"Marx was... second???"
Richard Metzger is the current Boing Boing guest blogger
It looks like it was actually Thomas Jefferson who came up with the concept of "fictitious capital"!
Since the "Marx was Right!" post proved so darned popular, I thought I'd do a lil' bait and switch, but looky at what we have here:
Via Infectious Greed
the latest
latest episodes
It's all a conspiracy - stop spreading this propaganda you damn commie.
I will take "sowing the wind and reaping the whirlwind". Poetic and true!
The current banking system IS one of the bigger enemies of a true Free Market system. Not that there shouldn't be banking and investments, just that it should all have to be based on real capital, rather than funny money.
thank you Jhouserizer,
I agree fully. Banks and the current system in which they operate are literally "public enemy number 1". A system that lent out only the currency created by "true labor" would in effect create a slower, more organically growing economy not prone to crashes and recessions. Obviously the danger of the modern banking system has been known since the beginning. I have a feeling we will not see the end of this tyranny in our lifetimes.
How does one stop a slave from rebellion? Our banking system.
Fractional reserve banking ensures that the overwhelming majority of money in existence is fictitious. It allows banks to create money out of thin air, and charge interest for its use (known as a "loan".)
Note that only banks have this power. If a private individual or regular corporation engages in "fractional reserve banking," we prosecute them for fraud. If I loan you $100 and you give me an IOU, I can't spend that IOU at the store like it was real money. Banks, however, can and do. In fact, over 90% of the money you put in the bank has been replaced with IOUs from people you don't know...on which the bank earns interest.
And we are somehow surprised that those with this power own the entire political process, Democrat and Republican?
In order to ensure a truly free market, we must enforce four simple rules. Otherwise fictitious capital will continue to overwhelm real capital, and we will continually suffer massive depressions when the debt underlying the fictitious capital is exposed as worthless.
1) No person or institution may create money from thin air, by loaning money out and simultaneously pretending that it is available on demand ("fractional reserve banking").
2) No person or institution may sell things they do not own at that exact moment ("naked shorting").
3) No person or institution may make a bet they cannot cover. This includes insurance companies (who must have sufficient capital to cover all their losses, not just a fraction of them) and financial services companies (who must not be able to sell financial commitments they do not have the capital to cover, e.g. "credit default swaps".)
4) All financial instruments must be traded on open exchanges, with real-time data on all transactions available to the public at no cost.
jhouserizer is correct. The problem is not capitalism. [B]The problem is that the fundamental medium of exchange -- money itself -- has been hijacked.[/B] Until we fix this problem, it doesn't matter what political system grows up around it.
To use an analogy, this is sort of like deploring the widespread use of fire (which can be very dangerous and burn people) and proposing a ban on the usage of fire anywhere. I think it's more reasonable to adopt fire codes and have inspections and fire departments.
Going back to Jefferson (or Marx, for that matter) for advice on this issue is incredibly obtuse. Jefferson's ideas were somewhat appropriate, though a bit retrograde, for his century, when economy depended on agriculture and people were disquieted by the rise of manufacturing and trade. We live in a different world now and there is no turning back.
I agree with this to some extent, but historically there was a depression at the time that was caused by unregulated speculation that was the direct result of both greed and a very young national bank. Andrew Jackson destroyed that bank just as the pendulum began to swing back toward economic balance. In the 1830s Jackson's deliberate killing of the national bank caused a skyrocketing inflation and a lack of regulated currency. That caused and even greater depression. That depression was only brought under controlled by a better regulated banking system and currency. Banks in and of themselves aren't inherently good or bad, they simply need effective regulations that prevent abuse.
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
Thomas Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802)
As bad as thing seem to be, I am very cautious about overplaying the current fad for hurling hate at banks and financial enterprises. Something very nasty usually follows hard upon this kind of anti-bank sentiment. Something very nasty indeed. There is a very dangerous and secret agenda behind many bank and finance conspiracy lovers.
After all, let's stop the bull. All money is fictitious. Every last green dollar of it is nothing more than one big agreed-upon tall tale. There's no such thing as money. It's a mind game. Fictitious capital is one of the most logical inventions in history.
Without fictitious capital you will never build a rocket that goes to the moon. You might as well be trading nuts for stones.
Once again, Jefferson is my hero. And, once again, the more things change...
"Fictitious Capitol" has an ordinary name - CREDIT.
Ever buy something with a credit card when you didn't have the money in the bank? You just used 'Fictitious Capitol' - expressed by your credit limit - to make a purchase.
Ever 'float' a check, knowing that payday would come before the check would hit your bank?
That was Fictitious Capital as well.
Credit is the assessment of how likely it is that you'll pay back a loan; it's a wager by the lender (Bank, Bookie, Loan Shark, Guy in the next cubicle) that you will (eventually) pay back the loan.
An economy -without- credit has no 'flexibility'; no way to adapt to extraordinary demand for funds (like rebuilding homes destroyed in a tornado, or that fall off a Cliff..., or burn down in a riot). Until the greenbacks arrive in a pile, everyone's broke, and not much happens.
If, however, based on the knowledge that the piles of Dough were in transit, vendors extend CREDIT, knowing that money was on it way, then the economy starts running early - fast - and to everyone's benefit.
Don't sneer at "Fictitious Capitol" - especially if you've got a Student Loans in Arrears.
Alessandro: Your arguments make no sense.
You start with the classic "conflate and mock" meme: stating flatly that anyone who opposes giving banks the ability to create money out of thin air is a CONSPIRACY THEORIST with a "dangerous and secret agenda." Please explain how agreeing with Thomas Jefferson (quoted above) is a "dangerous and secret agenda." Hint: you can't, because it isn't. You're just trying to sow fear.
Your next argument ("All money is fictitious") is just freshman nihilism. If money is all fictitious, then why shouldn't you or I be able to make money out of thin air, just like the banks do? What benefit accrues to society from reserving the power to create money (without creating any underlying value) to a select group of individuals?
