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walterallenhaxton's avatar

How can there be enough money to pay for credit default insurance if the general rate of interest is too low to cover the risk of the loan?

Asked by walterallenhaxton (888points) February 21st, 2010

Just wondering.

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10 Answers

SeventhSense's avatar

It has to do with fractional reserve banking and the extensive “money”(whatever that is) which is created by selling debt. Debt multiplies money held in reserves. The actual worthless paper dollars created are actually quite minimal compared to the money in circulation. A creditor’s value is actually established by the debt they create. We imagine they are assuming a risk like we are which is far from the case. Their asset is our debt. It sounds absurd (which it is to everyone but the banker) but the only value passing hands at all is the labor we extend to discharge this debt. They just need to establish the value of their debt as fairly stable by credit rating.
I don’t know for certain but I imagine their debt is insured by the same companies as the bank. Companies like AIG.

UScitizen's avatar

Because the Fed is running the printing presses to beat hell. They are printing money (Federal Reserve Notes) with no backing, no value. Get ready for the fall. Oh, and be aware, the government does not want you to know this.

YARNLADY's avatar

You misunderstand the meaning of “money”. There is no cash currency in circulation to cover such losses, but the world of finance runs on loans, interest, and investments. Those three things add up to a lot more than our general understanding or ‘money’.

walterallenhaxton's avatar

@SeventhSenses You are talking about the loans. My question is about the insurance on them. Creating debt does not create value. What it does do is create a paper asset in exchange for a promise of labor. It is only as good as the amount of labor a person has to sell. Fractional reserve banking creates more of those promises than there is labor to sell. The value that a banker creates is in arranging the transactions between investors and borrowers. If he sets his price to low for that he sells more loans than he has investor cash for things wind up as they are today. (An indivual borrower does not look at the total amount that he is paying to budget his finances, He looks at the total payments. If he can afford them he buys something. If not then not. If those payments are artificially low then he winds up borrowing more than he can pay for. There is not enough saved money out their for his customers to use to pay him enough to cover his loans.)(In total employers can’t hire and pay for their employees with borrowed money. They need to get that money from their customers. Not a bank.) People break their promises because they simply do not have enough labor that they can sell to give the bankers the tokens that we call currency in the amounts of their promises.

So how can the insurance companies expect to guarantee that people will do the labor to pay for the loans when interest rates are to low? They do know the math of insurance. Currency does not do work that people will pay for. It is just marks on a token.

walterallenhaxton's avatar

@UScitizen That is not happening yet. The banks are not lending and the borrowers are not borrowing. People are paying off those bills that they can. We will wait and it will happen when the USA government defaults on it’s interest payments. We have examples like Iceland and Greece to show us exactly when that will be. Watch out for our government bailing out others. Our debt could reach those levels very fast that way.

YARNLADY's avatar

@walterallenhaxton Sorry, but you are speaking of a small portion of the real world. Here where I live, thousands of house are ‘sold’ every day by mortgage/lender agreements, and hundreds of business move into new offices with borrowing. You are being misled by the media and the ‘sky is falling’ alarmists with their own agenda. Please look at the actual evidence and decide for yourself.

SeventhSense's avatar

No of course debt doesn’t create value but DEBT CREATES MONEY ON THE BOOKS and adds to the overall money in circulation. A bank can take 10,000 dollars of actual paper legal tender and transfrom it into 100,000 within a closed system. Of course none of it is backed by anything other than paper and collateral assets. There is no gold standard.

As to the risk assumed by loans, who do you think we just bailed out?? The banks? Yes but only inadvertantly. We covered the insurance companies who couldn’t cover the loans of the banks. They backed bad debt rated as AAA we covered them and now they continue to carry on as nothing happened while Joe taxpayer covers the tab. It will all eventually happen again as well because nothing has changed.

Goldman Sachs runs the country. It’s not George Bush or Obama. These are puppets. The principal economic advisor to the president Geitner came from Federal Reserve Bank of New York. His predecessor Chairman and Chief Executive Officer of Goldman Sachs was Henry Paulson. These two men could not be closer unless they were spooning on a pile of money. This is not a coincidence. In addition the line between private and public interests has been blurred so significantly that they are inseparable. The Federal Reserve Bank is an affiliation of 12 regional private banks with their own appointed board of directors. No other interests but the banking concerns can have an immediate response from the federal government. They pull the strings. The most damning quotes were uttered by our forefathers:
Mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges… which are employed altogether for their benefit.
Andrew Jackson

And how about businessmen:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford

YARNLADY's avatar

Oh, and to add to the above ^^; debt is a way of spending money before you get it. It isn’t new money, it’s the ‘stand in’ for future money. You give me a promise to pay me next week, and I’ll give you a sandwich today. You have the value of the goods, and I have a promise. If you don’t make good on your promise, I will be hurt. That’s what got us into this mess.

SeventhSense's avatar

The only real value is the house, the car or the stereo. The paper pushers lose nothing if you default. They’re insured. This sub prime fiasco is a perfect example. Major creditors have just expunged their books and houses are laying unoccupied. Most owned by the largest mortgage holder in the country, the US government who took over Fanny and Freddy Mac.

walterallenhaxton's avatar

@SeventhSense You come close but you still miss. The only real value is a human life and all others are derived from that. A human being requires material goods to survive for long. So he has the right to his property. A human being needs to act to survive so he has to have freedom to think and to move about. A person needs security to survive so he has a right to secure and keep his property and his person. A man needs values to survive so he needs to have the right to chose them to gain and keep them or to give them to whomsoever he pleases to get other values that he thinks best secure his right to live his life.

Right now we have more houses in this country than are required for people to live in. Since they are not needed by humans they actually have no value at all at present prices. They will only start having value when those prices make them useful for human beings to live in again. This is complicated by unemployment.

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