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 Author Thread: Income inequality
Joined: 12/4/2011
Msg: 13 (view)
Income inequality
Posted: 5/4/2014 7:31:18 AM

The top 1% is devouring 37% of income, enjoying a disproportionate amount of the wealth that we collectively create, and you find nothing wrong with that?

The OECD report shows the top one per cent of Canadian pre-tax income earners captured 37 per cent of the overall income growth between 1981 and 2012, and now swallow up 12.2 per cent of the country’s income pie.

Sorry, I meant to say income growth, as in the article.

The majority of Canada's one percent are doctors, lawyers, professionsals etc and they all pay a massive amount of tax because they all have t-4 income. What you're talking about is what you see on American news about ceo's, bailouts, off shore investors, tax loopholes etc. You just don't have a grip on what you're mad at and you're talking about two different countries. All the OWS dummies in Canada were so far out to lunch they couldn't even give an answer to the question, "What would you people like to change?". You're no different. If your plan is to increase tax on dividend yield, the only thing you're going to accomplish is making retirement harder for people who have worked for and paid taxes on their capital. The one percent here are gainfully employed.

You have tried to paint Canada's one percent as honest laborers, like all the rest of us, deriving their income from wages. And yet, the data says otherwise, since the top 1% earn only 5% more from wages than their US cousins. Having different tax treatment for things like dividends is all well and good, but the fact of the matter is that Canada's top 1% still derive a large chunk of their income from other sources aside from their wages. Maybe you didn't intend it to be, but this seemed largely misleading.

Lovely but the article you cite in your original post is about Canada. I assume you live in Canada. In Canada the average dividend tax rate is 35.95%. For people who try to pay themselves dividends through their own corporations in 2014, their tax rate will be the same as if they had simply earned income. In fact, in 6-10 provinces it will be more effecient to earn income rather than dividends for business owners. As for all other dividend income in Canada, it's taxed the same as normal income unless it is derived from an eligible Canadian business that has already paid tax on that money. You seem to have a difficult time understanding this but none the less, that's reality. It's also probably the biggest difference between Canadian and US top income earners. Whereas Americans pay a flat, low tax rate on their investment income, Canadians do not.

The article was from a Canadian source so it would of course put an emphasis on Canada, but the actual report was about global income inequality (and that was the scope of the original question that I asked). If you thought I was singling out Canada specifically then that was a misunderstanding (if that was the case then I'm sorry).
Joined: 12/4/2011
Msg: 10 (view)
Income inequality
Posted: 5/4/2014 4:32:04 AM
Yes actually it is a large difference but what I was trying to show is that you have no idea what you're talking about when you say the obvious fix is raising capital gains taxes and dividend taxes. That's not what most of the one percent in Canada pay. What you really mean is our highest income tax bracket which runs almost 50%, isn't enough.

Again, you seem to have rather deliberately tried to create the illusion that Canada's 1% is fundamentally different than the US's 1%. This is simply not the case.

It's taxed when you take it out of your rrsp so that makes no sense. But you've really got no idea about how any of this works.

I've already explained to you how this works. After retirement you are in a low income bracket, thus it makes it tax-efficient when you withdraw your funds (and obviously, if dividend income was treated the same as ordinary income then it will also be taxed at a low rate). This is why taxing dividends the same as ordinary income will not impact retirees much.

What you might be upset about are people who earn their normal income through dividend payments from their own contractors who pay themselves in dividends rather than wages. That's an obvious loophole but it has been closed and is no longer a viable option in Canada. No more income trusts, no more cheating contractors. All dividend earners are taxed the same as income earners. So, again, what exactly are you and the OWS crowd after again?

Frankly, I've never heard of such contractors (and it's irrelevant to the point I'm trying to make here). As I've explained before, dividend income is currently not taxed at the same rate as wage or interest income (e.g., in the US it is taxed at a flat 15% or 20%). This makes dividends attractive for those with a lot of money, since they can derive a significant portion of their income from dividends while paying relatively little tax. Treating dividend income the same as wage or interest income would help level the playing field between the super rich and the rest of us, making us all pay the same tax rate for the same income (in other words, the super rich would pay more tax, thus decreasing the income gap).
Joined: 12/4/2011
Msg: 7 (view)
Income inequality
Posted: 5/3/2014 2:16:01 PM

Absolutely. Here's the reason why and the point you've totally missed....

The majority of Canada's one percent are doctors, lawyers, professionsals etc and they all pay a massive amount of tax because they all have t-4 income. What you're talking about is what you see on American news about ceo's, bailouts, off shore investors, tax loopholes etc. You just don't have a grip on what you're mad at and you're talking about two different countries.

The same article states:

The top 1% earned at least 65% of their income in the form of salaries, with the rest coming from business income and capital investments, the study said. For their peers in the U.S., the figure was 60%, in France it was 55% and in Italy 45%.

So in Canada the top 1% earn a whopping 5% more of their income from salaries than in the US. Now, I'm sure that 5 is a big number for some people, but this somehow doesn't translate as a massive difference in my eyes. You seem to have (deliberately?) painted Canada's 1% as being radically different from the US when the data says otherwise.

All the OWS dummies in Canada were so far out to lunch they couldn't even give an answer to the question, "What would you people like to change?". You're no different. If your plan is to increase tax on dividend yield, the only thing you're going to accomplish is making retirement harder for people who have worked for and paid taxes on their capital.

How so? When people save for retirement they put their savings into a registered account, which is either tax-free or tax-deferred. Thus, raising taxes on dividend income would not affect those saving for retirement (your dividend-paying funds will still grow at the same rate), and would have minimal impact on those living on their retirement funds since they are already in a low tax bracket at that point. Raising tax rates on dividend income would primarily affect those who make a living on dividends BEFORE retirement in a non-registered/trading account, since they would have to pay the full tax amount when they receive the dividend. In other words, the people it would impact most are those with a lot of money right now (like the 1%) who use dividend income as their primary or secondary income source. What I'm thinking is that dividend income should be treated the same as wage income or interest income - that is, taxed at your regular tax rate (and the same goes for capital gains).
Joined: 12/4/2011
Msg: 4 (view)
Income inequality
Posted: 5/3/2014 7:45:29 AM
Before you get too giddy on euro envy and CBC news you should maybe get a better understanding of what you're talking about. Second on the list of income disparity means something totally different when you're near the top and gaining on median and average the middle class is doing better here than most countries, including the ones your article mentions...

So because the middle class in Canada is doing relatively well compared to other countries that makes this growing income inequality okay? The top 1% is devouring 37% of income, enjoying a disproportionate amount of the wealth that we collectively create, and you find nothing wrong with that?

Is it obvious? You want to penalize the people who actually have enough assets to assume the risks of investing, to the point that it will no longer make financial sense for them to invest? No investment, no new business, and no innovation. No new business and no innovation is the kind of stagnant economy where everyone sits on their ass and asks for government cheese because all the opportunities dried up. Sorry! We're cutting staff and we can't afford to hire any new employees because the market tanked thanks to punitive taxes; now go stand in line for a handout and whine about your entitlements. Or better yet, go back to your garage and invent something that will recreate the way people do business or communicate so that everyone can read about the bourgeois without having to pay for the privilege. Oops, Apple and Facebook have already been thought of. Try again.

Do the filthy rich get any tax credits for capital losses, or are you also going to penalize them by redistributing that money as well?

I think the first, second, and third planks of the Communist Manifesto have already been tested and found wanting, but Engels is getting a boner in his grave thinking about free bread and angry mobs of proletariat.

If the "risk" if investing is me getting 47% of total income then I'm all for it! I mean, even during the height of the financial crisis, while average shareholders (e.g., wage earners who put away money for retirement) were being decimated, the bond holders of companies like Bank of America and Citigroup did not lose a single penny, and the top executives of those companies made off like bandits! In fact, it did not even occur to anyone to ask rich bond holders to take a haircut - instead, taxpayers were forced to bail these companies out. If this is the kind of "risk" that the 1% take then sign me up right now!

Also, I find your argument that higher taxes or "penalties" will lead to less innovation to be empty rhetoric. America thrived during the 1950s to 1970s, enjoying one of the greatest periods of prosperity in the nation's history, yet the highest tax bracket was much higher than it is today (70% and over, almost twice what it is today). Even billionaire investors like Warren Buffett, one of the richest men in America, said that it's time for the US to raise taxes on the rich (and being an amateur investor myself, who admires Buffett for his investing acumen, I trust his words).

The engine of economic growth, and most of the jobs in the country, come from small businesses but they are hardly in the top 1%. Those in the 1% aren't those who are struggling to come up with innovations for their business, they are those who have already achieved widespread success and are now largely coasting on it. With sufficient capital, a person could make a living entirely on dividends, and they are treated favorably tax-wise for it. As Buffett indicated, a person making an income on capital gains and dividends is taxed about 15% while a normal wage earner (who makes far less than Buffett) is taxed at 25% or more.

Stop complaining about other peoples' money and work smarter.

Actually, if I was to follow the example of Wall Street, I would get myself elected CEO of a bank, ruin it for short-term gains, then award myself with a billion dollars while giving everyone else a giant goose egg. (is that smart enough for you? :p)
Joined: 12/4/2011
Msg: 1 (view)
Income inequality
Posted: 5/2/2014 7:39:41 PM
So I saw this in the news the other day:

The top one per cent of income earners have taken a disproportionate share of overall income growth over the last 30 years, in Canada and in most OECD countries, according to a study by OECD economists.

In Canada, the top percentile of earners captured about 37 per cent of total growth in the last three decades, according to an analysis of tax filings by the OECD in 28 member countries with advanced economies.

That explains why economic growth is not leading to improved incomes for the rest of us – the 99 per cent, the study found.

The Organization for Economic Co-operation and Development paper urges governments to reconsider tax policies implemented in the past 30 years that have reduced the amount paid by the wealthiest income earners, as well as providing preferential treatment for capital gains and dividends, sources of income most likely to be held by the one per cent.

Canada is second only to the U.S. in its growing inequality. In the U.S., about 47 per cent of total growth went to the wealthiest one per cent between 1975 and 2007, compared to 37 per cent in Canada, while in Australia and the U.K., about 20 per cent of growth went to the wealthiest.

In Nordic countries and in France, Italy, Portugal and Spain, about 90 per cent of growth went to the 99 per cent of middle and low-income earners in the same period.

The growing gap between rich and poor was a focus of the Occupy movement, which resulted in mass protests and sit-ins in New York, Toronto and other cities in 2011 and 2012. It also became a flashpoint last year, during protests over the low U.S. minimum wage.

According to a recent Oxfam report, the wealthiest 85 people in the world hold as much wealth as the poorest half of the planet's population – or about 3.5 billion people. The issue of income inequality is being raised by the International Monetary Fund, by the Davos forum and by the Conference Board of Canada as a concern.

Larry Summers, who was secretary of the treasury under Bill Clinton and is now a Harvard professor, has pointed out how the constant push for tax cuts and the erosion of union bargaining rights has led to greater income inequality.

Like the OECD, he advocates tax reform.

“There’s a concern that if you tax capital, capital will move out. That’s why this has to be done in a spirit of global co-operation,” he told CBC News in an interview last month. Summers said a global pact on taxing capital would help prevent tax avoidance and tax evasion.

The OECD points out that most member countries have reduced rates for top income earners, with the average dropping from 66 per cent in 1981 to 41 per cent in 2008.

“Higher disposable income makes it easier for the one per cent to save and accumulate capital, which eventually increases incomes further,” the OECD report said.

Taxes on dividends and capital, which make up a greater proportion of the income of the wealthiest taxpayers, have been cut.

The study calls for higher marginal tax rates and fewer tax deductions and credits aimed at high income earners. It also advocates wealth or inheritance taxes.

I'm ashamed to say that my country, Canada, ranks second on this list of income inequality. Europe seems to be doing a lot better in this regard, as the wealth is being distributed far more more widely than in the US and Canada.

So, aside from the obvious recommendations (raise taxes on the rich and remove tax benefits for dividends and capital gains), what else should be done to address income inequality? Also, what do we need to do to make these changes happen?
Joined: 12/4/2011
Msg: 125 (view)
Banks and the financial system
Posted: 3/20/2014 7:35:43 PM

Why not? And what do you mean by stable? What frequency and amplitude of fluctuation in the key varibales is acceptable? What are the key variables? We have to know what we're aiming for before we work out how to get there.

Stable, as in a system that does not result in economic crashes. For the US, that would be the Great Depression and the Great Recession, both of which exceed the technical definition of a recession by significant margins.

Perhaps there is a correlation between lax government regulations and financial disasters. Is it a causal correlation? Is there a trend demonstrating that as government regulations become less lax, financial disasters become less frequent and/or severe? It may well be the case. I don't accept it as a given until I've seen the evidence. Especially not when I know that there were government regulations in place such as limited liability and tax incentives favouring high debt that were probably not stabilizing influences.

