This blog printed on 100% recycled electrons.
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Aaron HeidelbergerDec 31, 2009
Hey we can agree on something! I think everyone should support there local banks. However your a failing to address the fact that all banks are based on the fraudulant practice of fractional reserve banking. George Baily would have never had a problem at his banks if the banks were useing an honest system of 100% reserve banking.
--------------------------Cory Allen HeidelbergerJan 1
Everyone, please note the main point: even a radical liberal and a radical conservative agree that you should take your money out of the big TARP banks and put it into your local community bank.
[The rest of this discussion is likely to go nowhere.]
So suppose you, I, and a thousand neighbors start a local full-reserve bank. We each put $5000 in savings. That's five million dollars of capital... which does nothing. We can't make loans, because we have to keep every penny on hand in case we all decide to withdraw our money at the same time. Isn't a full-reserve bank just a piggy bank?
Full-reserve banking is almost non-existent. Is that because...
(a) the market represents the collective and historical judgment of millions that full-reserve banking is a sub-optimal economic solution;
(b) the market is stupid and fails to produce useful services and goods; or
(c) the Federal Reserve has orchestrated a vast conspiracy to prevent everyone but you from recognizing an effective banking solution?
--------------------------William BealJan 1
Make that 2 radical conservatives =|;)--------------------------Cory Allen HeidelbergerJan 1
(Nice hat, William!)--------------------------Aaron HeidelbergerJan 2
So, Cory are you saying its OK for a private bank to create money? Maybe we should get together and create the Heidelberger bank and start printing our own money. But who would except Heidelberger notes? Well we can just lobby congress and make al law that requires all taxes and debts be paid with Heidelberger notes. Hmmm...do you think we could print enough to pay off my house, I think so.--------------------------Cory Allen HeidelbergerJan 2
No, Aaron, I'm asking how a full-reserve bank is any different from my piggy bank, where money just sits. If you're advocating a complete ban on loans, just say so. Otherwise, describe a practical financial lending model.--------------------------Aaron HeidelbergerJan 2
So No its not OK for private bank to create money? Because thats what the Federal reserve does. And the total amount that they create is no longer reported (M3) also the majority of there operation is NOT audited. www.auditthefed.com
How secure is your piggy bank? If a tornado rips through the town and you lose your house where did you piggy bank go? Banks have giant secure vaults and guards (sometimes). Plus Banks can still make make loans under 100% reserve banking, BUT the bank would have to loan out there own money not other peoples money. If people are putting ther ... See Moremoney in a bank what do they want it to do? they want it to "just sit" otherwise they would be putting their money in an investment like stocks, bonds or what ever.--------------------------Cory Allen HeidelbergerJan 4
No, I'm not taking a position on your little "make their own money" talking point. Save it for the Ron Paul meeting. I'm asking where banks get the money to lend if they can't lend the money customers invest in savings. Under your scheme, it seems community banks that loan out of the combined wealth of a lot of small investors disappear. The only banks left are those with a handful of super-rich guys who float every loan out of their personal wealth (yikes). Where does the average guy get a loan? I still don't see the practical way in which full-reserve banks don't bring the economy to a screeching halt.
If the only purpose of a bank is to keep my money safe, that also spells the end of interest on savings accounts. The bank pays me interest for the privilege of lending my money out. Take away that option, and the bank will have to charge me for the privilege of babysitting my money in its vault.
And what vaults? Are you advocating we get rid of electronic funds transfers as well? Does the bank have to have 100% reserves in cash or gold? When's the last time your paycheck was anything more than a slip of paper, or a stream of electrons?--------------------------Aaron HeidelbergerJan 4
How much interest do you make on a savings account at a bank? Hardly anything, for sure will not keep pace with inflation.
This video will explain everything. Have fun!
http://video.google.com/videoplay?docid=-515319560256183936&ei=PJBCS_OhFY-OqAL6m93ECg&q=money+masters+&hl=en&view=3#--------------------------Aaron HeidelbergerJan 4
"I still don't see the practical way in which full-reserve banks don't bring the economy to a screeching halt." ---The Monetary Reform Act. This would pay off the national debt, end the Federal reserves monoply on money, and allow the government to pay for the stuff it needs with out paying interest to a private bank.
The banks purpose IS to keep a persons money safe, prior to the Federal reserve act in 1913 the US dollar gained in value. http://www.westegg.com/inflation/ Play around with that inflation calculator using 1913 as a pivot point what kind of money would you rather have money that gains purchaseing power or loses it? Tough one I know.
The problem with the current system the banks are control of the money supply. Why do you think we have had these bank failures, they basically loaned out too much money on things they shouldn't have. Why because the fed set interest rates so low that banks and people did not want their money sitting in banks savings account where they were making nothing on iterest instead they bought houses and anything else createing a bubble. NOW if we hand sound money, with a set rate of growth in the money supply it would end these boom bust cycles caused by the fed/banks and easy money.
In 1964 a box a corn flakes cost 25 cents. Same box of corn flakes now is over $3, in 1964 a quarter was made of 90% silver, a pre1965 quarter is worth about $3.11 about the same price you can buy box a corn flakes for now. So in 40+ years the value of that quarter has not changed.
In the 70's under Carter the money supply increased by 12% that caused higher prices in everything.
Eventually interest rates had to climb to 20% in order to suck back the ecess money supply and stop inflation. In the last few years our money supply has increased by 120% yes 120%. Talk about bringing an economy to a screeching halt, what do think rates will have to go to suck that back in? 50% 80%?
We have a system based on fraud.
www.AuditTheFed.com
http://www.endfinancialfraud.org/
I welcome further discussion here. But if you're going to advocate this system, you must explain one simple thing: where does a full-reserve bank get the money to make loans?
Lets try again with proper formatting.
ReplyDeleteIt should be noted that with full reserve banking the bank cannot invest, and thus cannot make profits with, a depositor's money. Instead, they must only utilize their own capital to make loans.
Bank would therefore need to charge a fee to 'store' a depositor's money in order to make it profitable. While I'm sure this fee would not be much, but over time it would add up to some pretty major cash.
If one would like a secure, safe place to simply 'put' money in today’s system (other than a bank), I would suggest treasury securities. They even earn some interest, usually make enough to offset inflation. They are also very liquid, in that anyone wishing to sell would be able to do so very quickly and easily. In fact, when large corporations and trusts need to simply 'store' money for a period, they usually do so in the securities market, not a commercial bank.
In the meantime, I will continue to use good ol’ Wells Fargo when I have money to store. It is perfectly liquid, gives me the convenience of using my debit card, makes me a bit of interest, and is absolutely safe (until I exceed $250,000 in deposits, which will not happen soon). Plus, my deposits help finance local mortgages and other loans. In my own little way, I’m helping Mr. and Mrs. Jones down the street buy a new house or send little Suzy to college.
Aaron repeatedly said that the banks were creating money under the current system. This is not clear to me. Is he saying that lending out other people's money is creating money or is it that when the government prints money it is the creation of money? Or something else?
ReplyDeleteI believe he is referring to money multiplication. Basically, if a bank recieves $100 in deposits and there is a required reserve of 20%, then the bank will keep $20 in its vault and lend out $80. Aaron would call this $80 loan 'creating new money'.
ReplyDeletehttp://en.wikipedia.org/wiki/Money_multiplier
Hope the Heidelbergers had a great Christmas and are happy here in the New Year.
ReplyDeleteAnd I'm glad to see you wrestling with this issue - your cousin and I are of the same mind on banks and banking. I've long been a sound money advocate, preached against the evils of usury and not only think we should end the Fed but that Congress should have never delegated its power to issue money in the first place.
I don't have time now for much dialog but I thought to simply share a fun story from a family vacation a number of years ago....
We were in Denver and took the kids to the Denver Mint. On the tour I was quite constrained by my wife who kept looking at me and squeezing my arm which meant - - "don't open your mouth." I behaved, except for a few moments during the Q&A at the end.
The tour guide did confirm by assertion that the Federal Reserve was neither "federal" and that there are no "reserves." I asked if, in light of that, she thought the name quite misleading to the general public.
Then I asked about the new Sacajawea "dollar" they were coining at the Denver Mint. On the tour the gal told our group it "costs" 8 cents to make a one "dollar" coin. I asked... why then do they "sell" it to us for one dollar instead of eight cents? She didn't know. I then asked who "gets" the ninety-two cents profit on each dollar sold to the public? She didn't know. Most don't.
I hope that is enough of a teaser to get a few more people looking into what is really going on here.
I have an FDIC regional associate friend who confirms the FDIC is bankrupt, yet is quietly hiring back retired employees to handle the expected doubling of bank closures this year. They expect 300 failures in the next 12 months - there were 133 last year. It's time to start listening to those other than the Fed spokemen who laughably told us last week the recession is over. And, I'm kicking myself for selling all my dad's gold after his death in 02 - it was then at $300 an ounce.
"where does a full-reserve bank get the money to make loans?"
ReplyDeleteIt doesn't, that is what "investment banks" are for. You also need to study up on the difference between "demand deposits" and "time deposits".
I too don't have a lot of time to explain all of this. In fact this would be a good subject for a couple of 912 meetings. But Cory would probably just stay for part of it and go home to invent ways to trash us.
But I will try to help Tony out. What Cory is in favor of is you putting $10,000 into the checking account. The bank then lends $8,000 to Cory so he can buy a car. The car dealer puts that into the back, and the bank lends $6,400 to me to buy another car. So now Tony has $10,000 in the back, the car dealer has $14,400 in the bank. But the bank only has $2,000 of Tony's money on hand. So what happens when Tony and the car dealer want to withdraw their $24,400 at the same time? The bank only has $2,000.
That is how a back creates money out of thin air. Today the bank closes and the taxpayers pay Cory and the car dealer. The taxpayers now have the car loans to Cory and Steve. Lets hope Cory and Steve keep their jobs during the recession that was caused by the Federal Reserve and the banking system by making too many car loans with the same money.
Ah, gotcha Steve. So the major concern would be a run on the banks. Isn't that why we have the FDIC?
ReplyDeleteI see that Steve Hickey believes that it is an insolvent institution, but beyond his word I can't find any evidence online to back it up. As per the wiki:
http://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation
The regulations seem sound and the practice has been successful so far. No one has ever lost their money due to an insolvent FDIC insured bank.
Also, there appear to be many benefits to our current system. It allows individual citizens to place their money into a protected, interest producing account. Without it, we would be left to put our money in far more dangerous things such as the stock market or to loan it out ourselves without the FDIC shield. In addition, the current systems makes everything far more liquid. Removing the ability of banks to give out loans per your example Steve Sibson would dramatically reduce borrowing power and increase interest rates due to scarcity of capital.
Perhaps you would prefer such a system, I'm not sure. There certainly are trade-offs.
Also, as per the free market, a full-reserve bank could certainly be created. There are not outlawed. Perhaps they don't exist because they are not economically efficient?
Steve, investment banks do not make loans directly. They only buy loans that are made by commercial banks, make them into securities, and those securities to investors.
ReplyDeleteAnd why did you bring up 'demand' and 'time' deposits? I haven't seen anything in this post (or in the Monitary Reform Act) that suggests limiting 100% reserve requirements to one or the other.
So I will repeat, "where does a full-reserve bank get the money to make loans?"
No need to take my word for it - FDIC is bankrupt - just google it and there will be more articles than you can possibly read - they went in the red Sept. 30, 2009http://money.cnn.com/2009/10/14/news/companies/fdic_deposit_fund/?postversion=2009101415
ReplyDeleteBank failure surge for 2010 and FDIC quietly hiring back retired workers can be found here among other places... http://www.personalfinanceanalyst.com/fdic-anticipates-surge-of-bank-failures-through-2010/
"No one has ever lost their money due to an insolvent FDIC insured bank."
SO SO not true. The most memorable story for me came out of the America West bank failure. An Ethiopian man was working in Califoria for two years saving money for his family to relocate to the US - he had $250,000 in the "bank" - he collected $80,000 after FDIC stepped in. Sad.
I have a buddy who leads America's fasting growing church and they have 15 million in the "bank" for an upcoming building project- he's making his bank demonstrate hard collateral on that money. That "money" would instantly evaporate in a bank failure.
"where does a full-reserve bank get the money to make loans?"
ReplyDeleteEver hear of Free Lakota Bank? They have full reserves and they are loaning out money.
"The regulations seem sound and the practice has been successful so far."
ReplyDeleteTony,
So then why was TARP needed to bail out the ones that were too big to fail?
Kyle,
ReplyDeleteLucas Engelhardt supports my premise:
"We stand at an unusual crossroads. At the moment, banks are holding nearly 100% reserves for transactions deposits. (As of November 19, they had about $652 billion in reserves for about $700 billion in transactions deposits.) We could implement the 100%-reserve rule now for transactions deposits, without creating much impact on the banking system. All that would happen would be that these reserves would not be lent out in the future, which would keep the banks solvent going forward. If we really want to "invest" taxpayer dollars to stabilize the financial system, why not use just $48 billion as a reserve injection, and enforce 100% reserves?
