How the banks create money

[drkitten]

How deep do you need to go?

Deeper than you, apparently.

We are suppose to be a republic, a republic is government according to laws posted in a constitution.

Nope. A republic is simply a government without a monarch.

The constitution says that congress have the power to coin money and determine its value.

Yes.

Then you turn around and tell me that the Fed is independent?

Yes. Congress has delegated that power to the Fed.

But independece does not mean delagation ...it clearly means abdication.

Nope. Delegation does not require active supervision, and in fact, active supervision may reduce the effectiveness of delegation if the person supervised is in a better position than the supervisor.

[ If a franchise owner of Taco Bell hires a manager. This is delegation. The franchise owner goes and plays golf all day long, but looking at the books at the end of the month he can come in and question the manager how he sees fit.

And if he chooses not to look at the books, or if the manager demands as a condition of his contract that the franchise owner NOT look at the books, it's still delegation.

The owner doesn't have to sign the contract, of course. But if he does -- possibly because the manager is Just That Good -- then everything's just fine.

 

[tensordyne]

delegate



Well drkitten, you should probably put your money where your mouth is and "delegate" your checkbook to someone without checking up on them because that should just be fine after all.

 

[Sceptic-PK]

Well drkitten, you should probably put your money where your mouth is and "delegate" your checkbook to someone without checking up on them because that should just be fine after all.

The Fed is audited regularly by the GAO. What's your point?

 

[tensordyne]

audit everything... everything...

From the wiki entry on the Fed in the section about accountability.

"""The Federal Reserve System and the individual banks undergo regular audits by the GAO and an outside auditor. GAO audits are limited and do not cover "most of the Fed’s monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee" ...[nor may the GAO audit] "dealings with foreign governments and other central banks.""""

So, there you go, audit that stuff too. Audit all of it. In front of congress Bernanke was asked point-blank if he would tell the congress to whom the Fed made some recent huge loans to, his answer, NO. Sounds great to me.

 

[Sceptic-PK]

You obviously don't understand how central banks are meant to operate.

 

[webb5]

This guy says it all

“First off there are no experts in economics. Economic experts have totally failed us for too long. We need to get back down to basics and think about the root of the flaws in the present system and what we can possibly replace them with. I do not put myself forward as an expert or that my opinions are correct but I will put forward what I see as the basic flaws in the system and suggest something that might work instead of what we have now.

1. Flaw 1 is that all money is created as debt and the debt money is temporary hence there is no permanent money supply in any country (except a small % in notes and coin, less than 3% usually)
2. Flaw 2 is that banks are permitted to create the money supply in economies and effectively control and own the money supply therein. This they charge interest charges on for money that is effectively counterfeit created out of thin air by simply typing the amount into there computer systems. Gosh I wish I had a computer that could magic money like that.
3. Since there is insufficient money in the system to pay the principal and the interest due to the fact that only the principal is created into the money supply there is a constant pressure cooker effect in every economy to get growth.
4. The enormous pressures of insufficient money in the system is responsible for nearly all the ugly news of bad things in our world, from wars to environmental decimation of the planet it is all down to the pressure created by the financial system itself.”

As I have said before Social Credit is the answer. A new reform in banking is badly needed. An independent banking commission in Britain is currently looking at submissions in this area. A very promising one is from a group called ‘Positive Money’ see link below
http://www.positivemoney.org.uk/
The fist step is to remove debt and make fractional reserve banking illegal. The proposal by Positive Money does this. The second step is to activate social credit. Positive Money is the vehicle to bring in the permanent money supply. Social credit is the vehicle to distribute real wealth of the nation to its people via dividends and by tax reductions.

 

[Sceptic-PK]

“First off there are no experts in economics.

Not too many in this thread, that's for sure.

 

[drkitten]

This guy says it all

Yep. If there's anything wrong that can be said, it looks like he said it.

And you believed it all, too, which is even more pathetic.

