patrick.net

tatupu70 says

The Fed's charter is to keep the US economy crappy? Interesting. Please tell me more.

Once again with the "Socratic" method...

The Fed did not create more stability in banking, 20 years after it's institution we had the the great depression, that lasted for 10 years, In the past 20 years we have had one Fed created bubble after another.

indigenous says

Once again with the "Socratic" method...

The Fed did not create more stability in banking, 20 years after it's institution we had the the great depression, that lasted for 10 years, In the past 20 years we have had one Fed created bubble after another.

I forgot--it's always the Fed.

tatupu70 says

I forgot--it's always the Fed.

Yup, you do realize that before the Fed the currency's value went from a value of a dollar to a dollar and eleven cents, after the Fed the value went from 1 dollar to 4 cents?

tatupu70 says

Strictly speaking, they aren't printing money. They are lending out their depositors' money.

A reserve ratio of 10% means that $2,000 becomes $20,000. That is money creation, also known as money printing. And yes, the banks are not literally operating printing presses, but they are creating money by lending what they do not have.

The Soviet Ruble was a hard currency.

The 10x multiplier is not 10x on every dollar lent, only the total dollars in circulation, plus some other liabilities on the Fed balance sheet. From a high level, the excess reserves above is calculated as such:

Excess Reserves = FRN in circulation * 10 - money supply.

No one ever answers the question: In a growing population with increasing productivity, why should a dollar earned by my grandfather for a days labor 50 years ago be worth more than a days labor today, simply because he by delaying its consumption he is taking advantage of its scarcity under a hard money system? Delayed consumption is not investment in itself.

Blurtman says

A reserve ratio of 10% means that $2,000 becomes $20,000. That is money creation, also known as money printing. And yes, the banks are not literally operating printing presses, but they are creating money by lending what they do not have.

No, it's not creating any money. It's putting saved money back into circulation. They do have what they lend. They just don't keep all deposits on hand at the bank.

When you put money in the bank--it becomes the bank's money, which they then lend out.

control point says

No one ever answers the question: In a growing population with increasing productivity, why should a dollar earned by my grandfather for a days labor 50 years ago be worth more than a days labor today, simply because he by delaying its consumption he is taking advantage of its scarcity under a hard money system?

One of the cornerstones of a culture, country is reliable money. It has been the downfall of almost all countries in history more than any other.

So you think that going from a dollar to 4 cents makes sense?

“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Henry Ford

tatupu70 says

No, it's not creating any money.

Incorrect.They are lending what they do not have, thereby creating money

Money creation by the commercial banks
Most money is in the form of bank deposits in the contemporary economic system. The main way in which those bank deposits are created, is through loans made by commercial banks. When a bank makes a loan, a deposit is created at the same time in the bank account held by the borrower. In that way, new money is created.
http://en.wikipedia.org/wiki/Money_creation

Blurtman says

Incorrect.They are lending what they do not have, thereby creating money

OK--let's take a step back. If you deposit $2K and the bank lends out $1.8K of it, the bank clearly HAS the money. Are you arguing that the demand deposit isn't the bank's money?

indigenous says

So you think that going from a dollar to 4 cents makes sense?

Money is a medium of exchange. It does not matter what its value is relative to itself historically. It only matters that I can immediately exchange my work for it, then exchange it for something I want.

As long as, basically, something I want cost $1 in 1900 when my daily wage was $1, then why should I complain that the same thing cost $25 today, when my daily wage is $35?

tatupu70 says

If you deposit $2K and the bank lends out $1.8K of it, the bank clearly HAS the money. Are you arguing that the demand deposit isn't the bank's money?

I'm going back to the moment in economics 101 when my jaw dropped to the floor - off in the distance, there was an ice cream truck, but that was all you could hear.

When I deposit $2K, it's still my money: I can withdraw it at any time. The bank, in lending $1.8K to someone else, which will go into another account at some bank, has effectively turned my $2K in bank deposits into $3.8K of bank deposits.

But wait: there's more! The second bank, receiving $1.8K in new deposits, lends out (0.9)*(1800) = $1620, which goes into yet another bank. So now the $2K in deposits is actually $2000+$1800+$1620 = $5420.

