Singapore Democrats

Finally, an article that talks remotely about monetary policy. However, let me give my views on a few points that I think the SDP is not quite correct on.

1) Regulation vs de-regulation.

The problem is not about whether there is regulation or not. The problem is about having the RIGHT kind of regulation. Having 1000 wrong regulation is worst than having no regulation. The reason why Glass-Steagall is needed is to balance out the regulation of guaranteed bank accounts. In the US, banks compete by offering the highest interest rates and not by how sound their banking is because all the accounts are insured by the government. If the bank fails, the government will come in and make the deposits whole. Banks that make prudent investments cannot compete with those that make high risk bets because the customers do not care how safe the banks are. Therefore, the removal of Glass-Steagall is another form of regulation, or rather mis-regulation on the part of the government.

2) US commercial banks embarked on a spree of reckless housing loans.

That was partly due to low interest rates by the Federal Reserve and the Community Reinvestment Act which mandates that bank make loans to poor/low income individuals. This ultimately led to the creating of government backed mortgage giants Fannie Mae and Freddie Mac which guaranteed all the mortgages and bought a lot of the subprime ones. The commercial banks were not reckless in the sense that they know that if the borrowers can't pay back, the government would. That initiated the housing bubble which eventually popped, but the reason behind the reckless activity is all that government intervention.

3) A few years later in 2008, the banking system crashed.

That's not true. The system did not crash, it is just that many of the major banks would have gone bankrupt. The system is still intact. However, these banks are very well politically connected and convinced a lot of US congressman and senators to bail them out (both Obama and McCain voted for them to be bailed out). This is a form of socialism, where the banks makes private profits while the losses are socialized. Again, the problem is that the government bailed them out, and not them taking the bailout. If you got bailed out, will you say no? Of course not.

Perhaps in the part2, the SDP can discuss the role of the Federal Reserve (Central bank of the USA) and it's role in the mess. If you think bailing out the banks at the cost of 700 billion dollars is bad, wait till you hear how much the Fed pumped into the banks to keep them alive (> 7 trillion dollars).

Buwakasha, are you trying to split hair or really trying to educate readers here?

If it is the latter, I think there is considerable inconsistencies in your argument. Here they are:

On your point about regulation vs de-regulation, you said: "The problem is not about whether there is regulation or not. The problem is about having the RIGHT kind of regulation".

You are right of course but then your later comments started to sound a tad trying to score point rather than trying to educate. Here is what you said: "In the US, banks compete by offering the highest interest rates and not by how sound their banking is because all the accounts are insured by the government".

Er are you sure the US banks are offering High Interest rates? Was it not the case the US banks were offerring "competitive" or low interest rates to entice people to buy houses they can't afford? Or are you talking about saving interest rates? If the US Banks were offerring high deposit rates, then the banks would have more money to invest and not rely on borrowings from other banks and thus causing credit crunch. After all high interest rates would be sucking in more money because there is more incentives to save sucking in money not only from US residents but also other countries depositors.

Later on you got me lost with your rambling about banks risk and this weird comment: "Therefore, the removal of Glass-Steagall is another form of regulation, or rather mis-regulation on the part of the government".

Reading this sound to me like you are playing with words than really make a case for regulation vis-a-vis deregulation or vice versa.

You also made the comment: "That was partly due to low interest rates by the Federal Reserve and the Community Reinvestment Act which mandates that bank make loans to poor/low income individuals" in the your argument about bad housing loans. Does this not contradict your earlier assertion that US Banks were competing to offer high interest rates?

Now you said there is an law in the US to force bank to offer low interest rate? If so how can US bank compete to offer high interest rate? Which is which?

The final part of you comment is even more bizzare. You said: "That's not true. The system did not crash, it is just that many of the major banks would have gone bankrupt. The system is still intact."

On the one hand you said the system did not crash but the bank has gone bankrupt. Er if the system has not crash how come the banks are bankrupt?