 

[se7ensnakes]

expansion contraction, expansion contraction, expansion contraction,

Oh that reminds me I need to get another copy of the “Secrets Of the Federal Reserve”. The one I have the covers are worn out. I want to get a hard copy because this is a permanent book in my library. However, without question the books “The Creature From Jekyll Island” by Edward Griffin, “Primer on Money” by Wright Patman, and “The Case Against the Fed” by Rothbard, should be required reading for ALL high school students. You simply cannot let these students go into society without knowing this hard facts about our monetary system. Omitting this from the curriculum is the cruelest form of censorship. Without this course we are going to have a population that wont even know that their money is a Federal Reserve Note. Can you imagine?


Some Half a Billion Dollars went abroad to various central banks, after Bernanke had meetings with European central banks. You mean to tell me that you are going to sit there and lie to the people in this forum and tell them that the European meeting minutes are going to be publish for congress to read? You are a naughty, naughty liar, SkepticPK.


Lets get this straight. Billions of people get up everyday and perform what is required to make money. So we can safely say that money is a great motivator. The Fed gets the money for nearly nothing. Our representatives needs lots of money to get elected. Our representatives need lots of money to be heard, but the Fed, and the Private Banks are managers of this money. So if a representative like Rand Paul or lets say Alan Grayson spoke ill of the Fed, or of private banks, do you think that these institutions just sit idle by not taking into account who might affect what they are doing? If Rand Paul says anything wrong about the Fed you can be sure that there are going to be suitcases of money to his adversaries.


Look at some Building Contractors. Some payoff inspectors when something goes awry with an inspection. Look at the more sophisticated drug cartels. They payoff police, judges. Now take the money trust crime families. Do you think that they are not into politics? They are into everything, newspapers, television, colleges, universities, and everything imaginable that was made to protect the public. Believing otherwise is pure fantasy.


That being said, delegation involves a base of superior-subordinate relationship. In such a relationship the superior keeps control of the most important aspect of the relationship, namely money. Thats how work gets done. Thats how business works. That is why billions of people on the planet get up every morning and do things they don't want to do. Independence means that you no longer control the money and the accountability factor is lessened because the suppose subordinate is well trenched in. In any business having control of the money is nearly everything. Having control of the money and the judiciary you have everything. You truly have independence. There is no longer delegation, it is abdication.


Perhaps congress likes it this way. They don't have to work hard. They don't need to purchase supercomputers to note market actions. They could tackle less intense subjects like making sure that people don't get too hassle by collectors, making sure that there is enough financial aid for education, etc.


So, we should obviously ban credit cards, EFT payments and sharemarket transactions, right?
Do credit cards, eft payments and share market transactions create inflation? If they do ...do you think that you desire for these products should interfere with my paycheck? If my paycheck buys less is the same thing as if my paycheck is less. So why should your actions devalue my savings? Why should we have a wild fluctuations in the economy due to money expansion and contractions as a result of inflationary products?


“You're conflating a number of irrelevant issues here. People go bankrupt and have their houses foreclosed on because they are unable to make their repayments.”
Hmm does this sound like yet another tulip mania? Easy money follows by a money contraction. Like the great depression. The collapse in the banking sector precipitated a parallel contraction in the money supply. A severe contraction in the money supply, whether as a result of a policy or as a result of bank failures, then leads to a severe contraction in economic activity. People that borrow money for a house are thinking stability. But in a fractional reserve system you cannot expect that. We must end fractional reserve banking.


Maybe theorist know better. You throw a pile of ◊◊◊◊ on the ground and a bunch of flies surface. You institute a type of money and immediately the Bernie Madoff's of the world convene. The need for money is insatiable but some of us think of ways to circumvent the working aspect of money acquisition, even if to the extent of breaking laws.

 

[drkitten]

That being said, delegation involves a base of superior-subordinate relationship. In such a relationship the superior keeps control of the most important aspect of the relationship, namely money.

Never bought a mutual fund, have you?

When I buy a mutual fund, I am delegating control of my money to the fund manager. I don't get to approve or disapprove his individual decisions about what to buy and sell. I delegate this control to him because he has the time and resources to make informed decisions about investments that I don't have. I might be able to do better making my own investment decisions (although that's not clear; most stock-pickers do worse than the professionals, in part due to higher trading costs), but I will almost certainly be spending more time that way and less time doing what I want to do, such as improving my professional standing and making money that way.