This chain continues, until there is $2000*[1 + 0.9 + (0.9)^2 + (0.9)^3 + ... ] = $2000*[1 / (1 - 0.9)] = $2000*10 = $20,000 in bank deposits.

In one sense, you are correct, because the moment I withdraw my $2K, the bank must restrict its lending, and the effect then manifests in reverse.

Also, if that $2K I received my have come from a drawdown of someone else's bank account - say, a check, instead of a loan, or instead of me depositing cash from my mattress - then the net effect of money creation is zero, because there is a chain of banks on the other end of that transaction which must tighten up their lending, which kills of $20,000 in deposits going the other way.

tatupu70 says

OK--let's take a step back. If you deposit $2K and the bank lends out $1.8K of it, the bank clearly HAS the money. Are you arguing that the demand deposit isn't the bank's money?

Sure, let's take a step back. And I offer the following analogy, and it is only an analogy and I am not a gold bug, BTW.

You have 10 $200 gold pieces, or $2,000. You write your nephew a check for $2,000, and keep one of the gold pieces, and pass the remaining 9 to your nephew. Your nephew writes a check to his friend Bobo for $2,000, keeps one of the gold pieces, and passes the remaining 8 to his sweetie, Tootsie. Tootsie writes her aunt Mildred a check for $2,000, keeps one of the gold pieces, and passes the remaining 7 to pastor Phil, who then writes a check for $2,0000,.....etc.until the last check writer has the last gold piece. On the basis of the original $2,000, $20,000 in checks have been written, but yet each check writer has only one $200 gold piece. So no, each check writer does not have $2,000, but only $200.

Can you imagine if banks could only lend out actual deposits on-hand? Wonder what that would do to inflation and prices of goods?

jvolstad says

Can you imagine if banks could only lend out actual deposits on-hand? Wonder what that would do to inflation and prices of goods?

What happens to inflation and the price of goods in the reverse, i.e., when you switch from a sound money policy to a fractional reserve policy?

control point says

Money is a medium of exchange. It does not matter what its value is relative to itself historically. It only matters that I can immediately exchange my work for it, then exchange it for something I want.

Because it gives an unfair advantage to investors, and the corollary to wage slaves.

Also the dept is eroded in this manner, since TARP a trillion dollars has been taken away from the 4 trillion in Fed spending during that time just by inflation.

Because it gives an unfair advantage to investors, and the corollary to wage slaves.

Also the dept is eroded in this manner, since TARP a trillion dollars has been taken away from the 4 trillion in Fed spending during that time just by inflation.

Huh?

So should Buddy, the child pornography dealer, be allowed to create money to fund child porn movies that he then resells at great profit?

Should Ratso the swindler be allowed to create money to fund the creation of bogus securities which he then resells at great profit?

Blurtman says

I am not saying fractional reserve lending is a crime, but that it is money printing. And criminals should not be allowed the privilege of creating money.

The alternative is the government could simply print the money. When you consider what you've written, then the economy is really on the banks, therefore we know who to blame.

I personally fail to see the difference between a few hundred bureaucrats in DC controlling the money supply, and a few hundred bank execs in NYC controlling the money supply, except the former is subject to democratic pressure and the latter is unelected and unaccountable.

Blurtman says

You have 10 $200 gold pieces, or $2,000. You write your nephew a check for $2,000, and keep one of the gold pieces, and pass the remaining 9 to your nephew. Your nephew writes a check to his friend Bobo for $2,000, keeps one of the gold pieces, and passes the remaining 8 to his sweetie, Tootsie. Tootsie writes her aunt Mildred a check for $2,000, keeps one of the gold pieces, and passes the remaining 7 to pastor Phil, who then writes a check for $2,0000,.....etc.until the last check writer has the last gold piece. On the basis of the original $2,000, $20,000 in checks have been written, but yet each check writer has only one $200 gold piece. So no, each check writer does not have $2,000, but only $200.

That's a poor analogy. A better one would be you get $2000 from the lottery. You keep $200 and loan $1800 to your nephew. He keeps $180 and loans $1620 to his girlfriend. She keeps $162 and loans $1458 to her out of work Dad. He keeps $146 and loans $1312 to his son. And so on.... Each person who took out the loan only has 10% of the loan value.