Even if I wanted to give you the benefit of the doubt that the "system" has not crash, I am still scratching my heard as to what you mean by the "system"?

If by system, you mean banks are still taking deposit and lending money, then er.. isn't that what bank is supposed to do. What do you expect the banking system to be other than this?

If you have banks that are as you say bankrupt how can they do that? Who dares to lend to bankrupt banks and how do these banks lend money they don't have?

AhKow,

I'm trying to educate, not to split hairs. I try to clear up any misconception. As for interest rates, I'm talking about the rate you get on deposits, not the rate you get on borrowing.

"If the US Banks were offerring high deposit rates, then the banks would have more money to invest and not rely on borrowings from other banks and thus causing credit crunch."

I'm not sure what you mean here. The banks can only offer as high a rate they can base on the risk they take with the money. Say, if I offer 10%, then I have to make >10% to cover, i.e. I have to buy risky investment instruments to make >10%, so I can pay back the 10% I promised to my depositors. As for borrowing from other banks, they don't necessary do that unless you are talking about the Federal Reserve (Central Bank) which is a different story. Bottom line is, banks need reserves (deposits) before they can loan out money or make investments.

"After all high interest rates would be sucking in more money because there is more incentives to save sucking in money not only from US residents but also other countries depositors."

Saving money is good for the economy because it makes investments and growth possible. But, I'm not saying that there is high interest rates. I'm saying that banks have to compete with for depositors base on interests rate alone and not on the safety of what the banks do with the money.

"Reading this sound to me like you are playing with words than really make a case for regulation vis-a-vis deregulation or vice versa. "

It might sound like playing with words, but it is not because the de-regulation is incomplete and that make it worst. My point is, if you want to deregulate, you have to remove both Glass-Steagall AND government-insured bank accounts. That means, you go back to a system where people put money in the bank that they trust and not just in the bank that gives them the highest interest rate on deposits. On the other hand, if the government insures all the bank accounts, i.e. if the bank goes bankrupt, tax-payers will pay back 100% of all deposits, then you need Glass-Stegall to ensure that the banks don't do ultra risky bets with the money because the depositors aren't going to care. I hope that explains it better.

"Does this not contradict your earlier assertion that US Banks were competing to offer high interest rates?"

No, this is different because the rate I'm talking about here is the rate offered to people borrowing money, not the rate that people get on deposits. For the former, the customer pays the interest while for the latter, the customer gets paid the interest.

"Er if the system has not crash how come the banks are bankrupt?"

Well, it depends on what you mean by system. The system I'm talking about is the monetary system and the banking system. It is not about particular banks or financial institutions. There are 1001 banks in USA, but only the top 10-20 will go bankrupt. There are still many banks and financial institutions that did not make those risky bets and did prudent investing. Many companies go bankrupt everyday, there is nothing surprising about that.

"If by system, you mean banks are still taking deposit and lending money, then er.. isn't that what bank is supposed to do"

Yes, that is the system. That system will still be intact.

"If you have banks that are as you say bankrupt how can they do that? Who dares to lend to bankrupt banks and how do these banks lend money they don't have?"

Just because 1 bank goes bankrupt does not mean that the system crashed.

Buwakasha,

Sorry your latest explanation confuses me even more.

On the one hand, at the start of your comment, you wrote: "As for interest rates, I'm talking about the rate you get on deposits, not the rate you get on borrowing".

Than later your comments veered to and here is what you say: "No, this is different because the rate I'm talking about here is the rate offered to people borrowing money, not the rate that people get on deposits".

So coming back to your earlier comment. How can US Bank pay for higher interest rate on saving and lend it on a rate that is cheaper than what they take from depositors?

Another point that you mentioned also confused me: "As for borrowing from other banks, they don't necessary do that unless you are talking about the Federal Reserve (Central Bank) which is a different story. Bottom line is, banks need reserves (deposits) before they can loan out money or make investments."

