The Mechanisms of Financial Collapse and the Consequences of Global Monetary Policy

The history of the global financial system is closely linked to the recurring cycles of greed, insanity, and subsequent collapse. As markets overheat and confidence in the stability of institutions wanes, the underlying mechanisms of money and credit reveal themselves in all their brutality. The following text highlights the emergence of financial bubbles thatinevitable bursts of the same and the devastating consequences for the real economy. In particular, the measures taken by the central banks to save the system after the great crisis of 2008 show how political interventions are driving social division and questioning the foundation of the monetary system.

The Beginning of Decline and the Illusion of Security

Some experienced investors hedge their profits knowing that no one has lost their fortune by selling too early. A clear signal for the turning point rarely exists, and when it appears, it is only recognized retrospectively. These clever minds step out just before climax, leaving the field to those who step in later and deeper. The market is now open to newParticipants at the lower end of the food chain. After the experienced players, other players decide to exit, causing prices to fluctuate slightly for the first time.

The denial phase and the deceptive hope

We are now entering the denial phase, where those who made quick profits dismiss the fall in prices as a minor slip-up. Many true believers even use this decline to make further purchases, as they sense supposed bargains. Theoretically, prices could rise because those already engaged increase their capital. But the basic feelingand experienced market participants speak of a trap for the optimists. The impression of a new upward movement arises, while in reality the spell has already been broken.

The competition paradox and the collapse of collateral

The rumor mill is now working in the opposite direction, buyers are disappearing and prices are starting to fall. People are trying to sell their properties, but the market is completely flooded. In business, this is referred to as a competitive paradox in which the profit for the individual harms the community. The banks look at their balance sheets and realize thatthe collateral for their loans have massively lost value. They demand additional cash from borrowers to fill the coverage gaps.

The vicious circle of mass sales

If a bank advises an owner to sell, this is not a problem in itself. However, the paradox occurs when all financial institutions simultaneously urge their customers to sell in order to raise liquid funds. If everyone wants to sell, there are simply no buyers left who match the prices. The remaining interested parties are waiting for even lower prices, whichCrash accelerates further. Think of a football game where the man stands up in front of you to see better.

The collective deterioration of the balance sheet

His getting up signals the other to also get up until the entire stadium is standing, although no one has a better view anymore. The same applies to the sale of real estate, because as an initial seller you get a good price, but when everyone sells, the values plummet into the basement. Fear spreads, prices continue to fall and a widespread depressionstarts as soon as the earth realizes its mistake. Banks recognize that their balance sheets are inextricably linked to the collapsing market. More and more borrowers are returning their keys because they can no longer service their debts.

The collapse of speculative borrowers

Those borrowers who bet on a Ponzi scheme are the first to give up, as their strategy of reselling is now failing. They lack income, and they disappear, pursued by creditors and collection agencies. As prices continue to fall, even those speculative buyers who could only pay their interest are starting to stumble. Your income depends on the overall economy,and when the real estate boom bursts, the entire credit cycle collapses. Banks are starting to cancel loans and a massive credit crunch is emerging.

The illusion of secure bank balances

At this stage, it dawns on people that the money in their account is actually a loan to the bank. The bank uses these deposits to make further loans, and as long as everyone is serviced, no one asks questions. But what happens when loans are no longer serviced and a cascade of bad loans rolls over the institutions? The banks had granted excessive loans andhad to back their balance sheets with deposits for each new admission. When they ran out of deposits, they borrowed money from other institutions, often for very short periods of time.

The maturity transformation and loss of trust

In a credit crisis, there is a massive mismatch between long-term assets and short-term liabilities. Banks offer higher interest rates on deposits during such times to prevent the outflow of their capital. If the deposits flee, the institution has a major problem, as they borrow money in the short term, but lend in the long term. A mortgage is oftenover 30 years, while the depositor can claim his money back immediately. Money and banks are all about trust, and as soon as it disappears, it becomes dangerous.

The rush to the banks and the collapse of stock prices

Falling stock prices are an alarm signal and warn that something is going on in the bank that the leadership likes to hide. This something is the impending bankruptcy, and as the number of bad debts increases, the share prices of the institutions are collapsing. Sellers stand in line, but there are no more buyers. Concerned savers withdraw their money, which oftenstarts gradually with large corporate customers. As soon as this process begins, it accelerates rapidly, which is why one speaks of a rush and not of a walk.

Freezing the money market

Just as a rise in asset prices is driven by rumors, so is this rush. Normally, a credit institution goes to the money market to raise capital. But who lends money to a company that is on the verge of bankruptcy? A large US investment bank was in this predicament in the spring of 2008. When this bank entered the money marketno other institution was willing to lend her money.

The End of an Era and the Beginning of the Global Crisis

Attempts to sell assets to other banks failed because no one wanted the toxic papers. The central bank tried to support the institution, but the extent of the total losses was too unclear. In the weeks after this event, one bank after another went bankrupt, because in a crisis not only money, but also time is lacking. Sales continued, whichBalance sheets imploded, and even good assets were squandered in the race for cash. In September of the same year, the global financial crisis hit the world.

The psychological nature of money

This story highlights the characteristics of money that motivates us and reinforces human behavior. It focuses on qualities such as enthusiasm, hope and optimism, but also greed, envy and pride. Money allows us a kind of time travel by using tomorrow’s income for today through loans. Even when things are falling apart and we’reWe swear by betterment, we never really learn from it. The seed of the next cycle is the ruin of the last, because new buyers are getting back in.

The balance sheet recession and the interest rate trap

In the 10 years after the crisis, central banks slashed interest rates and pumped money into the market. Their goal was to clean up the balance sheets of consumers and the banking system. This type of recession is called a balance sheet recession because the assets collapsed but the debts remained. The central bankers resorted to new means, as the traditional rate cut ina so-called money trap. This trap exists when people are over-indebted and do not want to borrow despite low interest rates.

The massive expansion of the money supply

Relying on interest rates to boost the economy is completely useless in such a situation. Instead, the central bank had to flood the economy directly with money and force the banks to lend. Technically, the monetary authorities did not print physical money, but bought government bonds from the banks. As a result, something illiquid was immediately transferred to newExchanged means of payment, which the banks were able to lend from then on. In one fell swoop, the central banks had created enormous sums that did not exist before.

The upward redistribution and the disadvantage of savers

The central banks had to make sure that the banks actually lend this new money instead of hoarding it. They bought up the safe government bonds from the market in order to deprive the institutions of the convenient alternative. The banks had no choice but to pass the money on to their favorite customers, which are usually the already wealthy. Lower interest ratesdrive up asset prices, and those who benefit the most are the owners of real estate and stocks. The small minority, which lives on rents and dividends, benefits significantly more than the vast majority of wage earners.

The Political Consequences of Growing Inequality

The rising wealth inequality was not an unintended consequence of the expansion of the money supply, but rather its direct result. More and more people saw themselves excluded from the Prosperity Party, and their participation in society dwindled. These people may not have large deposits, but they have a voice and choose those who want to alleviate their plight. Movements withsimple slogans that provide comfort in this unequal world suddenly start to look attractive. The rise of nationalist movements and the exit of the British from the European Union are direct political descendants of this monetary policy.

The loss of trust and the question of the future

Populism was born in the central banks and created by the very elite it sees as the enemy. As inequality increased and banks were bailed out while austerity measures were imposed on citizens, respect for institutions waned. Given the low confidence in the global financial system and the widening gap between rich and poor,a fundamental question. It is about whether a new form of money is emerging on the horizon that holds a new promise for society. Established monetary policy has broken the old promise, and the search for an alternative has long since begun.