How the banks create money

[psionl0]

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.

The bit that you quoted doesn't change the fact that the IED website used a strawman argument to deny that banks create money (something that you still argue that banks do).

However, the bigger question is, "do you really want to defend the IED?" Their website is mostly a sea of words but it appears that they are calling for an end to monopolies, an end to private banking and easy access to cheap (or is it zero interest?) unsecured loans for private investors. There is also mention of increasing fiat money and increasing the reserve ratio but I don't know where they are going with that.

These don't sound like causes you or Skeptic-PK would champion.

LINK

 

[psionl0]

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...?

Well done Finsend. You have uncovered the fatal flaw in FRB - banks can't pay out all of their depositors at the same time.

If a bank can't meet customer demands for withdrawals, they go bankrupt. Worse, all of the money in its demand deposit accounts disappears into the "thin air" from whence it came and its customers lose all of their savings. A sharp drop in the money supply like this can often be the start of a depression. Since this is the case, even a rumour that a bank could be in trouble is enough to cause bank depositors to rush over to the bank to withdraw their savings. This is called a "bank run" and it is an ugly thing.

Bank runs were a common occurrence in the 19th century. (I posted about this in post #946). A large spate of bank runs in 1907 lead to the formation of the Fed in order to protect banks. The government also set up a deposit insurance scheme which all banks have to pay into. However, if a major bank were to topple over, it would be the taxpayers who have to bail out the bank's depositors.

For your enjoyment, I have included the famous bank run scene from Jimmy Stewart's "It's a wonderful life".

 

[psionl0]

< - - - - snip - - - ->
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.

I agree with everything in your post. What is your argument?

 

[Finsend]

Hi Iomiller,

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.

I think I understand this now, more than ever.

Model:
Still I wonder what happens if some/lots of persons take loans with BankX for say a year (so they only have to pay this back after 1 year has passed - that is in the contract).
And during this year all the savers (or lots of them) suddenly ask for their money.

So some QUESTIONS here about this (I also try to answer myself):

Q: Does BankX have to paid out?
A: Yes, if they can.

Yell: But they can't!
Yell: That's a (big) problem!

Q: Will they have to take loan at the FED or somewhere else?
A: I think - if they can - they should.

Q: Do they go banktupt (and how fast will they go) if the problem is very very big, and will the savers lose (some of) their money?
A: I think so, they could go bankrupt. And the saver might lose (some or all of their) money.

Q: And are the borrowers then still obliged to pay back to this Bankx - AND (maybe more important) eventually to the savers?
A: I think so, yes. I think this is about claims and stuff like that, who gets what first, etc. Don't know much about that I'm afraid - but I think the savers should be on the list to get stuff from this BankX if they mess up. Even the furniture maybe.

Q: I wonder who is really really deep down responsible if these things go wrong?
A: I guess we all share this responsibility in some kind of way, but some/lots of people don't realize this, think. And in a way intelligent people are (of course) more responsible than others! Gheheheh)) Lame joke here sorry. But in a way I think FED people and TOP CEO's of banks etc, should be responsible people, wise etc, just as the lawmakers should be! Some kind of UTOPIA I guess, geheheh. So we all share this responsibility in a way, some maybe more that other, I am not very very sure and we all make mistakes some times.

Some NOTES:

BankX follows the (FRB) LAWS so they do nothing illega with the FRB.
We all agreed to this (more or less, depending how you digest DEMOCRACY I guess

So I think this (system of FRB et al) is a RISK we all take...
Like when we go to a bank and put money in there.
Buy tons of crappy stuff on credit, etc.

Q: And this is probably stated as well in some kind of papers I sign, but never read when doing business with the bank - like in saving my money over there?
A: ?

I should look that up!
Or maybe one of you people knows this (in general etc) and would like to say something about it?

I really think lots of people don't read these boring papers very "consciously" or read them at all. This is the way it goes.. We had this DEXIA thing here in Europe once, with some kind of credit/stock things and lots of people lost lots of money. And I think Wim Duisenberg (former CEO of out National Bank here in Holland) and others then arranged that some people got some money back, like elderly people who were promised ********* of money, geheheh. This was pretty fair I think. But another topic, although related maybe in some kind of way.

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.

I (think I) agree.

Very slowly I begin to understand that there are all kinds of "money/credit" actually having a (slightly/very) different meaning and impact and/or value maybe. But very soon it becomes a big web of "money things" for me...

