Startz
Muse
That's exactly what I was doing in the first part, where there was no currency in the model. In the second part, I put currency back in. So I think we're in complete agreement.
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How the banks create money
- Thread starter webb5
- Start date
That's exactly what I was doing in the first part, where there was no currency in the model. In the second part, I put currency back in. So I think we're in complete agreement.
Startz
Muse
I probably didn't read carefully enough. Some people--and I have no reason to believe anyone here is one of them--have the notion that compound interest means that the banking system necessarily implodes. This is very "wooish." So I was thinking about something no one here has said. (Sorry.)
The growth of both private and public debt is a cause for concern. It's not so clear that either necessarily has anything to do with the banking system. There are all kinds of other lending. In the U.S., banks clearly played a role in an overexpansion of credit. But this didn't happen in Canada. Both have fractional reserve banking.
Remember that during the U.S. housing bubble, households thought that their nonliquid wealth had increased enormously compared to their income. That makes increased borrowing perfectly reasonable. Except, of course, it turned out wealth hadn't magically increased.
Accountancy training and practical experience in banks, but years ago and none in the US.
This area can get quite complex, especially when looking at central banks, as it lies at the intersection of accounting and economics and the disciplines look at the same things in different ways.
My view is that the banking system generally works, but is much more fragile than people realise as it depends on confidence in the system. Bankers also try to exploit any loopholes in the regulations, so what worked in one generation may not be suitable for the next.
psionl0
Skeptical about skeptics
Now I see what you did. You derived a formula for a base multiplier (as distinct to a reserve multiplier). If all of the base money is in the banking system (cu = 0) then the base multiplier and the reserve multiplier are one and the same (1/r).
It's not a question of whether the base multiplier is more "accurate" than the reserve multiplier but whether it is more "useful". I have always believed that the "cash economy" exists separately (though not necessarily independently) of the banking system. So, if dealing with the banking system alone, I would prefer the reserve multiplier.
OTOH no economist is going to invent a useless parameter.
tensordyne
Muse
- Joined
- May 12, 2010
- Messages
- 693
FRB, what it is in essence, not how it works.
That is your model and you are sticking with it. I am going to demolish that model below.
Yes, you did. I am asking for a balance sheet though. The example
is not a balance sheet. I have my own reasons for asking for this. Note that you will need Assets and Liabilities sections. In the Assets section you need Loans and Reserves, in the Liabilities you need Capital and Deposits.
You could have just copied the example of the ones I have given (even if for no other reason then for formatting). Wow, what a thought! Then you would have met my challenge, made me look like a fool, and been done with the whole thing, but I guess you were not quite clever enough for that little ruse. Oh well.
Incorrect about the relevance of the "out of nothing". Before going into that though, let me quote you from an earlier post:
This tells me you think of FRB banking in the same way as how pay-day loans work. That the "bank" as lender puts it's and other people's resources on the line only. This is not true. You have not considered the role that society as a whole plays in this equation. I will attempt to make this more explicit a little later.
Before I go into that, I guess I should also note that banks, as one of the things they do, is like the above. The accounts in which this happen are not demand deposit accounts, which is the part that normally goes with FRB. These types of accounts come with time and access restrictions and many of them have no reserve requirements.
So, let's get into the supposed irrelevance of the deposit additions when a loan is made.
Now, Sceptic-PK says the addition of the money in deposits during the loan making process is 'irrelevant'. I, of course, disagree, but until I thought about it for a second, I could not place why I disagreed. Here is my answer as to why I consider the addition of deposit money 'relevant'. I will take it as relevant when any party to the loan process has to either put up work or money. In general, work is traded for money.
Now, with that definition of relevancy in place, why is the addition of deposit money relevant? To answer that, one should first say who are the counter parties to the borrower, what are they putting on the line, and what are they getting back in return. Here is my breakdown of the situation.
The money in reserves comes from loans to the bank in the form of deposits as well as investments made by the bank owners in the form of capital. When a loan in FRB is made, the borrower gets credited some amount of money, but this money does not come from reserves, since reserves remains unaffected by a loan. The money is from society at large, it is, in actuality, a loan from everyone, to the borrower. The bank puts in it's own money (made up from capital and deposits) as a form of collateral, in case the loan defaults.
Assuming everything goes well, the borrower gives society and the bank a receipt on future earnings the borrower may earn, which is what a promissory note is. In return, the borrower gets credited a certain amount of money. When the borrower spends the money into society, the borrower gets something in advance of full repayment to society where the thing was produced and work done to make it (similar logic for services rendered). Then the borrower repays society by having the bank in trust of society, zero out the principal of the loan, after of course hopefully having the borrower work for society, earning back the money it put into society, and then some for interest.
