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while it is good to raise awareness about the federal reserve this video draws fallacious conclusions based on a stupid premise: that when you make an agreement

while it is good to raise awareness about the federal reserve this video draws fallacious conclusions based on a stupid premise: that when you make an agreement to pay back a loan you aren't creating value. If i give you a piece of paper that says I will pay you $x over the next 10 years that paper has value and can be used as money to the extent that you are legally obligated to make said payments. A loan is transplanting future productivity on your part into value today, which can then be traded for a house a car what have you. I'd suggest the free literature from the Mises institute if you want to understand banking.

gduffy 18y ago
I watched this video a while ago, so I don't remember it exactly, but there is clearly something dubious behind the money-creating power governments give to banks. As a society, we do want to grant promissory notes to encourage growth. However, banks, as commercial entities, quickly run away from simple, society-uplifting investments to derivatives and subprime credit. As rational businesses they are motivated to grow, so the value/paper ratio goes steadily down as they expand. There is clearly something missing in the equation, and I think the video hints at it nicely. Something is wrong when the rules of the business encourage banks to make increasingly lower value loans over time. And bailouts make them even less likely to be prudent with the power we give them.
- Devilboy 18y ago
  I feel very uncomfortable with all the financial derivatives - and derivatives of derivatives and so on. It becomes so abstract that it loses connection with what is going on in the real world processes. It seems counter-productive to me.
  - iigs 18y ago
    I feel that way as well, and I assumed I was ignorant or stupid because I couldn't make sense of it... then October hit and it became obvious that a large number of companies that made their fortunes on this system also did not or could not understand the whole thing either. It was kind of reassuring in a "you're smarter than you let yourself think, but not smart enough that your house isn't underwater" way. The last time I felt this way was in the mid-late 90s sitting on the porch with my dad in rural Nebraska. We couldn't figure out why so many tech companies were darlings of the stock market. And sure enough, while there was some (read: substantial) lasting value in the internet business, there were a lot of really stupid dot coms that didn't bring anything to the table. I believe that there's a large amount of capital seeking returns right now. That is to say, I think at this stage of the world's economic evolution many organizations have obligations to invest large amounts of money, and that there's some ratio of money to real work that is off kilter possibly. For this reason I think tech and the financial bubbles represent a class of problem that we're going to see repeat itself (irregularly) going forward. It would sure be nice to be able to capitalize on it, somehow. :)
- davidw 18y ago
  Something like this, from the Financial Times' chief economist, Martin Wolf, might be a better treatment of what's wrong and how to fix it: http://en.wikipedia.org/wiki/Fixing_Global_Finance http://en.wikipedia.org/wiki/Fixing_Global_Finance The Economist has been dedicating a lot of space to the topic as well. Neither one of them advocates throwing the baby, bathtub, and one's self out of the window.
newt0311 18y ago
Stupid doesn't quite do it justice. The first fallacy is the Malthusian fallacy: namely that humans cannot grow indefinitely. If anything, history has shown as that we can. People have been predicting the coming scarcity apocalypse every few decades and they have always been wrong (the most recent predicted famines in 1985. Then people came up with artificial nitrates...). The second fallacy is that a certain number of borrowers must default: The money can go in a circle reflecting the value created by the borrowers in excess of interest. Fallacy 3: It assumes that if nobody had any debt, then there would be no money. The fallacy is that the original money issue (~$2 trillion for the US) is unaccounted for. If there are absolutely no debt, we would still have that amount. (Which can go on ...) The replacement ideas suggested are idiotic beyond words. This video starts well and quickly degenerates into loony-ville.
- kingkongrevenge 18y ago
  > the Malthusian fallacy: namely that humans cannot grow indefinitely Nothing grows geometrically forever. Malthus's discovery was that any increase in food supply was matched by an increase in population until food per person was pretty much the same. He didn't actually say anything about limits to growth. But guess what? He perfectly described all human societies all over the world for over 50K years. The data clearly show that Victorians and cavemen and modern day residents of Ghana had basically the same quality of diet on average. The Malthusian equation has only "stopped" being clearly applicable in a select few industrialized countries and since different points in time after about 1820. For most of humanity the equation actually still works. That's a pretty flimsy set of evidence to start talking about the "Malthusian fallacy" with its huge pile of evidence.
  - newt0311 18y ago
    "Nothing grows geometrically forever." No, not in the empirical sense but the universe is large and, as far as we know, ours for the taking. By "'stopped' being clearly applicable", you mean completely irrelevant and flat out wrong. Also, >200 years of data is flimsy? In a scientific sense maybe, but economics isn't a science -- you can't really perform controlled experiments on the entire economy. Also, if some of the third-world countries do indeed start to grow in economic terms, I am certain that their food production capabilities will catch up. India can feed its 1 billion population and I am pretty sure that 50 years ago, that would have been considered impossible.
davidw 18y ago
> I'd suggest the free literature from the Mises institute if you want to understand banking. Those guys have an Agenda with a capital A themselves. I'd suggest reading a broad variety of sources, including some (mostly, actually) mainstream ones. With economics, there is an unfortunate tendency for "free on the internet" to mean "extremist", which is quite different from all the free programming docs we are used to hoovering up. Imagine if the documentation to color forth were the only thing you could get for free on the internet... BTW, this is one notable exception: http://www.introecon.com/ http://www.introecon.com/
- cchooper 18y ago
  I have to second this point. Mises.org is a propaganda site, an echo chamber for people with a rather extreme political philosophy. It is not a source of balanced information on any topic.
axod 18y ago
One of the main take aways I had, was the fact that banks can lend more than they have on deposit. Then that money can be deposited with another bank, and again multiplied indefinitely. So for example, I deposit $10 at bank A Bank A can now lend 10x ($100) to you You deposit that at Bank B, who can again lend 10x ($1000) Can you explain what value has been created there? To me, it seems like the bank has been given a license to create money indefinitely, which seems like a very bad idea. For me, that is the scam. Why can't we exist only allowing banks to lend out what they actually have instead of creating money out of thin air?
- cx01 18y ago
  Banks don't create money indefinitely. If you deposit a $10 banknote at a bank, then the whole money supply can only increase by $100 (when the reserve is 10%). Your example is wrong, because you mixed up deposits(which exists only on the balance sheet of the individual banks) and reserve (which is basically the paper money + balances of all banks at the central bank). But of course you're right, that banks still lend out more than they have, which I agree is scam.
  - cchooper 18y ago
    If I have only $100 and I lend out $60, then I have loaned more money than I have, because I now only have $40 dollars. Banks are not doing anything different to this. They are just loaning the cash deposited with them. Although the original $10 loan will eventually lead to $100 being created, it has also lead to $100 dollars worth of loans to banks. There's no scam here, it's just the way that debt works. It's no different to people loaning money to each other.
    - cx01 18y ago
      Banks loan out money on checking accounts, but the basic idea of a checking account is to have access to the money anytime. So if I put $100 in my checking account, and the bank lends out $90 of it, the bank has liabilities of $190, backed by only $100 in cash. In other words, the bank has created $90 out of thin air.

