Welcome Guest [Log In] [Register]
Welcome to Bill Still's Monetary Reforum. We hope you enjoy your visit.


You're currently viewing our forum as a guest. This means you are limited to certain areas of the board and there are some features you can't use. If you join our community, you'll be able to access member-only sections, and use many member-only features such as customizing your profile, sending personal messages, and voting in polls. Registration is simple, fast, and completely free.


Join our community!


If you're already a member please log in to your account to access all of our features:

Username:   Password:
Add Reply
The Fallacy of Fractional Reserve Banking (FRB); money
Topic Started: Jun 3 2011, 04:31 PM (3,209 Views)
LarryL
Advanced Member
[ *  *  * ]
The Federal Reserve System is filled with archaic terms that are counter intuitive and downright misleading. For example, the very name “Federal Reserve” implies that it is a government agency but as we know, it is not, and should be called the non-Federal Reserve to eliminate confusion. Another confusing term and the topic of this thread, is “fractional reserve banking.”

Fractional reserve banking is a real dandy in that both “fractional” and “reserve” are misleading terms that combine to really confuse the folks. It would probably be best to simply stop using the term as it clouds rather than clarifies anything to do with modern banking. Yes, I know that Wiki, Murray Rothbard (The Mystery of Banking) and the non-Federal Reserve make a big fuss in discussing the term, along with charts and formulas, as if it were a banking fundamental. Actually, it is an old rule of thumb that doesn’t really apply to modern banking.

How does Fractional Reserve Banking (FRB) supposedly work?

We’re told that banks can loan a large portion of their deposits under FRB. The portion that must be kept is called the reserve requirement and is usually expressed as a percentage. If the reserve requirements were 10%, and a customer deposited $100, the bank could lend out $90 and hold $10 (10%) in reserve. And, if the reserve requirement were 20%, the bank could only lend out $80 since it would be required to keep $20 (20%) in “reserve.”

If the $90 loaned in the above example (10% reserve) by bank A, is deposited in bank B, then bank B could lend $81 in keeping $9 (10%) in reserve. And on it goes, the money “expands” as deposits go back and forth between banks. A $100 deposit has the potential to expand to roughly $910 through FRB (at 10% reserve).

Posted Image

Fractional reserve banking under the above explanation, doesn't exist. I have asked many in the past to show me where such a system exists as BIS (Bank of International Settlements) and U.S. banking standards and regulations make no mention these restrictions. In actuality, banks are constrained by capital, not reserves. Banks may lend even if they have do not have adequate reserves. And, if FRB were accurate, how could investment banks operate as they hold few deposits while making huge loans?

BIS Basel Accords & U.S. Regulations

I think many confuse FRB with BIS Basel accords that define an adequate "capital ratio" along with five tiers of risk weighted assets. The Basel capital ratio may be adjusted under U.S. regulations that include a very similar "leverage" ratio.

In addition, banks must meet a Net Stable Funding Ratio (NSFR) which is basically a one year cash flow projection. The quantity of available stable funding (the numerator in the ratio) must be greater than the required stable funding for these assets (the denominator). The general intent of the capital ratio and NSFR is to establish adequate capital to handle some losses and to complete interbank transactions.

FRB Critics

Many critics contend that one of the problems with FRB is that if all depositors tried to withdraw their funds simultaneously (bank run); only some of the money would be available. If the reserve requirement were 10%, we’re led to believe that only 10% of the money would be available to depositors. This is in contrast to full reserve banking where supposedly, the bank safely stores 100% of their deposits – none of the deposits are used in loans. FRB banks say fugetaboutit, all deposit losses are covered by FDIC ($250,000 maximum).

You may be thinking that if deposits are not actually loaned, how can there be a bank run since all deposits should be there? Unfortunately, depositors are junior creditors; they are in the back of the line behind more senior creditors (other banks, etc.). If a bank goes down, usually depositors are left holding the bag. The law could be changed to make depositors senior creditors but the bankers write the laws to protect themselves at our expense.

FRB implies that banks are lending some percentage of their own money or the money held in deposit accounts. Of course this is not true as 100% of the money loaned is created on the spot. They leverage deposits as assets, they don’t lend them. Another common objection is that FRB enables banks to create money (for virtually free). They contend that the banks should lend their own and/or their depositors money and stop creating new money. I’m not sure how such a system would work but my guess is that if a depositor allowed the bank to lend 50% of their money, they would have to agree not to withdraw it until the debt was repaid.

Banks as Recyclers

If banks were not allowed to distribute new money, they would become money recyclers in borrowing from some to lend to others. The cost of loans would greatly increase since people and banks would be inconvenienced in giving up the usage of their money in lending it to others. And, the money supply would instantly begin to diminish (contract) since no new money is being added to the system that continuously destroys money as principal debt is repaid.

This makes me wonder, what is it that those who are against FRB really want? Do they want to change banking regulations, if so how? Do they want to make banks money recyclers, if so why?

