Split Thread Fractional reserve credit vs. derivatives

[psionl0]

Banks create money when they make loans because they give depositors and borrowers access to the same money at the same time.

False. If Sally withdraws money then her bank either has to liquidate some reserves or call in its loan to Bob, and if liquidating reserves brings them below the reserve requirement, then it still has to call in the loan to Bob. Banks are prohibited from printing money and increasing the monetary base.

This off-topic response has absolutely nothing to do with creating money. It is further evidence that you don't understand what you have read about fractional reserve banking.

It can't say this to its depositors because it isn't borrowing this money, it is holding it on behalf of its depositors.

Too complicated for you eh? Well, consider this analogy: If you put your furniture into a storage shed, is the owner of the shed borrowing your furniture or holding it for you?

BTW bank loans are not backed by deposits

By now, I'm not surprised that a simple statement like this would go straight over your head.

Banks can get away with this because money in bank accounts is just as real as notes and coins.

"Real" means what? It is not part of M0, it is not the monetary base.

Well if you think the money in your bank account is not real then transfer your balance over to mine.

However, phantom shares (if they existed as you claim) would have none of the properties of the real ones. One can make or lose money by trading on the things he has borrowed but that doesn't mean that anything has been created during the trade.

An asset and a liability are created, both of which are legal obligations. No net wealth is created. Same with bank lending.

Sure a debt is an asset for the lender and a liability for the borrower but debts are not phantom shares. Some debts can be highly liquid but they are not actual money.

In reality, a stockbroker could not lend its clients' shares out without the permission of the share holder. So FRB is more akin to "naked" than "covered" short selling.

False. Banks have the "permission" of demand depositors to lend against their monies. If they did not, it would be fraudulent and you could notify the authorities and get the practice stopped. (Note that it is invalid for you or anyone to call it "legal fraud" at this point. You invoked permission which in turn invokes prevailing laws.)

This again reveals the gaps in your education. Banks do NOT lend depositors' money - they lend from the money they hold in reserve (or more to the point, they credit borrowers' bank accounts). No matter how much money the banks lend out, the balance of its depositors's accounts remains unchanged. As far as the depositors are concerned, none of their money has been lent out.

The key question you need to ask is, "can the original share owner trade these shares WHILE they are on loan"? Since the answer is "no", there is no fractionalism involved.

Red herring, as above, once Sally withdraws her money, that part which was on loan (if it was on loan) is recalled.

That was about trading shares - not withdrawing money from a bank!!!
It is no wonder this statement is totally meaningless to you. You created this whole thread on an incorrect premise - that FRB is equivalent to "covered" short selling. Until you learn to understand FRB, you will continue to believe this.

Sorry, you still have nothing. It is something of a mystery why you are typing yourself in knots trying to dodge around this so much. Almost as though you really do not wish to admit that there is no logical case against FRB.

That is not a logical conclusion to our posts - but then, you are not a logical person.

 

[ladmo]

Sorry Michael, you are labouring under a misapprehension. If a bank lends out ANY of its reserves then it is practising fractional reserve banking. In the most usual case, the loaned money is deposited into the borrower's bank account and the dollar amount of the reserves is unchanged (ie money has been created even if the loan is for less than the bank's reserves).

Since the bank is just crediting its borrower's bank account, it could in theory lend more than its reserves. However, they wouldn't do so because they would expect the lent money to be withdrawn and wind up at a different bank.

psion10... your logic is logical Question: given what you stated, do banks actually "own" the houses that are collateral against the loans which were generated with the bank... when the house is foreclosed? How do they own the house when money was created out of thin air is created?

 

[psionl0]

psion10... your logic is logical Question: given what you stated, do banks actually "own" the houses that are collateral against the loans which were generated with the bank... when the house is foreclosed? How do they own the house when money was created out of thin air is created?

In a mortgage situation, the bank has a LIEN on your house meaning that you have given it permission to sell the house to recover the debt if you have failed to make your payments.

Although creating money out of "thin air" is a good description of the FRB process, the bank is actually exchanging a liability for a liability. The money in your bank account is a liability for the bank while the promissory note you signed is a liability for you. (It could be said that you created the money yourself when you signed the promissory note).

 

[Francesca R]

This off-topic response has absolutely nothing to do with creating money. It is further evidence that you don't understand what you have read about fractional reserve banking.

Banks are prohibited from increasing the monetary base. A borrower and a depositor (lender) cannot use the same money at the same time. Show an example of this happening.

If you put your furniture into a storage shed, is the owner of the shed borrowing your furniture or holding it for you?

"This off-topic response has absolutely nothing to do with creating money. It is further evidence that you don't understand what you have read about fractional reserve banking."

Sure a debt is an asset for the lender and a liability for the borrower but debts are not phantom shares. Some debts can be highly liquid but they are not actual money.