gduffy 18y ago

I watched this video a while ago, so I don't remember it exactly, but there is clearly something dubious behind the money-creating power governments give to banks. As a society, we do want to grant promissory notes to encourage growth. However, banks, as commercial entities, quickly run away from simple, society-uplifting investments to derivatives and subprime credit. As rational businesses they are motivated to grow, so the value/paper ratio goes steadily down as they expand. There is clearly something missing in the equation, and I think the video hints at it nicely. Something is wrong when the rules of the business encourage banks to make increasingly lower value loans over time. And bailouts make them even less likely to be prudent with the power we give them.

Devilboy 18y ago
I feel very uncomfortable with all the financial derivatives - and derivatives of derivatives and so on. It becomes so abstract that it loses connection with what is going on in the real world processes. It seems counter-productive to me.
- iigs 18y ago
  I feel that way as well, and I assumed I was ignorant or stupid because I couldn't make sense of it... then October hit and it became obvious that a large number of companies that made their fortunes on this system also did not or could not understand the whole thing either. It was kind of reassuring in a "you're smarter than you let yourself think, but not smart enough that your house isn't underwater" way. The last time I felt this way was in the mid-late 90s sitting on the porch with my dad in rural Nebraska. We couldn't figure out why so many tech companies were darlings of the stock market. And sure enough, while there was some (read: substantial) lasting value in the internet business, there were a lot of really stupid dot coms that didn't bring anything to the table. I believe that there's a large amount of capital seeking returns right now. That is to say, I think at this stage of the world's economic evolution many organizations have obligations to invest large amounts of money, and that there's some ratio of money to real work that is off kilter possibly. For this reason I think tech and the financial bubbles represent a class of problem that we're going to see repeat itself (irregularly) going forward. It would sure be nice to be able to capitalize on it, somehow. :)
davidw 18y ago
Something like this, from the Financial Times' chief economist, Martin Wolf, might be a better treatment of what's wrong and how to fix it: http://en.wikipedia.org/wiki/Fixing_Global_Finance http://en.wikipedia.org/wiki/Fixing_Global_Finance The Economist has been dedicating a lot of space to the topic as well. Neither one of them advocates throwing the baby, bathtub, and one's self out of the window.

