Dont be too quick to judge the 1%

Moonlight Graham · November 18, 2011

Ya, there's a few nicey-nice 1%'ers. Big deal. The vast majority use their power to screw over the other 99% of the pop, as well as every developing country on the planet in order to increase their incomes, meanwhile the 99% in US/Canada and the majority of people in most countries have seen little or no growth in income over the past 30 years and vast income inequalities in their countries since Reagan/Thatcher led the era of neoliberalism and free-market globalization into full-swing. Some of these 1%'ers say they want to pay more taxes, yet they also use their power to screw the 99% in the name of profit as much as possible. Two-faced biatches.

It's not about criticizing wealth, it's about criticizing the distribution of it. If Canada's GDP increases, why should only 1% of the population (or a small % whatever that exact # is) see income gains? How stupid is that? And how stupid would the other 99% of the population have to be to put up with that?

If you defend the 1% and chastise the 99% for wanting a slightly fairer deal, you're either a 1%'er yourself or a goddamn idiot. Sorry.

Edited November 18, 2011 by Moonlight Graham

bush_cheney2004 · November 18, 2011

....It's not about criticizing wealth, it's about criticizing the distribution of it. If Canada's GDP increases, why should only 1% of the population (or a small % whatever that exact # is) see income gains? How stupid is that? And how stupid would the other 99% of the population have to be to put up with that?

Boo-hoo...the rest of the world's 99% had to "put up" with it long before "Reagan/Thatcher"..and still does compared to the "US/Canada".

dre · November 18, 2011

Ya, there's a few nicey-nice 1%'ers. Big deal. The vast majority use their power to screw over the other 99% of the pop, as well as every developing country on the planet in order to increase their incomes, meanwhile the 99% in US/Canada and the majority of people in most countries have seen little or no growth in income over the past 30 years and vast income inequalities in their countries since Reagan/Thatcher led the era of neoliberalism and free-market globalization into full-swing. Some of these 1%'ers say they want to pay more taxes, yet they also use their power to screw the 99% in the name of profit as much as possible. Two-faced biatches.

It's not about criticizing wealth, it's about criticizing the distribution of it. If Canada's GDP increases, why should only 1% of the population (or a small % whatever that exact # is) see income gains? How stupid is that? And how stupid would the other 99% of the population have to be to put up with that?

If you defend the 1% and chastise the 99% for wanting a slightly fairer deal, you're either a 1%'er yourself or a goddamn idiot. Sorry.

I didnt chastise anyone. I dont think you even read my post to be honest. Try again. I DO want to see a more equitable distribution of wealth but you cant get that without reforming the system. And attacking a nameless demographic percentile is not gonna do shit to bring about any reform.

TimG · November 18, 2011

No thats simply not how it works. In reality Bank C just takes the money deposited by Person B, puts a tiny percentage of it into its account with the Federal reserve and then loans the rest out as interest.

WRONG. Bank C takes the money and demands interest from Bank A. If Bank C then creates it own loans then other banks will demand interest from it. Every cent of money created by banks becomes a liability that they MUST pay interest on. Central banks are the only banks with the power to create money from nothing and they are already non-profit organizations.

And there only market based constant on how much money they can create is the supply of new borrowers. Every single time a person borrows money the money supply grows.

MacDonalds needs to constantly sell hamburgers to make a profit and the banks constantly need to lend money. You are trying to make normal business activities seem nefarious. Bankers are nothing but brokers that make money on the difference between what they have to pay when they create money and what they can charge.

Up until 1971 dollars were backed by real gold deposits and the value of the dollar was pinned to gold within 5% in either direction. That meant only so much DEBT could possibly exist because there was a finite supply of money.

And under fiat currency the money supply is controlled by the ratio of fractional reserves mandated by government. I see no difference between a completely artificial link to an arbitrary commodity and a fiat currency. You seem to think the gold standard is "better" because governments can't monkey with it but governments can ditch the gold standard at any time so it is no real protection. What we need are responsible governments that spend within their means and effective regulation of banks.

Any holder of dollars could show up at the bank and demand to trade them in for gold. Now all they can do is trade them in for more dollars.