I will look at this page some more, it is also about TYPES OF MONEY like M1 and M2 etc.

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

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.

Have to ponder this one, I am afraid.
Inflation I did not study very well - yet.
But I think you are saying that inflation could be caused (or has to do with) by the amount of M2 money? Difficult sentence for me, you wrote there. But maybe I understand it.

The last sentence is also a bit more difficult, but I have some idea.
What contexts could that be? And what doings do you means?
Could you give maybe an (easy) example, this would be helpful for me maybe (or complicate things more, that could the case as well.

I will think about this block again later as well!

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

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.

Ok.

1. So the US government backs things up.
But these are (in the end) the US people, or not?
They have a big debt, don't they?
So how could they guarantee anything?
Does this mean the FED will print/create it for the banks in trouble, like I think the ECB is also doing maybe?
FIDC I do not know - wait - Federal Deposit Insurance Corporation (FDIC) = is a United States government corporation created by the Glass–Steagall Act of 1933. Ok so I have some idea, but not too much I'm afraid Maybe I dig into this later. Where do they get their money from?

2. Ok. This seems clear. FED can always create money - but this could cause other problem(s) right? If they do it too much too fast maybe?

I heard of this Lehman Bank and how it went down. Why were they not saved by 1. or 2.?

Thanx for your post I0miller, I appreciated this very much, the time and effort and the information as well! So

Cheers,
Finsend

Sorry for this very long post, I try to create some order in it, but it is still very long - so please do crossread/skip/cherrypick/ignore@will!

 

[Finsend]

Thumbs up for every-one!

Well done Finsend. You have uncovered the fatal flaw in FRB - banks can't pay out all of their depositors at the same time.

If a bank can't meet customer demands for withdrawals, they go bankrupt. Worse, all of the money in its demand deposit accounts disappears into the "thin air" from whence it came and its customers lose all of their savings. A sharp drop in the money supply like this can often be the start of a depression. Since this is the case, even a rumour that a bank could be in trouble is enough to cause bank depositors to rush over to the bank to withdraw their savings. This is called a "bank run" and it is an ugly thing.

Bank runs were a common occurrence in the 19th century. (I posted about this in post #946). A large spate of bank runs in 1907 lead to the formation of the Fed in order to protect banks. The government also set up a deposit insurance scheme which all banks have to pay into. However, if a major bank were to topple over, it would be the taxpayers who have to bail out the bank's depositors.

For your enjoyment, I have included the famous bank run scene from Jimmy Stewart's "It's a wonderful life".

Thank you psionI0, I think this could be considered a (risky) flaw, but it seems this FRB also has some "good things" in it - like the things we said before about being able to get credit and start-up a busines, etc. The percentage is maybe important? Of the reserves? And also WHAT will people do with their loans? If we all burn it, then ehm well I guess that would be a problem, now wouldn't it be? Gheheh. I am correct of course in my way of thinking.

So they go indeed bankrupt - money disappears - I think I believe that, but I am not sure if I could prove it - yet. I trust you on this one And I read something about Iceland and Argentina et al (up to the Goldsmiths that were hung in Amsterdam in the 17th C I think) so I guess some people are really losing their savings sometimes. And it seems to me all kinds of ACTIONS within the "markets" could cause all kinds of troubles - maybe like we see now - and some "good old people" good be ehm De Sjaak (that is Dutch for "the losers" - so losing their hard (or soft) earned saving).

It read about the BANK-RUNS as well a bit, and I understand that rumours are important in the markets, like with the stocks et al. These act on info sometimes as I understood, and this could be false or good info, etc - setting things into MOTION.

Thanx for that link! These RUNS seem to occur more often than I thought they were (relatively maybe) just like crisis are in history and this makes me wonder IF we are dealing with the SAME PROBLEMS now and then? If yes what could they be (except for greed and stupidity of course, they seem to be "involved ", at least up to some degree most of the time - IMhO

I take a look at Jimmy Stewart later, don't have time now, but his name does not ring a bell, so I am gonna read about it!

Good Luck for now and thanx for the info again,

Finsend

PS I like this thread very much, good st*ff for me, I learn a lot in a pleasant way here!

 

[Finsend]

* slighty OT - HISTORY Goldsmiths etc in Finsendian

Hi people,

Some history things I collected from the net, my interpretations and words here of the things I read - so no truths!

