5 ms·

As a side note, I find it fascinating how fractional reserve banking is not only legal but considered indispensable to the economy. It just sounds like a big sc

As a side note, I find it fascinating how fractional reserve banking is not only legal but considered indispensable to the economy. It just sounds like a big scam. Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way.

stavros 4y ago
Because it's good for growth, as far as I know.
- baremetal 4y ago
  Until it isn't.
phkahler 4y ago
They don't create money, they loan out deposits. It's not as scammy as people think. You are free to put your cash in a mattress instead.
- hughw 4y ago
  The create money by loaning out many times the amount of deposits they have.
  - phkahler 4y ago
    No. Less than their total deposires. But loaned money may well end up in a bank where it might be loaned out again. But it's not IMHO right to try to claim one deposite as somehow "the first one" that gets loaned out repeatedly. Each deposit is loaned out less than 100 percent. The bottom line is that not all deposited money is not readily available on short notice.
    - hughw 4y ago
      If you deposit $1000 in a bank, and if the reserve requirement is 10%, the bank can lend out $10,000 to a borrower. It gives the borrower a bank account with a $10,000 balance. It has created $9000 of money out of thin air.
- rpeden 4y ago
  Sure, but loaning out deposits creates money, does it not? Most of that loaned out money is getting deposited into another bank account. And that deposited loan will (minus a percentage kept in reserve) get loaned out again. And so on, etc. I might be missing something important, though.
  - jameshart 4y ago
    Loaning out deposits creates money + debt. The amount of money is cancelled out by the amount of debt.
  - karpierz 4y ago
    I guess it's unclear what you mean by "creating money". Anytime I lend money to someone, they're going to spend it on something. They have a liability (their debt to me) and an asset (the thing they "bought", which could be anything from a T-bill, to a bagel). Basically, any debt "creates money."
    - olalonde 4y ago
      If you lend money to someone, it's no longer available for you to spend. However, if a bank loans out the money that you deposited, both the borrower and you can spend it. This is known as money creation, as it expands the money supply.
      - phkahler 4y ago
        If that were true, bank runs could not happen.
      - karpierz 4y ago
        > if a bank loans out the money that you deposited, both the borrower and you can spend it. When you "spend" money that you deposited with the bank, what you're actually doing is getting the money you lent to the bank paid off. What's the difference between that and you lending money to someone to buy a bagel/T-bond, and then at some point in the future, getting money back so that you can buy a sandwich/car?
- moralestapia 4y ago
  Sure, but why couldn't be a bank that's just like a money vault and that's it. I don't care if I get no interest, I may even pay a fee for that service.
  - tiffanyh 4y ago
    That’s called a safety deposit box.
    - paulclinger 4y ago
      Chase doesn't allow storing cash in them (other than collectible items) and I know that others banks don't allow either (most likely to limit their liability). I lived through Washington Mutual going through FDIC receivership back in 2008 (I was their employee, shareholder and account holder at that time) and their stock price dropped to almost zero when the news broke about that. I'm curious why this is not the case here.
      - quickthrowman 4y ago
        > I'm curious why this is not the case here. SIVB trading was halted during premarket at 8:35 EST due to pending news, and never resumed trading.
    - moralestapia 4y ago
      No, not a safety box. A bank. Like the other ones but without them playing bets with your money. That's literally it.
  - grog454 4y ago
    For a large enough fee you will absolutely find (or create) such a bank.
deelowe 4y ago
Because it gives the fed the power to control the economy. That's why it exists...
- ausbah 4y ago
  things would be much worse off without the Fed. look at hard banks lobby to up end the minimal restrictions they have now
  - deelowe 4y ago
    Why the downvotes? Is this not why fractional reserve banking exists? Please correct me if I'm wrong. Without it, the Fed would have very control over inflation/deflation. By the way, I'm not arguing against the Fed. I'm against fractional banking, or at least feel they should require banks to offset their liabilities more than they do today. We're literally discussing an example of why the current system isn't good.
metalspot 4y ago
Every game has winners and losers. The fact that losers exist doesn't mean there aren't winners. Banks with poor management go bankrupt. The ones with good management run the entire economy. One doesn't detract from the other.
heavyset_go 4y ago
> Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way. It's the system working as designed.
jonahbenton 4y ago
No, no, quite the contrary. I mean, money itself is an illusion, but within that illusion, understanding accounting and credit money creation is absolutely fundamental. Read this paper. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- olalonde 4y ago
  Thanks for the link. I read "The Mystery of Banking"[0] recently and understand more or less how it works. I realize that it's not the most neutral source but I haven't found any of the other side's arguments very convincing either (including this Bank of England paper though I just read the first few pages, planning on reading it fully later). [0] https://www.amazon.com/Mystery-Banking-Murray-N-Rothbard/dp/1933550287 https://www.amazon.com/Mystery-Banking-Murray-N-Rothbard/dp/...
  - jonahbenton 4y ago
    Good link- with respect, to my personal mental model the von mises stuff is a near total misunderstanding both of the mechanics and of the dynamics. Credit in particular seems to be a mystery to them, yet in anthropological terms humans- and other creatures- have credit/reputation accounting in their heads, long predating even organized math. But I have not engaged their arguments directly in depth. I do all my reading on kindle, that one is only print but I will aim to track down a digital version of their arguments.
rsync 4y ago
"It just sounds like a big scam. Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way." It's a time-shift. That's all. You can absolutely run an economy - and a culture - without leverage and even without debt. In such an environment it will take multiple lifetimes to accumulate a single lifetimes worth of provision and security ... and we all decided we wanted to provide and secure within our own lifetimes. ... and then we decided we wanted that before we had grandchildren, and then before we even had children. We're time-shifting and this instability (and, in many ways, incomprehensibility) is the price we pay for it.
- deleted 4y ago
  [deleted]
SkyPuncher 4y ago
The whole system is basically built on "putting money to work" as quickly as possible. Money sitting in "storage" just isn't useful to anyone. Most of the economy relies on an expectation that a service you provide now will be paid off in the next 30, 60, 90 days.
unity1001 4y ago
> It just sounds like a big scam It is. Its what happens when a country's currency is used as the exclusive foreign exchange currency in international trade and that country can print money like a banana republic without that currency losing value. The US went apesh*t on the foreign exchange currency position of the dollar and not only printed $ from the Federal Reserve but also allowed quite high % ratios for private banks to do fractional reserve lending. The legal % ratio was reduced after the 2008 crisis, but right at the end of Obama's 2nd term, they were restored to 2008 levels. So the cycle that started 2008 crash started again - not necessarily backed by high risk mortgages this time, but whatever could be used as a collateral. Now that many countries are moving to trading in their own currencies, all the printed dollars are coming back to the US and hiking up inflation and causing all this mess. So youre right. Its literally a scam. It could work if it was tightly regulated with low %es and what the banks could show as the backing asset could be very tightly regulated. But we all know what the corporate lobbies do to regulations in the US...
paxys 4y ago
We need money for economic growth. Creating money causes inflation. So instead we borrow money from tomorrow to build/invest today. There is nothing inherently wrong with this system, and it has worked perfectly fine for hundreds of years (probably longer).