Naturally, it is better not to force taxpayers to subsidize this policy change to the benefit of the banks. However, forcing taxpayers to pay $48 billion for long-term stability is far better than forcing them to pay $1 trillion to create future crises. We have a unique opportunity to provide future stability for our banking system. Sadly, it is an opportunity that will almost assuredly pass us by."
http://mises.org/story/3237
ANd that analysis will tell Tony that the FDIC would no longer be needed. In fact Lucas argues that the FDIC is an disincentive for depositors holding the banks accountable:
"I am no fan of the FDIC or the Federal Reserve. Their very existence weakens or eliminates an important incentive that helps guarantee the solvency of the banking system: the incentive for depositors to demand that their financial institutions operate conservatively."
Steve,
ReplyDeleteTransaction accounts (essentially the M1) are only a small portion of the money supply. The M2 (which includes not only the M1, but also savings accounts, small denomination CDs, among others) is 5 times larger ($8392 billion vs. $1688.7 billion, as of December '09). And there are no reserve requirements on M2 monies not in the M1...
Full-deposit transaction banking is far from full-deposit EVERYTHING banking. It would simply tie the hands of the banks while not actually preventing them from doing anything you consider bad.
And as for the Free Lakota Bank;I don't have any silver, nor do I think SDSU will accept it as payment.
Kyle,
ReplyDeleteThanks for the facts, and I do appreciate your points. The Federal Reserve came about in 1913. After nearly 100 years, I doubt that we can get rid of the mistake in 100 hours or days. One step at a time. Patience.
I posted 3 more comments after your last response Cory. It was only 2 hours after your last post so not sure why it did make it. But could please add them.
ReplyDeleteThanks
Aaron Heidelberger
"where does a full-reserve bank get the money to make loans?"
ReplyDeleteWhere does anyone get the money to make a loan?
The Federal Reserve system allows banks to create money. If you do not yet understand this watch these two videos.
http://www.youtube.com/watch?v=VMEhbyWEZkI&feature=player_embedded
http://www.youtube.com/watch?v=X1Fx-kDHY8c&feature=player_embedded
Under full reserve banking a bank must earn their money like anyone else and lend/risk their own money OR people can chose to have their money loaned out and then they will demand a higher interest for taking on that risk, much like a CD or buying a bond. BUT with full reserves banking the bank can only loan out its own money, or what it has in CD’s or sold in Bonds.
Then this would happen http://mises.org/daily/3913
“A full-reserve scheme would prevent banks from lending phantom money. Banks' primary functions would be bifurcated into money warehousing and deposit lending. As warehouses, banks would collect fees for storing deposits, with the deposited funds always available to the depositor. As deposit lenders, banks would accept time deposits to lend. The depositor would earn interest for the use of his money, while the bank would earn the spread between the rate it paid to depositors and the rate it charged its borrowers.
Insufficient credit is the first and most voluble objection to a full-reserve banking system. This shortage may or may not occur. If it did, no problem — private finance companies would arise to fill the credit void. They wouldn't accept deposits, instead they would raise funds by issuing equity and debt. These companies would be free to specialize and lend to what their charters dictate.
A full-reserve system would facilitate credit flows while separating money from credit creation. Therefore it would inject safety and stability into the credit system. Banks would require less equity to cover the risks associated with matching assets and deposits. Depositors would no longer fear bank runs: banks would carry reserves to cover all demand withdrawals. Banking panics, banking crises, and taxpayer-funded banking bailouts would be relegated to historical footnotes. We would no longer need a lender of last resort.”
Aaron Heidelberger
The Right Heidelberger
Cory,
ReplyDeleteI've met you a few times, I'm married to your cousin Holly.
I think the article that Aaron referenced does a pretty good job of presenting an answer to your question regarding where a full reserve bank would get money for loans:
http://mises.org/daily/3913
As far as the Federal Reserve goes, I think it’s hard for a lot of us to accept the concept that there is very little "real" or "sound" money anywhere within the Federal Reserve and/or the house of cards that is our current “too big to fail” banking system. The only proof of where the money (debt) comes from are transactions in ledgers that we are not allowed to see. I would think that someone who purports to be a champion of the less fortunate would be outraged at the bleeding off of a nations wealth through inflation and debt payments, just think of what could be accomplished socially with the interest payments to the Fed alone. Instead, the Keynesian economists who control US monetary policy choose to pad the pockets of unknown Fed partner bank owners. These are the true “fat cats” that the administration should be outing. Currently you can’t even stage a protest outside their mansions (though most are likely on foreign soil anyway) because the Fed protects their identities and congress does nothing to expose this scam.
Many people seem to believe that there is something tangible that happens when you make a deposit at your financial institution of choice; somewhere up or down the line there is some sort of something of real value rather than just a book entry. In reality, it’s all in the paperwork, if the financial institution can collect the right type/combination of entries, they win a prize. Maybe it’s access to buckets of loans or other derivatives to increase profits for owners/shareholders, maybe it’s their name on a project which enhances their position within the community.
Point is, it is a shell game, and those of us who are responsibly paying back our obligations are the marks.
Also, talk about American Imperialism, the pain we inflict on the people of other nations via our flawed economic policy is mind boggling. Check out this article in the EU Times: http://www.eutimes.net/2009/11/red-alert-the-second-wave-of-the-financial-crisis-to-hit-in-2010/
It all starts with the privately held central bank known as the Federal Reserve, surely we can do better. Just sayin'.
Don Hodge
North Sioux City, SD
This video is better. It has sound and everything.
ReplyDeletehttp://video.google.com/videoplay?docid=-2550156453790090544#
The problem is that "money creation" doesn't happen like this. Any deposit at one bank must come from another bank. As such, any $10,000 deposit that 'creates' $100,000 must come from a $10,000 withdrawal from another bank which 'destroys' $100,000.
The second video also panics about banks withholding loans. That is why the Fed exists. When the money supply shrinks (which happens when banks withhold loans), the Fed will inject money (in a funny twist, this money is actually created from nothing). Once the money supply is big enough, the Fed will withdraw money (and destroy it).
The only real problem comes is when people default on their loans; even your video said so. People defaulting on their loans is always bad, even in full-reserve banking (depositors would lose exactly how much the defaulted loan was). Defaulting loans would have hurt a full-reserve banking system just like it did our fractional-reserve banking system.
Even your full-reserve lending has issues. The problem we run into is called the liquidity preference. This happens for a number of reasons, which you can read on your own.
http://en.wikipedia.org/wiki/Liquidity_preference
One example: most people need access to most of their money at all times to cover emergencies (hospital bills, car repairs, plasma TV sale, etc.). Since they cannot afford to lock their deposits away into the CDs and bonds that full-reserve banking requires, they will have to put their funds into the non-loanable transaction accounts. As such, transactional accounts (M1) would probably grow greatly in size.
Any money in a purely transactional account is of no use to the economy. It is not being loaned, it is not buying anything, it is not earning interest. It is doing nothing. Putting any significant amount of money in these accounts would severely hurt the economy.
Also, as to this passage: "private finance companies would arise to fill the credit void. They wouldn't accept deposits, instead they would raise funds by issuing equity and debt."
Firstly, debt banking is what Bear Stearns did (take short term loans to finance long term loans). If a shock interrupts credit, then they go under (like Bear did). This system can work, but it is largely responsible for starting the latest crisis.
Secondly, equity (selling stock) is a fine idea. However, it is not liquid enough to substitute for a transactional account; it can only stand in for a deposit account.
Finally, bank runs are not a major concern anymore. I can find a whopping 2 real bank runs resulting from the current economic troubles.
The FDIC (which is privately funded by the banks) covers any losses if a bank goes under, so the average depositor doesn't make a run.
http://en.wikipedia.org/wiki/List_of_bank_runs
And please stop throwing walls of text quoted word-for-word from mises.org at us. I would like to discuss this with y'all, not with them.
“Paper money eventually returns to its intrinsic value ---- zero.” Voltaire (1694-1778)
ReplyDeleteThat is where we are headed folks.
Aaron Heidelberger
Aaron, your ability to repeat propaganda from Ron Paul and Ludwig von Mises is impressive. But when you get done beating that dead horse, I would still like a straight answer. I am not surprised that mnoey is an illusion. I'm not interested in debating the authority to create money. I want you to say, in simple terms, what money a full-reserve bank can loan. This is not an ideological question. This is a practical business question. Suppose you and I want to open the Heidelberger Building and Loan Full-Reserve Bank. We expect we can get a thousand friends and neighbors to deposit their savings with us. When a good customer walks in and asks for a home loan, what money can we hand that customer?
ReplyDelete"when you get done beating that dead horse"
ReplyDeleteCory,
That dead horse was the true life in America's economy. Using debt creates an illusion of wealth. Wake up Cory. Again, you can ignore the truth of Von Mises, but your ignorance will not change the truth behind Von Mises application of Natural Law to economics.
Fine. You're a genius of political and economic philosophy. Now answer the question.
ReplyDeleteCory, I already answered that question.
ReplyDeleteWhen a good customer walks in and asks for a home loan, what money can we hand that customer?
ANSWER: (that I stated before)
Under full reserve banking a bank must earn their money like anyone else and then lend/risk their own money OR people can chose to have their money loaned out and then they will demand a higher interest for taking on that risk, much like a CD or buying a bond. BUT with full reserves banking the bank can only loan out its own money, or what it has in CD’s or sold in Bonds.
ANSWER: A little simpler
The BANK's own money (that would be money that we came up with to start Heidelberger bank and any money we have in profits) OR the money in accounts that have agreed to the risk and want their money loaned out. BUT NO MORE THEN WHAT IS THERE.
IT's not hard.
Aaron Heidelberger
“Now answer the question.”
ReplyDeleteCory, I answered the question on 1/5/2010 at 11:47Am:
“It doesn't, that is what "investment banks" are for. You also need to study up on the difference between "demand deposits" and "time deposits".”
And Aaron details that with this:
“Under full reserve banking a bank must earn their money like anyone else and then lend/risk their own money OR people can chose to have their money loaned out and then they will demand a higher interest for taking on that risk, much like a CD or buying a bond. BUT with full reserves banking the bank can only loan out its own money, or what it has in CD’s or sold in Bonds.”
Kyle has this problem:
“Any money in a purely transactional account is of no use to the economy. It is not being loaned, it is not buying anything, it is not earning interest. It is doing nothing. Putting any significant amount of money in these accounts would severely hurt the economy.”
That money is real wealth, and is essential for a stable economy. Using debt to create artificial wealth is like a drug addict increasing happiness by shooting up heroin. Neither is sustainable, and anybody who tries will have major problems.
Now Cory, your question has been answered multiple time, so please stop ignoring them. Ignorance does not change the truth.
So now I have a question for you Cory:
ReplyDeleteWhy do you support the Federal Reserve, which is used by the plutocrats, to steal from us all through inflation that results from an inflated money supply?
"its own money"
ReplyDeleteO.K., how much money is really the bank's "own" money? You and I start a bank. We spend... what, $500K building brick and mortar, buying computers, etc.? We have cash for paying our highly qualified and trustworthy staff. Just what mad money do you and I have left lying around to make loans?
At the point where you say we'll let people choose to release their deposits for use in our loans, you negate the whole point of your full-reserve system and justify the status quo. We have the system you describe right now: people can choose to make their money available for lending in return for interest, or they can choose to keep their money in perfectly secure savings like the mayonnaise jar. Or they can get the best of both worlds—credit liquidity and guaranteed savings—and put their savings in a perfectly safe FDIC-insured account (and for all your hyperbole, the FDIC has never lost anyone's money, as Tony points out above).
So you don't really want to require full-reserve banking. You aren't even proposing a new revolutinoary banking system. You want people to be free to turn their money over to bankers for interest and lending. That's exactly the system the free market and millions of investors have created and declared succesful with their dollars. Your full-reserve "proposal" is a sham, an excuse to bloviate about gnostic economics in an effort to make yourselves and Ron Paul sound like financial geniuses who possess some special arcane knowledge that would save the world if only everyone else were smart enough to get it.
Cory,
ReplyDeleteYou are ignoring time versus demand deposits. And the FDIC are funds used by big "fat cat" banks to buy out the broke little ones. The big corporate banks just keep on getting better. So answer my question:
"Why do you favor a system (the real sham) that benefits the rich plutocrats and hurts all us through the tax called inflation?
“It’s own money”
ReplyDeleteYes its own money, if you want to make a loan to someone Cory where would you get the money? You would use your OWN money, as far as I know you are not allowed to create money.
"I'm not interested in debating the authority to create money."
You cannot debate fractional reserve banking with out talking about the creation of money.