It seems that there is not much info about the GOLDSMITH's and the reserves they kept (I could not find it so much) and it seems to me that there were first no regulations about the reserves (but I could be wrong).

I think - in the beginning - they just decided themselves what would work, as far as the amounts of reserves are concerned.

And I read some were even hanged (in Amsterdam for example) when they could not pay out.
So I think they just tried to figure it out for themselves some taking more RISKS than others, maybe - back in the old days I mean of course. Later laws were made, like in 1913 for example and some earlier as well about banking, etc...

I also read about the TULIP CRISIS, geheheh, I heard of this before and it is still a very funny story and maybe (also a bit sad) some kind of earlier crisis as we have them now. I think it was greed back then, if I understood correctly and/or insanity maybe, gehehe, still nice to read about it since I live here in Holland and we are a Merchant peoples, some times nice, but sometimes pretty 'evil' or insane as well so it seems to me. But then again what peoples are not once in a while

BACK TO THE GOLDSMITH's again reading things like the US Chamber of Commerce declares the goldsmiths found they could “safely issue $10 for each $1 of gold.” somewhere. But this is according to some not quite accurate, I also read. So I think it grew into what it has become and I bet that some GM's had more reserve's than others and that there were no laws in the beginning of this. And I regard the law of some King also slightly different than the law of the people (although the difference might be tiny sometimes).

As I read on I read that ENGLAND seems to be at the cradle of Goldsmithing as well and it might have started there in the "pre-modern" way, somewhere in the 16th century with the scriveners, merchants and traders overthere. They (merchants et al) amassed huuuuuge hoards and TONS of GOLD and valuable things. And some entrusted some of their wealth to the ROYAL MINT for storage (I am repeating the wiki - helps me to get things inside my brain and maybe other people like my post using BOLD markers and things like that to skiprip crossread humpty dumpty from word to word, losing not to much TIME all the time If it is inappropriate here to you - messing up this thread - please let me now! I read this KING CHARLES I ripped the MINT in 1640, gehhehe, because he needed the cash or something as a "loan", geheheheh And I wonder if everybody was happy with that, my source does not say. But I read some merchants then stuffed their wealth in the VAULTS of te GOLDSMITH's for safe-keeping and had to pay for that service. And here them MERCHANTS GOT RECEIPTS as evidence that the heaps of gold belonged to them. And with these they could withdraw. I think this was on a personal basis first, I'm not sure, but at some time the RECEIPTS could also be used by agents of the merchants and/or everybody else who got their hands on them, I guess. So THESE RECEIPTS STATED QUANTITIES AND PURITY etc and whom they stashed metals, etc belonged to - but this last part was maybe getting out of the picture some time - so that it just said - THIS RECEIPT HAS CAN BE EXCHANGED FOR (has a "value of) THE AMOUNT OF this many COINS of this type AS are KEPT (catching some dust, hopefully for you - the one - carrying this paper note) IN OUR VAULT OVERHERE are @ Ye Olde Goldsmithy Inc, PO BOX etc - I think it was actually people back then who would be held responsible like with that guy that was strung up in Amsterdam somewhere in the 17th C, I guess.
The the law of Darwin and The People, or something like that, I suppose

So, something like this or that I guess
For me. 4Now.

Cheers,

"oh no noooOOOO NOT more coffee! Finsend"

 

[Finsend]

* last one for now - ANCIENT MONEY THINGS! HAMMURABI et al

Hello,

Here's some very Ancient Laws about money and even interest and receipts.

From the Code of Hammurabi, dating to ca. 1700 BC (could be 2000 I don't care, I HATE numbers and years.

49. If any one take MONEY from a merchant, and give the merchant a field tillable for corn or sesame and order him to plant corn or sesame in the field, and to harvest the crop; if the cultivator plant corn or sesame in the field, at the harvest the corn or sesame that is in the field shall belong to the owner of the field and he shall pay corn as RENT, for the money he received from the merchant, and the livelihood of the cultivator shall he give to the merchant.

100. . . . INTEREST for the money, as much as he has received, he shall give a NOTE therefor, and on the day, when they settle, pay to the merchant.

102. If a merchant entrust money to an AGENT (BROKER) for some INVESTMENT, and the broker suffer a loss in the place to which he goes, he shall make good the capital to the merchant.

105. If the agent is careless, and does not take a RECEIPT for the money which he gave the merchant, he can not consider the unreceipted money as his own.