Er isn't that what banks do? They lend to each other so that at the close of each banking day they have enough to cover for withdrawal? This occurs on the daily basis. That is why we had the credit crunch when Lehman in the US and Northern Rock in the UK collapse because they could not borrow from the wholesale (i.e. from other banks) market or do you dispute this?

Isn't it because Banks collapse, such as Iceland whose bank had liabilities bigger than the country's GDP and likewise with Ireland and Greece that these country had to get bailout from their International partners to sustain themselves. And now Spain and Italy, and even mighty Germany could have banks collapsing -- big style -- potentially having to rely on state bailout because they can't borrow from other banks?

Okay, sorry for the confusion. Okay, when I will not use the term interest rate now. When I will use only interest on deposit, ie the rate you get paid when you put money in the bank, and interest on borrowing, the rate that you get when you have to borrow money.

"So coming back to your earlier comment. How can US Bank pay for higher interest rate on saving and lend it on a rate that is cheaper than what they take from depositors?"

I never said not implied that, sorry for the confusion. Yes, you are right, the interest on borrowing has to be higher than the interest on deposits. The interest on borrowing now is about 4-5% while the interest on deposit is about 1%. My point is that while the interest on deposit is generally low, but because of guaranteed bank accounts, banks have to compete just on who can provide the highest interest on deposit and not on how safe the investments the bank makes. Remember at one time, there were some Indonesian banks during the Asian crisis offering 20% interest on deposits. However, they failed to get any depositors because no one trusted them. However, if the government has guaranteed the accounts, then people would not care and they will all flock to open an account.

"Er isn't that what banks do?"

Not primarily. The banks have to make money too, they are a business you know. You can't just have 1 bank lending to another bank. Then what is the other bank doing with the money? The banks will borrow money only if they have a way to invest it, i.e. use it to give out loans, use it to buy treasury bonds, etc. Also, the banks can always borrow from the Federal Reserve through the discount window, but there is a limit on how much they can borrow which is dependent on the amount of deposits (they call it the reserve requirement) they have.

"do you dispute this"

Yes, that's not the problem. The credit crunch you are talking about is the inability for those banks to borrow from the discount window at the Fed, because of the reserve requirement. These bank made bad investments, they lost a lot of money (i.e. they lost almost all their reserves). Once you have no reserves, this limits the bank's ability to borrow from the discount window which limits the bank's ability to get credit.

As for your last question, yes, these banks should and will collapse, that's how I see it. You see, now, all the major banks are loading up on sovereign debt. They do that buy buying treasury debt from various governments. These treasuries are also investment vehicles that are worth something, i.e. you can turn around and sell them to someone else and some price and there is a market for that. However, their value is dependent on the existing interest rate (this rate is totally different, it is the rate of interest that you will get when you hold a treasury bond). When interest rate on the treasury goes up, the value of existing treasury bonds go down. That's what happened in Greece and Italy. A few years ago, the banks were okay because the interest rate on treasury was low. However, as people begin to doubt the ability for the government to pay back the debt, the interest on treasury starts to rise, it rose to about 10% in Greece and that made all the existing treasuries almost worthless. The banks lost their reserves and again they cannot borrow and the story is the same.

Buwakasha, your latest explanation confuses me even more further.

On this point you said: "My point is that while the interest on deposit is generally low, but because of guaranteed bank accounts, banks have to compete just on who can provide the highest interest on deposit and not on how safe the investments the bank makes. Remember at one time, there were some Indonesian banks during the Asian crisis offering 20% interest on deposits. However, they failed to get any depositors because no one trusted them. However, if the government has guaranteed the accounts, then people would not care and they will all flock to open an account".

Seemed to you are saying that interest rate are low because the fault is caused by bank guarantee, right? And how does that relate to regulation vs deregulation?

Now here you seemed to miss out the point that in the run up to the crash of 2008, interest rates were kept low by central banks because inflation was low because of cheap imports of developed countries and developing countries kept their interest rate low because they want to their export oriented companies to borrow cheaply. Won't you say that is more of a driver in terms of keeping interest rate low than because of lack of guarantee?

