7. While the profits from speculation are used for further speculation, huge volumes of new money

are required to keep the bubble growing. Where does that money come from?

We visit the money creating ability of banks. The simple fact is that money in the real economy is created by banks.

Banks create money by fiat using electronic means and place the money in circulation through loans. Since the new
money is balanced by a debt (the loan) the inflationary effect of bank money is moderated.

After laying out the basic facts of the bank money and debt creation, a moment of reflection is required
to appreciate the foolishness that underlies the whole system.

8. The Minsky speculative cycle and money-creation-as-debt is explained.

As the speculative cycle proceeds, all money is returned to financial institutions.

Money deposited into banks has a very short time commitment but the money lent out is often for many years.
Which is to say that the banks develop a "short position" on where their money comes from and a
" long position" on where the money goes i.e. a mortgage. This is the basic fragilityof the banking system.
Government regulation was designedto prevent too many risky loans that might not get repaid.

9. The spectacular scale of the current crisis is the result of many previous

crisis being papered over through ever greater money-debt creation. Along the way,

the financial industry eroded federal and state government banking regulations designed

to restrain reckless lending. The end of branch banking restrictions in the 1970s paved

the way for banks to grow into huge national firms. The ending of a cap on interest rates

allowed the ever larger banks to make ever larger profits. As the financial industry became

more profitable and powerful it eventually captured the very government agencies responsible

for holding reckless lending in check.  

"And the banks - hard to believe in a time when we're facing a banking crisis that

many of the banks created - are still the most powerful lobby on Capitol Hill.

And they frankly own the place."

- Illinois Sen. Richard Durbin

During the 1980s, political leaders, themselves barely able to understand the evolving financial system,

caved in to a full-blown deregulation ideology blind to the dangers of free market financial dynamics.

We review the timeline of deregulation set against a graph of growing income disparities.

By 2000, the financial industry's take over of federal regulation was complete and

key leaders in both major political parties had become advocates for financial interests. The federal

regulatory structure for banking and finance was effectively dead. The only governing body with

the lights still on was the Federal Reserve, which is a private corporation chartered to service the

money creation system. Good grief!