Banks claim to create wealth. But do they really? They manage money - which is the medium we think store wealth. But money lose value all the time. Meaning the people keeping money are robbed all the time without realizing it! After watching numerous documentaries and reading loads of stuff, i think banks do not create wealth. They redistribute wealth. Mostly to themselves and to the people keeping them out of trouble. And screwing their customers.
Came across this thing called credit default swaps, explained in numerous documentaries. It comes across as a pretty screwed up tool for the banks.
Explaining it simply, banks take money and help you keep it physically safe (it does not mean the value of the piece of paper stays unchanged - it just means you are likely to have that piece of paper when you wish to withdraw it). And since it is something of value, they pay you a tiny interest for it. Then they take the money that they have and they give out loans. They are able to give out loans amounting to more money than what the banks' customers have deposited with the bank. And they charge the lenders an interest (which of course, is a higher percentage than what is paid to the depositors).
I have yet to understand why they are able to give out more than what the depositors have placed with them. But to me, that is what i understand to be printing money. However, it is very different from creation of wealth. It does however, sound like re-distribution of wealth. Imagine if you are on a plot of land that has 5 farms. 4 farms are established and healthy. So you have plenty of vegetables, chickens, cows, etc. And those 4 hardworking farmers store their money with mister banker. Mister scammy came along and said, i have not farm before and i do not have many assets, but i would like to borrow some money, buy farm 5 and plant dragon fruits for sale. Mister banker want to sell the loan because if he sells this loan, he will get a huge bonus from the bank. So he say, sure mister scammy, take the money. And he gives out more money than the total money saved by the established 4 farmers in the bank. So, now all the money in the system represents the value of everything on that plot of land. Effectively distributing the 4 farmers' wealth to mister banker (bonus) and mister scammy (loan which might go bad). There is more money in the system, but essentially, it is worth less. At least until and if mr scammy manage to establish a healthy, profitable farm.
Then mister banker got creative. He wants more bonus. And he wants to give out more loans. So, he need more money to come into the bank. And he knows mister scammy might not be able to repay his loan. So, he also need to get rid of the risk associated with the loan that he has given out on behalf of the bank. One fine day, a new customer came to the bank. This customer has some money from other plots of land and would like mister banker to advise him on how to make more money. Mister banker told new customer, why don't you buy this asset I have - it is a loan (mister scammy's loan) and you can get interest from this loan. New customer asks, what if they lender default? Mister banker says, don't worry, I will get rating agency to verify that it is a good "investment". So, he bought rating agency a bottle of wine and says, mister scammy's loan looks like a AAA asset - don't you think? As it is a very expensive bottle of wine, rating agency agreed and says, it does look like a solid investment. With that, mister banker screwed new customer over and sold him a loan likely to default - with the help of rating agency. And now bank has more money to loan to other people like mister scammy. The overall wealth of the plot of land and now the adjacent land is now overall less - unless mister scammy turns out to be a talented farmer. And the wealth of the hardworking farmer and new customer has now be redistributed to mister banker and mister scammy and rating agency. There is even more money in the system, but it would be chasing after less vegetables, chickens and cows. The money held would be worth less (again).
With this tool, banks can give out loans irresponsibly, because they can offload their risks to unsuspecting investors with the help of the not-so-objective rating agencies. Earn their bonuses and not worry about non-performing loans. That would be somebody else's investment risk.
This is why crypto currency exists - the people are trying to look for an alternative. To give banks less power. To take away the "services" they claim to provide. To make banks less relevant. Because time and again they create bubbles by doing things do not create wealth and then they threaten the not so smart politicians - if you don't save me, your country's financial system will collapse and you will be in recession. Well mister banker, it is time wrap arms around each other and die together (direct translation from cantonese dialect). When they bankers have stolen enough and the people are fed up enough, people might be willing to see how things can be when banks (if they still exist) have significantly less relevance. Bail outs have happened time and again with no difference in outcome. Perhaps it is time to try something different.
Be aware of new vehicles that may not be called banks, but does exactly what banks do. So, educate yourself. As tools become more complex, don't ever agree that it is too complex for you to understand. If banks do not understand their products well enough to explain it is a simple manner, then they do not deserve the business. when banks tell you it is a good investment backed by rating agencies - know that there are always fine prints - you are investing knowing that there is "investment risk" and rating agencies' ratings are only an "opinion", not a recommendation.
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