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Dr. Kalinda Rose Stevenson
Free Report: Is Your Money Making Money For You Or Your Bank?
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Here is a question for you. If you put your money into a savings account in the bank, who makes money from your saved money?
I have just completed a free report, “Who Is Your Money Working For? You Or Your Bank?”
The goal of the report is not to bash the banks, but to identify what happens to money itself when you save it, and how “saving” money limits your ability to “make” money.
The report is available for immediate download at Free Report
For Your Abundant Success,
Kalinda Rose Stevenson, Ph.D.
kalinda@NoMoneyLimits.com
www.NoMoneyLimits.com
PS. Do you understand how the current economic crisis is directly related to what bankers understand about the nature of money? Find out how the banks made money out of thin air, in “No Money Limits For Real Estate Investors.”
Award Winner of National Best Books 2007 Awards
Business: Real Estate Category And Finalist in
Business: Personal Finance Category
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If You Are Thinking About Buying Foreclosures, Ask Yourself This Question
Are you thinking about buying foreclosed properties? If you are thinking about this, know that you are not alone. Anyone who has even the slightest interest in real estate investing is probably thinking the same thoughts.
All across the United States, and in other places around the world, property owners are losing their properties to foreclosure. Blame it on corrupt mortgage brokers, greedy bankers, and unqualified, irresponsible buyers, if you want. Whatever happened to cause foreclosure for any particular property owner, the harsh reality is that one person’s loss can be another person’s gain.
As foreclosed properties lie empty across the land, thousands of people see the potential for wealth in buying foreclosed properties.
And so, you are right to recognize that this is a time of tremendous opportunity to lay the foundation for wealth creation by buying foreclosures.
If you get out your calculator, you can get excited about the possibilities as you crunch your numbers. If you can buy some of these foreclosed properties at a fraction of their market value only a year or two ago, just think of how much money you will make when the market rebounds and prices go up—as they surely will, sooner or later.
While so many other potential buyers are too afraid or too broke to buy, or they can’t get credit to buy, you can scoop up prime properties at bargain basement prices.
How do you do this? If you have the cash, or if you have excellent credit , and if you can get a mortgage, or if you can get private funding, this is the ultimate buyer’s market. If you can hold the properties, while so many other owners are losing their properties to foreclosure, and if you can rent them to responsible tenants who pay the rent on time, you can use the rents to pay off your mortgages in a record time. By the time the markets rebound, and the market value of your properties climbs up again, in the next real estate boom, you can be the landlord of an empire of real estate holdings.
This vision is certainly possible, and will very probably turn into reality for at least some of the real estate investors who see the potential of thousands upon thousands of foreclosed properties.
But….before you begin to calculate your future profits, there is more to consider. Before you seriously consider buying any foreclosed property, ask yourself this question:
What are you going to do with any property after you buy it?
Expressed another way, the question is: What is your strategy for foreclosure properties?
A strategy is a plan to accomplish a particular result. Strategy always looks at the intended outcome.
Especially now, when there are so many foreclosed properties available in the marketplace, it is especially critical to understand clearly that a decision to buy property is never a complete plan. It is a tactic, rather than a strategy.
Consider the difference between a tactic and a strategy.
Tactics are about what to do, and how to do it. Strategy begins with the question: Why? Why are you going to do something?
When it comes to real estate investing, buying property is a tactic. It is never a complete strategy, because you have not clearly defined “why” you are buying the property. Buying real estate becomes more than a tactic and becomes part of a strategic plan when you know “why” you are buying the property, and what you intend to do with the property after you buy it.
In the boom years of real estate investing, much emphasis was placed on buying property. In my chapter on “No Money Limits Selling,” in my book, No Money Limits For Real Estate Investors, I made this observation.
One of the greatest deficiencies of real estate training targeted toward beginners is the emphasis on buying without equal attention to selling. I have heard too many gurus exhorting their students to go out and make a deal. And so people rush out, determined to make a deal—any deal—and end up making bad deals. No Money Limits for Real Estate Investors, page 74.
The common wisdom of the real estate boom era was: “You make your money when you buy.” Because market values were climbing so fast, and credit was so easy to get, investors often made a lot of money by buying property without having a clear plan of what they were going to do with the property after they bought it. In those heady days, investors could buy property and then decide if they wanted to use tactics such as “flipping,” “rehabbing,” and “lease options.” Even without clear strategies when they bought, many investors did very well.