Evidence? The very fact that the entire financial system was almost destroyed by unregulated financial instruments is proof positive that lax regulations are (one of the) causes of financial crisis (you'd have to be willfully blind not to see it!). There is no other explanation for the monumental financial crisis that unfolded in 2008 (if you were in the market like I was, then you'd know that it was an extraordinary event... WHEN DO YOU EVER SEE THE YIELD ON A T-BILL GO NEGATIVE???). No amount of cheap credit would have caused such a crisis, with banks writing off several billion dollars every quarter! Of course cheap credit from low interest rates might have added fuel to get the credit bubble going, but that decision was also made by a private bank, the Federal Reserve.

Poverty>millions, unemployment>millions and war>millions. That is good, but is there anything else to add to the list before we use it? My intent is to say that any system that increases the frequency and/or severity of Poverty>millions, unemployment>millions, war>millions is not preferable to systems which decrease those things, since you appear to hold the crises as the key to determining preferential systems. Would you agree with that? If so, then it should be relatively simple to narrow down which systems are preferable according to your selection criteria.

You asked for criteria that would make an economic crisis a bad thing, and I gave it to you (I actually found it funny that you would ask for such a thing - it's like asking what 1 + 1 is :p). Economic crises, like the one causing the Great Depression, did all of these things, and no one in their right mind would consider it anything other than bad. Like I said before, lax government regulations can be one of the causes of this, which means that strong government regulations are needed to keep the market stable (private-sector bankers alone cannot be trusted to keep the economy stable).
Joined: 12/4/2011
Msg: 118 (view)
Banks and the financial system
Posted: 3/19/2014 5:37:28 PM

I've never heard anyone use an argument from stability or mention Nash equilibria when discussing these things. It is always about what effects do we observe in the real world.

Stability is a big part in any debate about competing economic theories (a system that isn't stable obviously isn't worth anything). I mean, the entire point of having an entity like the Federal Reserve is to maintain stable prices. And if you haven't heard about the Nash equilibrium then you have some homework to do ;)

What evidence have you used to come to that conclusion? We've just been discussing how the 20th and 21st century examples such as depressions and financial crises occurred within regulated systems, so in my view are not particularly valid data to use for examining free market behaviours.

And the fact that the two greatest financial disasters happened during a time of lax government regulations doesn't suggest something? The fact that the financial inventions that almost brought the system down in 2008 were deliberately non-regulated derivatives?

You're also assuming that economic crashes are bad. I may agree with you, but our methods may differ. What criteria are you measuring? Inequality, unhappiness... what? We can't just assume these things if we're going to do this properly.

What criteria? Well, just the fact that the Great Depression led to millions of people being thrown into abject poverty (and may have also been one of the triggers for World War II, which led to the deaths of millions of people). The Great Recession of recent times also led to millions of people losing their jobs (could have been much worse, and thankfully wasn't). Frankly, I don't see any positives here, do you?

Looking into fractional reserve banking just a little bit here-- I see that money is "created" not when a loan is issued, but when that money is redeposited into another bank (or the same one, even). It is then counted as assets twice-- once in two banks or twice in one bank. I see how that is created in one sense (counted twice) but not created in the central bank sense. Even 100% reserve banking does this, though, just not with its demand deposits (checking account $).

It's certainly true that when you deposit into a bank, you are left with an IOU. However, since the money supply increases by the exact amount of a loan when it is issued, it is also accurate to say that issuing loans creates money (as the Wiki article explains, when a bank makes a $80 loan from $100 [$20 as reserve], a new $100 IOU is created, and the total money supply is now $180). And yes, only commercial banks duplicate deposits like this (central banks do not do this).
Joined: 12/4/2011
Msg: 113 (view)
Banks and the financial system
Posted: 3/16/2014 4:41:42 PM

I don't know where you get the perfect knowledge and perfect rationality requirement thing from. It doesn't fit in with my understanding of a free market. In a free market people are free to buy and sell wherever and whenever they want. They bear all responsibilities and consequences, so they have an incentive to do their homework and not take more risk than they're willing to bear. Knowledge and rationality are not required, but they do have value. The question is, is that a good or a bad thing?

It's all about having a stable economy. One of the ideas of the free market system is that rational self-interest can, by itself, preserve the markets and keep the economy stable (this is one of the reasons why free market advocates so oppose government regulation/intervention). Among the many who have come up with rationales for this idea is mathematician John Nash, who won the Nobel prize in economics for his "Nash equilibrium", which showed how non-cooperative and selfish actions can lead to stability. However, even Nash admitted that the assumptions made in his models do not always reflect real life (his equations depend on the players having knowledge of all other market participants and always choosing the most rational, self-preserving strategy based on that knowledge). It should go without saying that if market participants only have partial knowledge, or choose to make a non-rational/emotional choice then the equilibrium is lost. And as the business cycle shows, these things have a tendency to snowball (e.g., if someone is doing well flipping houses then others will have the courage to do the same). My thinking is that the laissez faire system that people like Friedman endorsed are, more often than not, prone to economic crashes, and that strong government regulations are needed to prevent market participants from taking undue risks.
Joined: 12/4/2011
Msg: 107 (view)
Banks and the financial system
Posted: 3/14/2014 6:18:21 PM
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?

The big illusion that caused the financial system was that risk had been eliminated. That is, people believed that the financial wizards at Wall Street had figured out a way to make previously risky investments safe, even for things like subprime mortgages (by packaging these up into different tranches and spreading it around the market they believed that they had reduced the risk to the point of irrelevance). Unfortunately, the end-result was that risk infected the entire financial system and almost brought the entire system down.

The thing is, even those investors who recognized these investments were baloney still had to trade them, since the profits coming from them were so enormous (otherwise, those profits would go to their competitors, who would then have a competitive edge). When there's a strong bubble forming then it's difficult for anyone to stop it, even if they wanted to. After all, even those who recognize that they are taking on risky investments believe that they're smart enough to get out before these investments blow up (this is a collective illusion among the investment community).

Again, free-market economics only works if everyone had perfect knowledge and was perfectly rational. In other words, investors would have to be able to accuracy measure risk at all times and would not be subject to emotions. This is nothing close to the truth. The mortgage-backed securities that the banks created were so complex that no one could accurate measure their risk, and people are always falling for the latest fad (just look at the dotcom bubble). And of course even for those companies that were bought out, bailed out or went belly-up during 2008, the executives of those companies made a fortune (if their goal was to make a lot of money for themselves then they succeeded admirably).

Another part of the confusion comes from the fact that the loan institution and the borrowers are using different TIMES to talk about "money." From the borrowers point of view, since the bank or other loan institution doesn't take actual cash from their reserves and hand it to them, they both perceive, and go about their business as though the bank DID print cash money for them to spend. But from the banks' point of view, they did nothing of the kind. They gave the borrowers part of his own future profits to use today, in order to reach and get a direct hand on that future money tomorrow. And they use their existing reserves as a "buffer" of sorts, in case they misjudged the borrower's future wealth creation, or he dies or absconds with the money borrowed from the future by the bank.

The loans that the banks make have absolutely nothing to do with their future profits. Under the rules of fractional-reserve banking, banks can loan money up to the multiplier limit (so if the limit is 9 then the banks can loan/create up to 9 times the amount of their reserves). Furthermore, banks can only legally create money based on the value of a loan contract; since a loan contract is a legally-binding promise to pay, it has real value once it is signed.
Joined: 12/4/2011
Msg: 97 (view)
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.
Joined: 12/4/2011
Msg: 93 (view)
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.

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).
Joined: 12/4/2011
Msg: 88 (view)
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.
Joined: 12/4/2011
Msg: 86 (view)
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.
Joined: 12/4/2011
Msg: 82 (view)
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).
Joined: 12/4/2011
Msg: 47 (view)
would you turn down a relationship with someone who believes in a God?
Posted: 3/6/2014 5:51:11 PM

and it's not simply because they don't believe in God.. it's because.. many atheists I have met, have an arrogance about them, and unreliability that doesn't click with me.. not saying they're arrogant or unreliable.. but in relation to someone respcting my beliefs.. I see them always trying to belittle or well... being to material... I can't talk philosophy or spirituality with them..

Perhaps so, but arrogance can work both ways. As you may know, every once in a while a theist comes along who insists that evolution (or radiometric dating, or any other proven scientific theory) is false. By taking the position that they do and refusing to budge from it, they are basically saying that they know more about science than actual scientists! Frankly, this is one of the most arrogant positions I can imagine (I may not be the dumbest person in the world, but I wouldn't even think of comparing my feeble level of knowledge to scientists). There's also a documentary by Richard Dawkins called 'Root of all evil' (not his personal choice for title), where the pastor, Ted Haggard, comes out as one of the most arrogant people that I've had the pleasure of not meeting.

It should also be noted that many atheists, if not most, have come out of (abusive) religious families and so are sensitive to theists and theism. Robert Price once mentioned this, saying that many atheists have a kind of Dracula-response to Jesus. Perhaps this causes them to overreact sometimes, and that may cause them to come out as argumentative and arrogant.

As for the topic, I wouldn't mind being friends with someone who believed in god(s), although I'm not sure about anything beyond that. I guess it depends on their level of religiosity (if they are sufficiently lax in their faith then I think I'd be fine with it). Although I'm an arrogant atheist type on internet forums, I rarely talk about such things in real life (prefer to focus on real life ;) ).
Joined: 12/4/2011
Msg: 80 (view)
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?
Joined: 12/4/2011
Msg: 75 (view)
Banks and the financial system
Posted: 3/5/2014 8:23:04 PM
I think we are talking about different things here. I suspect that you really aren't talking about "money being worth more" at all. I think what what you mean is, that as a person labors, their total life value should increase accordingly, such that they ought to be able to accumulate a lifetimes worth of wealth, in exchange for a lifetime of work. They should be able to buy more, not because their MONEY has changed in value, but rather because they have MORE of it, because they worked so hard.

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?

A permanent money system also means that we, the people, would be in control of our own money, as opposed to the current system where the banks control the money. Currently, we have to hope and pray that the banks don't run into trouble, otherwise the wealth that we've built up over a lifetime can suddenly disappear (by controlling the money supply the banks own all the real wealth in the economy as well).

As for measuring the value of money, that seems pretty tricky to me. I read all sorts of stories about how much you used to be able to buy for a nickel, but not all of the changes have been due to changes in the value of money. Sometimes it's been all about inflation and money supply, but many changes have come due to technological changes, which reduced the actual value of various things. When an item that used to require a hundred people, several days to make, can be made instead by a single person in a few hours or minutes, the actual value of that item can change. And further, changes in people's tastes can make a given product or service go from being a sure fire way for a guy to get rich, to being a sure fire way to be seen as the local nutcase who lives in that shack at the end of the alley.

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.
Joined: 12/4/2011
Msg: 70 (view)
Banks and the financial system
Posted: 2/27/2014 5:37:32 PM
You are talking about a number of different things there.

First, set aside the idea that making improvements on a car causes it to be worth more. Cars are very tricky to develop value in. Most cars fall tremendously in value the moment you drive them off the lot, for reasons that have nothing to do with the cost or quality of the vehicle (though the better ones do retain more value than the cheaper ones).

Houses and real estate in general are market-linked. They rise and fall in value depending on the general economy, more so than on what you do with them. Again, of course, a house that is well maintained and improved, will always bring a better selling price than one that isn't. But as most any knowledgeable real estate person will tell you, how much you put into them, and your choice of improvements, wont always directly relate to how much they sell for later. In fact, there are lots of improvements that people spend to change their houses, which actually cause them to fall in value, even in a good market.

I was making a general point. When you do maintenance or improvements on things like a house or vehicle then it is generally worth more afterwards (otherwise, what would be the point?).

If our money decreases in value through a year of labor, that has nothing at all to do with how hard we worked, or with how much wealth we created. The value of money is tied to other things entirely, which are beyond the control of a single working stiff. Inflation(the DECREASE in the value of money) and deflation (the INCREASE in the value of money) cause problems for everyone, depending on their position in the money-for-goods-and-services exchange. if you SAVE your extra money, and the economy suffers INFLATION, your savings will buy less for you at the end of the year, than you could have purchased if you had spent the money as you went along. If the economy DEFLATES, the opposite results would obtain. This is no doubt why so many rich people who are "investing" or saving their extra money, hope for DEFLATION, and why so many people who borrow money, hope for INFLATION.

My point is that as you work and produce goods and services, your money SHOULD buy more. Instead, inflation eats away at the value of money, driven by an ever-growing money supply, and within less than a century the value of our money has fallen 90+%. An inflation rate of 2% means that the value of your money will be halved about every 35 years (a bitter reward for 35 years of wealth-creation and productivity, don't you think?).

Of course you're right that inflation benefits some people, but that largely depends on the money system. In a debt-based money system such as ours, inflation is the healthy choice. Borrowers need a growing money supply to be able to pay interest costs, and inflation will eat away at the value of debt so it's good for people who are in debt. Inflation is also beneficial to banks, since it encouraged people to put their money in the bank to make it grow (sitting on cash is a bad idea). Deflation, on the other hand, would benefit a cash-based money system, where the vast majority of the money in the economy is existing money (or money that does not have an interest charge attached to it). In such a society money would only be created as needed, by the government or central bank, since only very little of it would be needed to pay interest charges. In such a society you wouldn't need to put your money in the bank to make it grow - it'll grow all by itself (sitting on cash is a good idea). Naturally, this latter kind of system makes banks almost redundant (they'd be relegated to just moving money around the economy to facilitate wealth-creation). The latter kind of system also makes being in debt disastrous, since the value of your debts will grow over time.

