Split Thread Fractional reserve credit vs. derivatives

[Francesca R]

1. Banks don't pretend they have money

2. You don't need to have money to be owed money.

I recommend you stop wasting your Monday writing nonsense

 

[ladmo]

1. Banks don't pretend they have money

2. You don't need to have money to be owed money.

I recommend you stop wasting your Monday writing nonsense

1. explain yourself when you say banks don't pretend they have money.
2. this makes perfect sense... I am not sure why you put this in. Example: I am flat broke, I sell you my car, you only pay 50% of it... you owe me the remainder. Not really sure this has anything to do with Fractional Banking.
3.

 

[Suddenly]

The government is in debt to private banks that pretend that they have money.

Still does not give a mechanism. How does FRB cause the national debt? If the banks (who hold a portion of the debt) were operating on a non-FRB basis, or if the T-bills were paid for by Ron Paul, that is still debt.

 

[ideogram]

The government is in debt to private banks that pretend that they have money.

Peter Piper picked a peck of pickled peppers?

 

[ladmo]

Still does not give a mechanism. How does FRB cause the national debt? If the banks (who hold a portion of the debt) were operating on a non-FRB basis, or if the T-bills were paid for by Ron Paul, that is still debt.

The answer is more like a Boolean problem.

When The government backs the "too big to fail" banks, Freddie/Fannie along with some insurance companies... this is the single biggest problem of the FRB. If the government would not back the bad debt of the FBR... we would not have the FBR. If the FBR is replaced by 100% reserve with some sort of base Standard... the government would not be in debt.

Maybe one of the questions should be... who do you blame, the drug pusher or the user?

 

[Suddenly]

Maybe one of the questions should be... who do you blame, the drug pusher or the user?

Let me get this straight. The banks (and their FRB practices) are to blame for the national debt because they are willing to lend money to the government?

It isn't like without FRB there would be no credit. Not as much, and the economy would deflate like a cheap balloon, but the need to borrow wouldn't disappear.

 

[ladmo]

Let me get this straight. The banks (and their FRB practices) are to blame for the national debt because they are willing to lend money to the government?

It isn't like without FRB there would be no credit. Not as much, and the economy would deflate like a cheap balloon, but the need to borrow wouldn't disappear.

I agree.

Your comment on deflation is dead-on or at least I believe it to be true. I also understand the need to borrow, it happened before FBR, so there would be no reason to think it wouldn't happen in the future. The main difference is there would be no government backing of institutions and the marketplace takes over... but I don't think the FBR can survive without government support.

 

[lomiller]

Think a little further. The bank has added $10,000 to the money that is in circulation (reserves are not counted as money in circulation).

As per previous discussions you are conflating reserves with required reserves. Cash held to meet required reserves may not be in circulation, but other cash held by the bank is in circulation and is part of the money supply, and this is where the loan comes from because required reserves can't be touched.

The transaction you describe, therefor moves in circulation currency from the bank to the borrower and therefor does not change the money supply. I guess if you want to be nit picky you could argue the banks required reserves go up and since these aren't counted as part of the money supply the supply drops as a result of this transaction.

In no sense can new money created or destroyed because either way you are talking about existing currency that is either being tied up or released.

 

[lomiller]

Fractional reserve lending certainly creates money out of thin air. That is why higher monetary aggregates are larger than the monetary base. I don't know why this would be in dispute. It's purpose is to multiply money in circulation. (It does not create net wealth out of thin air)

Opponents seem to think that this is some kind of rationale for it being undesirable, or evil, or prone to depress interest rates. And that it should be illegal even though the same mechanism is what permits forward trading, insurance, derivatives and myriad other risk transfer markets.

Actually what they argue is that it allows banks to create money to issue loans which would certainly be illegal and improper if true. Banks, however, do not create money to lend, rather the act of lending creates new asserts (loans on which the bank can expect to collect) and corresponding liabilities (deposits the bank will have to make good on). Money is created because the latter behaves no different from currency in the economy and is therefor counted as part of the money supply.

In short, yes new money is created in the FRB process, no banks are not creating money from thin air or loaning out money they do not have.

 

[psionl0]

Cash held to meet required reserves may not be in circulation, but other cash held by the bank is in circulation and is part of the money supply, and this is where the loan comes from because required reserves can't be touched.

Where in MMM does it say that "excess" reserves are "in circulation" and "part of the money supply" (M1 money)?

Or is this just your own pet theory?

 

[psionl0]

How does FRB cause the national debt? If the banks (who hold a portion of the debt) were operating on a non-FRB basis, or if the T-bills were paid for by Ron Paul, that is still debt.

I explained why under FRB the government has to borrow to fund its deficits in post # 84.

Under a full reserve system, the government could print money to fund its deficits without causing any more inflation than it does now. However, under FRB, if the government printed its entire deficit, the banks would multiply this money through the FRB process and cause a huge amount of inflation.

So the choice for the government under FRB is either no budget deficits or borrow to fund its deficits.

The national debt wouldn't exist if banks didn't have a monopoly on money creation.

 

[psionl0]

But the owner almost always does. Standard terms for securities lending is that they are callable on demand. Check here. Lent securities are analagous to demand deposits. The only difference is that settlement periods vary--for equities and bonds they are 3 days but bonds can be same day. But whatever the settlement is, once called the borrower has to effectively cough up instantly.

You are still not describing naked short selling which is a form of fractional reserve stockbroking, is damaging and is illegal.