Finally, you offer no justification for your last argument ("You might as well be trading nuts for stones") at all. Please explain how allowing a small class of people (bankers) to create fictitious capital at will is necessary for the creation of real wealth. Are you saying that people will work for fictitious wealth, but not for real wealth? In that case, your argument fails utterly, because people have been working for real wealth (food, labor, raw materials, precious metals) since time began.
Very nice. Jefferson had a keen insight.
About "all money is fictitious" -- I wrote a long post, but deleted it because it was annoying. Let me leave it at "it doesn't have to be". There are several reasons why the world as we know it today doesn't want money that represents actual value, but that doesn't mean that there is no such thing.
The proof that you can build a rocket that goes to the moon is in the rocket that went to the moon. The materials and the labor that made that rocket must have existed, to be expended to make the rocket. Likewise the value must have been taken from somewhere -- the materials, the labor, and the factories could have been employed in some other way. The fact that the money used to fund the project was "fictitious" simply means that the relationship between who nominally paid and who really paid is much more complicated than it looks.
Roku -- How does lending out a portion of their deposits mean that banks "create money out of thin air"?
(And while we're on the topics of Alessandro, inanity, and moon rockets: "You can't go to the moon with fractions, man! What are you going to land on? One-quarter? Three-eighths?")
FirstBakingBook: It doesn't. Unlike some people I won't tell you that fractional reserve is the root of all evil and must die. It represents a risk, but as long as that risk is represented honestly then there's no reason that people shouldn't be allowed to make deposits with banks that run a risk with their money.
The problem is more literal. The money you use is arbitrary -- although on a micro scale it's exchanged for goods and services, when you look at it on a broader scale it's worthless. And the banks, very simply, decide how much of it there is, and in essence how much it's worth at any given moment. The banks, with the cooperation of the treasury, literally make money appear from nothing (or occasionally make it disappear, but they're horribly deflation-phobic, so that doesn't happen so much). Even when it comes to "real" bills rather than credits, the Bureau of Engraving and Printing works on the Fed's command.
Firstbakingbook:
Glad you asked! Here's how fractional reserve banking creates money. (Note: all names are randomly chosen and fictitious.)
Let's say you deposit $40,000 in the newly created "Bank of Roku." Bank of Roku is legally permitted to lend out over $36,000 of your money: we'll call it $37,000 to keep the math easy.
(The remaining $3,000 is called the "reserve", and the name "fractional reserve banking" comes from the fact that the reserve only equals a fraction of your money.)
Now Bank of Roku lends $37,000 of your money to Christy, who use the money to buy a shiny new Acura. The Acura dealership takes the money and deposits it in her bank ("Second Bank")...
but you still have $40,000 in Bank of Roku, and can take that money out at any time.
Your money is now in TWO PLACES AT ONCE...in your account at Bank of Roku, and in the Acura dealership's account at Second Bank. Bank of Roku has just created $37,000 out of thin air, and is earning interest on that $37,000.
This process continues. Second Bank can loan out over 90% of the dealership's $37,000. Let's say that David and Keisha want to remodel their house, and they take out a $34,000 loan from Second Bank, which is paid to their contractor, who deposits the $34,000 in his account at Third Bank. The dealership's $37,000 is now in two places at once, too, and Second Bank, having created $34,000 from thin air to lend to David and Keisha, is now receiving interest on that $34,000.
Then Third Bank loans out the contractor's $31,500 to someone else...and the process of money creation continues.
I know this seems completely insane, but it's absolutely true.
"Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU." -Federal Reserve Bank of New York, "I Bet You Thought...", p. 22
Available here: http://www.eric.ed.gov/ERICWebPortal/contentdelivery/servlet/ERICServlet?accno=ED175743
"The process by which banks create money is so simple that the mind is repelled." -John Kenneth Galbraith
((((( )))))
Andrew, your insight is excellent: "The fact that the money used to fund the project was "fictitious" simply means that the relationship between who nominally paid and who really paid is much more complicated than it looks."
This is precisely why the modern monetary and banking system is so opaque: the people who benefit from the current system want to obfuscate the relationship between who produces goods and services of actual value (the mass of working people) and who receives the value produced (typically owners of banks).
1) Central Bank is item 5 of the Communist Manifesto
http://en.wikipedia.org/wiki/The_Communist_Manifesto#10_Planks_of_the_Communist_Manifesto
2) Jefferson was not against Banks. He was against a Central Bank.
3) For more fun reading: Google "Austrian Economics"
http://en.wikipedia.org/wiki/Austrian_School_of_Economics
4) Ever wonder if the Banking industry employs and P.R. firms to astroturf internet discussions of this topic?
5) Peter Schiff is my hero. (After Robert Anton Wilson) I'd like to see more posts about Max Keiser by Cory, and add Peter Schiff to that basket as well.
Anonymous #11:
Credit is debt, and debt cannot create economic activity. Debt simply brings economic activity forward in time -- at the price of substantially less economic activity in the future, since interest payments on debt suck up productivity that would otherwise generate even more economic activity.
This leads to a common-sense result -- an economy based on debt is less productive than an economy based on savings.
So why is it otherwise? Who benefits from a system in which every dollar represents a debt of someone to a bank? (I just answered my own rhetorical question.)
It is true that an economy based on savings, instead of debt, must grow more slowly. However, it will also not be subject to collapses like our current crisis.
((((((( )))))))
I bobbled a couple of the dollar amounts in the middle paragraphs of my post #17. Here's how it should read:
"The dealership's $34,000 is now in two places at once, too, and Second Bank, having created $34,000 from thin air to lend to David and Keisha, is now receiving interest on that $34,000.
Then Third Bank loans out $31,500 of the contractor's $34,000 to someone else...and the process of money creation continues."
My apologies.
Worse still, with publicly held banks its often the operators of banks who get the lion's share, not the nominal owners.
CEO circle jerk, they all sit on each others boards.
Another great post Richard!