These are different times. You can buy property well below prior market value, but that doesn’t mean you can easily turn around and make a profit using the same tactics that worked so well during the boom times.
The reason lies in one simple word, “if.” Did you notice all the “ifs” in this paragraph?
If you have the cash, or if you have excellent credit, and if you can get a mortgage, or if you can get private funding, this is the ultimate buyer’s market. If you can hold the properties, while so many other owners are losing their properties to foreclosure, and if you can rent them to responsible tenants who pay the rent on time, you can use the rents to pay off your mortgages in a record time. By the time the markets rebound, and the market value of your properties climbs up again, in the next real estate boom, you can be the landlord of an empire of real estate holdings.
But the list of “ifs”—and this isn’t even a complete list of “ifs”—is formidable at a time when mortgage lenders are doling out mortgages only to borrowers with excellent credit and substantial down payments. This is also a time when people who might buy or rent from you are not only losing their homes, they are also losing their jobs.
Even if you have the cash, credit, or financial partners to buy the property, this doesn’t mean that potential buyers or renters will be able to buy or rent your property. In addition, you will need to hold the property long enough for the market to turn around, which can be months or years. You will also need to be able to pay taxes, insurance, and maintenance. If you can’t do all of these things, you could very quickly find yourself in a position where you are facing foreclosure of your investment properties.
In all of this, I don’t mean to throw cold water on anyone’s plan to seize the wealth creation opportunity created by the foreclosure epidemic. My goal is to encourage you to start at a different place than the idea of buying foreclosures at bargain prices. Make sure that you have a strategic plan that includes both how you will buy the properties and what you intend to do with them after you buy them.
Dr. Kalinda Rose Stevenson
Discover the secret of making money in No Money Limits For Real Estate Investors, 2007 Best Books Award Winner in Business: Real Estate Category
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The Lending Game Gone Bad: The Money Reason Why Banks And Corporate Giants Are In Trouble
One of the factors creating turmoil in the economy is the blurring of financial roles.
In the Monopoly Game®, the rules are clear. The players have a clear set of rules, which determine what they can and cannot do with money. The banker also has a clear set of rules, which allows the banker to use money differently than the players do.
This distinction between the money rules for players and the money rules for bankers is a critical element in No Money Limits.
In the real economic world, we have experienced significant blurring of roles among various institutions, as the rules have changed and evolved over time.
Banks are a prime example. It used to be that the lines between different types of banks were clearly defined. In broadest terms, commercial banks served businesses, thrifts served consumers by taking deposits and originating home mortgages, and investment banks help businesses acquire capital. In recent years, through a series of legal changes, these lines have become so blurred that most of us have only the vaguest idea of the difference between various types of banks.
During the same period of time, there has also been significant blurring of the lines between bankers, non-banking companies, and private lenders related to lending.
One particular example concerns large companies that have become both sellers and lenders.
Analysts point to two key reasons why some of the nation’s largest companies have unraveled in the current downturn. One is that they had come to rely on providing financing to their customers, lending money for sales of their own products. When the credit markets ground to a halt in mid-September, it set off chain reaction of pain, hurting consumers and manufacturers alike. Corporate America’s Giants Crumbling
As we analyze what went wrong with the economy, to lead us to this state of economic crisis, one theme keeps recurring. The economic crisis originated with lending practices gone bad.
Lending money can be extremely profitable. To get in on the profits, various types of banks kept expanding their services and their capacity to make loans. At the same time, big corporations realized that they could increase their profits if they became lenders for consumers who wanted to buy their products.
In the process, bankers made risky mortgages to people who could never repay them, because the lending process itself was highly profitable. Meanwhile, big companies set up their own lending divisions. Instead of sending car buyers to the bank to get car loans, why not provide financing directly to your customers? As a result, a company such as General Motors became both the maker of cars and financer of cars through its financing arm, GMAC.
In retrospect, [Ed] Yardeni said, the business model was essentially flawed. When companies like GM and GE financed customers, the loans must have been cheaper than what the customers could get elsewhere and must have meant that the risk of lending to them wasn’t being reflected in the loan rates. Corporate America’s Giants Crumbling
Self-financing by big companies led to the same trap that ensnared the banks that got caught up in making subprime mortgages.
