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How Does The Financial System Work?

2 Minute Video

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

Posted December 14, 2013

 

Australian Broadcasting Corporation - Broadcast: 02/10/2008

 

 

ALI MOORE, PRESENTER: Time now for 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, being.

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 at the moment.

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?

BRYAN DAWE: I do, but I also charge you fees.

JOHN CLARKE: Well why do you charge me fees?

BRYAN DAWE: 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.

JOHN CLARKE: How much interest do you pay me?

BRYAN DAWE: Approximately the same as I'm charging you in fees.

JOHN CLARKE: Oh good deal for me.

BRYAN DAWE: 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.

JOHN CLARKE: And they put the income into the bank?

BRYAN DAWE: I do, of course Bryan. That builds the savings bill, and we can invest more money.

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 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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