We tend to forget that until the late 20th century, the one thing that united most political theorists and economists across the spectrum was an immense suspicion and dislike of 'finance capital'. Along with Marx and Jefferson, some of the best attacks against speculators were made by Edmund Burke--notwithstanding the fact that he was a total inequalitarian hose-bag driven by the desire to defend the privileges of the landed gentry in Europe.
But finance (or fictious) capital and the speculation that they fuel are but one part of wider systemic malaise that has historically created growth (at least until now) on the back of widening disparity, environmental destruction, and social dislocation. We currently live in an area that has it all backwards. Blips on a broker’s screen are understood as having value (both market and social) whereas things like clean air, fresh water, labour rights, or gender equality are considered fictious commodities because they do not fit into the formal rationality of the market (i.e., one cannot easily assign a dollar value to them). For anyone interested, it is well worth reading Karl Polanyi's 'The Great Transformation' for a historical account of what happened the last time governments decided that markets were to have primacy over society. The link to the google preview is below:
http://books.google.com/books?id=xHy8oKa4RikC&dq=the+great+transformation&printsec=frontcover&source=bn&hl=en&ei=aS7XSfO1EZfLjAepwcCWDQ&sa=X&oi=book_result&ct=result&resnum=4
these videos are worth watching
Money as Debt
http://www.youtube.com/watch?v=vVkFb26u9g8
Crash Course
http://www.chrismartenson.com/crashcourse/chapter-1-three-beliefs
"The eyes of our citizens are not sufficiently open to the true cause of our distress."
Oh,if only more people took that quote to heart,we'd have a new Renaissance right around the corner.
ROKU -- Great comments. Your 4 part prescription for fixing the financial system sound like they came out of an Islamic banking textbook (as well as being supported by thinkers from the Austrian School in the western economic tradition). You should read up on Islamic banking principals if you are interested to learn why Islam bans interest and non-asset based financial transactions. A good book on the subject is "The Problem with Interest" by Tarek El Diwany:
http://www.amazon.co.uk/Problem-Interest-Tarek-El-Diwany/dp/0954497406
FIRSTBAKINGBOOK --How does lending out a portion of their deposits mean that banks "create money out of thin air"?
IF banks only lent out a "portion (i.e. less than 100%) of their deposits" that would be one thing (though still a problem since the interest creates money out of thin air). Based on your question it is clear that you, like the majority of intelligent people everywhere, are under the impression that banks loan out the money deposited by savers. They are usually shocked to find out that banks actually loan out 900% of the money deposited by savers, in such a way that the deposits represent 10% of the value of the loans (the fractional reserve). In other words they create money out of thin air to the tune of nine times what is deposited. When the loan is repaid, they destroy the principal (since it never existed in the first place) and keep the (hugely inflated) interest payments. You and I can not do this because we do not have the monopoly power given to banks by national governments (a relatively recent phenomena). It represents a drain on the economy and an exponential growth of money unrelated to the natural growth of the real economy leading to a tremendous default risk. This is a system which by its very nature must fail on a regular basis, socializing the losses (of course the profits were privatized in the run-up). Is this a conspiracy? - Jefferson thought so, which is why he fought against it - as did Andrew Jackson. Judging from the comments on this blog and others, as well as from the typical economic texts, the misunderstanding is intentional. Bankers (and semi-financially literate politicians) seem to intentionally try and obscure the above "arrangement". Very few exceptions (Ron Paul being one of the exceptions).
Eh, fraud by the top banksters: they really make out lending, deliberately, to those who cannot re-pay: the personal profits to be had "forced" them to do it, and now they try to blame Congress and democratic regulation of their iso-called "industry" :"Waaah! They forced us to lend to poor people! (sotto voce, adds: not people like us)... Waah!"
But we've seen this before, been here before, and we know what they have done, and how to deal with them: read this from Bill Moyers, interview transcript with William J. Black, banster-buster of the Reagan-Bush 1980s (geez recession follows Bush Presidencies like night follows day, eh? War too, it seems...):
http://www.pbs.org/moyers/journal/04032009/transcript1.html
I notice that Mr. Black in the interview I linked to above calls Bernard Madoff a "piker".
I would also term Madoff's case a distraction (as is Congressional outrage over "bonuses" not yet paid - it's the ones paid out over the past eight years that ought to be catching their and your eye), to get eyes off the ball, which I remind you is still in play...what's that I hear from Washington today? Another 1000 billion (= 1000 x 1000 million)( = 1 trillion) tax dollars for the Banks?
No wonder people are losing their jobs: the money they ought to get as income (or income support) has got to go through the banksters' digestive system first.
In post #5 above, Roku wrote insurance companies should have sufficient capital to cover all their losses, not just a fraction of them. This can be interpreted in two ways and their are problems with both. And once you understand these problems it is easy to extend the thoughts to the rest of the banking industry.
The first interpretation of the insuance company statement is that Roku means insurers should be able to cover all *projected* losses. This is already the case though. Insurance companies are heavily regulated and must have reserves to cover their estimated losses. Furthermore they have to have extra, called surplus, in case their projections were light.
Second, perhaps instead Roku meant instead that insurance companies should have enough to cover all *potential* losses, no matter how unlikely. So if a company wrote homeowners insurance for 100 houses each valued at $100,000 then they'd have to have $10,000,000 on hand in case all had catastrophic losses. This could never happen. To have that much money on hand the insurance company would have to charge each homeowner $100,000 for their insurance....every year. Who would pay that premium? No one. It doesn't make any sense.
So, having cash for all *potential* losses is impossible, and yet homeowners insurance (for example) is important for the economy. Insurance companies holding a reserves reflecting a conservative estimate of the potential losses is what can be, should be, and is currently done.
The same can be done in with a *regulated* banking system. No need to assume *all* borrowers will default. That's too conservative and would never happen. It doesn't have to be all or nothing. You don't have to go all the way to "no fictional capital". You just need to stop taking risks that could harm the economy if things go wrong.
To put it bluntly, both Jefferson and Marx were wrong. They fact that they are a billion other folks predicted that at some point the market will fail over the next 200+ years and it happens doesn't make the prescient.
