Fractional Reserve Banking : Criminal?

Discussion in 'Markets & Economies' started by hawkeye, Feb 28, 2013.

  1. hawkeye

    hawkeye New Member Silver Stacker

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    That's right. But then more often than not that money will get spent and end up back in a bank as deposit. The cash stage in this society is mostly incidental. And as we all know, you couldn't do that with all deposits.

    Yes, the deposits can be subsequently "destroyed", but the point is that they are created. How else, could you have ever increasing loans on the banks' balance sheets if deposits weren't increasing too?
     
  2. capt.sparrow

    capt.sparrow New Member

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    i feel like i'm in the twilight zone here...

    you mean to say you have no idea that all money is created as credit??? and interest is payable on it...
     
  3. fishball

    fishball New Member Silver Stacker

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    I think you're looking for the Money Multiplier?

    There's still a finite amount of cash that can be 'generated' per unit of 'original cash'.

    You can take a look at the growth here:

    https://en.wikipedia.org/wiki/File:Fractional_reserve_lending_varyingrates_100base.jpg
     
  4. systematic

    systematic Well-Known Member

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    i cant believe we are trying to make sense of banking nonsense
     
  5. hawkeye

    hawkeye New Member Silver Stacker

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    Ahhh, see now we get down to the nitty gritty.

    The question is what happens today when someone goes into a bank and say asks for a $500, 000 mortgage? What calculation does the bank do on it's balance sheet to say whether it can give out that loan or not?

    My argument, going by the Steve Keen article that I posted, is that the bank makes the loan (and demand deposit) and then later will shore up it's reserves to meet regulatory requirements.

    EDIT: the money multiplier no longer applies.
     
  6. renovator

    renovator Well-Known Member

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    :)
     
  7. Old Codger

    Old Codger Active Member Silver Stacker

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    This is my last try at this.

    If the banks has an application for a $500,000 loan, and its deposits, and overdrafts, (together with the money in 'Reserves' is in EXACT balance, they cannot make the loan. They may delay it a bit until the money flows in, but no sooner.

    Try re-reading the Westpac Financial Accounts, LOANS do NOT exceed DEPOSITS!

    Believe it or not, I don't give a ****.


    OC
     
  8. hawkeye

    hawkeye New Member Silver Stacker

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    Of course loans don't exceed deposits. Who claimed that they did? Look at my simple example.

    Why so angry?
     
  9. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Have been very busy at work but managed to start reading this (about halfway through). So far it is very good. It builds a lot on Rothbard etc and explains the simple mechanics from a different viewpoint. Importantly, so far nothing really differs from Rothbard (which I believe more people have read) but Keen does skip over any ethical discussion which some people may prefer.

    Have skim read most of the posts and I agree with you Hawkeye. I think OC is focussing on how a bank operates if it was a single small entity within an economy and not how it operates once there is extensive trust, multiple banks etc.
     
  10. Lovey80

    Lovey80 Well-Known Member

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    Ok I had to comment after only reading part of page two.

    Can someone explain, why "full reserve is not possible"?

    Because I say bullshit and I want to know why you think otherwise.
     
  11. Lovey80

    Lovey80 Well-Known Member

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    Correct! My original understanding of FRB (which is now under review after your posts) lead me to believe that FRB could not exist with one bank alone but many banks make up the system. So if we were starting from day dot and there was no currency in the system but two banks (say NAB and CBA) without any deposits or loans. And a few individuals and a central bank-RBA.

    Let's stick with pure cash and credit for now, because this is where I believe this all started and why physical ink and paper cash is so small now we are so far down the Rabbit hole

    Let's say the central bank issues $100 in $1 notes and buys say one ounce of gold from Bob fully redeemable for example (it's irrelevant really but the RBA has an ounce of gold and Bob has $100 ).

    Bob goes into NAB and deposits the $100 and now has credit of $100. NAB has a liability of $100 and an asset of $100 in actual cash.

    Jane comes into NAB and borrows $90 to buy a car and NAB gives her $90. NAB now has a liability to Bob of $100 and assets of $10 in cash and a $90 loan to Jane that they also consider an asset. Balance sheet balances.