My suggestion is to continue with the existing system with one major change...all money to be created by government, through congress, in establishing a huge pool for banks to draw from at 0% interest. This separates the "creation" and "distribution" functions to decentralize the system while adding safeguards.

Larry
Edited by LarryL, Jun 3 2011, 04:35 PM.
Offline Profile Quote Post Goto Top
 
Sage Against The Machine
Member Avatar
Advanced Member
[ *  *  * ]
LarryL - an excellent article and great questions raised. I'm a novice at this but I'll do my best to highlight some relevant issues.

Monetary reform in the UK aims to do the following things:
1. Replace most of the debt-based money with debt-free money in a way which will not cause inflationary shocks. There is so much debt-based credit in the money supply that it is unpayable without huge forced, unsustainable growth or a swinging slash and burn policy by the government. Why should the losses of the banks be nationalised? The banks (the so-called experts) were controlling the tap of credit. Sure there was some greed by consumers but many people have felt their real purchasing power dwindle.
2. The above can be achieved by paying off the national debt (which is owed chiefly to private banks in the UK) using digital debt-free money. This on its own would cause inflation. Not because of debt-free money itself but because the debt-free money could easily be converted to debt-based money using the FRB / capital adequacy ratio system that we currently have. UK Money Reformers consider debt-based money and FRB-type systems to be inherently inflationary. This explains why the Bank of England target for inflation is 2% and not 0%. The current model balances the economy on such a precarious knife-edge that an inflation rate that approaches 0% would tip the economy into a deflationary spiral. The 2% target represents the extra amount of money needed over and above that which is required to keep the economy working. Even during comparatively good times, we get a little bit of inflation - which as we know is really a stealth tax on money itself as people find their purchasing power diminish - and we get a little bit of recession - job losses, home repossessions (the real-life human tragedies that lie beneath economist's bland jargon and dysfunctional theories). In addition, even though UK goverments gave the power of money creation to the banks, they gain huge political power by having the national debt as a contrived tool of scarcity. They can dip into it whenever they want to stimulate the economy or they can stop subsidising industries they don't like (e.g. coal and steel). With a debt-based economy they win the argument every time with cries of "we're living beyond our means" or "we've maxed out the nation's credit card" or "we didn't fix the roof when the sun was shining!"
3. Raise the capital adequacy ratios to full reserve. The existing sytem is considered to be fundamentally fraudulent and inflationary as well as a complete mess.
4. The government in question would need to repeal necessary legislation which gave private banks the ability to create new money out of thin air. Private banks would still remain private. The money supply would be nationalised as you imply and banks would effectively be account holders in the Bank of England (or wherever) and there would be massive penalties if they went into the red - which would be effectively counterfeiting and devaluing UK currency. An at arms length agency such as the Monetary Policy Committee would have control over the total money supply which they could increase or decrease accordingly to set inflation or to take into account a rising population or even boost it during a national emergency to stimulate the economy.
5. The UK would need to sever all ties with the Central World Banks, the Basel Accords and the credit ratings agencies. All they do is hold entire countries to ransom with economic WMDs. Look at the developing world - they are producing but not for themselves. They are producing just in order to service an unpayable debt whilst their citizens starve. Nice.

I believe the above would free up a lot of the money which was previously hanging around not doing very much other than servicing a debt.
Banks keep saying they can make money (I don't understand how other than the fact they have money already and they charge people interest for using it - a form of exploitation perhaps? - We'll leave that issue for now). So I say let them try to make it - on a level playing field, competing with other banks who are not allowed to lend to each other (no LIBOR).
Customers would have 2 types of account.
(a) Transaction (current) account - guaranteed by the government, no risk.
(b) Investment (savings) account - not guaranteed, therefore slight risk.
Customers do not have to put all their eggs in one basket. They can spread their savings around. The reason I would not want to go for a State run bank initially is that it would be politically better if someone got refused a loan on commercial grounds by a commercial bank rather than a government bureaucrat. There would be cries of "Totalitarianism" or "the Commies are here."
This model should free up so much money that the demand for loans would fall because people would no longer be experiencing "poverty amidst plenty."
If there are temporarily insufficient funds for lending to viable businesses then interest rates would need to be raised to encourage savers to put more money in the banks coffers for lending.
Banks could still be profitable if run responsibly but they would cease to be the multibillion dollar gambling casinos they are at present. They will also have to stop paying CEOs silly seven figure bonuses which have not been earned in the true sense of the word.

Other things to consider:
Does FRB differ that much to capital adequacy ratios at the end of the day? Banks are not lending money that is actually theirs. The banking system is a complicated, interconnected web of various financial packages - some low risk, some toxic. The way this is directed is by market forces and herd mentality. The whole thing is a bit like a nasty game of pass the parcel with a bomb inside and when the music stops, the person left holding the parcel is up a certain creek without a particular implement.
The system of full reserve acts to calm the system down (not stagnate it) and simplify it, which should smooth out some of the inefficiencies (how efficient is it to allow electronic money be passed around from computer to computer the way it was leading up to the credit crunch?) Full reserve also is a means by which the money supply can be stabilised during a transition period to debt-free money, so inflation can be controlled and set to 0%. Contrary to popular belief a 0% inflation rate wouldn't cause people to stop spending (people will always want to spend, some would say, too much!) - but it would benefit savers and debtors equally.
The UK has a money supply of 2 trillion pounds. Plenty of money for anyone to gain acces to - to earn it and spend it.