stavros 4y ago

Because it's good for growth, as far as I know.

baremetal 4y ago
Until it isn't.

phkahler 4y ago

They don't create money, they loan out deposits. It's not as scammy as people think. You are free to put your cash in a mattress instead.

hughw 4y ago
The create money by loaning out many times the amount of deposits they have.
- phkahler 4y ago
  No. Less than their total deposires. But loaned money may well end up in a bank where it might be loaned out again. But it's not IMHO right to try to claim one deposite as somehow "the first one" that gets loaned out repeatedly. Each deposit is loaned out less than 100 percent. The bottom line is that not all deposited money is not readily available on short notice.
  - hughw 4y ago
    If you deposit $1000 in a bank, and if the reserve requirement is 10%, the bank can lend out $10,000 to a borrower. It gives the borrower a bank account with a $10,000 balance. It has created $9000 of money out of thin air.
rpeden 4y ago
Sure, but loaning out deposits creates money, does it not? Most of that loaned out money is getting deposited into another bank account. And that deposited loan will (minus a percentage kept in reserve) get loaned out again. And so on, etc. I might be missing something important, though.
- jameshart 4y ago
  Loaning out deposits creates money + debt. The amount of money is cancelled out by the amount of debt.
- karpierz 4y ago
  I guess it's unclear what you mean by "creating money". Anytime I lend money to someone, they're going to spend it on something. They have a liability (their debt to me) and an asset (the thing they "bought", which could be anything from a T-bill, to a bagel). Basically, any debt "creates money."
  - olalonde 4y ago
    If you lend money to someone, it's no longer available for you to spend. However, if a bank loans out the money that you deposited, both the borrower and you can spend it. This is known as money creation, as it expands the money supply.
    - phkahler 4y ago
      If that were true, bank runs could not happen.
    - karpierz 4y ago
      > if a bank loans out the money that you deposited, both the borrower and you can spend it. When you "spend" money that you deposited with the bank, what you're actually doing is getting the money you lent to the bank paid off. What's the difference between that and you lending money to someone to buy a bagel/T-bond, and then at some point in the future, getting money back so that you can buy a sandwich/car?
moralestapia 4y ago
Sure, but why couldn't be a bank that's just like a money vault and that's it. I don't care if I get no interest, I may even pay a fee for that service.
- tiffanyh 4y ago
  That’s called a safety deposit box.
  - paulclinger 4y ago
    Chase doesn't allow storing cash in them (other than collectible items) and I know that others banks don't allow either (most likely to limit their liability). I lived through Washington Mutual going through FDIC receivership back in 2008 (I was their employee, shareholder and account holder at that time) and their stock price dropped to almost zero when the news broke about that. I'm curious why this is not the case here.
    - quickthrowman 4y ago
      > I'm curious why this is not the case here. SIVB trading was halted during premarket at 8:35 EST due to pending news, and never resumed trading.
  - moralestapia 4y ago
    No, not a safety box. A bank. Like the other ones but without them playing bets with your money. That's literally it.
- grog454 4y ago
  For a large enough fee you will absolutely find (or create) such a bank.