Neither Marx nor Jefferson thought long and hard about the wisdom of securtized derivatives... mostly because they didn't really exist until about a decade ago. Saying that some times fractional banking fails hardly makes you a prophet, and it sure as hell doesn't validate any other claims you make. I can tell you that some times airplanes crash, but you would be a moron if you came to me looking for how to make sure it never happens again.
Fractional banking is good. Can you bungle it? Hells yes. It is a safe bet you won't see derivatives with AAA credit ratings based upon some morons lack of understanding between the difference between a Gaussian distribution and a power law. It was tried, it failed, we paid. Traders learned a valuable lesson in statistics and the government (hopefully) learned a valuable lesson in letting your financial markets be consumed by flashy new highly leveraged investment vehicles.
The point remains that fractional banking, while possible to screw up, is good. Fractional banking is what lets someone who isn't already fabulously wealthy open up their own business. Take away fractional banking and only the already wealthy elite can afford to take risks and make investments. In fact, we went through a period without fractional banking... it involved the little peasants working like slaves as the land lords lashed them with whips and occasionally skewered the ones that got too uppity with a lance and cavalry charge. As much fun as the times of completely illiquid markets were, I'll take a big old pass on that.
Fractional banking is what lets the little guy make big investments. It is what lets someone spread the pain of a large investment over a long period of time. When you lack it, you have small business that can never grow even when the demand is there. People can't make big investments in themselves (like say through college).
Fractional banking has its pit falls. We just got a nasty lesson in some of them. Instead of fleeing in terror and retreating our banking system to a time when it was still cool to burn witches and whip the peasants, lets simply learn some lessons. If a shinny new financial vehicle is sucking up the market cut that shit off at the head. There is nothing wrong with innovation, but you don't gamble the entire frigging market on it. Put an end to this "too big to fail" bull shit. Capitalist and Marxist alike can agree that nothing is more of a pisser than the government shelling out wads of tax payer cash to private corporations to prevent financial d00m. Finally, re-relearn the lessons from 1929, and put some sanity back to how far leveraged companies are allowed be. Being ok with fractional banking doesn't mean that you can't put some sane limits on it. I am ok with drinking water, but that doesn't mean I want jump into the Mariners Trench with a pair of lead boots on.
So lessons learned all around. Time to learn and push forward.
The established system of fractional-reserve banking merely brings under the Law and codifies what successful bankers (even bankers in ancient times) have always done, with or without the Law's blessing: since obligations and receipts come due at different times, while we are waiting for the date of fulfillment(= payment out) to come around, there's no need for the gold or cash to idly sit in the vault, if it can be used to earn income (by lending at interest or speculation in assets).
That is, the temporal mismatch of the set dates for payment/receipt allows for "shifting" the gold or cash, in such a way as to increase the overall level of lending activity, even with a set and limited pile of gold in the vault.
This works so long as there is no rush to redeem the bankers' obligations all at once (and the bankers are competent enough in the temporal arrangement of their obligations, both owed by them and owed to them).
That in turn was not as likely at a time when only merchants used banks: it is much more of problem with the large number of "on-demand" obligations, from the members of the non-business public, taken on by modern deposit-taking banks. Hence, deposit insurance: hence, detailed regulation of the banks, to prevent simple insurance fraud.
The fractional reserve system merely codifies the long and socially beneficial (at least in the rulers' opinions, which in this instance I happen to share) practices of successful bankers - and the prudence which all successful bankers possess leads them, as a matter of self-interest, to maintain an "unforeseen contingency" reserve, even in the absence of Laws requiring them to maintain such.
But as we have seen, some bankers can alas! be far from prudent: and those same bankers are usually far from successful. But again, the answer is Regulation. For that imprudence, in a modern system, puts the insurance at risk...
Note: not "banksters", but "bankers", in this (fraud-free) context.
Rindan: As to lessons learned: not till justice is done and the frauds cough up their ill-gotten gains.
The lesson ain't learned till the criminals are punished.
If they are not, the "lesson learned" may be very very different than the one you think is being learned.
Honest value never fails.
Thebes: remember not to ignore that part about a standing army being a threat to liberty. There's one hell of a standing army in the USA since 1945.
How fortunate that it's no longer a threat to liberty, eh?
#11: Floating a check is a crime.
---
Large corporations -- even medium corporations and some small ones -- need credit. They need capital in order to operate, they need long and short term loans.
They also have a wealth of regulations, laws, and the ability to negotiate terms, and the capital ability to retain legal and financial advice.
Contrast this with middle-income (screw this "class" distinction) families and low-income families - who have almost* no use for credit; Their needs may be met without indenturing themselves to a financier.
Credit is extended to them for the purposes of profit, of increasing volume, of manipulating financial statements.
* If home valuations were not artificially inflated by real estate speculators, owning a home would be well within the reach of most individuals and families without recourse to lending.
Rindan:
Fractional banking is what lets the little guy make big investments. It is what lets someone spread the pain of a large investment over a long period of time. When you lack it, you have small business that can never grow even when the demand is there. People can't make big investments in themselves (like say through college).
I am assuming that by little guy you mean someone that does not have large amounts of captial. So then I am forced to ask why should they? Are you suggesting that they should be allowed to risk money they don't have (aka someone else's). That doesn't seem fair.
I also don't see why fractional reserves are critical to lending. I suspect that there is an option that you are not considering. Lending out savings. Accounts could be made where you deposit money for a fixed term. That money could then be loaned out. Kind of like a GIC http://en.wikipedia.org/wiki/Guaranteed_Investment_Certificate.
Granted that this would cause interest rates to rise but only to the point were savings are sufficient to supply the demand for loans. The fundamental problem I see with fractional reserves is they can cause very rapid expansions and contractions of the money supply which in turn destabilize the pricing structure. Money that is created from nothing can disappear just as quick. As for the Fed's ability to stabilize, I would side with laughable because of the way prices and wages are falling even though the Fed is growing their balance sheet at unprecedented rates.