The borrower repays the bank for having the bank put it's money on the line as collateral by paying the bank the interest as spelled out on the promissory note, as well as pursuant to relevant laws. The bank repays the depositors for allowing the bank to use their loaned money (as collateral for other loans) by paying them an interest that is less than the interest it charges for acting as a trust for society, and a co-signer to a loan deal by putting up it's own collateral for a loan between the borrower and society.
Oh, I forgot to mention something. The borrower must also put up some collateral quite often in these kinds of deals, in the form of the thing the borrower is going to get when the loan comes in (house, car). If and when the loan is defaulted on, we, in our utter stupidity, have decided that banks are the ones who should be refunded by giving them (the original collateral holders), the collateral that is built up from the borrower's purchase.
That, my dear Sceptic-PK, is the basis of who owes whom and why, in fractional reserve banking. It is very different then the model you advocate as to what FRB is doing. And, it makes the additions made to deposits relevant by the definition I gave above because society put up its money.
Assuming you were correct, here is what happens in your model. The bank takes the money from deposits and its own investments (capital) and transfers it to another deposit account (already red flag here, the accounting in FRB does not work this way!). In return for the loan, the borrower repays the bank (in a way that would also break FRB accounting), the bank repays the depositors, and everyone is hunky-dory.
Wrong! WRONG! wrong wrong, wrong. The above is wrong! Did I mention that the part above in italics is farcically, ironically, fantastically, WRRRROOOONNNNG! It makes correct look like it is right because the above in italics is WRONG.
Just wanted to make sure that was clear.
There is no mention of society in your way of thinking about FRB Sceptic-PK. You could include collateral in your model if you wished, but I did not hear you mention much about it. This model of yours, as to how FRB works, is so simplified, that it is as if someone made it up so that someone who was not too bright could maybe understand something about how FRB works, but not really. That, is the model of FRB you subscribe to Sceptic-PK.
I, for one, think you could be smarter than that. I have the feeling, that after reading the above, I think you will get it intellectually, but maybe your 'gut' will get in the way. Do not think with your stomach! This is how it works. Deal with it.
And reserves without deposits are worthless to the account holder. From the above I hope you can follow why parts of the statement above are non-starters. If not, whatever, I am writing for myself and others who can understand anyway.
It is interesting to me because it has to do with the law and society. At the very least, FMOTL is a different philosophy on how people should be treated.
All the best to you Sceptic-PK!
That is your model and you are sticking with it. I am going to demolish that model below.
Yes, you did. I am asking for a balance sheet though. The example
is not a balance sheet. I have my own reasons for asking for this. Note that you will need Assets and Liabilities sections. In the Assets section you need Loans and Reserves, in the Liabilities you need Capital and Deposits.
You could have just copied the example of the ones I have given (even if for no other reason then for formatting). Wow, what a thought! Then you would have met my challenge, made me look like a fool, and been done with the whole thing, but I guess you were not quite clever enough for that little ruse. Oh well.
Incorrect about the relevance of the "out of nothing". Before going into that though, let me quote you from an earlier post:
This tells me you think of FRB banking in the same way as how pay-day loans work. That the "bank" as lender puts it's and other people's resources on the line only. This is not true. You have not considered the role that society as a whole plays in this equation. I will attempt to make this more explicit a little later.
Before I go into that, I guess I should also note that banks, as one of the things they do, is like the above. The accounts in which this happen are not demand deposit accounts, which is the part that normally goes with FRB. These types of accounts come with time and access restrictions and many of them have no reserve requirements.
So, let's get into the supposed irrelevance of the deposit additions when a loan is made.
Now, Sceptic-PK says the addition of the money in deposits during the loan making process is 'irrelevant'. I, of course, disagree, but until I thought about it for a second, I could not place why I disagreed. Here is my answer as to why I consider the addition of deposit money 'relevant'. I will take it as relevant when any party to the loan process has to either put up work or money. In general, work is traded for money.
Now, with that definition of relevancy in place, why is the addition of deposit money relevant? To answer that, one should first say who are the counter parties to the borrower, what are they putting on the line, and what are they getting back in return. Here is my breakdown of the situation.
The money in reserves comes from loans to the bank in the form of deposits as well as investments made by the bank owners in the form of capital. When a loan in FRB is made, the borrower gets credited some amount of money, but this money does not come from reserves, since reserves remains unaffected by a loan. The money is from society at large, it is, in actuality, a loan from everyone, to the borrower. The bank puts in it's own money (made up from capital and deposits) as a form of collateral, in case the loan defaults.
