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 Ed Bear
Joined: 5/19/2007
Msg: 76
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Banks and the financial systemPage 4 of 7    (1, 2, 3, 4, 5, 6, 7)
I guess that's why one so rarely sees a house being driven off its lot.

Seriously, houses tend to go DOWN in value, particularly when new. LAND, or the right to build on it, tends to go UP in value (though they are free to fall, as when there is a nearby natural disaster or economic crash). "You're buying dirt" is what Real-Estate Pimps call it. Condos don't go up much compared to detached or semi-detached homes because so little of their value is their tiny allocation of dirt; that's why new condos commonly fall in value for a year or two.
* * *
For all the people designing formulae for compounding risk, forget it. Nobody will take a mortgaged asset as security for its full value. When credit is sought, piggybacked debt must be disclosed and discounted.

It was specifically allowing that sort of thing to start happening due to more sophisticated "securitization" that multiplied the risk by 2008. Bad deregulation, separation of risk from profit, and misrepresentation of risk.
* * *
Now, on the other hand - inflation IS related to the money supply. (among other things)
ED BEAR
 IgorFrankensteen
Joined: 6/29/2009
Msg: 77
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Banks and the financial system
Posted: 3/6/2014 4:43:39 AM

I mean, am I the only one who finds it strange that if we stop producing wealth (like in the Great Depression) then the value of our dollars actually increases?


You are describing deflation, mostly. But it's not even JUST as simple as that. One of the big reasons why the greedier rich people do want a bad economic situation, is that it makes poor people much more desperate, and more willing to part with goods and services for much less money. That's not really deflation, per se, that's economic victimization, since the value of the money for EVERYONE is not the same.

The collapse of real estate bubbles usually make for lots of bargains for the rich. It is why we saw lots of wealthier people declare that the "solution" they WANTED the government to implement, was to let all the banks and other loan institutions fail completely. By letting them fail, the banks assets would fall in COST, waaaaaay below even their actual market value, but since only rich people would still have enough money to buy them (all us poor and middle class folks lose our jobs, or see our wages cut), only already rich people would get the bargains. This is why a lot of the more annoying Republicans are STILL angry that half of their fellow Reps voted to rescue the system, instead of letting us all fall into another Great Depression.

It's not the fall of wealth production that makes the value of money go up in such times. The fall in wealth production is a result or symptom of the general collapse of the monetary system, not the cause of it.


There seems to be a general consensus that the money supply affects prices in the long run, whereas many factors contribute to prices in the short-term. It's for this reason that the consumer price index, used for measuring inflation, usually only considers commodity items (with the exception of oil), since the price of other consumer items can fluctuate wildly in the short-term.


I don't think that's quite right either. It isn't the money supply that affects those prices. Maybe "money supply" isn't the right term to use for what we are discussing in this instance.

What we want in a "money supply" way is, for the amount of money in the system to equal or slightly exceed the amount of wealth in the system. If the money supply remains set while actual wealth increases, no matter how much harder you work, your income will remain the same. No matter how many improvements you make to your property, it's value in the market will remain flat. This is why JUST having the value of my held money increase, doesn't make me desire that scenario.
 flyguy51
Joined: 8/11/2005
Msg: 78
Banks and the financial system
Posted: 3/6/2014 10:00:27 AM

Under the current system, we HAVE TO have more of it in order to have anything. A constant inflation rate means that the amount of money in the economy always exceeds the amount of goods and services produced every year. As it is now, we need a raise of 2% on average just to maintain our standard of living. On the other hand, if our money increased in value over time then we wouldn't need a raise at all. Our money would automatically buy more, in proportion to the goods and services produced. Our productivity will be its own reward, a kind of dividend that will allow us greater access to that increased wealth while making the same dollars as before (and of course our failure to produce will result in the opposite - our money will buy less). In other words, if we work hard then our money will buy more, and if we work less then our money will buy less. I mean, am I the only one who finds it strange that if we stop producing wealth (like in the Great Depression) then the value of our dollars actually increases?

There was a good article in "The Economist" that explained why a certain amount of inflation is a positive-- in short, there is relative stability and predictability with 2% inflation. It also pointed out the downsides of going below that rate, as many countries, like England, are already doing. Try searching "the dangers of low inflation."

What you describe is deflation, which is actually very perilous to an economy. How? Well, people put off buying goods because they will have greater buying power if they wait. So, I have to conclude that you are on the wrong track with what you posit in this thread.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 79
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Banks and the financial system
Posted: 3/6/2014 4:09:05 PM
Demi: from the beginning of this thread, I've been overlooking the question I should have asked from the very beginning.

