The Fed Workbook - How to make 'money' out of... well, nothing really

[VRS]

This is the Fed's own workbook published by the Federal Reserve Bank of Chicago which explains "Banks don't really payout loans. What they do when they make loans is credit borrower's accounts, by creating deposit money" ie: banks are committing fraud every time they charge anyone for a loan... It's one HECK of a read...

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

Enjoy!

VRS x

 

[injin]

Would you prefer it if banks didn't write credit - but instead informed a borrower that they could just come to the cashier and collect their loan in banknotes by prior appointment?

What difference would it make?

 

[Paulo]

Would you prefer it if banks didn't write credit - but instead informed a borrower that they could just come to the cashier and collect their loan in banknotes by prior appointment?

What difference would it make?

With only having just skim read the article, I think the issue comes back to charging interest on money which they don't actually own. They have been given the right to create money by the people, and then charge people for the privilege of borrowing that same money.

The problem is that this creates a false lack in the system which should not actually exist. We are all working really hard to pay off this interest, and governments are forever imposing "compromises" upon its people because this situation of false lack.

 

[injin]

Would you prefer it if banks didn't write credit - but instead informed a borrower that they could just come to the cashier and collect their loan in banknotes by prior appointment?

What difference would it make?

With only having just skim read the article, I think the issue comes back to charging interest on money which they don't actually own. They have been given the right to create money by the people, and then charge people for the privilege of borrowing that same money.

The problem is that this creates a false lack in the system which should not actually exist. We are all working really hard to pay off this interest, and governments are forever imposing "compromises" upon its people because this situation of false lack.

Maybe you didn't read my question.

I'll repeat it for you.

Would you prefer it if they didn't create credit - but merely handed out cash at the cashiers desk?

 

[Paulo]

Would you prefer it if banks didn't write credit - but instead informed a borrower that they could just come to the cashier and collect their loan in banknotes by prior appointment?

What difference would it make?

With only having just skim read the article, I think the issue comes back to charging interest on money which they don't actually own. They have been given the right to create money by the people, and then charge people for the privilege of borrowing that same money.

The problem is that this creates a false lack in the system which should not actually exist. We are all working really hard to pay off this interest, and governments are forever imposing "compromises" upon its people because this situation of false lack.

Maybe you didn't read my question.

I'll repeat it for you.

Would you prefer it if they didn't create credit - but merely handed out cash at the cashiers desk?

I dont understand your question, sorry. Maybe you can elaborate.

 

[injin]

With only having just skim read the article, I think the issue comes back to charging interest on money which they don't actually own. They have been given the right to create money by the people, and then charge people for the privilege of borrowing that same money.

The problem is that this creates a false lack in the system which should not actually exist. We are all working really hard to pay off this interest, and governments are forever imposing "compromises" upon its people because this situation of false lack.

Maybe you didn't read my question.

I'll repeat it for you.

Would you prefer it if they didn't create credit - but merely handed out cash at the cashiers desk?

I dont understand your question, sorry. Maybe you can elaborate.

The OP seems to have had an epiphany concerning an "out of thin air" experience. How did he think loans originated? Did he think the bank handed over cash instead of "writing credit"?

If so, will he be placated if the banks reverted to the methodology of physical banknotes, when giving loans? Would you?

If so, how do you think this would actually change anything? Hint: It doesn't.

 

[systematic]

physical bank notes are printed and have no intrinsic value
would you like to photocopy them and pass them around?
because there really isnt that much difference as long as the "bank" does it ...

 

[hyperinflation]

The same process occurred when banknotes were backed by gold (gold certificates), or even when gold coin was the medium of exchange - you could still go the bank and ask to borrow gold, which they would lend out from their deposits..

Banks dont create money to hand out loans - they loan out the money you have deposited with them, and pay you interest for the privilege of doing so.

 

[systematic]

The same process occurred when banknotes were backed by gold (gold certificates), or even when gold coin was the medium of exchange - you could still go the bank and ask to borrow gold, which they would lend out from their deposits..

Banks dont create money to hand out loans - they loan out the money you have deposited with them, and pay you interest for the privilege of doing so.

too big to fail ....

 

[jparrie]

Would you prefer it if banks didn't write credit - but instead informed a borrower that they could just come to the cashier and collect their loan in banknotes by prior appointment?

What difference would it make?

That is exactly the same thing, as you have later said. The OP didn't say that he would prefer bank notes to be given out, so why the hostility towards him?

I don't get your point?

 

[Wout]

Loans should be created from deposits and the interest rate should reflect the risk involved lending out those loans, without any ridiculous government guarantees

 

[injin]

Loans should be created from deposits

In net, they already are.

 

[ozzanon]

Loans should be created from deposits

In net, they already are.

