How the banks create money

[Finsend]

Topic off

Mon ami, merci pour les guillemets! Il est merveilleux le travail que vous avez. Croyez-moi, vous êtes intelligent. Votre anglais est mieux que notre français, en supposant que vous parlez français.

Tip my hat. Probably a bad translation above, no doubt.

I'm afraid had to use some kind of online-translation for most of that!

It means:

"My friend, thank you for the quotes! It is wonderful the work that you have. Believe me, you are intelligent. Your English is better than our french, assuming that you can speak French."

You're welcome, but I just picked some I liked/found interesting.
And I looked for a brief period for quotes stating the more opposite - money is not created out of 'nothing' but I could not find them (very fast) but I think there must be some? I found lots of them saying (more or less) that money is indeed created/multiplied out of (almost) "nothing"...

Oh and I am Dutch, but since my avatar is named Finsend (after you know who) it seemed more appropriate to change my location! This is where the real Vincent (and his brother Theo as well) is buried (if I am correct, I visited this grave once so it would be very weird/scary if I was wrong

Maybe I shouldn't have done that! Change my location!
Because my French is even worse than my English, geheh

And I am indeed a painter, which I like very much - BTW I studied some history as well and did some ICT jobs for a while (cobol/delphi/etc) and I am now painting for I guess 4-5 years or so...

Languages are not one of my strong properties, but writing here and posting and thinking is good for me I notice and I learn a lot of new English words and maybe my English will improve doing this as well - that's 2 flies in 1 strike as we say here in Holland - learn about banks and money and at the same time learn some English and even French!!

Well. enough OFF topic said I guess - I already got some comments of some people in other threads - so I guess I should be focussing on the TOPIC now!

 

[Finsend]

Ot - please note!!

I did not (yet) read any of the post from yesterday/today competely/ intensively - but it seems already very GOOD and SERIOUS and interesting to me!!!

So please make jokes (sometimes it is difficult for me to see if some thing is a joke or not, etc) but also respect each other and if some-one has an opinion and sticks to that and/or decides to do something else - well that's fine by me, etc...

SO what I am trying to say is - jokes I like ad hominems etc as well but well ehm this is a (personal) paradox is it not? Still it 'feels' important to me...

I like the large posts on TOPIC of all of you guys so ehm I guess it would be in my interest if you write these things so I can make my own opinion and it saddens me a bit when people start clubbering etc - and I do this myself as well... so ehm guess this sums it up!

Let's FOCUS and RESPECT each other and STICK TO THE SUBJECT as much as possible /etc - make 'nice/soft' jokes instead of ? as much as possible - ALL THESE THINGS!!

It is like OEBOEMA said!!

YES WE maybe CAN, can we?
If we try?
Can't we?
What's that?
Overthere?
Is it?
IT?

Gehehheheheh

http://nl.wikipedia.org/wiki/Jiskefet#Oboema_en_Jos.C3.A9

I'm afraid it is a dutch wiki page, but still humor!

 

[Finsend]

"Slightly" off topic...

Now that the dummy spit is over:Some people ask questions and some just abuse other posters. I know who I prefer to deal with.

A lot of people who are opposed to FRB describe it as "counterfeiting" (they even accuse the Fed of this when it creates money).

However it is not quite counterfeiting for two reasons:
1) The counterfeiter is representing his note as being produced by the government.
2) The counterfeiter does not promise to exchange something for the return of his note.

Remember, the goldsmiths were still promising to give you gold in exchange for your receipt.

The historical data on this is sketchy. I imagine that the goldsmiths simply worked out through experience how much gold they needed to back up all the receipts they were lending out.

I can't find any evidence that the activities of the goldsmiths were banned or regulated by the king. As a matter of fact, it appears that around 1100AD, King Henry I side-stepped the goldsmiths by introducing the "tally stick" system together with a law that said the only way you could pay your taxes was with tally sticks. (I will leave you to do your own research on tally sticks).

BTW I like your new avatar. Did you scan a painting of yours or did you create it using a computer graphics program?

It is like you said AND we do this (some times) ourselves as well, I guess, at least I do - maybe some people do never - God/Darwin bless them, they might be the real diamonds of this place called Earth!

I agree about the counterfeiting and I myself have a "strange feeling" about this FRB banking as well and that is one of the reasons I visit this thread, like some other people too I guess.