Your argument using the example of the Indonesian bank may seemed on face value valid for that example. But as you point out it was a financial crisis and no one trusted the banks. So won't you say the crisis itself was the cause of lack of confidence rather than the lack of guarantee?

I could also point out that in the UK, Northern Rock during the credit crunch, there was guarantee in placed even before the crunch came, albeit limited to 50,000 pounds for all account in one bank, the bank still suffered a run. Even when the UK government offered 100% guarantee it did not stop the run on the bank, and the government had to finally nationalised the bank. So how do you explain that?

Also way before the crunch Icelandic bank were offering marginally higher interest rates in the UK, which on face value vindicated your theory, but there was no guarantee on the deposit and yet many people, including some UK equivalent of town council, were putting their deposit in it. Quite clearly your theory about depositor wanting guarantee is not so clear cut is it?

It was only when the crisis hit that Icelandic and Irish bank decided to offer 100% guarantee only then to late to realised that banks had deposits (or liabilities to the bank) bigger than their GDP!

On my general point about banks lending to banks, your respond was: "Not primarily. The banks have to make money too, they are a business you know. You can't just have 1 bank lending to another bank. Then what is the other bank doing with the money? The banks will borrow money only if they have a way to invest it, i.e. use it to give out loans, use it to buy treasury bonds, etc. Also, the banks can always borrow from the Federal Reserve through the discount window, but there is a limit on how much they can borrow which is dependent on the amount of deposits (they call it the reserve requirement) they have".

Here I think you are trying to split hairs. My point is basically about banking system and how banks loan money to each other and implicitly implying that that is how credit flows. And my GENERAL point is that when this credit stops flowing to each other you get what is call a credit crunch. What causes the crunch is a multitude of factors. For example, Northern Rock in the UK relied heavily on borrowing from the whole sale market (other banks, sovereign, etc), when that ceased up it had to borrow from the Bank of England, who extended loans to it. But it did not stop the bank from failing. Likewise with Irish and Icelandic banks. So it is not as simple as explanation.

Implicit in that is also that when banks lend to other banks, they are not doing it out of the goodness of their heart or for the good of the banking system. Of course banks are going to lend to each other at some profit, for example, by optimising on the spread from borrowing cost and returns from the used of the borrowed money. I don't think there is any need for you to educate on this point. I am sure readers understand this very well.

Ok be that as it may. The question that puzzle is what general point are you trying to make here? That the credit crunch is caused by the Fed not lending out at the right time to distress bank? And how does that explain bank failures in Iceland, Ireland and UK?

The only respond I could find is this from you: "Yes, that's not the problem. The credit crunch you are talking about is the inability for those banks to borrow from the discount window at the Fed, because of the reserve requirement. These bank made bad investments, they lost a lot of money (i.e. they lost almost all their reserves). Once you have no reserves, this limits the bank's ability to borrow from the discount window which limits the bank's ability to get credit."

First you say, yes that (i.e. banks in ability to borrow) not a problem. You than say it is cause by an inability to borrow from the Feb. Aren't you contradicting yourself here or just trying to split hair here. As you have pointed out it is the inability of banks to borrow that is the problem. Whether the funding source is coming from the fed or not the point is they can't borrow. Also Isn't the fed only confined to the US registered banks. In any case, how do you explain you bank failures in other countries?

As for your last point you are basically saying exactly what I said albiet in a in long winded fashion. More importantly is what is the point you are trying to make here. How does that related to the question about regulations vs deregulation?

Again, sorry for the confusion. You seem to make statements that I didn't say, but you think I said them. Let me explain again,

"Seemed to you are saying that interest rate are low because the fault is caused by bank guarantee, right?"

I never said that. Not sure where you get that from. Interest rates are low because of the Fed action to lower the Fed funds rate. If the Fed had not done anything, then the rate would not be so low. It has nothing to do with whether there are any bank guarantees or not.