The risk exposure is a phantom share. It has all the risk and return properties of a real one (minus the carry). It walks like a share and talks like a share, but is not a share. Ergo . . . . phantom share.

Banks do NOT lend depositors' money - they lend from the money they hold in reserve

 

[Francesca R]

Clearly my statement is entirely accurate and true.

Starting from the position of a bank having zero reserves, if money is put on deposit with that bank by savers, that money can be considered the bank's reserves.

If in the course of operations the bank lends out more money than was deposited in it by the public, it necessarily must be engaged in fractional reserve lending (either that or it's engaged in outright fraud, one of the two).

Please describe a situation where this is not the case.

Erm, . . . . every case?

 

[ladmo]

Erm, . . . . every case?

Francesca(please read this post with no sarcasm or contempt on my side)

... I thought michaelsuede made a straight comment. You appear to have a knowledge of finance, so I am truly curious about what is incorrect in what michaelsuede put forth. However "cute" the laughing dog is, it doesn't provide the insight that you have. I have always taken the position that michaelsuede speaks to, so again, I am interested in what you have to post. thx

 

[Suddenly]

That's a nice democratic sentiment. It almost sounds like it could work although the banks would still have to be compelled to offer full reserve accounts.

Hardly. If there was a market for this nothing stops a bank from operating as a money warehouse. I don't know if that would even have to be a bank seeing the bank just provides security and processes transactions.

I suspect that the banks' argument against this idea would be that with modern electronic banking, a flight of money from fractional reserve accounts to full reserve accounts could happen much faster and more frequently than would otherwise happen with traditional bank runs. This would be just as catastrophic as as traditional run and because of the ease of transferring money electronically, a flight could start with the slightest of rumours.

The bank's argument would be that there wouldn't be a market for the service. People aren't going to pay to warehouse money when they can be paid for depositing with little or no risk.

That is the thing about 100% reserve banking. It is basically stuffing money under a mattress.

 

[Suddenly]

Although creating money out of "thin air" is a good description of the FRB process, the bank is actually exchanging a liability for a liability. The money in your bank account is a liability for the bank while the promissory note you signed is a liability for you. (It could be said that you created the money yourself when you signed the promissory note).

Eh. All a bank is, is a middleman between a depositor and a borrower. They take the depositor's money and give it to the borrower. No new money there, just that the bank owes it's depositors cash it doesn't have on hand, which is normal and just dandy as given remotely normal behavior they have enough on hand to cover withdraws.

If indeed the depositors try to withdraw more than what the bank has on reserve, then there is going to be a problem, but life is full of risks.

Why FRB is a good thing is that it takes money that is inactive, otherwise that would be stuffed under a mattress or buried in a yard, and puts it in a place where it can be used to produce something useful, building a house or a small business loan. An asset is moved from a low end use to a high end use, and that is how more wealth is created.

(which is why the FDIC is a good idea. It removes a remote risk and encourages this wealth creation, but maybe that is another thing entirely)

 

[lomiller]

Francesca(please read this post with no sarcasm or contempt on my side)

... I thought michaelsuede made a straight comment. You appear to have a knowledge of finance, so I am truly curious about what is incorrect in what michaelsuede put forth. However "cute" the laughing dog is, it doesn't provide the insight that you have. I have always taken the position that michaelsuede speaks to, so again, I am interested in what you have to post. thx

Did you not read the post? Banks do not lend base money they do not have, ever.

The issue here is that some people want to conflate base money and demand deposits. For economists looking at the economy these act in almost exactly the same way so they are both called considered of the money supply. In actual fact, though, they are different things that behave the same way.
Base money is just that. Demand deposits however are a contract between you and the bank where you give them base money and they agree to give it back to you on demand. As I said for the purposes of economists both act the same way so they are both considered forms of money but in how they actually work demand deposits are a lot more like other common investment vehicles and agreements.

To actually enforce a ban on FRB you would need to make laws that limited the amount of economic actively people could engage because the value of outstanding agreements and contracts would be limited to the amount of base money the government produced and therefore be placed directly under government control. Essential these would be the most draconian anti-business laws ever enacted outside a command economy.

 

[ladmo]

Did you not read the post? Banks do not lend base money they do not have, ever.

The issue here is that some people want to conflate base money and demand deposits. For economists looking at the economy these act in almost exactly the same way so they are both called considered of the money supply. In actual fact, though, they are different things that behave the same way.
Base money is just that. Demand deposits however are a contract between you and the bank where you give them base money and they agree to give it back to you on demand. As I said for the purposes of economists both act the same way so they are both considered forms of money but in how they actually work demand deposits are a lot more like other common investment vehicles and agreements.

To actually enforce a ban on FRB you would need to make laws that limited the amount of economic actively people could engage because the value of outstanding agreements and contracts would be limited to the amount of base money the government produced and therefore be placed directly under government control. Essential these would be the most draconian anti-business laws ever enacted outside a command economy.

