Big short again

maxinger said:
Look at how strong iron core and copper prices are.
the prices keep on breaking record high.
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Economies are opening up and people have to get back to businesses and raw materials will still be needed for various projects they have re-started or starting. Keeping people just locked up as in other countries, will not end Corona Virus.
 
traderjo said:
MBS were invested by mon and pop pension fund and they lost it I Get that and I get that it is sad and BS etc .. not saying that this was good ...
I am purely looking at it from financial maths point of view my simple proposition is money did not disappear it changed hands.

( keeping brokerage and cost aside for this example)

-Bank has 100 to start loan book
- People borrow 100 and buy houses worth 100 ( sellers and people involved in selling of houses of houses get 100)
- Bank makes an MBS company and sells it's shares for 105 ( Banks get the 100 back)
People through pension funds purchase the MBS for 105
- More bad quality MBS created
- Houses prices collapse
- People who bought the MBS at 105 loose THE MBS IS WORTH say 10 ( Cant be that low as houses and land still has some value but lets assume it is)
BUT THE ORIGINAL 100 that the sellers got is still in the economy ! where did it go?
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The original 100 went to the seller of the existing home, or to build a new one. Simply put, the borrower got the loan and paid for the house.

It was lent/created from the bank's cash reserves. Remember a bank can lend out 10x more than it has on deposit, based on the fractional reserve system [1]

1. https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp
 
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