    Jane pays Steve $90 for the car and Steve deposits the $90 at CBA. CBA now has a liability of $90 and $90 in cash as an Asset.

    James borrows $81 from CBA and deposits it with NAB who is offering more interest than CBA is charging (just for arguments sake to cut humans out of the loop here and to highlight that with all this cash no interest is possibly payable)

    CBA now has a Liability of $90 to Steve and assets of $9 in Cash and $81 in loan to James.

    NAB now has $181 in "deposits" (liabilities) $100 to Bob and $81 to James yet assets of just $91 in physical cash and the remained is made up in promises to pay of $90 by Jane.

    The whole system has a grand total of "deposits" of $181 at the NAB and $90 at the CBA totaling $271 in the "monetary system". Reality is that there only ever existed $100 and the extra $171 has been created by credit in the banking system from thin air with a few banking entries from less than a handful of transactions.

    So now let's forget for a second that NAB was offering more interest than CBA was charging and that both institutions pay 5% and charge 10%.

    Where the F is that interest coming from? There only exists $100. Without the bank created "credit" being thought of as, as good as cash (which under this scenario is as good as gold) the interest could never be paid.

    Ok so I am being told that now days this isn't exactly how it happens because the huge numbers we are talking about mean everything is simply moving "credit" around on computer screens, which is entirely plausible and probable.

    But the key thing for me that puts OC's myth to rest (busted) is the M3/broad money supply growth thread. We know from that thread (RBA figures) that broad money is about 1.3 Trillion from memory. We also know that this increases roughly a minimum of 10% every year up to 20% some years (2008?). We also know that OF THAT GROWTH, the RBA is only responsible for adding about 3% of that. So if the Australian banking sector isn't responsible for the other 97% of money supply growth, who the hell is?
     
  12. fishball

    fishball New Member Silver Stacker

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    The interest the bank pays in your example would be the interest they get from the loans they put out (ie. Jane & James would pay interest on the $170). The bank doesn't magically make money or print it.

    They simply act as the middlemen so if you were paying 5% for the loan they would pay 4% for deposits (extremely simplified version).

    You are correct there's only ever '$100' and the rest 'is from thin air' but the link I posted above (Wikipedia one) explains it better. It is not really truly unlimited money, there's an upper limit of X times based on the required reserve ratios or CARs.

    Let's say we used gold coins instead of fiat. If I put 100 sovereigns into Bank X and expect 101 sovereigns next year (1% interest rate) and require 100% reserve at all times how will they make money? They are unable to use my 100 sovereigns to do anything at all as they need 'full reserve' backing 24/7/365. It would not be a profitable venture at all for the bank and banks like most other businesses operate for profits.
     
  13. Lovey80

    Lovey80 Well-Known Member

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    I get what you are saying, but if Jane and James were to pay interest they would need to aquire money from somewhere. So unless one of the other depositors was to give up that interest, it needs to be created in order for it to somehow flow into their hands to be paid. Hence why the banking system requires the credit to expand consistently for them to avoid a collapse. After 10 years, forget a bank run, all it would take is several years of debt being paid down instead of expanding, for the system to collapse as there is always more money owed than is in the system.

    You simply split the banking system as Bord or Hawkeye mentions. One side is simply a service provider that charges a fee for service and the other is the investment side where depositors are locked into terms. People's general deposits would stay 100% backed and those willing to do a term deposit are a different kettle.
     
  14. Tacrezod

    Tacrezod Member

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    Here's my take on it;

    Bob deposits 100 sovereigns in the bank and is promised 10% per year interest.

    Along comes Bill who wants a 100 sovereign loan which the bank gives him (leaving aside the fact that the bank has to leave some in reserve) at 20% per year interest.

    Bill invests the 100 sovereign loan in a gold mine and over the course of a year repays his loan to the tune of 120 sovereigns, of which the bank gives Bob 110 and keeps 10 for themselves.

    As I see it, the problem occurs because at the time of the loan Bob's balance remains at 100 sovereigns and Bills balance grows by 100 sovereigns; Money is created. What should happen is that Bob's balance should go to zero at the time of the loan and gradually recover to 110 sovereigns over the course of the year. Because this doesn't happen, Bob believes he still has 100 sovereigns in the bank which are still his to spend. The bank relies on Bob not turning up early and demanding his 100 sovereigns back.

