Split Thread Fractional reserve credit vs. derivatives

[NewtonTrino]

Ok my version of a 2 bank scenario. Francesca, feel free to point it out if I get it wrong.

First bank gets $100. Loans out $80.

Person takes $80 deposits it in another bank. Thank bank then loans out $64.

Person take the $64 back to original bank and deposits. Bank then loans out $51.20

Around and around we go between both banks with a small amount being loaned out each time until there isn't enough left to loan.

Where and how is this creating new money... still not seeing it. Your move Mike.

 

[NewtonTrino]

If a bank has 1000 gold pieces in its vaults, the maximum amount of outstanding loans the bank could ever have at any given time in a 100% reserve system is a dollar amount equal to 1000 gold pieces.

If the bank issues new loans, bringing the total outstanding loan amount held by the bank, in excess of the actual 1000 gold pieces held by the bank, they are creating new money out of nothing.

If a bank has 1000 gold pieces and has issued outstanding loans that sum to a total greater than 1000 gold pieces, it has engaged in counterfeiting (fractional reserve banking).

There are NO GOLD PIECES involved in fractional reserve banking. None, zippo, zero. So please explain the CURRENT SYSTEM we have and how it creates new money at the bank level. Sure the fed issues new money but Chase or any other bank doesn't. If you're claiming they do then please show the math. Otherwise go away.

 

[NewtonTrino]

Mike,

It's REALLY REALLY obvious at this point that you don't have the slightest clue how fractional reserve banking works. Please go do some homework before blabbing about stuff you are clueless about.

 

[ngc6205]

Please explain this with an example in your own words. I'm not arguing with or watching youtube videos, I'm discussing something on a forum.

You haven't done anything other than present wrong information. So please, give me a 2 bank example where new money gets created. And please, be specific.

Newton,

The video linked to by Mike actually does a decent job of explaining fractional reserve banking and isn't a typical conspiracy theory video that is commonly found on YouTube. Mike just thinks fractional reserve banking is evil even though it has existed since people got tired of carrying around gold coins and began depositing gold at a blacksmith in exchange for notes from the blacksmith.

 

[ngc6205]

If a bank has 1000 gold pieces in its vaults, the maximum amount of outstanding loans the bank could ever have at any given time in a 100% reserve system is a dollar amount equal to 1000 gold pieces.

Where did the bank get the 1,000 gold pieces? If any of it came from depositors, then what you describe above is NOT full-reserve banking.

 

[NewtonTrino]

Where did the bank get the 1,000 gold pieces? If any of it came from depositors, then what you describe above is NOT full-reserve banking.

Exactly. Which is why I asked earlier about what depositors are giving to the bank.

 

[Francesca R]

The Khan academy video is fine. But it disagrees with what michaelsuede posted. From above, it is now apparent that this member doesn't know what full reserve banking is either.

 

[Francesca R]

Ok my version of a 2 bank scenario. Francesca, feel free to point it out if I get it wrong.

Normally some transaction is put in the middle of each loan and subsequent deposit, EG Sue borrows $80 and buys a widget from Bob, who puts his proceeds into another bank etc. . . But the bank transactions are as you describe yes.

 

[michaelsuede]

There are NO GOLD PIECES involved in fractional reserve banking. None, zippo, zero. So please explain the CURRENT SYSTEM we have and how it creates new money at the bank level. Sure the fed issues new money but Chase or any other bank doesn't. If you're claiming they do then please show the math. Otherwise go away.

Screaming and stamping your feet does not make the math go away.

The video I posted uses graphics to explain fractional reserve banking so you don't get lost.

Refusing to watch the video and demanding I explain it to you by typing is ridiculous, but I shall humor you since I have nothing better to do.


Bank A opens and gets 1000 dollars deposited by savers that acts as base reserves.

Bank A is a 10% reserve bank, meaning it can lend 90% of these reserves out.

Bank A proceeds to issue 900 dollars in loans, holding 100 dollars in reserve.

Bank A's loan recipients, who just borrowed that 900 dollars, then deposit the money they just borrowed from Bank A back into savings accounts with Bank A.

Bank A now has total outstanding loans of 900 dollars.
Bank A now has total deposits of 1900 dollars
Bank A now has total reserves of 900 dollars that it can issue new loans on since it held 100 dollars in reserve for the original 10% reserve requirement.

Bank A can now make a new loan for 90% of its base reserves. So Bank A issues another loan for 810 dollars while it holds 10% of the 900 in reserves (90 dollars).

That 810 dollars is then redeposited back into Bank A by the loan recipients.

Bank A now has total outstanding loans of 900 + 810 = 1710 dollars.
Bank A now has total deposits of 2710 dollars
Bank A now has total reserves of 810 dollars that it can issue new loans on.

Bank A has added 1710 dollars to the original money supply of 1000 dollars.

In a 100% reserve system, Bank A could have issued a maximum of 1000 dollars in loans and the money that was redeposited back into Bank A would not be counted as new reserves able to be lent upon.

In a central banking system, the Fed is responsible for manipulating the amount of base reserves that a bank can pyramid loans upon.

Clearly, the money supply is expanded, the dollar is depreciated, and the bank is inherently in a state of bankruptcy.

 

[michaelsuede]

The Khan academy video is fine. But it disagrees with what michaelsuede posted. From above, it is now apparent that this member doesn't know what full reserve banking is either.

It does not disagree with what I posted at all.

Go ahead and try and quote me and show where I am wrong.