A complete myth. Here is some data from the 1700 and 1800s for the US:

Once again, we see that banknote issuance by no means stays in some stable 2% per year trend defined by gold mining, nor does it maintain any stable ratio with bullion reserves. Bullion reserves vary from 30% to 60% during this period. Counting gold alone (as you should, because this was really a monometallic standard), we see that they drop as low as 12% or so. What stayed stable during this time was of course the value of banknotes, as defined by their $20.67/oz. gold peg.

http://www.newworldeconomics.com/archives/2011/010211.html

There is no way everyone with bank notes in the 1800s could have ever redeemed them for gold. The same 'problem' existed.

Immediately almost every industrialized country in the system began to bleed red ink.

You are confusing cause and effect. Governments when into debt because irresponsible politicians wanted to spend money to get votes instead of telling people they need to cut back and live with less. Going back to the gold standard will not get rid of those politicians.

If you follow this scenario through until the end, you will see that after a few lending cycles theres more debt outstanding to banks, than there is money in the money supply. Unless theres a steady stream of new borrows its a mathematical impossibility for all the borrowers to pay back their debt.

Again - every cent that is borrowed creates someone else with an asset. These assets, like the debts, are electronic but they are real and produce income for the owner. The system is completely sustainable as long as the borrower is able to produce more wealth with capital than it costs in interest. We only get into trouble when these loans are used to fuel a speculative asset bubble but that is a problem with the regulators - not the system itself.

Not it isnt. The way the system functions guarantees that wealth will concentrate. 95% of the ENTIRE MONEY SUPPLY was created with bank credit. Bankers are collecting interest on literally every dollar in the system. We are talking 10's or 100's of trillions of dollars they have taxed the entire productive economy by collecting interest on money they quite simply never had to loan in the first place.

How many times do I have to repeat: every loan made by a bank is a LIABILITY that they must pay interest on. Bankers make their money as brokers - they do not collect all of the interest - the interest goes to the savers that are keeping their money in the bank.

The reason wealth accumulates is the same reason it always has: people with money find it easier to make more money. The banking system has nothing do with it.

Edited November 18, 2011 by TimG

Moonlight Graham · November 18, 2011

I didnt chastise anyone. I dont think you even read my post to be honest. Try again. I DO want to see a more equitable distribution of wealth but you cant get that without reforming the system. And attacking a nameless demographic percentile is not gonna do shit to bring about any reform.

I wasn't referring to you specifically in my last sentence, you = anyone, not "dre". I did read your post, twice.

And yes I agree the system needs reform. And it proves that capitalism needs some regulations (maybe not fed mucking with money/supply & interest rates, this needs reform also), but it needs regs because some people are greedy, immoral a-holes, and those people will do just about anything to increase profit & get ahead. And this forces others in business to do immoral things in order to compete in the game, because if they don't they go belly-up. One of the moral hazards of free-market competition. If there were no regulation of business many of us may still be working for 3 dollars an hour in garbage work conditions, consuming products laced with poisons, much more of the animals in our major lakes dead from pollution, and maybe the ozone would be completely destroyed by now.

I blame the 99% just as much as the 1% for putting up with this crap. We've all been fooled.

dre · November 18, 2011

WRONG. Bank C takes the money and demands interest from Bank A. If Bank C then creates it own loans then other banks will demand interest from it. Every cent of money created by banks becomes a liability that they MUST pay interest on. Central banks are the only banks with the power to create money from nothing and they are already non-profit organizations.

No sorry its COMMERCIAL banks that create money from thin Air. Banks like BMO, and CBIC in Canada. 95% of the money supply was created by these banks in the form of bank credit also known as "Checkbook Money". Every time a commercial bank makes a loan they are creating new money. They pay no interest at all on it because it doesnt come from anywhere. They simply write a number next your name in an account ledger. The money is backed not by deposits, but by your promise to pay it back.

And under fiat currency the money supply is controlled by the ratio of fractional reserves mandated by government.

Some countries (like Canada, Sweden, Australia) dont even enforce reserve rates anymore. And in most countries reserve rates have been dramatically slashed. Again this is a consequence of not having a sound money system. Since 1971 for example the reserve rate in Brittain has gone from 20% to 2%. And the part youre missing is that even the money deposited in the central bank to maintain reserve ratios is the same checkbook money that banks created from nothing. Under the gold standard reserves were backed by real value. Now those reserves themselves are just more bank credit. Go back to the example I gave you and walk through it. Monetary expansion is virtually limitless in the fiat FR system as long as theres always new borrowers.