Bardfinn: Not so, if the "floater" honestly (even if mistakenly) and reasonably believed and expected that there would be funds sufficient to cover the check deposited in the account, prior to the check's presentation for payment. It becomes a matter of the factual intent of the drawer of the instrument. But without the intent to defraud, it's not a crime, but a simple matter of overdraft.
Actually, the rationality of the drawer's belief that the funds would be sufficient, speaks more to the weighing of the honesty of the drawer, if she should profess a lack of intent to defraud after the check has bounced, rather than as to what her intent actually was.
If there was no intent to defraud, it is no crime. That what that intent was must be inferred, does not remove the necessity of the inquiry into what the intent actually was, if one wishes to make the determination as to whether or not this particular bouncing of a check was a crime.
If Marx was right about dialectical materialism (I think he was), then wasn't the age of fictitious capital historically inevitable? Because, for the times, it was indeed the most productive economic arrangement. I find it very hard to imagine the last 200 years' progress without the liquidity provided by the banking system. Now, perhaps, we are at a nexus of technical and demographic circumstances that will make American socialism the most realistically productive arrangement, and therefore inevitable.
Money serves to multiply the ends and the means of human endeavor - it is one of mankind's greatest inventions.
google Zeitgeist...
download and watch both the movies available there (Zeitgeist & Zeitgeist Addendum are both available as both as well seeded torrents)
thinks about what the films present to you...
form your own conclusions.
AOK -
The first sentence off wikipedia on fractional-reserve banking:
"Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits immediately upon demand."
The fraction is against the deposits, not against the size of the loans. Your understanding of this is wrong. In your example, the bank would not be in compliance with the reserve requirement. Here's wikipedia on the reserve requirement:
"The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes."
Again, it's the fraction against the deposits, not against the loans.
And Roku: nowhere in your example is money created. Your understanding of this is wrong, too.
firstbakingbook:
Read that last bit again.
"while maintaining the simultaneous obligation to redeem all these deposits immediately upon demand."
I have a problem with the wiki quote because there was only one deposit so I am uncertain what they mean by all these deposits. I can only assume that they are able to give the loan and return the initial deposit immediately upon demand.
Also those fraction of deposits can multiply.
For example:
Bank A gets a $100 deposit from a client.
Bank A loans Bank B $90 keeping a 10% reserve.
Bank B then loans Bank A $81 again withholding 10% reserves.
It does eventually end but even in this example, that $100 became $171 like magic.
The question I really want answered is, if fractional reserve banking is good for the economy, why is it that only a few select people can participate in it.
Yes, I'm quite confused how money is ever created in a fractional reserve system. For each time in the Bank of Roku example money is deposited, an equal amount of debt was created. On balance, that should mean that the net sum is 0. The only reason I can imagine any of this should bother anyone is if they don't believe in negative numbers.
Further, I thought interest was earned based on interest charged for loans. And if this is considered creating money out of thin air, then surely doing *anything* that raises the value of property or a service would be considered creating money out of thin air.
Wealth is created. There isn't a fixed amount of it in the world that we all shuffle around. If I buy a piece of wood and make ukulele out of it, it is worth more than the underlying piece of wood. I created that value. If someone takes my ukulele and polishes it, hypes it up and creates demand for it, they increase its value
syng "frctnl-rsrv bnkng" s gd fr th "cnmy" s lk syng
h fr xmpl
snt cls s gd fr th str bnny
f f crs y hv hrd f flyng rndr
nd dnt mnd spndng r lf pntng ggs pnk
Proper title: tjefferson fp ftw
> Something very nasty usually follows hard upon this kind of anti-bank sentiment.
> Something very nasty indeed. There is a very dangerous and secret agenda
> behind many bank and finance conspiracy lovers.
that would make you a bank-and-finance-conspiracy-lover conspiracy lover, wouldn't it ... what is YOUR dangerous and secret agenda, mister nasty?
Roku et al you are ignoring the element of time: not just how much, but when, is crucial to discounting, present values, depreciation, cash flow, rates of interest & return, etc. etc.
You are missing a dimension, the dimension of time...
The fact is, not all obligations come due at the same time. On any of us, actually. Although a life is short, OUR life is long. This creates opportunities for "bootstrapping".
On another tack, funny how the early church fathers were unanimous in condemning the payments of interest. I think that they undoubtedly got this wrong, as they got almost everything else wrong too, and thus started the Dark Ages.
Could it be that fractional reserve banking is an enlightened - and an Enlightenment - practice?
Anonymous #27:
You claim that insurance is impossible if insurers must have full reserves cover every potential loss. This is a false and ridiculous accusation. It simply means that insurers must come into the insurance game with capital, and can only increase their coverage as they collect premiums and their capital base increases.
Under the current rules, insurers collect premiums on policies they can't possibly cover, hoping that they'll accumulate enough capital before a disaster hits. Please tell me how fraudulent insurance that collects premiums but cannot pay out (i.e. AIG) is beneficial to our economy?
You might argue that it is impossible to insure the entire economy under such a system. Well, it's impossible to insure the entire economy under our current system, as we are finding out: writing credit default swaps in excess of world GDP (let alone the assets of the companies that issued them) inevitably results in all our real, productive capital being sucked up in a doomed attempt to cover them. $11 TRILLION and counting...
http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4
((((((( )))))))
Rindan: "Fractional banking is what lets someone who isn't already fabulously wealthy open up their own business. Take away fractional banking and only the already wealthy elite can afford to take risks and make investments."
This is obviously false. Fractional reserve banking allows loans proportional to assets, so the already-rich benefit proportionally more than the poor. In fact, since the already-rich have a better credit rating and can borrow against a greater proportion of their assets, they benefit more than the poor from easy access to credit.
The relative difference in wealth between a Middle Ages serf and a Middle Ages lord is no larger than the relative difference in wealth between you or I and a financial executive making $100 million a year (> 1000x). The difference is that due to modern medicine and technology, we serfs have a much higher standard of living than we did in the Middle Ages, or even the 1800s. (Recall that antibiotics didn't even exist until the late 1930s.)
