It is a Ponzi scheme. Banks create money out of thin air to loan it out and expect to be repaid in return with the principle plus interest. The problem is that the amount of money needed for interest doesn't exist. The only way for interest to be paid back is for more money creation by the banks. But the more money created, the more interest payments increase. And you have a vicious cycle. Not only are banks creating money at multiples of what they have in their deposits, but you have this other imaginary amount of money that needs to be accounted for (remember, when a loan is issued and money is created, the banks are only creating principle, not the principle plus interest).
And there you go.
It's a system that designed to fail. But the banks aren't what will "fail". It's the debtor that fails.
I know that bamawriter and GAVol will take issue with the above, so let's look at the real world application.
Borrower goes into a bank seeking a loan. The bank knows that they probably can't pay the loan back, but the loan is an "asset" that goes on their books. They have little or no skin in the game because they get to create the "money" they are loaning out with a few strokes of the old QWERTY.
They create the money out of thin air, just like all of the other banks are doing. But they don't create the $$$ that will be required to pay the interest on the loan (just like all the other banks have been doing.)
The banking industry has created an economy where, by definition, more debt exists than money to pay off the debt (principle + interest).
In other words, it is impossible for all of the debt to be paid off. This is important to keep in mind as we are considering John and Jane Doe below...
All of the Jane and John Does out there now get to play Economic Musical Chairs... With more debt in the economy than money, we get to run around chasing the available $$$ to pay the debts (principle + interest) when only the principle exists.
When the music stops for any given round, the loan (that was created from nothing by the bank) is called in by the bank. For anyone without access to the money that actually exists, the bank gets their real asset through foreclosure, and the music starts up again. More debt than $$$ still exists, more chairs are removed, more people lose their homes, and the bank gets more real assets in exchange for the "debt" assets on their books (that they created from nothing).
And on and on the Ponzi scheme goes, designed to fail (i.e. trade created $$$/debt for real assets). And when the system fails, we (the tax-paying hostages), give the banks lots of our $$$ through taxes because they are too big/important to fail.
But now, according to some, not only are they too big to fail, the very system they implement is so important that we could never have an economy that worked in any other way. (Or maybe that's not what GA said. Maybe he just meant that we should keep the Ponzi scheme b/c if we did away with the Ponzi scheme, the Ponzi scheme wouldn't work... Not sure... But I expect that we could have a working economy that is not a fiat economy Ponzi scheme since we've had them before.)