In effect, when you deposit in a bank, you are loaning them the money at a specified interest rate for any term you choose.

HydroCabron says

When I deposit $2K, it's still my money: I can withdraw it at any time.

That's the crux. It's a demand deposit, but is it really your money?

jvolstad says

Can you imagine if banks could only lend out actual deposits on-hand? Wonder what that would do to inflation and prices of goods?

How would that even work? The bank is only loaning money it physically has. But once it loans the money, it no longer has it. If you argue for a 100% reserve requirement, there would be NO loans. Ever.

It seems the case is being made that without clawbacks, ours is an economy that wasn't worth saving.

Especially not at the expense of further devalued labor, and increasing and cementing inequality

I mean, whatever would we do without hair and nail salons, big box staging areas for landfills, restaurants that serve up crappy food substitutes, the war machine, and all the financial institutions utilized by the politically privileged to tenderize the meat of the politically disprivileged before marching them off for slaughter.

Drink some more alcohol while we beat you to a pulp, your meat will taste better! And more importantly, it just feels so good!

personally fail to see the difference between a few hundred bureaucrats in DC controlling the money supply, and a few hundred bank execs in NYC controlling the money supply, except the former is subject to democratic pressure and the latter is unelected and unaccountable.

If only those were the choices. Sadly, they are in cahoots, and their partnership allows them to use the currency for their intended use; a method to control and exert their political privilege over the disprivileged masses

Banking is legalized fraud: It began as fraud, when goldsmiths lent out more money in paper receipts than they took in as gold - other people's gold they were holding in their safes and charging fees to hold on to. Basically, lending out other people's property stored with them and then issuing paper receipts to others. They usually collapsed when people tried to collect all at once. Then they began paying interest as hush money when people deposited their wealth with them (Interest on bank accounts).

But people couldn't live without all the extra money floating around so this was legalized. IMHO, since precious, rare metal specie is no longer the currency, we do not need this. The Government can simply print the money. Indeed this happens anyway via the Fed buying bonds from the Treasury. The only difference would be accountability.

Banks do not want reasonable inflation, they want their loans to be paid back with expensive money. Banks control the Fed, have a strong say in the Government, and are dedicated to keeping the Fed "Independent."

Another word for independent is "Unaccountable": The Fed can do what it wants without government interference, and therefore does not need to respond to Public Pressure.

All banks - all of them - survive only because of FDIC government guarantees. Otherwise bank failures would be as routine as traffic jams, as they always have been before it. And as I pointed out to Indigenous, you had to have your bank notes discounted if they came from another bank, which is why a private system doesn't work without government guarantees.

The Fed's real desire is to encourage limited inflation or deflation whenever possible, at whatever cost to Employment. It's official goal is 100% employment, but that's quite secondary, as the Fed is controlled by Banks, who own shares in it, and the pastiche of Government Control - the appointment of the Board of Governors - is always staffed by the former head of the private NY Fed. You will NEVER see Ralph Nader or Warren or anybody else like them as Fed Chair - only somebody pre-approved by the Banking Industry..

Banks need to be reduced to a supporting role in the Economy, instead of the Leadership role they've taken. FIRE isn't real productivity, and if too powerful, it becomes a Tax on Productivity.

indigenous says

Because it gives an unfair advantage to investors, and the corollary to wage slaves.

Also the dept is eroded in this manner, since TARP a trillion dollars has been taken away from the 4 trillion in Fed spending during that time just by inflation.

The exact oppposite of the first statement is the truth, and the evidence is the second statement.

We got into Fractional Reserve Banking by accident: We legalized a Fraudulent Process.

With the huge amount of capital and intellect we have, we can certainly think of a more manageable alternative.

Right on. There's no reason why we couldn't bring banking into the 21st century with an exchange based marketplace comprised of peer to peer lending.

errc says

Huh?

I'm surprised to hear a honest question.

tatupu70 says

That's a poor analogy

In your analogy, about $17,995 is created from the original $2,000, when only $2,000 actually exists.

One more thing: Yes, the Fed might have gotten us out of the Bubble.