"you negate the whole point of your full-reserve system and justify the status quo. We have the system you describe right now:"
WRONG, That is NOT the system we have now. The Federal Reserve System can loan out nearly 9 times the amount of money it has on hand and creates additional money through an accounting entry. (but for some reason you want to debate fractional reserve banking and not want to talk about money creation, that’s like talking about cooking with out talking about food)
In a system where money is sound, the money in your mayonnaise jar would not lose its value. Imagine if it was filled with silver dollars or how about gold eagles from the 1920's what would that be worth today. Remember my cornflakes example from my previous post above? Silver and gold have not gone up in price the US dollar has gone down. Now if your mayonnaise jar was filled with change from 1965 or later (excluding half dollars) it would have LOST purchasing power due to inflation. (Oh, I’m bringing up inflation because the Fed has been continually devaluing our currency through fractional reserve banking, and the printing press.)
“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.” ---Ben Bernake
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
The real sham is the people have bought into this hook line and sinker, full accepting that inflation is OK. While they get poorer and the banker fat cats get richer.
Did you watch that 3 hour long video by the money masters? (Nothing to do with Ron Paul) Actually Ron Paul probably would not fully agree with The Monetary Reform Act because you would have to trust the government to control the money supply which would be as worse then the Fed, but at least Americans would not have to pay interest on our money.
Aaron Heidelberger
This is a pamphlet from the Federal Reserve bank of Chicago.
ReplyDeletehttp://www.bibliotecapleyades.net/archivos_pdf/money_mechanics.pdf
Page 11 will give you a pretty good run down of how banks create money.
Page 10 and 11 on this link will make the case as well.
http://www.monetary.org/amacolorpamphlet.pdf
Aaron Heidelberger
Aaron, you never cease to miss the point. I ask you for a business plan, and you go off about pamphlets and history and injustice. If I were a real businessman, I'd laugh you out of the office.
ReplyDeleteCut the crap. Assume I buy every argument you've made about everything else. Now I want a clear business plan. Tell me how we start a full reserve bank right here in Madison (or in Canton, or Sioux Falls, or a branch in each). Tell me:
--how much money we need to start, how we pay our employees,
--what we charge depositors for full-reserve accounts,
--how much interest we pay depositors for lending accounts,
--how much interest we charge our borrowers,
--how much money we're going to have available for lending,
--how we turn a profit and make entering this business worthwhile.
The argument isn't about philosophy. It's about the bottom line. Convincing me is no big deal—I'm all for idealism and hare-brained schemes. You need to convince the pragmatists, local businessmen like George Bailey and Ed Fiegen that you your system provides practical business advantages over the status quo.
"Tell me how we start a full reserve bank right here in Madison (or in Canton, or Sioux Falls, or a branch in each)."
ReplyDeleteCory,
I have already answered that question on this thread too. Check out "Free Lakota Bank". Then answer, would you want to be with them or Citi? Cory, are you staying with the plutocrats?
From what I see, the Free Lakota Bank (hereafter FLB) only offer withdraws in silver. As I said before, I don't think SDSU will let me pay my tuition with silver, even if it is AOCS approved.
ReplyDeleteAnd I for one would like to know what the interest rate on loans from the Free Lakota Bank are. Steve, I assume you bank with them. Do you know what rates they charge?
You asked me this:
ReplyDeleteWhen a good customer walks in and asks for a home loan, what money can we hand that customer?
I completely answered your question. Now you want a complete business plan!
Are you trying to get me to say “well first we would go to a bank and get a loan” well do you think we would need to get a loan if we could just PRINT THE MONEY!? Hmm... paper, ink, printing press... I think we could come up with some money our selves to cover that.
Do you think Wal-mart would need a loan to start a bank? No probably not.
As for your questions.
--how much money we need to start,
I don’t have the time to do find out….unless we are printing money. Then it would be pretty easy.
how we pay our employees,
What the market would allow—Madison SD probably minimum wage
--what we charge depositors for full-reserve accounts,
what the market would allow
--how much interest we pay depositors for lending accounts,
less then we charge the borrowers
--how much interest we charge our borrowers,
more then we pay interest to the lending accounts
--how much money we're going to have available for lending,
how much do we have in the accounts that are willing to lend? how much money did we start with? (how much do you think Wal-mart could lend out?)
I think what you fail to realize though there are many banks there really is only one, The Federal Reserve system. They are the ones that have there name on the dollar bills floating around.
And Steve Sibson is 100% correct on the Free Lakota bank. I think Indian reservations have a huge advantage and I believe it won’t belong and there will many businesses popping up out of Indian reservations.
Check out what the Feds did to the Liberty Dollar www.libertydollar.org. They through the guy in Jail and confiscated all the gold and silver held by the customers.
My Guess is you will somehow attack me for bringing up Wal-mart.
Or
You will want me to provide blue prints for the building for the bank in Madison.
Kyle
I bet if you walked into SDSU with some silver, you could find someone there that would take it. Even if they end up buying it from you cheaper then where the market was at, then give you cash to pay your bill.
Aaron Heidelberger
"I don't think SDSU will let me pay my tuition with silver, even if it is AOCS approved."
ReplyDeleteYou need to complain to SDSU about that.
"Steve, I assume you bank with them. Do you know what rates they charge?"
ReplyDeleteNo I don't because Aaron pointed out what happend to Liberty Dollar. If this ever became popular, the rich plutocrats will have their governemnt cohorts use their man-made laws to attack the entity. Is this freedom, or is this the kind of crap you only would find in a communist or fascist state?
So what side are you picking Cory, the plutocrat fat cat bankers or the common folks?
"Even if they end up buying it from you cheaper then where the market was at, then give you cash to pay your bill."
ReplyDeleteIsn't that inflation? I thought that was what we were trying to avoid.
"No I don't because Aaron pointed out what happend to Liberty Dollar..."
Actually from what I've read about the Liberty Dollar, it was considered illegal because it looked too much like US currency (i.e. it was counterfeiting. There are ~18 other commodity-backed monies in the American Open Currency Standard that haven't been shut down; you could easily use one of those.
Not that I blame you for not banking with Free Lakota; I find them a bit shifty too (which isn't exactly a great business plan, in my opinion).
"If this ever became popular, the rich plutocrats will have their governemnt(sic) cohorts use their man-made laws to attack the entity."
What kind of laws would you prefer they use? And why would the plutocrats care about people using what amounts to gold and silver to buy things? People buy those commodities all the time without the man putting them down.
"So what side are you picking Cory, the plutocrat fat cat bankers or the common folks?"
I don't mean to speak for Cory, but as I remember it it was his (and Aaron's) support for local banks (not the plutocrat fat cats) that sparked the whole debate.
“Not that I blame you for not banking with Free Lakota; I find them a bit shifty too”
ReplyDeleteNo as shifty as the plutocrats running the Federal Reserve. Anybody think that zero interests are good for investors?
“What kind of laws would you prefer they use?”
The Natural Laws that the founders used to create this nation.
“And why would the plutocrats care about people using what amounts to gold and silver to buy things?”
Because we would stop using inflated dollars that they first used before they were inflated when they increased the money supply.
“I don't mean to speak for Cory, but as I remember it it was his (and Aaron's) support for local banks (not the plutocrat fat cats) that sparked the whole debate.”
Yes that is correct, but I and Aaron have pointed out that those that support and defend the Federal Reserve are, perhaps unknowingly, supporting the fat cat bankers. But now Cory can no long be ignorant because he has been presented with truth. So what side are you on now Cory, the fat cat bankers and their Federal Reserve System, or the common folks?
Kyle is right: the original issue was local banks. Aaron, you said you agreed with me that doing business at local banks is better for everyone. My question is thus whether a full-reserve bank is a viable local option. From everything you have said, I can only deduce that a true full-reserve bank, where we keep every penny of our depositors' money locked up in the safe, is not economically viable, as the only pool of money we'd have available to lend would be the meager service fees we could charge our depositors for protecting their money and maybe the lint in our own pockets.
ReplyDeleteI'm going to try numbers again (since Aaron seems to have a pathological aversion to giving anything other than vacuuous wise-guy answers about what his imaginary market will bear). Suppose I start Heidelberger Building and Loan. Madisonites love me, so they all deposit their money with me. Suppose 5000 adults each deposit $10,000. I have $50 million in the vault. Awesome. I have two business models to choose from:
(1) I can run a partial-reserve bank. I keep a 20% reserve. I thus have $40 million I can spread around town as loans. I can float 250 $20K new car loans, 100 $150K new home loans, and 40 $500K business loans. Pat Prostrollo, Shorty Williams, and Dwaine Chapel love that. More common folks can get cars, houses, and jobs. At 5%, I can bring in $2M in interest from those loans. I can pay my depositors huge 3% interest—$1.5M—hire Rod Goeman and Craig Walker to sell some other financial services, and be happy.
(2) I can run a local full-reserve bank. I keep $50M in the vault. I charge depositors 1% for the security service I provide. I thus have $500K I can put into loans. That's 25 new cars or3 new houses or one $500K business loan. Pat, Shorty, and Dwaine sneer at me. Rod and Craig keep their day jobs. The only businesses that expand in Madison are shoe stores, bike shops, and canvas factory, as Madisonians all walk, bike, and live in yurts (ah, an upside!).
(2.1) I can offer my full-reserve customers the option to release their funds for loans in return for a piece of the action (3% interest). My depositors flock to that option, since they don't give a good gosh-darn about arcane Austrian arguments that banks shouldn't craete money. They think it's great that their money can create more money. And pretty soon, my "full-reserve bank looks just like the bank in option #1, and Shorty shuts down his yurt business and gets back to stick-frame and brick houses.
So, Steve, I think both the plutocrats and the common people in Madison would prefer Option #1.
Or let's just test the market. Let's start Cory's Building and Loan right next to Aaron's Austrian Mayonnaise Jar and see which one stays in business longer. In this case, I will happily submit to the judgment of the free market.
ReplyDelete[Catching up:
ReplyDelete--Go ahead, watch Aaron's video... if you have three and a half hours to watch crackpot 1990s homebrew propaganda that's not good enough to make Wikipedia. (But then neither is the Madville Times—so much for Sibby's assertion that Wikipedia is a tool of Obama's Marxist fascist revolution....)
--Steve's link on FDIC in the red notes the same thing happened during the S&L crisis of the late 1980s-early 1990s. Life goes on.
--Also, Steve's sinister link on FDIC "quitely rehiring" retired workers is from 2008. It signals no heightened danger right now. CNN reports today that 2009 saw 140 U.S. bank failures. We had 181 in 1992, 534 in 1989. CNN says FDIC was $8.2B in the hole in September, "But that includes $21.7 billion the agency has earmarked for future bank failures."
--Don Hodge: European Union Times? Do you get all of your news from neo-Nazi skinhead "European Pride" front groups? Regardless, your concerns about American financial imperialism don't quite inform me on how to run a viable community bank.
And oh, what the heck, while I'm at it, here's a quote out of the blue from New Jersey libertarian anarchist Daniel Ust:
"The ultimate test, of course, is whether people on a market would use a full reserve bank's or a fractional reserve bank's money. Historically, full reserve banks did not survive – or where they did exist in recent history, the government mandated them. Free Banking FAQs," 2005].
Aaron wants a banking system that has never arisen and survived in the free market, that apparently can only exist by government mandate. Aaron wants big government; I want local banks that work.
Cory you will have to help me out here, your example number 1 for our bank plan you call it "partial reserve" bank, is this the same as term that started as "fractional reserve"?
ReplyDeleteAaron Heidelberger
And then there's the Free Lakota Bank. The only institution these guys can cite as an example of their full-reserve banking principles sends up these red flags:
ReplyDelete--cites a novel as its charter statement;
--offers no names, no corporate board info, or any other personal identification of whom I'd be doing business with;
--offers no physical location information (where is the vault?);
--claims to be based in or at least issues press releases from Hill City but doesn't appear anywhere on the Hill City Chamber of Commerce website;
--is not licensed to do business in South Dakota (as of 2009.12.10);
--appears to want to create its own currency;
--is at least playing word games if not lying on that currency, by stamping it "Currency of the Free and Independent Nation" on one side and "Lakota" on the other;
--is disavowed by the Republic of Lakotah;
--asserts that "money is anonymous and not subject to tracking," which should make corporate transparency nigh impossible;
--runs from a web domain licensed to Rob Gray of Frisco, Texas, an apparent shyster who stamps John Galt and "Barter Is Better" on his coins.
I thought we agreed community banks are the best places to do our business. Yet you recommend a shyster bank that won't show its face in any specific community? Give me a break.
Yes, Aaron. As my example should make clear, I'm talking about the same thing, a typical status quo bank.
ReplyDeleteOK, If you say we have 40million bucks worth of money that we can make in loans. Well then through fractional reserve banking we could loan out as much as 360 million. If 40 million is good 360 million must be better? That is our Federal Reserve System, That is fraud, That is the practice that I'm arguing against.
ReplyDeleteAaron Heidelberger
OH and my mayo jar full of gold and silver coins would have beat the pants off your savings accounts for the last 10 years.
ReplyDeleteAaron Heidelberger
"Yet you recommend a shyster bank that won't show its face in any specific community?"
ReplyDeleteCory, the Federal Reserve is also secret and don't allow audits. You wanted an example of a full reserve bank, but no one is saying that its entire setup is the way to go.