Lots of unco-ordinated ideas in this post. I hope you can decipher them and get something useful from my ramblings.
Positivemoney.org.uk have commissioned some research (out in July) which should shed some light on whether full reserve banking would stagnate the economy more than it's already stagnated. I think the answer will demonstrate that the current financial system is dead and if the government hadn't nailed it to the perch, it would be pushing up the daisies.
"Madness is doing the same thing over and over again expecting a different result".
Offline Profile Quote Post Goto Top
 
LarryL
Advanced Member
[ *  *  * ]
Hello Sage Against The Machine,

I agree with your point, some debt free money is needed. This is not an opinion as the math clearly shows that there is more debt than available money - the bridge cannot be crossed with more debt money, even if it at 0% interest. Default or jubilee are the only alternatives and both must be avoided.

Quote:
 
Sage wrote: 2. The above can be achieved by paying off the national debt (which is owed chiefly to private banks in the UK) using digital debt-free money. This on its own would cause inflation. Not because of debt-free money itself but because the debt-free money could easily be converted to debt-based money using the FRB / capital adequacy ratio system that we currently have.


Paying the national debt off would not necessarily be inflationary. First, we ourselves (intragovernmental debt) around $4.5 trillion, including social security, medicaid and government pensions. Instead of money, those "trusts" are holding "non-negotiable" bonds. Government could call the bonds in and create the money for free. This would not be inflationary as the money already exists, it is simply being transferred from bonds to dollars.

And we owe the non-Federal Reserve around $4 trillion. We could repay the debt electronically with the click of a mouse in issuing debt free money and calling in the bonds for early payment. The repayment would extinguish the money in principal repayment - the money would cease to exist. This would not be inflationary as the money borrowed through the bond, would remain in the economy - essentially no difference in the money supply.

Ok, so we just eliminated around $8.5 trillion of the $14 trillion national debt, what next? The remaining $5.5 trillion debt is held in private and foreign hands. Japan is suffering through a major catastrophe and we owe them close to $1 trillion dollars. Why not ask them if they want their money back without any future interest? This would not be inflationary but could set up a massive buy of U.S. infrastructure and real estate. If they spend the money rebuilding infrastructure, U.S. companies could benefit (are there any left?). They'd be crazy not to accept such a deal, which means the national debt could be reduced to $4.5 trillion.

The balance, could be paid with debt free money as the bonds mature.

Quote:
 
Sage wrote: 3. Raise the capital adequacy ratios to full reserve. The existing sytem is considered to be fundamentally fraudulent and inflationary as well as a complete mess.


What does that mean? Are you suggesting that banks simply recycle existing money?

Yes, the existing system is fatally flawed but that doesn't mean that we don't need or understand banking. Lending ratios have been understood for a long time. The problem is that the regulators (non-Federal Reserve) simply ignored the rules and gave loans to people who clearly could not pay while fraudulently stealing everything they could grab.

Larry
Offline Profile Quote Post Goto Top
 
MG_Andrew_Jackson
Member Avatar
Advanced Member
[ *  *  * ]
Quote:
 
Paying the national debt off would not necessarily be inflationary. First, we ourselves (intragovernmental debt) around $4.5 trillion, including social security, medicaid and government pensions. Instead of money, those "trusts" are holding "non-negotiable" bonds. Government could call the bonds in and create the money for free. This would not be inflationary as the money already exists, it is simply being transferred from bonds to dollars.

And we owe the non-Federal Reserve around $4 trillion. We could repay the debt electronically with the click of a mouse in issuing debt free money and calling in the bonds for early payment. The repayment would extinguish the money in principal repayment - the money would cease to exist. This would not be inflationary as the money borrowed through the bond, would remain in the economy - essentially no difference in the money supply.

Ok, so we just eliminated around $8.5 trillion of the $14 trillion national debt, what next? The remaining $5.5 trillion debt is held in private and foreign hands. Japan is suffering through a major catastrophe and we owe them close to $1 trillion dollars. Why not ask them if they want their money back without any future interest? This would not be inflationary but could set up a massive buy of U.S. infrastructure and real estate. If they spend the money rebuilding infrastructure, U.S. companies could benefit (are there any left?). They'd be crazy not to accept such a deal, which means the national debt could be reduced to $4.5 trillion.

The balance, could be paid with debt free money as the bonds mature.


Great post, I agree.