“Self-financing is inherently a dangerous game,” Yardeni said. “You’re biased. You want to convince yourself that the borrower is good for it, and you want to make the sale. You’re not going to be an objective lender. That may be one of the problems here.” Corporate America’s Giants Crumbling
The driving force behind the expansion of their traditional roles—both for banks and large companies involved in self-financing—is the intention to create profit by increasing transactions. This is the essential goal of any business.
Ultimately, the nature of money made all of this possible. Money is not a commodity in limited supply. Money is created in transactions. By creating more transactions, banks and self-financing companies could make more money. The more transactions they made, the more money they would make.
The primary insight of No Money Limits is that the only limit to money is the belief that money is limited. What we are seeing in the current economic crisis is the result of people who took this insight too far.
In the desire to increase profits, banks and self-financing companies made more and more bad loans, throwing prudent lending practices out of the window, until the whole financial structure teetered on the edge of collapse.
Dr. Kalinda Rose Stevenson
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When Creative Financing By Banks Gets Out Of Control
What is the basic cause of the financial crisis? It is the process called creative financing, because creative financing creates money. Creating money is different from mining for gold or drilling for oil. Mining and drilling seek to find something that already exists. But money cannot be discovered the way that gold or oil can be discovered. Money is an idea of value and is created in transactions.
The Monopoly Game involves players and a banker. The rules of game state that the banker cannot go broke. The significance of this rule is a critical element in No Money Limits. Yet, one of the dominating experiences of recent months has been the spectacle of banks going broke. We have seen banks receive billions of dollars in “bailouts” or “rescue” packages, and still go broke.
At its core, the economic crisis began with the banks, as they multiplied techniques to use creative financing to fund the real estate boom. The reason banks have gone broke is that the banks stopping playing the kind of role the banker plays in the Monopoly Game.
In Monopoly, the banker serves the players as a utility. The banker provides a useful function to collect and distribute cash, to allow the players to play a real estate trading game. In the real world of the real estate boom, the banks were no longer content to be utilities. Instead, the banks began to be drivers of the economy. The banks used increasingly creative financing techniques because they understood that money is not found. Money is created.
The root cause of the financial crisis is that people who understand the essential nature of money carried creative financing too far. They became ingenious in their methods to create money on paper, with a variety of clever techniques.
The bankers on Wall Street created an array of techniques, such as mortgage securitization, credit swaps, and derivatives. All of these creative techniques created more and more paper assets, until the whole system was revealed as so much mumbo-jumbo, and collapsed like a giant soufflé.
In the Disney classic “Fantasia,” one of the most memorable episodes is the “Sorcerer’s Apprentice.” The young sorcerer taps into magic he cannot control. Watch the ”The Sorcerer’s Apprentice.”
This is one of the best illustrations of what went wrong with the banking system during the real estate boom. The bankers tapped into the magical power to create money by using creative financing techniques and the whole process quickly got out of control.
[This is the second post in a series about how creative financing techniques, which created money out of thin air, led to economic crises around the world.]
Dr. Kalinda Rose Stevenson
Find out more about the nature of money and how money is created out of thin air in No Money Limits For Real Estate Investors: Discover The Money-Making Secret In The Real Estate Game That Transforms Your Money Struggles Into Financial Abundance, National Best Books 2007 Awards Winner in Business: Real Estate Category and Finalist in Business: Personal Finance Category.
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Why Money Itself Is The Underlying Cause Of The Recession
Money itself is the underlying cause of the recession. Although you will hear many explanations for the economic meltdown, few explanations analyze the role of money itself in creating the problem. Instead, analysts blame a long list of usual suspects, including irresponsible consumers, greedy bankers, and corrupt government officials. However much truth there is in these explanations, the ultimate cause of our economic crises originates from the nature of money itself.
What is money? In most of the commentaries, accusations, and proposals about what went wrong and how to fix it, this critical question remains unasked.
Watch the news broadcasts about the economic stimulus plan. What do they show as they talk about proposed solutions? They show high-speed printing presses spewing out endless sheets of currency at the Bureau of Printing and Engraving in Washington D.C.
Listen to the commentators. You will hear again and again. “We need the government to step in because only the government can print money.”
This idea that the government can “print money” obscures the fundamental cause of the dire global economic crises. The notion that governments “print money” misrepresents the nature of money. It misrepresents what governments do. And it even misrepresents what we are seeing as the printing presses print out sheets of paper currency.
