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On The Money with Robert Peston

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Dana Stevens | 10:00 UK time, Monday, 29 March 2010

When our credit got crunched and the media started talking about sub-prime this and fiscal that, I'm sure I wasn't alone in wondering what the hell they were on about.
Working out how to survive until payday takes enough concentration, let alone trying to work out what is behind the financial crisis. But even if we try to ignore it, it does have an impact on all of us, so admittedly it would be helpful to understand what is going on.

So award-winning business journalist Robert Peston has made a series of handy online videos explaining everything we need to know about money. In this animation about how the banks work he sets up his very own Pesto Bank (and no it isn't full of pasta sauce. Shame.)

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Watch more videos from Robert Peston:

Watch out for a related TV show coming soon to BBC Three called On The Money with Robert Peston. It will feature an audience debate exploring the issues around money and how the financial crisis affects us all.


Dana Stevens is content producer for BBC Three online.

Comments

  • Comment number 1.

    I would e-mail Robert Peston, but cannot find his e-mail address. So, my question:-
    With the many millions of pounds profit made daily by the banks, hedge funds, money markets etc. etc., who are the losers? We never hear where the profits come from, we never hear who has lost out. This seems to be a closely guarded secret. Please enlighten us. Thanks. Ralph.

  • Comment number 2.

    The answer to Post 1 is "Just about everyone else.".

    Profits mainly come from institutions which are owned, ultimately, through shareholding by individuals - one way or another everything is owned directly or indirectly by individuals. Even the Government is effectively owned by the population - it is certainly paid for by it.

    The financial game is rigged. Salaries are always paid. Plus a bonus on "profit". If a loss is made the shareholders, i.e. everyone else, pays for it. There is no downside for the players within the game. The only question is how much they make.

    If the losses in banks are too big for existing or potential shareholders, the government steps in, i.e. you and me, and pays the salaries and bonuses.

    Not one participant in the game loses money - ever. They cannot because they are not exposed.

    If private hedge funds lose money, its the money invested in them that is lost. Not the employees' money.
    The one exception is if hedge fund managers put up their own capital; but then, that is capital presumably largely accunulated from the same system.

    The business model in financial services is simple. You are charged for putting your money on a horse. If the bet pays off you share the winnings. If it doesn't, you carry all the losses.

    No secret.




  • Comment number 3.

    I would email but cannot find an appropriate address, but the "On The Money" with Robert Peston videos are without sub-titles; can this be remedied (or at least a transcript posted) - please....

  • Comment number 4.

    Haven't you omitted one really important fact? When the bank takes a £1,000 deposit from me, they lend out ten times that amount to other borrowers - I understand that some were lending out 50 times that sum - all on the basis that the chances of more than 10%/2% taking their money out at any one time was too small (as it would have been had American property not been grossly overvalued)That means that they get the same leverage on their interest margins. i.e. pay me 1% on £1,000 = £10, get 5% on £10,000 = £500!

  • Comment number 5.

    Before, there was the gold to support the value of the 'paper' money; what of support is there behind today's 'electronic' and 'paper' money? How do we know when and where there is a shortage or overflow of the paper money and the electronically generated one?

  • Comment number 6.

    Dear Robert Peston
    I am writing to thank you for these insightful blogs. I used your information about the recession during my a-level business and I have just recieved an A in business today. I feel that your economic information and witty writing style has contributed to my grade and would therefore like to say thank you as I learned more about the business world from you than my teachers.

  • Comment number 7.

    Peston's video is over-simplistic to the point of being misleading.

    If banks only loaned out money which they had received on deposit (plus any capital investments they may receive) then, if there was a run on the bank, there would be no significant problem. The money deposits could be repaid (less any bad debts) when the loans were repaid. If the bad debts were say 5% on £1 million of loans then the bank has a potential loss of (only) £50,000.

    The fact is, as Mike Brodie correctly pointed out on 27th April, the banks effectively print money for themselves by loaning out far more than they have. 10 times is conservative but using that ratio, on £1 million of deposits, the bank loans £10 million and a potential bad debt loss of (a significant) £500,000.

    Banks effectively have a licence to print money. They take the handsome/indecent profits and if their gambling fails they we the people have to pay - have paid up.