If a stock borrower gets a demand call then (if he doesn't have enough of the stock on hand) he has to buy the stock on the market to return to the lender. No phantom shares are created in this process so this is still akin to a full reserve system.

 

[psionl0]

Under full reserve banking the collapse of a major bank would also be a catastrophe and the government would bail out depositors. Governments do not let despositors lose their savings where governments are democratically elected. Even if the depositors were in dodgy Icelandic banks

You clearly don't know what full reserve banking is. Under FRB the money in demand deposit accounts disappears if the bank folds. This can't happen under full reserve banking because the banks will always be able to pay out every cent that is in all its demand deposit accounts.

People who invest their money in bank investment accounts risk losing some money but if you want to earn interest on your money then you should be prepared to take the risk.

 

[ehcks]

Where in MMM does it say that "excess" reserves are "in circulation" and "part of the money supply" (M1 money)?

Or is this just your own pet theory?

A bank has money that isn't required to be held in reserve. Do you expect them to sit on it?

It's going to be in investments of some sort, then it's taken out of that to be given in loans.

 

[Francesca R]

You are still not describing naked short selling which is a form of fractional reserve stockbroking, is damaging and is illegal.

Please stick with the example you gave:

"There is nothing wrong with short-selling shares as long as the short seller actually posesses the shares he is selling and the original owner of the shares has no access to the shares while they are on loan."

Under covered short selling, borrowed stock is callable on demand. Did you not know this? Since it is the case, why is shorting SLV ethically OK and not shorting money (a bank lending against its fractionally-reserved deposits)? You have not answered.

And fractional reserve banking is decidedly not akin to naked shorting. If it was, then a bank would not need to take any deposits in order to make loans. Would it? Fractional reserve banking is analogous to covered short selling (fully collateralised). As I have outlined. You do not appear to have any rationale why it should be illegal, given you are fine with covered shorting.

If a stock borrower gets a demand call then (if he doesn't have enough of the stock on hand) he has to buy the stock on the market to return to the lender. No phantom shares are created in this process so this is still akin to a full reserve system.

As above, incorrect. Of course phantom shares are created. You cannot have a "physical negative share". It must be synthetic. And if shorts are synthetic, there must be synthetic longs too.

Your erroneous protestation that "No phantom shares are created" is as bananas as people claiming that FRB does not create money assets/liabilities "out of thin air". Of course it does.

What is at issue--and which you have not been able to defend--is why one of these is wrong and the other is right.

 

[Francesca R]

Under FRB the money in demand deposit accounts disappears if the bank folds. This can't happen under full reserve banking because the banks will always be able to pay out every cent that is in all its demand deposit accounts.

Check the Icesave example. These were not demand deposits.

People who invest their money in bank investment accounts risk losing some money but if you want to earn interest on your money then you should be prepared to take the risk.

Rubbish. Notice deposits and time deposits are always bailed out by democratic governments. You are describing an anarcho-capitalist utopia that is not in existence in any developed country with a functioning banking system.

 

[Francesca R]

Money is created because the latter behaves no different from currency in the economy and is therefor counted as part of the money supply.

In short, yes new money is created in the FRB process, no banks are not creating money from thin air or loaning out money they do not have.

Agreed.

 

[psionl0]

If a stock borrower gets a demand call then (if he doesn't have enough of the stock on hand) he has to buy the stock on the market to return to the lender. No phantom shares are created in this process so this is still akin to a full reserve system.

As above, incorrect. Of course phantom shares are created. You cannot have a "physical negative share". It must be synthetic. And if shorts are synthetic, there must be synthetic longs too.

You will have to explain this a lot better.

Where did the phantom shares come from in the above example?

 

[Francesca R]

The short position is a "phantom" (synthetic) share. It is not, and can not, be a "negative" share issued by the issuing entity.

There is necessarily a long position called into existence at the same time as the short. Otherwise the short seller would not be able to sell to anyone and could not go short in the first place.

The long position is also synthetic or "phantom". It is not a physical share. It has not been issued in exchange for money by the issuing entity. It is an asset created out of nothing.

What do you not understand about this?

(Minor correction to what I said before--if a beneficial owner recalls lent stock then the sequence of events there may be the "destruction" of phantom shares, not the creation of more. Apologies. The phantom shares are created when a covered short is opened, and they are destroyed when it is closed)

 

[psionl0]

The short position is a "phantom" (synthetic) share. It is not, and can not, be a "negative" share issued by the issuing entity.

If you are talking about a "covered" short then this is false. Selling shares that have been borrowed from a third party does not create phantom shares - as long as the buyer or his agent takes physical possession of the traded shares. Any benefit that may be due to the original owner of the shares would have to be paid by the borrower of the shares in accordance with whatever agreement they entered into.

I could borrow a motor car from somebody and sell it to a third party. There would still only be one motor vehicle and the original owner would not be driving a "phantom" motor vehicle around while his real vehicle is on loan. (Of course, I would be in lots of trouble if I couldn't return the car to original owner when demanded ).


There is another issue that you don't appreciate:

And fractional reserve banking is decidedly not akin to naked shorting. If it was, then a bank would not need to take any deposits in order to make loans. Would it?

If a broker was to start selling shares that he had neither bought nor borrowed (naked short selling) he would still need to have actual shares on hand in case some of his clients wanted to take their shares away with them.

This is exactly analogous to how a bank operates under FRB and it has the same problem; if the broker goes out of business (and any rumour that he was naked short selling would ensure that) then all the shares that his clients thought they were buying would cease to exist.