I agree it is not "counterfeiting", it is lawful, etc. But still it "feels weird" and so I try to really understand how it works to see if I agree with the laws and could label it "counterfeiting / stupidity or good and useful, etc" or maybe something in between - that would be MY opinion, I guess, not The Holy Truth.

Re-membering the Gold Smiths and some of my history lessons as well I see a lot of 'conspiracies' (not in the weird way) events were people get together to make plans and perform some (future) actions mostly in "their" own interests and not always for "the common good" (from my point of view that is).

So I think some people are "evil" and "bad" "selfish" "destructive" "not so very wise" and maybe even "stupid" etc - still I do not know most of the time so I try to understand their motives, etc.

Sometimes things "grow" into a "bad" situation (leaving Darwin out of this and manybe Nietzsche as well) and we all have our own views on "bad" and "evil, etc... And threads like this are useful in my opninion especially when people try to provide data and arguments and all these things, exchanging ideas and of course making a joke once in a while!

So let's do that! all2getherNOW! You do it and sceptic-PK and Tensor do this as well, so let us continue and if sceptic is not interested anymore, well why not - I can imagine a little bit trying to get myuself into his/her/it's position(s). And I bet (i guess) he does not mind getting a kick or a funny image, but mabe he does? So let's be very careful with that, I think we should and once more I KICK MYSELF her as well, 3 times - in reality - no joke!! Ok it was punches, kicking myself is more difficult for me, so it seems.

2myself i say: STOP PREACHING, you IDI*T!
OK.

Cheers4now!
Finsend

PS I made this one yesterday in Paint using not a mouse, but this square thing on the laptop of my girlfriend, gehhee that's why it is ehm a bit blunt I guess Bit still nice I thought and you seem to think as well so thanx for that!

It is some Finsend/Vincent making a painting and handing out another (finshed) one (which noboy wants to have and/or pay for except maybe his brother Theo) he just finished... There is also a rabbit like animal somewhere... and a sun and some birds and stuff like that as you probably already noticed!

It does not mean any thing I gues, but maybe it does ( 2 you and/or me and or other beings)...
I ponder ths now, for whilem but first I go read the things sceptic, tensor, you and others posted smells very interesting to me, I hope I understand some of it and that I will be able to write something intelligent/usefulwise about it, that would be including my own opinion - as always

And I will look into the laws and kings with kind regards to the goldsmiths as well!
I painted to much so I have (some) time for some other things NOW!
I guess

 

[Finsend]

About the Diamonds example

Hi Sceptic-PK,

Thanx for this post!

I try to understand it, but I am afraid I do not understand everything, maybe not even most of it. I have some questions about the diamond example, but feel very free to ignore then! I just mutter on in my own way and try to understand this so this I what I do.

And I did not read all the other things written, so this question(s) I ask could already have been answered. I will read these other posts later - I have a lot to read so it seems - but now I feel drawn to this example with the Diamonds so I try to understand that one first.

We will use diamonds to prove our point. The bank has in its reserves (base money) eleven $1,000 diamonds and loans me ten $1,000 diamonds keeping one $1,000 diamond in reserve.

So the bank has 11 Diamonds (D's) in it's reserve.
Does this mean that the bank is the owner of these D's?
I think not and will suppose this.
I will suppose they belong to savers/depositors - some peoples who put them in the vault of the bank.
Maybe this does not matter but to me it would, I guess.
So they do not belong to the bank, the bank guards them.

The savers could still (at any time) ask for their 11 D's (?).
While the borrower (after taking a loan at the bank ) walks the streets with 10 REAL D's in his or her pockets.
So the savers/depositors still would have credits of + 11 D's (in their accounts - but they are not really there there is only 1 left in the vault) and they (savers) could ask for them D's to go shopping as well, at any time, could they not?

In this case there should be 11+10=21 D's but here are not!
Not real ones.

And 'all of this' works because the savers do not ask for their 11 D's at the same time, most of the time - while the borrower walks with the 10 D's in his or her pocket towards the car-shop...

That could be a problem (them savers asking for let's say 5 REAL D's) and in a way it seems there are now the 11 REAL D's (the diamonds belonging to the savers) 10 of them in pocket the pocket of you mrBorrower, and 1 in the vault. But there seem to be also 10 virtual ones (and maybe more because of interest). Hope my math is correct, always a very weak point of me.

To buy a $10,000 car, I write out a check for ten $1,000 diamonds.

I think now it already gets difficult for me with the check - so I skip this out - but understanding there are IOU / loan contracts etc who 'mean' something / have 'value'.

