The debt hoax ...

[twinstead]

That's how banking works, and bankers have always realized that they are in the catbird seat. But even from the short example above you should realize that banks don't just lend 'other peoples' money, they create money out of nothing. Galbraith has the famous quote ..."The process of money creation is so simple, the mind is repulsed".

Beyond that they also can borrow money today from the Fed at 0% interest. The Fed creates the money out of thin air by following the necessary accounting charade, or if that fails an appeal to congress is made, and the rules changed, and that the bank, or Goldman Sachs, et. al., gets the money for nothing.

You still haven't shown me where banks create money out of thin air. Between the fact they need to keep 10% in reserve, and the other 90% is deposited by others, and they interest they pay on those deposits, and the interest they earn investing that money, where is the money from thin air coming from?

 

[Anders Lindman]

ETA again: So that doesn't mean the bank has 1$ and loans 9, it means it has 10$ and loans 9?

In the example the bank only has $1 and the other $9 are created as new money simply by punching in that number in a computer. It's $9 created out of nothing! And it must be $10 that the bank can lend out because 10% required reserves means that they need to keep $1 in reserve (10% of $10 = $1).

Here is how fractional reserve banking started:

"A key development often credited to the London goldsmiths around this time was the adoption of fractional reserve banking[6]. By the middle of the 17th century, the civil war had resulted in the demise of the goldsmiths traditional business of making objects of gold and silver. Forced to find a way to make a living, and have the means to safely store precious metal, they turned to accepting deposits of precious metals for safekeeping. The goldsmith would then issue a receipt for the deposit. At first, these receipts circulated as form of money. But eventually, the goldsmiths realized that, since not all of the depositors would demand their gold and silver simultaneously, they could issue more receipts than they had metal in their vault." -- http://people.brandeis.edu/~cecchett/Textbook inserts/A Brief History of Banking.htm

 

[twinstead]

In the example the bank only has $1 and the other $9 are created as new money simply by punching in that number in a computer. It's $9 created out of nothing! And it must be $10 that the bank can lend out because 10% required reserves means that they need to keep $1 in reserve (10% of $10 = $1).

NO. The bank has 10$. The 1$ is the 10% reserve, from what I can see. If the bank only had 1$ it could only loan 90 cents and keep 10 cents in reserve.

Now, I do believe banks can hand have misused their position of keeping other people's money, but the economic theories you are quoting are far from universally accepted.

 

[Anders Lindman]

NO. The bank has 10$. The 1$ is the 10% reserve, from what I can see. If the bank only had 1$ it could only loan 90 cents and keep 10 cents in reserve.

Now, I do believe banks can hand have misused their position of keeping other people's money, but the economic theories you are quoting are far from universally accepted.

No. The bank creates $9 out of thin air! Here is another explanation:

"Fractional Reserve banking simply stated means that a bank can loan out several times more money than it actually has in supply. This is done by manipulating script and then loaning that out with interest to be returned to the bank in payments. The bank thus supposedly makes money by drawing value “out of thin air”, getting back more than it gave out in loan. This is a risky business built on the trust that savings loaned to the bank at smaller interest by masses of depositors, will not all be taken out at once en masse. This money is “recycled” at higher interest to borrowers. Legally, banks can loan out ten times more than they have in actual reserve, with the backing of other banks like the Federal Reserve that loans to loaners in a chain of command." -- http://syzygyastro.hubpages.com/hub/Milton-Friedman-A-Sales-Pitch

 

[Sceptic-PK]

As I wrote before, $1 in reserves means that the bank can create $9 out of thin air and lend out $10. That's 10% fractional reserve requirement.

Wrong.

 

[Anders Lindman]

Correct, but then the borrower of the 90% deposits it in another bank, or the same bank for that matter, and the bank then can lend 90% of that 90%, and so on, so that eventually 10 times, 1000%, the original deposit is lent.

But that is too technical, and only applies to banks which we understand, but not to the credit created by derivatives and other financial instruments we don't understand, i.e. the secondary credit market.

What it boils down to is that banks, and other financial institutions, can create money out of thin air and lend it.

Wrong. The bank can create 10 times the amount of the reserves directly.

"Most people do not realize that the basic Fractional Reserve System operating on (for instance) a 1 to 10 ratio of "reserves" to loans (the basic underlying system we use now) gives the managing or owning institution -- whether the Fed or Congress -- a system that has enormous leverage, both up-side and down-side built into it. For every dollar of capital invested by the owners of the system - those owners can make loans adding up to ten times the amount of the invested capital. In other words -- if a Federal Bank opens its doors with one million dollars of invested capital -- it has the right to lend out $10 million at whatever interest is currently in vogue." -- http://www.primeronmoney.com/fractionalreservebankingdefended.html

 

[Anders Lindman]

Wrong.

See my previous post #46.

 

[Sceptic-PK]

But even from the short example above you should realize that banks don't just lend 'other peoples' money, they create money out of nothing.

This is another common misconception. All the money that banks lend, is "other peoples" money. Unless of course they're loaning their own money. This idea that banks "invent" the money they lend is just nonsense.

 

[Sceptic-PK]

See my previous post #46.

Again, you're wrong. You're conflating the expansion of deposits with how much a bank can lend. $1 can support $10 in loans/deposits after many subsequent transactions in the banking system. But if a bank has $1, it may only lend 90c, not $9. Get it right, specifics matter.