Assuming everything goes well, the borrower gives society and the bank a receipt on future earnings the borrower may earn, which is what a promissory note is. In return, the borrower gets credited a certain amount of money. When the borrower spends the money into society, the borrower gets something in advance of full repayment to society where the thing was produced and work done to make it (similar logic for services rendered). Then the borrower repays society by having the bank in trust of society, zero out the principal of the loan, after of course hopefully having the borrower work for society, earning back the money it put into society, and then some for interest.
The borrower repays the bank for having the bank put it's money on the line as collateral by paying the bank the interest as spelled out on the promissory note, as well as pursuant to relevant laws. The bank repays the depositors for allowing the bank to use their loaned money (as collateral for other loans) by paying them an interest that is less than the interest it charges for acting as a trust for society, and a co-signer to a loan deal by putting up it's own collateral for a loan between the borrower and society.
Oh, I forgot to mention something. The borrower must also put up some collateral quite often in these kinds of deals, in the form of the thing the borrower is going to get when the loan comes in (house, car). If and when the loan is defaulted on, we, in our utter stupidity, have decided that banks are the ones who should be refunded by giving them (the original collateral holders), the collateral that is built up from the borrower's purchase.
That, my dear Sceptic-PK, is the basis of who owes whom and why, in fractional reserve banking. It is very different then the model you advocate as to what FRB is doing. And, it makes the additions made to deposits relevant by the definition I gave above because society put up its money.
Assuming you were correct, here is what happens in your model. The bank takes the money from deposits and its own investments (capital) and transfers it to another deposit account (already red flag here, the accounting in FRB does not work this way!). In return for the loan, the borrower repays the bank (in a way that would also break FRB accounting), the bank repays the depositors, and everyone is hunky-dory.
Wrong! WRONG! wrong wrong, wrong. The above is wrong! Did I mention that the part above in italics is farcically, ironically, fantastically, WRRRROOOONNNNG! It makes correct look like it is right because the above in italics is WRONG.
Just wanted to make sure that was clear.
There is no mention of society in your way of thinking about FRB Sceptic-PK. You could include collateral in your model if you wished, but I did not hear you mention much about it. This model of yours, as to how FRB works, is so simplified, that it is as if someone made it up so that someone who was not too bright could maybe understand something about how FRB works, but not really. That, is the model of FRB you subscribe to Sceptic-PK.
I, for one, think you could be smarter than that. I have the feeling, that after reading the above, I think you will get it intellectually, but maybe your 'gut' will get in the way. Do not think with your stomach! This is how it works. Deal with it.
And reserves without deposits are worthless to the account holder. From the above I hope you can follow why parts of the statement above are non-starters. If not, whatever, I am writing for myself and others who can understand anyway.
It is interesting to me because it has to do with the law and society. At the very least, FMOTL is a different philosophy on how people should be treated.
All the best to you Sceptic-PK!
Startz
Muse
There's a substantive issue behind the modelling choice. The idea is that the public is free to exchange currency and bank reserves by making deposits and withdrawals. So that the Fed can control the total (base money) but can't really control just reserves. That's why the multiplier is written the way I did. I can't say I know of any evidence supporting one view over the other.
In any event, these multipliers are mostly for intuition rather than policy making per se. The Fed actually separately tracks every monetary aggregate separately.
No promises.
tensordyne
Muse
- Joined
- May 12, 2010
- Messages
- 693
2 step for the Bank, doe see doe your partner, yeah!
I have to say, I like the level that the discussion has just gone to, which is way up, a quantum step up, as it were.
As far as possible instabilities that are inherent in the banking system goes, I think there could be two main contributing factors that might even in themselves be causes of instability. I am curious on how both you Startz, and you psionl0, will think about them, so here goes.
1. "The host government of a central bank goes into an impossible contract when it gets loans. These loans 'infect' other loans that normally have at least the theoretical ability to be repaid, and are thus, not impossible contracts initially, but become practically impossible by the infection. The more loans that get infected, the more unstable the banking system becomes until too much instability occurs, causing bank runs and other problems."
Now, hold your breath for a second, I know this sounds wooish as all hell, let me present this in terms of assets and liabilities and maybe this can be borne out by analysis. First off, let's be honest, the central bank of a particular country (or countries with ECB), does not have to play by generally the same rules as commercial banks do.
The main thing central banks do not have to worry about is reserve and asset ratio requirements is what I am pointing out here. So if in the balance sheet for a central bank that I present to you seems like it has scary numbers as per those kinds of requirements, don't worry too much about them (unless that is, you know about something I do not, which is entirely possible).