Are you willing to set up a full reserve bank that overcomes those problems you have, or are you instead content with the corrupt Federal Reserve system that includes community banks where fat cat bankers are ripping us off?
Thanks for avoiding the issue, Steve. The only functional (or at least self-professedly functional) full-reserve "bank" you can point to is a shyster operation, but you keep saying we should follow their model. How absurd.
ReplyDeleteA full reserve bank can only overcome the specific practical problems I've outlined by becoming a partial reserve bank. Full reserve dosn't work.
It doesn't matter, Aaron, if you think the Fed is evil or the Illuminati or whatever is motivating your madness. What matters to me is that you are proposing a business model that doesn't work. Our friends and neighbors, real people in the real world, don't choose the mayo jar. Go ahead, abolish the Fed, elect Ron Paul, withdraw from the UN and World Bank, whatever trips your trigger. When you get home from the Constitutional Convention, your local banker is still going to choose to operate a partial reserve bank.
(Good grief: since when did I become the pragmatist?)
And isn't the value of gold and silver just as arbitrary as the value of money? Gold and Silver are just metals. I've never used them to build anything. I seem to get much more daily use out of iron, sodium, and aluminum. If civilization collapses (and you Glenn Beck-ers know that's what you're hoping for, just so you can say, "See, we told you so"), and I'm hiking the wasteland and come across a government truck filled with cases of food, cash, and gold, I'm taking the food.
Gold and silver are just media of exchange, infused with value by nothing more than a social agreement to recognize them as symbols of purchasing power. They are hardly any different from a credit card, just harder to carry.
"Thanks for avoiding the issue, Steve."
ReplyDeleteYou asked ofr an example of a full reserve bank and I gave it too you. You are avoiding the issue. Why do you support a system that takes your money and lends it to others for profit, more than once? Explain why that is not fraud?
"Gold and Silver are just metals. I've never used them to build anything."
ReplyDeleteFrom teh libra's Wikipedia:
"Silver can be alloyed with mercury, tin and other metals at room temperature to make amalgams that are widely used for dental fillings. To make dental amalgam, a mixture of powdered silver and other metals is mixed with mercury to make a stiff paste that can be adapted to the shape of a cavity."
"Photography used 30.98% of the silver consumed in 1998 in the form of silver nitrate and silver halides. In 2001, 23.47% was used for photography, while 20.03% was used in jewelry, 38.51% for industrial uses, and only 3.5% for coins and medals."
Cory, you made a false statement, so you are the true shyster here. Will give me some of you money so I can lend 80% to someone else for profit. I promise to pay you back!
OK Cory, does the AP excerpt bother you in regard to teh Federal Reserve secrecy:
ReplyDelete"New York (AP) -- It was the banking industry's equivalent of Judgment Day: Dark-suited bank executives called in to top-secret meetings with Federal Reserve officials to learn whether their institutions might live or die if the economy took a sharp turn for the worse.
The disclosure of the stress-test results to the nation's 19 biggest financial firms made for high drama on Wall Street, which buzzed with anticipation even though the banks' report cards won't be made public until early next month.
Bank executives learned their grades in meetings at Federal Reserve banks across the country. The proceedings were shrouded in secrecy. By law, the banks can't publicize the results without the government's permission. Most banks refused even to confirm that the meetings took place.
The stress tests are among the ways the government has tried to restore confidence in the banking sector amid the gravest financial crisis since the Great Depression."
And Cory,
ReplyDeleteIt is really too bad that we can't have a constructive conversation over this very important issue. It seems your hatred toward Ron Paul, Glenn Beck, the Tea Party movement, and every one else who favors returing to the limited governemnt system the founders created gets into the way with your issuing personal attacks. If you want more on reserve banking check out the Bank of Amsterdam.
And question:
Why doesn't colleges and universities give equal time to Austrian economics (versus Keynse)?
Another question:
When are you going to take seriously the point that Big Government serves the interests of Big Business? I am working on a post for tomorrow if you want more insight.
Cory,
ReplyDeleteI think I found the problem I'm talking about fractional reserve lending and you are talking partial reserve banking. My first response that started all this I should of said “fractional reserve LENDING” not banking. Yup, I screwed up there. I would actually be OK with your first example of our banking plan. If a bank has 40 million to loan they loan out 40 million great, I have no problem with that. However, what you are missing is the money creation step that allows that 40 million to be loaned out multiple times over and over until actually 360 million is loaned.
PLEASE check out this link:
http://en.wikipedia.org/wiki/Money_creation
Pay particular attention to the RE-Lending and the money multiplier section.
Also you NEED to look at this chart:
http://en.wikipedia.org/wiki/File:Fractional_reserve_lending_varyingrates_100base.jpg
The chart shows a starting deposit of a $100 deposit. How much money does the chart show you can loan out with a 100% reserve lending bank $100 I believe that is the example you used in our banking plan. Sounds good to me.
Now through fractional reserve lending using a 10% reserve how much can be made in loans with a $100 deposit? $900 this is the problem. I believe if old George Bailey was following our business plan for our bank practicing in 100% reserve LENDING then he would have been fine.
This is why I wanted you to clarify your example for the business plan of our bank.
Now Cory you explained that our new bank would practice 100% reserve lending, and partial reserve banking in your first example. Is this the way you think banks should do business?
Well guess what I do too.
And isn't the value of gold and silver just as arbitrary as the value of money? Yes, money is only good for what can be done with it. Stand out in the middle of the dessert with pocket full of gold and pocket full of 100 dollar bills and they aren't going to do you a darn bit of good.
What makes gold/silver valuable is it will always be scarce, it takes work to recover it, and it doesn't change over time. Because it doesn't change over time it is way to store value. (my corn flakes 25 cent example again)
By the way people vote with their money. Pull up a 10 year chart of gold and silver. People ARE choosing the mayo jar filled with real money. (gold/silver, sound money)
Believe me the last thing I want to say is "I told you so” I hope for the best and plan for the worst.
Yes if I were traveling across a waste land I would take the food too. Now what if you were starving and you came across a store and all they had was corn flakes and all you had was 25 cents. You better hope the year is 1965 OR a quarter that was coined prior 1965 (which is 90% silver) worth $3.33.
Aaron Heidelberger
See Steve run.
ReplyDeleteI couldn't care less about this quixotic little crusade against the Fed. Heck, I could play Sancho and grant that your windmills are dragons. That would have no impact on the clear evidence offered that the Free Lakota Bank, your only example of a full-reserve bank, is a sham.
Full-reserve banks don't exist. They don't work. You and Aaron may have a grand plan for insurrection against the New World Order (have fun storming the castle!), but you don't have a workable plan for community banking.
But hey, I'm obviously too closed-minded to understand the profundity of your Austrian economics. Please, get together with your Glenn Beck/Tea Party friends and field some candidates. Run for county commission and state legislature. Make full-reserve banking a key part of your platform. Face the bankers, businessmen, borrowers, and lenenders in your communities. Answer their practical questions the same way you've answered mine, with your tangential discourses on Ludwig von Mises and the Federal Reserve.
And then watch yourselves lose, as you're doing here.
See Cory run.
ReplyDeleteRun to the aid of the fat cat bankers. See him support a system that enriches the plutocrats and takes away from small business, consumers, and the taxpayers. See Cory run, and lead useful idiots to their slaughter.
"(Good grief: since when did I become the pragmatist?)"
Read Proverbs to learn the truth about the proud.
Try this again:
ReplyDeletehttp://en.wikipedia.org/wiki/File:
Fractional_reserve_lending_varyingrates_100base.jpg
Aaron Heidelberger
Cory you explained that our new bank would practice 100% reserve lending, and partial reserve banking in your first example. Is this the way you think banks should do business?
ReplyDeleteAnswer that question for me please.
Aaron Heideleberger
Okay, here we go.
ReplyDelete"Why do you support a system that takes your money and lends it to others for profit, more than once? Explain why that is not fraud?"
What a bank does when they make a loan is essentially the same as what you do when you buy a CD or bond; give money to someone and they promise to pay you back with interest. In other words, banks balance out by giving up an asset (the cash amount of the loan) to acquire an asset (the loan itself, which will pay off over time). Likewise, the bank invests depositor's money for them and earns them interest. All of this is fully disclosed to any depositor who wants to ask; nothing is hidden from them.
It might be a little difficult to wrap one's head around, but it is not fraud. At most it is slightly risky for the bank, but all businesses are.
If the bank makes bad loans, it isn't the depositors who lose their shirts, it's the bankers. That's why many banks have doubled--if not more--the required reserve amount since the financial crisis started. That way, their collective backsides are covered.
"AP excerpt bother you in regard to teh(sic) Federal Reserve secrecy..."
The reason this information is not disclosed is so people don't panic and cause a crisis. If the Fed announced that a bank might fail, people might run on it and cause it to fail. That pretty much ensures that no bank could ever recover.
"...and every one else who favors returing to the limited governemnt system the founders created gets into the way with your issuing personal attacks."
Even with a limited government, there must be some broad-reaching programs. I believe one of them should be the monetary system. Look at the EU; it is relatively loose union of member states, but it still has one overarching (an very, very good) central bank.
I'm all for small government, but small economy? Not so much.
"Why doesn't colleges and universities give equal time to Austrian economics (versus Keynse(sic))?"
The purpose of education is to prepare a student for their future career. Since no economy in the whole of the world implements the Austrian school, learning about it is of little (if any) use.
To use a colorful example, universities don't teach Austrian economics for the same reason that culinary schools don't teach how to make a crap sandwich.
"I think I found the problem I'm talking about fractional reserve lending and you are talking partial reserve banking."
"I would actually be OK with your first example of our banking plan."
"Now Cory you explained that our new bank would practice 100% reserve lending"
I'll tackle these as one.
If you are okay with Cory's first plan, they you are okay with fractional reserve banking and money multiplication. Cory's example is the definitive example of money multiplication. The money lent out would eventually circle back and be deposited into the bank, then lent out again.
There is no difference between fractional reserve lending and fractional reserve banking, no matter how much you want there to be.
"Also you NEED to look at this chart:"
ReplyDeleteNo, we don't NEED to; we know how money multiplication works. You have yet to explain why money multiplication is a bad thing.
"...if old George Bailey was following our business plan for our bank practicing in 100% reserve LENDING then he would have been fine."
Well yes, but then his depositors would have lost all of their money. The great depression happened (basically) because lots of people didn't pay back their loans. If George's loans didn't get repaid, then his depositors would have lost their investments. Why is that better again?
"Full-reserve banks don't exist."
This point of Cory's really sums it all up. If you believe in capitalism, then you believe that the economy reaches the best and most efficient equilibrium. Basically, if full reserve banks were economically viable in our market, then they would exist.
"See him support a system that enriches the plutocrats and takes away from small business, consumers, and the taxpayers."
Fractional reserve banking allows small businesses and consumers to get cheap loans. This allows them to pay for things like houses, cars, and college educations. It also provides insured transactional accounts that earn interest for depositors.
Full reserve banking doesn't.
Which one is better for the little guy again?
Look, I hate to pull out this card, but this is the textbook for my Money and Banking class. It is an older edition, but it is mostly the same.
http://www.amazon.com/Economics-Banking-Financial-Markets-MyEconLab/dp/0321200497
If you really want to understand how fractional reserve banking works--or at least the reasons why every major power uses it--have a read. You can get a used copy for under $20. You could study it, find all its flaws, and throw them back in our face. I'm sure it wouldn't change your mind, but it might let you know where we're coming from.
"You have yet to explain why money multiplication is a bad thing."
ReplyDeleteWe don't have too, you did:
"The reason this information is not disclosed is so people don't panic and cause a crisis. If the Fed announced that a bank might fail, people might run on it and cause it to fail. That pretty much ensures that no bank could ever recover."
Thanks for pointing out the fallacy in fractional banking. And it is not spelled "TARP".
Yeah, what Kyle said!
ReplyDeleteCulinary school and the crap sandwich—excellent! :-)
crap sandwich:
ReplyDeleteA bank who pays its customers 1.25% on a CD that is loaned out 5 times at 6% interest.
1.25% versus 30% = fat cat shyster bankers
So Kyle, when Cory stated he has 40million available to loan out? Under a 10% reserve lending requirement how much can he loan out?
ReplyDeleteAaron Heidelberger
Aaron,
ReplyDeleteYes, a run on the bank would cause a failure, but as I've said it almost never happens. Of the three bank runs that have happened in the last 20 years, one was caused when investigators disclosed that the bank might be weak; that's why they normally don't report these studies.
However, every bank run is preempted by a shock of some sort. No bank would ever fail if loans were always paid back. None of this financial crisis would have happened if the sub-prime mortgage crisis had not happened.
In fractional reserve lending, if enough loans are not paid back, the bank will lose money and eventually fail. However, since all deposits are ensured, the depositors do not lose their money.
In full reserve lending, if enough loans are not paid back, the bank will lose money and eventually fail. However, since no deposit insurance exists the depositors will lose their money.
Why is the second option better than the first?
Kyle you did not answer the question.
ReplyDeleteSo Kyle, when Cory stated he has 40million available to loan out? Under a 10% reserve lending requirement how much can he loan out?