 

[michaelsuede]

Newton,

The video linked to by Mike actually does a decent job of explaining fractional reserve banking and isn't a typical conspiracy theory video that is commonly found on YouTube. Mike just thinks fractional reserve banking is evil even though it has existed since people got tired of carrying around gold coins and began depositing gold at a blacksmith in exchange for notes from the blacksmith.

Mike thinks counterfeiting money is wrong, apparently you don't.

Expanding the money supply through loan issuance is counterfeiting. There is no other way to put it. It is diluting the money supply and destroying the purchasing power of the people who hold dollars.

 

[ngc6205]

In a 100% reserve system, Bank A could have issued a maximum of 1000 dollars in loans and the money that was redeposited back into Bank A would not be counted as new reserves able to be lent upon.

That is NOT a 100% reserve system. In a 100% reserve system, a bank cannot loan any of the depositor's funds at all. It can only loan money that belongs to the bank. IOW, it can only loan out the bank's equity.

 

[ngc6205]

Mike thinks counterfeiting money is wrong, apparently you don't.

Expanding the money supply through loan issuance is counterfeiting. There is no other way to put it. It is diluting the money supply and destroying the purchasing power of the people who hold dollars.

I also think counterfeiting is wrong. However, fractional reserve banking is NOT counterfeiting regardless of what you believe.

 

[michaelsuede]

That is NOT a 100% reserve system. In a 100% reserve system, a bank cannot loan any of the depositor's funds at all. It can only loan money that belongs to the bank. IOW, it can only loan out the bank's equity.

This is wrong.

In a 100% reserve system, the bank can only lend an amount equal to its base reserves.

In a gold standard, base reserves are CLEARLY EVIDENT because they can count up gold coins easily. It's much more murky when dealing with fiat money that has base reserves coordinated by a central bank.

The gold on deposit with the bank in TIME DEPOSIT SAVINGS ACCOUNTS is the only money that can be counted as base reserves in a gold standard.

So all the gold held at the bank that is not on a time deposit can not be counted as loanable monies.

This is why savings accounts bear interest. Back in the day, when you put real money into a savings account, you could not get access to it immediately precisely because the bank first had to clear an outstanding loan in order to free up the gold from its balance sheet.

 

[michaelsuede]

I also think counterfeiting is wrong. However, fractional reserve banking is NOT counterfeiting regardless of what you believe.

I just plainly showed you that it is.

Stamping your feet and saying it is not, when it plainly is, is ridiculous.

 

[ngc6205]

I just plainly showed you that it is.

Stamping your feet and saying it is not, when it plainly is, is ridiculous.

Stamping your feet and saying it is, when it plainly is not, is ridiculous.

 

[michaelsuede]

Stamping your feet and saying it is, when it plainly is not, is ridiculous.

Is the money supply expanded or is it not?

 

[ngc6205]

This is wrong.

In a 100% reserve system, the bank can only lend an amount equal to its base reserves.

In a gold standard, base reserves are CLEARLY EVIDENT because they can count up gold coins easily. It's much more murky when dealing with fiat money that has base reserves coordinated by a central bank.

The gold on deposit with the bank in TIME DEPOSIT SAVINGS ACCOUNTS is the only money that can be counted as base reserves in a gold standard.

So all the gold held at the bank that is not on a time deposit can not be counted as loanable monies.

This is why savings accounts bear interest. Back in the day, when you put real money into a savings account, you could not get access to it immediately precisely because the bank first had to clear an outstanding loan in order to free up the gold from its balance sheet.

Fine, I wasn't clear and I was responding to a simplified statement that you made which wasn't clear either.

In a 100% reserve system, Bank A could have issued a maximum of 1000 dollars in loans and the money that was redeposited back into Bank A would not be counted as new reserves able to be lent upon.

You said nothing about TIME DEPOSITS. What you described in that sentence is NOT full reserve banking. In fractional reserve banking, a 50% reserve ratio would accomplish what you described in that sentence.

Regardless, according to you a bank would still be a constant state of insolvency even if it was utilizing full reserve banking since TIME DEPOSITS are still liabilities of the bank and the money loaned out from those funds would still be owed to the depositor even if the loan went into default. The bank cannot use its reserves to pay back the time deposit because then it wouldn't have enough reserves to cover its entire demand deposit base. IOW, a violation of full reserve banking. In that regard, there is little difference between full reserve and fractional reserve banking.

 

[ngc6205]

Is the money supply expanded or is it not?

Counterfeiting has a definition. Expansion of the money supply through banking does not fit it.

 

[michaelsuede]

Fine, I wasn't clear and I was responding to a simplified statement that you made which wasn't clear either.


You said nothing about TIME DEPOSITS. What you described in that sentence is NOT full reserve banking. In fractional reserve banking, a 50% reserve ratio would accomplish what you described in that sentence.

Regardless, according to you a bank would still be a constant state of insolvency even if it was utilizing full reserve banking since TIME DEPOSITS are still liabilities of the bank and the money loaned out from those funds would still be owed to the depositor even if the loan went into default. The bank cannot use its reserves to pay back the time deposit because then it wouldn't have enough reserves to cover its entire demand deposit base. IOW, a violation of full reserve banking. In that regard, there is little difference between full reserve and fractional reserve banking.

A 50% reserve ratio on our pyramid scheme would accomplish the same task as a 100% reserve gold standard.

A 50% reserve gold standard means the bank could issue 2000 in loans on 1000 in gold.

A 10% reserve gold standard means the bank could issue 10,000 in loans on 1000 in gold.