OK, so the first thing I will try to do is create an impossible contract. I want to distinguish between impossible in theory, and impossible in practice. Impossible in theory is a much stronger form of impossibility. In this case, the mathematics is such that a given condition can not be met (since we are talking about loans, it will be the impossibility of repaying a loan using the mechanisms available in the system). Impossible in practice means that while it may be possible in theory, certain practices exist that make it pretty much impossible for something to happen (a poor person not ever getting a job, thus making it impossible in practice for the poor person to pay off a loan the person has).
So we start off with a central bank that has nothing. I will do the no capital case first because it is the one that most clearly shows an impossible in theory loan contract. So, then the central bank makes a loan to it's host government of X. The balance sheet should look like so if I understand correctly how to do balance sheets.
Central Bank of Moneystan
Assets:
Reserves: 0
Loans: X
Liabilities:
Deposits: X
Capital: 0
Now, I am on purpose trying to make a theoretically impossible contract to fulfil, just to show it is possible, and how the impossibility works. If the Central bank of Moneystan wants in return for the loan, any interest at all, the above is an impossible contract. This is because, quite simply, there is not enough in Deposits to pay for what is in loans and the interest that is owed. The only thing Moneystan could do is get yet another loan, which would only compound the problem, but allow for the debts incurred to at least still be serviced.
Now, the real case is probably more complicated. The central bank should have no reserves however, because reserves is what a bank has on the books with a central bank. There should be something like capital for central banks though, so it is possible with capital, that if there is enough capital, the loan may be repaid.
What of infection though? I am not too certain what I mean by this. Normal bank loans should at least be theoretically possible to be repaid (I used to not think this, but now I see that this is the case). From what I understand, in the US for instance, pretty much all of the taxes that go into paying off the national debt go towards interest, with none left over to pay off the principal. If that is the case in the country of Moneystan, then for every new loan made by one if its banks (not the central bank), there will part of it that has to go toward servicing the interest on the national debt.
The part that goes toward servicing the national debt interest means that those loans are now 'infected' by an impossible debt contract (whatever part is used to service the national interest can not be used to paying the loan principal and interest because of taxes). It gets more interesting when you consider the consequences of the national debt interest also not being completely repaid.
If the interest is not serviced (like a person with a credit card paying only the minimum payments but then not even paying that), then the problem becomes the dreaded compounding interest problem (exponential functions away!). This exponentially rising interest at first remains serviceable because Moneystan just goes more in debt, but after a while, the other loans become so infected, the whole system comes crashing down.
2. "The wealth and stored labour value of society flows out to banks through Rentier mechanisms described as per Henry George, thus leaving not enough left for society to ensure stability, resulting in instabilities to the banking system."
I love that word, rentier, pronounced, ron - tee - ay (not rent - ear or ren - teer). Add in some French Physiocrat frillage and I think you will have the right pronunciation. So, the idea is somewhat encapsulated in the above sentence if you have the right background knowledge, but I think it is worth spelling it out even if you know about Henry George and his work.
I am definitely not an expert on Henry George or the Classical Economists, so I am probably going to mess up this explanation to one degree or another. Let me see if I can get the right outlines of the idea, at least.
First, a quick outline of Henry George terminology, as well as one basic idea. First the terminology. Land is any natural resource. The profits due to owning land are called rents. Capital is anything that is man made (I will possibly be using the term capital interchangeably with capital of a bank or even as a different term for money, but these are different. I do disagree with Henry George's idea that one should classify money(capital) the same as capital defined as described before for what capital is, because while money is made from human labour, perhaps even represents human labour, there is another non-capital aspect to money that I think he missed about money, and that is it facilitates trade). So, after that long detour of a parenthetical remark, profits earned from capital is interest. Labour is human work. The profits of sin may be Eternal Damnation (naw!), but the profits of labour is a wage.
Now that that is out of the way, one more Georgist type idea. Land (as in, normal land, the good earth, or some cube of air on it) gets it's value from development near the land. Land in the city is more valuable than in the countryside, that sort of thing. Well, that additional value comes from the community around a given piece of land. More on the implications of that in a second.
This is connected to something banks are also want to do. Banks make loans to real estate investors. What a real estate investor will do at least some of the time (and especially during boom periods) is take a loan from a bank such that the interest is covered by the rental value of the land the investor purchases with the loan. Then the investor sits on the loan for a while, waiting for the price of the land to go higher. Once it is high enough the investor sells, pays back the loan and gets a profit based on the difference in the form of capital gains.