Aaron Heidelberger
"A bank who pays its customers 1.25% on a CD that is loaned out 5 times at 6% interest.
ReplyDelete1.25% versus 30% = fat cat shyster bankers"
First, if the money is loaned out 5 times, customers gets paid 5 times. Each round of lending only happens if the funds are re-deposited.
Plus, 1.5% CDs are short-term investments. Any 6% loan a bank makes is very long term (like a 30 year mortgage). As I have said, the liquidity premium dictates that long term loans have higher interest rates than short term ones. For instance, a 20 year AAA bond currently yields 4.4%.
"So Kyle, when Cory stated he has 40million available to loan out? Under a 10% reserve lending requirement how much can he loan out?"
ReplyDeleteLet's just use Cory's numbers. He actually stated that he had $50 million in deposits. At a 20% reserve requirement, he can lend out $40 million initially. If all of those loaned funds are re-deposited and re-loaned, eventually there will be a total of $250 million in deposits.
However, to use your numbers, with a 10% reserve requirement he could loan out $45 million, with an eventual total deposit of $500 million.
Trust me, I understand how this works. I passed my class, after all.
Oops, I mean to address my post a little while ago to Steve, not Aaron. Sorry 'bout that.
ReplyDeleteOK, Kyle So...
ReplyDeleteWhat your saying is 45 million in loans turns into 500 million in deposits.
So those deposits are money that has been "created"?
Sounds Inflationary to me?
Aaron Heidelberger
"customers gets paid 5 times"
ReplyDeleteOK 6.25% vs 30% = Fat Cat shysters bankers
And when all 5 want their money, the bank doesn't have it. So it fails even though the loans are rock solid.
What would happen if evey American wanted their money out of the bank tomorrow. The FDIC would be a mere drop in a huge bucket. This is called artifical wealth created with debt. Fools gold. This why they needed TARP last year. The FDIC wasn't enough, so they pushed it on to future genersations. How long can we continue to push debt onto future generations AND:
Is pushing our costs to fund are artifically high standard of living onto future generations moral?
"Sounds Inflationary to me?"
ReplyDeleteNot sure that's a question, but...
As I said before, if people deposit $50 million in one bank (and create $450 million), they must withdraw $50 million from a different bank (and destroy $450 million). It's a zero sum affair.
Kyle, so you are saying withdrawing money from a bank destroys money? Don't you destroy money when loans are paid off. Correct?
ReplyDeleteAaron Heidelberger
Kyle,
ReplyDeleteAnd you are forgetting the long-term rip off when banks artifically create money...inflation.
"And when all 5 want their money, the bank doesn't have it."
ReplyDeletePeople can't withdraw a CD at their own will. That's the definition of a time account.
"So it fails even though the loans are rock solid."
Find me one, one, instance where an otherwise healthy bank failed because of a bank run. A 10% reserve is more than enough to cover day-to-day business.
"What would happen if evey American wanted their money out of the bank tomorrow."
What would happen if the Apocalypse came tomorrow?
"This why they needed TARP last year. "
Actually, TARP was used to buy so called 'Troubled Assets' (bad mortgages).
When the mortgages went south, the banks seized the collateral (usually the house the mortgage paid for). However, since the housing bubble popped, the houses are worth far less than the loan used to build it.
As such, the government bought these mortgages (or houses sized) form the banks. They will hold on to these assets until the market has turned around and the houses regain their proper value. At that time, they'll re-sell the assets to the banks (probably at a profit, too).
If the sub-prime mortgage crisis happened to a full-reserve banking system, a similar plan would have probably been enacted.
Ahh! It's all coming so fast!
ReplyDelete"Kyle, so you are saying withdrawing money from a bank destroys money?"
Yes, until it is re-deposited or spent, it is effectively destroyed.
Think of it this way: you withdraw $1000 from the bank and bury it in the back yard. You vow to never, NEVER spend it, no mater what happens. Wouldn't that burial be effectively the same as literally burning the money?
On second thought, I'd better answer that. Yes, it would.
"Don't you destroy money when loans are paid off. Correct?"
No, 'cause when you pay back the loan the money goes back into the bank and is lent right back out.
"And you are forgetting the long-term rip off when banks artifically create money...inflation."
ReplyDeleteInflation is better than what happens with full-reserve banking: deflation.
Basically, there are many ways to deal with inflation, but none to deal with deflation. That is why every good central bank in the world doesn't target 0% inflation, but instead a low and stable inflation (usually 1.5% to 2%).
As long as inflation is low, the damage is not bad. As long as it is stable, it is predictable and can be factored into all long-term financial contracts (interest, wage negotiation, etc.). That is why most businesses give a 'cost of living' raise every year, usually equal to inflation. This is called the Fisher Effect.
http://en.wikipedia.org/wiki/Fisher_equation
You said "No, 'cause when you pay back the loan the money goes back into the bank and is lent right back out." What if the bank NEVER loans it out?
ReplyDeleteFrom what I remember in my banking classes paying off a loan destroys money. Burying money would not because that money is owed to somebody somewhere. The only way our money is created is through debt.
Aaron Heidelberger
"but none to deal with deflation"
ReplyDeleteDon't you remember Ben Bernake saying he would drop money from helicopters to fight deflation?
Have you ever heard of "Helicopter Ben"
Thats becuase it is the banks best interest to inflate inflate inflate. Soon they will end up doing somethign like this:
http://online.wsj.com/article/SB126316619465423909.html
Who does that benefit? Look what happened to Zimbabwe
Aaron Heidelberger
Deflation is a sign of a wealth creating economy. For teh same amount of money you can buy more than you could before. That is wealth. You need to study Austriqan economics. Your economics education is out of balance.
ReplyDelete"None of this financial crisis would have happened if the sub-prime mortgage crisis had not happened."
ReplyDeleteWithout fractional banks, sub-prime mortgages would not have existed. Fractional banking system created sub-prime mortgages and it created the crisis. Blame needs to rest where it belongs.
"From what I remember in my banking classes paying off a loan destroys money."
ReplyDeleteI don't presume to say what you remember. I only know what I know. And unless you can give evidence otherwise, paying off a loan does not destroy money since, as I said before, the money is lent out again.
"Burying money would not [destroy money] because that money is owed to somebody somewhere."
What? Not all money is owed. I have a tenner in my wallet that isn't owed to anyone. There are people around who live debt-free, ya know.
"Thats becuase (sic) it is the banks best interest to inflate inflate inflate."
Actually inflation hurts banks and helps loaners. Basically, if I take out a loan, I get to pay for it with inflated (less powerful) money.
Deflation would help banks, since repaid funds are worth more than the initial loaned funds.
"Who does that benefit? "
You clipped your URl again. But I got to it.
I'm not arguing that hyperinflation is good, nor would anyone. What I am saying is that low and stable inflation stimulates the economy and does not significantly hurt it, because of the Fisher effect.
"For teh (sic) same amount of money you can buy more than you could before."
However, this creates problems. One is so called 'price stickiness'. Bascially, it means that workers will never want to take a nominal pay cut (which would need to happen with deflation), even if they are earning more real wealth.
http://en.wikipedia.org/wiki/Sticky_(economics)
Another is that no one will buy or invest in anything. Think about it; you could buy a TV for $500 today. However, with deflation your money will be worth more next week, and you could buy the same TV for $495 then. This would stunt consumer buying horribly and hurt the economy in a big way.
"You need to study Austriqan economics."
Nah, I don't want to study Austriqan economics. Heck, i don't even want to study Austrian economics. I'm actually a mass communications major. I just did some econ for fun. And as I said, Austrian econ is as much fun as a certain sandwich.
"Without fractional banks, sub-prime mortgages would not have existed."
Why not? Can't a full reserve bank make a bad loan?
"Can't a full reserve bank make a bad loan?"
ReplyDeleteNot 5 times with the same money.
"However, this creates problems. One is so called 'price stickiness'. Bascially, it means that workers will never want to take a nominal pay cut (which would need to happen with deflation), even if they are earning more real wealth."
ReplyDeleteNot sure why workers would take a pay cut, since they are working the same number of hours, but producing more goods.
"Heck, i don't even want to study Austrian economics. I'm actually a mass communications major. I just did some econ for fun. And as I said, Austrian econ is as much fun as a certain sandwich."
ReplyDeleteHow would you know if you never studied it? Are you just taking the word from some Progressive professor?
"Not 5 times with the same money."
ReplyDeleteJust 'cause one loan goes bad doesn't mean all of them go bad. A bad loan is a bad loan, regardless of the banking system.
"Not sure why workers would take a pay cut, since they are working the same number of hours, but producing more goods."
ReplyDeleteThey are not producing more goods. Example: Carpenter Carl can build 1 house a week, and is paid $500 a week.
Deflation happens, which makes money worth 5% more than it used to. That is, 1 new dollar is worth 1.05 old dollars. Take the ratio of that and 1 old dollar is worth 0.9523 new dollars.
After the deflation, Carpenter Carl can build one house a week. He is now paid $476.15 (500*0.9523) a week, which is worth the same as the $500 from before.
Perhaps I'm reading your post wrong. Why did you think Carl would produce more than 1 house a week after deflation?
"How would you know if you never studied it? Are you just taking the word from some Progressive professor?"
ReplyDeleteYou mean like you're taking the word of (what's the opposite of progressive? Regressive?) pundits like Ron Paul and Glen Beck? Have you studied fractional reserve banking?
But you're right, I will read up on full-reserve banking, if only from bias free sources like Wikipedia. I urge you to do the same.
Kyle
ReplyDelete"Not all money is owed. I have a tenner in my wallet that isn't owed to anyone."
Pull that ten bucks out of your wallet and what does it say on it?
FEDERAl RESERVE NOTE
Why does it say that Kyle?
What is a "Note" in banking terms.
Someone living debt free has nothing to do with the fact that money is created out of debt and our monetary system is completly based on debt.
Aaron Heidelberger
"Why does it say that Kyle?
ReplyDeleteWhat is a "Note" in banking terms."
A note is a type of bond, usually medium term.
However, I don't owe the Fed, they owe me. All money issued by the Fed is a liability to them.
http://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm
Before fiat currency, this would mean that the treasury (before the Fed) would have to give me $10 worth of gold if I turned in a $10 bill.
Now there is no commodity backing the bill, but the Fed still owes me something: $1 worth of purchasing power, which it can guarantee by decree ("THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE").
Kyle, you are awesome. You systematically destroy every argument these guys offer, and all they can do is circle back and re-cite the same old tired tenets of their defeated abstract conspiracy theory.
ReplyDeleteAnd I agree, Kyle: you don't have to taste a crap sandwich to know you don't want to take a bite. We've already had more than a mouthful of the kind of impractical, unrealistic thinking Austrian economics apparently engenders among its devotés. That's all I need to feel comfortable your econ curriculum is just fine the way it is.
"You mean like you're taking the word of (what's the opposite of progressive? Regressive?) pundits like Ron Paul and Glen Beck? Have you studied fractional reserve banking?"
ReplyDeleteKyle & Cory,
I am a member of USD's honor society in economics. Unfortunately, I was not exposed to Austrian economics during my years at USD. I have been exposed to that neglected field of study while researching what caused the Great Depression and the recent financial meltdown. That research answered my question:
Why did the housing market end up hurting the manufacturing sector in America?
Austrain economics described in detail "malinvestment" as it impacted the up and downs of our economy and centered on the capital goods sector.
What is missing in today's mainstream economic studies are the motivations behind the actions taken. If you two want to catch up on that, read Von Mises "Human Action".
I also learned that the father of Austrain economics was Karl Menger. Research the huge fight he had with the German Hegalian based Historical School. The same philosophy that Woodrow Wilson fell in love with at John Hopkins. And he was the President that brought us the Federal Reserve.
It was the Federal Reserve that did not prevent the Great Depression, and it did not prevent the current financial crisis that we have yet to over come.
Any body want to talk about the current bonuses that are now being handed out to Goldman Sachs employes as 10% of Americans are still unemployed? It is the plutocrates within Goldman Saches that control the Fedderal Reserve, that controlled the Bush asministration, that control the Obama administration, and continuously control Congress via their lobbyists and insiders within the executive branch of our government. And they profited from the TARP bailout, which is at the expense of the future of America because it is still debt.
Cory, when are you going to stop supporting the plutocrats at Goldman Sachs and join the crusade that is the little guys fighting for the little guys. Glenn Beck is the inpiration behind that fight. It is a fight of truth over power...Goldman Sachs power.
Who said:
"You can lead a Progressive to the truth, but you can't make him believe it."
"I am a member of USD's honor society in economics."
ReplyDeleteThat is somewhat disappointing. If you have actually studied economics, you should have known most of what I told you. I've only taken 3 econ classes, after all; I'm no expert, yet I've answered or refuted pretty much all of your assertions.
"What is missing in today's mainstream economic studies are the motivations behind the actions taken."
Not exactly. Modern economics dictates that all economic action is undertaken to gain profit. As such, the most economically efficient option is nearly always the one taken.
