Debunking fractional reserve conspiracies

[lomiller]

Epic Fail.

Just to expand on that:

The Fed doesn’t give money to banks, it loans it to them when available money drops to the point where they can’t borrow it from anyone else. This only occurs when money supplies or money velocity drop to low, and in both cases the Fed needs to inject liquidity or you risk a repeat of the great depression.

Second, the Fed doesn’t back banks business, that’s the role of their Asset/Capital base. What the Fed Guarantees is their liquidity and it doesn’t provide this service free of charge. When a bank borrows from the Fed it’s charged interest and must pay both principle and interest back.

Finally, the Fed doesn’t do this to protect the banks, but to protect the public from the consequences of a bank lacking liquidity.

 

[GreyICE]

I suggest some people check out the Von Mises Institute and Lewrockwell to learn more about fractional reserve systems. There is some legitimate criticism that is not at all related to conspiracy theories. They do note, however, that our federal reserve and fiat money system clearly benefit the government and bankers at the expense of consumers.

As far as I know free banking resulted in a stabilization of prices and it wasn’t until government started getting more and more involved that it screwed the system up.

Don't dismiss the ideas just because a few crazy people talk about them.

Actually, non-backed banks resulted in this interesting phenomena called a run on the bank, which isn't good for various reasons. But wait, laissez-faire free markets are God, I can't insult God, I'm a heretic, quick get the torches.

 

[The Man]

Actually, non-backed banks resulted in this interesting phenomena called a run on the bank, which isn't good for various reasons. But wait, laissez-faire free markets are God, I can't insult God, I'm a heretic, quick get the torches.

Substitute a run on the bank with a run on GreyICE, with torches no less it might be a laissez-fire free market.


“Torches! Get your torches here! They’re red hot! Get your red hot torches here!”

 

[se7ensnakes]

yes IOMILLER, the fed does "loan" the money. But as the money is "loaned" the it enters circulation thereby causing inflation. The bank gets to use the money before it circulates, and causes inflation. Those who work for the money do not, so by the time the bail-out money inflationary situation hits the working person, his money is devalued.
But actually, it is far worse than that.
What happened in the grand 1933 BANKERS HOLIDAY? Hordes of people / foreign governments when in to cash in their gold notes for real gold. There were many bank runs, bank failures. FDR decided to close the banks and eventually traded real assets for paper. FDR force the people of the United States to give up their property, represented in gold for paper. Gold prevents governments, private institutions from doing a tap dance party on legal tender currency. Why did the government force people to give up their gold? One answer: Fractional Reserve Banking.
In a debt based system, corporations do not fund their own expansion, people borrow to buy products, savings dwindle due to inflation. The system is very fragile.

 

[se7ensnakes]

i think your debunking is failing miserably...
BTW
here is a list of bank bail-out including those who have paid back. For a list of closed bank visit FDIC webpage.
Bailed-out banks

The Treasury Department has invested about $200 billion in hundreds of banks through its Capital Purchase Program in an effort to prop up capital and support new lending. Here’s a list of the banks that got bailed out.

DENOTES THE BANK HAS PAID TREASURY BACK

Related bailout Links

• Obama mortgage plan servicers
• CNNMoney.com's bailout tracker
• List of failed banks

Date Financial Institution City State Amount 10/28/2008 Wells Fargo & Co. San Francisco Calif. $25,000,000,000 10/28/2008 State Street Corp. Boston Mass. $2,000,000,000 10/28/2008 Bank of America Corp.1 Charlotte N.C. $15,000,000,000 10/28/2008 JPMorgan Chase & Co. New York N.Y. $25,000,000,000 10/28/2008 Citigroup Inc. New York N.Y. $25,000,000,000

Edited by Tricky: 

Edited for Rule 6.

Please read rule 6 of the Membership Agreement and the footnote explaining how much of an article may be quoted.

Replying to this modbox in thread will be off topic  Posted By: Tricky

 

[se7ensnakes]

No soylent the bank does create money out of nothing. They offer a product, i.e. a loan that does not have 100% backing. This happens because people bank money. Surely, if all loans are repaid, the phantom accounts disappear, but the bank would have made money on the interest on non-existing money caused by the multiplicity effect. The proper terminology is "money creation".

 

[thought_fugitive]

se7enspams

 

[se7ensnakes]

"The Fed doesn’t give money to banks, it loans it to them when available money drops to the point where they can’t borrow it from anyone else. This only occurs when money supplies or money velocity drop to low, and in both cases the Fed needs to inject liquidity or you risk a repeat of the great depression."
This assumes that the great depression was "the great contraction" (inferior money stock).
1) The question is do we expand the money supply to create more debt, or expand the money supply to pay off debts. One promotes a small minority and the other the general public, because it causes a long lasting stable economy.
The Federal Reserve injects liquidity because the system is debt based. But more debt causes more volatility. Just ask those consumers who are spent-out with credit cards, or the many people who lost their life savings in down payments for home purchases, only to loose their home in a foreclosure due to unemployment. how many more plasma televisions or cars they are going to be buying in the near future. The party is over for these consumers. It is time to pay back. The thing is that money is not destroyed, it goes somewhere, and to someone.
2) When banks fail who insures the depositors? Well the FDIC of course. Except that the FDIC really has no reserve money. Like the Social Security, there is no exclusive FDIC reserve. When banks pay the premiums it is treated like a tax that goes into the general coffers. Have banks actually put in enough to cover bank failures? Some say yes, and still others say no as in this article here:
WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.
http://www.boston.com/news/nation/w..._fdic_collected_little_in_premiums/?page=full

