How the banks create money

[JoelKatz]

This is the very definition of fractional reserve banking because at the same time as banks lend out money that was deposited, they are telling their depositors that they can all get their money out any time they wish. This of course is not possible (although people can transfer their money to other peoples' bank accounts).

If that's what you're on about, it's trivially fixable. The bank can simply make clear in the account agreement (though I think everybody already knows this) that they are buying a 'best effort' service, not a 'guaranteed success' service. Prior to Federal deposit insurance, it was not unusual for banks to specifically state what their run policies and deposit shortage policies were.

Everyone who has put any thought into the issue understands that a bank that could never have a run or deposit shortage would have to charge you a fee instead of being able to pay you interest. Banks offer things like safety deposit boxes that work on this principle. If you want to argue that some people may not know or fully understand this, I'd argue that then every modern business is a scam because there are fundamental things about how it operates that many people don't know because they haven't bothered to.

 

[psionl0]

It's nice of you to credit webb5 with such an intelligent quote but I don't think he sees it that way.

It appears that you are saying that as long as it saves you about $5 a month in bank fees, you are perfectly happy with the current setup. (Having the taxpayer standing by ready to bail you out if the bank gets into trouble can be a great source of comfort).

 

[JoelKatz]

It's nice of you to credit webb5 with such an intelligent quote but I don't think he sees it that way.

Did you say that? My apology if I misattributed.

It appears that you are saying that as long as it saves you about $5 a month in bank fees, you are perfectly happy with the current setup. (Having the taxpayer standing by ready to bail you out if the bank gets into trouble can be a great source of comfort).

No, I'm not at all happy with the current set up. I think Federal insurance of bank deposits is idiotic and harmful. However, I am not willing to lie about it or distort the facts. I find the truth sufficient to make any case I need to make.

More damage is done to a position by false claims and bogus arguments made by people who agree with it than anything people who disagree with it can do.

 

[se7ensnakes]

Bank reserves do not belong to depositors. They are legally the bank to do as the bank wishes.

 

[psionl0]

Below is a link to a proposal to Banking Reform in Britain, it is the best one I have seen to date
http://www.positivemoney.org.uk/how-it-works/creating-new-money/

I have studied this site webb5 and you are right. It is brilliant! It is similar to what I have been proposing but instead of having separate lending institutions, the banks offer "investment accounts" where savers can put their money in and earn interest. However, money can not be withdrawn from these accounts immediately. Transaction accounts of course, operate at full reserve. They also propose that all interbank transfers go via a central reserve bank to ensure that money does not get created.

The only problem with this web site is that it doesn't mention "social credit"

 

[psionl0]

No, I'm not at all happy with the current set up. I think Federal insurance of bank deposits is idiotic and harmful.

Then why are you so in favour of fractional reserve banking? At best it makes the money supply unstable because it relies on borrowers being able to make all their repayments and, as we have seen, that is nowhere a certainty anymore.

Banking doesn't come for free. The cost has to be paid by someone. I don't see why this cost should be met by forcing customers to risk their savings on the viability of their bank and having taxpayers meet this cost by guaranteeing deposits is even worse because it encourages banks to throw caution to the wind when making loans.

It would be much more honest if the banks just charged for risk free bank accounts.

 

[psionl0]

Bank reserves do not belong to depositors. They are legally the bank to do as the bank wishes.

Poppycock! Banks don't own the money you put in your bank account. That is money that is held by the banks in trust on behalf of its depositors and the banks have a duty of care to manage that money wisely.

Just because the government lets banks operate under different rules to those applying to other trusts doesn't mean that the banks ought to be able to do what ever they wish.

 

[JoelKatz]

Then why are you so in favour of fractional reserve banking?

Because I understand that fully-informed people have the right to do whatever they want with their money, and this is what they want to do.

At best it makes the money supply unstable because it relies on borrowers being able to make all their repayments and, as we have seen, that is nowhere a certainty anymore.

So what? If I spend my money at Burger King, it makes me fat. If I spend my money on skiing, I might wind up in the hospital. These may be good reasons for me not to spend my money that way, but they're not anywhere close to the type of rationale it would take to prohibit or eliminate Burger King or skiing.

Banking doesn't come for free. The cost has to be paid by someone. I don't see why this cost should be met by forcing customers to risk their savings on the viability of their bank and having taxpayers meet this cost by guaranteeing deposits is even worse because it encourages banks to throw caution to the wind when making loans.

I agree with you about Federal deposit insurance for precisely the reason you state.

It would be much more honest if the banks just charged for risk free bank accounts.

No, it would be equally honest, since no deception, trickery, or fraud is involved in either scheme. And people prefer fractional reserve banking.

If we got rid of Federal deposit insurance, you would of course be free to open a 100% reserve bank. If people prefer to zero out their risk, they'll be your customers.

 

[psionl0]

Because I understand that fully-informed people have the right to do whatever they want with their money, and this is what they want to do.

Most people are not aware that there is an alternative and they don't have a choice.

So what? If I spend my money at Burger King, it makes me fat. If I spend my money on skiing, I might wind up in the hospital. These may be good reasons for me not to spend my money that way, but they're not anywhere close to the type of rationale it would take to prohibit or eliminate Burger King or skiing.