"I also learned that the father of Austrain economics was Karl Menger."
You must have studied him in detail, especially since his first name is spelled Carl. Karl Menger was his son, a mathematician.
"It was the Federal Reserve that did not prevent the Great Depression, and it did not prevent the current financial crisis that we have yet to over come."
The Fed isn't meant to completely prevent financial crises. That is, quite simply, impossible. Instead, it uses monetary policy to lessen the impact.
And I should ask, in Austrian economics, what would happen if a recession would occur? Without a central bank or elastic currency, what corrective measures could be taken?
"Any body (sic) want to talk about the current bonuses that are now being handed out to Goldman Sachs employes as 10% of Americans are still unemployed?"
No. Goldman Sachs managed to recover from their troubles and paid back their TARP allotment (with 23% interest, mind). Why not reward the management who led the company out of trouble?
It is not up to Goldman Sachs to ensure full employment.
"It is the plutocrates within Goldman Saches that control the Fedderal Reserve, that controlled the Bush asministration, that control the Obama administration, and continuously control Congress via their lobbyists and insiders within the executive branch of our government."
Am I over optimistic to hope you have proof of this?
"When are you going to stop supporting the plutocrats at Goldman Sachs and join the crusade that is the little guys fighting for the little guys."
Again, Cory advocated NOT banking with the big guys, but with smaller, less evil, local banks.
Plus, how will Austrian banking help the little guy?
"Who said:
ReplyDelete"You can lead a Progressive to the truth, but you can't make him believe it.""
Neither I nor Google knows. Who?
From my limited readings, my major problem with Austrian economics is that it is a stagnant theory. No additions or corrections have been made to the theory for more than 60 years, and no real evidence exists to support their claims.
ReplyDeleteOne cannot expect that a 60 year old theory that has not changed since to hold water. Modern economics is an ever-changing science. New theories are put up to supplement or replace old ones. New data are collected that reveal new facets to how things work.
I'm not claiming that mainstream economic theory is the be all end all. I would not claim that about any science. Instead, it is constantly adapting and evolving, trying to reach an unachievable perfection. This progress may be disavowed someday, but its the best we have for the current.
Austrian economics is not. It has many interesting ideas that it can lend to modern thinking, but expecting the world to drop everything and embrace this old, abandoned idea is simply preposterous.
"If you have actually studied economics, you should have known most of what I told you."
ReplyDeleteYes I do know it. I too have been through the indoctrination system that you are now in. Once you get into the real world and think about things a little bit, you will understand that we are being lied to by the Progressives that rule our universities.
I have to agree with your position on Austrian economics. It is not in effect, which means that we are not operating under a true free market capitalistic system. Progressives like you and Cory need to understand that your agenda has not produced the outcomes that you desire, and now need to look at the Progressive agenda as the problem instead of blaming free-market capitalists, Republicans, conservatives and Tea Party activists.
I was the one who said:
"You can lead a Progressive to the truth, but you can't make him believe it."
If you want the truth about Goldman Sachs, read Tim Carney's work. If you want the truth about the latest financial meltdown, read Thomas Woods' Meltdown. If you want the truth as to the causes of the Great Depression read Murry Rothbard's book on it. Perhaps then you will be quiped to challenge teh professors instead of believing their lies.
" Cory advocated NOT banking with the big guys, but with smaller, less evil, local banks.
ReplyDeletePlus, how will Austrian banking help the little guy?"
Kyle, first you need to get past the thought that inflation is good. It is not. It makes all of us poorer. It only took 3 cents to buy in 1913 what takes a dollar to buy today. Deflation is the evidence that an economy has grown. Inflation only gives an illusion of growth. It is a lie.
Again, I suggest Carney's Rip Off and Obamanomics so that you can understand how Big Government benefits Big Business at the expense of small business, consumers, and taxpayers. I believe Carney, because I came up with a theory that the Republcians wanted Big Government the same as the Democrats. Carney did the research to prove my theory.
My hope is to bring forward truth and hope some of you believe. If enough do, perhaps we can fix the problems, or at least minimze their negative impacts on our lives. That is especially important for younger generations.
Fed Generates Record Profits of $46.1 Billion in 2009
ReplyDeletehttp://wallstreetpit.com/13578-fed-generates-record-profits-of-461-billion-in-2009
I think If I could print money I would have record profits too.
Aaron Heidelberger
"I was the one who said:
ReplyDelete"You can lead a Progressive to the truth, but you can't make him believe it.""
I'm not sure if it is kosher to quote oneself like that.
"Progressives like you and Cory need to understand that your agenda has not produced the outcomes that you desire, and now need to look at the Progressive agenda as the problem instead of blaming free-market capitalists, Republicans, conservatives and Tea Party activists."
Firstly, I don't think you can claim to be a free-market capitalist. Mandating full-reserve banking (i.e. huge government intervention into the private sector) is not laissez-faire capitalism.
Second, it is true that the current system may not achieve everything that progressives want. However, there is little evidence that conservative methods would work any better.
Third, I am a registered Republican and otherwise politically moderate. However, that does not mean that I endorse the fanaticism that is the Tea Party. More on that later.
"Kyle, first you need to get past the thought that inflation is good. It is not. It makes all of us poorer. It only took 3 cents to buy in 1913 what takes a dollar to buy today."
I've looked up some numbers according to the
US Embassy in Germany (the first webpage I found).
In 1900, the price of a dozen eggs was $0.23 and the average yearly salary was $438. That means the average worker could buy 1904 dozen eggs in a year.
In 1990, the price of a dozen eggs was $1.23 and the average yearly salary was $23,600. That means the average worker could buy 19,168 dozen eggs, over ten times as many as in 1900.
There are several more sample goods given, and they all have similar outcomes.
"Again, I suggest Carney's Rip Off and Obamanomics so that you can understand how Big Government benefits Big Business"
Isn't the entire point of Obamanomics how current taxes are overcharging the rich and the big corporations?
Plus, what does this have to do with banking? If fractional reserve bankers are evil, why wouldn't full reserve bankers? A banker is a banker.
"Fed Generates Record Profits of $46.1 Billion in 2009...I think If I could print money I would have record profits too."
For one, those profits come from the interest on loans that they've borrowed.
As I have said, the Fed uses so-called open market operations to help regulate the money supply; these basically entail buying securities with newly created money and sitting on them. While sitting on them, they collect all of the coupon payments (a form of interest) from the bonds.
When the Fed sells the bonds (and destroys the recently created money), they get to keep the interest. They use some to finance themselves, and they give the rest to the Treasury.
I guess, depending on your point of view, that isn't really reassuring. However, the Fed isn't just printing money and putting into their bank account; it making money is just a side effect of what they are doing.
It frustrates me that we have gotten so off topic during this discussion.
ReplyDeleteThis started off as a good discussion of two opposing economic systems. We were batting ideas back and forth and generating some good debate on the subject. We were trying to settle things logically, taking the pros and cons, the merits and detriments of each side.
Now we have devolved into an almost pure political argument: progressive versus conservative. This argument cannot be settled logically, since the two sides do not share common values. Any argument over politics will not change any minds. All it will do is lead to fanatical raving.
If there is one thing that dislike, it is fanaticism: unwavering, unrelenting support for any goal. As George Orwell said, "Orthodoxy means not thinking—not needing to think." When people fall to the level of just shouting party slogans at each other, nothing gets done. People and parties start regarding themselves and their point of view as the be all end all, and to hell with everything else.
You will not convince me that fractional reserve banking will completely destroy the American way of life, at least not without better evidence than you've given me thus far. I am always willing to change my mind, but you will not do that by simply touting the party.
For every point that was brought up in our debate, I tried to respond with a logical and reasoned response to the best of my ability. Rather than giving me data and science, you have responded with truisms and rhetoric.
You have asked many questions and I responded point-by-point, answering as many as I could. Rather than refute my assertions with fact, you dodge the issue by asking different questions or resorting to ad hominem and political attacks.
If you want to continue discussing the merits of full-reserve vs. fractional-reserve banking, I will gladly do so participate. However, if you want to continue ducking behind your politics and playing the victim, this is my last post.
So please, point out problems with fractional reserve banking. Show how full reserve banking is better. Show how my answers have been wrong. Give me science. Give me data, not dogma.
Kyle
ReplyDeleteYou said through fractional reserve banking 50 million in loans after being re-lent which would create 500 million in deposits.
Now that first 50 million came from the US government selling a bond to the Fed. Where did the Fed get this "newly created money" to the buying securities? They create it.
This does raise the total money supply.
Now, what does the US constitution say about who has the authority go create money?
Power of Congress
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
Is this done by Congress? No, in 1913 congress gave up the power to private banks. So what I'm saying is congress is not coining money or printing it. They sell bonds, and bonds are not money. The Fed has created a debt snowball for out country that we will never get out of. Unless we issue a currency like the green backs. However I do not trust that our government has the moral ability to have this power. Look at Venezuala, zimbabwe and North Korea. Our fore-fathers recognised this thats why they said "only gold and silver can be made legal tender." It forces the congress to live with with a budget because they cannot create more gold/silver. Thats why we left the gold standard in 1971, so congress can pay for war debt.
I want debt free money. (not possible with fractional reseve banking) Money that is not created by the sale of a bond and we need a government responsible enough to grow the money supply only as fast as the growth of actual production. (never happen)
Aaron Heidelberger
"Firstly, I don't think you can claim to be a free-market capitalist. Mandating full-reserve banking (i.e. huge government intervention into the private sector) is not laissez-faire capitalism."
ReplyDeleteNot true, free-market capitalism requires the government to eliminate fraud or at least try to. The current system has the government right in the middle of the corruption.
"It only took 3 cents to buy in 1913 what takes a dollar to buy today."
ReplyDeleteOn average Kyle, and what impact did government intervention (subsidies) have had on ag prices? This is why economics based entirely on statistics can be very misleading.
"Now that first 50 million came from the US government selling a bond to the Fed."
ReplyDeleteNot exactly. Money is injected into the system when the Fed buys bonds from the open market (banks and individuals), not from the Treasury (at least not directly). As I have said, it is true that the Fed creates this money from nothing, but they also destroy the money when they sell the bonds back.
Yes, this does raise the total money supply, which causes inflation. Howver, mild inflation has a benificial stimulatory effect to the economy.
Almost all central banks have what is called a 'single mandate' wherein their only real goal is to keep inflation low and stable. So long as it is stable, the Fisher effect ensures that it is not harmful and is in fact priced out of all transactions, so real wages do not fall.
One problem with the Fed is that they have a so called 'dual mandate', where congress tasks them with keeping inflation low and stable AND ensuring low unemployment. I know that it is hard to accept, but low unemployment is not always the best thing for the economy. In the long run, it is better to always have low and stable inflation than always have full employment.
Even American economists know that this dual mandate is bad, but American politicians cannot support the implementation of a single mandate (their constituents do not like the idea of having unemployment). If you want to study a properly run centeral bank, the Eropean Centeral Bank is pretty much the best in the world.
"Power of Congress
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
Is this done by Congress?"
Actually, the Treasury still runs the mint (which makes the coin). The Fed then buys the coin at face value and distributes it.
"The Fed has created a debt snowball for out country that we will never get out of."
Speculative, though possible. It should be noted that the national debt as a percentage of GDP was
higher in the late '40s and early '50s.
Once the recession is over and we stop putting out stimulus money, proper fiscal policy should be able to reign in spending. Clinton did it, so we know it is possible.
"Our fore-fathers recognised this thats why they said "only gold and silver can be made legal tender." It forces the congress to live with with a budget because they cannot create more gold/silver."
Then why was there national debt before fiat currency? Money used to be gold backed, but the government could still take out loans and thereby exceed their budget.
"I want debt free money..."
What is so bad about inflation. As I have said, so long as it is predictable it is priced out of everything due to the Fisher effect. What does it really matter if I make $500 and pay $0.10 for bread or if I make $50,000 and pay $1.00?
Plus, if you want "debt free money" backed by gold and silver, just buy gold and silver. Yes, you'll have to convert it into dollars every time you want to buy something, but if you are scared of inflation it is a safe investment. People do it all the time.
"You have asked many questions and I responded point-by-point, answering as many as I could. Rather than refute my assertions with fact, you dodge the issue by asking different questions or resorting to ad hominem and political attacks."
ReplyDeleteKyle, it was you that came up with the "crap sandwich", which Cory loved. And I challenged your lack of knowledge which gave you no basis to much such a judgement. I have studied both economic philosophies and I will continue to do that. Right now the current system is a corrupt one, and it is too bad that more people don't know it.
"Not true, free-market capitalism requires the government to eliminate fraud or at least try to. The current system has the government right in the middle of the corruption."
ReplyDeleteWhat kinds of corruption are you talking about? How do we eliminate the corruption? Will implementing full reserve banking eliminate the corruption?
Somehow I doubt full reserve banking is option that has the least government regulation.
"On average Kyle, and what impact did government intervention (subsidies) have had on ag prices?"
I have no idea what impact it was. Do you have the data?