 

[se7ensnakes]

Finally, the Fed doesn’t do this to protect the banks, but to protect the public from the consequences of a bank lacking liquidity.
Once again is this liquidity going to provide for a stable economy or is it going to be more of the same, more debt and volatile boom-burst economy? More inflation, less buying power, more stable jobs. You seem to think that a debt based economy is the natural order of things, that there is no architect and no one group in particular benefiting from this.

 

[GreyICE]

i think your debunking is failing miserably...
BTW
here is a list of bank bail-out including those who have paid back. For a list of closed bank visit FDIC webpage.
Bailed-out banks

The Treasury Department has invested about $200 billion in hundreds of banks through its Capital Purchase Program in an effort to prop up capital and support new lending. Here’s a list of the banks that got bailed out.


http://i2.cdn.turner.com/money/news/specials/storysupplement/bankbailout/green_thumb.gif DENOTES THE BANK HAS PAID TREASURY BACK

Related bailout Links

• Obama mortgage plan servicers
• CNNMoney.com's bailout tracker
• List of failed banks

Date Financial Institution City State Amount 10/28/2008 Wells Fargo & Co. San Francisco Calif. $25,000,000,000 10/28/2008 State Street Corp. Boston Mass. $2,000,000,000 10/28/2008 Bank of America Corp.1 Charlotte N.C. $15,000,000,000 10/28/2008 JPMorgan Chase & Co. New York N.Y. $25,000,000,000 10/28/2008 Citigroup Inc. New York N.Y. $25,000,000,000

Edited by Tricky: 

Edited for Rule 6.

Please read rule 6 of the Membership Agreement and the footnote explaining how much of an article may be quoted.

Replying to this modbox in thread will be off topic  Posted By: Tricky

I love using the quote button on this post.

 

[lomiller]

WTF are you talking about se7ensnakes? We are still at serious risk for deflation; the Fed injects liquidity to prevent deflation from occurring. Specifically they target a low but consistent inflation rate of ~2%. This gives both borrowers and lenders have a clear idea of what discount rate they need to use when they calculate the value of money.

When the fed injects liquidity it enables economic activity, without sufficient liquidity the economy collapse, which is exactly what happened in 1929 when the Fed did what you are advocating now. The inflation rate is still near zero meaning there isn’t enough liquidity in the US economy to support its economic activity. The Fed must therefore decide to shrink the US economy, or continue to increase liquidity.

Keep in mind that deflation + shrinking economy provides and active disincentive towards investment and running businesses. That is, the smart move in periods of deflation is to sell off your business and hold onto your cash because the value of cash increases over time even if its just buried in your back yard while the value of a business goes down even if it’s profitable. IOW deflation is very bad and it’s the Feds job to p0revent it by injecting liquidity but for some bizarre ideological reason you want to repeat the mistakes of 1929-1932 instead.

 

[lightfire22000]

I don't like the Federal Reserve and I actually think free banking worked when the US implemented it. National banking definitely worked.

Nevertheless, one can easily debunk the conspiracy theories with one simple statement, "Who cares"?

If the Federal Reserve Act was passed to keep people down, it sure failed big time. The dynasties that held sway during the passage of the act are now shadows of their former selves. The Fed was originally attacked for being associated with protectionism and the gold standard by the populist William Jennings Bryan. Now, populist styled groups such as John Birch Society attack the Fed for promoting fiat money and free trade. It's not a question of whether Bryan or the Birchers are right, in my opinion they're both wrong. The bottom line is, if the Fed is a conspiracy, it sure is a lousy one. Or, I suppose it could be a wicked clever one with a purpose so intricate that no one's cracked it. Parsimony dictates the former.

It's just a poor banking system that makes it too easy to get loans and relies too much on the international community's reverence for the dollar as a reserve currency.

 

[se7ensnakes]

I dont know exactly how you are defining inflation, but inflation is measured by the increase in the amount of money (money stock) in relation to the supply of goods and services. Money can stimulate the economy but why on earth does it have to be serviced by private institutions? And why does it have to be offered to these private lending institutions so that the rest of us can be indebted to them? Who designed this system? This system is not natural, it has a designer with obvious interest. These lending institutions are making more money than companies that actually produce something.

 

[se7ensnakes]

when you study the economics of this country (or any country for that matter) you can see that there has to be a balance, to avoid deflation and inflation. You can affect this balance by the price index and by the introduction of more currency. Why does it have to be based on indebtedness by private institutions? How did this middle man get so deeply involved in our financial lives?