So you pay the car with the 10 real diamonds you lend/loaned from the bank. And at any time the savers could still ask for their 11 D's which 'should be' (but do not have to be by law I guess - so who is responsible for problems if we have a bank run on the diamonds - you borrower with contract of 1 year, bank, savers?) in the safe of the bank. It would show in their accounts the savers own 11 D's together - this is real is it not? (although virtual, because... well... you have took 10 D's and handed them over to the carshop owner (who has them now his pocket).

So you buy the car (and have to pay back this loan) and

The car dealer deposits the $10,000 diamond demand (the check) and the bank moves the ten $1,000 diamonds (base money circulating) from my account to the car dealer’s account.

The cardude goes to the bank and puts in the 10 D's he got from you - they are his - and the savers should also have 11 d's together as well, that is a problem is it not?
Could be?

And you have a debt+interest of at least 10 D's with the bank, because you took the loan and bought this very nice car indeed

SO now I see this NOW:

SAVERS still OWN: 11 Diamonds+interest
CARDUDE OWNS: 10 Diamonds
YOU: have debt of 10 DIAMONDS+interest
BANK: has maybe some (vitual) diamonds (which don't exist) on te interest you probably have to pay them for the loan and which is probably more than the bank pays to the savers. So some IOU/things papers which say -> we pay savers interest and YOU pay us interest for this loan you took a with us... at banks-r-us

There are STILL only 11 REAL Diamonds in the vault of the bank all in the vault of the bank now.

Maybe I make some mistake could very well be the case!
Looking at it this way it seems to me there is some kind of shortage of diamonds if everybody would ask for all the diamonds... And in a way more diamonds (virtual ones) are created in my opinion...

Anyway mind boggling it is for me all of this, still...
Some times I think I get it but then I seem to forget it, gehehehehh or something like that.

Now I will read the rest and try to keep away from some other thread gehhehh I got some warning over there so it might be better to keep out of there for a while, emotions weird things some times.

Cheers
Finsend

PS my counter went down I had 100+ aaaah now only 97 again!

 

[tensordyne]

Common sense comes with experience.

You probably don’t care as much about wasting your time as I do.

The implication here is that neither of us could change our opinions on this topic. I seriously beg to differ. In at least my case I assure you that if I am presented with credible arguments I will change my mind, or at least realize I should do more work (example: I looked into Plasma Cosmology because I thought it was interesting. I tried to argue for it in one of the threads on the forum and got slammed left, right and center, so I stopped arguing and am still reviewing and reading posts about the topic to see what makes sense. Oh, and I did openly admit I needed to learn more. Maybe you should take a queue from that because I for one would not hold it against you if that was your new position).

You’re right. I don’t care enough to do the all the work required, to end up where we started, with neither opinion having shifted (especially given your obvious hard-on for a couple of sentences in MMM).

Besides the whole topic of not changing your mind, I asked you to review 6 measly sentences (I did whole paragraphs on paragraphs for the quote you gave). Even if it does not change my mind, do you think this forum is just for me and you? Who knows who else is reading this, or will be reading this. Get your position down, if not for me, then so that it is down for posterity.

As for the hardon for a couple sentences, you are correct. I have a hardon for those sentences the same way a forensic scientist would have a hardon for a drop of blood or speck of hair. Facts matter Sceptic-PK. This is a
grown-up world with grown-up consequences for every fact.

I honestly don’t see what else there is to add to this discussion or what can be gleaned from it. We’re going around in circles. All the disagreements hinge upon the interpretation of MMM.

And yet, I will not weep one tear for you as you pitty yourself. Why? You have as yet not given your own interpretation of MMM (or any other document from some real authority). We are not going in circles because you have not even gotten on the race-track as yet.

While I certainly agree the word choice favours your position, I disagree that this is supported by common sense facts we all experience in the real world. I believe banks lend out their reserves, you don’t. I don’t see anything changing either of our positions.

Common sense facts?!? Banking is a human institution on a grand scale. We have been specifically trying to get at what happens when a loan is made. Does money come from nothing, is it transfered from something else, perhaps some other possibility...

Unless you are a bank programmer who has programmed in how bank loans electronically work, you will have no experience on which to give you a common sense of how such things as these operate. Going to the teller, seeing banks close and so on, do not constitute sufficient experience to give anyone "common sense" as to how bank-loans actually work. As a person who programs myself, I find that position to be the common sense position to have.