Besides, that site had washing machine and bike prices listed too. I am unaware of any current washing machine subsidies.
"Kyle, it was you that came up with the "crap sandwich""
ReplyDeleteI used that mostly to insert some humor; I'm sorry if you found it offensive.
However, I maintain that the metaphor was valid. The sandwich was meant to represent something almost no employer or customer wants, much like Austrian economics. Perhaps something less excretory, a lutefisk and anchovies sandwich instead.
Kyle
ReplyDeleteWhy does our government sell a bond to create money? If they can make a peice of paper that says IOU 10,000 plus interest they can make $10,000 bill.
What does it really matter if I make $500 and pay $0.10 for bread or if I make $50,000 and pay $1.00?
Well it doesn't if it was always that price. I'm sure you agree that if went from those to prices in a short period of time it would not be good, anyone with savings would have been big losers. Because that guy who just retired makeing 500 bucks a month and saved all his live so he could retire now has to pay $1.00 for loaf a bread.
Aaron Heidelberger
"Why does our government sell a bond to create money? If they can make a peice of paper that says IOU 10,000 plus interest they can make $10,000 bill. "
ReplyDeleteThis doesn't create money. The money comes from the financial market, which buys the governments bonds, called Treasury Bonds (T-bonds, T-notes, or T-bills for short).
This is no different than if I give you $95, and you promise to pay me back $100 in a year. I didn't create the $95, I just pulled it from my pocket.
"Well it doesn't if it was always that price. I'm sure you agree that if went from those to prices in a short period of time it would not be good, anyone with savings would have been big losers..."
Yes, so it's good that it is done a few percent a year; not too bad.
Plus, as I have said the centeral bank goal of low and stable allows people to plan for inflation via the Fisher Effect. In that manner, if you know that bread costs $1 now and you know that inflation will be 2%, you can demand at least a 2% raise so that you can afford the $1.02 for bread next year.
As I said, the Fed doesn't do as good of job publicly announcing its target inflation rate as other countries. However, if you look at the European Central Bank webpage, its inflation target is obviously displayed (in the 'Objective' section).
Kyle,
ReplyDeleteIn order for you to understand the corruption of fractional banking, here is a quote from Hayek 1933 (Sorry if this doesn't format right):
So long as we make use of bank credit as a means of furthering
economic development we shall have to put up with the resulting
trade cycles. They are, in a sense, the price we pay for a speed of development exceeding that which people would voluntarily make possible through their savings, and which therefore has to be extorted from them.
"In order for you to understand the corruption of fractional banking, here is a quote from Hayek 1933..."
ReplyDeleteSo, the boom and bust cycle is corruption?
"So, the boom and bust cycle is corruption?"
ReplyDeleteUsing people's money for your own use is the corruption.
Loaning people's money who don't want it loaned out is the extortion described by Hayek.
"Using people's money for your own use is the corruption.
ReplyDeleteLoaning people's money who don't want it loaned out is the extortion described by Hayek."
Who are these people?
When I put money into a bank, I expect to earn interest on it. This is normally done by the bank loaning out the funds. It is not corruption.
If I didn't want the money loaned, I could put it into a safety deposit box or a hole in the ground.
And do you have any recent (like the last 15 years) of corruption caused by the system? Other than this loaning of funds, I mean.
"When I put money into a bank, I expect to earn interest on it."
ReplyDeleteWhat you are talking about is the current system, not the system that was in place centuries ago. Hayek's response was to the change. Again, if everyone in America wanted to withdraw their money tomorrow, the FDIC would be only a drop in a very huge bucket. America is addicted to a drug, it is called debt (live for today and don't worry about tomorrow).
"And do you have any recent (like the last 15 years) of corruption caused by the system?"
TARP, inflation, sub-prime loans
And before this discussion ends, I want to thank you for the conversation. I believe you have been very sincere. I wished Cory would do the same. We can learn from each other without agreeing.
"TARP, inflation, sub-prime loans"
ReplyDeleteTARP was simply aid to keep the big banks from trashing our economy. Inflation is an expected, even beneficial, occurrence. Sub-prime loans were stupid business moves, but it is not in the best interest of the banks for mortgages to fail. None are corruption.
'Corruption-lack of integrity or honesty (especially susceptibility to bribery)'
Any of that?
Also, the biggest problem with full reserve banking has yet to be addressed; the inevitable contraction of the credit market. Even if the rest of the scheme goes off without a hitch, you are talking about at least a 90% reduction in loanable funds. With so few funds, the interest rates on what is left would be astronomical, ensuring that only the richest or the most foolish can afford to take them (the second part there is the Lemons problem, of course).
"And before this discussion ends, I want to thank you for the conversation. I believe you have been very sincere."
And the same to you. This has been fun.
Kyle is right. The full-reservists haven't answered the fundamental practical objection we can raise: whether we're talking just one community bank or a nationwide system, full reserve means an immediate and inevitable contraction of the economy. Now I have argued perviously that GDP growth isn't all it's cracked up to be, but as this recession has shown us, freezing credit kills jobs and creates other econoic unpleasantness. Full-reserve is a stake in the heart of any economic growth or recovery.
ReplyDeleteI was talking with Jason Bjorklund yesterday and it occurred to me that economic growth and wealth creation may be absolutely necessary among a growing population. If you have a big pile of gold to divide and trade among a million people, that's fine. But as those million people make babies, you've got more people to share finite gold with. If we want people to have enough money to live and work, and if we have more and more people, don't we need some mechanism to create more wealth? And isn't the lending system Kyle has so ably defended an excellent way to do just that? A little manageable inflation (great egg-purchase-power example, Kyle!) is preferable to declining standards of living or population control.
The full-reservists are all talk, no action. The market has rejected their theory, and its defenders here have failed to offer sufficient direct response to Kyle's clear, specific, fact-based objections.
'Corruption-lack of integrity or honesty (especially susceptibility to bribery)'
ReplyDeleteAny of that?
Yes TARP, Read Obamanomics.
"but as this recession has shown us"
ReplyDeleteThe current corrupted system does not work. Why are you still defending the system that rewards the fat cat bankers?
"The full-reservists are all talk, no action. The market has rejected their theory"
ReplyDeleteThe market is saying we need a recession to correct the out of balance market that was caused by the Federal Reserve adding too much debt with an interest rate that is below what the market dictates. Fixing that problem by doing more of the same is like a drug addict trying to reach the same level of happiness by taking heavier doses of the drug of choice. And as I have said many times, America's drug of choice is debt. Inflation makes it look like we have growth, but it is an illusion.
And who benefits from inflation? Those who spend the increases in the money supply first. And who are they...the fat cat bankers and those running the Federal Reserve.
"I was talking with Jason Bjorklund yesterday and it occurred to me that economic growth and wealth creation may be absolutely necessary among a growing population. If you have a big pile of gold to divide and trade among a million people, that's fine. But as those million people make babies, you've got more people to share finite gold with. If we want people to have enough money to live and work, and if we have more and more people, don't we need some mechanism to create more wealth?"
ReplyDeleteYou can have more people and more wealth without more gold. Prices would drop to a point where it would take far less to buy the same amount of goods. Wealth is wealth. Money is suppose to a means trade wealth among ourselves. Printing more money does not create wealth. It is just a way for those printing the money to make money off of the rest of us. Again, corruption.
"Yes TARP. Read Obamanomics."
ReplyDeleteThis one, or this one? It is so hard to decide.
Besides, even if Obama (who I assume is the target of the book) is corrupt, why would he not be just as corrupt in a full reserve system? How does having full reserve loans make bankers intrinsically more moral?
"The current corrupted system does not work."
We're pulling out of the recession, which could have by all accounts been much, much worse. I do not believe the system is so broken that we must completely abandon it.
Besides, you have not presented any real evidence that your system would work any better. You have yet to address the horribly low amounts of credit (and corrosponding astronomical intrest rates) that a full-reserve system would neccitate.
"Why are you still defending the system that rewards the fat cat bankers?"
Again, why wouldn't full-reserve bankers be fat cats? They would be in charge of an extraordinarily small credit market, which gives them great power and the ability to gouge the market.
Not to mention that Cory and I don't like the fat cat bankers any more than you. That is why we have repeatedly advocated smaller, local banks which are not too big to fail (and thus would not have needed TARP).
"Fixing that problem by doing more of the same is like a drug addict trying to reach the same level of happiness by taking heavier doses of the drug of choice."
Oooh, apt medaphor. Most drug reabilitation programs (at least good ones) do not advocate going off any drug cold turkey. Instead, they must be weaned off slowly. Otherwise, the shock to their system could kill them. Even then, some drugs--while harmful if abused--are beneficial if used properly.
It is the same with our system. Neither Cory nor I would argue that it is perfect. There are adjustments to be made, but they cannot be made in a grand revolution without completely killing the economy. And some things--like inflation--are horrible at high levels, but at low, stable, and managable levels it can be good.
"And who benefits from inflation?"
Many, many people. Low inflation helps credit markets remain active (the Tobin effect), which allows more people enjoy the riches of this nation, not simply those who were born into priviledge.
How many deprived people who could not otherwise afford college recieved loans that allowed them to become educated and highly productive members of society? How many people have been able to spend their monthly housing budget to buy a house rather than whileing it away on rent? Have you ever taken out a loan?
So, to wrap up I'm going to put up a list of questions you've otherwise ignored.
Will implementing full reserve banking eliminate the corruption? If not, how do we eliminate it?
With full reserve banking, what corrective measures can be done if a recession occurs?
How will full reserve banking help 'the little guys'?
If fractional reserve bankers are evil, why wouldn't full reserve bankers?
How would you adapt for the lack of credit in a full reserve system?
"If you think that's good, read one of my former students pretty much single-handedly destroying arguments from Steve and my Tea Party cousin Aaron in a comment war"
ReplyDeleteCory said that on another blog. So Kyle are you ready to learn the other side of this debate, or are you just going to believe the one-sided biased indoctrination of your college professors?
Again, who said:
"You can lead a Progressive to the truth, but you can't make him believe it."
Kyle tell me why this would not work?
ReplyDeleteThe Montary Reform Act
http://www.themoneymasters.com
/wp-content/uploads/2009/11
/Monetary_reform_act_pdf2.pdf
OR The American Monetary Act
http://www.monetary.org/amacolorpamphlet.pdf
Take a look at page 25 and 26 which explains how banks would still have money to lend under 100% reserve.
It Pays off the national debt which would save over 440 billion in interest payments. Requires bank reserves to be brought to 100%and ends the bank money/deposit creation ability. Money suppyly then has a set controlled rate of growth. That way the money supply is not contracted or increased to slow or fast that exacerbate the normal business cycle.
Aaron Heidelberger
Will implementing full reserve banking eliminate the corruption? If not, how do we eliminate it?
ReplyDeleteBy throwing the crooks into jail, instead of giving them government bailouts.
With full reserve banking, what corrective measures can be done if a recession occurs?
The recession is the corrective action.
How will full reserve banking help 'the little guys'?
Full reserve banking will not help anybody, it will be fair to all.
If fractional reserve bankers are evil, why wouldn't full reserve bankers?
See my answer to your first question.
How would you adapt for the lack of credit in a full reserve system?
Borrow from those who want to lend. If I can't get enough, then I need to offer a higher rate of interest. Ever think that the market setting the interest rate is better than a club of plutocrats getting filthy rich manipulating the rate?
I will be glad to answer any other question. Read both Obamanomics books. Balance is a good thing. But it was Carney's that I have been referring to on this thread.
And Thomas Wood's "Meltdown" is also a must read.
Thanks.
"Kyle tell me why this would not work?"
ReplyDeleteHuh, yeah I guess there would still be money multiplication with full reserve banking. That puts some more money into the system at least.
But wait, this would make things worse than they are now. Think about it: you put $100 in a CD. Since there is no reserve requirement, the bank lends out all $100 to me. I spend that $100 at the Sunshine liquor store. Sunshine deposits that $100 into a CD. The bank loans out $100 to me, who spends it at the liquor store again (I've become an alcoholic for the purposes of this demonstration).
The process could go on forever, creating an infinite pool of multiply loaned out money, which causes massive inflation. That sounds less than optimal. I just thought of this off of the top of my head. Please, tell me if I'm missing why this can't happen.
However, that still leaves liquidity preference. Most people who put their money into loanable transaction accounts presently cannot afford to lock their money up in CDs. That will be a huge chunk of change that cannot be lent out.
"It Pays off the national debt"
Likewise, simply dumping $11 trillion dollars of new greenbacks into the system will cause massive inflation, wouldn't it?
"By throwing the crooks into jail, instead of giving them government bailouts."
Well let's just do that then. We don't need full reserve banking to arrest people.
"See my answer to your first question."
Yeah, sorry I asked that twice.
"The recession is the corrective action."
So why are you complaining when there are recessions now? If there are occasional corrective recessions, then full-reserve banking will operate just like fractional-reserve banking in that respect. Except, of course, that fractional-reserve banks have the Fed to help minimize the impact of recessions.
"If I can't get enough, then I need to offer a higher rate of interest."