I do, of course, get periodic reports from the fund manager about what he has done, and I can pull (what's left of) my money away from him at any time, but that's far from "control." The day to day control of my money is left in his hands.

In any business having control of the money is nearly everything. Having control of the money and the judiciary you have everything. You truly have independence. There is no longer delegation, it is abdication.

Do you really think that when you repeat a stupid and wrong statement, it will do anything other than make you look more stupid and more wrong?

 

[se7ensnakes]

money market accounts

You can also approach the manager and ask him any question you think necessary, without a lawyer intervening. This is not so in the FED-CONGRESS relationship. You dont have all of your resources in one basket, so if the money market account goes bad you still have options.
Do I need to tell you how many times our economy have gone belly up? Not to mention th devaluation of money. Nothing is done and nothing apparently can be done because the FED is well trenched in.
It is very clear that the public's money need to be manage publicly. Everyone needs to know what is going on and when a representative fails to maintain stability he is booted out. It is insane to think that somehow you are going to find Angels that are going to independently watch your well being. That is simply not human nature.

But really what do you know if human nature? You apparently dont believe that conspiracies are possible. That somehow secrets cannot be kept. You probably believe that the CIA never assasinated anyone. You also probably believe that everytime a group of criminals get together, with intentions of fleecing the public, those intention are posted in the local paper. How can a logical person debate with such a mindset?

 

[se7ensnakes]

Economic Studies in the USA

Webb
In the USA Monetary studies are never complete. You get bits and pieces of concepts and events that appear unrelated. There is no adequate explanation of why something is done. This reminds me of a quote by a well know economist, Kenneth Galbraith:
[FONT=&quot]“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” Money: Whence it came, where it went - 1975, p15[/FONT]

Now note how many times the people in this forum state that: "You dont know anything about central banks". They feel they can hide in complexity. When logic and common sense fails...the resort to: "it is too complicated for you."

 

[tensordyne]

lag in the machine

Explain to me how people pay off their loans then. How did I pay off my car loan? How am I paying off my house loans? How did my parents, my grandparents?

I feel like I am answering to a creationist how it is possible that humans could come from monkeys (really should be apes of course as humans are African Apes so far as I understand it) through evolution or something.

A simple question sometimes requires a complex answer, but to simplify things greatly, the money supply increases each year, year in and year out. This is just a historical fact anyone can look up. Aside from this though, the reason you can pay off your loans, besides the fact that you probably have a job or other source of income, is that there is a lag between the time one set of loans has to be repaid and another set of loans has to get created to cover the non-zerosum interest debt requirement of the previous set of loans. This lag is almost continuous in nature due to the huge number of loans in existence. That is not a conspiracy theory or happy magical unicorns or homeopathic ointments, none of which I believe in (well, except that maybe there might be a conspiracy associated with 9/11 but at the very least I do not see the harm in asking for a new investigation when as I have heard most of the original commisioners on the 9/11 commision said it was a cover job), it is just the cold hard facts of how a debt-based economy operates, so far as I have been able to determine.

I am always open to debate though on any issue. I have to ask though drkitten, and thanks for asking such a penetrating and simple question Sceptic-PK, have either of you read much of anything by people who have criticized how the Fed and Fractional Reserve Banking operate? I mean, anything? I have tried to read as much as I can of people on all sides of the fence about these issues and would happily take any recomendations for reading you might provide. It just seems to me that some of the most vocal people on these forums seem to not have read a damn thing either way. lomiller for instance talks with such conviction, but I have as yet not seen one thing he (assuming he is a he) uses as evidence except his own inate and seemingly infallible knowledge on matters economic. That is kind of an odd stance to take in a skeptic forum I would presume.

