Sunday, June 10, 2012
  Connection?

Opinion piece in today's online UK Guardian, written by a Spaniard:
Spain's banking crisis did not come out of the blue. In the 1990s the Spanish suffered a bout of collective madness. Interest rates fell from 14% (with the peseta) to 4% (with the euro) in a matter of weeks. In 1998 the centre-right government passed a law that significantly increased the amount of land for development. Developers got rich, selling the idea that everyone was going to win because property would always go up – never down – in value. German banks financed Spain's savings and commercial banks, which needed extra funds for high-risk mortgages. Greed made us rich for a while – but then it made us poor, and jeopardised our future.

This is now a country with a million unsold properties; hundreds of housing developments left unfinished by construction companies and real estate promoters, especially along the Mediterranean coast but also in city centres...

Sounds very much like the situation in Nevada, Arizona, New Mexico, and California.

Hmmmmm. What else do those places have in common?

Is the Spanish temperament especially prone to bubbling?

= = = = =

Semi-related: Of course we know why bankers always get bailed out, but assuming for a moment that logic is involved, let's look at it logically.

Normal businesses start with raw material, apply some combination of labor, organization and advertising to the material, then sell it. For normal business, money serves only as the medium of exchange, making these transactions convenient.

A bakery uses money to buy flour and sugar, pays its workers with money, then receives money for the bread and cakes. If it's doing well, the money received will be more than the money paid for materials and labor.

Banks should be analyzed the same way. The confusion arises because a bank's raw material is also money. So we need to separate the material-money from the exchange-money for a clear analysis.

A properly run bank uses exchange-money (interest) to rent the temporary use of material-money (deposits) from other people and businesses. It then adds value by organizing the material-money into loans, advertising those loans, and assuming the risk on those loans. People pay exchange-money (interest) to get those loans. If the bank is doing well, the exchange-money received for the loans will exceed the exchange-money it pays for the material-money. For hundreds of years banks actually operated this way, and the vast majority of them made very good profits.

Now to the question of bailouts.

Banks are clearly failing because they have abandoned the proper way of banking. They are no longer paying exchange-money (interest) for their material-money. They're stealing it from depositors, and also counterfeiting nonexistent material-money. Because the cost of stolen material-money is zero, and because the supply of counterfeit material-money is infinite, the banks have abandoned the caution that had previously been a major part of their added value.

A bakery that operated like modern banks would steal flour from the miller, and then sell pictures of bread and cake to the people. This wouldn't last more than a day. He'd be arrested for theft and fraud. We certainly wouldn't re-flour-ize the baker, giving him even more flour to continue his fraud!

So why do we re-money-ize the bankers as a reward for stealing their raw material?

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Polistra was named after the original townsite of Manhattan (the one in Kansas). When I was growing up in Manhattan, I spent a lot of time exploring by foot, bike, and car. I discovered the ruins of an old mill along Wildcat Creek, and decided (inaccurately) that it was the remains of the original site of Polistra. Accurate or not, I've always liked the name, with its echoes of Poland (an under-appreciated friend of freedom) and stars. ==== The title icon is explained here. ==== Switchover: This 2007 entry marks a sharp change in worldview from neocon to pure populist. ===== The long illustrated story of Polistra's Dream is a time-travel fable, attempting to answer the dangerous revision of New Deal history propagated by Amity Shlaes. The Dream has 8 episodes, linked in a chain from the first. This entry explains the Shlaes connection.

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