As to FRB, the banking system, and monies creation, I'm starting to form an outline of a system I think is workable:

1. Congress/Executive/Treasury working as the National Bank

2. A State Bank in each state working as a mini Fed like N. Dakoda( Handling State Treasury deposits, States share of National Infrastructure monies, State wide infrastructure monies, and mini Fed to County/City banks, also bond and security offerings to Wall Street as needed and proscribed(( still need to think on this one)).

3 County/City banks working as a mini Fed and quasi regulator/auditor to local banks, handling city/county deposits, and infrastructure funds.

In this system all infrastructure funds are interest free loans.

Here's a way it should work, as far as cash moving through the system:
Quote:
 
Congress should pass a bill to allow Treasury print debt-free monies to extend a interest free loan to The Bank of California to Pay-Off the debt they are now making 7 billions of dollars worth of (Usury), sorry I mean interest payments on, setting up a nice long payment schedule of say 500 millions of dollars per year until the debt is paid in full, with the surpluses The State Legislature of California should pass a bill allowing The State Bank of California to offer interest free loans to The Bank of (INSERT NAME OF CITY/COUNTY HERE) to pay off it's debts, setting up a nice long payment schedule, less than the Usury payments, sorry I did it again, interest payments they are now paying, with the surpluses, the City/County Council should allow the City/County Bank to make Interest free loans to pay for needed infrastructure.


And a bit more:

Quote:
 
The Congressional Rep. for St.Louis offers a bill for funding, the bill asks for funds to pay for the nation wide network, and funds to acquire needed locations in St. Louis, and offers these funds to The Bank of St. Louis in the form of an interest free loan to be repaid by a .02 cent tax on those ATM locations in St.Louis, it also offers contract to be won by the lowest bidder to provide the physical ATMs, service them( you know repair and fill as needed), it levies a fee of .13 cents per transaction for the maintenance costs of the national network, and another low bid contract to get these funds( .13 cents) and whatever is left over is used to pay the lard arses in Congress, Congress debates it, finds it sound( the number add up ), so Congress passes the appropriations bill, thus authorizing United States Treasury(You know the lard arses WE ALREADY PAY TO DO THIS JOB) to print the funds and United States Secret Service( You know the lard arses WE ALREADY PAY TO PROTECT PRESIDENTS(( BOTH DEAD AND ALIVE )) move these monies to The Bank of St. Louis.


Picture the Monies from a Nation wide project like a National Electronic monies network going to each State bank, and monies for the physical land/building costs needed going to each City/County Bank.

Now let's look at how this system should operate to help eliminate or reduce the need for FRB.

Say I am a builder, I build Homes, I have good reputation and credit, so I go to a local bank and apply for a loan to by 55 home tracts and monies to build 55 homes, I have the land selected and the investment looks sound so the local bank offers me the loan, but must clear it with the City County bank to get the terms.

The local bank in turn goes to the City/County bank and gets funds, the City/County bank access's the market and looks at the price value of the homes I have offered blueprint to build( say it's tract housing ), they look at my estaminets of building costs as well as my "Required profit"( Say it's going to cost me 85k to build small 3 bedroom homes and I'd like to require 10k profit per home ) These margins look sound, so the City/County bank offers the funds 85k x 55 = 4.675 Million for a term of 6 years( all these funds are not going to be needed at once and some homes are going to be sold before others started so the City bank has the funds over time to handle this loan, but if it did not it could turn to the State bank or go through the Congressional Rep. directly).

Now the City bank prepares an offering for Wall Street, the offering must be approved by the State Bank who will underwrite it( for a fee ) and if it were a larger loan the Senate of U.S. would have to approve it as it's a State bank underwriting. Now the price I need for these houses is 95k each, and the local bank wants a fee of 1k per home, the city bank decides it wants 3k per home fee, and the State bank takes 500h each to underwrite the offering, it's a 6 year term so, but some homes will be done over time so a set of 2 year bonds should work, the City bank breaks up each Home into 1k bonds and adds 20% for the bond holder and the Wall Street broker wants 500h per home to handle the offering( Sell it ).

So per home you end up with 100 1k bonds paying $1200 and the end of 24 months( If I did the math right? ), that leaves the Sale price of the home at $120k with a nice profit for everyone, but the Real-estate agent, but the City bank owns the homes, or is servicing the bonds, so it needs to sell them, so it contracts an agent to sell each one for 5k.

6 months later 20 homes are done.

Now the buyer walks into a local bank and wants to buy a home that has been complete, these homes are a known quantity and all the legal costs are handled in the 5k the real estate agent, the buyer has a credit score of 680 has been on their job for 5 years pays his/her non credit reported bills on time(( doesn't have any extraneous lines of revolving debt, more on that another time)) so everything is in order, the local bank slaps a 1k fee on the loan and goes bak to the City bank, the City bank turn to Congress Rep. who rubber stamps
it and adds it to that weeks home loads appropriations bill( THIS HOUSE IS REAL, IT EXISTS, SO THE MONIES NEED TO EXSIST, PRINTING THEM WILL NOT BE INFLATIONARY, AND IF THE HOME OWNER DEFAULTS, THE HOUSE IS STILL REAL, SELL IT AGAIN ) so Treasury prints the monies and the loan is made, the buyer pays for Insurances at the rate of $75.00 per month or near that, in the terms of the loan.