Banks do math. There are a lot of ways to set up various mathematical systems. Since I do not have access to the software banks use I have to rely on what sources I can find to answer this loan mechanics question, of which the main one is MMM. No apologies for that.

Good day to you Sceptic-PK (isn't that the British way to brusquely say good by and so on?).

All the best to you all.

 

[tensordyne]

Finsend, I think you are referring to Vincent van Gogh? Is that how Vincent is done in Dutch, as Finsend? Sorry about thinking you were french. Maybe I should look up Auvers-sur-Oise, it sounded french to me.

Let's see how well this translates (dictionary.com).

Ik denk dat je een goed mens bent. Ik heb een harde tijd na uw aguments. Ik vind je nieuwe avatar. Sorry voor het zijn bedoeling om Sceptic-PK. Het is alleen dat Sceptic-PK is niet de regels van goed debatteren na. Uw berichten maken me soms lachen hoe onschuldig ze zijn. Let op mijn vriend.

 

[Finsend]

Problems that might be arising.

I used this example here:

SITUATION - some months later, I guess:

SAVERS OWN (Granny and Gdaddy): 11 Diamonds+interest

CARDUDE OWNS: 10 Diamonds

YOU 'OWN': a DEBT of 10 DIAMONDS+interest -which has to be paid back to the BANK within lets say a year AND you have brand new CAR (and lot of other things you take from nature and your labour, etc - same for all the people BTW in this example "situation")

BANK: has some (VIRTUAL) DIAMONDS (which don't exist - yet) on te interest YOU have to pay them for the loan and which is more than the bank pays to the savers. So some IOU/things papers which say -> we pay savers interest and YOU pay us interest for this loan you took a with us... at banks-r-us

Let's say bank pays 5% interest and asks 10% for the loan per year.

Now many things can happen.

Diamonds could be dug up, you could crash your car or sell it, etc, etc.
And so it gets very very complex for me and it seems it is lunch time already!!!!

So I now ponder this and wonder about the problems that could be getting into this SYSTEM.

People getting angry and stuff because some Diamonds might be missing - not available at the moment

 

[Finsend]

Time4 some High tea!

HiT!

With some cookies as well

Finsend, I think you are referring to Vincent van Gogh? Is that how Vincent is done in Dutch, as Finsend? Sorry about thinking you were french. Maybe I should look up Auvers-sur-Oise, it sounded french to me.

Let's see how well this translates (dictionary.com).

Ik denk dat je een goed mens bent. Ik heb een harde tijd na uw aguments. Ik vind je nieuwe avatar. Sorry voor het zijn bedoeling om Sceptic-PK. Het is alleen dat Sceptic-PK is niet de regels van goed debatteren na. Uw berichten maken me soms lachen hoe onschuldig ze zijn. Let op mijn vriend.

Yes I am he seems to be (still despite 'everything') one of my so called 'idols' in the area of "art" and messing up canvasses with ehm... paint! And his name was Vincent I just made a typo oh ehm 2 I C now no 3! XinXenX Vincent!

Auvers-sur-Oise is in France (I hope, still?).

Bedankt voor je compliment, goh wel lekker om ff Nederlands te kunnen praten - hoop dat je dit begrijpt! Al dan niet met behulp van systranbox (is it still working?) of een andere online translator. Erg leuk dat je dit doet! En goh dat voelt echt heeeeeeeeeel heel erg / bijzonder prettig voor mij om even in het Nederlands te kunnen typen!! Wow, een beetje alsof ik te kleine schoenen even mag uit doen ofzo iets!!!

I think we all have our issues and problems (I DO - read again! believe this is the suitcase) look at some religous thread, I really messed up there (about does god cause natural disasters and things like that, you'll find it) and I am not always a very good or nice person like most people, I fear very much, but I try to be more and well... Let's hope I succeed at least a little bit some times

I like humor (also silly humor) but is it difficult sometimes (4me) because we/I do not always understand each other or we feel hurt etc become angry etc you probably know what I mean - want to own truth etc...



<Whatever you like> bless you dude,

F

 

[tensordyne]

Original put in Dictionary.com (as addressed to Finsend):

I think you are a good person. I have a hard time following your aguments. I like your new avatar. Sorry for being mean to Sceptic-PK. It is just that Sceptic-PK is not following the rules of good debating. Your posts make me smile sometimes at how innocent they are. Take care my friend.