It's clear to me that your questions and suggestions all spring from your earnest desire to solve some specific concern. You haven't said what that concern is, directly.

As a Service Tech, I have often run into situations where customers went on and on about what they wanted done, and wouldn't accept any explanations about why what they were asking for either wasn't feasible, or wasn't a good idea. Invariably, I found that the problem was that I hadn't determined what PROBLEM they were suffering, before launching into solutions. They were not telling me what was wrong, they were telling me what they thought would fix their problem. Once I knew what the actual problem WAS, I was able to both fix it for them, as well as to explain how their own ideas were off course.

I'm certainly not going to pretend that I know the best solution to whatever your concern is here, since I'm an Historian and a Fix-it guy, and not an economist. But I am confident that if we all talk DIRECTLY about the actual problem we are trying to solve, that we will more quickly come up with at least more PERTINENT answers.
 Demigod1979
Joined: 12/4/2011
Msg: 80
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Banks and the financial system
Posted: 3/6/2014 5:26:55 PM
What we want in a "money supply" way is, for the amount of money in the system to equal or slightly exceed the amount of wealth in the system. If the money supply remains set while actual wealth increases, no matter how much harder you work, your income will remain the same. No matter how many improvements you make to your property, it's value in the market will remain flat. This is why JUST having the value of my held money increase, doesn't make me desire that scenario.

Yes, your income will remain the same, but the difference is that you can buy more with that income over time. That cup of coffee you bought for $1 today can be bought with $0.80 in a few years so even if your income doesn't increase your purchasing power will (which is, of course, the important thing).


Demi: from the beginning of this thread, I've been overlooking the question I should have asked from the very beginning.

It's clear to me that your questions and suggestions all spring from your earnest desire to solve some specific concern. You haven't said what that concern is, directly.

As a Service Tech, I have often run into situations where customers went on and on about what they wanted done, and wouldn't accept any explanations about why what they were asking for either wasn't feasible, or wasn't a good idea. Invariably, I found that the problem was that I hadn't determined what PROBLEM they were suffering, before launching into solutions. They were not telling me what was wrong, they were telling me what they thought would fix their problem. Once I knew what the actual problem WAS, I was able to both fix it for them, as well as to explain how their own ideas were off course.

I'm certainly not going to pretend that I know the best solution to whatever your concern is here, since I'm an Historian and a Fix-it guy, and not an economist. But I am confident that if we all talk DIRECTLY about the actual problem we are trying to solve, that we will more quickly come up with at least more PERTINENT answers.

There's two problem that I want to highlight in this thread. The first is debt-based money. It's not a mistake that our entire society is so dependent on debt - the banks have ensured that this is the case, making sure that the wealth-creating sectors of our economy are persistently in debt. Most people consider debt to be a bad thing, and yet we wouldn't have a money system without it. In an era of fiat money, where money can be created at will (and destroyed at will), why can't we make it so that banks only lend out actual money and make interest demands on money that actually exists (as most people imagine it works today)?

The other issue is the wisdom of having all of our money managed by the banks. Commercial banks are the source of all credit, but they are also private companies, with the desire to make as much profit as possible, which can sometimes lead them into trouble. Of course when that source of credit runs into trouble then we are forced to bail them out, since their loss will mean our loss as well. Those people who were angry at the bailout SHOULD be angry, yet what choice did politicians have? Is it really the wisest thing to have such a crucial thing like money be controlled by private, profit-seeking corporations? We don't allow the justice system or police force to be run by private corporations (such services are considered too vital to society). Arguably, money is one of the most important elements in our society, so why allow it to be managed to private companies?
 IgorFrankensteen
Joined: 6/29/2009
Msg: 81
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Posted: 3/6/2014 7:57:32 PM
Yes, but exactly WHY do you think that those things are problems? I can't quite agree with calling this a "debt-based economy," if I don't know WHY you want to call it that. Because it is obviously a lot more than JUST debts which play their parts here.


Again, what is it that you find to be wrong, which you think that the banks are to blame for? And what is it about having lots of people borrowing money and paying it back (which is what happens most of the time) which makes you so unhappy?

It couldn't JUST be that you don't like the word, or the idea of debt. There is something wrong, which you have come to believe is due to the way things are currently handled, and not just due to abuses of the system by miscreants and insiders misusing their trust and powers.