Now, if you want to get into the relative injustices in how much real wealth a worker creates, versus how much money employers give them in return, that's another subject area entirely.

I think that would require a separate thread altogether ;)
Joined: 12/4/2011
Msg: 68 (view)
Banks and the financial system
Posted: 2/27/2014 5:31:49 AM

The client come in with a house, which already has value, and the bank comes in with cash.

Not to nit-pick here, but neither the client nor the bank comes in with anything. The property that the client wishes to buy is obviously not owned by him/her when he/she comes in for a mortgage, and the bank does not use its own cash/earnings to buy the property. The moment that new money is created is when a mortgage loan document is signed. The signature on a loan contract is a borrower's promise to pay the amount of the loan plus interest, otherwise forfeit the property that he bought with the loan. Based on this contract, the bank can create brand new promise-to-pay money (IOU), which is treated exactly like government cash. In effect, the borrower and the bank have exchanged promises. Today, a large chunk of money in the economy is in the form of promises, which is why people need to have faith in the banking system in order for it to work (the moment that people no longer believe in the bank's promises is called a bank run).

Printing cash or issuing IOUs (bonds, certificates of deposit, etc.) does not create or destroy value.

Yes, I've said this before. When banks create money they're only creating more representations of value (money) - they are not creating value or wealth itself.

Like so many things in life: if you do whatever it is right, the results are generally positive. If you do it wrong, you'll make a mess.

This system works for most people most of the time, only a small number of people will fall through the cracks. However, the sad fact is that the more we produce, the less our money is worth. If we make repairs on a home or improvements to a car then we expect it to be worth more. The time and effort we put into it makes it more valuable and we can expect some tangible benefits, in functionality, aesthetics or monetary value. With money, this is not the case. We work all year long, producing things of value, and in the end our money decreases in value.

The thing is, as we create more and more wealth in the economy, shouldn't money, which is the representation of that wealth, be worth more?
Joined: 12/4/2011
Msg: 65 (view)
Banks and the financial system
Posted: 2/24/2014 6:32:33 PM
The two initial players deposit their $2200 which is the $ 1000 borrowed plus $100 interest times 2. In my example the bank keeps 10% as its reserve so can lend out $1980... (2200-220).

Wait a minute, are you suggesting the borrowers, after receiving their loan money, will deposit that loan money into their account with interest? What, are borrowers sitting on a pile of cash that they can use as interest even before they get the loan? Also, if they simply deposited their money back into the bank (with that magical interest included), then how it supposed to generate wealth? (are you sure you are not confusing this with loan repayment?)

The $5000 is loaned out but in reality never leaves the bank, so the bank under a fractional reserve has now a further $4500 (5000-500 keeping 10% reserve), which it has yet to loan out. The creation of wealth and therefore the interest can be found in this $4500. So the equation is at any one time

p + p2 > p + i

No, it's p + p2 on the left and p + i + p2 + i2 on the right. What, you are forgetting the fact that the second loan also has to be paid back with interest?

Under the fractional-reserve system, money is added to the money supply when a bank makes a loan. A corollary to that is that until the bank makes that loan, that money does not exist. In your example, that $4500 basically is the bank's capacity for more credit, but it will only be added to the money supply (that is, come to exist as money) when it is lent out (p2 is created). However, the instant that they lend it out it also has an interest charge attached to it (as soon as p1 is created i1 is also created, and as soon as p2 is created i2 is also created and so forth).

So basically, it goes like this:
First loan: p1 < p1 + i1
Second loan: p1 + p2 < p1 + i1 + p2 + i2
Third loan: p1 + p2 + p3 < p1 + i1 + p2 + i2 + p3 + i3

Your equation would only work if p2 was introduced into the money supply by commercial banks but did not need to be paid back at all (that is, it is NOT a loan). This is not possible. Commercial banks cannot just create money willy-nilly (they can only do so based on a borrower's pledge of debt - that is, a loan contract).

Again, I feel that you are working under the assumption of full-reserve banking, in which banks loan money which already exists.

(Note: for simplicity, the example above excludes the original high-powered bank money, which ultimately contributes so little to the money supply that is does not affect the equation)
Joined: 12/4/2011
Msg: 64 (view)
Banks and the financial system
Posted: 2/24/2014 8:07:56 AM

Sorry, I've got no idea what you are saying here. The bank isn't recycling 100% of the interest money. The bank has $1980 to invest and uses $300 of that to buy what has been create as wealth, it might have been gold the first individual had mined or a share in his company he had formed. Banks make these investments all the time.

In your example, no one redeposits their loans so the bank is insolvent until it receives a payment, if it is waiting for the whole (principle+interest) this isn't going to happen. The individuals walk away with the notes but the notes are worthless because where it says 'the bank of x promises to pay the bearer...' it cannot

I've been trying to figure out where you got the $1980 figure, but now I see that you were using a full-reserve system, where banks lend existing money. I'm going to have to go back to your initial example to sort this out so bear with me.

Say the bank has $3000 to lend to 3 individuals, each get $1000 with 10% interest. The first comes up with an item the other two would like. The second offers him $100 for it, which he accepts. The first individual then repays his loan of $1100. The third individual offers the second $200 for the item. The second now repays his loan of $1100. The bank sees this item as an investment and offers $300 for it from the $2200 it has. Individual number three now pays off his loan of $1100.

Each individual is now debt free and the bank has $3000 plus the item which is valued now at $400 (each transaction has increased its value by $100).

By the way you describe the initial $3000 money the bank has, it would seem to be high-powered money deposited or borrowed from the central bank. The bank, when it lends this money, will create a new $3000 IOU and so the money supply will increase by that amount minus the reserve. Ultimately, with a 3% reserve ratio (tyipical of countries like the US) the banks can create up to $100,000 of checkbook money from the initial amount of $3000. Assuming an interest of 10%, borrowers would need to pay back a total of $110,000 ($100,000 * 1.1), whereas the total money supply is $103,000 ($3000 + $100,000). Once again, the total owed by borrowers exceeds the total amount of money in the money supply, which can only be remedied by them spending all their interest money back into the economy.

Also, you seem to be saying that the bank will arbitrarily value some asset at a higher price than it bought it for (on what basis is it doing so?). Wouldn't this depend on market prices and/or supply and demand? (also consider the fact that once all the loans have been repaid, that $100,000 is now gone so the money supply has been drastically reduced)

When a loan gets paid back either in full or portion. That same money is available for bank’s to re lend. That is what they do. They are recycling money back into the economy by lending it. If at the end of the week a bank has received principal repayments totalling say $10,000. They have $10,000 available to lend. So if they write a loan for $10,000, they are not creating new money at all. They are just putting that money back into the economy from where it came from.

I've pointed out numerous times, backed by various Wikipedia articles, that banks create new money. Your continual refusal does not change the matter - it just means you are in denial. The textbook definition of money creation is an action that increases the money supply - whether that's done by physically printing or entering digitally on a computer doesn't matter. Money is a medium of exchange, used to buy goods and services. Banks, when they make a loan, increase the ability to buy goods and services because the IOUs they create can be used like cash.

Increasing the money supply isn’t creating new money at all. It is just transferring it into the economy by lending it.
I fully understand how commercial banks increase the money supply. It is so simple I don’t understand how you can’t grasp the concept. All you do is keep repeating that they create new money, when in fact they are not creating new money.

So if I lend you $10 of existing money I've actually increased the money supply? Really??? Oo

Lending existing money might increase liquidity and circulation, but it should be plainly obvious that it would not increase the total supply of money in the economy. Increasing the money supply can only happen if new money is created.

It is profitable businesses that create new money.

Like I said before, counterfeiting is a crime.

Why don’t you take the time to learn that when a bank borrows off a central bank it has nothing to do with fractional reserve banking. Fractional reserve banking is when money is deposited into a bank. And they have to keep whatever the reserve requirement is in reserve with a central bank.

Umm, my example was based on what happens when a commercial bank makes loans, NOT what happens when they get loans from the central bank (I thought that would be obvious).

Nope, you didn’t answer the question. What would it achieve by breaking up the big banks?.

It means that no single bank can threaten the entire financal system. If one of the big banks, like Bank of Ameica, runs into financial trouble then the government would most likely have to bail then out, since their failure can lead to the collapse of the entire system. Breaking it up into smaller banks lessens this risk (you can let one bank fail without bringing down the other banks). Basically, you don't want to put all your eggs in one basket.
Joined: 12/4/2011
Msg: 62 (view)
Banks and the financial system
Posted: 2/23/2014 3:27:59 PM

This is what we've been trying to tell you all along. Your claim was that the interest didn't exist but it does in the reinvestment of the principle. The bank initially had $3000 to loan out, when the individuals redeposited the loans, the bank has a further $2700 to supply the market. They're expecting $300 back which the are going to want to invest themselves.

You claim that my example is highly theoretical and does not happen, but yours is perfectly fine.

Once again, this can only happen if banks recycle 100% of the interest money back into the general economy in a way that borrowers can access it - that is, by spending on goods and services. In your example, the $300 would have to be spend by the bank (why would they "invest" that money if the borrower is just going to give it right back to them?)
Joined: 12/4/2011
Msg: 61 (view)
Banks and the financial system
Posted: 2/23/2014 12:36:41 PM
In connection with this thread, I decided to look up "what causes booms and busts?", to see what there was to say about things like the "creation" of money, inflation, and so forth. I couldn't find two sources which agreed, and instead I found lots of sources with axes to grind, and heavy bias. In particular, there is one linked to Forbes (which has SOME authority) that showed an obvious bias towards using a Gold Standard for stability. The thing is, as I read it, I noticed that right in the article, the author admitted that we had plenty of booms and busts under the gold standard as well, but he blithely brushed them off. He claimed that "Gold standard = good," because economics is complicated, and booms and busts with a gold standard aren't gold's fault, but booms and busts under the modern system ARE entirely the fault of NOT having the gold standard.

In other words, I like Wikipedia for source material too, but I keep in mind (Historians training) that just because someone uses a nice type-face and spells fairly well, doesn't mean that they know what they are talking about, and doesn't mean they mightn't have written something in the wee hours of the morning after a long bachelor party or something.

By the way, I found no good "boom and bust" explanation in particular yet, so I'm staying with what I've collectively read and observed, which is that it comes down to correctly assessing value, correctly assessing necessities, and borrowing or spending accordingly. Whenever a significant number of powerful (i.e. rich) groups manage to get everyone to over-value something, in order to borrow and spend lots of money against the over-valued things, we get a boom, followed by a bust when the true value is recognized. That means that there IS no SINGLE thing that can be done to make an economy function well and smoothly. Like parents attending children, we have to constantly watch the ENTIRE situation, be constantly vigilant for even our smartest "kids" to decide to do something stupid and destructive, out of some mistaken idea that it will get them a bigger piece of chocolate cake.

By "boom and bust", are you referring to the business cycle, or to credit bubbles?
Joined: 12/4/2011
Msg: 60 (view)
Banks and the financial system
Posted: 2/23/2014 12:16:12 PM
Banks still do not create money by issuing loans. The mighty Wiki article that is repeated here has it vaguely wrong and sort of half right. At least the interpretation of it is wrong. The original thesis...

To quote from the Wiki again (

In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased.

When banks create loans they increase the money supply. According to the definition above, this is creation of money (this does NOT mean that new value, assets or wealth has been created).

Also remember that when a loan is paid back, the new money created by the loan (the principal) is extinguished, thus it is not permanent money (only the interest is permanent). It's not like printing physical coins or dollar bills, which circulates permanently in the economy. The loan money is to serve a purpose, after which it will be removed.

You can't walk into a bank and receive a loan for 200k with nothing in return. That loan is secured by existing assets. The bank forwards you the money without first obtaining anything but a legal right to the asset in the event of a default. But the asset already exists. It is the dinosaur in the chicken and egg dilemma.

Yes, banks do not just create money out of this air, they need to secure it with an asset that the borrower pledges as collateral. However, this does not invalidate the idea that banks create new money (as per the definition above, if it increases the money supply, it's new money).

Say the bank has $3000 to lend to 3 individuals, each get $1000 with 10% interest. The first comes up with an item the other two would like. The second offers him $100 for it, which he accepts. The first individual then repays his loan of $1100. The third individual offers the second $200 for the item. The second now repays his loan of $1100. The bank sees this item as an investment and offers $300 for it from the $2200 it has. Individual number three now pays off his loan of $1100.

In a world where banks spend every single penny of interest they have back into the real economy in such a way that borrowers can earn it again (the $300 offered would be this example), every borrower can pay back his loan. But like I said, this is a highly theoretical scenario and does not happen in real life. Banks are under no obligation whatsoever to spend all their interest money, and will often times use it to increase their own wealth, such as investing in stocks, debt, currency exchanges and other profit-making venture. Unless a law is passed to force banks to spend every single penny of interest into the real, goods & services economy, someone will always come up short (in my continuous example I had the bank spending a portion of their interest earnings).