 

[Finsend]

OT

Bedankt voor je compliment, goh wel lekker om ff Nederlands te kunnen praten - hoop dat je dit begrijpt! Al dan niet met behulp van systranbox (is it still working?) of een andere online translator. Erg leuk dat je dit doet! En goh dat voelt echt heeeeeeeeeel heel erg / bijzonder prettig voor mij om even in het Nederlands te kunnen typen!! Wow, een beetje alsof ik te kleine schoenen even mag uit doen ofzo iets!!!

Thanx for your compliment, it really feels good to be able to speak *I wrote speak but I meant write = schrijven of course* some Dutch - hope you understand this (I wrote) With or without systranbox () oor another online translator. Very nice/cool you do this. And goh that realy feels especially good for me to be able to type in Dutch for now. Wow, a little as if I can put of shoes that are to tiny...

Ehm I translated it myself - as you obviously already noted

Now I really take a break Off topic, because I do not want another warning, etc!! So I hope you understand, I like off topic things as well and I think some of this is ok, but I also agree with the moderators ans will try to keep it down a bit! Just so you know.

 

[tensordyne]

I have no problems understanding. I like learning languages and I appreciate you taking the time to respond. I am not religious myself (atheist), but I do sense a truly Christian attitude in your responses (altruistic). I am glad I could let off some of the burden you must face in translating to English. Feel free to type in Dutch to me if you have a technical question about banking.

Ik heb geen problemen met het begrijpen. Ik hou van het leren van talen en ik waardeer je de tijd neemt om te reageren. Ik ben niet religieus mezelf (atheïst), maar ik voel een echt christelijke houding in uw reacties (altruïstische). Ik ben blij dat ik kon laten een aantal van de last moet je gezicht in het vertalen naar het Engels. Voel je vrij om in het Nederlandse type voor mij als je een technische vraag over bankieren.

I have to say, I know some German and it is interesting how Dutch is different from German. Ich instead of Ik, von instead of van, etc. Some things are definitely the same such as 'in' (same as English too!). I wonder how uw is pronounced though.

OK. back on topic. psionIO and me are basically in agreement. My suggestion is if you want to know how things really work ask one of us Finsend. The rest think in terms of folk economics or something.

All the best to you all.

 

[psionl0]

Hi Sceptic-PK,

Thanx for this post!
. . . . .
I feel drawn to this example with the Diamonds so I try to understand that one first.
. . . . .

I wouldn't waste too much time on the reference that Skeptic-PK provided. It is a classic example of trying to put a different spin on what is just an exchange of liabilities between the borrower and the bank (something I pointed out in post #903).

Unfortunately, that document completely misrepresented the FRB process in an attempt to "prove" that FRB doesn't work the way MMM says it does. (This is known as the "strawman" argument). I pointed out some of the flaws in that document in posts #965, #967 and #968.

In short, the whole document is woo-ish nonsense.

 

[Finsend]

I was reading this book, trying to understand it and I find it very ok, but it is Dutch and I am not sure there is an English version of it...

It is called Utopie van de vrije markt - the utopia of the free market

by this guy:

http://en.wikipedia.org/wiki/Hans_Achterhuis

Very interesting book and touches this subject here as well in some way and things like atlas/ayn rand/greenspan/etc...

I just thought drop it here, came to mind in another thread.

 

[Finsend]

I have no problems understanding. I like learning languages and I appreciate you taking the time to respond. I am not religious myself (atheist), but I do sense a truly Christian attitude in your responses (altruistic). I am glad I could let off some of the burden you must face in translating to English. Feel free to type in Dutch to me if you have a technical question about banking.

Ik heb geen problemen met het begrijpen. Ik hou van het leren van talen en ik waardeer je de tijd neemt om te reageren. Ik ben niet religieus mezelf (atheïst), maar ik voel een echt christelijke houding in uw reacties (altruïstische). Ik ben blij dat ik kon laten een aantal van de last moet je gezicht in het vertalen naar het Engels. Voel je vrij om in het Nederlandse type voor mij als je een technische vraag over bankieren.

I have to say, I know some German and it is interesting how Dutch is different from German. Ich instead of Ik, von instead of van, etc. Some things are definitely the same such as 'in' (same as English too!). I wonder how uw is pronounced though.

OK. back on topic. psionIO and me are basically in agreement. My suggestion is if you want to know how things really work ask one of us Finsend. The rest think in terms of folk economics or something.

All the best to you all.