 

[GreyICE]

I dont know exactly how you are defining inflation, but inflation is measured by the increase in the amount of money (money stock) in relation to the supply of goods and services. Money can stimulate the economy but why on earth does it have to be serviced by private institutions? And why does it have to be offered to these private lending institutions so that the rest of us can be indebted to them? Who designed this system? This system is not natural, it has a designer with obvious interest. These lending institutions are making more money than companies that actually produce something.

Not really. This situation is very natural. It arises any time you try to create any sort of banking/lending scheme, besides the Harry Potter one.

Not that I'm implying libertarians live in a fantasy world or something

 

[Father Dagon]

In our society, the government has a total monopoly (as only a government can have) on the issuance of legal tender. Try to offer an alternative (ex. Liberty Dollar), and thugs with guns will come for you soon enough!

Privatized competing monies would be such a calamity...

Why not? We already have governmental competing monies.

However, the huge mistake the issuers of LD makes is moralism. They are not just issuing a convenient solution. They are going to save the world.

The D-Mark was used areas where the local monies was no good. The dollar too, even tho' the criminals seems to prefer Euros nowadays.

 

[drkitten]

You can affect this balance by the price index and by the introduction of more currency. Why does it have to be based on indebtedness by private institutions? How did this middle man get so deeply involved in our financial lives?

Because you can't affect a price index directly, and while you can introduce more currency, it's difficult, expensive, and not very effective [since most transactions are no longer currency based] -- and it's almost impossible to withdraw currency from circulation on a large scale when you need to fight inflation.

Since everyone uses debt-based financial instruments instead of currency anyway, controlling the amount of debt is a very efficient way to control the money supply.

 

[Sceptic-PK]

Annoying, isn't it? At the root of the problem is an erroneous view of how fractional reserve banking creates money.

If a bank takes $100 in deposits and has a 10% reserve requirement, it may choose to lend up to $90. It looks like this:

Assets: $10 reserves, $90 loans. Liabilities: $100 deposits.

Those $90 it lent out gets spent and whomever recieves them may put them back into the bank, and the bank may again lend out 90% of that. If repeated to the full extent possible you get:

Assets: $100 reserves, $900 loans. Liabilities: $1000 deposits.

Fractional reserve conspiracy kooks have a tendency to say that the bank has now created $900, since they still have the original $100 and $900 in loans, they just willed it into existance somehow and if they lose that money, well it's no skin off their backs.

Back in reality however, no new money has come into existance, just a bunch of debt(the bank owes $1000 to depositors and is owed $900 by lenders, this was accomplished by passing the same $100 back and forth).

The money creation comes when depositors treat the bank debt as if it were money; they pay with a credit card or check or something of that nature. What happens then is that the bank transfers the debt they owe to a depositor from one bank account to another bank account. The recipient of the check or credit card has just accepted debt owed by a bank in lieu of money and they've done so voluntarily. The bank doesn't monetize its debt, its depositors do.

In reality, a fractional reserve bank is quite highly leveraged and taking even a small loss on outstanding loans can quickly bankrupt them.

Nor is there anything fraudulent about fractional reserve banking if proper standards are followed. If someone wants a mortgage for instance, a responsible bank will demand a sufficient down-payment so that even if the house depreciates rapidly and the mortgage defaults the bank can still recoup their investment; a responsible bank will generate a detailed credit risk assesment for each person based on income, existing debt service, how many houses are in default in the target area, credit history etc. Unsecured loans(e.g. credit cards) should never exceed their excess capital and interest rates should be set accordingly.

With properly secured loans the bank does not make the full profit desired if a loan defaults, but it won't kill the bank even if every secured loan fails. With unsecured loans being met with excess capital the bank can eat the defaults from 100% of it's unsecured debt without needing a visit from the nice men and women working for the FDIC. Neither of these will make the share-holders happy since they will not realise the full profit or will take a beating, but the bank will stay solvent which means that should it choose to, the bank can sell all those loans and other assets, repay all its depositors in full, have some money left over to be divided among its share holders and close its doors. As soon as the institution is known to be insolvent it must be taken into recievership to minimize loses to its depositors and the FDIC or it might go further into insolvency.

Sorry for the bump but I think some numpties need a good dose of reality.

 

[psionl0]

* snip *
If a bank takes $100 in deposits and has a 10% reserve requirement, it may choose to lend up to $90. It looks like this:

Assets: $10 reserves, $90 loans. Liabilities: $100 deposits.
* snip*

Sorry for the bump but I think some numpties need a good dose of reality.

This example of a bank lending money directly from its vault doesn't count.

You forgot to say the magic word, "exposition".

 

[Sceptic-PK]

Despite what your pre-conceived notions are, for all intents and purposes, banks do loan money from their “vault” (ie when the loan is accessed/utilised/withdrawn/transferred/whatever’ed). The processes in-between make this less obvious, however this is how FRB works (see stevea’s example with the mattress). That there are no credits to borrower’s accounts etc in such examples does not change the fundamentals of how fractional lending works. The reason people use such examples is there is no meaningful difference between their examples and the dire evils of accounting entries.