Let us start with the most basic question. Is the United States government in fact printing money? To answer this question, look carefully at a United States twenty-dollar bill and ask yourself: “What is this piece of paper?” You will see the answer printed on the paper itself. Conveniently and truthfully, United States paper currency identifies each piece of paper currency with this label: “Federal Reserve Note.”
And so then the question is: Is a Federal Reserve Note actually money? In fact, a “note” is a promise to pay. The pieces of paper the government prints out on its high-speed presses are in fact sheets and sheets of promissory notes.
If you wonder if these pieces of paper are equivalent to money, ask yourself another question: “If someone writes an IOU on a piece of paper, do you have money?” One way to find out is to take your IOU to your local supermarket, load up your cart with groceries, and then attempt to use your IOU to pay for them. You will quickly find out that your IOU won’t buy you anything. Your IOU is a piece of paper promising to pay a debt. It is not money.
The critical point is that every piece of currency is a promise to pay a debt. These pieces of paper printed by the Bureau of Printing and Engraving are not money at all. They are promissory notes. And yes, you can use those promissory notes from the United States government to pay for your groceries, but this does not change the fact that these pieces of paper are notes rather than money itself.
So what is money? Money can be represented by tangible things, but it is itself intangible. Money is fundamentally a belief. Money is not a piece of paper.
In fact, currency is a symbol for money, not money itself. Money itself is an idea and the currency we hold in our hands is the physical representation of the idea of money. No Money Limits
And why is money itself the cause of the recession? Money itself has no capacity to make decisions or take actions. Money as the cause of the recession comes from the nature of money as a belief in value. Because money is an idea, money can be created at will by people who understand that money is not equivalent to any tangible object. The long list of culprits who share responsibility for the financial crisis share one critical distinction. They know that money can be created out of thin air, through all sorts of creative financing techniques.
[This is the first post in a series about how creative financing techniques, which created money out of thin air, led to economic crises around the world.]
Dr. Kalinda Rose Stevenson
Find out more about the nature of money and how money is created out of thin air in No Money Limits For Real Estate Investors: Discover The Money-Making Secret In The Real Estate Game That Transforms Your Money Struggles Into Financial Abundance, National Best Books 2007 Awards Winner in Business: Real Estate Category and Finalist in Business: Personal Finance Category.
For a simple and clear guide to real estate notes as the safest way to increase profit, sell quickly, and increase cash flow, see Owner Financing Made Easy.
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Why Real Estate Investing In Raw Land Is A Safe Strategy During The Recession
Real estate investing, for some people, has gone from a fast way to create wealth to a faster way to lose money. Do you wonder if there are any safe real estate investing options during the Great Recession?
A friend attended one of the best-known real estate investing seminars. She did what she was taught to do, and bought investment property. Her plan was to rent the properties, make profits, and generate wealth. This wealth-producing strategy has worked in good economic times and bad economic times. It worked especially well during the years when real estate values seemed to be on a never-ending climb to unprecedented heights.
Unfortunately, real estate prices can also go down. My friend bought rental properties when market values were at their peak, just as the “real estate bubble” was about to burst. The last time I talked with her, she told me that she had seven mortgages on rental properties and no tenants. She was broke. She was being sued by a contractor who worked on one of her investment properties. And her real estate agent turned out to be a crook. Her wealth-building dreams collapsed as her real estate investments turned into a nightmare.
Who knows how many times this story is being repeated right now? How many foreclosures, how many bankruptcies, how many broken dreams are the result of real estate strategies that worked so well during boom times, but left hopeful investors stuck with bad investments when property values started to drop?
So, do you give up entirely on real estate investing during this time of economic crisis? It’s a fact that great fortunes often start in the worse economic situations. Even now, when the news media tell us on a daily basis that these are the worst economic times since the Great Depression, it is important to remember that real estate investing still works, and still creates wealth. The important point is to know what you are doing, and to adjust for current conditions.
This leads to the question: What kind of real estate investing protects your nest egg and increases your wealth during the down cycles of real estate markets?
One of the safest real estate investments is raw land that is pre-development land. Even if prices are stagnant now, pre-development land will increase in value during the next real estate boom. How do you know that that there will be a next real estate boom? It is the nature of real estate to undergo up-and-down cycles. In addition, the population is increasing dramatically, and real estate development will continue to sprawl farther out from developed areas. This means that pre-developed land will be developed, sooner or later.