106. If the agent accept money from the merchant, but have a quarrel with the merchant (denying the RECEIPT), then shall the merchant swear before God and witnesses that he has given this money to the agent, and the agent shall pay him three times the sum.

107. If the merchant cheat the agent, in that as the latter has returned to him all that had been given him, but the merchant denies the receipt of what had been returned to him, then shall this agent convict the merchant before God and the judges, and if he still deny receiving what the agent had given him shall pay six times the sum to the agent.

You can find translations of the whole Codex here:

Sources:
http://avalon.law.yale.edu/ancient/hamframe.asp
http://public.wsu.edu/~dee/MESO/CODE.HTM.

 

[lomiller]

Inflation I did not study very well - yet.
But I think you are saying that inflation could be caused (or has to do with) by the amount of M2 money? Difficult sentence for me, you wrote there. But maybe I understand it.

Famous quote by Milton Friedman
"Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."


Thus one of the key roles of modern central banks is to monitor inflation and increase/decrease the money supply to keep in the desired range (usually 1%-2%) but this isn’t always easy because it responds to M2 money which the central banks can influence but not control. On a day to day level, however banks in their normal operation respond to the changing needs of the economy far faster than a central bank can so even if control is less precise it’s still better to work this way.

The last sentence is also a bit more difficult, but I have some idea.
What contexts could that be? And what doings do you means?

Depending on the context bank deposits can either be money or they can simply be a contract between borrower&lender. The process of FRB creates additional deposits which are in a way very similar to futures contracts they are promises to deliver a certain amount of money on certain terms. In some contexts this acts like money so it’s called money. In other another context however it does not behave the same way real base money does.
When people say “banks are creating money via FRB” they are making 2 mistakes. Fist the bank isn’t creating money; it’s the interplay between bank and borrower that creates the money. Second they are conflating the context. What they create is only money in certain contexts but it’s very different from money in another context.

Does this mean the FED will print/create it for the banks in trouble, like I think the ECB is also doing maybe?

It can, it has the authority, but it’s a power that the Fed is extremely reluctant to use because of the obvious dangers. It’s something that would be done only if every other alternative was exhausted, and possibly not even the.

FIDC I do not know - wait - Federal Deposit Insurance Corporation (FDIC) = is a United States government corporation created by the Glass–Steagall Act of 1933. Ok so I have some idea, but not too much I'm afraid Maybe I dig into this later. Where do they get their money from?

2. Ok. This seems clear. FED can always create money - but this could cause other problem(s) right? If they do it too much too fast maybe?

I heard of this Lehman Bank and how it went down. Why were they not saved by 1. or 2.?

FDIC doesn’t protect banks it protects depositors and Lehmans was an investment bank which means it can’t provide services like demand deposits. A big part of the problem is Lehmans no longer had collateral for loans when the value of the mortgage backed securities they held dropped.
Ultimately, however, the US treasury made a conscious decision to allow Lehman to go down under the premise because they were worried about moral hazard. The common libertarian view that Alan Greenspan long held and actually recanted before congress is that if you simply sit back and allow business who make bad decisions to fail the market will regulate itself and eliminate these bad decisions.

What they rapidly discovered, however, is that the banking system is so large an interconnected that allowing one part of it to fail could cause other parts to fail and cause a domino effect where one bank after another fails do to decisions they had little to do with.

 

[lomiller]

Well done Finsend. You have uncovered the fatal flaw in FRB - banks can't pay out all of their depositors at the same time.

Of course the chances of everyone withdrawing all their money at the same time is so statistically improbably that it likely wouldn’t occur even once in the history of the universe. It could still happen for a non-random reason but things with known causes can be understood and prevented. We don’t say “the fatal flaw of passenger jets is they could crash into buildings” we look at the reason why they may crash into buildings and prevent that from occurring rather than doing away with passenger jets.

Second, while it’s true that since bank depots exceed the value of real money in existence it does not mean the system can’t accommodate the withdrawals of all of them simultaneously central banks can create new money at a moment’s notice to cover this. As a practical concern the real problem would be printing the physical paper money needed.

Untimely the value of our current baking system to our economy is immense and irreplaceable. No other system we know of could support the wealth and economic activity we currently have so it makes far more sense to tweak the system when we see problems then to try and replace it.