"And how does that relate to regulation vs deregulation?"

That's another aspect of the problem, but it has nothing to do with the Glass-Steagall. The original article made it seem that it was the removal of the Glass-Steagall act that allowed the banks to make reckless bets and cited it as an example of why deregulation is not good. My point is that by removing Glass-Steagall, it is not deregulation because the bank accounts are still guaranteed (not 50,000 pounds, but 250,000 dollars). But you are right, the fact that the Fed made interest rates so low is also a big problem. The cheap money enabled them to make risky loans and bets. If money isn't so cheap, the problem would not exists, whether there is Glass-Steagall or not.

"interest rates were kept low by central banks because inflation was low"

Not really. The economy was in a recession and they think that keeping rates low is an answer to stimulate the economy. That's where the problem lies. Just because inflation is low is no reason to keep rates low.

"because of cheap imports of developed countries and developing countries kept their interest rate low because they want to their export oriented companies to borrow cheaply. Won't you say that is more of a driver in terms of keeping interest rate low than because of lack of guarantee?"

That's also stupid. It is a race to the bottom by both countries because both countries (USA and China) think that by destroying the value of their currencies, it will benefit their exports. While that is true, it also damages your ability to import. Keep in mind that the only reason why a country would export is to increase its ability to import, otherwise there is no reason to export at all. But the driver of keeping interest rate low is the Central bank's misconception that low interest rates can boost the economy. It does not, it will only create temporary asset bubbles that is bound to pop.

"So won't you say the crisis itself was the cause of lack of confidence rather than the lack of guarantee?"

Exactly. Once there is no confidence, it does not matter whether there is a guarantee, but that's not what cause the crash in the US. If people trust the guarantee, there would be confidence, not in the bank, but confidence in getting the money back if the banks fail. If there is no confidence in getting the money back and no confidence in the banks, then people will still rush to get their money out.

"So how do you explain that?"

As I said before, if people don't even have confidence in the guarantee, then a guarantee is pointless.

"But it did not stop the bank from failing."

Of course that would not stop the bank from failing. If the bank made risky bets and lose tons of money, then there is nothing you can do to stop it from failing. But the point is letting it fail is the solution.

"Quite clearly your theory about depositor wanting guarantee is not so clear cut is it?"

Not really. The guarantee would not need to be explicit. As long people believe that there is an implicit guarantee, i.e. the mentally that "the government will not let the banks fail", then people would not care. Let some bad banks fail and this moral hazard will be eliminated. Believe me, after 1 or 2 bad banks fail, people will become more prudent in where they put their money. As for your example of a UK town council, the point is taken, but in that case, why would a town council care where they put their money? It is not their money.

"t was only when the crisis hit that Icelandic and Irish bank decided to offer 100% guarantee"

Doesn't that prove that there is a guarantee?

"UK government offered 100% guarantee it did not stop the run on the bank"

Exactly. So, it is not about the explicit guarantee, but the confidence of such a guarantee. If people do not believe that the UK government can afford to guarantee the accounts, then they will not believe the government.

"For example, Northern Rock in the UK relied heavily on borrowing from the whole sale market (other banks, sovereign, etc), when that ceased up it had to borrow from the Bank of England, who extended loans to it. But it did not stop the bank from failing."

It did not ceased up, they were loaded up with assets that went sour. That's the problem. One should never try to stop any bank from failing. Banks that make risky bets that fail should fail. But if the Bank of England were more aggressive, they can save the bank, but at the expense of the taxpayers. They did not however, which is a good thing.

"I don't think there is any need for you to educate on this point."

I did not say that initially, it was you that mentioned it. I'm trying to correct you, at least what I thought you were saying that the banks primary role is to borrow money from other banks. Ultimately, the banks borrow from depositors to fund investments and loans to make a profit, that's what a bank does. Therefore, it is in the depositors interest to keep the banks in check such that they don't do over-risky bets/investment/loans with that money. If you take away that risk by guaranteeing the accounts whether explicit or implicit, then the banks have to be regulated in what they can or cannot do with the money.