In reality though I would most like to debate with se7eneyes. Looking at the things written so far by se7eneyes it looks like a case of serious Austrian Economics Cult following going on there. Seriously, I can say with all honesty the only banking system I have seen myself that I liked was the one used in association with Colonial Scrip. It was zero-sum in that the amount of money created was always the same as the amount eventually destroyed, plus it was dynamic so that the money supply would be contracted or expanded based solely on how many loans were getting created. Even better is the fact that they had no taxes because the interest on the loan was spent into the economy. A nice circular system. Those are the two critical features (expansion and contraction of the money supply based on free market loans as well as a zero-sum on principal and interest owed) I would contend any workable and honest monetary system must have. That gets rid of gold as money as well as many of these "social good" money systems that ask for a fixed fiat money supply.

So, there you have it Sceptic-PK, unlike most people on this forum I think for myself when I can.

 

[drkitten]

Now note how many times the people in this forum state that: "You dont know anything about central banks".

You're misinterpreting. The people in this forum are stating to you that "you don't know anything about central banks."

They feel they can hide in complexity.

Occam's razor suggests that a simpler explanation is: the reason people tell you that you don't know anything about central banks is that you don't know anything about central banks.

No one's saying anything about it being too complicated; it's simply that you don't understand it.

 

[drkitten]

I have to ask though drkitten, and thanks for asking such a penetrating and simple question Sceptic-PK, have either of you read much of anything by people who have criticized how the Fed and Fractional Reserve Banking operate?

Yes. Extensively. Just because I read something doesn't mean I find it compelling.

It doesn't matter how many times I read economic gibberish; it remains wrong.

In reality though I would most like to debate with se7eneyes.

I'm sure you would. He's one of the few people on this forum that's actually more wrong than you are.

 

[tensordyne]

yet more oppinions not backed by evidence

Yes. Extensively. Just because I read something doesn't mean I find it compelling.

It doesn't matter how many times I read economic gibberish; it remains wrong.



I'm sure you would. He's one of the few people on this forum that's actually more wrong than you are.

I am glad that you have at least read some things. Other then that, the rest is just oppinion yet again unsubstantiated by reasoning and evidence, par for the course I suppose.

While we are at it, I have evidence in the form of a quote from a Federal Reserve Publication showing that when banks make loans they create new money from nothing. What evidence do you have to show otherwise? If you have none, as is ussually the case around here, then I suggest keeping your oppinions on possible factual matters to yourself. Just a thought.

 

[drkitten]

While we are at it, I have evidence in the form of a quote from a Federal Reserve Publication showing that when banks make loans they create new money from nothing.

No, you don't. What you have is a quote explaining that loans are issued as credits. They're created by multiplication of existing reserves, a quote that you have been corrected upon several times. Quote-mining doesn't work for creationists and it doesn't work for economic nutbars like you. Here's a hint: if your argument hinges on an interpretation of a single quote, you're almost certainly wrong.

The process has been explained to you several times; the bank re-lends out the money deposited with it. However, that explanation is ambiguous; "money" can be used either to refer to actual currency, or to banking credits, an ambiguity that extends to other phrases like "money supply," which is more precisely described by terms like M1 and M2.

The quotation of which you are so fond simply resolves this ambiguity; the bank doesn't lend out its currency supply and instead creates new credits from the existing deposits.

For a more detailed description of this process, see this document by the University of Nebraska. It's written in very simple terms (it's designed to be a high school module) precisely because the subject isn't that complex:

The process whereby banks make loans equal to the amount of their excess reserves and create new checkbook money is known as multiple deposit creation. Each time a bank receives a deposit, it sets aside some of it to meet reserve requirements and may lend an amount equal to the remaining excess reserves

The bank creates new money by re-lending its excess reserves. Your quote simply makes it clear that this money is created as account entries instead of cash.

And your misinterpretation of the quote redefines 'drivel.'

 

[Sceptic-PK]

I am always open to debate though on any issue. I have to ask though drkitten, and thanks for asking such a penetrating and simple question Sceptic-PK, have either of you read much of anything by people who have criticized how the Fed and Fractional Reserve Banking operate? I mean, anything?

Yes, and it's all complete nonsense. But as someone who entertains 911 conspiracy BS, I am not surprised you can't tell the difference between fact and fiction. That's not to say the Fed is perfect of course, that would be like saying the Dept of Defence or Dept of Labor are perfect, which is of course rather silly. But central banks' mandates of stable prices, full employment & a stable currency are not part of elaborate nefarious conspiracies. Central banks are there for the government to manage the economy as best it can.