In net? What does this mean?

I was under the impression that total value of loans issued only needed to be backed by 10% of this total in actual reserves. So the net effect is that loans really are not issued based on total deposits, but merely a very small percentage. Or maybe I have misunderstood what you are trying to say.

 

[Naphthalene Man]

Thank you for the nice summary VRS. Makes it very easy for all to see what the link is about... and i bet it didn't take that much time.

I think i'll look at this one

 

[hyperinflation]

Loans can be created from deposits, or from money borrowed by banks elsewhere.. eg issuing bonds

 

[injin]

Loans should be created from deposits

In net, they already are.

In net? What does this mean?

If you walk home from work two days in a row. The first day you took one route, and the second day a different route - on both days you have reached the same net effect (getting home) but the method you employed was different.

I was under the impression that total value of loans issued only needed to be backed by 10% of this total in actual reserves. So the net effect is that loans really are not issued based on total deposits, but merely a very small percentage. Or maybe I have misunderstood what you are trying to say.

If banks held all the money deposited - how could they lend it out?

The "deposits" match the loans. A bank owes as much as it is owed.

Deposits <> money deposited.

A deposit is a receipt.

 

[Wout]

yea thats right, so say a bank has deposits of $10,000 and fractional reserve banking was not allowed, so how could they loan any of that money out without breaking the "non fractional reserve banking law" ?

If they loan out $5,000 they have the other $5,000 in reserves to back it up, so a maximum of half of the money held in deposits can be loaned out and that way you would keep the reserve ratio of 1:1

Thats just how I think of it, if anyone can find a problem with that tell me because Im still trying to understand how a banking system would work without fractional reserve lending

 

[hyperinflation]

yea thats right, so say a bank has deposits of $10,000 and fractional reserve banking was not allowed, so how could they loan any of that money out without breaking the "non fractional reserve banking law" ?

If they loan out $5,000 they have the other $5,000 in reserves to back it up, so a maximum of half of the money held in deposits can be loaned out and that way you would keep the reserve ratio of 1:1

Thats just how I think of it, if anyone can find a problem with that tell me because Im still trying to understand how a banking system would work without fractional reserve lending

No, the reserve ratio is then 0.5 (reserves as a % of total deposits), and while yes it does provide a larger buffer of liquidity, it still will not save the bank when there is a bank run, and ppl try to pull 10k out, while only 5k is available.

Banking (in the sense of giving loans) cannot really work without the fractional reserve system.. without it banks cannot make loans, and would just be storage houses for money/metal.

Also, fractional reserve banking has existed as long as money - ppl in Ancient Rome could get loans from bankers, who used their existing deposits to finanance them

 

[jparrie]

I was under the impression that total value of loans issued only needed to be backed by 10% of this total in actual reserves.

Australia does not have a reserve ratio.

 

[Wout]

yea thats right, so say a bank has deposits of $10,000 and fractional reserve banking was not allowed, so how could they loan any of that money out without breaking the "non fractional reserve banking law" ?

If they loan out $5,000 they have the other $5,000 in reserves to back it up, so a maximum of half of the money held in deposits can be loaned out and that way you would keep the reserve ratio of 1:1

Thats just how I think of it, if anyone can find a problem with that tell me because Im still trying to understand how a banking system would work without fractional reserve lending

No, the reserve ratio is then 0.5 (reserves as a % of total deposits), and while yes it does provide a larger buffer of liquidity, it still will not save the bank when there is a bank run, and ppl try to pull 10k out, while only 5k is available.

Banking (in the sense of giving loans) cannot really work without the fractional reserve system.. without it banks cannot make loans, and would just be storage houses for money/metal.

Also, fractional reserve banking has existed as long as money - ppl in Ancient Rome could get loans from bankers, who used their existing deposits to finanance them

Ok so the reserve is a % of deposits got it. Yea I can see why it would be impossible to make loans with a 100% reserve ratio because if you lent anything out it would compromise that.

I think the problem is that banks keep their reserve ratios secret and that governments backstop the banks accounts so tax payers end up footing the bill if the bank screws up. This creates a huge moral hazard where the bank says " ok so if I will get bailed out if I screw up Im just going to act extremely risky and speculate in all sorts of markets woopie..." and then a central bank setting a benchmark interest rate no matter how risky the loans of the banks are so the risk is not reflected in the banks interest rate is the other big problem.

So say we were on a gold standard and banks were allowed to hold fractional reserves of gold and hand out paper IOU's, that would inevitably create inflation yes? Because they would hand ot more IOU's than they are holding gold.

So how would a fractional reserve banking system work under these conditions:

A 100% gold standard is in place

No central bank to dictate the benchmark interest rate

No government guaranteed bank accounts

?