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Other People's Money
By Stephen Kresge

It was never a secret. It was explained by Walter Bagehot in 1883: bankers do not get rich using their own money; they get rich using other peopleís money. Bankers lend the money deposited with them to other people; or they buy and sell claims to commodities, shares of stock, bonds, and so forth. What is peculiar about all financial transactions is that everyone expects to get back at least as much as they have put out and then some. Depositors expect to get their money back from the bank; the bank expects loans to be repaid and to gain as much from the sale of stocks and bonds as they paid. And then some.

I think we should be as surprised that this is usually the case as we are clearly surprised when it doesnít happen, when deposits are lost, loans are not repaid, and money is lost investing in stocks and bonds. Some bankers get rich; others do not. Banks can and do fail, and a bank failure can bring down an economy and even a world, as happened with the failure of the Credit Anstalt in Austria in 1930.

We have learned something since Bagehot wrote and the Credit Anstalt failed, but apparently not enough. The world is now in a financial crisis of unknown but apparently vast dimension. The veil of euphemisms that have been used to conceal the ugly reality of banks and investment funds wielding complex and sophisticated credit instruments with the carelessness of gamblers and the ethics of pirates has fallen . What is the reality that now stares us down? We donít know. This is not a face that we have seen before. Some features are familiar: there was the rich manís panic of 1907, the crash of Ď29 and so on: read Charles Kindleberger, Manias, Panics, and Crashes, and itís easy to think that this is deja vu all over again. But in no earlier panic have governments ever created (printed) trillions of dollars (and other currencies) to monetize private debt. We are familiar with the nationalization of banks and other industries. We are all too familiar with the nationalization of money which happened when governments abandoned the gold standard. The line between private and public in the modern state is blurry indeed, as is the distinction between money and credit. Using public credit to guarantee private debt crosses a line that we had not thought needed to be drawn. What does this mean and where does it lead? We need to find out and we need to find out quickly.

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