So, there you have it Sceptic-PK, unlike most people on this forum I think for myself when I can.

There's nothing wrong with thinking for yourself as long as you have some capacity to make reasonable inferences from the information you have available. So far you have not indicated that you can.

 

[tensordyne]

The document and other data

You don't need to believe in conspiracy theories to realize that there are better ways than fractional reserve banking. As a matter of fact, it doesn't even help.

Could not agree more. Simply understanding the process of FRB and how unballanced it is mathematically, as well as morally, is certainly enough to make one think it was designed by a person who does not understand the importance of the minus sign. If that is not enough, then recent events with the housing bubble and so on should serve as further ample evidence for all except the most thoroughly brainwashed. Oh well, a lot of people believe in a sky daddy, drkitten believes in an invisible hand.

Speaking of which, I took my time and went over the document provided by drkitten. The math was the same as how I thought FRB worked. So the question occured to me, why is drkitten complaining about my use of the phrase "creating money from nothing"?

It occured to me after some time that maybe drkitten does not know what creating something from nothing means. If you create something from something else, then at least part of that previous thing is subtracted from. In physics, we have conservation of energy, which is a very apposite example of something coming from something else because for that form of conservation there is equal exchange occuring. In terms of a single variable the formula is x + y = (x - a) + (y + a). If y = 0, then x = (x - a) + a and we would say a is created from x.

Since FRB can be thought of in algorithmic terms, lets look at what creating something from nothing means algorithmically. It is possible to just assign a variable a new value or add to it if we wish, this is what created from nothing means in terms of FRB algorithmically. So even in the document you gave out drkitten, the checkbook money (which don't try and confuse the issue about whether it is real money or not, because it is), is created from nothing. There is more checkbook money, or simply money, created in each stage of the multiple expansion process. New money is being created from nothing because there is not a corresponding loss of checkbook money from each of the banks giving out the "loans", as the document makes pretty clear.

The first creation from nothing is $20,000 from the Fed. Let's let that one slide and just say it is part of the process. Well, then $18,000 is created from nothing. Then $16,200, and so on. Now, you may say that the money is created from the fact that the bank has the reserves to create it, but that is a far stretch of the phrase and concept "something from something else". Maybe you are saying it is created from the promisorry note, but that promissory note is not cash in the same way that other checkbook money is. Maybe drkitten you chafe under the pressure of using English in a commonsense way. That seems to be the most likely case.

In the end, it is just semantics, or maybe not. If one has the idea of something from something else subverted, then 2 + 2 can equal 5 and then who knows what other kinds of insane ideas may be lurking under such a deranged mindset? Oh yeah, lomiller, read this document, it shows that you are wrong about the idea of FRB banks lending out money from what they have already, they do not.

That said, I noticed the document did not explain what happens when each of the loans is being repayed, it only explains the fractional reserve multiple expansion and contraction processes. Too bad, that would have been nice to read. Maybe when you work out the resulting math of that part drkitten you will understand why FRB is a Ponzi scheme, but I doubt it. The religion of Neoclassical Economics has you in its spell just as much as Austrian Economics has se7eneyes in its spell. psionl0 and s7eneyes understand the basic down to earth implications of FRB: slavery to one degree or another to the bankers.

So, good job in providing evidence of some kind drkitten. That makes you an infinitely better debater then most of the people on this forum. I especially enjoy the evidence too, as it is in agreement with what I have been saying all along. Bravo, good job! Keep up the good work of disproving your own assertions. I know it must take great courage.

 

[drkitten]

It occured to me after some time that maybe drkitten does not know what creating something from nothing means.

Or maybe you don't know what it means, which is more likely.

If you create something from something else, then at least part of that previous thing is subtracted from.

Really? So if I photocopy a document, then the original document is destroyed in part? Or are you suggesting that I'm creating the document "from nothing" and therefore it's a completely independent work that I could copyright separately.

The simple fact is that you don't need to "subtract" anything, especially if what you're "creating" is information, as money largely is.