What are the advantages of buying raw land rather than developed properties, such as houses or apartments? One of the biggest advantages is that you are not going to rent out pre-development land to tenants. This means that you are not depending on income from rents. You don’t have to worry about evicting tenants who lost their jobs and stopped paying the rent.
If you have investment money you want to put to work, such as money in an IRA, but you don’t want the headaches and heartaches of dealing with rental properties, one of the best options right now is to put your money into well-chosen pre-development land.
Kalinda Rose Stevenson, Ph.D. invites you to attend a FREE webinar about investing in raw land, “How Strategic LandBanking Lets YOU Be Part Of The Great American Land Grab Right Now.” She is the author of No Money Limits For Real Estate Investors: Discover The Money-Making Secret In The Real Estate Game That Transforms Your Money Struggles Into Financial Abundance, National Best Books 2007 Awards Winner in Business: Real Estate Category and Finalist in Business: Personal Finance Category.
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The Freedom Equation
A Proven Process For True Success
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How You Can Create Financial Freedom In A Time Of Financial Crisis
The financial crisis fills the news. Each day, we hear about more billions for stimulus packages to banks “too big to fail.” We also hear dire warnings about the collapse of major corporations, such as the Big Three auto makers in the United States. The crisis is real, as is spreads throughout our entire economic system, both nationally and internationally.
In all of this, we hear talk of Main Street and Wall Street. To this point, the rescue packages, the stimulus packages, the bailout packages, have gone to Wall Street, with very little directed toward Main Street—the small businesses and ordinary people who are being dragged down with little hope of immediate rescue.
What I want to focus on is the contrast between two types of stories. One story teaches us to hope for rescue. The other story teaches us to be heroic and rescue ourselves.
Let’s start with the stories that teach us to wait for rescue. From earliest childhood, we have been taught to hope for a savior. The movies and TV shows have taught us that rescue will come, usually at the last minute, in the nick of time. The cavalry will ride over the hill. Reinforcements will arrive. The knight in shining armor will show up and we will be saved.
The hope of being rescued touches a deep psychological need for all of us. We hope that someone will help. Someone will care. Someone will do something to solve the problem.
Christian religion has made salvation a central promise of the gospel message. You are lost. You are hopeless. You are struggling. God sends a savior, to rescue you, because you cannot rescue yourself.
Twelve step programs teach that we are incapable of saving ourselves from our addictions. We need help. We need a higher power. We need to be rescued.
In other words, we hope for a hero to save us.
In all of this, I don’t mean to undermine, diminish, or challenge the idea that sometimes we really do need help. We really do need rescue. We really do need to be saved. If you fall off an ocean liner, you will need someone to throw you a lifeline, to haul you back in.
But that fact that we sometimes need to be rescued, does not mean that we always need to be rescued.
In heroic stories, the hero is the one who finds a way to solve the problem. Sometimes the hero rescues others. Often, the hero has to rescue herself or himself. No one saves the hero. The hero is the one who does the saving.
And this leads me to my point. Especially now, when the economic crises pile up day after day. When things seem to get worse and worse, this is the time to be heroic about your situation. Rather than wait for rescue, resolve to find a way to rescue yourself.
The unofficial entrepreneur’s motto is: “If it is to be, it is up to me.” This single belief is the real distinctive of true entrepreneurs. They don’t wait for permission, approval, or help. If they are in trouble, they act to save themselves.
The real danger right now is for everyone in financial trouble—which includes millions of people—is to wait for the savior to come. These are tough times and they require commitment, determination, and a plan of action.
I wrote a book with a man who faced a financial crisis and did exactly that. He made a commitment to get himself out of his financial crisis, with focus, passion, and motivated action. In the process, he created a formula for the essential elements of financial freedom. Find out the formula that saved him from financial ruin here.
Maybe the government will find a way to bail out Main Street, and solve your financial problems. But don’t wait for it. Most of us do not fall into the category of “too big to fail.” This means that the only real salvation will come from saving ourselves.
Dr. Kalinda Rose Stevenson
One of the primary reasons for the economic crisis is that banks have abused their ability to create money out of thin air. Find out how banks create money in No Money Limits For Real Estate Investors: Discover The Money-Making Secret In The Real Estate Game That Transforms Your Money Struggles Into Financial Abundance, Winner of 2007 National Best Books Award in Business: Real Estate Category.