They don’t re lend it they use it as the basis for loans? That is the same thing. It works like this when a bank borrows from a central bank. Lets say they borrow $10,000 to fund their lending activities.

Assets (Loans) $10,000 Liabilities (Central Bank) $10,000

Again, you are thinking of full-reserve banking. In fractional-reserve banking the bank reserves a small portion as reserves, lends out the rest, and then creates a brand new IOU for the original amount (this is what I mean by "basis for loans"). So with a 10% reserve ratio $9000 is lent out, $1000 is kept as reserve, and a new $10,000 IOU is created. The total money supply is then $19,000 ($9000 + $10,000). Do you get it now? The bank borrowed $10,000 from the bank, and has expanded the money supply by $9000. The bank balanced this newly created money by the value of whatever asset was pledge as collateral, but it is essentially new money.

Again, take the time to learn how money is created by the commercial banks before you attempt to discuss this topic (you are in way over your head here).

Why would you want to break up the big banks? That doesn’t make economic sense. Banks make billions of dollars in profit. They pay tax on that and so are a major source of revenue for the Govt.

Do you actually know how the economy works?

Are you implying that small and medium-sized banks don't pay taxes?
Joined: 12/4/2011
Msg: 52 (view)
Banks and the financial system
Posted: 2/21/2014 6:33:40 PM

First of all, I think I am finally getting a handle on what you are on about here. It's a good subject, but I do think that you went too directly to the details of the mechanics of the economy, and so both confused me (always tragic, I know), and more significantly, lost sight of the Big Picture.

Sorry, I assumed that people knew what I was talking about (plus, this thread was initially in response to OMG!WTF!'s comment in the prostitution thread so I thought I'd get right into the mechanics).

On the "debt based economy," for one thing...I shy away from terminology like that, because it implies that we all purposely WANT to be in deep debt, among other things. It's been politicized to the point where no two people mean the same thing when they use such phrases.

Perhaps, but I think to a large extent, debt is a part of our lives. Taking out a mortgage, getting a car loan, getting credit cards and utilizing other types of credit is a normal part of our everyday experience (in many ways, it is positively expected of us). We also hear that it's a good thing to have a clean credit record ("you don't want to hurt your credit score!"), even though what it really means is that we don't want to hurt our chances of being in debt. It's also become somewhat necessary - with incomes stagnating for the lower- and middle-classes for the past couple of decades, the only way to maintain a good standard of living nowadays is to use debt. In short, I think people today would rather be in debt if it allows them to get the things they need and want.

It's not JUST a matter of maintaining a sufficient money supply to "lubricate" the economic wheels. It's very much a matter of where exactly said "lubrication" is applied. Right now, the proponents of "supply side" ideas of economics, want all the lubrication to be poured directly into the pockets of the people who already have a lot, with the thought that if enough money gushes into their already full vats, that those people will decide to let SOME of it out, in the form of business expansion. I think that's nuts, myself, since there has never been any indication that anyone invests in business expansion while the customer base is shrinking. I think this simple and basic fact, is why even though a lot of Federal money has been poured into the economy, that not much movement has resulted. It's been going to people and places where the goal is not to spend it, but rather to build up reserves, to prepare against ANOTHER failure of loan companies.

Yes, I'm a die-hard opponent of supply-side economics as well (snake oil economics, as Keynesian economists call it ;) ). I also feel that the Fed pumping money in the economy isn't doing much, not with the wealthy hoarding cash the way they do (not that I blame the wealthy for doing it - hell, I would do the same if I had several million dollars under my name). The distribution if income has become a gaping chasm over the past couple of decades, and I think that's hurting the economic recovery. The rich tend to store away most of their money while the poor and the middle-class tend to spend most of it, thus the most effective way to get the economy going again is to reduce that income gap and put more money into the hands of those who will spend it (it's no surprise that the greatest period of economic prosperity in American history came about when the middle-class was empowered after WW2). Of course that's not going to happen with the leadership that we have today, who would prefer to coddle the rich.

BTW, it should be noted that not all wealthy people are so corrupt. I greatly admire Warren Buffett for his investing acumen, and although he's one of the richest men in America, he actually proposes raising taxes on the rich (he said if the nation needs money then they should take it from those who have it). He also finds it ludicrous that he only pays about 15% in taxes (capital gain and dividend) while normal workers under him pay 30% or more.

I am very worried for the future. But not because of the national debt. It's the self-destructive "solutions" being foisted on us, that hold the real danger.

Well, I think some of that debt load can safely be reduced without causing economic chaos (a lot of that money isn't doing anything anyways and isn't causing inflation, so removing it would not automatically cause deflation). My biggest fear is that the problems with the banking system have not been resolved. Although the risks of another crash are low (despite cheap money, it's not blowing up another bubble), I have no doubt that banks will once again "innovate" once conditions are better. IMO, breaking up the big banks should be a major priority, along with some very serious legislation (the new legislation that has come out is too tepid and limited to fix the core issues). They should reinstate Glass-Steagall at the very least, as well as creating new regulations for investment banks (perhaps have them regulated by the FDIC, instead of the SEC). Without a stable financial system, economic prosperity is a pipe dream.
Joined: 12/4/2011
Msg: 50 (view)
Banks and the financial system
Posted: 2/20/2014 5:23:23 PM

Where did the bank get the original $5000 from? Assets have to equal Liabilities. So for the purpose of your scenario I will assume they borrowed it from another bank.

I'm going to stop you right there. You assume wrong - banks expand the money supply when they lend.

From the Wikipedia article on money creation (

In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased. A central bank may introduce new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Commercial bank lending then multiplies this base money through fractional reserve banking, which expands the total of broad money (cash plus demand deposits).
Through fractional reserve banking, the modern banking system expands the money supply of a country beyond the amount initially created by the central bank.

Do you get it? Commercial banks don't simply re-lend the money they borrow from the central bank. They use it as the basis for loans, which expands the money supply.

Honestly, you should take the time to actually learn how the modern banking system works.
Joined: 12/4/2011
Msg: 49 (view)
Banks and the financial system
Posted: 2/20/2014 5:43:11 AM

Part right, and part wrong, with the most problematic interpretation being the idea that BECAUSE the economy has to stay moving to survive, that it's a bad way to do things.

You are right that deflation tends to favor lenders, because it means that the value of their loans goes up. This is part of why we have so many rich investor advocates of deflationary concepts, such as dealing with high costs by lowering wages, instead of by finding better ways to do things, or by lowering top officer pay. Borrowers tend to favor inflation, because since loan repayments are almost never tied to a fluctuating valuation of currency, inflation means that it takes less real wealth creation in order to repay the loans.

And yes, since our population is always growing, our economy has to always grow as well. And since lots of people want to have their lives improve over time, it has to grow even faster than the population does.

But the fact that this is all difficult and complicated and tricky to manage, doesn't mean it's wrong or bad. It doesn't mean that because we need more real wealth, in order to carry on into the future without a steady loss of freedom and satisfaction in life, that therefore we are in some sort of depressing death spiral.

Maybe I am not grasping what it is you are saying in sum about it all. From the start of this thread, I have been under the impression that you were saying that our whole way of growing an economy is inherently false, and bad for us. Is that right, or did you have something else in mind?

Or is the problem that you think that an EXPANDING economy, is synonymous with an INFLATING economy? Economic EXPANSION is different from economic INFLATION.

For the most part, I wanted to discuss (or muse about) our debt-based economy and its implications. The economic truth is that the vast majority of the money in the economy is debt money (current estimates in the US put physical currency at about 10% of money in circulation). I find it sort of a sad fact, since it means that our prosperity depends almost entirely on the bank's willingness to extend credit, but I think it's also something that many people don't realize when they talk about things like government debt. There's a general impression that debt is a bad thing, and that people should try to pay off their debts (it's true on a personal level). A lot of people talk about how the government should stop spending and try to reduce the national debt. This sounds good in principle, but decreasing the debt load for such a large entity at a time of slow economic growth would also mean decreasing our money supply, which is disastrous for the economy. Of course the government will eventually have to start paying some of it off (not always necessary, since inflation and a growing GDP can reduce debt levels) but the rest of society will have to pick up the slack and take on more debt if we are to have a prosperous economy.

So is debt a good thing, or a bad thing? On a personal level it's bad, but on a national level it's good. This seems to be something of a conundrum since no one wants to be in debt, but our collective happiness depends on a great number of people being indebted. Any thoughts on this?
Joined: 12/4/2011
Msg: 47 (view)
Banks and the financial system
Posted: 2/19/2014 6:17:25 PM
Yes, but in your model they do, that's why it's stupid

I'm pretty sure I indicated that the $5000 is money that's been loaned by a bank - by default, that excludes reserve cash.

The reserve cash IS part of the money supply!

Perhaps you're using a different definition of "reserve cash"...

When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of M1 money supply)
At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money

Again, my example was about the principal that is created by a loan (in other words, the $80 from the Wiki example I quoted above, NOT the $20 that's kept as reserve).

Yes, but in your model they don't, thats why it's stupid.

When did I ever indicate that the borrowers do not deposit into a bank account? (the only thing I indicated is that there is a total of $5000 in the money supply, which obviously includes both cash and money in bank deposits).

No, I said you are expected to do something with that cash... Which ultimately creates cash such as putting it back in the bank SO THE BANK can create more cash, not you go out and buy a printing press!

Frankly, I have no idea what you're saying there (putting cash in the bank creates cash?). Can you clarify a little bit?

No it isn't, not sure if you are confusing driving out good money with bad or you just haven't understood how fiat money works, users still have to value the notes that are tendered against the assets of that bank, if that bank is fudging the figures (mixing gold with other metals or in your model there is no more assets) the notes will be devalued by the users. Archimedes was set the task to work this out because they knew how much pure gold weighed, he had a eureka moment.

The value of money has nothing to do with the "assets at a bank", it is tied to the goods and services in the economy (obviously, if money can't buy goods and services it is worthless). The more money that exists compared to goods and services, the less valuable it is, thus inflation. Inflation will eat away at the value of money, making money less valuable than before. It's the same effect of with mixing gold with other metals - you get more coins but each coin is worth less than previous coins.

Near as I can tell, Demi, you are absolutely intent and adamant, insisting that there is no such thing as wealth creation.

Either that, or you insist that there is no such thing as adjusting the money supply to match the amount of wealth created.

Or, you are insisting that even if wealth is created, that because existence is shackled to a set amount of "money" (which I put in quotes here, because you do clearly differentiate between printed or coined money, and a concept of value, though you never get around to spelling out HOW you do so)..... that therefore all capitalism is doomed.

Since you are obviously unwilling to define any of your terms to mean what the rest of the world means by them, and insisting on your own inaccurate definitions, of COURSE your proof that we are all doomed is correct. It's just meaningless, because you DO insist on non-standard definitions, which have nothing to do with the actual economies of the world.

Yes, you are quite right, that IF we set a strict limit on how much wealth there is in the world (to your $5000 for example), that the act of expecting anyone to borrow that wealth, and return MORE than they borrow back, would be impossible by definition. Everyone keeps telling you that your imaginary economy with such limits is not the one that we actually use, but you so far have refused to recognize this.

I will therefore leave all this to you, since it isn't logical to negotiate with someone who refuses to negotiate.

The things that I've been posting here are basically things that the Wikipedia article on fractional reserve banking says (why do you think I keep quoting from it?). It outlines pretty clearly how the lending process goes, and how new commercial bank money is created by it.

As for my example, I used a snapshot for the sake of simplicity, but it is no different if a continued scenario is used, where wealth is generated from economic activity over time, new loans are created and old ones paid back. It doesn't matter how many new borrowers you add and how big the money supply grows, the problem highlighted in my example still remains: the total money that borrowers owe to the bank exceeds the total amount of money in the money supply at any particular point in time.

The five borrowers use the loan money to produce products and services. The bank extends more credit to more people to take advantage of this new economic activity, in the form of credit cards, car loans and business loans - let's say five more people get a loan/credit of $2000 each with 10% interest, expanding the money supply by a total of $10,000.

At this point, the total money supply is $15,000 ($5000 + $10,000). The total owed is $16,500 ($5000 * 1.1 + $10,000 * 1.1).

The five original borrowers then pay back their loans and the bank exterminates the principal while taking the interest, reducing the money supply by $5500 (of course in real life this is done gradually with each payment). They also spend some of their interest money, putting it back into the money supply to be earned by borrowers (interest earned from the five borrowers was $500 - they spend $300 back into the economy and keep $200 to use elsewhere).

At this point, the total money supply is $9800 ($15,000 - $5500 + $300). The total owed is $11,000 ($16,500 - $5500).

Of course you can go on and on forever, but the basically point is, you will never get to a point where total money supply = total owed (the latter will always be bigger). It will never happen because of the interest charges applied to each loan.

Of course this doesn't mean we're doomed, just that the money supply must continually grow in order for our economy to be healthy. As a corollary, it also means that during times of economic distress the supply of new loans will be limited, meaning borrowers will have a difficult time paying back what they owe.

