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Dr. Kalinda Rose Stevenson
When Creative Financing By Banks Gets Out Of Control
Welcome back!
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.
Tags: bailout, banks, banks create money out of thin air, creative financing, financial crisis, money, real estateRelated posts
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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