Who is getting what in this deal, as well as how, is the question I will address next. The bank is getting the rent! The classical economists all said they wanted a free-market. Well, a free market is one where rents have been reduced as much as possible (the modern day definition of free market is almost the same as free for white collar criminals not to go directly to jail and not collect $200 for going around the board. Which makes me recall that the game of Monopoly(TM) was originally created to explain this rip-off to everyone, maybe that is why everyone hates playing that damn game! Maybe they should have a new game called Rentier that includes FRB banking, that would really blow some minds (if they could be expected to follow the rules (I know the current banking system can't seem to))).
This is therefore not a free market, as it is not free of rents. The bank in the end (or it's shareholders), gets the rents. They are the end of the rentier chain. The investor on the other hand gets something else. They get the upswing in value created by the community where the land is located. So banks siphon off rents, real estate investors siphon off community investment. Real good deal for both, crappy for everyone else.
Now, when enough siphoning occurs, the end result is that reinvestments that should occur for the upkeep of society, do not occur. This leads to broken roads (the US has an F rating on its infrastructure, I have read, maybe I could find the specific reference if needed), a loss in jobs because capital is not being reinvested, etc. etc., eventually leading to an unstable economic situation in various ways depending on if we are in a boom or a bust period.
My take? I do not know. It could be a combination of 1. and 2., with maybe something else added in, that leads to these instabilities. I thought it would be fun to at least introduce these kinds of ideas for discussion purposes.
I will say one thing for sure, it certainly seems to matter economically if you are the one putting money into the capital of a bank, or the one on the receiving end of capital from a bank (unless you are one of those stupid smiling bank tellers that are always so ridiculously happy all the time)!
All the best to you all!
I have to say, I like the level that the discussion has just gone to, which is way up, a quantum step up, as it were.
As far as possible instabilities that are inherent in the banking system goes, I think there could be two main contributing factors that might even in themselves be causes of instability. I am curious on how both you Startz, and you psionl0, will think about them, so here goes.
1. "The host government of a central bank goes into an impossible contract when it gets loans. These loans 'infect' other loans that normally have at least the theoretical ability to be repaid, and are thus, not impossible contracts initially, but become practically impossible by the infection. The more loans that get infected, the more unstable the banking system becomes until too much instability occurs, causing bank runs and other problems."
Now, hold your breath for a second, I know this sounds wooish as all hell, let me present this in terms of assets and liabilities and maybe this can be borne out by analysis. First off, let's be honest, the central bank of a particular country (or countries with ECB), does not have to play by generally the same rules as commercial banks do.
The main thing central banks do not have to worry about is reserve and asset ratio requirements is what I am pointing out here. So if in the balance sheet for a central bank that I present to you seems like it has scary numbers as per those kinds of requirements, don't worry too much about them (unless that is, you know about something I do not, which is entirely possible).
OK, so the first thing I will try to do is create an impossible contract. I want to distinguish between impossible in theory, and impossible in practice. Impossible in theory is a much stronger form of impossibility. In this case, the mathematics is such that a given condition can not be met (since we are talking about loans, it will be the impossibility of repaying a loan using the mechanisms available in the system). Impossible in practice means that while it may be possible in theory, certain practices exist that make it pretty much impossible for something to happen (a poor person not ever getting a job, thus making it impossible in practice for the poor person to pay off a loan the person has).
So we start off with a central bank that has nothing. I will do the no capital case first because it is the one that most clearly shows an impossible in theory loan contract. So, then the central bank makes a loan to it's host government of X. The balance sheet should look like so if I understand correctly how to do balance sheets.
Central Bank of Moneystan
Assets:
Reserves: 0
Loans: X
Liabilities:
Deposits: X
Capital: 0
Now, I am on purpose trying to make a theoretically impossible contract to fulfil, just to show it is possible, and how the impossibility works. If the Central bank of Moneystan wants in return for the loan, any interest at all, the above is an impossible contract. This is because, quite simply, there is not enough in Deposits to pay for what is in loans and the interest that is owed. The only thing Moneystan could do is get yet another loan, which would only compound the problem, but allow for the debts incurred to at least still be serviced.
Now, the real case is probably more complicated. The central bank should have no reserves however, because reserves is what a bank has on the books with a central bank. There should be something like capital for central banks though, so it is possible with capital, that if there is enough capital, the loan may be repaid.
What of infection though? I am not too certain what I mean by this. Normal bank loans should at least be theoretically possible to be repaid (I used to not think this, but now I see that this is the case). From what I understand, in the US for instance, pretty much all of the taxes that go into paying off the national debt go towards interest, with none left over to pay off the principal. If that is the case in the country of Moneystan, then for every new loan made by one if its banks (not the central bank), there will part of it that has to go toward servicing the interest on the national debt.