newt0311 18y ago

Stupid doesn't quite do it justice. The first fallacy is the Malthusian fallacy: namely that humans cannot grow indefinitely. If anything, history has shown as that we can. People have been predicting the coming scarcity apocalypse every few decades and they have always been wrong (the most recent predicted famines in 1985. Then people came up with artificial nitrates...). The second fallacy is that a certain number of borrowers must default: The money can go in a circle reflecting the value created by the borrowers in excess of interest. Fallacy 3: It assumes that if nobody had any debt, then there would be no money. The fallacy is that the original money issue (~$2 trillion for the US) is unaccounted for. If there are absolutely no debt, we would still have that amount. (Which can go on ...) The replacement ideas suggested are idiotic beyond words. This video starts well and quickly degenerates into loony-ville.

kingkongrevenge 18y ago
> the Malthusian fallacy: namely that humans cannot grow indefinitely Nothing grows geometrically forever. Malthus's discovery was that any increase in food supply was matched by an increase in population until food per person was pretty much the same. He didn't actually say anything about limits to growth. But guess what? He perfectly described all human societies all over the world for over 50K years. The data clearly show that Victorians and cavemen and modern day residents of Ghana had basically the same quality of diet on average. The Malthusian equation has only "stopped" being clearly applicable in a select few industrialized countries and since different points in time after about 1820. For most of humanity the equation actually still works. That's a pretty flimsy set of evidence to start talking about the "Malthusian fallacy" with its huge pile of evidence.
- newt0311 18y ago
  "Nothing grows geometrically forever." No, not in the empirical sense but the universe is large and, as far as we know, ours for the taking. By "'stopped' being clearly applicable", you mean completely irrelevant and flat out wrong. Also, >200 years of data is flimsy? In a scientific sense maybe, but economics isn't a science -- you can't really perform controlled experiments on the entire economy. Also, if some of the third-world countries do indeed start to grow in economic terms, I am certain that their food production capabilities will catch up. India can feed its 1 billion population and I am pretty sure that 50 years ago, that would have been considered impossible.

davidw 18y ago

> I'd suggest the free literature from the Mises institute if you want to understand banking. Those guys have an Agenda with a capital A themselves. I'd suggest reading a broad variety of sources, including some (mostly, actually) mainstream ones. With economics, there is an unfortunate tendency for "free on the internet" to mean "extremist", which is quite different from all the free programming docs we are used to hoovering up. Imagine if the documentation to color forth were the only thing you could get for free on the internet... BTW, this is one notable exception: http://www.introecon.com/ http://www.introecon.com/

cchooper 18y ago
I have to second this point. Mises.org is a propaganda site, an echo chamber for people with a rather extreme political philosophy. It is not a source of balanced information on any topic.

axod 18y ago

One of the main take aways I had, was the fact that banks can lend more than they have on deposit. Then that money can be deposited with another bank, and again multiplied indefinitely. So for example, I deposit $10 at bank A Bank A can now lend 10x ($100) to you You deposit that at Bank B, who can again lend 10x ($1000) Can you explain what value has been created there? To me, it seems like the bank has been given a license to create money indefinitely, which seems like a very bad idea. For me, that is the scam. Why can't we exist only allowing banks to lend out what they actually have instead of creating money out of thin air?

cx01 18y ago
Banks don't create money indefinitely. If you deposit a $10 banknote at a bank, then the whole money supply can only increase by $100 (when the reserve is 10%). Your example is wrong, because you mixed up deposits(which exists only on the balance sheet of the individual banks) and reserve (which is basically the paper money + balances of all banks at the central bank). But of course you're right, that banks still lend out more than they have, which I agree is scam.
- cchooper 18y ago
  If I have only $100 and I lend out $60, then I have loaned more money than I have, because I now only have $40 dollars. Banks are not doing anything different to this. They are just loaning the cash deposited with them. Although the original $10 loan will eventually lead to $100 being created, it has also lead to $100 dollars worth of loans to banks. There's no scam here, it's just the way that debt works. It's no different to people loaning money to each other.
  - cx01 18y ago
    Banks loan out money on checking accounts, but the basic idea of a checking account is to have access to the money anytime. So if I put $100 in my checking account, and the bank lends out $90 of it, the bank has liabilities of $190, backed by only $100 in cash. In other words, the bank has created $90 out of thin air.