Go here

http://web.me.com/schuffelen/Site/vocabulary.html

search for "wat is uw naam" an listen!
I means - of course - What is your name.

PS and I am not a Christian (I guess - anymore) but was raised very much so, so that would explain some things
I am not sure if I am an atheist or deist, tryin' to figure that out here as well I guess

PS

Ik ben blij dat ik kon laten een aantal van de last moet je gezicht in het vertalen naar het Engels.

This sentence does not make much sense to me...?
I says to me:

I am happy that I could let some of the burden should your face in translating to English
But I think I get it now!


Face means gezicht - so your face looks nice
but I think you meant things I face (my trouble etc

 

[Finsend]

OT

Hi tensor about the Uw

I think the Dutch U is more like the French than the English, but snce my french (as in bien sur I guess) is ehm lame I am not sure... it is not like the U - pr: YOU in English... and I don't know if you have this sound in English... tis dutch u...

 

[Finsend]

Hi psion

I wouldn't waste too much time on the reference that Skeptic-PK provided. It is a classic example of trying to put a different spin on what is just an exchange of liabilities between the borrower and the bank (something I pointed out in post #903).

Unfortunately, that document completely misrepresented the FRB process in an attempt to "prove" that FRB doesn't work the way MMM says it does. (This is known as the "strawman" argument). I pointed out some of the flaws in that document in posts #965, #967 and #968.

In short, the whole document is woo-ish nonsense.

I think at least that #903 post now starts to sink in with me...
This one

Don't make it too complicated Finsend.

When banks lend money, they are essentially exchanging a liability for a liability. The borrower's liability is the promissory note (or credit card slip) he signed while the bank's liability is the credits in its depositors' transaction accounts. Both liabilities are created when the loan is approved. The only role the bank's reserves plays is in setting an upper limit to how much new liability the bank can take on.

Since bank account balances can be used to settle debts just as well as cash, we are justified in calling them money. The rest of the explanations are largely spin - people trying to describe it in terms they understand. (I think the term is "reasoning by analogy").

So the bank has liability to the the credits in the creditors accounts - that means it should be able to pay up if asked for this money.

And you say we don not have to keep track of all individual savers etc - the bank just has this liability to all of them (there accounts) and the reserves set the upper limit.

Now I am still wondering what if lots of people run to the bank and ask for their money, what will happen - if the bank cannot pay - the bank defaults and the people lost their money, I guess...?

It is about responsibility then and taking risks some times... Maybe I should read some about Argentina as well and since I live in Europe it seems that foe example some Greek people are also taking the money of the bank and put it elsewhere so some trust seems to be getting less here... And I think all these banks and things they are connected as I understood and so who knows what will happen, like a few years ago with this american bank which went bankrupt...

Anyway I am a bit tired now so I go do something else - but I am very curious about also the current situations and if they have anything to do with FRB or other things, what will happen next and should we change things in this current system, what things, etc, etc!



bye4now

f

 

[lomiller]

From the same source:Such a fundamental error in FRB analysis is hardly inspiring.

More an indictment of you then them I think

here is the quote with the parts you decided to cut. Clearly they are showing the implications of some specific beliefs of money creation and show why those beliefs are wrong.

Challenge 1, Money theorists cannot have it both ways. If that first $1,000 in reserve deposits backs a $10,000 loan, their goldsmith-wildcat banking view of how fractional reserve banking works, that secondary deposit of $10,000 into a reserve account becomes reserves for a $100,000 loan which completes cycle two.

Cycle three creates $1 million.

Cycle four $10 million.

Cycle five $100 million and four more cycles would reach $1 trillion.

No bank will claim that ability or that right. Such a money creation process would destroy the very meaning of both M1 and fractional reserve banking.

 

[tensordyne]

Hahahaha, lomiller is back in the house.

The problem with the Diamond portion of the text is that it is basically explaining by analogy how the author thinks FRB loans work, when in reality it is just explaining some arbitrage or even just cheque clearing aspects of banking.

As for the cycles creating progressively more money, that is a confusion about how fractional reserves lead to geometric-like sums of money. If you have a reserve ratio of R and reloan some original base amount of money over and over again to the maximum extent possible, then the original amount of money gets expanded by the money multiplier given by MM in the formula

MM = 1 + R + R^2 + ... = 1 / (1 - R).