You're comparing the stability of the money supply with McDonalds???

Remember that I am not trying to ban banks from lending depositors' money - only saying that it should not be the default or only choice for depositors.

If we got rid of Federal deposit insurance, you would of course be free to open a 100% reserve bank. If people prefer to zero out their risk, they'll be your customers.

The major banks have become "too big to fail" so the taxpayer is on the hook for as long as fractional reserve banking rules.

 

[JoelKatz]

Remember that I am not trying to ban banks from lending depositors' money - only saying that it should not be the default or only choice for depositors.

If the only change you are advocating is eliminating Federal deposit insurance, then we are in agreement. What, beyond that, do you think is needed?

 

[Loss Leader]

Then why are you so in favour of fractional reserve banking? At best it makes the money supply unstable because it relies on borrowers being able to make all their repayments

At best it allows people to make large capital investments in infrastructure that lowers costs, increases efficiency and multiplies the value of an hour of labor to the benefit of the owners and the workers, but whatever.

 

[psionl0]

Remember that I am not trying to ban banks from lending depositors' money - only saying that it should not be the default or only choice for depositors.

If the only change you are advocating is eliminating Federal deposit insurance, then we are in agreement. What, beyond that, do you think is needed?

Did you even read anything I posted?

 

[psionl0]

At best it allows people to make large capital investments in infrastructure that lowers costs, increases efficiency and multiplies the value of an hour of labor to the benefit of the owners and the workers, but whatever.

You don't need fractional reserve banking in order for there to be money for people to borrow.

 

[Loss Leader]

You don't need fractional reserve banking in order for there to be money for people to borrow.

And you don't need a brain to post on the internet.

 

[drkitten]

You don't need fractional reserve banking in order for there to be money for people to borrow.

No, but you do need FRB in order for there to be large amounts of money for people to borrow.

FRB allows people to lend out money they might need in the near future. If I have an emergency cash reserve of $20,000, I would be unwilling to lend it out, precisely because it's my emergency reserve and my car might die or my roof might need replacing or I might lose my job. There's no way I'd be willing to lend it to you for the next five years (or thirty years).

And if you need $300,000 for a house, I can't lend that to you, because I don't have it.

But, if there are a hundred of us, and we each have $20,000 in our emergency reserve bank deposits, the bank can lend $300,000 to you for a house on a thirty-year mortgage. While some of us will undoubtedly need to tap our emergency reserve in the next thirty years, at any given time, most of us will simply leave it in the bank. if 90% of us don't need our money, then then bank will at any given instant have $1,800,000 of the $2,000,000 available to pay off day-to-day transactions, and still be able to lend out $300,000 and make money off it.

Because FRB increases the supply of money available for lending, it decreases the price of lending money, so borrowing is substantially cheaper.

 

[lomiller]

No, but you do need FRB in order for there to be large amounts of money for people to borrow.

FRB allows people to lend out money they might need in the near future. If I have an emergency cash reserve of $20,000, I would be unwilling to lend it out, precisely because it's my emergency reserve and my car might die or my roof might need replacing or I might lose my job. There's no way I'd be willing to lend it to you for the next five years (or thirty years).

And if you need $300,000 for a house, I can't lend that to you, because I don't have it.

But, if there are a hundred of us, and we each have $20,000 in our emergency reserve bank deposits, the bank can lend $300,000 to you for a house on a thirty-year mortgage. While some of us will undoubtedly need to tap our emergency reserve in the next thirty years, at any given time, most of us will simply leave it in the bank. if 90% of us don't need our money, then then bank will at any given instant have $1,800,000 of the $2,000,000 available to pay off day-to-day transactions, and still be able to lend out $300,000 and make money off it.

Because FRB increases the supply of money available for lending, it decreases the price of lending money, so borrowing is substantially cheaper.

I expect he will answer something along the lines of “but we can set up separate account types that will let people do this if they want”.

The problem is that we already did that and this type of account is now so ubiquities that it’s all we ever mean when we talk about bank accounts. Because it’s so popular it’s where all the attention goes as far as additional services etc. Ultimately, unless there were distinctly unattractive regulations tied to fractional reserve accounts, my guess is that his full reserve accounts would fall by the wayside, leaving us back where we are now. If this was blocked by regulation then lending costs would rise.

 

[drkitten]

I expect he will answer something along the lines of “but we can set up separate account types that will let people do this if they want”.

The problem is that we already did that and this type of account is now so ubiquities that it’s all we ever mean when we talk about bank accounts.

Yes, we have those now. They're called 'mattresses,' or if you want better security, 'safe deposit boxes.'

No one wants to keep all their money in a safe deposit box.

Why not?

 

[psionl0]

And you don't need a brain to post on the internet.

Obviously!

(Mind you, it would help if some of the people on this forum could read).

 

[psionl0]

No, but you do need FRB in order for there to be large amounts of money for people to borrow.

So where do these large sums of money come from if we are already at the limit as set by the reserve ratio?

 

[JoelKatz]

So where do these large sums of money come from if we are already at the limit as set by the reserve ratio?

Mortgages.