High interest rates are rarely great for the economy. As I have said before, with high interest rates the only people who can afford to take out loans are: a) fat cats who don't need to OR b) lemons. And the later of the two will probably default on the loan and lose the bank a bunch of money, eventually causing it to fail.
The average Joe who wants to buy a house or a car can't afford 10% interest. And the fewer cars bought the fewer people in Detroit that have a job. And so on, and so on.
"Ever think that the market setting the interest rate is better than a club of plutocrats getting filthy rich manipulating the rate?"
The market does set the interest rate, and if the plutocrats can influence the rate now, they will be able to in a full reserve economy.
"Full reserve banking will not help anybody, it will be fair to all."
What about the poor who can no longer afford to get a loan?
"So Kyle are you ready to learn the other side of this debate, or are you just going to believe the one-sided biased indoctrination of your college professors?"
I will believe whichever side is more credible. You have yet to convince me of anything.
It pays off the national debt as the reserve requirements for banks are raised to 100%. So one counter acts the others. So no it would not be inflationary.
ReplyDeleteI'm going to have to get back to you on your $100 example.
Aaron Heidelberger
"You have yet to convince me of anything."
ReplyDeleteYou can lead a Progressive to the truth, but you can't make him believe it.
So go ahead and continue to support the plutocrat's system. I am going to continue with speaking truth to power.
"So go ahead and continue to support the plutocrat's system. I am going to continue with speaking truth to power."
ReplyDeleteKay.
Note how often Kyle responds with a clear example and is answered by the same rhetoric and slogans that his examples disproved five comments ago.
ReplyDeleteThe problem here is worldviews. Full-reserve banking is part of this abstruse economic Gnosticism the Tea Partiers like to use to pretend they have accessed some special knowledge that no one else has. This knowledge makes them feel special. It gives them personal definition and self-esteem. Kyle, Tony, and I have pointed out that the free market—the practical experience and judgment of millions of individuals throughout the modern era—has demonstrated the non-viability of full-reserve banking. We have thus shaken Steve's and Aaron's worldview.
Having your worldview shaken is profoundly disturbing, so disturbing that the shaken individual is more likely to ignore reality and cling to his rhetoric instead of accepting the facts and moving on to a new worldview.
So, dear readers, do you understand what's happening here?
[Cue Steve's predictable response about Progressive academics conspiring to protect fat cats....]
{For more on the damage caused by disrupting worldviews, read Black Elk Speaks. Pay attention to what Black Elk says about the breaking of the hoop.]
ReplyDelete"Having your worldview shaken is profoundly disturbing, so disturbing that the shaken individual is more likely to ignore reality and cling to his rhetoric instead of accepting the facts and moving on to a new worldview.
ReplyDeleteSo, dear readers, do you understand what's happening here?
[Cue Steve's predictable response about Progressive academics conspiring to protect fat cats....]"
Yes Cory, the cue is that it is your Progressive worldview that is being shaken. It is your Big Government that is providing the corruption, not the free market capitalists like you have been charging. If we had a true free-market, the market and not the Federal Reserve, would be setting the interest rates. Because, as you and Kyle admit, true free-market full reserve Gold backed banking does not exist today. Instead Corporate socialism is in control. The plutocrats of Big Corporations control Big Government with their lobbyists. And the little guys that you say need Big Government are the very ones being hurt by these Big Goverment/Big Business - public/private partnerships.
Goldman Sachs controls America and they can't do it without the Federal Reserve, the US Treasury, and the federal government to partner with. And they are using tons of debt in the process. The Progressives do not want to accept the reality that continuing to pile on tons of debt is not viable for America.
The only thing the government should do in a true free market is eliminate corruption and fraud. But instead of the government putting the crooks in jail, they are in bed with them. Very sad.
And Cory, Progressive academics includes Woodrow Wilson who was President of Princeton before he was President of this country. And he was the president that created the Federal Reserve. It not only failed to prevent the Great Depression, it was the main cause of it. There is more reality that should shake the Porgressive worldview, but Cory can't accept the reality that his heros are corrupted crooks. That FDR was stupid when it came to economics. That his New Deal was concocted by the "brain trust", a bunch of Columbia professors who thought they should implement a theory call Keynesian economics. That New Deal movement is correctly called the "Constitutional Revolution of 1937". The Tea Party movement is about restoring what Woodrow Wilson, FDR, and the Progressive Movement destroyed...the America the Founding Fathers created. The country that used God's Natural Law to give us true freedom.
"Note how often Kyle responds with a clear example and is answered by the same rhetoric and slogans that his examples disproved five comments ago."
ReplyDeleteNo Cory, he did not disprove my points, he just refuses to believe them. He has been very strongly indoctrinated with the Progressive worldview. You passed on your terrible disease. And has I have said,
You can lead Progressives to the truth, but you can't make them believe it.
"So why are you complaining when there are recessions now? If there are occasional corrective recessions, then full-reserve banking will operate just like fractional-reserve banking in that respect. Except, of course, that fractional-reserve banks have the Fed to help minimize the impact of recessions.
ReplyDelete"If I can't get enough, then I need to offer a higher rate of interest."
High interest rates are rarely great for the economy."
Did the Fed use higher interest rates to hold down inflation in the Past? Yes they did. Your response shows the typical confusion about how free markets use recession to fix out of balance situations. By using debt and lower interests, we are simply delaying the correction not minimizing it.
Question: Instead of paying for our own excesses by allowing the recession to correct it, we are pushing the pain onto future generations via debt. Is that moral? Or is that a violation of Natural Law (taking/stealing of property[pursuit of happiness])?
I would like that answered by both Cory and Kyle.
At the point where Steve says, "No I'm not, you are!" (and he does this often), is there really anything left to say?
ReplyDeleteFull-reserve banking and Austrian economics don't work. But if Steve and Aaron want to put their money in full-reserve accounts, the status quo offers them that option, in the form of safe-deposit boxes. Our current system accommodates a variety of preferences, and the market—millions and millions of individual actors—responds by saying, "Thanks, we prefer credit liquidity and a growing economy."
Seems I've said that before. Seems Steve has ignored that with irrelevant questions before. Oh well. Don't ask us about full-reserve banking. Go downtown. Ask your local banker. Ask your local businesspeople. Let us know what they say.
"Thanks, we prefer credit liquidity and a growing economy."
ReplyDelete"Seems I've said that before. Seems Steve has ignored that with irrelevant questions before."
I have asnwered that many times. Using debt to grow the money supply does not create wealth. It is an illusion.
Now answer my questions about the morality of buying stuff funded with debt so that future generations can deal with the costs.
“Over time, whoever controls the money system controls the nation.”
ReplyDeleteStephen Zarlenga
"Give me control of a nation's money and I care not who makes the laws."
Mayer Amschel Rothschild
Who currently has the most control of our money?
Aaron Heidelberger.
"You can lead Progressives to the truth, but you can't make them believe it."
ReplyDeleteYou can lead anyone to the truth, but you can't make them believe it. It is called the selective exposure theory. Please stop saying it.
"Did the Fed use higher interest rates to hold down inflation in the Past? Yes they did."
That is because the economy was overheated. However, high interest rates during a recession is bad.
Basically, the Fed has really low interest rates in a recession (to stimulate activity, moderate interest rates in normal times, and higher interest rates when the economy is overheated.
"Instead of paying for our own excesses by allowing the recession to correct it..."
Recession is correcting it. After a few more quarters the economy will pick back up and all will be well. The government can get the TARP money back, lower expenses, and start a Clinton-esk budget reduction.
The worst time to tighten credit and government spending is during a recession. For example, when FDR balanced the budget during the Great Depression, GDP dropped pretty bad and it took a year or two more to recover the same level again.
In other words, I believe it is better to fix the recession and go into debt for a while than let the recession get worse. I'd rather that my kids grow up with a national debt than grow up with me unemployed and living in poverty.
"I have asnwered that many times. Using debt to grow the money supply does not create wealth. It is an illusion."
No, fractional-reserve banking does not create wealth, but neither does full-reserve. A system by itself does nothing; it is only a tool to achieve an end. Only an expanding and productive economy can create wealth.
Kyle,
ReplyDeleteYou are believing lies. Are you going to take a serious look at the other side of the issue, or are you going to continue to repeat the talking points of Progressive professors?
You keep bouncing back and forth between recession is the fix to we need to fix the recession. Recession is the fix to an overheated economy, and lowering interest prevents the fix from happening. The "malinvestments" are allowed to continue.
Why haven't you and Cory answered the morality of generational redistribution.
Kyle & Cory,
ReplyDeleteSo after this discussion, do you both still believe that wealth is created by simply adding more money into the system?
No, as I said wealth is not created by either system by itself. Rather it is just a tool that allows for the creation of wealth.
ReplyDeleteHere is how Jerome Corsi explains the heroin addict overdosing on its drug of debt:
ReplyDeleteStatistics from the federal government document how the Federal Reserve over the course of 2009 bought some 80 percent of the $1.5 trillion borrowed by the U.S. Treasury – making the federal government like the family that uses Visa to pay down a monthly MasterCard bill.
Remarkable as that may seem, data make clear the Obama administration has been managing trillion dollar federal budget deficits by selling financial instruments to the Fed.
Even to sophisticated investment analysts, using the Fed to buy Treasury debt is the equivalent of simply printing money to pay for government-funded programs an increasingly bankrupt United States can no longer afford.
While the Federal Reserve's massive purchases of Treasury bonds and government agency debt, including debt issued by the government-sponsored mortgage giants Fannie Mae and Freddie Mac, has keep interest rates low, the Federal Reserve Open Market Committee in its Dec. 15-16, 2009, meeting strongly suggested the program to buy debt issued by U.S. Treasury, government-sponsored agency debt and mortgage-backed securities will come to a close at some point.
And with the Chinese revealing a diminishing appetite to buy U.S. government debt, the Treasury is facing a crisis regarding how to sell possibly $2 trillion in new debt to finance the 2010 Obama administration federal budget deficit.
The likely results of the crisis – rising interest rates and hyper-inflation – could include a burst stock market bubble and a deepened real estate foreclosure crisis and also could force average Americans to face higher prices as the dollar continues to lose value against stronger currencies, such as the euro and possibly the yen.
Has anyone figured out why full-reserve loans wouldn't create infinite money?
ReplyDeleteKyle sorry it took me so long but your example is flawed.
ReplyDeleteThink about it: you put $100 in a CD. Since there is no reserve requirement, the bank lends out all $100 to me. I spend that $100 at the Sunshine liquor store. Sunshine deposits that $100 into a CD. The bank loans out $100 to me, who spends it at the liquor store again.
In a full reserve banking there is a 100% reserve requirement. If someone deposits $100, the bank cannot loan that money out if the depositor still has claim to it.
If the depositor wants take on the risk and loan out his money to earn interest, he would have to purchase a bond with that $100. The seller of that bond could turn around and buy a bond with the money he got, and so on and so forth but no new money would be chasing goods.
Take a look at this article:
http://www.swifteconomics.com/2009/06/17/got-100-reserve-banking-on-the-mind/
Here is a tidbit:
“Therefore, inflation acts as an almost perfectly regressive tax, redistributing wealth upwards.”
Aaron Heidelberger
"In a full reserve banking there is a 100% reserve requirement."
ReplyDeleteNot for CD accounts. The 100% reserve requirement only applies to transactional (checking) accounts.
"If the depositor wants take on the risk and loan out his money to earn interest, he would have to purchase a bond with that $100. The seller of that bond could turn around and buy a bond with the money he got, and so on and so forth but no new money would be chasing goods."
That is exactly what happens with fractional reserve lending. Each of the people who take out a $100 CD would say that they have $100 in assets, even though it is the same physical $100 for all of them.
And it could go on forever.
"Take a look at this article:"
As I have said, inflation doesn't hurt anyone in the long run (Fisher effect). If there is expected to be 2% inflation, people who take out loans will pay 2% more on top of their normal interest.
Your right the 100% reserve is just on transactions accounts. That sounds good to me.
ReplyDeleteBut currently the reserve requirement in the US is for transaction accounts is 10%.
"As of 2006 the required reserve ratio in the United States was 10% on transaction deposits"
http://en.wikipedia.org/wiki/Reserve_requirement
People are still hurt by inflation even if we lived in a magically world where it was constant of 2%. Some people don't automaticly get a raise to keep up with price inflation. The people that create the money (government, banks, people taking on loans) get the money and spend it before the money supply increase is noticed and prices go up.
"When new money is created, it doesn’t create inflation until it has had a chance to circulate throughout the economy. For example, say there are $10 dollars and 10 widgets in an economy. Each widget costs $1. If I pump in $10 more dollars, the widgets will be worth $2. However, since the economy isn’t some giant computer, it has no idea new money has been pumped in until after that money is spent. The widgets will still cost $1 until after they’ve been bought. So those who get the $10 I pumped in will be able to buy the widgets for $1, when they should have had to pay $2. In other words, those who get the money first get to buy at below market prices, while those who get the money last buy at above market prices."
Aaron Heidelberger