I did read the post, part of the issue are definitions. I must say, this last post of yours is succinct. There is room for agreement with all that have posted... what it really breaks down to is your last paragraph. Go that additional step and expand on what laws need to be made in limiting economic activity. Why I ask for you to do this is that the last thing I care to do is anticipate an answer as it, without fail, will come back to haunt me. thx

 

[lomiller]

No new money there, just that the bank owes it's depositors cash it doesn't have on hand, which is normal and just dandy as given remotely normal behavior they have enough on hand to cover withdraws.
)

To extend this a bit, if you make it illegal to owe money when you don’t have the cash on hand to pay back the loan why would there be a banking system at all? The only time you could borrow money is when you already had the cash, furthermore you would need to hold onto that cash until the loan is paid.

What this amounts to is the complete restriction of credit. We actually have examples of how outlawing credit limits an economy because this is actually the case in countries that practice strict Muslim law. (I understand that these days most Muslim counties have structures that do an end around such laws but these are still less efficient then western banking)

 

[ladmo]

Eh. All a bank is, is a middleman between a depositor and a borrower. They take the depositor's money and give it to the borrower. No new money there, just that the bank owes it's depositors cash it doesn't have on hand, which is normal and just dandy as given remotely normal behavior they have enough on hand to cover withdraws.

If indeed the depositors try to withdraw more than what the bank has on reserve, then there is going to be a problem, but life is full of risks.

Why FRB is a good thing is that it takes money that is inactive, otherwise that would be stuffed under a mattress or buried in a yard, and puts it in a place where it can be used to produce something useful, building a house or a small business loan. An asset is moved from a low end use to a high end use, and that is how more wealth is created.

(which is why the FDIC is a good idea. It removes a remote risk and encourages this wealth creation, but maybe that is another thing entirely)

... it is when the banks take this inactive cash and invest it poorly that hurts the public... then the public has to bail them out. FBR could be considered "ok" if better conditions were put on banks but most of that went away with Glass-Steagall. It would be great if only loans went out to the public versus the credit being used to create a banks wealth.

 

[ladmo]

To extend this a bit, if you make it illegal to owe money when you don’t have the cash on hand to pay back the loan why would there be a banking system at all? The only time you could borrow money is when you already had the cash, furthermore you would need to hold onto that cash until the loan is paid.

What this amounts to is the complete restriction of credit. We actually have examples of how outlawing credit limits an economy because this is actually the case in countries that practice strict Muslim law. (I understand that these days most Muslim counties have structures that do an end around such laws but these are still less efficient then western banking)

That is not necessarily the case... what about collateral?

 

[lomiller]

That is not necessarily the case...

No, that is the case. By definition ending FRB means that you are ordering people no to borrow money or form a contract where money is owed without keeping the cash on hand to repay the loan.

what about collateral?

What about it? Banks are required to have more than enough assets to pay their depositors even if the depositors withdraw all their money at once. They do have collateral on the loans they make to depositors. If you are calling for an end to FRB you are already saying having this collateral isn’t good enough.

 

[ladmo]

No, that is the case. By definition ending FRB means that you are ordering people no to borrow money or form a contract where money is owed without keeping the cash on hand to repay the loan.



What about it? Banks are required to have more than enough assets to pay their depositors even if the depositors withdraw all their money at once. They do have collateral on the loans they make to depositors. If you are calling for an end to FRB you are already saying having this collateral isn’t good enough.

If I want to make a loan to someone, I can demand collateral and payment terms. This is done without a bank, it is done with money... the person defaults and I own what was collateralize.

 

[Suddenly]

... it is when the banks take this inactive cash and invest it poorly that hurts the public... then the public has to bail them out.

FBR could be considered "ok" if better conditions were put on banks but most of that went away with Glass-Steagall. It would be great if only loans went out to the public versus the credit being used to create a banks wealth.

So FRB isn't really the issue, rather this is all about federal regulations w/r/t how the dough is invested?

 

[lomiller]

If I want to make a loan to someone, I can demand collateral and payment terms. This is done without a bank, it is done with money... the person defaults and I own what was collateralize.

If a bank fails (can’t pay it’s depositors what’s owned) uninsured depositors get to file claims on a portion of its assets.

 

[ladmo]

So FRB isn't really the issue, rather this is all about federal regulations w/r/t how the dough is invested?

Short answer...Yes long answer... Yes Sir!

Why I feel that the FBR should be changed is because of the abuse of what the FBR creates... In my opinion, the FBR is the enabler.

 

[ladmo]

If a bank fails (can’t pay it’s depositors what’s owned) uninsured depositors get to file claims on a portion of its assets.

I agree with you...

 

[psionl0]

By definition ending FRB means that you are ordering people no to borrow money or form a contract where money is owed without keeping the cash on hand to repay the loan.

Are you STUPID or something?