Did I get all this right?

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nazgulnarsil posted on Tue, Dec 9 2008 4:44 AM

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Just curious if there are any gaps in my reasoning.  I made a topic title about the article posted on the mises blog: Bank reserves approach bank deposits.

nazgulnarsil Posted 12/8/2008 7:39:11 AM message detail	As of November 19, they had about $652 billion in reserves for about $700 billion in transactions deposits. we now have the opportunity to painlessly move over to a non-fraudulent 100% reserve banking system. will we take the opportunity? of course not. No one even realizes it's a problem. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 7:53:51 AM message detail	How could a bank pay out interest if they don't invest that money somehow? Hell, how could they even keep their doors open?
nazgulnarsil Posted 12/8/2008 8:13:48 AM message detail	gee i don't know. charge for their services? is it better that banks gamble with their clients money and then expect a gov. bailout when they lose? you wouldn't need to earn interest on your deposit if your buying power wasn't constantly going down. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 8:20:35 AM message detail	nazgulnarsil gee i don't know. charge for their services? is it better that banks gamble with their clients money and then expect a gov. bailout when they lose? you wouldn't need to earn interest on your deposit if your buying power wasn't constantly going down. You really think that a bank could survive if they did absolutely nothing with the money? Ok, lets just say that a bank charges a $20 annual fee on each account, and then hires a single person to run the physical bank location. The building cost them $100,000, which they pay as $1000 a month. They pay the teller $24k / year with no benefits (which is pretty crappy, IMHO), which works out to $2000 / month. Lets assume that heating and electricity are free. So, that $20 annual fee turns into them needing 1800 accounts active for the whole year, to be able to afford the building and single worker. 1800 accounts, managed by a single person. I don't think so.
nazgulnarsil Posted 12/8/2008 8:36:39 AM message detail	did you not read the first post. the numbers are approaching parity right now. and you think the $20 annual fee would be the majority of the money they took in? hell no, just like now the main source of revenue is interest on loans. fees on accounts is a small piece of the pie. If it wasn't possible to operate a bank with loan revenue how would small banks stay in business? --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 8:38:17 AM message detail	nazgulnarsil just like now the main source of revenue is interest on loans Which is an investment of deposits!!!
nazgulnarsil Posted 12/8/2008 8:39:21 AM message detail	no it isn't. you think banks lend you depositors money when they make you a loan? it's the piece of paper you sign that says you'll pay x amount that becomes the basis for the loan. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 8:44:12 AM message detail	nazgulnarsil no it isn't. you think banks lend you depositors money when they make you a loan? it's the piece of paper you sign that says you'll pay x amount that becomes the basis for the loan. Ok, so you're saying that when you go get a house loan from a bank, they don't actually need any money to do that? It doesn't cost them anything to buy a house for you to live in, and you just agree to give them money for the fun of it!?! I'll admit that I'm a novice at economics, and I don't fully understand how a bank works, but I do know that the basic model is: people deposit money, which the bank loans to other people, which makes the bank money, which they take a portion of to pay interest on deposits.
nazgulnarsil Posted 12/8/2008 8:56:51 AM message detail	banks do not loan deposits. http://en.wikipedia.org/wiki/Reserve_banking#Money_creation the piece of paper you sign has some value that is derived by taking the amount you are going to pay back (principal and interest) and subtracting some amount based on the risk of you defaulting, the period of the loan, and prevailing market conditions for loans (supply and demand for loans). --- The Founding Fathers never intended for poor people to live into their 40's.
nazgulnarsil Posted 12/8/2008 8:59:08 AM message detail	What i really hate is that stupid Money As Debt video making the rounds on the internet. It identifies that FRB is fraudulent but points to the wrong reason. The reason FRB banking is fraudulent is that it does maturity transformations instantaneously. In a society without FRB the market for long term loans wouldn't be artificially inflated by the fact that FRB treats FutureDollars as if they were NowDollars. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 9:05:00 AM message detail	So, you would rather the bank loan money from the government than use it's own deposits to make more money?
nazgulnarsil Posted 12/8/2008 9:08:03 AM message detail	you seem to be laboring under false presumption. "money" doesn't have to come from anywhere. Money is a symbolic representation of the value of goods and services. When you promise to pay a certain amount of money back to someone in exchange for something now (a car) you are promising some of your future production to this person. That promise is a form of money. --- The Founding Fathers never intended for poor people to live into their 40's.
BigRedRacer Posted 12/8/2008 9:13:31 AM message detail	so the dealer does not get the monetary value of the car? or the owner of the house does not get the value of their house? where does that money get created from? --- Wait...WHAT? That makes no sense at all.