    When you deposit money in a bank, you should be given two options;

    1. Have it earn interest; You commit to loan out your money for a fixed period as above, in which case your account would initally be zero and then recover over the course of the deposit term, or

    2. You want to use the bank simply as storage for your money in which case you pay the bank a fee.

    Does this make any sense?
     
  15. hawkeye

    hawkeye New Member Silver Stacker

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    The thing to remember about deposits is that they are not cash, they themselves are loans also. They just have a different maturity to the loans that the banks make. ie, the bank has to pay them on demand as opposed to the bank loans which are paid off over a period of months/years.

    The reason they seem as if they can be used is cash is because when you say use EFTPOS, all that is happening is the bank is changing who it owes the money to. It seems a bit abstract at first but if you think about it you'll realise that's exactly what is happening. Again, you have to think of the money in your account as a loan to the bank and not cash.

    The full-reserve thing is not viable,imo, for reasons I mentioned, ie having to match lenders and borrowers with exact terms, borrowing length, start date, amount, etc. There may be alternatives as Bord has mentioned that I haven't thought of that circumvent this problem. But regardless, all options should be available in a free market imo and let people(the market) decide.
     
  16. Lovey80

    Lovey80 Well-Known Member

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    You make sense tacrezod.

    Because essentially even if we had a split banking system like you and I are talking about, the money that was loaned out of banks can and will be deposited in another bank to be lent out again there will be some sort of fractional banking.

    At least then and only then, would people that are looking for a return on their money be aware that their money is being lent out at full risk to them if the bank goes under and people that are not looking for a yield are 100% protected by a 100% reserve. This would have to happen without any government guarantees on loaned money.

    This would also take a lot if the inherent risk out of the banking system. If people are chasing yield through a bank and know that if the bank goes under their money is gone for ever then they will want a higher yield. A higher yield will mean a higher interest rate for borrowers. And or much more stringent quality controls with respect to credit worthiness.
     
  17. Pirocco

    Pirocco Well-Known Member

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    I borrow you $100000.
    You buy a house with it now.
    My $100000 transfers to the account of the former house-owner.
    What did you expect?
    That the $100000 would have been removed from deposits?
    That bank personell would "delete" it? :)
    A payer implies another being paid.
    So, your question is self-providing the answer.
    541-515=$26B.
    Which is a fraction of 26/541=4,8%
    A full reserve WESTPAC would list DEPOSITS of $541B and LOANDS of $0B.

    About how a bank, as a business, should operate, simple, it lends out what its customers agree to lend out.
    The rest is stored and sits there, doing nothing.
    It's been REMOVED from circulation.
    The bank, as a business, receives a fee for the storage, and/or a part of the returns of the lend out money.
    Since todays situation already is stocks/bonds/deposits, what's the difference, other than banks misleading people with deposit intentions?
     
  18. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    It's been put up a few times before, but here is a link to where Murray Rothbard's Mystery of Banking can be downloaded for free.

    In the context of this thread people should just go straight to Chapter VII. Deposit Banking and start reading. The first few pages provide some history of FRB and are quite readable before moving onto the balance sheets. Even if people read nothing else in the book, this chapter is worthwhile.

    As people have mentioned many times, the criminality aspect in the thread title arises from the banks being allowed legally to treat demand deposits as a loan rather than a bailment.
     
  19. systematic

    systematic Well-Known Member

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    Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924.
    "I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people."

    H W White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.
    "The banks do create money. They have been doing it for a long time, but they didn't realise it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create it."

    http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/
     
  20. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    There are lots more but here's another couple from insiders:

    Ralph M. Hawtrey (1879-1975) - former Secretary of the British Treasury
    "Banks lend by creating credit. They create the means of payment out of nothing."

    Federal Reserve Bank of New York; Friedman, David H. (1977).
    Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU.

    William Paterson, founder of Bank of England (disputed quote)
    The bank hath benefit of interest on all moneys which it creates out of nothing.
     

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