5 ms·

You say "Banks, and the Federal Reserve, create new money". That is factually untrue: only the Federal Reserve can legally create new money in the US. Since you

You say "Banks, and the Federal Reserve, create new money". That is factually untrue: only the Federal Reserve can legally create new money in the US. Since you mentioned it by name, you are definitely talking about the US, but the same state holds in virtually all developed countries as well: one designated "central bank" entity creates money, the others don't. Per your main point, yes, the central bank creates money, but it doesn't "give" it to anyone. Seriously, you describe it as if there's a "printing party" at the FR, and only the rich get invited to grab booty bags stuffed with trillions of freshly minted dollars. The truth, of course, is that the FR (and secondary banks) can only lend that money. They lend it for a variety of people and reasons. Not too long ago, they lent it to too many people. Not because their kind heart, but because it's a business: they lend it out hoping to get it back with interest. Who do they lend it out to? Well, to some of the people here, for starters. Because what you failed to consider is that if I'm already at the top 0.1%, the best thing for me is to keep the situation static: not printing any new money. Because you're talking about the top 0.1% dollar earners and holders. Inflation dilutes their assets and earnings just like everybody else's, and in absolute values, they lose more. Lending is (generally) an instrument of economic growth, a way to fund innovation and investment in production of new products and services. Guess what, if nobody can get loans, new businesses and startups won't get funding either.

Astrohacker 15y ago
Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out. And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.
- swampthing 15y ago
  ... except unlike with counterfeiting, when all is said and done (all debts paid and all bank balances withdrawn), the total amount of US dollars in this closed system you describe will still be $100. You are ignoring the balance sheet of the second person (the one the bank lent $80 to) and only looking at that of the bank and the initial depositor. Edit: Wow really, someone downvoted this?
  - Astrohacker 15y ago
    No. Suppose the $80 are immediately paid back. The bank just moves the $80 from the loanee's checking account into the bank's own checking account. Total amount of money is now $180. $80 have been created, and is now owned by the bank.
- eternal_skeptic 15y ago
  So you're calling fractional reserve banking "counterfeiting". I assume you oppose it. Let's analyze your argument. Fractional lending doesn't particularly benefit the rich. A lot (IIRC, the vast majority) of the current millionaires in the US are 1st generation. They got their money in their lifetime. The vast majority therefore required a loan at some point, to fund their money-making venture. Even the evil financiers in virtually all cases get rich by leveraged (i.e. loan-fueled) investments. So at least for those people who are able to help successful businesses - by creating, funding, or helping them in any way - fractional lending is a good thing. The vast majority, or at least a substantial number, of poor people who are now rich were able to do so because at some point, they received a loan of money that fractional reserve banking made more readily available. You can still ban fractional lending, pulling the financial system back 500 or so. By doing that, you will get all the effects of the system that existed at that time: limited money supply, reduced lending, limited allocation of funds and investment to grow businesses, therefore stunted growth, less innovation, reduced social mobility, etc, etc. Are you sure that's what you want? Because you haven't explained why fractional lending is bad yet, so it seems like we'll be sacrificing an awful lot for unclear benefit. In all seriousness, a community focused on creating new businesses is the last place I'd expect to see fractional lending attacked so severely. Edit: phrasing.
forensic 15y ago
Banks do create money using the fractional reserve system. The majority of money in the economy was created by banks other than the Federal Reserve. This is a simple fact. They also create money through loans, mainly mortgages. They loan out money they don't actually have, which is the same as issuing money. Since this behaviour carries systemic risk, they are protected by the FDIC -- the taxpayers.
zedpm 15y ago
You can argue about what constitutes "giving money" vs. loaning money, but in certain cases there has been very little difference. Take the "loans" made available to the top .1% via TALF. Matt Taibbi describes the non-recourse loans handed out the wealthy and well-connected in this piece: http://www.rollingstone.com/politics/news/the-real-housewives-of-wall-street-look-whos-cashing-in-on-the-bailout-20110411?print=true http://www.rollingstone.com/politics/news/the-real-housewive... .
eurohacker 15y ago
In the United States - Federal Reserve is a private organisation and its owners are hardly known to anyone, its like a commercial bank with special rights to print money while in other countries in the world central bank is a government institution - state organisation
nazgulnarsil 15y ago
FRB is fine in a free banking system. Competition would create an ideal level of reserves by means of some banks dying and some thriving. We do not have that. Large banks are shielded from their fuckups. This creates perverse incentives for them to make high risk/high reward investments with other people's money.
- danvet 15y ago
  Exactly. All this massive discussions about creating new money somehow ingnores the elephant in the room: If banks with too much leverage would actually be able to default people will suddenly notice the problem and check their bank's reserves before opening a deposit or something like that (in historical timeframes, i.e. years ...). Now the problem is obviously that everyone who went along for the ride, hoping for the best will go bust, too. Among them the top 0.1% (or at least a large part, you need to substract the Warren Buffet type). Obviously the rich and powerful don't like becoming poor and deprived of power, so the bailout themselves via the gov't/fed. And as a strawmen they set up the crumbling 401k savings of the 99.9% normals. An aside: I seriously wonder what would have happend if the gov't would have continued to let banks default. I don't think it'd be much worse than the Marshall plan for Germany with it's complete reset of the (liquid) wealth after WW2. And that went really well. And for a bit of fairness, resetting the clock every 80 (because people tend to forget the last utter economic catastrophe) probably won't hurt.
perfunctory 15y ago
> That is factually untrue: only the Federal Reserve can legally create new money in the US That is factually untrue: Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public... The actual process of money creation takes place primarily in banks http://en.wikisource.org/wiki/Modern_Money_Mechanics/Introduction#Who_Creates_Money.3F http://en.wikisource.org/wiki/Modern_Money_Mechanics/Introdu...