THAT is what I would like you to spell out, rather than repeating that you don't like a "debt -based economy."
 Demigod1979
Joined: 12/4/2011
Msg: 82
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Banks and the financial system
Posted: 3/7/2014 7:46:48 PM

Yes, but exactly WHY do you think that those things are problems? I can't quite agree with calling this a "debt-based economy," if I don't know WHY you want to call it that. Because it is obviously a lot more than JUST debts which play their parts here.

Again, what is it that you find to be wrong, which you think that the banks are to blame for? And what is it about having lots of people borrowing money and paying it back (which is what happens most of the time) which makes you so unhappy?

It couldn't JUST be that you don't like the word, or the idea of debt. There is something wrong, which you have come to believe is due to the way things are currently handled, and not just due to abuses of the system by miscreants and insiders misusing their trust and powers.

THAT is what I would like you to spell out, rather than repeating that you don't like a "debt -based economy."

I thought I made it pretty clear in my last post. Just in case you missed it, I'll reiterate. Our entire economy is dependent on the whims of private, profit-seeking corporations, who decide what businesses can exist (they can turn down loans if they don't like the idea), how much money exists, and how we use money. The entire debt-based money system is one that benefits the banks most of all (inflation means that we have to give the banks our money, since sitting on it will only make it worthless). The way they create money also has a loss for all of us. At least with counterfeiters there is only a direct loss to one person (the person who accepts it and gets caught with it). Nobody else suffers any kind of loss at all. However, when banks create money we collectively suffer a loss (the loan money leads to some wealth creation, but it comes at the cost of a decrease in the value of everyone's money).

Once again, how wise is it to place something as crucial as money into the hands of private corporations whose only desire is to make more money off that money? As long as banks control all the money in society, they'll always be able to hold the government hostage (the bailout in 2008 was not just some fluke event). We can't just go on and pretend that there is no problem with the financial system (complacency will get us nowhere). It's crucial that the financial system be reformed so that the banks primarily benefit society (if this means they have to spent most/all their interest money, or charge very little interest for loans then so be it).
 gingerosity
Joined: 12/10/2011
Msg: 83
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Posted: 3/7/2014 10:45:19 PM
Demi

In an era of fiat money, where money can be created at will (and destroyed at will), why can't we make it so that banks only lend out actual money and make interest demands on money that actually exists (as most people imagine it works today)?

Becuase we're lazy, greedy apes.
https://en.wikipedia.org/wiki/Full-reserve_banking#Views_on_full-reserve_banking

Trying to increase to 8.5-11% Tier 1 capital requirements hasn't exactly been welcomed in some quarters.
https://en.wikipedia.org/wiki/Basel_III#Critics
 IgorFrankensteen
Joined: 6/29/2009
Msg: 84
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Banks and the financial system
Posted: 3/8/2014 3:00:51 AM

Our entire economy is dependent on the whims of private, profit-seeking corporations, who decide what businesses can exist (they can turn down loans if they don't like the idea), how much money exists, and how we use money


We've already talked about ways that isn't accurate. They don't "decide what businesses can exist." If they did, then NO businesses that they disapproved of, WOULD exist, and clearly lots of them do. Further, there are lots and lots of different people and companies which lend money, or otherwise provide needed funding to get things going.

And look at it from the alternate side of things: if financing of business ventures DOESN'T come from private sources, where will it have to come from? Only two other possibilities: government , or the pockets of the person who wants to start the business. It's pretty obvious what's wrong with limiting financing to the government, so I wont bother to elaborate. Limiting it to the individual starting the business, would mean that ONLY people who inherited wealth could get anything more than subsistence living going, and would limit new business ventures as well, to whatever the entrepreneur's current employer approved of. That is how the world of business USED to work, before investment banking was invented, and believe me, progress, expansion, and wealth creation was all but undetectable.

So where IS the financing going to come from?


And no, the private institutions do NOT decide "how much money exists," nor do they decide " how we use money." Once you have money in your pocket, you can spend it on whatever you want to. Now, if you want to use someone ELSE'S money, as in if you are getting someone else to finance your business, then yes, you have to spend THEIR money the way that THEY want you to, but that's a different issue. Once you create real wealth and carry money representing that, how you use it is up to YOU.


The entire debt-based money system is one that benefits the banks most of all (inflation means that we have to give the banks our money, since sitting on it will only make it worthless).