The part that goes toward servicing the national debt interest means that those loans are now 'infected' by an impossible debt contract (whatever part is used to service the national interest can not be used to paying the loan principal and interest because of taxes). It gets more interesting when you consider the consequences of the national debt interest also not being completely repaid.
If the interest is not serviced (like a person with a credit card paying only the minimum payments but then not even paying that), then the problem becomes the dreaded compounding interest problem (exponential functions away!). This exponentially rising interest at first remains serviceable because Moneystan just goes more in debt, but after a while, the other loans become so infected, the whole system comes crashing down.
2. "The wealth and stored labour value of society flows out to banks through Rentier mechanisms described as per Henry George, thus leaving not enough left for society to ensure stability, resulting in instabilities to the banking system."
I love that word, rentier, pronounced, ron - tee - ay (not rent - ear or ren - teer). Add in some French Physiocrat frillage and I think you will have the right pronunciation. So, the idea is somewhat encapsulated in the above sentence if you have the right background knowledge, but I think it is worth spelling it out even if you know about Henry George and his work.
I am definitely not an expert on Henry George or the Classical Economists, so I am probably going to mess up this explanation to one degree or another. Let me see if I can get the right outlines of the idea, at least.
First, a quick outline of Henry George terminology, as well as one basic idea. First the terminology. Land is any natural resource. The profits due to owning land are called rents. Capital is anything that is man made (I will possibly be using the term capital interchangeably with capital of a bank or even as a different term for money, but these are different. I do disagree with Henry George's idea that one should classify money(capital) the same as capital defined as described before for what capital is, because while money is made from human labour, perhaps even represents human labour, there is another non-capital aspect to money that I think he missed about money, and that is it facilitates trade). So, after that long detour of a parenthetical remark, profits earned from capital is interest. Labour is human work. The profits of sin may be Eternal Damnation (naw!), but the profits of labour is a wage.
Now that that is out of the way, one more Georgist type idea. Land (as in, normal land, the good earth, or some cube of air on it) gets it's value from development near the land. Land in the city is more valuable than in the countryside, that sort of thing. Well, that additional value comes from the community around a given piece of land. More on the implications of that in a second.
This is connected to something banks are also want to do. Banks make loans to real estate investors. What a real estate investor will do at least some of the time (and especially during boom periods) is take a loan from a bank such that the interest is covered by the rental value of the land the investor purchases with the loan. Then the investor sits on the loan for a while, waiting for the price of the land to go higher. Once it is high enough the investor sells, pays back the loan and gets a profit based on the difference in the form of capital gains.
Who is getting what in this deal, as well as how, is the question I will address next. The bank is getting the rent! The classical economists all said they wanted a free-market. Well, a free market is one where rents have been reduced as much as possible (the modern day definition of free market is almost the same as free for white collar criminals not to go directly to jail and not collect $200 for going around the board. Which makes me recall that the game of Monopoly(TM) was originally created to explain this rip-off to everyone, maybe that is why everyone hates playing that damn game! Maybe they should have a new game called Rentier that includes FRB banking, that would really blow some minds (if they could be expected to follow the rules (I know the current banking system can't seem to))).
This is therefore not a free market, as it is not free of rents. The bank in the end (or it's shareholders), gets the rents. They are the end of the rentier chain. The investor on the other hand gets something else. They get the upswing in value created by the community where the land is located. So banks siphon off rents, real estate investors siphon off community investment. Real good deal for both, crappy for everyone else.
Now, when enough siphoning occurs, the end result is that reinvestments that should occur for the upkeep of society, do not occur. This leads to broken roads (the US has an F rating on its infrastructure, I have read, maybe I could find the specific reference if needed), a loss in jobs because capital is not being reinvested, etc. etc., eventually leading to an unstable economic situation in various ways depending on if we are in a boom or a bust period.
My take? I do not know. It could be a combination of 1. and 2., with maybe something else added in, that leads to these instabilities. I thought it would be fun to at least introduce these kinds of ideas for discussion purposes.
I will say one thing for sure, it certainly seems to matter economically if you are the one putting money into the capital of a bank, or the one on the receiving end of capital from a bank (unless you are one of those stupid smiling bank tellers that are always so ridiculously happy all the time)!
All the best to you all!
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tensordyne
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Oh, one more instability possibility, GREED! Pure, unadulterated, greed. Like the pure cocaine going up the noses of Wall Street investors, the system could very well be undermined quite often by the pure greedy desire of banks to just become fabulously wealthy by engaging in control fraud.