"The question that puzzle is what general point are you trying to make here?"

The point I'm trying to make here is that regulation can come from the market or from the government. I believe that market regulation is a better mechanism, i.e. you allow the people to make choices freely and bear the risk of bad choices. In such a situation, the market will regulate the banks and they cannot do too risky bets with the money they have. On the other hand, if you take away the risk, whether by an explicit guarantee or an implicit one, i.e. "the government will never let the banks fail" mentality, then the market will not regulate the banks behavior and the government has to step in. For example, if you buy stocks from the stock market and the company collapse, you lose everything. There is no guarantee, implicit or explicit that the government will bail out any companies (except the banks). As such, people are more prudent in which stocks they buy.

"That the credit crunch is caused by the Fed not lending out at the right time to distress bank?"

I'm not in favor of that, but the credit crunch is caused by bad investment/loans by the banks that went sour.

"As you have pointed out it is the inability of banks to borrow that is the problem."

I've never said that that is the problem. That is actually the consequence of the problem. The problem is that the banks made risky investments that went sour. If a person jumps from the building and falls flat on his face, the problem is that the person jumped, the consequence is that he falls flat on his face.

"In any case, how do you explain you bank failures in other countries?"

The same way I have explained it, they made risky bets/investments that went sour. Like our DBS Lehman mini-bonds fiasco. Now people will think twice in putting money in high yielding bonds.

"How does that related to the question about regulations vs deregulation?"

I hope I have sufficiently answered. If not, feel free to respond. Thanks.

Here is what you said earlier in your argument: "My point is that while the interest on deposit is generally low, but because of guaranteed bank accounts, banks have to compete just on who can provide the highest interest on deposit and not on how safe the investments the bank makes. Remember at one time, there were some Indonesian banks during the Asian crisis offering 20% interest on deposits. However, they failed to get any depositors because no one trusted them. However, if the government has guaranteed the accounts, then people would not care and they will all flock to open an account".

In your latest response, you said: "I never said that. Not sure where you get that from. Interest rates are low because of the Fed action to lower the Fed funds rate. If the Fed had not done anything, then the rate would not be so low. It has nothing to do with whether there are any bank guarantees or not."

Fair enough I might have been mistaken in saying that you said bank guarantees led to low interest rate, so apologies on that point. What I meant to say that you have made the link between bank guarantee and interest rate.

As you have said "but because" of bank guarantee, banks were chasing high interest rates. And my point was that what about Icelandic bank operating online Banking accounts for their offshore customer offered no guarantee yet why was their deposit interest rate higher than banks with guarantee in the UK. Does that not imply that your theory that BECAUSE -- your word -- of this bank chased high interest rate?

Secondly, you brought out the case that Indonesian bank raised interest rate and still no one wanted to deposit in it. In your words: "However, if the government has guaranteed the accounts, then people would not care and they will all flock to open an account".

But as I pointed out to you, when Icelandic, Irish and in the particular case of Northern Rock, the government decided in when people were rushing to close their account causing a bank run, the governments decided to offer 100% guarantee. Yet people were still not flocking to open accounts. How come? Does it not invalidate your theory that if there was guarantee people would flock to open accounts.

Before you twist my words, in the case of Icelandic bank, I say again, the 100% did not come in before the bank run. Before the bank run it was NO guarantee if you open an offshore account.

On your latest response, here is what you said: "That's another aspect of the problem, but it has nothing to do with the Glass-Steagall. The original article made it seem that it was the removal of the Glass-Steagall act that allowed the banks to make reckless bets and cited it as an example of why deregulation is not good. My point is that by removing Glass-Steagall, it is not deregulation because the bank accounts are still guaranteed (not 50,000 pounds, but 250,000 dollars). But you are right, the fact that the Fed made interest rates so low is also a big problem. The cheap money enabled them to make risky loans and bets. If money isn't so cheap, the problem would not exists, whether there is Glass-Steagall or not".