You've got that backwards and inside out, at the very least. Yes, if in an inflating economy, you put your extra cash in a sock, you will find that when you finally get around to spending it, that it wont buy as much as it would have had you spent it earlier. But you don't have to give it to a bank! Where did you get THAT idea? Are you caught up with the fact that once you owe someone money, that you have to pay it off in a timely fashion, and that that makes you feel as though someone else is running your life? That has nothing to do with WHO you borrowed from. And as for the loan institution getting all the benefits, as has been described by several people here already, inflation REDUCES how much wealth the loan institution gets back from you.


The way they create money also has a loss for all of us. At least with counterfeiters there is only a direct loss to one person (the person who accepts it and gets caught with it). Nobody else suffers any kind of loss at all. However, when banks create money we collectively suffer a loss (the loan money leads to some wealth creation, but it comes at the cost of a decrease in the value of everyone's money).


You've actually got two examples there which are closer together than you seem to realize, as well as still being wrong about how loan money works. First, counterfeit money: cash is a representation of actual wealth. It is not wealth, in and of itself. Because counterfeit cash represents NOTHING, when it is allowed to flow through and economy, it does far more damage than JUST to whoever happens to be holding it when it is recognized as fake, like some financial game of musical chairs. The thing to realize, is that an economy is continually building on itself. Everything that is built on a lie, will also be a lie itself, and will cause the lie to expand.

When the real estate mess was foisted on us a few years back, THAT was a form of counterfeiting. Instead of printing hundred dollar bills, and pretending that they represented real wealth, the claimed value of real estate was lied about, and it was claimed to BE real wealth. When more money is loaned out against what secretly doesn't exist, then that loan is itself without actual value. And the people who were holding that counterfeit wealth magnified it's damage even further, buy building it and selling it as though is was real to other people who made loans against it. That's the same as padding bundles of real cash with fakes, and using those bundles again and again, with each person who accepts them LOSE money even as they think they are making new wealth.

It's the fundamental dynamic of wealth creation and what "money" represents that you are still mixing up.

And you still aren't getting the fact that inflation does NOT happen as a direct result of loans being made.

Again, when banks and other institutions make loans, they are NOT CREATING MONEY. NOT NOT NOT. They are guaranteeing that THEY will pay, should the people to whom they make loans, fail to create the new wealth they say that they will create. If the bank DID "create money," then as with your version of counterfeiting, the only thing that would happen when the people they made loans to defaulted, would be that the bank would cross that person off, and ignore the fake cash they were handed. The bank would still have the full amount of all deposits in their vaults, and would not be responsible to account for the cash they "created."
 gingerosity
Joined: 12/10/2011
Msg: 85
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Banks and the financial system
Posted: 3/8/2014 3:47:40 AM
Igor

And look at it from the alternate side of things: if financing of business ventures DOESN'T come from private sources, where will it have to come from? Only two other possibilities: government , or the pockets of the person who wants to start the business.

There are private bank sources and there are private sources.
https://www.kickstarter.com/

Again, when banks and other institutions make loans, they are NOT CREATING MONEY. NOT NOT NOT.

Technically they do facilitate the creation of M1-M3 money, but it is an amount predetermined by the Fed through the amount of MB credited to them and the reserve rate mandated. So to say they are 'in control' of the money supply is like saying the cows are in control of the milk output of a farm.
 Demigod1979
Joined: 12/4/2011
Msg: 86
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Banks and the financial system
Posted: 3/8/2014 7:21:59 AM
And look at it from the alternate side of things: if financing of business ventures DOESN'T come from private sources, where will it have to come from? Only two other possibilities: government , or the pockets of the person who wants to start the business. It's pretty obvious what's wrong with limiting financing to the government, so I wont bother to elaborate. Limiting it to the individual starting the business, would mean that ONLY people who inherited wealth could get anything more than subsistence living going, and would limit new business ventures as well, to whatever the entrepreneur's current employer approved of. That is how the world of business USED to work, before investment banking was invented, and believe me, progress, expansion, and wealth creation was all but undetectable.

So where IS the financing going to come from?

Nationalizing the banks is always an option. The power to create money is something that the government has granted to the banks, and it's something that could always be taken back (and if they abuse it, like during the financial crisis, then there is every reason to). Some governments nationalized their banks during the financial crisis (e.g., Iceland) and they haven't suffered much for it.