Say the terms are 15 years, so 126k / 15 / 12 = $700 per month + 75 for Insurance $775 a month for 15 years and no Interests, each payment is Priceable - Insurance and the buyer can pay it off as fast as they want, if they fall behind some, it does not bring down some pyramid scam, there is NOT ONE to bring down.

Looks honest to me, look over my math and see if it's right?

Does anyone think it would be inflationary if the buyer defaulted and Congress printed new monies for the next buyer???

Fee for service banking???

Do we need FRB in this example?


Edited by MG_Andrew_Jackson, Jun 4 2011, 10:11 AM.
Neo-Fuedalism--Too many men/women out chasing too little monies, to repay too much debt.

Offline Profile Quote Post Goto Top
 
Sage Against The Machine
Member Avatar
Advanced Member
[ *  *  * ]
Hi LarryL.

You wrote: "What does that mean? Are you suggesting that banks simply recycle existing money?"

The model suggested by Positive Money and the New Economics Foundation says that banks can make money on the money markets but only using money they actually have. They can access more money from customers investment accounts if they need to.

It is an interesting question though - one I have never got a satisfactory answer to. The question is: what is the source of the bank's profits? Is the system a zero sum game? In which case, there will be some random winners and random losers and the whole thing seems pointless and unfair. I'm tired of money being used as a commodity. It's supposed to be just a lubricant for the machine. I don't feel equipped to answer the question - for fear of what I may find perhaps?

There are some interesting stats available about the UK banking sector.

Total tax take from UK banks totals 55bn (Ref: Bank of England)

According to Andrew Haldane of the Bank of England, the implicit subsidy to the UK banking sector is a massive 187bn (157bn on deposit insurance and 30bn for a licence to legally print their own money!)

The estimated cost of the recent banking failure to the UK economy is a colossal 850bn (National Audit Office).

Are banks good value for money? I have my doubts. From all the evidence I can gather they are net wealth extractors from the UK economy - possibly the entire world economy - simply by virtue of the fact that they have some cash to start with. They sit above the world goverments and pull the strings with lobbyists, economic incentives & economic threats etc. just so that they can live in a manner to which they have been accustomed. Banks claim they can make money - so I say let them try, on a level playing field. If it doesn't work, at least we'll have discovered the truth and we can set up a publicly-owned, state-run bank in the national interest.

You are right when you say that full reserve may not be entirely necessary. In a sense I don't care that much about whether it's 100% full reserve or 50% reserve. That needs to be decided after a public debate. The immediate concern is awareness raising - I am constantly stunned by how little the general public know about any of this and yet they are quite happy to slam politicians because they need someone to blame (although I am guilty of this sometimes and quite enjoy it!). The people need to take ownership of the economic issue. So-called experts have been spectacularly wrong recently.

The problem with FRB-type systems is first and foremost a moral / clarity issue - the government wouldn't tolerate anyone else "creating money out of thin air!" No other such industry is afforded the privilege and subsidy that the financial sector gets.

The other issue is one of inflation - surely anything other than full reserve has to be inflationary by definition?

Anyway, I'll leave it there. I hope you've gained something from my little scribblings. I certainly have from yours!
"Madness is doing the same thing over and over again expecting a different result".
Offline Profile Quote Post Goto Top
 
LarryL
Advanced Member
[ *  *  * ]
Quote:
 
Sage Against The Machine wrote: The model suggested by Positive Money and the New Economics Foundation says that banks can make money on the money markets but only using money they actually have. They can access more money from customers investment accounts if they need to.


Hello Sage, as it stands now, you're right, banks may create money for their own investment account and I think this can create problems. In some respects, it is needed under the current system as big Wall Street investment banks (money centers) aggressively pursue this as a way to build capital while smaller, commercial banks (depository banks) were very conservative with investing. The end of the Glass–Steagall Act meant that the line was blurred between investment and commercial banking which has caused problems. I think that the investment banking model should be changed or eliminated but that's another story.

I'm not familiar with the New Economics Foundation but am vaguely familiar with "positive money." It seems that "positive money" and some others (e.g. The National Emergency Employment Defense Act (NEED) by Stephen Zarlenga (AMI) and Congressman Dennis Kucinich HR6550, are based on the "Chicago Plan" of the late 1930's. Bill Still wrote about the plan in a thread entitled "1939: A Program for Monetary Reform."

Basically, I think these plans would have the national government spend debt free money into the economy on greatly needed new and repaired infrastructure project. The thinking is, if the money supply is increased, then banks could become recyclers of existing money rather than creating new money. The term "FRB" may have had some relevance to commercial banking of the 1930's, but it just adds confusion today. I think there are far better solutions than the old "Chicago Plan."