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Governments Are Buying Banks : Will They Ever Let Them Go?
In response to the global credit crisis, governments are buying ownership in banks. Often, we don’t recognize significant moments when they happen. We don’t see the events that change things forever. But the economic events of the last few days are a clear sign of enormous systemic changes that are underway around the world.
For weeks, we have heard about the proposed “$700 billion bailout” for banks passed by the United States Congress. On Monday, October 13, European governments topped that amount with a plan to invest $2.3 trillion into European banks.
European governments overcame their differences to put $2.3 trillion on the line Monday in guarantees and other emergency measures to save the banking system in their most unified response yet to the global financial crisis. “Europe puts $2.3 trillion on line for banks”
http://www.msnbc.msn.com/id/27137551/
Today, Tuesday, October 14, the United States government announced that it will buy shares in the largest banks.
The government put itself four-square into the country’s banking business Tuesday, resorting to what President Bush conceded was the unwelcome choice of massive government investments in the banking system in order to loosen paralyzed channels of credit.
The president said the decision to buy shares in the nation’s leading banks – a kind of federal intervention not seen since the Depression era – was “not intended to take over the free market but to preserve it.” “Administration unveils revamped bank bailout”
http://www.msnbc.msn.com/id/27161138/
From a long term perspective, these actions to nationalize banks, both in the United States and Europe, raise several issues.
First, is this a temporary response to a global crisis or are we witnessing a fundamental change in the relationship between governments and banks?
In both Europe and the United States, governments are stressing that the actions are temporary.
The government said its stake in each of the banks is strictly temporary, but the subsequent transformation of the sector is on the massive scale of the postwar bank nationalizations in the 1940s and the privatization of the industry in 1980s. “Europe puts $2.3 trillion on line for banks” http://www.msnbc.msn.com/id/27137551/
Under the new multifaceted stabilization program described Tuesday, the government will initially buy stocks in major banks. When financial markets stabilize and recover, the banks are expected to buy the stock back from the government, Bush said in brief remarks from the White House Rose Garden. “Administration unveils revamped bank bailout”
http://www.msnbc.msn.com/id/27161138/
However urgent the crisis, and however necessary this response, temporary solutions, made under crisis conditions, have a way of becoming permanent. Under crisis conditions, people and their leaders will agree to conditions that they would reject under non-crisis conditions.
Said Treasury Secretary Henry Paulson: “We regret having to take these actions. Today’s actions are not what we ever wanted to do – but today’s actions are what we must do to restore confidence to our financial system.” “Administration unveils revamped bank bailout”
http://www.msnbc.msn.com/id/27161138/
History shows all too often that when governments receive temporary powers under crisis conditions, they are often not willing to surrender those powers when the time of crisis has passed. This plan does not make clear how the government will get out of the banking business after the time of crisis has passed.
It’s far from clear what the government’s exit strategy will be. The history of financial panics shows that they are rarely resolved in a single moment by a single measure. The loss of confidence that underlies the current panic took years to develop; it will be months at least before some measure of confidence is restored. “Massive bailout won’t work overnight” http://www.msnbc.msn.com/id/27181364/
Another notable issue is that the United States government will buy these bank shares with part of the $700 billion bailout fund that was supposed to buy up bad mortgage debt. In other words, however urgent and however necessary this action to buy bank shares, the government is already veering away from the stated purpose of the $700 billion bailout. This means that the bill that was passed with enormous conflict and drama is already being modified by actions without the approval of Congress.
The administration plans to spend $250 billion this year on the stock purchases and the president certified Tuesday that another $100 billion would be needed in connection with covering bad assets. That would leave $350 billion of the $700 billion program, presumably to be spent by the next president.
The action represents a remarkable turnaround for a rescue program that was already the largest bailout in U.S. history. As the plan sped through Congress, the administration said the money was needed to purchase bad mortgage-related assets that are weighing on the books of financial institutions, never mentioning direct stock purchases. “Administration unveils revamped bank bailout”
http://www.msnbc.msn.com/id/27161138/
A final issue concerns Bob Hope’s observation:
“A bank is a place that will lend you money if you can prove that you don’t need it.”