A bank could make good on all their promises to depositors. They would have to call in all their loans. Not an ideal situation for the economy however .Did you miss the whole point about Balance Sheets?

That contradicts fractional reserve banking, which is based on the premise that not all depositors will withdraw their money at the same time (since most of the money in a bank is IOUs, to truly pay back everyone they'd have to hand out IOUs to everyone :p). Besides, in real life the banks could not recall all their loans (that would assume the borrowers have all that money ready to pay back, which defeats the purpose of getting a loan in the first place); they'd have to seize whatever collateral was pledged by the borrower and try to sell it at firesale prices.

If banks really could pay back everyone then bank runs would never happen (as evidenced by the 2008 financial crisis, they still do).

So what if the lending activities of bank’s create inflation? Inflation is healthy if it is kept in check. An inflation rate of 2-3 percent is ideal. Would you rather deflation? That is what caused the Great Depression.

Our economy cannot handle deflation because banks lend with interest (if they didn't then deflation wouldn't be a problem). If the money supply shrinks, like during deflation, then borrowers would find it difficult to find the money they need to pay back their loans with interest, resulting in massive defaults and a non-functioning economy. If they actually COULD pay back all their loans then deflation wouldn't be an issue since there would be enough money for everyone and so no one has to default. It's the very nature of our financial system that makes inflation "healthy". Basically, our economy is like a train that can never stop, and in fact must go faster and faster in order to be functional at all.
Joined: 12/4/2011
Msg: 43 (view)
Banks and the financial system
Posted: 2/18/2014 6:50:37 PM

a) the bank would never be allowed to lend out 100% of its reserves

Eh? Banks cannot lend out their reserves (the reserve cash is NEVER part of the money supply). It's only the bank-created IOU that expands the money supply when they create a loan.

b) people do not withdraw 100% of their deposits and then do not put them back on deposit anywhere.

Yes, banks depend on people depositing their money at the bank. The entire financial system depends on only a tiny fraction of people redeeming their IOUs.

In your model the bank (entity number 6) is bankrupt the minute it divvies up all it's reserves

Yes, the bank can never make good on all of their promises to depositors. They are technically bankrupt the instant that they create a loan.

Consider this. If you owe $100 to ten people, yet only have $100 in total cash and assets, then what does that make you?

Secondly, you are expected to do something with that cash to create more cash for yourself in order to pay back the whole.

No, you are expected to create wealth, not create cash (as you know, counterfeiting is illegal ;) )

In your fictional fixed economy, say we have been given 5kg of gold bullion where in this reality there is only 5kg in existence and I melt this down to create five 1kg coins. Then lend out these coins with the expectation of getting back 5.5kg of gold when there is only 5kg in existence, is ludicrous! That isn't an economic model of any kind, certainly doesn't represent a fiat fractional reserve model which you are comparing it to.

Do you seriously not remember what happened with gold? They devalued the currency by mixing it with other metals.

Mixing gold with other metals is the equivalent of creating new fiat money today (whether that money is cash or credit). Banks demand more money from borrowers than that which exists in the economy. What keeps the system going is that banks do not demand all their loan money at once, and they keep creating new loans, thus injecting more credit money into the economy. The cost is that the ever-growing money supply makes inflation inevitable, decreasing the value of everyone's money. Whether it's with gold or fiat money, the end result is the same: inflation.
Joined: 12/4/2011
Msg: 41 (view)
Banks and the financial system
Posted: 2/17/2014 5:53:07 PM

Your example doesn’t make any sense. Why would a bank lend out $5000 if that was the total money supply at the time? How would the bank create more loans, if they don’t have any left to lend? Because their balance sheet would say $0. So in your example where does the original $5000 go? Does it get spent and redeposited in the bank.? Where is it going to get spent?

You misunderstand. The $5000 that comprises the total money supply was created by the bank when it issued the loans. Although this "money" is essentially an IOU, it increases the money supply.

That would be you mixing things up. Here is a simple example you might be able to get your head around.

Assume that the liquidity requirement of bank’s is 10% $100 is deposited. The bank then lends $90. That $90 gets spent. The shopkeeper then deposits $90 into his bank. That bank then lends $81. That $81 gets spent and gets deposited into the bank. Then $72.90 gets lent and spent and so on. This continues until there is nothing left to deposit and lend out.

That is how banks create wealth in the economy by lending money.

Again, from Wikipedia:

The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money

Basically, when a bank makes a loan they increase the total money supply by the same amount. By doing this, banks can duplicate money many times over. Of course this checkbook money is not actual physical cash (nothing is printed or stamped), but it works the same way so is counted the same.

I've been pondering this today, and I suddenly realized that I and others have been using some misleading terminology here.

Banks do NOT "create money." Ever. Yes, they will give you a loan for more than they have in the vault. But that is not in any way, and act of "creating" money. What they do is, they provide the assurance that the money you borrow and spend, is backed by their deep pockets. They are giving YOU some of their anticipated earnings now, and in exchange, you will give them some of YOUR future earnings later.

Perhaps it is a difference in terminology, but I would say that they actually DO create money - they just don't create cash.

As Wiki puts it:

At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money...

Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans ... As this process continues, more commercial bank money is created... When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400

When banks lend money they create an IOU (or checkbook/commercial bank money) into the depositor's bank account. This IOU is a promise to pay money and the cash for this IOU doesn't actually exist (if it did, they wouldn't need to give you a promise). However, this IOU can be redeemed for government-printed money, can be used to buy goods and services, can be used to pay bills and taxes, and increases the money supply. For all intents and purposes, it IS money. It behaves and can be used exactly like hard, physical currency (the only difference is that it exists digitally on a bank's computer).

Of course you may think an IOU does not constitutes actual money, and for most IOUs that's true (if I promise to give you $50 in the future, you cannot use that to buy groceries today). However, the bank's IOUs CAN be treated like real money, and we use it as such every day (when I pay my credit card bill, I transfer the IOU from my deposit account to my credit card, and it's accepted as payment). Similarly, if someone owes you money then they can pay you using the IOU in their bank account (e.g., a cheque) instead of cash.

The reason they can lend more than they have, is because they have more than one customer. It wouldn't work if there was only one bank, and only one customer. They'd only be able to lend you as much as they had on hand, if that was the case.

I don't see why multiple customers would be needed. Under the fractional reserve system, the bank can lend and re-lend to the same customer at the same time (they just have to set up a different account for each new loan). Of course this is highly impractical and there is no reason why anyone would do this, but I don't see why it couldn't be done.

The reason they have to do so sometimes, is that there are times when a lot of people start hoarding cash for some reason. There has to be enough cash in the system for people to buy things, so if savings are TOO high, the government can only get things moving by printing more.

I would say the government prints money only to make sure that people can redeem the IOUs in their bank accounts when they want to. Of course both they, and the banks, are hoping that most people will keep their money in the bank so they don't have to print a lot of new cash.
Joined: 12/4/2011
Msg: 46 (view)
Posted: 2/17/2014 6:24:32 AM

Has no one seen a t.v. show about a brotherhood of hunky male prostitutes? No misfortune there, or unhappiness. And makes you wonder who's taking advantage of who. Don't think that applies to female prostitutes? Better think again. Might be a case of gender-blindness...Being blind to how women really are just because they're women.

I think it has to do with the general attitude people have between men and women when it comes to sex. When a man has sex with a lot of women he's seen as a stud, a go-getter, a winner (at least when they do so outside of marriage :p). Women also go chasing after them for such reasons. On the other hand, if a woman has sex with a lot of men she's seen as a slut and a whore, as dirty, a loser. Men tend to stay away from such women. It seems like in the sex industry, gender discrimination still dominates.
Joined: 12/4/2011
Msg: 35 (view)
Banks and the financial system
Posted: 2/17/2014 6:09:14 AM

Governments may be the biggest customer for spending but the overall population is much larger and it is consumer confidence in their own spending that actually drives the economy ... the downfalls are pretty much always people stopping their spending out of fear. due to whatever. ... the actual collapse in 2008 was driven by fear and people pulling their money out of the economy ... so much of it too late to do anything but speed the downfall and guarantee their own losses.

Part of it is fear, but part of it is lack of spending power. Earnings have stagnated over time, to the point where even two people working full-time jobs often times isn't enough (previously, a single breadwinner could earn all that his family needed). Although some jobs have come back, those jobs are lower-paying jobs than the ones that existed before. I think that a concentration of wealth at the top is hurting the situation; the rich tend to store most of their money away (often times in tax havens or invested overseas where they can get a bigger return) while the lower- and middle-class tend to spend most of their money.

The situation is somewhat different up here in Canada. We don't have lack of spending, but the exact opposite. Fueled by low interest rates, our debt to income ratio is now sitting at a worrying 163.7% and there are no signs that it's slowing down. Mortgages are the major factor in this, and getting a loan on a house is still extremely cheap due to the low interest rates (the Bank of Canada is keeping it's rate at 1%, as it fears the economy is still too fragile). As always, people flock to cheap credit, and I feel that Canadians are becoming more exposed to financial shocks.

the bail out was only needed because people in general were not willing to do the required spending. Our economy rests on the fickle attitude of the fund managers more than the government.

Actually, the bailout was to inject money into the banks to offset their liabilities and keep them afloat (originally it was supposed to buy toxic assets from the banks but that was scrapped as impracticable). No amount of consumer spending could have done that. You're also getting the correlation backwards - it's the banks that refused to extend credit to businesses and consumers, resulting in layoffs and cutbacks that make it difficult for people to spend.

Banks used to be just banks and held and borrowed money but now they sell insurance and promote stocks and have major conflicts of interest ... if the government had any balls they would force the banks to be just banks again. And for them to settle for the pretty much guaranteed profits that are respectable but not exponential like they presently strive to have by any means possible.

There used to be walls between these things (now they're mostly Chinese walls). And yes, banking should be a boring business. It's the rise of the shadow-banking industry that really tipped the balance though. They were making so much money trading and selling their mortgage-backed securities that it was difficult to stop, and it infected the entire financial system. The only thing that saved Canada's banks from sharing the fate of American and European banks is that there were regulations that prevented taking on such risk.
Joined: 12/4/2011
Msg: 34 (view)
Banks and the financial system
Posted: 2/16/2014 9:05:35 PM

That's because it has never been the cost of money, that causes or prevents by itself, the expansion of an economy. What makes an economy expand, is lots of people buying things. Making loans cheaper only helps, if the problem is lots of customers, but insufficient production. Your misunderstanding of this is identical to the Republicans' misunderstanding (intentional or not) that leads them to (pretend to?) believe in "Supply Side Economics."

Right now still, there are tons of businesses who have a lot more cash on hand than they did in 2008, some even more cash on hand than they did BEFORE 2008. But they STILL aren't expanding and hiring, for the simple reason that there are still no CUSTOMERS.

Yes, spending is the main issue in the current economy. As many Keynesian economists have said, what needs to be done right now is for the government to increase spending to get the economy going again, since they are the largest customer.

Not only are banks under no obligation to print new money, they are legally prohibited from doing so. Again, you are mixing up Wealth, and Money, and Cash. There are three different things here. The Federal Government is the only body that can print money.

Who said anything about physically printing money? As explained before, banks create checkbook money (which has to be treated the same as Federal Reserve Notes) by issuing loans. This bank-issued loan money is basically the only thing I'm talking about here since it's the issue at hand (why you're referring to physical cash is beyond me). The wealth element is also something that you brought up (it had nothing to do with my example, which was a straight-forward math analysis about the problem with the money supply). Who's the one that's mixing things up here?

Additional wealth has nothing to do with the value of money. If you plant seeds and for some reason, twice as much grows as normally does, the price of it isn't required to go down. If available cash had anything to do with Wealth, then no one would ever bother to increase production. The reason why prices for something SOMETIMES fall when production increases, AND the cost of production per unit remains the same, is only because the desire to BUY the items falls.

Lots of factors can affect the price of specially-made goods in the short-term, but over the long run, the supply of money will cause prices to rise (the threat of runaway inflation is one of the reasons why the Federal Reserve exists - price stability is one of its mandates). Note that the price of volatile items is typically not included in the index when calculating inflation (usually only commodities are, since their price remains relatively stable, and is thus a good barometer of the money supply).
Joined: 12/4/2011
Msg: 31 (view)
Banks and the financial system
Posted: 2/16/2014 3:00:29 PM

Demigod, if you're going to talk sustainability, virtually nothing we have now is sustainable on its present trajectory. Eventually, the trajectory will have to be altered. In the case of money, it's value will eventually have to be reset to a different position in order to maintain its viability.

I think with the current system the way it is, it's difficult to predict or control the supply of money. We saw this when the 2008 financial crisis hit - the Fed lowered rates all the way to zero and it still didn't revive lending. The herd mentality of the "business cycle" makes guarantees that any upturn/downturn will be accelerated, leading to periods of boom and bust. As for the currency, I'd prefer to have one that remains stable, but that would mean lending without interest (not going to happen with private banks) or having the government control the money supply (also not going to happen with our current economic models).

There is another place, unless you are sticking with a theoretical model economy, limited to $5 k. If you are, then nothing I said is meaningful. I thought we were talking about an actual economy, such as the one in the US.