"But," you claim, "I'm not in thrall to my lord." Do you have a mortgage (literally: "death pledge")? Do you pay rent every month to someone who does? Sorry, you're in thrall to the banking system.
((((((( )))))))
Scisco: "The fundamental problem I see with fractional reserves is they can cause very rapid expansions and contractions of the money supply which in turn destabilize the pricing structure. Money that is created from nothing can disappear just as quick."
You are absolutely correct. Both the creation of money by issuing credit in a fractional-reserve system, and the destruction of money by credit default in a fractional-reserve system, are positive feedback loops resulting in unsustainable booms followed by massive busts.
The proponents of fractional-reserve banking, both left (Keynesian) and right (monetarist), claim that proper manipulation of central bank policy can avoid these positive feedback loops. This has never happened. There is so much profit ($trillions) to be made from cheap credit, that those that benefit from cheap credit inevitably hijack the system, resulting in repeated huge booms followed by massive busts. Even Milton Friedman came to realize this towards the end of his life.
Well, Mr. Jefferson also thought it was OK to hold slaves, have sex with your slaves, sell people into slavery etc. Probably not a paragon of good economic thought. Thank God the Republicans came into power and freed the slaves.
#40 FBB and #42 Aloysius:
All economists of every school (Keynesian to monetarist to Austrian), and all bankers from the Fed on down, absolutely agree that fractional reserve banking creates money, because it does. You're just having a hard time grasping it. Again: "The process by which banks create money is so simple that the mind is repelled." -John Kenneth Galbraith
Once again: "Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU." -Federal Reserve Bank of New York (see #17 for link and attribution)
Let's contrast two examples. To keep them simple, let's assume that only $100 exists in the entire world.
In this first example, I, Roku, personally have $100, and Aloysius has $0. I loan $90 to Aloysius. Now Aloysius has $90 and I have $10. The total amount of money in existence is still $100.
In the second example, I, Roku, personally have $100, and deposit it in "First Bank." First Bank loans $90 to Aloysius. Now Aloysius has $90...but the concept of "fractional reserve banking" allows First Bank to claim that I, Roku, still have $100 in First Bank which is fully available upon my demand. There is now $190 in existence...Aloysius has $90, and I have $100.
Continuing with the example, Aloysius deposits his $90 into Second Bank. Second Bank loans $81 to FirstBakingBook, who deposits $81 in Third Bank...yet Aloysius' $90 is still available from Second Bank on demand, as well as my $100 in First Bank. There is now $271 in existence. And the cycle of lending and money creation continues...
This is how fractional reserve banking creates money: it gives banks (and only banks) the power to substitute your money with an IOU, and to force the rest of the world to accept that IOU as real money...just like the New York Fed says.
You can think of it either way: as "loan amount created out of thin air" or as "real money loaned out, IOU substituted and treated as real." The first is simpler, but I believe the second is more accurate, because the bagholder isn't the person who received the loan -- it's the depositor in the bank. (Or, in the case of FDIC-insured bank deposits, the taxpayer.)
And, a bit more from Jefferson written earlier:
708. . The paper interest is now defunct. Their gossamer castles are
dissolved, and they can no longer impede and overawe the salutary
measures of the government. Their paper was received on a belief that
it was cash on demand. Themselves have declared it was nothing, and
such scenes are now to take place as will open the eyes of credulity
and of insanity itself to the dangers of a paper medium, abandoned to
the discretion of avarice and of swindlers. It is impossible not to
deplore our past follies, and their present consequences, but let them
at least be warnings against like follies in future.—To Thomas Cooper,
vi, 382. (M., Sep. 1814.)
http://books.google.com/books?id=2D0gAAAAIAAJ&printsec=frontcover&dq=%22Jeffersonian+cyclopedia%22#PPA76,M1
yeah roku much moneyin existence is purely notional and exists only as a bookkeeping entry: so what?
Money has a function as a medium of exchange, not just as a store of value: what is the difference between the original depositors' money and the money subsequently lent by the banker? It sure ain't some noumenal "reality" (as in your "real money"vs. bank-created money) present in some money,in contrast to the other (unreal?) money: for in actual reality both the deposited money and the subsequently-lent money is identical. That is, they are indistinguishable in circulation, being equally acceptable in payment, and that's the only reality that counts with money.
So long as counterparties accept it as real (and the tests for this have varied from age to age, civilization to civilization), then it is in fact REAL money. regardless of "where it came from".
You neglect the psychological aspects of money, as well as its temporal aspects.
And with what, pray tell, does the taxpayer pay his taxes?
Eh, Roku #12, you say:
I don't really know what a meme is. I do know that money only exists in thin air. I've personally never seen anyone pushing a billion dollars up my street. But I've seen it move across my computer screen. It's easy. You type in: 1,000,000,000 and press 'Enter.' Thin air. Happens every 60 seconds.
I try to agree with Mr. Jefferson as little as possible since he was a raging bigot and had the worst eye for architecture I've ever seen. But yes, he may have understood something about fictitious capital.
And what does 'sowing fear' mean? Is it fear of naming that 'privileged class' everyone is so mad at. What privileged class? Name it. What's that class called?
I'm privileged class. I walk on the backs of people who have nothing each and every day. I'm trained to do that well. I press 'Enter' and someone loses a job in India. You know who taught me how to do that? Thomas Jefferson.
Could it be that fractional reserve banking underpinned the freedom from feudal Lords, the prosperity, and the liberties of the trading Italian city-states of the early Renaissance?
I'll take you at your word:
http://en.wikipedia.org/wiki/Meme
Since Stephen Fry apparently went unquoted in the last post about Karl Marx, allow me to quote him here:
(One can, of course, say the same about Jeffersonian democracy)
personally, I agree with Mr. Ralph Waldo Emerson, Marx's more enjoyable literary contemporary, who said, IIRC:
There has never been a period, when the times were not hard, and when money was not scarce?