 

[Finsend]

Just for me so I can see/remember:

M2 wiki MONEY includes:

- Notes and coins (currency) in circulation (outside Federal Reserve Banks, and the vaults of depository institutions)
- Traveler's checks of non-bank issuers
- DEMAND DEPOSITS (A demand deposit or bank money refers to the funds held in demand
deposit accounts in commercial banks.[1] These account balances are usually considered money and form the greater part of the money supply of a country).
- Other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.
- Savings deposits
- Time deposits less than $100,000 and money-market deposit accounts for individuals

Famous quote by Milton Friedman
"Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."

What is this output?
What would that be?
Did he mean production or something like that?
If so
This raises the question how do you measure that?
What is this output and how do you determine it's value, I mean I see quantity of money being compared to this output - quantity of money I can imagine, but this output is a bit unclear to me. Maybe it means something completely different? Still they are compared to each other.

Thus one of the key roles of modern central banks is to monitor inflation and increase/decrease the money supply to keep in the desired range (usually 1%-2%) but this isn’t always easy because it responds to M2 money which the central banks can influence but not control. On a day to day level, however banks in their normal operation respond to the changing needs of the economy far faster than a central bank can so even if control is less precise it’s still better to work this way.

I think I have some picture of this, M2 can be influenced but it is hard to control for a
Central Bank. CBanks respond faster and have a more direct influence. I should do some more reading about inflation I guess.

Depending on the context bank deposits can either be money or they can simply be a contract between borrower&lender. The process of FRB creates additional deposits which are in a way very similar to futures contracts they are promises to deliver a certain amount of money on certain terms. In some contexts this acts like money so it’s called money. In other another context however it does not behave the same way real base money does.

So bank deposits can be a contract or money.
I understand the (sum of) money part.

And I think a bank deposit can include coin and paper currency, deposits of valuables in safe deposit boxes maybe. Important papers, jewelry, and other things people want to keep in a protected environment.

What are these contracts are these IOU's for example?

SIDE - NOTE for Finsend - should look up back - I think I asked this before do only dollars count as reserves or also gold/jewelry foreign currency etc?)

I understand some of the FRB process creating additional deposits and can imagine these are future contracts, promises... prooooomemeeesis sorry, that was a song was it not?
to deliver money on certain terms. This acting as money is clear to me (more or less) but this other context is not completely - yet. I think it has to do with the type of deposit (?) being not base money - but we are not talking about jewelry here are we? Maybe I am missing the point here, could very well be the case.

So this is still a bit fuzzy for me, but I think I will check the internet to see if I can find some more info about this context and types of deposits!

When people say “banks are creating money via FRB” they are making 2 mistakes. Fist the bank isn’t creating money; it’s the interplay between bank and borrower that creates the money. Second they are conflating the context. What they create is only money in certain contexts but it’s very different from money in another context.

THIS IS AN IMPORTANT PART for me.

QIo-It’s the interplay between bank and borrower that creates the money.-UQIo

This is "true" and important. AND there are many many many things to say about this one.
A very important statement as far as I am concerned. And here we could get into the opinion-section I guess... Maybe we should.

Because it is indeed (IMO) some kind of interplay - as you say
I think this is what this thread is about for some (big) part.
More on this one later I hope!


2nd - Context - this is probably technical?
Is it?

I am not sure what you mean exactly by these contexts, but I have some ideas.
Maybe you c/would say some more about these contexts so I understand what you mean by that (?). Or point me to someplace.

--

Originally Posted by Finsend
Does this mean the FED will print/create it for the banks in trouble, like I think the ECB is also doing maybe?

It can, it has the authority, but it’s a power that the Fed is extremely reluctant to use because of the obvious dangers. It’s something that would be done only if every other alternative was exhausted, and possibly not even then.

This might be about the To Big to Fall one's?
An important issue - maybe - as well.

--

Originally Posted by Finsend
(1.) Government Aid - FIDC I do not know - wait - Federal Deposit Insurance Corporation (FDIC) = is a United States government corporation created by the Glass–Steagall Act of 1933. Ok so I have some idea, but not too much I'm afraid Maybe I dig into this later. Where do they get their money from?

2. Ok. This seems clear. FED can always create money - but this could cause other problem(s) right? If they do it too much too fast maybe?

I heard of this Lehman Bank and how it went down. Why were they not saved by 1. or 2.?

FDIC doesn’t protect banks
<snip>
cause a domino effect where one bank after another fails do to decisions they had little to do with.

Thanx for this info I seem to understand most of it.

Still I asked:

What if lots of people run to the bank and ask for their money, what will happen, if the banks cannot pay? The banks could default and the people could lose their money, could they not?