William K. Black "The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry" is on my eventual reading list, is it on yours?
Just thought I would throw that possibility in as many commentators have said that the current crises is the result of similar mechanisms.
William K. Black "The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry" is on my eventual reading list, is it on yours?
Just thought I would throw that possibility in as many commentators have said that the current crises is the result of similar mechanisms.
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tensordyne
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Oh, and if you want to know how this relates to Globalisation, here are two other books
'Superimperialism" by Michael Hudson
and
'Confessions of an Economic Hitman' by John Perkins.
I have read Confessions, but not the other one, so that is on my eventual reading list as well.
'Superimperialism" by Michael Hudson
and
'Confessions of an Economic Hitman' by John Perkins.
I have read Confessions, but not the other one, so that is on my eventual reading list as well.
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tensordyne
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Actually, I just want to read everything by Dr. Michael Hudson, that guy is the smartest Economist I have ever seen, and he loves to put down the Chicago School (of economic rape apologists) even though they are the top rated school in the world for Economics. Awesome! Truth to Power!
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psionl0
Skeptical about skeptics
Are you sure you haven't jumped the gun tensordyne?
After all, Sceptic-PK has until midnight AEST (22 hours from the time of this post) to produce the goods. If you wanted to, you could add another 15 hours to this by extending the deadline to midnight Randi-time (I'm not sure which timezone that is). It's legal.
No doubt, Sceptic-PK has already collated a number of quotes from MMM that prove his theory that banks pay out loans from the money they receive as deposits.
pigsfly)
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tensordyne
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Good job.
Oh, you are probably right. I just figured the chance of him responding at all was so slim I might as well send in the wrecking crew. It was perhaps a somewhat greedy desire on my part for catharsis about the whole thing. I even demolished his not responding by stating how he could have just cribbed from the examples I gave and still met the challenge.
Thus, Sceptic-PK's (I am done with sarcastic ad hom for now, which makes me think, I do not mind ad hominem per se, it is just ad hominem that does not pack any punch that is bad, like saying "You are a dumb dummy-head.", whatever though) inability to recognise that possibility is another sign of a mediocre mind at play.
No, it is just I figured out what he was going on about in the logical and psychological sense, and wanted to be done with it. After I figure something out, it becomes less interesting; on to other mysteries, as it were.
By all means though, if you are reading this Sceptic-PK, and you want to put up a balance sheet to show something, I am sure I and psionl0 will most likely review it for accuracy and try to give as constructive criticism as we can. Who knows, if you do it even before the week is out I will gladly congratulate you on meeting the challenge.
"Good job, well done!"
It is just not fun for me to argue against the mentally handy-capped past a certain point. I mean that with all due seriousness too. It really is not funny in reality. To one degree or another, we are all ignorant or lacking in knowledge and understanding about various topics.
It seems though to me that there are tranches of understanding, such that if the light-bulb goes on at one level, it might never turn on in another level (you understand arithmetic, but can not do algebra, my Mom is that way). It is not anyone's fault at what level their lights shine bright at, it is just a matter of electrical rigging.
So, it is best to leave it at that.
Best of Luck to you Sceptic-PK!
Are you sure you haven't jumped the gun tensordyne?
After all, Sceptic-PK has until midnight AEST (22 hours from the time of this post) to produce the goods. If you wanted to, you could add another 15 hours to this by extending the deadline to midnight Randi-time (I'm not sure which timezone that is). It's legal.
No doubt, Sceptic-PK has already collated a number of quotes from MMM that prove his theory that banks lend money that has been deposited.
Oh, you are probably right. I just figured the chance of him responding at all was so slim I might as well send in the wrecking crew. It was perhaps a somewhat greedy desire on my part for catharsis about the whole thing. I even demolished his not responding by stating how he could have just cribbed from the examples I gave and still met the challenge.
Thus, Sceptic-PK's (I am done with sarcastic ad hom for now, which makes me think, I do not mind ad hominem per se, it is just ad hominem that does not pack any punch that is bad, like saying "You are a dumb dummy-head.", whatever though) inability to recognise that possibility is another sign of a mediocre mind at play.
No, it is just I figured out what he was going on about in the logical and psychological sense, and wanted to be done with it. After I figure something out, it becomes less interesting; on to other mysteries, as it were.
By all means though, if you are reading this Sceptic-PK, and you want to put up a balance sheet to show something, I am sure I and psionl0 will most likely review it for accuracy and try to give as constructive criticism as we can. Who knows, if you do it even before the week is out I will gladly congratulate you on meeting the challenge.