Frankly, I don't think we need to go that far (at least not yet). But I do think that the government must break up the big banks, and make commercial banks boring businesses again (they should be restricted to just taking deposits and making loans). The government also needs to impose some new, strict regulations on what the banks can do with their interest money.


And no, the private institutions do NOT decide "how much money exists," nor do they decide " how we use money." Once you have money in your pocket, you can spend it on whatever you want to. Now, if you want to use someone ELSE'S money, as in if you are getting someone else to finance your business, then yes, you have to spend THEIR money the way that THEY want you to, but that's a different issue. Once you create real wealth and carry money representing that, how you use it is up to YOU.

Commercial bank credit accounts for the vast majority of the money in the money supply (up to 90% of it in the US). The central banks determine how much money should exist - in the US, the supply of money is regulated the Federal Reserve, which of course is a private bank.


You've got that backwards and inside out, at the very least. Yes, if in an inflating economy, you put your extra cash in a sock, you will find that when you finally get around to spending it, that it wont buy as much as it would have had you spent it earlier. But you don't have to give it to a bank! Where did you get THAT idea? Are you caught up with the fact that once you owe someone money, that you have to pay it off in a timely fashion, and that that makes you feel as though someone else is running your life? That has nothing to do with WHO you borrowed from. And as for the loan institution getting all the benefits, as has been described by several people here already, inflation REDUCES how much wealth the loan institution gets back from you.

Once again, inflation makes cash more and more worthless over time. This is why if you want to save your money you have to put it into a savings account or some sort of growth opportunity at a bank. This basically means that you are giving your money to the bank, since the moment that you deposit your money into a bank it is no longer yours.


You've actually got two examples there which are closer together than you seem to realize, as well as still being wrong about how loan money works. First, counterfeit money: cash is a representation of actual wealth. It is not wealth, in and of itself. Because counterfeit cash represents NOTHING, when it is allowed to flow through and economy, it does far more damage than JUST to whoever happens to be holding it when it is recognized as fake, like some financial game of musical chairs.

Money is something that is used to buy goods and services. If counterfeit cash is not detected, and is used to buy goods and services, then it IS money. If counterfeit cash is detected then it results in a direct loss to the person who accepted it, and if it's not detected then it dilutes the money supply, stealing from everyone (it's the same thing that happens with inflation).


Again, when banks and other institutions make loans, they are NOT CREATING MONEY. NOT NOT NOT.

I've said this numerous times. When banks make loans they expand the money supply (that IOU can be used to buy goods and services so it is technically money). How do you expand the money supply without creating money???


If the bank DID "create money," then as with your version of counterfeiting, the only thing that would happen when the people they made loans to defaulted, would be that the bank would cross that person off, and ignore the fake cash they were handed. The bank would still have the full amount of all deposits in their vaults, and would not be responsible to account for the cash they "created."

This is because banks, unlike counterfeiters, abide by certain rules of accounting. When banks create loans they enter the borrower's payments and collateral on one side of the ledger (asset), balanced by the money that the bank has created (liability) (note that both of these are basically just promises so no physical cash is needed to do this). When a default happens the bank seizes the asset and tries to sell it, but the value of the asset sometimes does not cover the amount of their liabilities, and this is counted as a loss on their books. Banks cannot just get rid of their liabilities on a whim, they can only do so by the money they receive from the borrower's repayments and/or by the sale of their collateral, and a profit or loss is what results when one number is bigger than the other. A bank's financial health depends on the value of their assets compared to their liabilities, NOT the amount of physical cash they have (physical cash is only important for withdrawals).

In other words, it is because of the rules of accounting that they cannot just ignore the cash that they created. They can't just undo their IOU when a borrower defaults, they have to try to balance it out in their favor somehow (and when they can't they are required to report it as a loss). When the total amount of their liabilities exceeds the total amount of assets then the bank is bankrupt and forced out of business and/or take into receivership.

Note that the financial crisis was finally resolved by a change in accounting rules (NOT by the bailout of any other government rescue plan). The banks ran into trouble because they were forced to value the mortgage-backed securities at market prices (and since the market for them had all but shut down they were valued at almost nothing). When the mark-to-market rules were lifted, and the banks could value these securities internally, the banks were suddenly cured (in other words, the value of their assets increased substantially, allowing them to balance their books). Banks live and die on these accounting rules.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 87
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Banks and the financial system
Posted: 3/8/2014 9:41:42 AM
How do you expand the money supply without creating money???


By giving out GUARANTEES. Not money. The guarantees, are exchanged for parts of the EXISTING money supply so that it can be reused by other people.