MacDonalds needs to constantly sell hamburgers to make a profit and the banks constantly need to lend money. You are trying to make normal business activities seem nefarious.

This doesnt even answer what I said, and your example is apples and oranges. Because only the principle of each loan enters the money supply, and not necessarily the interest there is always more money owed than exists in the economy. In order for todays borrowers to be able to repay their loans, the money supply has to keep expanding. Every single year. And again if you look at the money supply youll see it start to increase quickly as soon as money was decoupled from real value. Youll see the same corresponding increases in inflation, and also in debt.

A complete myth. Here is some data from the 1700 and 1800s for the US.

No its not a myth. Its true that even back then we didnt have 100% reserve requirements but dollars were legally redeemable for gold.

The system is completely sustainable as long as the borrower is able to produce more wealth with capital than it costs in interest. We only get into trouble when these loans are used to fuel a speculative asset bubble but that is a problem with the regulators - not the system itself.

No the system is only sustainable in conditions of strong economic growth. Because as I pointed out, theres a permanent imbalance in the system and there can never be enough money in the money supply to pay all outstanding debts. Thats explained pretty nicely here...

And heres an example based on set of Canadian data.

In 1999 bank credit amounted to $557 billion, almost 95 percent of our money supply. Real interest (i.e. nominal interest minus inflation) on this bank credit was at least 5 percent, or $28 billion. But where is this interest to come from since banks create credit, but not the interest they charge on that credit? It can’t come from the approximately $32 billion in cash (GCM) that circulates in public hands. It can only come from more bank credit with more interest attached. But for all existing bank credit to be paid without anyone defaulting on their loans, the economy must expand by 2.9 percent ($28 billion of interest divided by the GDP, $953 billion). Since the average annual real GDP growth from 1960 to 1995 was only 2.3 percent, the economy is going to repeatedly stumble in its effort to keep up with the interest payments on all that bank credit. This is the root cause of what is known as the business cycle, and there’s nothing inevitable about it. A lot of economic weather is man made. It is tolerated because it is the consequence of a system designed to provide investment income to those with financial assets. The cost to the community is increasing public and private debt with all the economic failure and misery that goes with it when the economy slows. What we have in a debt money system is cruelty motivated by self-interest and rationalized under the guise of economic law.

Base on the numbers from that one short period the economy has to grow 2.9%. If it doesnt its not possible for all outstanding loans to be repaid. Its essentially a classic pyramic schem (not technically a ponsi scheme for the reason I mentioned).

So the system by its function guarantees that unless economic growth is very strong debt will exponentially increase. And thats exactly what we see on that graph of debt I showed you before. During extremely fast growth in the 90's the line almost started to level out... but thats the only period since the system was put in place 39 years ago.

You are confusing cause and effect. Governments when into debt because irresponsible politicians wanted to spend money to get votes instead of telling people they need to cut back and live with less. Going back to the gold standard will not get rid of those politicians.

No its you that confuses cause and effect. As soon as there no longer a hard physical boundary on how much currency could exist, spending started to spiral out of control. The reason is simple. You would probably spend more money as well, if you could just print your own in a lexmark in your basement.

How many times do I have to repeat: every loan made by a bank is a LIABILITY that they must pay interest on. Bankers make their money as brokers - they do not collect all of the interest - the interest goes to the savers that are keeping their money in the bank.

No thats how banking worked hundreds of years ago but its not how banking works today. When you get a loan from the bank there IS no deposits/savings to back it (or very little).

Central banks are the only banks with the power to create money from nothing and they are already non-profit organizations.

Thats just factually incorrect. If you dont want to take my word for it, then read any publication from the by the central bank itself, or any other source that deals with the subject.

Central banks have created less than 5% of the actual money supply, COMMERCIAL banks created the other 95%, by making loans.

These two different types of money creation are described as GCM, and BCM. GCM is created by the government run central bank or the treasury. BCM is money created from nothing by commercial banks making the loans you mentioned.

1. Central bank money (all money created by the central bank regardless of its form, e.g. banknotes, coins, electronic money)

2. Commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money

Heres a basic description of those two parts.

There are two principal stages of money creation. First, the central bank introduces new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits) in the economy so that it is a multiple (known as the money multiplier) of the amount originally created by the central bank.