But Emerson did not phrase it as a question, of course.
Jefferson was actually a muslim, right?
@60
Stealth Muslim.
Thanks Takuan. I seriously never quite fully understand the word 'meme.' It seems in fashion on the web but I just would rather say 'notion.' Wikipedia has left my head spinning. But thanks. Now I can't get 'meme' out of my head.
I'm looking for that which is in between prion and meme. Let me know if you spot one.
Ugly Canuck, you ignore the problem of inflation.
Money is "created", and more money available (that's good right?). No, because this drives prices up (bid more when you have more) and in the bubble phase rewards speculative investment over responsible "real value" investments.
Opponents of Central Banking make this point: Inflation is not prices to going up, it is value per unit currency going down.
The unholy alliance of banking and the State allows the State the APPEARANCE of not stealing the wealth of the populace through taxes, and TO be spending money for the BENEFIT of the populace (Actually it goes to crony capitalist ends like bailing out Banksters bad investments.)
In fact, the State IS stealing from the Populace by authorizing Cartel-Monopoly Bank Systems (i.e. Federal Reserve / Central Bank) to loan new currency into the market.
The first recipients of that "created" money (The State / Banking Cartels) redeem it at full value, but over time inflation occurs, lowering the value of everyone else's currency.
The Banks never have anything at risk, while collecting fees and interest paid by the taxpaywer, because the money is all Fiat anyway. Their power over this system is enshrined in law through "Legal Tender" laws.
The Banksters Biggest risk is that someone would advocate fiscal conservatism and pay back all the governmet debt thus causing money to vanish back into the computer / inkwell from which it came.
Or and even worse risk that people would get fed up and engage in barter or some other economic means of exchange over which they did not have control.
If you are not investment saavy and you are NOT converting your money into some other asset class (like Gold or other investments (including irresponsible speculation) then you are losing value even as you may hoard piles of cash under your mattress like a responsible and conservative person might do.
That's why they call it an "inflation tax"
If you are incompetent and profligate in your usage of money, you are rewarded by this system as you get rid of the vanishing value of your currency by wasting in on consumerism or speculative investment before the value evaporates.
Hmm...maybe that explains why we go from a Manufacturing Giant in the U.S. to a country of fat consumers.
The current system is a constant attack on anyone trying to hold onto their wealth, by some of the Richest, and most Politically Connected Institutions on the Earth.
Those SAME Institutions LOVE Socialism, because like the founding of the Federal Reserve, THEY are the ones that will write the yet to come international banking regulations, further consolidating their grip on power over all human value exchanges.
See Peter Schiff on YouTube for more education on this.
Uglycanuck: "yeah roku much moneyin existence is purely notional and exists only as a bookkeeping entry: so what?"
Freshman nihilism again. If money is so unimportant, why are none of us happy to become subsistence farmers who live entirely outside the monetary system? We spend most of our lives making decisions around the scarcity of money. Therefore, whoever controls the issuance of money controls how we live our lives.
Uglycanuck: "Could it be that fractional reserve banking underpinned the freedom from feudal Lords, the prosperity, and the liberties of the trading Italian city-states of the early Renaissance?"
It could also be that the moon is made of green cheese. However, you'll have to actually make a case for this -- and I've already made a strong case against, @47. Your serve.
Uglycanuck: "You're ignoring the dimension of time."
No, I fully understand it. Interest is simply the price of having money now versus money later, and if an individual freely chooses to lend money to another who freely chooses to borrow, that's a legitimate transaction.
All I'm advocating is that banks should have the same constraints as the rest of us. Right now they get a free lunch: they can literally lend money and have it too.
The central questions still stand:
Why do we allow a small class of people (bankers) the ability to create money out of thin air and charge everyone else for its use -- yet we deny this right to everyone else, including ourselves?
Who profits by this arrangement?
Zoomraker: You are absolutely correct. Everyone should see "Money As Debt."
http://www.moneyasdebt.net/
Yeah, for both stylistic and pragmatic reasons, I like the great American radicals better than Marx. Jefferson. Paine. Frederick Douglas. Thoreau. Much of the radical sense of economic justice that we associate with Marx can be found in Andrew Jackson's veto of the second national bank (is that still on display in the exhibition hall at the National Archives along with all sorts of cool stuff?).
On the issue of fractional reserve banking, I think there is a lot of misdirected protest. The more important money creation is through the federal reserve's open market operations. It is there that money is created solely by fiat: solely through the federal reserve's federally granted cartel monopoly. Through these open market operations the federal reserve basically creates money out of thin air with no deposits backing it whatsoever and hands it over to its cartel member banks.
Fractional reserve banking is therefore a distraction from the more criminal (and unconstitutional) activities of the federal reserve cartel system. Much of the problems with fractional reserve banking articulated by Ron Paul and other obfuscaters, relates to a confusion about the different roles of money. Basically there's a confusion among three very distinct but interrelated things: money, credit, and capital.
Money itself is a complex combination of many processes: 1) a medium of exchange; 2) a means of payment; 3) a standard of value; 4) a unit of account; and 5) a store of value. I won't go in depth into all of these various processes, but in terms of a medium of exchange or means of payment, things only act as money in the fleeting moment of that exchange.
On the other hand as a store of value, every piece of credit/debit counts as money. However this immense collection of credit and its measurable quantity is not the same as the quantity of money expressed in the famous and tautological equation of exchange mv = pq. In this equation an increase in the quantity of money implies that the velocity of money must decline or the price or quantity of output must increase. As a store of value, money can increase without limit with any effect on prices, velocity, quantity of output or the quantity of money participating as a medium of exchange and a means of payment. It is the confusion over money in these various meanings that causes Ron Paul and others to mistakenly apply attention on fractional reserve banking.