You seemed to have missed the point of my example, which was about the viability of paying back loans at a specific point in time (not over time, which seems to be what you're referring to). The $5k amount is not a limit, it was just the total amount of money in the money supply at that time (after the banks had made those five loans). As they create more loans, or retire old ones, the money supply will grow or shrink, but that's not important to the discussion. The point is, the amount owed will always exceed the amount that exists. If the bank issues more loans to account for more wealth, those loans will also have interest charges attached to them, which can only be paid off with even more loans. Under the current system, we will never have a scenario where assets = liabilities.

If you are talking about an ACTUAL economy, the additional money can be printed (or created virtually as required) as the additional WEALTH (i.e. actual goods and services) is created.

Additional wealth would increase the value of existing money, not create it. Also, banks are under no obligation to automatically create new money to account for new wealth (e.g., in a recession/depression they will hold off on the creation of new loans, no matter the wealth that exists in the economy). Of course most of the time there is plenty of money in the money supply relative to goods and services, it's just that you should be aware that that money is part of an ever-growing debt pool which may, at any time, collapse (you can only swap credit card balances for so long).
Joined: 12/4/2011
Msg: 25 (view)
Banks and the financial system
Posted: 2/16/2014 11:15:44 AM

I told you. He gets both the money to repay the principle, AND the money to pay the interest, by selling his labor created "wealth." In the case of the farmer, he sells his crops, and uses the profits to pay the bank, and to care for his family.

And where does this money come from? There's only one place, the general money supply. And where does that come from? The vast majority comes from the principal of loans. Once again, if there is only $5000 in the money supply, yet borrowers need to pay back a total of $5500 then it is mathematically impossible for everyone to pay off their debts (you seem to be consistently missing this very basic point). The only way to avoid a default is to put more money into the money supply, which means creating more loans, but of course that just makes the debt hole bigger, necessitating even more loans.

It should be fairly obvious that paying a loan with the principal of another loan is the equivalent of paying one credit card bill with another credit card. Sure you can make your payments every month (at least for a while), but you have to add more and more debt to do so, with more and more interest to pay. Is this sustainable? Absolutely not. Eventually, it's going to collapse.

Yes there isn't enough base money to pay people off but that's the whole point of fractional reserve. Banks don't call all their debt in at the same time. This would cause a run on the bank and the whole system would crash.

None of this money is real (has no real value) it never really leaves the bank. The bank borrows $100 it can now lend $1000 on its tier 1 ratio. Joe takes his $1000 dollars and invests it (which ends up back in the bank which they can then lend out $10000 to other customers which ends up back in the bank...) over the 5 years Joe's investment has doubled, he now has $2000 dollars after repaying the principle plus interest, which is on deposit in the bank. The money is still in the system and has never left the system. Because the bank only has to hold 10%, they can lend out $20000 dollars to another customer... And so it goes on.

What the banks rely on is not everyone paying back or withdrawing all the money at the same time, there simply isn't enough, that's why it's a fractional system and fiat. Fiat money is based solely on faith.

See also


The duration gap measures how well matched are the timings of cash inflows (from assets) and cash outflows (from liabilities).

Yes, that's precisely how it works. In order for the banking system to work at all, people need to have faith in it (after all, banks don't need to create IOUs if they have the actual money itself). They require people taking on debt and leaving their money in their bank account most of the time.

In the US, the Glass-Steagall act should be re-instituted; this would be a good start!

Yup, that would be a great start. That would naturally force the big banks to break up, making those too-big-to-fail banks just a bit smaller. Of course the banks would never agree to this, since being too big to fail means that the government will be forced to bail them out.

Our economic system is so outdated and stupid. We are measuring the health of the economy based on the amount of paper or digital money we have -- which has no real value instead of the actual amount of REAL resources we have. The measure should be, how much trees do we have, how much land, how much water, how much manpower do we have, etc?

Not sure about the resource-based economy part, but there are many ways of gauging societies that do not rely on GDP. The US may have the highest GDP (at least for now, China is quickly catching up) but it is far lower than other industrialized countries on others.
Joined: 12/4/2011
Msg: 19 (view)
Banks and the financial system
Posted: 2/16/2014 6:19:13 AM

I get it! Thing is, it isn't that straight forward, just think what would happen if there was only $5000 in circulation in the American economy, the economy couldn't grow. Counter, if there is too much then you get inflation.

Google money supply m1 - m3 for your answer.

Do the math. With a 3% reserve, the total amount of base money only represent a tiny fraction of the total money in an economy. On the other hand, long-term debt like mortgages can have interest charges that far exceed the principal. Unless a whole lot of new base money is created (and NOT used as a basis for loans), there will always be a shortage.

You still appear to think that the problems come because of the interest not being created at the same time as the principle. You are ignoring the whole point of the transaction, which is WEALTH, and not MONEY creation.

The point of the loan, for the bank at least, is to make money by charging interest. Will they overlook a borrower defaulting on their loan because they created wealth? I don't think so. A default is a default. No matter what new product/service/wealth the unfortunate borrower creates, in the end the bank will declare him/her a defaulter and will take it away.

He then goes about growing his crops, raising his livestock, etc. His labors CREATE WEALTH. His efforts create wealth of greater value than the amount of money he borrowed, because a bushel of corn is worth more than a hand full of corn seeds. From that now much greater wealth, he repays his loan to the bank, AND pays the interest, AND uses what's left, to feed himself and his family.

You're missing the point. Where is he supposed to get the money from? How can he pay back his loan if the money he needs is not available in the money supply? The fact is, unless some new money is put into the system, it is impossible for him to meet his obligations to the bank.

Of course in normal times, a borrower will usually have no problem paying back their loans with interest, assuming they work hard and make a useful product/service. What keeps the system going is that new loans are always being created in sufficient amounts to allow previous borrowers to earn the interest they need not to default. However, the truth is that at no point will every borrower be able to do so, and during periods of economic decline a shortage of new loans will mean lots of borrowers will be forced to default, simply due to the shortage of money. This is what happened in the Great Depression - a severe cutback on new loans caused the money supply to drop dramatically, leading to a huge number of defaults (it's not wealth that decreased, but the supply of money). It also means that society, as a whole, needs to be permanently in debt in order for it to be prosperous.

And this is also why ideas like "returning to the gold standard" is ridiculous. In the days of gold-backed money, people STILL played the same greedy games, and pretended to have, or to expect to get, more gold than was actually likely to come out of the ground. It isn't what is used to back money that matters, it's whether real wealth is created or not.

Yes, that's a crucial advantage that fiat money has over gold. When money is needed, it can easily be created, either by the central bank pumping money into the economy or by banks issuing credit. Having control over your currency is also important (the PIIGS countries would be fine today if they could print their own money). As flexible as it is though, it's still difficult to get the economy going again after a financial crash. What I find interesting about the current scenario is that growth is anemic, even though politicians have urged the banks to extend lending and the Fed has pumped hundreds of billions of dollars into the economy. This excess money is also not causing any inflation, since it's not being circulated.
Joined: 12/4/2011
Msg: 15 (view)
Banks and the financial system
Posted: 2/15/2014 6:53:03 PM
Not trying to be difficult, but I still don't understand. I think that by "money creation" you are referring to the fact that loan institutions don't give anyone the ACTUAL wealth that they hold in their vaults, what they give instead is, essentially, a promise document which can be used in place of actual wealth, to buy things. Thus the equivalent of cash is "created," while the value it represents stays in the vault.

The interest which the loan institution expects to receive in return, is, of course, NOT handed to the people receiving the loan. It is not "created." In the loan institutions accounting (note I am NOT an accountant either), I believe that in some kinds of situations they are allowed to count the interest expected as an asset, even though it hasn't been created yet, while for other purposes, such as taxation, it doesn't count as being in existence until it is actually paid. Accounting is like that. Sometimes the "money" exists, and sometimes it doesn't, and everyone involved thinks this makes perfect sense.

The interest itself, is expected to be paid by the person getting the loan. They are expected to CREATE WEALTH in amounts sufficient to pay back the entire loan principle, plus the interest. The loan institution is NOT expected to create the interest wealth at all.

Are you perhaps thinking of the loan institutions who themselves borrow against, or use as purchasing power, the ANTICIPATED interest payments? If so, what is your concern about that common practice? It again relies upon the people who calculate the actual expected value of the anticipated interest payments, to do their job correctly, and not count bad investments. That all comes back to the decision by some greedy loan people, to over value loan applicants assets, and to make themselves rich from commissions for selling loans that are actually losses in disguise.

Okay, I'm going to try to explain this as clearly as I can, since it seems I've only been confusing you so far (sorry about that).

Here's an example of what I'm talking about. Let's start out with a blank economy, which has no loans yet and no money in the money supply. A bank is set up and the central bank infuses some base money into this bank. Five people then come to the bank looking for a loan of a thousand dollars each. The bank deems all them fit for a loan and creates an account for each person with a thousand dollars credited. The borrowers get to work and so now there is a total of $5000 in the money supply. Each person is then required to pay back their loan with 10% interest ($1000 + $100). My question is, will all five borrowers be able to pay back their loans? The answer is no, since the total amount owed by the borrowers is $5500 while there is only $5000 in the money supply. The difference is the interest, which was not created by the bank when it made the loans.

Hope this clears this up a bit.

Banks do loan out existing money. It is so simple I don’t understand your apparent confusion. Banks hold deposits and pay interest on the deposits. They lend that money out at a higher interest rate than they pay on their deposits. That is how they make a profit. How simple can it be? This is all regulated and they are not allowed to lend out more than the total of their deposits (in my country anyway).

Bank may have once operated as such, but they no longer do now. Under the fractional-reserve system, banks only have to hold a small portion of deposits and can lend the rest out, which becomes capital for more loans. The end result is that an initial amount of capital can result in a large amount of new debt money.

The Wikipedia article on fractional reserve banking ( does a pretty good job of describing the money creation process (go to the article itself to see the actual table):

The table below displays the relending model of how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $500 of commercial bank money (it is important to note that the 20% reserve rate used here is for ease of illustration, actual reserve requirements are usually a lot lower, for example around 3% in the USA and UK). Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.

The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank's accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial bank money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs.

With a more realistic reserve ratio (3%) that $100 can create more than $3000 of new money. Of course banks can't just do this willy-nilly (they need to balance the loan amount with an asset that the borrower pledges), but the fact is that when a bank makes a "loan" new money is created.
Joined: 12/4/2011
Msg: 11 (view)
Banks and the financial system
Posted: 2/15/2014 2:46:12 PM

I have no idea what you are referring to with that. Interest that doesn't exist? Interest on a loan, is essentially a fee that the loan institution charges the borrower for the service of loaning the money to them. Are you referring to the fact that the income from the loan repayments, including interest, is counted as revenue for the loan institution, regardless of how the borrowers managed to come up with their payments? Or what?

Sorry if I wasn't clear. What I mean is, the money creation process only creates the principal of the loan (it does not create the interest).

Gold has maintained value for thousands of years. However, throughout history, all fait money falls to its intrinsic value of zero and so will the dollar. Show me one fait currency not backed by gold or something with real value that has survived for 200 years and I will say that you can disagreed my statements.

What value? The $1300 it's worth now, the $1700 it was at the beginning of 2013 or the $800 it was in 2008? :p

If gold has value, it's purely aesthetic. Of course we're not the only animals who like shiny rocks and pebbles, but what actual value does it have? You can't eat gold, build a house with it, or use it for a tool or weapon. Plenty of other metals have far more utility than gold and other commodities have more intrinsic value (e.g., corn or rice, which can eat to stay alive).

As Igor stated before, money is a representation of wealth/value. It is a medium of exchange, which we use to buy real goods and services. Money itself has no value - what it buys does. IMO, the gold argument basically misses the point of money.
Joined: 12/4/2011
Msg: 7 (view)
Banks and the financial system
Posted: 2/15/2014 11:20:58 AM

That meant that suddenly NO ONE had any real wealth, which they could use to provide believable guarantees to vendors that they would ever receive real payment. The reason why the Government stepped in as they did, with BOTH major political parties support (until after the Dems got into power later, at which point the GOP started to lie, and pretended that they never had anything to do with emergency funding), was because they HAD learned from the Great Depression, that if all you do is wait for the dust to settle, that it will be a VERY long time before the economy naturally recovers.

Even still, it took a lot of scare in order for the government to respond positively. Remember that the first vote on the bailout bill failed, sending markets into a nosedive (I think the Dow dropped more than seven-hundred points that day). It was only afterwards that they responded favorably. Tim Geithner was also peppered with questions about his controversial PPIP initiative to buy the toxic assets from the banks.

The ironic thing is that neither the bailout bill nor the PPIP fully resolved the issue with the banks. The bailout money may have kept them solvent for a while longer, but the way the crisis was finally resolved was when the banks were allowed to use in-house valuations for their derivatives, as opposed to mark-to-market. In the end, it was all a numbers game - all they had to do was change the law to allow them to use their own numbers and presto, problem solved, and we've not heard of derivative problems since.