The government is following a similar strategy. The banks that don’t need the money are the ones that will get the government’s money. The United States government is going to appropriate half of the money appropriated for the $700 billion bailout to buy shares in banks that are stable.
Nine major banks will participate initially, including all of the country’s largest institutions. The first bank to take advantage of the new program was Bank of New York Mellon which announced Tuesday that it would sell $3 billion in preferred shares to the Treasury.
Some of the nation’s largest banks had to be pressured by to participate by Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts. “Administration unveils revamped bank bailout”
http://www.msnbc.msn.com/id/27161138/
These are perilous times and government leaders around the world are in full crisis mode. Each day brings more proposals, more challenges, and more fear, as leaders around the world make decisions that are intended to prevent a global economic collapse.
There is an old proverb—reputed to be an ancient Chinese curse—that says:
”May you live in interesting times.”
We are certainly living in interesting times. No one knows what the remade economic system will be like when this current time of crisis is over. What is clear is that banking will never be the same, whether the banks are owned by governments, held privately, or some combination of the two. We are witnessing the end of an era of economic growth fueled by uncontrolled debt owed to banks.
Dr. Kalinda Rose Stevenson
For more on how economic growth is fueled by debt created by banks, see Chapter 9 of No Money Limits For Real Estate Investors
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When Banks Go Broke
The heart of the economic crisis right now is that the banks are unwilling to make loans. Even though governments are pouring money into the banking system, the banks are hanging onto the money.
The rescue program originally was sold to Congress and the public as a plan to buy mortgage-related loans from financial institutions. The goal was to remove troubled assets from those institutions’ books and inspire them to restart more normal lending operations.
Congress passed the massive and hard-fought legislation, and Bush signed it. The government raised the amount of bank deposits it insured. Billions of dollars of reserves have gone into banking systems in the U.S. and other countries. Yet credit, the economy’s lifeblood, has remained virtually frozen. “IMF warns of global financial meltdown” http://www.msnbc.msn.com/id/27129830/
Why are the banks so unwilling to lend? The heart of the current economic crisis is that banks are going broke. This is very different from the Monopoly Game, which is the most popular board game in the world. In Monopoly, a bank cannot go broke. In Monopoly, if the bank runs out of money, the banker can make more money by the simple act of writing an amount on a piece of paper.
But the global economy is not Monopoly. Banks around the world are going broke and being bought up by other banks. Banks are also being bought by governments, in an effort to stabilize the economic system that cannot function without banks.
Banks are in the middle of the economic system because they control the flow of money between creditors and debtors. At the same time, banks are also creditors and debtors themselves.
The economic system includes several types of banks, including central banks, national banks, commercial banks, and thrifts. These different types of banks have charters to serve different functions within the economic system, but the essential point is that the flow of money is controlled by banks.
The critical point is that the current economic crisis is not a money crisis. It is a credit crisis. Banks are cutting or canceling credit limits for home equity lines of credit. Banks are reducing credit card limits. Banks are extremely reluctant to make real estate mortgages.
But there is more to the credit freeze than the effect on consumers. The real crisis is the credit freeze for the banks themselves. This is a brief introduction to borrowing within the banking system, from No Money Limits For Real Estate Investors.
In the United States, the Fed is the central bank, which controls the amount of money in the economic system. The Fed is a shadowy institution, formerly called the Federal Reserve. The Fed is a strange hybrid of private banks with federal authority, but not really under government control. It operates mostly out of sight, to keep the money flowing between the extremely rich, the financial markets, the banks, and the consumers, all the while responding to political pressures, both nationally and internationally, and demands by the extremely rich to increase their wealth even more. It holds its meetings in private, making decisions that affect the economic well-being of all of us.The Fed has the power to increase or decrease the amount of money available in the economic system. They can do this by raising and lowering interest rates.
……When the Fed wants to increase the money in the money supply, it lowers the interest rates the commercial banks pay for borrowing money. When it wants to decrease the amount of money, it raises interest rates the commercial banks must pay. When there is too much money, the Fed begins to increase interest rates. This shrinks the amount of money in the system, and the shrinkage continues down to the amount of money available for you to borrow for your mortgage.
….