Banks have not been allowed to create money for a very long time.

If they were allowed to create money, when someone wanted their entire principle back and the bank didn't have it (i.e. a run) they would solve the problem by creating more money. They can't do that.
 Demigod1979
Joined: 12/4/2011
Msg: 88
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Banks and the financial system
Posted: 3/8/2014 12:46:26 PM

By giving out GUARANTEES. Not money. The guarantees, are exchanged for parts of the EXISTING money supply so that it can be reused by other people.

Banks have not been allowed to create money for a very long time.

It's called "money supply" for a reason. For some reason you want to avoid using the term "money creation" when that's plainly what they do. The IOU (checkbook money) that they create acts like government-created cash, can be used like government-created cash, and the vast majority of the money supply is in this form. I'm sure you know yourself that there is a difference between cash and money (cash is money, but money is not always cash).


If they were allowed to create money, when someone wanted their entire principle back and the bank didn't have it (i.e. a run) they would solve the problem by creating more money. They can't do that.

As I explained in my previous post, banks are only allowed to create money by entering a borrower's promise to pay (the loan contract) on the positive side of the ledger. Otherwise, they are not allowed to create a single cent. Also, the money that banks create is a liability for the bank (it's what they owe to someone). They cannot create money for themselves.
 gingerosity
Joined: 12/10/2011
Msg: 89
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Banks and the financial system
Posted: 3/8/2014 2:24:41 PM
Igor

By giving out GUARANTEES. Not money. The guarantees, are exchanged for parts of the EXISTING money supply so that it can be reused by other people.

You're not seeing the multiplier that is the result of having a fractional reserve system. The multiplier m=1/R is applied by the commercials, and the reserve rate R or 'minimum fraction held in reserve' is dictated by the Fed.

https://en.wikipedia.org/wiki/Money_creation#Money_creation_through_the_fractional_reserve_system

When loans are paid back, they remove that extra money from the system. But becuase we're a debt-based economy, the amount on loan is always significant, so the total money in the system is always a multiple of what the central bank has issued.

The commercial banks act like suspension between the central bank and the road. It means that it might take 6 months for a tweak of the Fed's to flow through and have the desired effect, but it also means there is flexibility for day-to-day pot holes.

The logical course of action to reduce the risk in the system is to increase R, which is what things like the Basel accords are trying to do. Banks themselves have volunatarily increased their reserves since '08, but there is always a downward pressure on voluntary excess reserves for competeive reasons, so the Fed should be increasing the minimum required. Jumping to 100% in one step would probably be a disaster, but the main reasons it is difficult to get small, incremental increases in R is the greed of the vested interests and the laziness of everyone else.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 90
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Banks and the financial system
Posted: 3/8/2014 3:50:11 PM
I can't quite follow what you are saying, ginger, as I don't have the economics or whatever raining that formula comes from. I am fully aware that banks and other lending institutions do write loans for far more than they carry in reserves, and have done so for as long as I have been alive at least. I know that the money supply does fluctuate, but it has always been my understanding that it is due to a number of factors, only one of which has to do with lending practices. I also understand that the money supply can have positive or negative effects on the (relatively)smooth and stable functioning of the economy, but I've read people who are said to know whereof they speak, argue different things about that.

What I am MOST trying to find out, and still haven't figured out, is precisely what it is that Demi is concerned about which makes him want things to change. He seems to think that lots of lending is the cause of SOMETHING he doesn't like, but I don't know what that is.

I know that I ALSO want things to change from where they are now, with little or no regulation of any kind on the derivatives market, since that is what killed my prospects for another mate any time soon (money woes and the natural follow on problems that go with them). Among other things.
 gingerosity
Joined: 12/10/2011
Msg: 91
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Posted: 3/8/2014 4:17:24 PM
The part of wikipedia I liked to explains the basic idea. What I'm saying is that Demi is right that they do technically create money, but you are right that that isn't a problem becuase it is limited by the Fed. Going all the way to full-reserve will not be allowed to happen, but pushing in that direction would be sensible.
 gingerosity
Joined: 12/10/2011
Msg: 92
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Banks and the financial system
Posted: 3/8/2014 4:47:51 PM
Demi, you might be interested in this re. inflation. The 2nd half is a good discussion.

https://www.youtube.com/watch?v=jE7zxo61Xc8&list=PL0364ACCE6C7E9D8E
 Demigod1979
Joined: 12/4/2011
Msg: 93
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Banks and the financial system
Posted: 3/8/2014 7:32:03 PM