You said:

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 cannot 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 <snip by Finsend> could not keep their reserves up.

FDIC doesn’t protect banks it protects depositors
<snip>
moral hazard.
<snip>
market will regulate itself and eliminate these bad decisions.
<snip>
What they rapidly discovered, however, is that the banking system is so large an interconnected that allowing one part of it to fail could cause other parts to fail and cause a domino effect where one bank after another fails do to decisions they had little to do with.

I <snipped> and bolded First and Second up

SO FIDC will help depositors up to $250K (when - if a bank cannot pay up - I guess so(?) - I guess $250K per depositor(?).

I guess they have thought about this and did the math (which I hate) so this would be (some/big?) safety net - is there a max total limit of cash/reserves etc this FIDC has BTW?

AND we have 2nd The FED who has the power to lend money to the banks directly (using current interest rate? / no interest?) BUT FED prefers other banks do this IF they have excess reserves - banks wanting some loan need to have quality assets as collateral - things like stocks bonds real estate, I guess.

- - -

Some things I wonder about lately:

Lately I hear a lot about Greece, Ireland, Portugal, maybe Spain, Italy, France, Belgium, etc but also about the US debt, etc. Some banks that might or might not be in trouble, etc.

So with regards to the current situation and remembering 2008 etc is there anyway of saying that other banks might fall, in the US or UK/Europe - I guess it would be similar over here on the other side of the pond - for example? Is this safety net enough if things get worse, what should the FED/others do and how could these debts be erased, etc, etc...

...

Now I take break
So thank you very much for this one!
I learned a lot again, and

Cheers4now,
Finsend

 

[Finsend]

Of course the chances of everyone withdrawing all their money at the same time is so statistically improbably that it likely wouldn’t occur even once in the history of the universe. It could still happen for a non-random reason but things with known causes can be understood and prevented. We don’t say “the fatal flaw of passenger jets is they could crash into buildings” we look at the reason why they may crash into buildings and prevent that from occurring rather than doing away with passenger jets.

Agreed, very small chance.

Still some people might, as they have before and might be doing in Greece a little bit nowadays. And there seems to be this domino effect as well - which you referred to as well as I seem to remember, hopefully correctly - so some consideration might be useful (?).

Second, while it’s true that since bank depots exceed the value of real money in existence it does not mean the system can’t accommodate the withdrawals of all of them simultaneously central banks can create new money at a moment’s notice to cover this. As a practical concern the real problem would be printing the physical paper money needed.

Yes they can, as I understood. In Europe we have this heap of gold somewhere to help out the countries that seem to have some troubles now as well as "future problematic countries", like maybe Spain, Italy, Belgium, etc. Banks were also helped in 2008, some became almost government banks I guess... For a while or so

And there might be some other issues/problems with the creation of huge amounts of new/extra money by the Central Bank(s) as well. And of course the paper money as well

Untimely the value of our current baking system to our economy is immense and irreplaceable. No other system we know of could support the wealth and economic activity we currently have so it makes far more sense to tweak the system when we see problems then to try and replace it.

I think it certainly has it's advantages. And besides them we have it now, here on the table, so we have to deal with it in the current situations. Still I wonder sometimes what drives production and what is this "magick" of banking, this "mental engine" in a way, or so it seems to me - from some perspective.

A little thought experiment

What if all the money was gone *whoops* like that - and everybody still did exactly what he or she does now. Then our production would be the same and lots of people working at banks and Wall Street etc could help in other sectors. Not a very realistic idea, but it is meant as a question about the drive and the way we build our societies, what drives us and how can we make things more efficient and create even more wealth for even more people - on Mars etc

Sorry I wrote it a bit crappy But think about it and also ask yourself where does this wealth come from. If we look at labour and production and resources, etc there could be said a lot about this. Sure banks are handy and contribute to all of this, but I my point of view there is much more to this story. As you probably know as well. Looking at my country and Europe and the US you could say the wealth we have also comes from some other places, just like our resources and labour and lots of things - so it is - IMO - not only the banking system that supports this wealth and/or created it...

Anyway just some thoughts here.

Cheers
Finsend

 

[psionl0]

Of course the chances of everyone withdrawing all their money at the same time is so statistically improbably that it likely wouldn’t occur even once in the history of the universe. It could still happen for a non-random reason but things with known causes can be understood and prevented. We don’t say “the fatal flaw of passenger jets is they could crash into buildings” we look at the reason why they may crash into buildings and prevent that from occurring rather than doing away with passenger jets.