However, they caused it in the first place by continuously lowering reserve requirements to absurdly low levels, well beyond the thinnest shred of caution.

As for expecting the Independent Fed to fend off Wall St. demands for continuous high growth at all costs, remember the reaction Greenspan got when he warned of "Irrational Exuberance"

Blurtman says

In your analogy, about $17,995 is created from the original $2,000, when only $2,000 actually exists.

Exactly. And no money was "created" by anyone. What's illustrated is the velocity of money--not its creation.

In your analogy, about $17,995 is created from the original $2,000, when only $2,000 actually exists.

On both sides of the balance sheet. Eventually, the loans are repaid and the circle is closed. What remains is the $2000 + the interest

tatupu70 says

Exactly. And no money was "created" by anyone. What's illustrated is the velocity of money--not its creation.

You lost me somewhere. There was only $2,000. Where did the other ~$18,000 come from?

Velocity of money would be how quickly $2,000 rolls around the economy between actors, no?

thunderlips11 says

Banks need to be reduced to a supporting role in the Economy, instead of the Leadership role they've taken. FIRE isn't real productivity, and if too powerful, it becomes a Tax on Productivity.

This I agree with--there is very little that finance produces. Why not have a national bank?

errc says

On both sides of the balance sheet. Eventually, the loans are repaid and the circle is closed. What remains is the $2000 + the intere

And the same is true of banks and fractional reserve.

Right, I was pretty much agreeing with you. It seems most aren't familiar with how an accounting ledger works

If I deposit $2,000 into a bank, and they in turn loan out $1,800, there isn't $3,800 now

There's the $2,000 (+ interest)that the bank owes me, they sit on $200 of that as reserves, and loan out $1,800 to one of their customers. The only money that exists here still is my $2,000. It's just scattered amongst both sides of a couple balance sheets (bank owes me the $2,000, $1,800 of which they've lent to someone else, who will repay that same $1,800 to the bank, plus interest)

Once the banks customer has repaid the$1,800 + interest, they can take my $200 that they held in reserve, add it to the $1,800 their customer repaid in principal, and give me back my $2,000 that I loaned them, plus my 0.01% interest, which they take from the 11.9% they charged their customer on the loan.

That spread between what they paid me to deposit my cash (give them a loan), and the rate they charged their customer to loan them 90% of my deposit, is where they make their profit.

The onus of money creation is left up to the banks customer, who presumably, in theory, has put my capital to productive use in order to make their loan payments (principal + interest).

I profit a whopping two cents, and the bank keeps the rest of the spread between what they paid me to use my capital, and what they charged their customer to take on the loan.

The real problem here is Zero Interest Rate Policy

Back on 07/07/07, a local bank ran a special to attract deposits, where they paid 7.77%. For money they were loaning out for about 11.9%. That's an order of magnitude more reasonable spread for facilitating the transaction between me and the guy that took the loan

Today's environment where banks pay depositors literally zero interest, and turn around and mark the cost up 100 fold, is why we all rightfully hate banks.

A peer to peer online lending exchange could facilitate the deal for the smallest of rakes. That leaves the biggest of all problems still standing in the way, the opaque and corrupt credit ratings system currently in place

tatupu70 says

Exactly. And no money was "created" by anyone. What's illustrated is the velocity of money--not its creation.

$2,000 becoming about $18,000 is creation of money. If everyone who now has the created money sits on it there is no velocity, but the money has still been created.

errc says

There's the $2,000 (+ interest)that the bank owes me, they sit on $200 of that as reserves, and loan out $1,800 to one of their customers. The only money that exists here still is my $2,000

It might seem that way, but starting with $2,000, plug a series of loans at 10% capital requirements into your spreadsheet. There is quite a lot more more than the original $2,000 now created. That is the magic of fractional reserve lending. If you are asked to accept a check for $2000 in trade for your motorcycle, and know the lender has only $200 in his bank account, would you accept it?

Blurtman says

$2,000 becoming about $18,000 is creation of money. If everyone who now has the created money sits on it there is no velocity, but the money has still been created

You're not following. Add up the actual money left at the end. It's most definitely NOT $18,000. Once I've loaned out 90% of the money I once had, I no longer have it. I can't spend it anymore.