Edited November 18, 2011 by dre

dre · November 18, 2011

I wasn't referring to you specifically in my last sentence, you = anyone, not "dre". I did read your post, twice.

And yes I agree the system needs reform. And it proves that capitalism needs some regulations (maybe not fed mucking with money/supply & interest rates, this needs reform also), but it needs regs because some people are greedy, immoral a-holes, and those people will do just about anything to increase profit & get ahead. And this forces others in business to do immoral things in order to compete in the game, because if they don't they go belly-up. One of the moral hazards of free-market competition. If there were no regulation of business many of us may still be working for 3 dollars an hour in garbage work conditions, consuming products laced with poisons, much more of the animals in our major lakes dead from pollution, and maybe the ozone would be completely destroyed by now.

I blame the 99% just as much as the 1% for putting up with this crap. We've all been fooled.

I wasn't referring to you specifically in my last sentence, you = anyone, not "dre". I did read your post, twice.

Ok fair enough. I thought you were making me out to be the enemy there for a sec

The way I see it that people in general are greedy. The "99%" would probably do roughly the same thing as the "1%". The system needs to take this into account, and avoid concentration of wealth beyond a certain point.

Edited November 18, 2011 by dre

TimG · November 18, 2011

95% of the money supply was created by these banks in the form of bank credit also known as "Checkbook Moneyh". Every time a commercial bank makes a loan they are creating new money. They pay no interest at all on it because it doesnt come from anywhere. They simply write a number next your name in an account ledger.

What you can seem to understand is as soon as banks create this money it gets spent. And once it gets spent it will end up as deposits in some other bank as interest bearing deposits. This means that every cent that banks create ends up costing them. In other words: no bank gets to create money for free. They pay the going interste rate for it. Your problem is you seem to incapable of understanding the complete picture and are obsessing about one part of the system.

Some countries (like Canada, Sweden, Australia) dont even enforce reserve rates anymore. And in most countries reserve rates have been dramatically slashed.

This is because central banks have figured out they can control the money supply by setting interest rates. i.e. if the central bank raises interest rates the banks lend less and the supply goes decreases (a fact that would make zero sense if your 'banks create money for no cost myth' had any merit).

Because only the principle of each loan enters the money supply, and not necessarily the interest there is always more money owed than exists in the economy.

There are also more ASSETS than exists in the economy. Why do you insist on looking at only one side of the equation. Every loan means someone else gets an asset.

No its not a myth. Its true that even back then we didnt have 100% reserve requirements but dollars were legally redeemable for gold.

Now you are in complete denial. I just showed you how the 'fixed redeption value' was a complete fiction. The money supply rose and fell according to the economy and at no time was it ever possible to cash in all dollars for their equivalent in gold.

Thats just factually incorrect. If you dont want to take my word for it, then read any publication from the by the central bank itself, or any other source that deals with the subject.

The difference is I understand the material provided. You clearly do not. Try reading what I am saying carefully. I am saying that commerical banks cannot create money without incurring a direct interest cost. This means they only make money on the spread. If this was not true then why do banks make more money when interest rates are low?

Central banks are different. They can create money at no cost.

They only pay interest on a very very small percentage of it. They are not BROKERS, they are MANUFACTURERS. Its true that sometimes the central bank will lend commercial banks money at interest but for every $100 dollars they can loan out thousands, and the interest they collect is pure profit.

If a bank creates $1000 to lend the money almost ALWAYS ends up in a bank deposit. That means they have to pay interest on it. The only way your twisted view of the world makes sense if you assume the money created by banks simply dissappears into people's matresses. Edited November 18, 2011 by TimG

TimG · November 18, 2011

Here is some data that shows why any increase in debt cannot be discussed without looking at the asset picture as well:

The median value of assets owned by Canadian families climbed from $184,622 in 1999 to $29,930 in 2005. The median debt also rose over this period, but by a smaller amount, rising from $32,257 in 1999 to $44,500 in 2005

http://www4.hrsdc.gc.ca/[email protected]?iid=84

Edited November 18, 2011 by TimG

TimG · November 18, 2011

Dre, here is a simple example.

Bank A has $10000 in deposits and is paying 3% on them.

Person X decides they want to buy a house from Person Y for $100,000.