Let’s say that the Fed pumps a billion dollars into the economy through the commercial banks. The commercial banks do what banks do. They loan out that money. By the time the commercial banks get through loaning the billion dollars, the commercial banks have created more money. Let’s say, five billion. And the commercial banks loan out the five billion to the “thrifts,” which are the savings banks, savings and loan banks, corporate banks, and credit unions. The thrifts take those five billion dollars and make loans, creating who knows how many more billion dollars. Chapter 9, “How Banks Use Debt To Create Money,” No Money Limits For Real Estate Investors.
The fact is, the banks don’t trust each other. Recent events have demonstrated how much the banking industry as a whole has thrown much of its traditional bankerly caution to the wind, not only providing credit that has mired millions of consumers in debt, but also plunged banks into massive debt.
For instance, Lehman Brothers failed because it carried a debt ratio of 35:1.
To keep profits growing, Lehman borrowed huge sums relative to its size. Its debts were about 35 times its capital, far higher than its peer group’s ratio. And it plunged heavily into real estate ventures that cratered.
Here’s how leverage works in reverse. When things go well, as they did until last year, Lehman is immensely profitable. If you borrow 35 times your capital and those investments rise only 1%, you’ve made 35% on your money. If, however, things move against you – as they did with Lehman – a 1% or 2% drop in the value of your assets puts your future in doubt. “How Financial Madness Overtook Wall Street”
http://www.time.com/time/business/article/0,8599,1842123-3,00.html
The banks that have failed have been debtors that could not repay their debts. This is why banks are so reluctant to make any loans. The credit squeeze is not primarily about you and me. It is about banks being unwilling to loan to other banks.
The actions being taken by governments around the world are an effort to stabilize the banks and induce the banks to start lending to other banks, as well as consumers.
The International Monetary Fund warned Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and rich nations had so far failed to restore confidence. “IMF warns of global financial meltdown ” http://www.msnbc.msn.com/id/27129830/
The critical point is that the first priority of the IMF is to restore confidence in the banks about other banks.
Seized-up credit markets began to see the first small signs of easing Friday, but anxiety over the long-term prospects for recovery is keeping lenders mostly sidelined.
The overnight interbank lending rate, known as Libor, fell by half, suggesting that banks are becoming more willing to lend to each other in the very near term. The longer-term 3-month rate, however, continued to rise, hitting its highest level this year.
When banks show a willingness to lend to each other, it makes it easier for consumers and business to obtain loans. The financial crisis that caused Wall Street to buckle has spread around the globe, pushing panicky investors to sell stocks and sit on their capital.
“There is still an awful lot of fear driving this market and a preference to hoard cash rather than lend it out because you don’t know if you will get it back,” said Kim Rupert, fixed income analyst at Action Economics. “Credit freeze sees small cracks”
http://money.cnn.com/2008/10/10/markets/bondcenter/credit_markets/index.htm?postversion=2008101017
What we have seen so far is that the ”rescue” efforts by governments have involved pouring massive amounts of money into a banking system that is hoarding the money, from lack of confidence in the banking system itself.
Finance leaders from the world’s top economies, the Group of Seven, pledged Friday night to take steps to keep leading institutions afloat, unfreeze credit, ensure banks have enough capital to kick start lending and safeguard depositors’ funds and restart the secondary markets for mortgages and other securitized assets. “Global response” http://money.cnn.com/2008/10/11/news/economy/bush_group_of_seven/index.htm?postversion=2008101114
This credit crisis is by no means resolved, but already we see the direction that resolution will take—more government ownership of banks.
Bush did not mention any specific action that prompted his call. But Ireland recently moved to guarantee all bank deposits, triggering similar actions in Germany and other countries concerned that nervous depositors would move their bank accounts to Ireland.
The president barely referenced a significant new step from his administration – partial nationalization of some banks. After days of speculation this move was coming, Treasury Secretary Henry Paulson announced late Friday night that the government would buy part ownership in an array of American banks. “IMF warns of global financial meltdown” http://www.msnbc.msn.com/id/27129830/
So, at this point, it seems that the “bailout” or “rescue” plan, intended to buy mortgages, will be used to buy the banks themselves.
Dr. Kalinda Rose Stevenson
Find out more about the essential role of banks in the creation of money in No Money Limits For Real Estate Investors: Discover The Money-Making Secret In The Real Estate Game That Transforms Your Money Struggles Into Financial Abundance.
Award Winner of National Best Books 2007 Awards
Business: Real Estate Category
And Finalist in Business: Personal Finance Category
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