Demi, you might be interested in this re. inflation. The 2nd half is a good discussion.

https://www.youtube.com/watch?v=jE7zxo61Xc8&list=PL0364ACCE6C7E9D8E

Thanks for the link, was an interesting watch :)

Friedman is right that inflation is a very bad thing (at least hyperinflation), and what Friedman said about the "cure" is what I've indicated before, which is that our current economy is unable to shrink without enormous economic pain. I'm kind of dubious about the "cure" itself though. I know that Volcker cured inflation in the 70s this way (and of course the Great Depression saw the dollar appreciate rapidly), but it seems a rather cruel method, with thousands of businesses going broke and millions of people unemployed. He said there's no pain-free method but, like I said before, I think that's because of the nature of the debt-based money system.

On the flip-side though, the ECB is adamantly committed to maintaining a low inflation rate, but that's caused enormous pain for the PIIGS countries, ultimately requiring bailouts. IMO, it'd be nice to have a flexible money system, where we create money only when needed (and destroy as needed).
 IgorFrankensteen
Joined: 6/29/2009
Msg: 94
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Banks and the financial system
Posted: 3/9/2014 10:25:34 AM
The only things I'm really sure of in all this, are that the term "money" is confusing (I know that banks are prohibited from PRINTING money, and have been for a very long time, so the idea that they are allowed to "create" it makes no sense), and that the national and world economies are so very complicated, that anyone who claims that this or that ONE thing is the fix for it all, are either fooling themselves, or lying.

That very long program is interesting, but I'm not sure how much of it to take as financial gospel, since the subject matter has historically never been shown to be one where the term "fact" gets attached to anything other than who has the cash in their hands at the moment. What the basis is for valuing currency has been argued about and changed several times in the past in the US alone, and horrendous problems happened under every system.

I'm sure that greed is at the core of most of the problems that happen, but I know as well that there is no way to directly legislate against greed, which is why no matter what laws are passed, and no matter what policies are in place, someone WILL find a way to use them to screw someone else over, because of their greed. Therefore I can't imagine a world where we are NOT regularly having arguments over what to change about the system.

When I was a kid growing up, and I read about the Great Depression, and how the part of it which was brought on by the stock market crash, was in turn due to everyone being able to buy on margin... I naturally thought that buying on margin had been legally ended. It wasn't for a very long time that I learned that all that was done, was to slightly increase how big the percentage of actual cash was required for people to be able to "control" blocks of stock.

Hence I can easily understand everyone's consternation at learning that loan institutions are allowed to essentially pretend to have more money to lend, than they really have in from investors. It certainly appears that when they do so responsibly, that everything works out, and that when they don't, that a lot of rich people get richer, and the rest of us suffer huge setbacks in our lives.
 gingerosity
Joined: 12/10/2011
Msg: 95
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Banks and the financial system
Posted: 3/9/2014 2:45:30 PM
I also recommend part 3 of that series. It covers a lot of what you're bringing up - valuing currency, fractional reserve, the Great Depression, problems with the gold standard and destruction of money supply.

https://www.youtube.com/watch?v=jOO4kPSaD4Y&list=PL0364ACCE6C7E9D8E

I agree, taking anything as financial gospel is foolish. What I most like about this series is the discussion in the 2nd half, where many viewpoints are argued. It's hard to find quality discussions like that these days.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 96
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Banks and the financial system
Posted: 3/9/2014 9:21:57 PM
Something to note while watching that series: it was created a LONG time ago, when the problem we had WAS inflation. I don't see a date on it, but Friedman keeps saying "fifty years ago" when referring to the Great Depression, so this must date back to the early eighties.

Inflation is NOT our primary problem right now.
 Demigod1979
Joined: 12/4/2011
Msg: 97
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Banks and the financial system
Posted: 3/11/2014 5:52:26 PM

I agree, taking anything as financial gospel is foolish. What I most like about this series is the discussion in the 2nd half, where many viewpoints are argued. It's hard to find quality discussions like that these days.

