How the Financial System Works in 3 Minutes

John Clarke and Bryan Dawe with a lesson on how the financial system really works.

Bryan Dawe: Thanks for your time.

John Clarke: Very good to be with you Bryan, good evening.

Bryan Dawe: Now, you’re a market economist?

John Clarke: Yes, well, most economists are market economists Bryan, to a degree these days, yes.

Bryan Dawe: How do you think things are going at the moment?

John Clarke: There’s a great deal of international concern, we’re taking a towelling, but things will sort themselves out Bryan. This is what a market does.

Bryan Dawe: Well, can you explain how it works?

John Clarke: How the economy works?

Bryan Dawe: Well, yeah. What’s the problem at the moment, for instance?

John Clarke: Well, what we’ve got at the moment is an international credit crisis.

Bryan Dawe: Yes, how does that happen?

John Clarke: Well, I’m a bank Bryan, and I borrow money and lend it out. And I charge more to the people I’m lending it to than I pay the people from whom I borrowing?

Bryan Dawe: Well, who do you borrow money from?

John Clarke: Well, you know, from depositor’s Bryan. Have you got a dollar?

Bryan Dawe: Well, yeah, sure.

John Clarke: I borrow your dollar, and i give you, you know, there’s your bank balance.

Bryan Dawe: $1?

John Clarke: $1.

Bryan Dawe: Right, OK. And you pay interest to me on that?

John Clarke: I do, but I also charge you fees.

Bryan Dawe: Well, why do you charge me fees?

John Clarke: Well, because Bryan, I’m looking after your money. Your money is secure with me, I’m a bank. I mean, this is a very important amount of money; this is probably your nest egg, it’s safe with us.

Bryan Dawe: How much interest do you pay me?

John Clarke: Approximately the same as I’m charging you in fees.

Bryan Dawe: Oh, good deal for me.

John Clarke: Well, your money’s secure with us Bryan. And I then lend that money to businesses, and those businesses generate income. And this is how we build the economy.

Bryan Dawe: And they put the income into the bank?

John Clarke: They do, of course Bryan. That builds the savings pool, and we can invest more money.

Bryan Dawe: Well, who do you lend that to?

John Clarke: Well, to people who need credit Bryan. You see, money creates more money, so if we can create more money we’re broadening the economy, we’re expanding it all the time.

Bryan Dawe: But shouldn’t people just buy the things they can afford?

John Clarke: You don’t need to afford the things you’re buying Bryan; you need to afford the interest on the money you need to borrow in order to buy them.

Bryan Dawe: And you’re charging high rates for all this?

John Clarke: We do hop into them a bit on the credit rate Bryan; we stick the hydraulics under that because it’s a slightly higher risk strategy.

Bryan Dawe: Do people need to be buying these things they can’t afford?

John Clarke: Well, obviously they think so Bryan. I mean, these things are advertised to people as very necessary, very important, and deeply, deeply attractive.

Bryan Dawe: Well, who’s advertising things we people don’t need?

John Clarke: The companies we’re lending the money to.

Bryan Dawe: So OK, then you bought into the US sub-prime house market…

John Clarke: Well Bryan, so concerned are we to build a better Australia…

Bryan Dawe: You help build a worse America?

John Clarke: Yeah well, that was an accident Bryan. What we were doing was investing in the international investment market.

Bryan Dawe: That’s been a disaster.

John Clarke: Frankly, famously, it hasn’t been a huge success hitherto.

Bryan Dawe: Well so, what are you going to do?

John Clarke: Well, now you give me conclude $US 700 billion immediately.

Bryan Dawe: Why?

John Clarke: Well, because we need it Bryan. I mean the system needs money. Imagine the economy as a body, it needs blood pumping round it Bryan.

Bryan Dawe: But you haven’t got any?

John Clarke: We haven’t got any money, no.

Bryan Dawe: Well, why not?

John Clarke: Well, we lost ours; I’ve just been explaining that.

Bryan Dawe: Well, you’re not having mine.

John Clarke: Mum, Bryan won’t let me play with his stuff.

Bryan Dawe: That’s the only money I’ve got.

John Clarke: You’re in for it.

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