Here is another contradiction, on the one hand you said Banks because of the guarantee they had to offer high interest rate to attract deposits. Now you are saying Feb low interest and cheap money makes bank do risky loan and bet. Now then let me repeat myself again how can bank offer high interest deposit and loan out at low interest?

If your argument is that bank guarantee is a form of moral hazard that embolden banks to take risk with depositor money, maybe there is a case to be made, we can debate about it. But what is the link to the Glass-Steagall act is something you have NOT made clear in your argument. Nor is any of your so call explanation as clear cut as you might think. Maybe if you spent less time trying to score point and may a clear an concise explanation you might get your point across clearly.

The problem is you then muddy your explanation with your argument that cheap money is the cause of the problem, in your own word "Glass-Steagall or not". So which is which? Glass-Steagall or cheap money is the problem?

When I asked you whether you were trying to split hairs or educate, you said: "I'm trying to educate, not to split hairs".

On your point: "I did not say that initially, it was you that mentioned it. I'm trying to correct you, at least what I thought you were saying that the banks primary role is to borrow money from other banks. Ultimately, the banks borrow from depositors to fund investments and loans to make a profit, that's what a bank does. Therefore, it is in the depositors interest to keep the banks in check such that they don't do over-risky bets/investment/loans with that money. If you take away that risk by guaranteeing the accounts whether explicit or implicit, then the banks have to be regulated in what they can or cannot do with the money."

First you claim you were not educating and now you said you are not educating. Which is which?

Secondly, you said your are correcting me on banks from other banks. So assuming I am wrong, then here is the question I have for you. How is it that the UK has one of the lowest saving rates and a Bank like Northern Rocks able to raise enough deposit to loan out money? Where did they get the money from? It was not an investment bank like say RBS that were creating securities to sell to other banks or using its own capital (including depositors) money to buy other banks? Northern Rocks was just a simply a saving and loans company?

Thirdly, you said banks were doing risky investment. What do you mean by investment? As I have indicated Northern Rocks was not an investment bank. Yes they may have sold mortgage to sub prime but remember they then sold these on to the Lehmans to package up as bonds. So Northern Rock in theory was not itself making risky investment and more to the point since it sold its subprime to the Lehmens it is not taking on any risk is it? Yet can you explain why Northern Rocks collapse?

On this point: "If a person jumps from the building and falls flat on his face, the problem is that the person jumped, the consequence is that he falls flat on his face".

Er confused here.

Now are you implying that if a person jump and the act of "jumping" is the problem, and "falling flat on the face" is not the problem? Or do you mean "falling flat on the face" is the problem?

So if "act of jumping" is the problem than what if someone jump not not fall flat on the face. Is the "act of jumping" still the problem?

In case you think I am trying to be "facetious", let me related back to your banking case. You keep arguing that it was not the lack of credit that keep bank cause bank from failing but your so-call risky investment.

Now is "risky" investment really the problem? What about those Banks that took on so call "risky" investment and still survive (i.e. DBS Lehman mini bond*) or profit massively from it (Goldman Sacs)?

So when I asked you: "In any case, how do you explain you bank failures in other countries?"

Your explanation was this: "The same way I have explained it, they made risky bets/investments that went sour. Like our DBS Lehman mini-bonds fiasco. Now people will think twice in putting money in high yielding bonds".

First question in the case of DBS Lehman mini bond? Did DBS or for that matter made the risky bet? Or was it the buyer of mini-bond? Who are they "they" in your statement?

Secondly, if risky bet was the problem than how come DBS did not fail and only Lehman (and the bond buyers) did?