Person X negotiates a $100,000 loan from Bank A at 6% interest and uses the money to pay Y.

Person Y deposits the $100,000 in Bank A at 3%.

Bank A now has $110,000 in deposits that are paying 3% interest.

You can repeat this scenario as many times with multiple banks as you like but

you will always end up with the same answer:

Bank A ends up paying interest on every cent it creates for loans.

I challenge you to try to come up with a scenario where the bank does not

end up paying interest on the money its creates.

Remember that the money must go somewhere. It never simply dissappears.

Edited November 18, 2011 by TimG

Michael Hardner · November 18, 2011

I dont know if it would necessarily be such an earthquake. I didnt see any kind of massive collapse 39 years ago when this system was put in place. And those commercial banks bring nothing to the table... Its STILL the government (people in the economy) that back the money. WE ISSUE OUR OWN CREDIT. NOW. TODAY. The only reason that the money you borrow from a bank has any value at all is because you have a reputation as a producer of goods and services. THats it! Its value is entirely derived from your promise to pay, and the money does not even exist until AFTER you have signed your mortgage contract.

But im all for any other ideas you have, so lets talk about your bottom-up approach.

Fractional banking, or whatever it's called, has been around for longer than that - and it's a question of degree. It seems to me that if the video is true then the money supply would be quickly restricted if we banned fractional banking.

GostHacked · November 18, 2011

How about we all pay attention to what our economic system is doing, we vote responsibly, and we hold our leaders to their promises ? Is that really so fantastic ?

If people were paying attention, they would have started these protests years ago. This mess did not happen overnight.

GostHacked · November 18, 2011

Dre, here is a simple example.

Bank A has $10000 in deposits and is paying 3% on them.

Person X decides they want to buy a house from Person Y for $100,000.

Person X negotiates a $100,000 loan from Bank A at 6% interest and uses the money to pay Y.

Person Y deposits the $100,000 in Bank A at 3%.

Bank A now has $110,000 in deposits that are paying 3% interest.

Yes that is fractional reserve banking in a nutshell. A bank lends out more money that it actually has on hand at the bank. And the interest rate your money makes sitting in the bank is less than the interest you would be charged to borrow that same amount of money.

You can repeat this scenario as many times with multiple banks as you like but
you will always end up with the same answer:

Bank A ends up paying interest on every cent it creates for loans.

Up front they may pay that interest, but over the course of your loan, YOU will cover the loan, your interest AND the interest the bank had to pay.

I challenge you to try to come up with a scenario where the bank does not
end up paying interest on the money its creates.

Remember that the money must go somewhere. It never simply dissappears.

So where is it going? Follow the money.

Michael Hardner · November 18, 2011

If people were paying attention, they would have started these protests years ago. This mess did not happen overnight.

It happened due to small iterative changes. People pay attention to how much money they have, and how much stuff they have. It's difficult to sell big economic changes such as the FTA but that happens sometimes.

TimG · November 18, 2011

Yes that is fractional reserve banking in a nutshell. A bank lends out more money that it actually has on hand at the bank. And the interest rate your money makes sitting in the bank is less than the interest you would be charged to borrow that same amount of money.

So what? The bank is a broker and makes money on the spread. Banks cannot create 'free' money. Everyone benefits from the system because more credit is available at a lower cost.

That said, fractional reserve banking is a tool like a sharp kitchen knife. If you are not careful you will cut your fingers off. But that is not an argument to stop using kitchen knives or fractional reserve banking.

Up front they may pay that interest, but over the course of your loan, YOU will cover the loan, your interest AND the interest the bank had to pay.

You should not be borrowing money unless you believe you can create more wealth with the capital than you pay in interest. Many many people borrow responsibly and their lives are much better off as a result. But some people are stupid or make calculated bets that they don't win. The problem here are government regulations. For example, zero money down mortgages should have never been allowed. Edited November 18, 2011 by TimG

TimG · November 18, 2011

Fractional banking, or whatever it's called, has been around for longer than that - and it's a question of degree. It seems to me that if the video is true then the money supply would be quickly restricted if we banned fractional banking.