Quote:
 
Sage Against The Machine wrote: The question is: what is the source of the bank's profits? Is the system a zero sum game? In which case, there will be some random winners and random losers and the whole thing seems pointless and unfair.


You make a great point here - if money is created as debt and destroyed when the principal debt is repaid, it is indeed a zero sum game in that respect. Of course the interest is not created, but charged, which may make it less than a zero sum game. And I agree that with this system, "there will be some random winners and random losers" as a function of the math rather than something the borrower may have done wrong.

As far as bank profits, I read something interesting in BankingMagazine.net. According to the article, "In 2009, [Australian] banks earned a combined $1.64 billion from transaction account fee revenue, compared with $1.24 billion from home loans." Surprisingly, banks made most of their money through transaction fees and services.

One problem that banks have is that to increase capital, they must hold more as "retained earnings" which are taxed or, increase shareholder equity by splitting stocks, selling new stock or merging with another bank. Small banks are usually left with only the merger or retained earnings route. I developed a program that adds another option..."borrower capitalized lending" which I think is the best route for commercial banks.

Quote:
 
Sage Against The Machine wrote:The immediate concern is awareness raising - I am constantly stunned by how little the general public know about any of this and yet they are quite happy to slam politicians because they need someone to blame (although I am guilty of this sometimes and quite enjoy it!). The people need to take ownership of the economic issue. So-called experts have been spectacularly wrong recently.


Well said, public awareness needs to be increased. I'm not sure what percentage of the population are walking zombies but I think it is significant. Many just seem to assume that our monetary system is an act of nature or a development of science while it is neither.

Thanks for the great discussion, I don't think it is an overstatement to say monetary reform is the issue of our age.

Larry
Edited by LarryL, Jun 4 2011, 04:21 PM.
Offline Profile Quote Post Goto Top
 
Sage Against The Machine
Member Avatar
Advanced Member
[ *  *  * ]
"Thanks for the great discussion"

It's been a pleasure, sir!

"I don't think it is an overstatement to say monetary reform is the issue of our age."

I agree entirely. The problem is how can I make a contribution to getting that across to people without sounding like a nutter or religious fanatic? I'm off to the Bromsgrove (UK) conference in October. Maybe they can give me some ideas? I think with time though, the inherent problem will become increasingly more apparent - even to those who should be in Shaun of the Dead!
"Madness is doing the same thing over and over again expecting a different result".
Offline Profile Quote Post Goto Top
 
3rdMillenium-3rdEstate
Member Avatar
Advanced Member
[ *  *  * ]
LarryL
Jun 4 2011, 04:18 PM
Quote:
 

LarryL wrote: It seems that "positive money" and some others (e.g. The National Emergency Employment Defense Act (NEED) by Stephen Zarlenga (AMI) and Congressman Dennis Kucinich HR6550, are based on the "Chicago Plan" of the late 1930's. Bill Still wrote about the plan in a thread entitled "1939: A Program for Monetary Reform."

Basically, I think these plans would have the national government spend debt free money into the economy on greatly needed new and repaired infrastructure project. The thinking is, if the money supply is increased, then banks could become recyclers of existing money rather than creating new money. I think there are far better solutions than the old "Chicago Plan."

....As far as bank profits, I read something interesting in BankingMagazine.net. According to the article, "In 2009, [Australian] banks earned a combined $1.64 billion from transaction account fee revenue, compared with $1.24 billion from home loans." Surprisingly, banks made most of their money through transaction fees and services.

It seems to me, from the 2 paragraphs immediately above, that the Banks already are migrating in that direction ('recyclers of existing money'), evident from the greater reliance on fees & services [not to mention societal debt saturation and banking industry consolidations in recent years].
I'd like to hear about one of your preferred alternatives to the Chicago Plan... but maybe Bill's got this already worked out (the key issue of Who Controls the Quantity?):
Quote:
 
"The main regulator for controlling the QUANTITY of U.S. Notes issued, would be a National Monetary Authority (NMA) made up of one elected representative from each of the several States, serving a 2-year term only, limited to two terms. That way, Congress would set a target inflation rate, and the NMA would be responsible for hitting that target by using appropriate tools to control the QUANTITY of U.S. Notes issued. Of course, a mandatory feature of this system would be an end of fractional reserve lending by commercial banks, i.e. a full-reserve banking system."

Zarlenga claims that both (18th century) Continentals [$200mn.] and (19th century) Greenbacks [+$400mn.] were issued appropriately by Congress, and were only inflated by counterfeiting, rampant counterfeiting in the case of the former. It seems like the US government ought to be capable enough to minimize the counterfeiting issue this time.
Edited by 3rdMillenium-3rdEstate, Oct 10 2011, 09:19 AM.
'Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.'- Margaret Mead; Mancur Olson

"We have found it of paramount importance that in order to progress, we must recognize our ignorance and leave room for doubt."- Richard Feynman

"Any money system whose quantity is determined trans-nationally is mark-of-the-beast stuff"- Bill Still, 2013
Offline Profile Quote Post Goto Top
 
LarryL
Advanced Member
[ *  *  * ]
Quote:
 
3M3E wrote: It seems to me, from the 2 paragraphs immediately above, that the Banks already are migrating in that direction ('recyclers of existing money'), evident from the greater reliance on fees & services [not to mention societal debt saturation and banking industry consolidations in recent years].