 

[Anders Lindman]

This is another common misconception. All the money that banks lend, is "other peoples" money. Unless of course they're loaning their own money. This idea that banks "invent" the money they lend is just nonsense.

But the actual amount of money the bank has is only 10% of total amount of the customers' accounts! This video explains it: http://www.youtube.com/watch?v=ZyyaE3DIxhc

That's why runs on banks are possible. The banks only have 10% of the money to cover all their customers' bank accounts.

 

[Sceptic-PK]

But the actual amount of money the bank has is only 10% of total amount of the customers' accounts!

So what? This is almost never a problem. You're just paranoid.

 

[twinstead]

But the actual amount of money the bank has is only 10% of total amount of the customers' accounts! This video explains it: http://www.youtube.com/watch?v=ZyyaE3DIxhc

That's why runs on banks are possible. The banks only have 10% of the money to cover all their customers' bank accounts.

But that's not "creating money out of thin air", it's a risk, very much mitigated by the FDIC, that one takes when one deposits money in a bank. Consider putting money in the bank like any other risky investment, except putting money in a bank is just about as safe as something can be without being 100% safe.

 

[Anders Lindman]

Again, you're wrong. You're conflating the expansion of deposits with how much a bank can lend. $1 can support $10 in loans/deposits after many subsequent transactions in the banking system. But if a bank has $1, it may only lend 90c, not $9. Get it right, specifics matter.

But the deposits are a part of the reserve! Let's say that a bank only has one deposit of $10 and that is the bank's total reserve. Then they can create credits of $90 to other customers out of nothing.

 

[Anders Lindman]

But that's not "creating money out of thin air", it's a risk, very much mitigated by the FDIC, that one takes when one deposits money in a bank.

Risk only for the "too small to be bailed out" banks.

 

[twinstead]

Wrong. The bank can create 10 times the amount of the reserves directly.

"Most people do not realize that the basic Fractional Reserve System operating on (for instance) a 1 to 10 ratio of "reserves" to loans (the basic underlying system we use now) gives the managing or owning institution -- whether the Fed or Congress -- a system that has enormous leverage, both up-side and down-side built into it. For every dollar of capital invested by the owners of the system - those owners can make loans adding up to ten times the amount of the invested capital. In other words -- if a Federal Bank opens its doors with one million dollars of invested capital -- it has the right to lend out $10 million at whatever interest is currently in vogue." -- http://www.primeronmoney.com/fractionalreservebankingdefended.html

Doesn't the bank need to actually have the 10 million to loan in the form of deposits?

 

[twinstead]

Risk only for the "too small to be bailed out" banks.

Uh oh...now you're leaving economics and venturing into conspiracy land.

 

[Anders Lindman]

Doesn't the bank need to actually have the 10 million to loan in the form of deposits?

No, then there could be no run on the bank. That would be 100% reserve banking, not fractional reserve banking.

 

[Anders Lindman]

Uh oh...now you're leaving economics and venturing into conspiracy land.

The term "too big to fail" is not exactly a conspiracy. Big banks will in fact get bailed out by the government. But ok, there is still risk involved even for the big banks I agree.

 

[Foolmewunz]

I take it in AndersWorld only cash or bullion is an asset?

I depost my ten million in the bank. They are required, assuming I'm their only depositor, to keep 1 million "in reserve" (it has to do with the deposits, not the loans). They loan out 9 million. They get paper for that (paper that I guess according to you and Saggy is worthless, but that has solid rationale behind it). That 9 million plus interest is an asset.

The still have the million in reserve. As long as I don't need/want more than a million back at a time, they're fine. If I want more than the million, they have to go to the market and borrow whatever they're short. This happens in macrocosm and microcosm, every single day of the year.

You don't like it or don't trust it? Fine, ... don't use banks. Bitcoins are a lovely investment, I hear. But don't distort how the system works. You cannot loan out more than you have in deposits. (Except that keeping track of millions upon millions of depositors does allow some wiggle room, of course. But, at the end of the day,... er fiscal year... they have to pass an audit. Any bank loaning out more than its assets is in a bit of trouble.)

 

[Anders Lindman]

I take it in AndersWorld only cash or bullion is an asset?

I depost my ten million in the bank. They are required, assuming I'm their only depositor, to keep 1 million "in reserve" (it has to do with the deposits, not the loans). They loan out 9 million. They get paper for that (paper that I guess according to you and Saggy is worthless, but that has solid rationale behind it). That 9 million plus interest is an asset.

The still have the million in reserve. As long as I don't need/want more than a million back at a time, they're fine. If I want more than the million, they have to go to the market and borrow whatever they're short. This happens in macrocosm and microcosm, every single day of the year.

You don't like it or don't trust it? Fine, ... don't use banks. Bitcoins are a lovely investment, I hear. But don't distort how the system works. You cannot loan out more than you have in deposits. (Except that keeping track of millions upon millions of depositors does allow some wiggle room, of course. But, at the end of the day,... er fiscal year... they have to pass an audit. Any bank loaning out more than its assets is in a bit of trouble.)

You are wrong.

"Legally, banks can loan out ten times more than they have in actual reserve" -- http://syzygyastro.hubpages.com/hub/Milton-Friedman-A-Sales-Pitch