    To rub salt into that wound, the banks use some of the money we have given them to create more money which they then loan to our Government, with interest - and we the people have pay the interest.

    It is utter madness for this situation to continue. The financial markets have taken over the world's economies to the extent that their 'gambling' has become more important than all other productive commerce put together. The tail is wagging the dog, to death.

    Only national banks should be able to create money. Unfortunately, because vested interests are put before the interests of the people there about as much chance of that happening as there is of Peston reading this and correcting his video.

    There is hope though that investment banking (gambling) will be split from High Street banking - so that life and business can continue in the event the gamblers take a risk too far.

  • Comment number 8.

    While this film is a 'nice try' it is beguiling in its understatement. Were this the full extent of the issue, we really wouldn't have the financial problems we see today, nor would we be on a path to the far greater scale of financial melt-down that the rest of the story suggests is innevitable.

    To oversimplify the 'other end' of the story, the international banking/economic system is dependent upon growth for it's very survival and so relies on larger and larger numbers of people joining in. The more people who are signed up to the game, the faster the shift of ownership of assets shifts from the common population to the banking sector. In effect, it is constructed like a huge, global pyramid scheme.

    The Elephant in the Room? No, bigger, much bigger: that's why so few people see it. Those who think ourselves intelligent may congratulate ourselves on our enlightened search for (or study of) the Elephant, but the room itself is in a house built in a town on an island that is really the back of a whale, one greater than you've ever imagined and you could be celebrating your recent civil partnership with that elephant but it wont help either of you when that whale sinks!

    If you found the above video interesting (and maybe wonder what I'm on about), I heartily recommend you search for "Money as Debt" and watch the video you find. This is best explanation of this confusing subject that I've seen.

  • Comment number 9.

    It's funny, no mention of fractional reserve banking, the way that banks REALLY make their money and the real reason that a run on a bank is so damaging.

    I wonder why?

    The idea is simply that as money is really only a promissory note, or merely a promise (to give you your money on demand) As long as too many people don't ask for their money back at once you can lend money you don't have on the promise that you do. Lending imaginary money while being paid back in real money is far more lucrative than mere interest. Interest, and all the instability that comes with it, is merely being greedy.

  • Comment number 10.

    Can anyone tell me if when the banks are sold will the money be offset against the debt?.And if so then the true debt is around 80 billion not 157 billion.

  • Comment number 11.

    Doesn't this film only illustrate part of the problem? I was of the understanding that the money that banks give out in loans is often many multiples of what they hold as deposits. In this way they literally create money.

  • Comment number 12.

    Good points with banks being built as a huge pyramidal scheme. The more people come to a bank, the less demand this amount of money in a short time, the more they gain. They ended in the odd situation in which they lent money to people with no jobs or with no properties, just because their relative had money...Read this, a young man was given a loan, but he's "hesitant" about accepting it, because he's afraid he cannot pay back the money: http://www.financialcrisisblog.org/forum/Credit/HOW-can-they-do-this-Illegal-310260.htm
    So, why do we all have to pay for the bank's losses?

  • Comment number 13.

    The fact is... as Mike Brodie correctly pointed out on 27th April, the banks effectively print money for themselves by loaning out far more than they have. 10 times is conservative but using that ratio, on £1 million of deposits, the bank loans £10 million and a potential bad debt loss of (a significant) £500,000.

  • Comment number 14.

    The idea is simply that as money is really only a promissory note, or merely a promise (to give you your money on demand) As long as too many people don't ask for their money back at once you can lend money you don't have on the promise that you do.... Lending imaginary money while being paid back in real money is far more lucrative than mere interest. Interest, and all the instability that comes with it, is merely being greedy.

  • Comment number 15.

    I see that inflation is up again!! So what do all the economists say "well the Bank of England has better put up the interest rate so that will bring the rate down." They do not seem to be aware of what is causing the rise in inflation , it is the increases in the price of oil, and other energy supplies, the increase in the cost of any basic manufacturing commodities. the increases in the cost of food stuffs, the VAT increase, etc , etc.
    So I would like to hear from the "experts " as to how the increase in intrest rates will effect the world price of any commodity.

 

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