunately, citizens still blame the mess on greed and incompetence. Greed does occur in this type of environment and so does incompetence, but they are a result from an initial catalyst that brought this on the system in the first place.
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