For hundreds of years the banks have made a profit by loaning money. Where does the money come from? They are allowed to “leverage” their assets and create money out of thin air with the touch of a keyboard.
In the United States this leverage ratio is 10/1. The result is the vast amount of money in the world is not created by governments but is “loaned” into existence by banks as debt. The problem is when the loan is made it must be paid back with interest. The bank did not create the money to cover the interest. To “cover the interest” new loans must created in a large enough volume to service preexisting debts along with the interest on them.
Thus an expanding level of debt is required to keep banking and the rest of economy afloat. But we now have a “debt crisis” and banks have curtailed their loaning activities. So how are they making a profit?
Instead of loans the major banks are “investing” assets in various markets. Stocks, futures, options, and by far the biggest of the all is the derivatives market. Just how big is it? It is estimated J.P. Morgan Chase bank has over $90 Trillion worth. That’s right — Trillion with a capital “T”. The reason it is just an estimate is because the derivatives market is unregulated.
Not only do we not know how much they own, we do not know what kind (there are many different types and combination of types), whether they bought or sold them, and to whom they bought or sold them!
In the banking industry this is called “Casino Banking”. All the major banks around the world are “Casino Banking” It has been estimated that as much as $1.3 Quadrillion of various derivative and combination types are “in play”. So when Jamie Dimon is not very worried about a $2 billion loss you can understand why!
David A. Douthit