deelowe 4y ago

Because it gives the fed the power to control the economy. That's why it exists...

ausbah 4y ago
things would be much worse off without the Fed. look at hard banks lobby to up end the minimal restrictions they have now
- deelowe 4y ago
  Why the downvotes? Is this not why fractional reserve banking exists? Please correct me if I'm wrong. Without it, the Fed would have very control over inflation/deflation. By the way, I'm not arguing against the Fed. I'm against fractional banking, or at least feel they should require banks to offset their liabilities more than they do today. We're literally discussing an example of why the current system isn't good.

metalspot 4y ago

Every game has winners and losers. The fact that losers exist doesn't mean there aren't winners. Banks with poor management go bankrupt. The ones with good management run the entire economy. One doesn't detract from the other.

heavyset_go 4y ago

> Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way. It's the system working as designed.

jonahbenton 4y ago

No, no, quite the contrary. I mean, money itself is an illusion, but within that illusion, understanding accounting and credit money creation is absolutely fundamental. Read this paper. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

olalonde 4y ago
Thanks for the link. I read "The Mystery of Banking"[0] recently and understand more or less how it works. I realize that it's not the most neutral source but I haven't found any of the other side's arguments very convincing either (including this Bank of England paper though I just read the first few pages, planning on reading it fully later). [0] https://www.amazon.com/Mystery-Banking-Murray-N-Rothbard/dp/1933550287 https://www.amazon.com/Mystery-Banking-Murray-N-Rothbard/dp/...
- jonahbenton 4y ago
  Good link- with respect, to my personal mental model the von mises stuff is a near total misunderstanding both of the mechanics and of the dynamics. Credit in particular seems to be a mystery to them, yet in anthropological terms humans- and other creatures- have credit/reputation accounting in their heads, long predating even organized math. But I have not engaged their arguments directly in depth. I do all my reading on kindle, that one is only print but I will aim to track down a digital version of their arguments.

rsync 4y ago

"It just sounds like a big scam. Why do private bankers get to create money and decide who gets it? It feels like there has to be a better way." It's a time-shift. That's all. You can absolutely run an economy - and a culture - without leverage and even without debt. In such an environment it will take multiple lifetimes to accumulate a single lifetimes worth of provision and security ... and we all decided we wanted to provide and secure within our own lifetimes. ... and then we decided we wanted that before we had grandchildren, and then before we even had children. We're time-shifting and this instability (and, in many ways, incomprehensibility) is the price we pay for it.

deleted 4y ago
[deleted]

SkyPuncher 4y ago

The whole system is basically built on "putting money to work" as quickly as possible. Money sitting in "storage" just isn't useful to anyone. Most of the economy relies on an expectation that a service you provide now will be paid off in the next 30, 60, 90 days.

unity1001 4y ago

> It just sounds like a big scam It is. Its what happens when a country's currency is used as the exclusive foreign exchange currency in international trade and that country can print money like a banana republic without that currency losing value. The US went apesh*t on the foreign exchange currency position of the dollar and not only printed $ from the Federal Reserve but also allowed quite high % ratios for private banks to do fractional reserve lending. The legal % ratio was reduced after the 2008 crisis, but right at the end of Obama's 2nd term, they were restored to 2008 levels. So the cycle that started 2008 crash started again - not necessarily backed by high risk mortgages this time, but whatever could be used as a collateral. Now that many countries are moving to trading in their own currencies, all the printed dollars are coming back to the US and hiking up inflation and causing all this mess. So youre right. Its literally a scam. It could work if it was tightly regulated with low %es and what the banks could show as the backing asset could be very tightly regulated. But we all know what the corporate lobbies do to regulations in the US...

paxys 4y ago

We need money for economic growth. Creating money causes inflation. So instead we borrow money from tomorrow to build/invest today. There is nothing inherently wrong with this system, and it has worked perfectly fine for hundreds of years (probably longer).