Hello 3M3E, Sorry I didn't make my point more clear - I meant that commercial banks (retail) are having to rely more and more on service and transaction fees as they are less able to profit from lending. Under the current model, commercial banks act as intermediaries in paying interest to depositors while charging interest to borrowers. They profit from the spread or differential. But with every new loan, they must hold some "standby capital" in order to allow for some defaults without insolvency and to complete transactions. This is usually called the capital ratio and is watched by regulators.

The big problem is that commercial banks are being squeezed out of the market as the "10 biggest banks hold 60 percent of bank assets: In the 1980s, the 10 biggest banks controlled 22 percent of total bank assets. Today, they control 60 percent." -- Link

Without available capital (assets), commercial banks are reluctant to lend which is what we are seeing today. How does the Chicago plan solve this problem? As an unintended consequence, the plan may just eliminate smaller commercial banks and drive up lending costs in the process.

I mentioned earlier in this thread that I thought the notion of Fractional Reserve Banking (FRB) was fictitious and misleading. Actually, 100% of the money lent by banks, is created on the spot - there is nothing fractional about it.

The only thing that may be fractional about the process is that banks may leverage depositors money in making loans. But that is not a necessity as there are many ways to accomplish what is really needed - adequate capitalization. A bank may lend money without having any depositors though that would be very unusual with the prevailing model.

Quote:
 
3M3E wrote: I'd like to hear about one of your preferred alternatives to the Chicago Plan... but maybe Bill's got this already worked out (the key issue of Who Controls the Quantity?):


I will have to finish formalizing my plan in order to be fair. It may come across as bad snooker if I criticize without offering an alternative.

In the meantime, let me pose a question for the group:

Why does anyone need to control the volume of money in circulation; especially an independent group? And if this is needed, how would it be accomplished - by what parameters?

One problem is that we tend to design alternative systems to respond to the inherent flaws of the current interest-debt system. Under this system, yes, the volume of money is always a concern as the money supply perpetually contracts. All money is created by debt and as the principal on that debt is repaid, the money is destroyed. So, all money is temporary - it lasts only as long as the duration of the loans that create it. And, we must create more debt (money) every year in excess of the debt AND interest accrued the year before.

The money that is owed for the interest does not exist, since only the principal of the loan is put into the economy. The ONLY way this interest can be paid is by more debt being created to pay the previous debt AND interest.

Infinite growth in a finite world is impossible to sustain. An alternative system should be able to find a natural equilibrium and stability in order to be sustainable which makes the need for manipulations and interventions disappear.

The Chicago plan, like the Zarlenga - Kucinich plan, is not sustainable.

Quote:
 
3M3E wrote: Zarlenga claims that both Continentals ($200mn.) and Greenbacks (+$400mn.) were issued appropriately by Congress, and were only inflated by counterfeiting, rampant counterfeiting in the case of the former.


No doubt, counterfeiters attacked the currency in both instances. The continentals had another shortcoming - they were backed by silver and everyone knew the U.S. didn't have any silver, at least as a national government. The greenbacks were better but they were instruments of debt (save some from the 1861 issue) and there was no guarantee that the north would win the war, yet alone redeem the currency.

Larry
Offline Profile Quote Post Goto Top
 
kiwi
Advanced Member
[ *  *  * ]
Fractional reserve banking is history now

But we have NEVER really had a fractional reserve banking system. We have today and have always had a DEBT BASED money system. Money is simple a series of journal entries where credit (bank deposits) = money AND credit always = debt.

Money is backed by debt and nothing but debt. Either Govt debt (directly by say Govt bonds or cash and coins or indirectly via BoE reserves) or non Govt debt.

Fractional banking like the gold standard was just a way to restrict bank lending within a DEBT BASED money and banking system. It was based on banks lending being limited by a percentage of base money (reserves + vault held notes and coins) on hand.
Offline Profile Quote Post Goto Top
 
MG_Andrew_Jackson
Member Avatar
Advanced Member
[ *  *  * ]
Quote:
 
One problem is that we tend to design alternative systems to respond to the inherent flaws of the current interest-debt system. Under this system, yes, the volume of money is always a concern as the money supply perpetually contracts. All money is created by debt and as the principal on that debt is repaid, the money is destroyed. So, all money is temporary - it lasts only as long as the duration of the loans that create it. And, we must create more debt (money) every year in excess of the debt AND interest accrued the year before.

The money that is owed for the interest does not exist, since only the principal of the loan is put into the economy. The ONLY way this interest can be paid is by more debt being created to pay the previous debt AND interest.