Of course in actuality banks are not required to loan out to their maximum. The problem with the quote is that the author confuses MM for R (a very common misconception it seems). There are no 'multiple' cycles since really there are no cycles in the first place. It takes an infinite number of loans to make MM have the value it has above (unless the author by cycles means loans, in which case the author is still wrong since the loan amounts should be multiplied by R and not MM).

In practice though, after only five or six reloanings the sum becomes very close to what MM is, to the point that one would be talking about the difference of millionths or billionths of whatever the original loan was. After so many loans, such differences become statistical errors not discernable from the loss of money in your couch in the form of pennies and other small change.

Hope that helps in your understanding of Fractional Reserve Banking lomiller.

 

[lomiller]

So the bank has liability to the the credits in the creditors accounts - that means it should be able to pay up if asked for this money.

Close. When a bank makes a loan they create a new liability and gain a new asset. The asset is the promise to have the loan repaid and the liability is the entry they make into the borrowers account promising to give the base money when requested.

In terms of money supply, even though it’s just a promise to deliver money and not “real” money people treat their account balances as if it were base money. Since it acts as money in the economy economists need to consider it as money when they attempt to understand how the economy is behaving so they have definitions for money supply that extend beyond base (real) money.

Most often economists look most closely at the M2 money supply which includes, among other things, bank deposits. This means if you are looking at something like inflation that is sensitive to M2 money, fractional reserve banking does create money in the form of bank deposits. The thing to remember is that context matters depending on what you are doing it may or may not be suitable to consider demand deposits with a bank as money.

And you say we don not have to keep track of all individual savers etc - the bank just has this liability to all of them (there accounts) and the reserves set the upper limit.

In practice it’s actually a bank’s assets that set the upper limit (see below)

Now I am still wondering what if lots of people run to the bank and ask for their money, what will happen - if the bank cannot pay - the bank defaults and the people lost their money, I guess...?

Prior to the creation of the Federal Reserve and FDIC this is exactly what would happen. Today there are a couple measures that prevent this. First all deposits up to a certain value are fully insured by the US government via the FIDC so if the bank can’t pay the FIDC will, up to $250K.
Second the Federal Reserve has the power to lend money directly to banks, though it prefers to have banks lend their excess reserves to one another. To secure these loans the bank needs to put up quality assets as collateral, so as long as they meet the asset requirement they can always borrow the base money to meet reserve requirements.

The Lehman Brothers collapse and subsequent financial crisis occurred in part because people stopped accepting mortgage backed securities as high quality assets that could be used to back these loans and banks stopped lending to each other altogether. Thus when people started to take their money out of Lehman’s on mass they could not borrow base money and could not keep their reserves up.

 

[stevea]

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

That is from a publication given out by the Federal Reserve about banking, fractional reserve banking in particular. Let me break it down some.

It's out of context from an extremely crude "childrens pamphlet" from the Fed - you should read a few books. Obviously you didn't or can't read the pamphlet deeply enough to understand the concepts.

Your ".." quote represents LOAN ORIGINATION only - which is just a fraction of the process. You are reading it out of the larger context.

'A' goes to the bank and signs an IOU or mortgage or loan origination OBLIGATION for $1000. The bank creates an account with $1000 of CREDIT in the name of the borrower. So far - exactly as your quote states - this has zero impact on the net worth of the bank or it's reserves - there is $1000 more in the banks assets, and $1000 more in the banks liabilities. NO one doubts this.

What you fail to consider is that no one ORIGINATES A LOAN merely to leave the credit in the bank's account. It's nonsense to consider that this actually happens with any frequency. No - when 'A' borrows $1000 it's specifically to immediately buy some product or service. It is irrational to create an interest bearing loan without using the loan credit.

So the very first thing that happens (and isn't covered in your quote) is that the borrower buys something and causes of a transfers the entire amount of the loan to some service or product vendor. The transfer (unless the vendor make an identical deposit in the same bank) clearly has an impact on the bank's reserves - decreasing these and perhaps causing a reserve contraction. The vendors deposit in his bank causes in corresponding increase in the reserves of that 'other' bank.

psionl0 is fond of claiming that this matching expansion/contraction of bank reserves by withdrawal/deposit is a 'net zero' event, and this is roughly true - but it ignores that any (US)bank with deficient reserves can merely borrow from the Fed at the interbank lending rate (the only interest rate the US FED sets). In fact this is done constantly for the purposes of permitting deposit/withdrawal clearance. I hate to even touch on this topic since most of the posters fail to correctly understand the basics.