If a design flaw causes a jet aircraft to crash into buildings during stormy weather then it makes more sense to replace the aircraft with one that doesn't have the design flaw than to try and control the weather.

Second, while it’s true that since bank depots exceed the value of real money in existence it does not mean the system can’t accommodate the withdrawals of all of them simultaneously central banks can create new money at a moment’s notice to cover this. As a practical concern the real problem would be printing the physical paper money needed.

That is absurd nonsense. The Fed could no more create new money to cover a banking collapse than it could to cover a government deficit. Replacing non-M0 money with M0 money would cause massive inflation. (It would give other banks excess reserves).

Untimely the value of our current baking system to our economy is immense and irreplaceable.

The financial crises all over the world would suggest otherwise although admittedly, if governments didn't borrow money then this aspect of FRB would not be a problem.

No other system we know of could support the wealth and economic activity we currently have so it makes far more sense to tweak the system when we see problems then to try and replace it.

That is just a baseless assertion. We don't need banks in order to create money. There are a number of alternative systems which are at least equally capable of supporting the "economic activity we currently have".

 

[Blue Mountain]

That is just a baseless assertion. We don't need banks in order to create money. There are a number of alternative systems which are at least equally capable of supporting the "economic activity we currently have".

Such as?

 

[Finsend]

Flunker here

*WOOP-C*

Double poster!

Make some fun here I guess, why not do it?

"No way!" "Give me ALL your BANANAS!"

 

[Finsend]

Read this one!

No other system we know of could support the wealth and economic activity we currently have so it makes far more sense to tweak the system when we see problems then to try and replace it.

Could that also be "No other system we know of YET?"

I think things should not have to be static, all the time - so changes might be happening and we might be able to be part of them, as always we are, IMhO. So adaption might be the way and I think it is indeed "unrealistic" to change things (completely) in one day or a year, etc. Still changes will occur, I am certain of this, because of history mainly, I guess - my view on it, etc.

And (some) (long term) vision might be a handy tool as well.

If a design flaw causes a jet aircraft to crash into buildings during stormy weather then it makes more sense to replace the aircraft with one that doesn't have the design flaw than to try and control the weather.

Such as?

Good question, BM, IMhO!

And very interesting 2me as well, but maybe a bit OT (hope not, any moderators want to elaborate on this?).
I suppose we might continue untill some mod says we can't - agreed?

If we look at history we see all kinds of systems, failing and/or suceeding - more or less...

This is one of them!

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

And there are/have been many many many others, check them out!
And let's talk about this subject some more!

Also Utopias maybe

"Things" that "work" and things that don't.

Cheers,
Finsend

PS

I noticed I am a THINKER nowadays!
YIHAAAA!

8 ( dude, say what? )

 

[Aber]

You have uncovered the fatal flaw in FRB - banks can't pay out all of their depositors at the same time.

This is true in all banking UNLESS every loan is matched by a deposit with equal maturity.

Unfortunately many borrowers want to borrow over a 10 to 20 year period and not many people want to fix a deposit for more than a year.

 

[Finsend]

This is true in all banking UNLESS every loan is matched by a deposit with equal maturity.

Unfortunately many borrowers want to borrow over a 10 to 20 year period and not many people want to fix a deposit for more than a year.

Is this the case in "reality"?:

QA"every loan is matched by a deposit with equal maturity."UQA

According to you or course.
Close to it?

I guess not?
But I don't know, so it could be.

 

[Aber]

The reality in the current banking system is that there is always a mismatch between the maturity of loans and deposits.

The skill in banking management (and regulation) is managing the risk that too many depositors will want to withdraw their money at the same time.

 

[Finsend]

(F: A.)The reality in the current banking system is that there is always a mismatch between the maturity of loans and deposits.

(F: B.)The skill in banking management (and regulation) is managing the risk that too many depositors will want to withdraw their money at the same time.

A. I don't know, but this sounds plausible to me.
B. Agreed.

 

[psionl0]

This is true in all banking UNLESS every loan is matched by a deposit with equal maturity.

If the objective is to match the rate of deposits and loan repayments with that of withdrawals and new loans then you can't have on-demand withdrawals. There needs to be restrictions against timely withdrawals.

However, tying individual deposits to individual loans is a gross overkill.