Okay. I see whether the confusion comes from. There is difference between "compete on offering the highest interest rate" versus "interest rates are high". Let me clarify. Interest rates are not high, they are too low because of the central bank's manipulation. So if Bank A offers a rate of 1.5% over Bank B, which offers a rate of 1%, Bank A has the highest rate and depositors will be more attracted to Bank A. However, what if in order to out compete Bank B, Bank A has to load up with ultra risky investment instruments? Do the depositors care? Will they still prefer Bank A over Bank B? Do the depositors ever look at the Bank's balance sheet to make sure that their investment portfolio is sound? Most of time, it is no. Because of the guarantee (implicit or explicit). I'm not making a link between interest rate and bank guarantee. I'm making the point that Banks compete solely on interest rate and not on how sound their financial portfolios are when there is a guarantee.

As for your point about some banks that offer higher interest rate than UK banks with guarantee, I think that is a moot point, i.e. irrelevant. There are always going to be bad banks with bad business practices. Like the Indonesian banks example, no guarantee, but they can offer 20%. However, they can offer as much as they want does not mean they can get as much customers as they want. Also, just because there are some people foolish enough to put their money there, does not mean that there are people who are prudent enough not to. As it turns out, they failed and foolish people together with these foolish banks should lose their money.

Next, you ask, "how can bank offer high interest deposit and loan out at low interest?"

As I said before, banks are not offering out high interest deposit. They are competing on interest rate alone, on who can offer the highest rate of interest and not on the safety of how prudent their investments are. Again, there is a difference between "highest" which is a relative comparison with "high", which is an absolute judgement.

"First you claim you were not educating and now you said you are not educating. Which is which?"

Since when did I say that I'm not educating? I said that the point about banks making money by making investments and loans is not something I was intending to bring up, but I brought it up as a response to your initial statements.

"How is it that the UK has one of the lowest saving rates and a Bank like Northern Rocks able to raise enough deposit to loan out money? Where did they get the money from?"

I really don't know, I wouldn't put my money in those banks. Perhaps they found some suckers to deposit money in them. After all, Bernie Madoff did manage to attract suckers into his ponzi scheme for over a decade.

"Yet can you explain why Northern Rocks collapse?"

Not sure. I'm not even familiar with this bank. What I can tell you is this. Even if they themselves did not hold on to these toxic assets, but they were the ones who originated them. As such their reputation might have been hit hard. After all, the bank's reputation is worth more than its balance sheet. If people distrust the bank, they would not care and they will pull all their money out.

Okay, I did a little reading on Northern Rock. I got this from wikipedia.

"When the global demand from investors for securitised mortgages dropped in August 2007, Northern Rock became unable to repay loans from the money market with money which should have been raised from securitisation."

I think this problem is unique. Basically the bank sold bonds to raise money from the money market. They wanted to take that money, engage in sub-prime mortgage lending, securitise the mortgage and sell them off. The proceeds of the sale would cover the interest and principle of the bonds. Unfortunately, when the crisis hit, no one wanted to buy these sub-prime securities anymore and they are stuck with the money without any way to make more money to cover the interest. That's why they failed.

"Now are you implying that if a person jump and the act of "jumping" is the problem, and "falling flat on the face" is not the problem? Or do you mean "falling flat on the face" is the problem?"

Falling flat on the face is the consequence of the problem, but it itself is also a problem. Let me give another analogy. If you lose your job, you have no money to spend. Now losing your job is a problem, having no money to spend is the consequence of losing your job, but it is also a problem. Now to fix the problem, you can fix the problem of having no money to spend, i.e. borrow money, or fix the problem of losing your job, i.e. get a new job.

"Now is "risky" investment really the problem? What about those Banks that took on so call "risky" investment and still survive (i.e. DBS Lehman mini bond*) or profit massively from it (Goldman Sacs)?"

They would have collapsed if not for the bail out. The central bank can bail out the banks if needed. Not doing so is a good thing.

"First question in the case of DBS Lehman mini bond? Did DBS or for that matter made the risky bet? Or was it the buyer of mini-bond? Who are they "they" in your statement?"

They is the buyer of mini-bonds. They took the risk, the bear the burden. DBS unlike Northern Rock, did not take any risk.