Our economy would grind to a halt. Businesses would fail and unemployment would skyrocket because the only a small number of people would be able to access credit at high interest rates. It would exacerbate poverty and eliminate social mobility. The Grameen bank is a good example of how access to credit at reasonable terms benefits the poorest in society: http://en.wikipedia.org/wiki/Grameen_Bank

GostHacked · November 18, 2011

So what? The bank is a broker and makes money on the spread. Banks cannot create 'free' money. Everyone benefits from the system because more credit is available at a lower cost.

Credit is not the same as having the money to begin with. The bank borrows the money from a central bank at interest, because they don't have the cash to lend out. They pass that on to you. Not only that the central bank does fractional reserve banking as well. And where do they get THEIR money from? Thin air? A global central bank like the World Bank and the IMF?

That said, fractional reserve banking is a tool like a sharp kitchen knife. If you are not careful you will cut your fingers off. But that is not an argument to stop using kitchen knives or fractional reserve banking.

But without human intervention and fudging the system, if the knife is left alone, it can do no harm. Fractional Reserve Banking is more than a knife, it's a ticking time bomb. It will not explode, but it will implode.

How many countries are in trouble due to fractional reserve banking and horrible banking practices? It's a global ponzi scheme.

Greece

Italy

Spain

Portugal

Ireland

Iceland

France

USA

China

You should not be borrowing money unless you believe you can create more wealth with the capital than you pay in interest. Many many people borrow responsibly and their lives are much better off as a result. But some people are stupid or make calculated bets that they don't win. The problem here are government regulations. For example, zero money down mortgages should have never been allowed.

Nah, you still don't get it. Again, with deregulation (like abolishing the Glass-Steagal act) helped create the rampant abuse that has taken place over the last 5-6 years, possibly longer.

We need sound regulations with our government enforcing those regulations. Too much lobbying goes on by corporations to have the rules changed to suit their needs. This you don't get either.

Do you support the bailouts for the big banks? If so, why?

Did you benefit from the bailouts? If so, how?

Edited November 18, 2011 by GostHacked

TimG · November 18, 2011

Not only that the central bank does fractional reserve banking as well. And where do they get THEIR money from?

Each central bank can create as much of their own currency as they like. But they risk creating inflation if they create too much. That is why every major central bank uses the inflation numbers to determine if they need to reduce the amount of money in the system.

How many countries are in trouble due to fractional reserve banking and horrible banking practices? It's a global ponzi scheme.

All the debt problems are the direct result of politicians that refuse to tell their people that they must live with less and borrow money to cover the gap between their promises and reality. Fractional reserve banking has nothing to do with it.

Do you support the bailouts for the big banks? If so, why? Did you benefit from the bailouts? If so, how?

Governments are partly to blame for the mess the banks got into and many of the bailouts were to protect counter parties to derivative contracts. Without the bail outs the system could have collapsed leading to the next great depression. It is easy to second guess those decisions now because we can never know what would have happened without the bailouts. It was a calculated risk that governments had to take. That said, governments should have done a better job of making sure the managers of the bad banks paid a personal price for their bad managment. Edited November 18, 2011 by TimG

Bonam · November 18, 2011

Good thread. I am learning some things from the exchange between dre and TimG.

GostHacked · November 18, 2011

Each central bank can create as much of their own currency as they like. But they risk creating inflation if they create too much. That is why every major central bank uses the inflation numbers to determine if they need to reduce the amount of money in the system.

Whoooooaaaaah there. One cannot print as much currency as they like without negative effects like devaluing the currency, giving it less buying power. I have a billion Zimbabwe dollars for you if you like. The money supply has always been increased, i could be wrong, but when has there ever been reduction in the money supply?

There is no way you can remove/reduce the amount of currency in the system. If I am wrong, I'd like you to show me.

All the debt problems are the direct result of politicians that refuse to tell their people that they must live with less and borrow money to cover the gap between their promises and reality. Fractional reserve banking has nothing to do with it

.

It does have something to do with it. And if you blame the person for borrowing beyond the person's ability to pay back the loan, why do we engage in the same practices on a country level? How's our national debt doing? Getting smaller? Nope, always on the rise.

Get it yet?

Governments are partly to blame for the mess the banks got into and many of the bailouts were to protect counter parties to derivative contracts. Without the bail outs the system could have collapsed leading to the next great depression.

The next great depression already started. The bail outs delayed the inevitable.

It is easy to second guess those decisions now because we can never know what would have happened without the bailouts.