While it is clear to me that Jefferson was opposed to THE central bank of the US, its not clear to me he would be opposed to any central bank. All of the central banks the US have ever had – including the current federal reserve system – amount to a shakedown of the state by powerful financial cartels. What would truly serve the needs of commerce would be a central bank, run by the US government directly that provided the services of banking, money, and commerce that the US needs. Then we could have truly competitive marketplace for finance and free ourselves from the banking shakedown. Some say that the abolition of the first central bank of the US – the first financial shakedown – was the impetus for the war of 1812. I would rather see the US go to war against the bank cartels than for the bank cartels (as most of the other wars have been)
Licensing.
Anyone who manages money for others needs to have a license that can be pulled - like doctors, architects, and lawyers do.
Where there is room for abuse, there is room for heavy handed regulation.
Will it cut into profits? Sure effing hope so.
in #5, ROKU offered these remedies:
I agree there are some clear steps that could be taken. I'm not so sure I agree with some of these however.
“1) No person or institution may create money from thin air, by loaning money out and simultaneously pretending that it is available on demand ("fractional reserve banking").”
I think people like Ron Paul and the libertarians intentionally create these false issues to distract the public from the more serious problems. The fractional reserve banking is not so much of a problem as the Federal Reserve Cartel. The creation of money is necessary for the operation of commerce. The problem is now we have given over that privilege to the Federal Reserve. Through open market operations, the Federal Reserve basically gives newly created money to its cartel member banks. This is what should not be allowed (and some would argue is not allowed by the current US Constitution which grants that right to the Congress).
The claim that money needs to be backed by gold is misguided. The FDIC is as good as gold – actually better. People want to know that they can redeem their currency for gold, but simply knowing their deposits are sufficient as long as the US government remains. Those who think that the gold backing helps them must be imagining, after some Mad Max type World arises, showing up at Fort Knox after the collapse of the United States with their currency, coin, and bank statements and requesting the guards at the front gate there turn over the equivalent in gold. Its not going to happen. If it comes to that, Fort Knox will be the last place you'll want to try to breach.
“2) No person or institution may sell things they do not own at that exact moment ("naked shorting").”
I agree that naked shorting is a problem. I also think the excuses for it our quite weak. Some say that short selling (and other naked forms of shorting) help inject information into markets. However, typically the information injected is "I'm about to use short selling to screw you chumps". In terms of the current credit default swaps, purchase of naked CDSs and their sale are nothing more than gaming. The US statues were altered to declare them exempt from state gaming laws, but that is clearly a misuse of federal authority. In any event these debts – literally gambling debts – should not be covered by tax payer money after the fact.
“3) No person or institution may make a bet they cannot cover. This includes insurance companies (who must have sufficient capital to cover all their losses, not just a fraction of them) and financial services companies (who must not be able to sell financial commitments they do not have the capital to cover, e.g. "credit default swaps".)”
I have to say on this one I agree with much of what the anonymous commenter said in #27. In terms of insurance, there should be and are some regulations that require coverage of actuarially expected losses. However, I would add to this that such regulations do not help when something catastrophic occurs. For example a life insurance cooperative can fairly accurately predict through actuarial means when a person will die and therefore the policy obligation becomes due. However, if some global catastrophe occurred, that wouldn't work. Requiring insurance to hold reserves for such a catastrophe would mean there would be no such thing as life insurance.
The present crisis with credit default swaps is a similar situation: though a man made and not a naturally created catastrophe. In that case the banking industry and regulators colluded to create a situation where mortgage failure would increase, placed bets on those losses; and now turn to the public treasury to cover the losses of those betting on the preservation of the value of mortgage assets (something they likely new was a bad bet and one they would shake down the public for later).
“4) All financial instruments must be traded on open exchanges, with real-time data on all transactions available to the public at no cost.”
I agree here. I think we should make all exchanges use electronic trades using open source software. The software and the rules encoded in the software should face thorough academic review. The chicanery possible today is beyond anything any regulatory system can monitor. A software based approach would rectify that problem. Such a software approach would also free up labor in the financial sector for use in more productive places.
BTW, #57 was me too. I forgot to sign in.
“BTW, #57 was me too. I forgot to sign in.”
I meant #67. Sorry for the multiple posts just to correct my mistake.
Regarding #57 by IAN HOLMES, That is a funny quote from William Black. I also think the title of his book is particularly appropriate to our time: The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry:.
cplot @ 71 -
Does it devote a chapter to GWB's older brother and the bank he looted in Texas?
While I didn't make it all that clear my comment #67 was meant to respond and clarify the discussion between ALOISIUS and ROKU. My point is that fractional reserve banking is the creation of money through the creation of credit/debit. So Roku is correct that it is a creation of money and understood as such by many different schools of economic thought.
However, Alosius is also correct to question this since this is money that has a different effect on the equation of exchange (mv = pt) than other money creation. It is money mostly as a store of value and not necessarily as a medium of exchange. This is an important distinction. In contrast, the creation of fiat money by the federal reserve cartel and delivered directly to the public sector forms income for the recipients of that money. It is income and therefore fuels greater expenditures (fueling inflation). In contrast, the creation of money through fractional reserve banking creates a financial instrument (a credit insturment) that can be used as money if other forms of money are insufficient to meet the transactional demand for money. However, such creation of money – as Alosius suggests – simultaneously creates a offsetting obligation. The net wealth of the bank does not increase by this creation of money and neither does the income increase (other than through interest payments which simultaneously reduce the net income of the payee of the interest).
So the bottom line is that the open market operations creation of money is the more serious problem. It is also likely unconstitutional (it takes a bizarre reading of the constitution to support this function by the federal reserve: a private bank). Finally, open market operations also provides enosrmous gains for the financial industry that essentially comes out of the pockets of taxpayers.
Most people make money as wages for labor. The smart people make their money work for them. The really smart people make other people's money work for them. And the smartest of all money off of money that doesn't even exist. Unregulated, jungle-law, "free market" Capitalism makes possible the profiteering from increasingly ephemeral equities. Trouble is when the Emperor discovers what his clothes are made of the whole thing comes crashing down. Who gets hurt the most? The guy at the low end of the totem pole whose wages represent real wealth creation. Is this just? No, but evidently it's the American Way.