Astrohacker 15y ago

Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out. And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.

swampthing 15y ago
... except unlike with counterfeiting, when all is said and done (all debts paid and all bank balances withdrawn), the total amount of US dollars in this closed system you describe will still be $100. You are ignoring the balance sheet of the second person (the one the bank lent $80 to) and only looking at that of the bank and the initial depositor. Edit: Wow really, someone downvoted this?
- Astrohacker 15y ago
  No. Suppose the $80 are immediately paid back. The bank just moves the $80 from the loanee's checking account into the bank's own checking account. Total amount of money is now $180. $80 have been created, and is now owned by the bank.
eternal_skeptic 15y ago
So you're calling fractional reserve banking "counterfeiting". I assume you oppose it. Let's analyze your argument. Fractional lending doesn't particularly benefit the rich. A lot (IIRC, the vast majority) of the current millionaires in the US are 1st generation. They got their money in their lifetime. The vast majority therefore required a loan at some point, to fund their money-making venture. Even the evil financiers in virtually all cases get rich by leveraged (i.e. loan-fueled) investments. So at least for those people who are able to help successful businesses - by creating, funding, or helping them in any way - fractional lending is a good thing. The vast majority, or at least a substantial number, of poor people who are now rich were able to do so because at some point, they received a loan of money that fractional reserve banking made more readily available. You can still ban fractional lending, pulling the financial system back 500 or so. By doing that, you will get all the effects of the system that existed at that time: limited money supply, reduced lending, limited allocation of funds and investment to grow businesses, therefore stunted growth, less innovation, reduced social mobility, etc, etc. Are you sure that's what you want? Because you haven't explained why fractional lending is bad yet, so it seems like we'll be sacrificing an awful lot for unclear benefit. In all seriousness, a community focused on creating new businesses is the last place I'd expect to see fractional lending attacked so severely. Edit: phrasing.

forensic 15y ago

Banks do create money using the fractional reserve system. The majority of money in the economy was created by banks other than the Federal Reserve. This is a simple fact. They also create money through loans, mainly mortgages. They loan out money they don't actually have, which is the same as issuing money. Since this behaviour carries systemic risk, they are protected by the FDIC -- the taxpayers.

zedpm 15y ago

You can argue about what constitutes "giving money" vs. loaning money, but in certain cases there has been very little difference. Take the "loans" made available to the top .1% via TALF. Matt Taibbi describes the non-recourse loans handed out the wealthy and well-connected in this piece: http://www.rollingstone.com/politics/news/the-real-housewives-of-wall-street-look-whos-cashing-in-on-the-bailout-20110411?print=true http://www.rollingstone.com/politics/news/the-real-housewive... .

eurohacker 15y ago

In the United States - Federal Reserve is a private organisation and its owners are hardly known to anyone, its like a commercial bank with special rights to print money while in other countries in the world central bank is a government institution - state organisation

nazgulnarsil 15y ago

FRB is fine in a free banking system. Competition would create an ideal level of reserves by means of some banks dying and some thriving. We do not have that. Large banks are shielded from their fuckups. This creates perverse incentives for them to make high risk/high reward investments with other people's money.

danvet 15y ago
Exactly. All this massive discussions about creating new money somehow ingnores the elephant in the room: If banks with too much leverage would actually be able to default people will suddenly notice the problem and check their bank's reserves before opening a deposit or something like that (in historical timeframes, i.e. years ...). Now the problem is obviously that everyone who went along for the ride, hoping for the best will go bust, too. Among them the top 0.1% (or at least a large part, you need to substract the Warren Buffet type). Obviously the rich and powerful don't like becoming poor and deprived of power, so the bailout themselves via the gov't/fed. And as a strawmen they set up the crumbling 401k savings of the 99.9% normals. An aside: I seriously wonder what would have happend if the gov't would have continued to let banks default. I don't think it'd be much worse than the Marshall plan for Germany with it's complete reset of the (liquid) wealth after WW2. And that went really well. And for a bit of fairness, resetting the clock every 80 (because people tend to forget the last utter economic catastrophe) probably won't hurt.

perfunctory 15y ago

> That is factually untrue: only the Federal Reserve can legally create new money in the US That is factually untrue: Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public... The actual process of money creation takes place primarily in banks http://en.wikisource.org/wiki/Modern_Money_Mechanics/Introduction#Who_Creates_Money.3F http://en.wikisource.org/wiki/Modern_Money_Mechanics/Introdu...