That is in fact what they used to do. The result of that practice, was that human beings needs expanded at a rate that vastly outstripped their ability to create new wealth, and a HUGE swath of permanently poor people was created. If we switch back to that, we will have a choice between massacring 75% of the existing population, AND limiting birthrates by law to match the rate of wealth production... or we will have to accept a return to the days when there were a very few very rich people at the top, a tiny few merchants in the middle, and a huge class of nearly starving peasants, locked in a state of continual poverty. This is, in fact, what some modern "conservatives" want to do, though they pretend that they simply want a return to "responsible banking," and claim that the natural consequences of such notions are not real.

I don't mean to go back to gold-based money - I prefer fiat money myself. I also have no problem with banks creating money by lending, just the part where they charge interest that doesn't exist. Of course banks do spend most of that interest money so it gets put back into the real economy, but it will never sum up entirely so the money supply must necessarily always grow.

You have that halfway backwards. If instead, you said that UNREGULATED, and SELF-BLINDED securitization led to the crisis, you would be much closer to correct. Securitization is identical to basic banking. If the insurance company fails to properly vet the people it is insuring, then they will be opening themselves to having to pay out more in claims, than they ever had in investments.

Derivatives markets were ignored, and unregulated. They grew up in the shadow of the Great Deregulation fad started by the GOP under Reagan, and so even when various people repeatedly warned that there was danger there, no one acted. BOTH political parties are to blame for repeatedly and purposely turning a blind eye to the growing danger.

If securitization processes had been set up RESPONSIBLY, then there would have been no problem, because the people insuring the shaky loans would have told those about to make them, that they would lose all their insurance if they proceeded. They did not, and so the biggest financials insurance companies all failed (Lehman Brothers, as well as the Government insurance systems).

Yes, you're right, lack of oversight and regulation were big factors in this mess (probably the main factor, along with cheap credit). I think there was a movement by Brooksley Born to try to regulate these derivatives (make sure they actually had capital backing them up) but was shut down savagely by Greenspan and his ilk.

As a person who's traded derivatives, I know they can often times be useful (I can't trade actual physical gold, so I traded gold derivatives instead). I think one of the most tragic things is how these mortgage-backed securities were rated as triple-A by the rating agencies. Although the agencies have stated that their ratings are just their own "opinions", they should have done their job better (but of course then they would have missed out on those fat payments offered by the banks).

If you're just going to stick with the same incorrect information you got from that spooky banking video making the rounds on Youtube, why would you start another thread? You've gotten the right answers already but you're not getting it.

Banks don't create money when they issue debt. People are not mandated to pay interest expenses with borrowed money. People can and often do create wealth. Inflation is organic and necessary.

The article is correct that the Fed is the only bank that is allowed to create money whole cloth. When other private banks create money they must do so on the basis of some asset that the borrower pledges. This would be fine in itself (once that loan is repaid the principal will be destroyed so it does not permanently increase the money supply), except the bank keeps the interest that it charges. In theory, and in practice, that same asset can be pledged over and over again for further loans, and each time there is an interest charge applied to it. Where do you think that interest money comes from?
Joined: 12/4/2011
Msg: 4 (view)
Banks and the financial system
Posted: 2/15/2014 7:55:38 AM

I'm not sure what you are driving at here? Actual physical money? We used to make actual physical money (silver coins) set on the gold standard but it is unwealdy. The fiat monetary system is much better in a crisis. Don't forget a bank has two main purposes, deposit and lending. It only has to keep a certain percentage called the capital tier ratio in case there is a run on the bank, the rest is lent out, this is how banks make money.

Sorry, should have been clearer. My point was, if banks loaned out existing money (along with existing interest) then there would be no problem. Existing money would circulate around the economy, facilitating trade, and only being created or destroyed as needed for the reasons of price stability. Instead, banks create brand new money whenever they make a "loan" and then have borrowers extract the interest out of other people's loans, which the banks have to continually create. It certainly creates a competitive market, but it also ensures that someone will always default, no matter how hard they work or what they produce. It also means that inflation is unavoidable, which devalues everyone's money.

This is called monetizing the debt. Just printing money devalues the currency because more people have more money to spend on goods, goods therefore go up... See Germany's problems after the war or Zimbabwe . If the government borrows and has the tax payer pay back the interest, the burden is spread and avoids hyperinflation.

Inflation only happens when there is more money relative to goods and services. If the government created new money for the purposes of expanding the economy and increasing trade (e.g., building roads and other infrastructure) then it would cause little to no inflation (and if it DID cause inflation then money can easily be taxed and taken out of circulation). Currently, the central banks are tasked with maintaining price stability, although they can only do so indirectly, and look to maintain at least a positive inflation rate.

The main problem with the government borrowing from private banks is that a large chunk of our taxes go towards servicing the national debt, which means we get less value for our money. In other words, we would be able to buy a lot more government services with our taxes if this wasn't the case.

What went wrong most recently, was that loan originators were making loans against wealth that never existed to begin with, and was therefore never attainable. Speculation that real estate would increase in value all on its own, with nothing else at all happening in the economy, which it does not do.

That's certainly a part of it, but I think it should be recognized that the reason they made such loans, and made them so widely, is due to securitization. By taking mortgages off the balance sheets of the mortgage originators it reduced their risk, increasing their willingness to make risky loans. The demand for these securitized products also increased demand for mortgages in ways that would normally not happen, and the demand for these products encouraged the investment banks to take on more and more leverage.

Subprime mortgages going bad, in itself, wouldn't cause the kind of crisis that happened in 2008 (there might be a mild recession, but that would be it). Securitization was what made it a crisis.

The idea of increasing the fraction of cash they are required to keep on hand at all times to support their loans, is that this will put a limit on how much imaginary (i.e. future) money they can hand out in loans, thereby reducing overall risk.

Yes, I think that was one of the main elements of the crisis. At the height of the credit boom investment banks like Lehman Brothers had a leverage ratio of something like 1:44. The thing is, those banks requested such increases and were able to get it. How do we prevent those banks from being able to take such risks in the future?

Deflation can be good in the sense you become more competitive in the world market. Because your goods are becoming cheaper to produce, overseas buyers see them as better value so you start generating wealth.

International trade depends more on currency appreciation/depreciation, not inflation/deflation (e.g., think about China and their currency manipulation).

You make it sound like inflation is a bad thing, don't forget your wages go up in line with inflation (that's what drives inflation) so 1 unit buys you a loaf of bread, next year your wages go up to 2 units but so does the price of bread. So you are no better off. If your wages do not go up, the loaf of bread cannot either. Eventually you either knock off a zero and reprint so a 100 unit currency becomes a 10 unit currency or like we have done in the uk, lose the lower end denominations.

Although there is a general expectations that employers will give raises in line with inflation, there is no actual obligation - my previous company gave out 1% raises, which meant I was losing money during that time (one of the reasons why I quit). Central banks target a 2% inflation rate - they do this to make sure there is enough money in the economy for previous borrowers to service their debts, while at the same time making sure that the depreciation in value won't break people's wallets (it has nothing to do with wages).
Joined: 12/4/2011
Msg: 2 (view)
Banks and the financial system
Posted: 2/14/2014 7:19:53 PM
Yes, see comparisons to gold standard and great depression and why we do not use it.

Okay, how about a system where money is not created as debt? That is, a system where actual physical money would be created, instead of debt money that has to be continually created and destroyed.

Speaking of which, why is it that governments around the world take out loans from private banks (i.e., the Federal Reserve) when they can print all the debt-free money they want?

No, see the problems Japan has been facing with deflation over the last 20 years.

But that's the issue. With our current monetary system, there must be inflation in order for the economy to be prosperous; deflation or stagnation equals a sinking economy. Why is prosperity in our current economy incompatible with deflation?

Banks are now bigger than they were post crisis, if in the case of Iceland, you may not get a choice and the problem to big for the 'lender of last resort'. Protecting the economy is far more important than the bank so letting the bank go into receivership may be the only option next time.

Ah yes, I actually wished that the US government temporarily nationalized the big banks, who pretty much got away scott-free. You know, I found it ironic that Obama severely chastised the big three auto makers (one of the main victims of the credit crunch) while saying nothing about the big banks that got them into that mess in the first place (the main villains). Not that the big three had good businesses, but their fall came about primarily because of the economic shock produced by the financial crisis. I mean, during the Great Depression at least some people went to jail for their crimes (e.g., Richard Whitney). This time, no one did (aside from Madoff, but that was a different matter).

See Iceland's crisis recovery to understand why this statement isn't necessarily true.

Iceland's economy is relatively small though; what works for one country may not apply to the rest of the world (just like being debt-free is healthy for an individual while it's disastrous for the economy as a whole). Remember that the breaking point of the crisis came when AIG became a problem, which threatened to bring down large sections of the economy (viable large-scale businesses also became threatened with lack of credit, which they need to do business at all). The government had bet that the crisis from the fall of Lehmans could be contained but they were proven disastrous wrong when more than a trillion dollars of value was wiped out from the stock market the day after (as an institution trader, I watched as the value of my stocks, and the market as a whole, fell in ways that I had never seen before), and the safest financial assets were shown to be risky (it got so bad that the interest rate on short-term US debt actually became negative! Imagine that!).
Joined: 12/4/2011
Msg: 1 (view)
Banks and the financial system
Posted: 2/14/2014 5:29:03 PM
This thread is in response to the prostitution thread, which led to a side-discussion on the banking system. I want to discuss, in detail, how the current system works, what its implications are, and what we can do about it.

(Of course this is primarily for OMG!WTF! but anyone else can contribute as well)

So to start off, under the fractional-reserve banking system money is created by banks as interest-bearing debt. The banks create the principal of the loan, but not the interest, but demand principal + interest as "repayment". There is only one place where the interest can come from, and that's the general money supply (namely, the principal of other people's loans). Of course it's mathematically impossible for everyone to pay back their loans since there is not enough money in the money supply to do so, no matter what how hard they work (SOMEONE will default, simply because of the arithmetic). Of course it MIGHT be possible if the banks spent every single cent of interest that they earn back into the general economy, but of course there is no obligation (and in real life, they don't). Thus, the money supply must continually increase in order for current borrowers to avoid defaulting on their loans, resulting in an ever-growing money supply. And unless goods and services increase at the same rate, this will cause inflation, which is in modern times is targeted at around 2% a year (note that this grows exponentially, since it's 2% of the previous year's figure).

My question is, is this a superior money system compared to, say, one with a fixed money supply (e.g., actual physical money or equivalent) or one where money is created as value (this would be spending by government or banks that create things of value)? Is the current system the only one that can exist? Is permanent inflation unavoidable?

A second sub-topic I had in mind has to do with bank failures and their consequences. In the 2008 financial crisis the banks were bailed out by the government in order to save the financial system. This was done to avoid a complete meltdown of the financial system and the system of credit that fuels our economy (and most of us today who have jobs can be thankful for those actions). The problem is, there is no guarantee that the banks won't take such risks again, and what the tab will be next time. I've often times thought that the government should have temporarily nationalized the troubled banks or forced the bondholders of the bank to take a haircut (if even a fraction of bonds were converted to equity then a bailout might not have been necessary). Of course in the end, the crisis was resolved by changing an accounting rule, and the banks have long since paid back the bailout money.

My question for this is, what should be do about bank failures in the future? Should they be bailed out like before, allowed to go bankrupt or be nationalized?
Joined: 12/4/2011
Msg: 35 (view)
Posted: 2/14/2014 4:43:49 PM

Yes. For the third time, that is exactly what I'm saying. But I'm not the only one saying that. From the UN...

I was just confirming that human trafficking has no part in this thread, since this thread is about prostitution. From now on, I'll consider it as such.

I know exactly how the monetary system works as well as the banking and lending industry. You're going on about how banks make it impossible to pay back loans because they charge principle and interest. You're so far gone you would need another thread for me to sort this out for you. You've learned one thing about fractional reserve banking and have applied it way beyond what it truly means. Prime is 1% right now. Retail lending rates are a margin above that. People use money to create real wealth everyday. It's actually a very fair and robust system as evidenced by our standard of living. The victims of the system are victims because of their own choices and stupidity.

Yup, a new thread is needed to hash this out. I'll start one soon.
Joined: 12/4/2011
Msg: 32 (view)
Posted: 2/14/2014 12:24:18 PM

You don't understand!
(*)In truth nobody gives a crap about the well-being (and grievances) of a prostitute. The real reason why anyone (politicians) would consider legalizing prostitution is for the TAX revenues (like the gaming industry; who really cares about the compulsive gambler?). The money is the main impetus, everything else is but a pretext!

In the early twentieth century nobody cared about the health and safety of meatpacking workers. When people finally took this problem seriously they eventually turned these jobs into one of the safest and well-paid jobs in America. Of course things didn't stay that way forever, but the point is that real, positive change can happen when you try. Those who want to legalize wish to try to make things better, whereas those who want to keep it illegal are basically saying that the situation is hopeless.

In the US, you cannot prevent a company from moving "off shore", and abiding by the practices of the gov't underwhich they've been granted a license to manufacture their products. Unless there are gross human rights violations, all that can be done is to boycott the company & its product.