Discussing economic ideas is certainly useful, although they may not always apply to real life. For instance, the school of economics that economists like the late Friedman belonged to assume that market participants are always rational, and that rational self-interest will preserve the market. The laissez-faire economics that Friedman championed is based on the assumption that self-interest and greed will balance itself out. The problem is that the financial crash of 2008 dissolved those notions, as even Alan Greenspan admitted (he said the principle that he had believed all his life was wrong, although he also said that there is no better alternative). For such events, believers in the free market always put the blame on government intervention (e.g., many Republicans blamed the crisis on government promotion of affordable housing), but I don't think it's that simple. Frankly, I agree more with Keynesians in that I believe markets are NOT perfect and NOT rational, and that it is the government's duty to regulate the markets and make sure it does not get out of hand (e.g., if the government had actually regulated derivatives when they were just starting to take off then would the financial crisis have been averted?) Of course governments are not perfect either (as we are only too aware, total state control also results in economic failure) but complete market freedom is courting disaster. As with a lot of things, I think the solution is somewhere in the middle.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 98
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Banks and the financial system
Posted: 3/12/2014 4:27:34 AM
I am in complete agreement with you in all that, Demi. It is why I for one, wish it were ILLEGAL to claim that there is any such thing as "Business Science." The notion that economics CAN be handled as though it is made up of atom-like particles with easily predictable and self-limited behaviors has been among the most destructive concepts to have been foisted on humanity in modern times. Possibly THE most destructive.
 flyguy51
Joined: 8/11/2005
Msg: 99
Banks and the financial system
Posted: 3/12/2014 10:43:01 AM

Discussing economic ideas is certainly useful, although they may not always apply to real life. For instance, the school of economics that economists like the late Friedman belonged to assume that market participants are always rational, and that rational self-interest will preserve the market. The laissez-faire economics that Friedman championed is based on the assumption that self-interest and greed will balance itself out. The problem is that the financial crash of 2008 dissolved those notions, as even Alan Greenspan admitted (he said the principle that he had believed all his life was wrong, although he also said that there is no better alternative). For such events, believers in the free market always put the blame on government intervention (e.g., many Republicans blamed the crisis on government promotion of affordable housing), but I don't think it's that simple. Frankly, I agree more with Keynesians in that I believe markets are NOT perfect and NOT rational, and that it is the government's duty to regulate the markets and make sure it does not get out of hand (e.g., if the government had actually regulated derivatives when they were just starting to take off then would the financial crisis have been averted?) Of course governments are not perfect either (as we are only too aware, total state control also results in economic failure) but complete market freedom is courting disaster. As with a lot of things, I think the solution is somewhere in the middle.

I can certainly agree with your views as stated here. In fact, in another thread, I already have:

Free markets depend upon people acting rationally in their own best interests. The problem is that history and studies have shown that people do not always act rationally. Under certain regularly occurring conditions, they are greedy, fearful, petty, competitive, etc. beyond the point of rationality.


Modern civilization simply does not allow for a pure free market economy. Human nature does not allow for a purely government planned economy, either. The trick is finding that Goldilox region of capitalism.
 gingerosity
Joined: 12/10/2011
Msg: 100
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Banks and the financial system
Posted: 3/13/2014 3:33:13 AM
Demi

I believe markets are NOT perfect and NOT rational, and that it is the government's duty to regulate the markets and make sure it does not get out of hand (e.g., if the government had actually regulated derivatives when they were just starting to take off then would the financial crisis have been averted?) Of course governments are not perfect either (as we are only too aware, total state control also results in economic failure) but complete market freedom is courting disaster.

What results in a more stable, less 'out of hand' system: taking only such risks as you yourself will bear the consequences, or taking risks without consequences to yourself? Being paid inducements to rack up debt and take short-term risks, or having no such incentives?

Here is what I'm getting at... https://www.youtube.com/watch?v=jvH4YlpCGSo

Being downunder I have been spared the GFC, and the politics of GFC. I'm open to looking at the arguments and evidence for the effects of government regulations and market freedoms throughout history. From what I've been able to find so far, there seems to be copious amounts of data on the former, but precious little on the latter.

Igor

It is why I for one, wish it were ILLEGAL to claim that there is any such thing as "Business Science." The notion that economics CAN be handled as though it is made up of atom-like particles with easily predictable and self-limited behaviors has been among the most destructive concepts to have been foisted on humanity in modern times. Possibly THE most destructive.

This is possibly THE most destructive idea I've seen you espouse. Who decides which ideas we should suppress? What sentence would you recommend for thoughtcrime? What methods shall we use to prevent people testing ideas with reason and evidence?
As for econoscientism... if you're arguing that relying on knowing what economic levers to pull, when, doesn't work very well then I'd have to agree that there doesn't seem to be much evidence to the contrary.
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