"Good job, well done!"
It is just not fun for me to argue against the mentally handy-capped past a certain point. I mean that with all due seriousness too. It really is not funny in reality. To one degree or another, we are all ignorant or lacking in knowledge and understanding about various topics.
It seems though to me that there are tranches of understanding, such that if the light-bulb goes on at one level, it might never turn on in another level (you understand arithmetic, but can not do algebra, my Mom is that way). It is not anyone's fault at what level their lights shine bright at, it is just a matter of electrical rigging.
So, it is best to leave it at that.
Best of Luck to you Sceptic-PK!
tensordyne
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Talking about mysteries makes me remember something, I do not know how to account for high-powered money in terms of balance sheets! I saw somewhere that high-powered money literally gets multiplied from the reserve or something...
In any event, perhaps going over this last mechanics question will be more fruitful then trying to debate about the nebulous topics I just wrote about.
And I promise psionl0, one of these damn days I will respond to your 2nd and 3rd initial equation posts! I hope you will likewise respond to the post where I explain about modifying FRB to fall in line with Colonial Pennsylvania Banking with the other policy additions as well (about who and what gets taxed, Go, go, Henry George! If he can't do it, no one can!).
'till then, as always, all the best to you all!
In any event, perhaps going over this last mechanics question will be more fruitful then trying to debate about the nebulous topics I just wrote about.
And I promise psionl0, one of these damn days I will respond to your 2nd and 3rd initial equation posts! I hope you will likewise respond to the post where I explain about modifying FRB to fall in line with Colonial Pennsylvania Banking with the other policy additions as well (about who and what gets taxed, Go, go, Henry George! If he can't do it, no one can!).
'till then, as always, all the best to you all!
You need to do some work yet to prove this.
Central banks roles include:
- injecting cash into circulation
- making loans to governements
If a central bank puts cash into circulation:
Asset = cash
Liability = cash in circulation liability account
If a central bank makes a loan to the government:
Asset = loan to government
Liability = government current account
Governments can choose to spend their loan on projects with a positive return and so pay interest on the loan. Also remember that this is not a closed system, and the government/country can profit from exports.
Sceptic-PK
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I’ll just address this piece of nonsense at the minute. At no stage have I stated it works even remotely like this. I have said repeatedly that the deposit liabilities remain the same. Which part of that are you not grasping? Probably the same part you’re not grasping when you take money from reserves in your model while ignoring where those reserves come from (ie deposits).
Wrong! WRONG! wrong wrong, wrong. The above is wrong! Did I mention that the part above in italics is farcically, ironically, fantastically, WRRRROOOONNNNG! It makes correct look like it is right because the above in italics is WRONG.
Just wanted to make sure that was clear.
All you’ve made clear is your inability to read.
psionl0
Skeptical about skeptics
Since you have shouted out this statement many times, I am going to call you out on it. WTF do you mean?
I can think of three possible scenarios that might explain your statement:
- I have (other people's) cash in my vault. In order to lend you money, I hand over some of the cash in the vault in exchange for your promissory note.
- I write an IOU and give it to you in exchange for your IOU (presumably my IOUs are more popular than yours).
- People entrust me with their cash and I record their "deposits" in my accounting software. When you want to borrow money from me you give me a promissory note and I also record this in my accounting software (ie I start up my own bank).
As for the second scenario, I must be honest and say that I don't think you will have any more success spending my IOUs than you would your own.
The third scenario is effectively saying, "banks do nothing that a bank can't do itself".
So which of these scenarios most closely resembles your statement? Or is there a fourth scenario that I haven't thought of?
tensordyne
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!!LOL!! Among the many ways Sceptic-PK's mindset about FRB, is not how FRB works. We've already got your number Sceptic-PK, you just do not want to answer the phone. "Ring, ring, Sceptic-PK's brain? Yeah, do some work you lazy piece of crap."
psionl0
Skeptical about skeptics
Sceptic-PK
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This would be the closest approximation to what I’m saying. There’s nothing stopping you taking somebody’s money and lending it to somebody else (refer stevea’s earlier example about the mattress. This is how FRB works, though obviously the overall process differs). But, at the end of the day, you have clients borrowing money from the bank, who in turn borrow from their deposit customers in order to finance the loan, and you have the deposit customers being paid interest due to their loan to the bank. Yes, the depositing customers can’t really tell their money has been lent, because their statement doesn’t say so and there always seems to be the right amount of money in their account. Welcome to the glories of fractional lending! Haha.
Sceptic-PK
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Sorry, I missed this part. One doesn’t have to be a bank in order to do this.