I don't see a single reason why such legislation cannot be enacted (as far as I can see, it does not violate any part of the Constitution). As I explained before, even if the executives of these companies want to stop using sweatshop labor they cannot do so, for fear or losing their competitive edge with other companies (e.g., Motorola proudly declares that their products are made with U.S labor, but their profits are nothing compared to Apple, who uses cheap Chinese labor - in the marketplace, guess who wins?). Of couse you can boycott Apple products all you want, but why not enact legislation to level the playing field for everyone?

BTW, this latter point (as well as the financial industry talk) is off topic - I can take it to a separate thread if you want to discuss it further.
Joined: 12/4/2011
Msg: 30 (view)
Posted: 2/14/2014 5:45:09 AM

Prostitution is legal in Bulgaria yet that is a major source country for human trafficking. The major incentive is economic. If prostitution were legal everywhere, you would still have women being enslaved entirely for economic reasons. Making shirts is legal everywhere yet poor people are forced into labour they are not willing to do.

So you're saying human trafficking has little to do with prostitution itself and all to do with economics?

First off, nothing. People are trafficked into fully legal industries all the time. Second, even if your theory were correct, it would not matter because it is not reality. I'm not willing to legalize something that harms women with simply the hope that everyone else will too and then the problem will go away. That would make me what's know as a sucker.

Legalizing cannot do more harm than keeping it illegal (being illegal just means that the abuses that go on are out of the spotlight). With the former we can at least try to do something about the health and safety of prostitutes, whereas with the latter we actually cast them as criminals themselves. The latter is clearly the one that does most harm to women.

Really? Bankers show up at your happily rented home and drag you in, force you to sign a mortgage and then beat money out of you? Good lord people have a confused notion of money.

I'm guessing by this comment that you have no idea how the financial industry actually works. In case you didn't know, almost our entire money system is debt-based money, created by the banks as credit. Even that rent money is, more often than not, money that was created by someone taking out a loan, with the requirement to pay it back with interest that doesn't exist. Without bank credit there would be no money in the economy (physical currency makes up a tiny sliver of the total money in circulation), thus our entire society and its prosperity is dependent on banks creating loans that often times put people into debt for the rest of their lives.

What, were you under the illusion that if you rent then you're not subject to debt-based money?

Actually a thriving economy is the best way to deal with know, like where banks lend money to people who invest and create wealth. Not too many sweatshops in rich countries.

Hmm, really? China is the world's second largest economy today, yet Chinese workers are still employed to make cheap American goods. Furthermore, companies will always find the cheapest source of labor. If the wealth and standards of a poor country goes up, then they will move production to a poorer country. Companies need to maximize profits for their shareholders so they have an obligation to find the cheapest source of labor anywhere in the world.
Joined: 12/4/2011
Msg: 25 (view)
Posted: 2/13/2014 7:39:18 PM

That's not true at all. Most of the source countries for trafficked women have zero enforcement for prostitution laws anyway simply because they have no economy. The Ukraine is a major source of trafficked women. Prostitution is entirely illegal there and they have over 50k prostitutes. It is a destination for sex tourists now. It's like their major industry. Yet these women always go to more economically viable countries if at all possible. If that country happens to have legalized prostitution then that's even better.

I outlined the logic if the situation quite clearly (and I don't see a rebuttal in this paragraph). It's safer to have prostitutes work in countries where prostitution is legal, thus there is a natural incentive for shipping these (often poor) women to these countries.

Once again, what would happen if prostitution was legal in most countries?

Actually the opposite is least in real life. Amsterdam has been totally unable to control the criminal element in their brothels, have admitted as much, and have closed a full 2/3's of them since they became legal in 2000. It's not just human trafficking but also money laundering and drugs. They also add new laws all the time in an effort to control the ones they have left. It doesn't work.

When has prohibition ever been effective in eliminating a social problem? It's never worked with drugs, or alcohol so why would it work with prostitution? Furthermore, if laws are ineffective in regulating prostitution then new, more effective ones are needed, and can be erected. On the other hand, simply making something illegal is throwing up your hands and giving up.

A couple reasons. First, you can't tell the difference between a trafficked sex trade worker and a legitimate one. In an industry of 40k women, where are you going to start? As well, barely a handful of the willing, legal women sign up to work legitimately anyway (17 in all of Germany). But a trafficked sex trade worker is never in a million years going to admit they have been taken advantage of and will never "blow the whistle" for fear of retribution against their family and/or fear of being hurt, being returned to the crud bucket place they came from, or being abandoned in a foreign country with no money, id etc. So there's one difference with the banking industry anyway. I don't think bankers kidnap their employees.

LOL, you're basically highlighting all the reasons why prostitution should be made legal! Legalization would give sex workers rights, and allow them access to the legal system to address their grievances.

And if you REALLY want to compare to the banking industry then let's compare, shall we?

Banks ensure that in order for the economy to function at all, the majority of people have to be in debt, often times for the rest of their lives. Almost everyone we know is heavily indebted to banks and almost everything we do relies on them heaping more debt onto us - auto loans, mortgages, credit cards, etc. Every society in the world today is literally bankrupt, all thanks to banks (banks create the principal of a loan, but force people to pay principal + interest so mathematically it's impossible for everyone to be debt-free). The nature of the banking system also creates inflation, which erodes the value of money, making it worth less and less over time. You'd think that with increased productivity our money would buy more, but instead it's the opposite (you work more and get less, all because of the way the banks create money). Oh and let's not forget payday loans, which specifically prey upon poor people with ludicrous interest rates for upfront cash.

The financial crisis of 2008 resulted in millions of people all around the world losing their jobs and their property. It's thrown people into abject poverty (which, if you recall, is one of the reasons why prostitutes do what they do) while the CEOs of these banks made multi-million dollar bonuses. Millions of shareholders and have lost their hard-earned money, many of them retirees, while the bondholders (mainly financial institutions and wealthy people) didn't lose a single cent. Will they ever go to jail for their crimes? Nope. Bank executives go on living in their penthouse suites while the rest of society struggles to pay ever-mounting debts.

So in short, banks force people to be slaves to debt for the rest of their lives, create loans under conditions which are impossible to meet unless they keep creating more and more money (resulting in permanent inflation, robbing from everyone), and make the rest of society pay when they make mistakes, depriving you of your job, home and property in the process.

And you really have to ask who is the bigger criminal?

An erroneous assumption, since most pple are not likely to be able to tell the difference between a sex slave and a willing participant. Sex slaves are often threatened (as well as their families) if they even as so much give a hint that they have been forced into the trade.

That does not address my point. What would happen to human trafficking for sex workers if prostitution was legal in most of the world?

because in this case you are dealing with human lives as the commodity in question.

It is the fact that these industries are illegal which make them into "commodities", as you call them. Once again, legalizing would give them rights and legal status in their workplace (like the rest of us who have legal jobs). IMO, this is a right that everyone should have.

The point is even under the best of circumstances (if you discount the infiltrating criminal element); you'll have forces (that operate within legal parameters) that will seek to "corner the (legal) market" and reduce or eliminate other lawful competition. This can be done the same way the banking industry does it, that is by gaining political influence.

Again, I don't see your point. This can happen with any industry so there is no reason for you to single out prostitution.

In this case, you would boycott the company involved, as we cannot legislate laws against over-seas child labor.

In Canada, we have laws against using foreign labor; it is only allowed if there are no Canadians available with the required skills (recently there was a big scandal with RBC, the biggest bank in Canada, when it was discovered they were going to be using overseas labor in place of existing Canadian jobs). I don't see why something similar cannot be enacted in the US or any other country. Legislation is one of the most effective method of dealing with things like sweatshop labor. Companies are hesitant to stop the practice since it would mean their competitors would have an immediate edge over them (it's a way of putting yourself out of business). On the other hand, if the government forced every company to comply then there is no risk (plus they can blame government if they miss their quarterly profits).

I'm talking about an idealized scenario where nothing is left up to chance, and all the variables are controlled.

So in other words, a perfect world. :p
Joined: 12/4/2011
Msg: 22 (view)
Posted: 2/12/2014 7:49:18 PM
For example, in Germany, where prostitution was legalized a decade ago, human trafficking crimes have increased 70 per cent, and much of this involves youth. In the Netherlands, which legalized in 2000, it is estimated that child prostitution increased by more than 300 per cent between 1996 and 2001

Legalized prostitution will naturally draw in those people who wish to engage in human trafficking. After all, why have your prostitutes work illegally when they can be shipped off to a country where they can work legally? You referenced Germany, but many of the prostitutes who are brought there come from eastern Europe, where prostitution is illegal (probably mostly from poor countries or cities). Most instances of human trafficking are also from Asia, where there is virtually no legalized prostitution, and where living standards are often times poor.

The thing is, what if most countries in the world legalized prostitution? In such a case, human trafficking would practically cease (at least for sex workers). The point that you're making is not so much an argument against prostitution, but the effects of having it legal in some countries and illegal in others.

Correct, but some industries are easier to infiltrate than others; these are the ones most vulnerable.

Food industries are often regulated by the same people who work in those industries (e.g., food safety regulators often times come from the food industry or vice versa), banks have infiltrated the halls of government, creating favorable loopholes and conditions for themselves, and corporations own judges and/or getting them elected. Like I said, any industry is liable to corruption, especially if there's lots of money in it. Why would legalized prostitution be any different? Will there be corruption? Yes, of course. But, just like the banking industry, that's even more reason to legalize and regulate them. You don't make a dangerous business better by ignoring it, you take control of it as best you can (especially if people's health and lives are at risk).

As far as I know, Monopolies (or oligopolies, as you describe) are not illegal under the law (in most cases). I can imagine that if you legalize prostitution, "dark forces" will seek to monopolize this industry as well, which will further reduce choices for all involved.

Umm, I don't really see an argument here (what's your point?)

We are not only talking about corruption, we are talking about potential corruption that uses human lives as substrates here; can't you see that?

Would you ban the clothing industry because they use cheap child labor overseas? Or would you try to regulate and legislate to prevent such abuses? Again, you don't make a problem go away by just ignoring it. The fact is, prostitution is here, will probably always be here, and we'd better find ways of dealing with it in a realistic way.

Is it better to have it legal, yes; in a perfect world you would be right; but this is not the reality in the here and now!

LOL, in a perfect world there would be no prostitution, or it would never need to be regulated. If it was perfect world we wouldn't need to discuss such topics at all! Obviously, the reason we're even talking about this is because we are are NOT living in a perfect world. As with anything, we have to try to find the most optimal and most realistic solution possible.
Joined: 12/4/2011
Msg: 12 (view)
Posted: 2/10/2014 5:48:43 PM

What draws the criminal element into a given (legitimate)industry is the potential for it to be corrupted and to capture a certain sizeable percent of the "take"! Most of the Vegas brothels (if they still exist) have or had mob influence, and they are quite legal.


The notion that a lucrative industry such as prostitution can be "suitably regulated" and remain pristine free of corrupting forces here in the US, is not a reality. If it was, it would have been done long ago.

So any lucrative industry where you can have a "sizable percent of the take" draws criminals? Well then, almost any industry is subject to criminals, since monopolies can happen in any one of them (today, the entire meat industry is controlled by three or four companies). And if you want to talk about corruption then the financial industry would take the cake (the entire productive economy and it's wealth is held hostage by people who merely represent that wealth).

Of course no one imagines that legalizing prostitution would happen with absolutely no corruption (no industry has that), but it still has to better than having it illegal, where there is no regulation at all and prostitutes have no legal recourse available whatsoever. Given the choices, wouldn't legalization be the better alternative?
Joined: 12/4/2011
Msg: 1 (view)
Posted: 2/9/2014 6:44:20 PM
Hey guys,

The Supreme Court of Canada recently struck down anti-prostitution laws, and I thought it would be a good chance to get your thoughts on this subject. In your opinion, what is the best way to deal with prostitution, the "world's oldest profession"? Should it be criminalized or should it be legal? Which policies should we try to implement, and in what way?

For me, I think making/keeping prostitution illegal makes it far more dangerous than it needs to be. Although I deplore anyone who has to engage in such work, I think we should try to protect those who actually do it (after all, they are human beings too). In other words, the government shouldn't encourage prostitution, but they should make sure prostitutes, both males and females, are protected under the law while doing their trade.

(P.S., I know this subject is kind of taboo, and so I would like to ask that participants try to be as respectful as they can)
Joined: 12/4/2011
Msg: 10 (view)
My reflection on the portrayal of rationalists in (Hollywood) movies
Posted: 2/5/2014 8:01:33 PM
Thanks for everyone's comments. Yeah, it's not like I hate these films or anything (and maybe I've been watching the wrong type of movies :p), just commenting on what seemed like a common theme. It's just that I can well imagine someone being in such a situation in real life, and doing exactly the same thing that these skeptics would do. I mean, if you heard strange noises or encountered some strange phenomenon you wouldn't jump to the conclusion that there's a ghost or demon. We typically ignore such things or attribute it to some unknown cause. I guess these films are an exercise in make-belief more than anything.

Igor: I didn't know about previous films that glorified science. Thanks for the info.
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