This is the correct assessment of the flaws in the system, it requires an ever expanding amount of credit/borrowers, not too big of a problem if wages are going up and unemployment is low, thus the Fed's dual mandate, but the global economy limits how effective the Fed's "tools" are, as we can see.

The principles of supply and demand should apply to the banking system, but the banks have manipulated the public into the false assumption that a greater money supply leads to inflation, thus manipulating their monopoly on the supply of monies, the banks get a cut of all profits and benefits.

Commercial Banks should be limited to loaning monies in ventures that are "acts of commerce" between two or more commercial entities, vs an "act of trade" where the buyer is a privet person who will use the goods or services for privet noncommercial use.

Monies for "Acts of Trade" should be in the sole realm of State Government(State banks). State revenue should be limited to retail sales tax and property tax/sales, while the Federal Government is charged with the up keep of a unified national currency to facilitate international and interstate Commerce.

This opens two cans of worms:

1 Usury, charging interest to a privet not for profit person for use of monies in an act of trade, while a privet person may benefit form buying a house, car, or washing machine, benefit is not the same as profit, profit is derived from a successful act of commerce( Corporate Persons ).

Commercial Banks may charge interests for loans between two or more Corporate Persons, however State Banks derive funds from Tax and Retail sales of Privet Persons Property, so they should not in fact charge interests( Usury)

2 The laws have been manipulated to distort the line between an act of trade vs. an act of Commerce, classic power grab, the Federal Government needed the revenue stream of Taxing Privet Wage( Benefit ) to secure it line of credit with the Fed and the Commercial Banks that own it.

The answer is State Banks entrusted with expanding the National Money Supply barred from charging interest, or engaging in intrastate, interstate, or international Commerce.

State Chartered Commercial Banks being barred from loaning to privet persons@interest for retail sales, only loans@interest to in state Corporate Persons.

Federal Chartered Banks to loan monies@interest to Corporate Persons engaging in interstate or international Commerce.

This leaves the need for a National Bank, but then I thought that's what the Department of the Treasury was, and don't even get me started on trade between two or more privet persons, be it intrastate, interstate, or international.

Neo-Fuedalism--Too many men/women out chasing too little monies, to repay too much debt.

Offline Profile Quote Post Goto Top
 
kiwi
Advanced Member
[ *  *  * ]
"This is the correct assessment of the flaws in the system, "

It is not. This is a badly flawed assessment

The current system has problems but this interest problem is definitely not one of them. Bank interest revenue recycles back into the economy by bank expenses (including interest) and dividend payments

This interest flaw is a myth.
Offline Profile Quote Post Goto Top
 
telday
Mod
[ *  *  * ]
kiwi
Nov 30 2011, 09:40 AM
The current system has problems but this interest problem is definitely not one of them. Bank interest revenue recycles back into the economy by bank expenses (including interest) and dividend payments
This interest flaw is a myth.
Yeah in much the same way as a pickpocket spends the money, he steals, back into the economy.
Doesn't make it right though, does it. ;)

Whatever garbage some monetary theorists spew forth, in order to justify it, it's still a payment ransom we are forced to make just for the privilege of using our means of exchange.
I will never again refer to the perpetrators of continuous heinous crimes, as "banksters", it's too good a word for them. From now on I will only refer to them as psychopathic scum. (P. S.)
http://www.youtube.com/watch?v=Xu4xPvyLn5Y
Offline Profile Quote Post Goto Top
 
MG_Andrew_Jackson
Member Avatar
Advanced Member
[ *  *  * ]
Quote:
 
Yeah in much the same way as a pickpocket spends the money, he steals, back into the economy.
Doesn't make it right though, does it. ;)

Whatever garbage some monetary theorists spew forth, in order to justify it, it's still a payment ransom we are forced to make just for the privilege of using our means of exchange.


Well said Sir, I love it.
Neo-Fuedalism--Too many men/women out chasing too little monies, to repay too much debt.

Offline Profile Quote Post Goto Top
 
kiwi
Advanced Member
[ *  *  * ]
telday
Nov 30 2011, 10:31 AM
kiwi
Nov 30 2011, 09:40 AM
The current system has problems but this interest problem is definitely not one of them. Bank interest revenue recycles back into the economy by bank expenses (including interest) and dividend payments
This interest flaw is a myth.
Yeah in much the same way as a pickpocket spends the money, he steals, back into the economy.
Doesn't make it right though, does it. ;)

Whatever garbage some monetary theorists spew forth, in order to justify it, it's still a payment ransom we are forced to make just for the privilege of using our means of exchange.
The comment about interest is nonsense. Don't believe websites that promote this garbage and think some of these dubious claims through yourself
Offline Profile Quote Post Goto Top
 
1 user reading this topic (1 Guest and 0 Anonymous)
ZetaBoards - Free Forum Hosting
Free Forums. Reliable service with over 8 years of experience.
Learn More · Register for Free
Go to Next Page
« Previous Topic · Bill's money reforum · Next Topic »
Add Reply