Many knew what would happen. The bad banks would fail, leaving the banks who are doing the right things to prosper. Let a true free market evolve.

It was a calculated risk that governments had to take. That said, governments should have done a better job of making sure the managers of the bad banks paid a personal price for their bad managment.

We had banks getting bailed out, now we have countries getting bailed out. And more bailouts will happen unless we let the bad ones run their course. We also have Greece and Italy now controlled by the same bankers that got them into trouble in the first place. It's designed so the country never gets out of debt.

Edited November 18, 2011 by GostHacked

dre · November 18, 2011

Dre, here is a simple example.

Bank A has $10000 in deposits and is paying 3% on them.

Person X decides they want to buy a house from Person Y for $100,000.

Person X negotiates a $100,000 loan from Bank A at 6% interest and uses the money to pay Y.

Person Y deposits the $100,000 in Bank A at 3%.

Bank A now has $110,000 in deposits that are paying 3% interest.

You can repeat this scenario as many times with multiple banks as you like but

you will always end up with the same answer:

Bank A ends up paying interest on every cent it creates for loans.

I challenge you to try to come up with a scenario where the bank does not

end up paying interest on the money its creates.

Remember that the money must go somewhere. It never simply dissappears.

There is no real interest cost though, because for every dollar that can be potentially deposited at 3% the bank is already collecting interest at 6%. We know that because 95% of M3 is checkbook money.

Thats like saying if you give me 10 dollars and I give you 5 dollars back, that the transaction cost me $5.

http://www.yesmagazine.org/issues/the-new-economy/how-banks-make-money

If you do this operation 50 times, that $100 turns into $995.25—$885.25 in loans, and your original $100.

The net result of this scenario is that the commercial bank has expanded the money supply by 885 dollars... all of which they are charging interest on at rate that is the difference between what they pay on deposits and what they charge on loans. No matter how you look at it they are collecting interest on monetary expansion.

Why do you insist on looking at only one side of the equation. Every loan means someone else gets an asset.

Im not looking at one side of the equation, im explaining why its out of balance and requires roughly 3 percent growth for the system to stay solvent because less money enters the money supply than is required to pay off existing debt. Every time a loan gets made the system becomes dependant on an ever increasing number of future borrowers. The more the monetary base grows the more is owed in interest, and the more the monetary base has to grow next year in order for there to be enough dollars in circulation that producers of goods and services can compete for to maintain existing debt.

And thats why debt, inflation, government spending and monetary base all took off at the same time in a whole pile of different countries a couple of years after the gold window was closed.

http://practical-investing.com/img/Inflation_CPI_1774-2008.gif

http://practical-investing.com/img/Inflation_power_loss_log_1774-2008.gif

During that entire time the banking industry has been successfully lobbying to have reserve rates cut.

And every time a commercial bank makes a loan to you it expands the ammount of money in circulation and it reduces the purchasing power of all other dollars. If the money supply is not anchored to anything of real value (commodities, goods, services, anything) its a forgone conclusion that governments will continue to relax reserve rates because rapid monetary expansion (deb) lets them keep spending.

Edited November 18, 2011 by dre

TimG · November 18, 2011

There is no real interest cost though, because for every dollar that can be potentially deposited at 3% the bank is already collecting interest at 6%. We know that because 95% of M3 is checkbook money.

Nonsense. The $100,000 created in my example is a real asset owned by Person Y. If Person X defaults on the loan the bank still owes Person Y the money and the interest. That is a real cost. This means loaning money is a calculated risk for the bank.

Thats like saying if you give me 10 dollars and I give you 5 dollars back, that the transaction cost me $5.

When a bank creates a loan it creates a 'asset' (the loan that earns interest) and a liability (a deposit that requires interest to be paid). It is fundementally different from a simple exchange of money.

The net result of this scenario is that the commercial bank has expanded the money supply by 885 dollars... all of which they are charging interest on at rate that is the difference between what they pay on deposits and what they charge on loans.

Exactly. I don't see the problem.

Im not looking at one side of the equation, im explaining why its out of balance and requires roughly 3 percent growth for the system to stay solvent because less money enters the money supply than is required to pay off existing debt.

What is your point? Have ever done the math on any pension fund? Without continual growth there will be no money to pay the liabilities.

And your alternative is what? A rapid contraction of the economy because people and businesses have no access to credit?

Every time a loan gets made the system becomes dependant on an ever increasing number of future borrowers.

No it does not. All the banking system needs to sustain itself are people who can create more wealth with the capital than they pay in interest. Banks are the brokers between the savers and the spenders.

And every time a commercial bank makes a loan to you it expands the ammount of money in circulation and it reduces the purchasing power of all other dollars. If the money supply is not anchored to anything of real value (commodities, goods, services, anything) its a forgone conclusion that governments will continue to relax reserve rates because rapid monetary expansion (deb) lets them keep spending.

Inflation occurs because of rapid expansion of the money supply. This is a real risk and this is why all modern economies now have independent central banks that focus entirely on inflation. This system is much more effective than fixing the currency to an arbitrary commodity.

The problems in 2008 and now in Europe are caused by poor banking regulation and irresponsible governments. By trying to shift the blame to the 'money system' you are letting the real guilty parties off the hook.

dre · November 18, 2011

Fractional banking, or whatever it's called, has been around for longer than that - and it's a question of degree.

Fractional banking itself has been around but the currency has been anchored to real value. The fractional reserve multiplier was still in effect, but it was constrained. Now even the money banks are forced to keep on deposit with the central bank is simply other checkbook money created by the commercial banks by making other loans.

It seems to me that if the video is true then the money supply would be quickly restricted if we banned fractional banking.

That depends. Theres two ways to expand the money supply. Theres checkbook money (BCM), and theres GCM (created when the money authority lends to banks, or by purchasing securities). You could grow the money supply with GCM to avoid deflation.Or as I mentioned before the government could put new money into the economy by spending GCM into existance on building a road, or a nuclear plant, or providing healthcare.

And while Iv pointed out that the gold standard is the reason that the FR system was able to stay for such a long time prior to 1971, Im not actually a fan of basing currency on a commodity because that causes the opposite problem we have now... deflation. With todays technology we should be able to pretty much take people out of the equation and make a light weight system that determines how much the money supply needs to grow to keep pace with economic growth.

Edited November 18, 2011 by dre

dre · November 18, 2011

Nonsense. The $100,000 created in my example is a real asset owned by Person Y. If Person X defaults on the loan the bank still owes Person Y the money and the interest. That is a real cost. This means loaning money is a calculated risk for the bank.

When a bank creates a loan it creates a 'asset' (the loan that earns interest) and a liability (a deposit that requires interest to be paid). It is fundementally different from a simple exchange of money.

Exactly. I don't see the problem.

What is your point? Have ever done the math on any pension fund? Without continual growth there will be no money to pay the liabilities.

And your alternative is what? A rapid contraction of the economy because people and businesses have no access to credit?

No it does not. All the banking system needs to sustain itself are people who can create more wealth with the capital than they pay in interest. Banks are the brokers between the savers and the spenders.

Inflation occurs because of rapid expansion of the money supply. This is a real risk and this is why all modern economies now have independent central banks that focus entirely on inflation. This system is much more effective than fixing the currency to an arbitrary commodity.

The problems in 2008 and now in Europe are caused by poor banking regulation and irresponsible governments. By trying to shift the blame to the 'money system' you are letting the real guilty parties off the hook.

Inflation occurs because of rapid expansion of the money supply. This is a real risk and this is why all modern economies now have independent central banks that focus entirely on inflation. This system is much more effective than fixing the currency to an arbitrary commodity.

No inflation happens ANY time the monetary based grows faster than the economy. And based on the data on inflation, debt, M3 quantity, there was relative stability prior to Fiat FR, and immediate after we got instability.

The problems in 2008 and now in Europe are caused by poor banking regulation and irresponsible governments. By trying to shift the blame to the 'money system' you are letting the real guilty parties off the hook.

No these problems are caused by the ease with which governments can fund themselves with monetary expansion. Governments responded to the new system by doing exactly what you would have expected to do, and exactly what they will continue to do.

All the banking system needs to sustain itself are people who can create more wealth with the capital than they pay in interest.

That only works if theres perpetual monetary expansion, for the simple reason Iv already outlined (as have many others, including the fed system itself). Those people can only potentially earn dollars that exist in the money supply. And the ammount of oustanding debt exceeds the ammount of dollars available to be earned at any one time.