nazgulnarsil Posted 12/8/2008 9:18:12 AM message detail	that's what is referred to as checkbook money in the wikipedia article. the bank simply writes it into the dealerships or homeowners account. the bank is allowed to do this on the basis of your promise to pay. if a large enough number of loans default the bank goes bankrupt. here's where the fraudulence comes into play. With a 100% reserve bank the money to cover the defaulted loans comes from the bank itself. The bank doesnt touch the reserves that its regular depositors made. It is therefore able to return everyone's money without government intervention. In fractional reserve banking the bank uses deposits as COLLATERAL on the risk of default. When a lot of loans default or there is a bank run the bank becomes insolvent and can not pay back its depositors. --- The Founding Fathers never intended for poor people to live into their 40's.
nazgulnarsil Posted 12/8/2008 9:20:23 AM message detail	^what this means is that under FRB there is a lot MORE lending going on with much looser standards, because they are lending against this giant pool of depositors money rather than just the banks own money as they would in a 100% reserve system. A 100% reserve bank could be independently run as a regular business. A FRB requires government regulation and support. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 9:48:39 AM message detail	nazgulnarsil you seem to be laboring under false presumption. "money" doesn't have to come from anywhere. Money is a symbolic representation of the value of goods and services. When you promise to pay a certain amount of money back to someone in exchange for something now (a car) you are promising some of your future production to this person. That promise is a form of money. Money still comes from somewhere. The bank still has to pay back the money that the government created to loan to the bank. I would imagine that even if the person that received the money could not pay it back, the bank would still have to pay back the government, which could potentially put them in a state where their deposits would come into jeopardy.
nazgulnarsil Posted 12/8/2008 9:50:42 AM message detail	I don't know where you're getting this "the gov loans banks money" bit from. Maybe the current bailout is warping your perception. what part of "the bank just writes the number into the guys account" do you not get? --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 10:10:18 AM message detail	I guess that I just don't get it. What's to stop me from opening my own bank when I want to go buy a house, and just writing that I have a million dollars in my account, and agree to pay a ten thousand dollars a month back to myself every month? Then I'll just tell the other bank that I'm buying from that I'm good for it, and they'll say that it's cool and give me a house that they technically own, even though they just did the same thing to some other bank, which technically owned it before them.
nazgulnarsil Posted 12/8/2008 10:23:47 AM message detail	You'd have -1 million on your books and you'd have to delete 10,000 from your account every month. paying back checkbook money destroys it. I don't blame you, FRB is a a huge web of bull **** that is hard to wade through. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 10:29:09 AM message detail	nazgulnarsil You'd have -1 million on your books and you'd have to delete 10,000 from your account every month. We'll I'd just say that my bank was still 1 million in the black. And I'd just pretend to delete the 10,000 from my account every month. It's all imaginary anyway, so I can do that.
nazgulnarsil Posted 12/8/2008 10:39:26 AM message detail	You would have had to sign a piece of paper saying you would pay the 10k a month back. You can't just falsify your accounting, the government would come and take that piece of paper and either hold you to it or seize your assets. You're forgetting how corporations work. You don't owe that money to yourself. You owe it to the imaginary person you created when you filed to become a corporation. That imaginary person is held accountable by the government. --- The Founding Fathers never intended for poor people to live into their 40's.
SnyperWolf Posted 12/8/2008 11:09:53 AM message detail	nazgulnarsil You would have had to sign a piece of paper saying you would pay the 10k a month back. You can't just falsify your accounting, the government would come and take that piece of paper and either hold you to it or seize your assets. You're forgetting how corporations work. You don't owe that money to yourself. You owe it to the imaginary person you created when you filed to become a corporation. That imaginary person is held accountable by the government. Wait, so if I do what everyone else is doing, I'll go to jail and they'll get bailouts? That seems a little inconsistent, even for the US government.
nazgulnarsil Posted 12/8/2008 11:10:50 AM message detail	yes. you don't have friends in high places. --- The Founding Fathers never intended for poor people to live into their 40's.
nazgulnarsil Posted 12/8/2008 11:12:49 AM message detail	That seems a little inconsistent, even for the US government. I highly suggest an overview in the time Greensapn spent at the federal reserve. If that doesn't destroy a person's faith in the current gov. i don't know what will. --- The Founding Fathers never intended for poor people to live into their 40's.
nazgulnarsil Posted 12/9/2008 2:34:08 AM message detail	Since no one got as far as defending FRB I'll do it myself. the first defense of FRB banking one can make is simple: Even if the bank doesn't keep all its deposits on hand it can still be solvent by virtue of the fact that the net worth of all its loans and investments is greater than net deposits. If the bank starts to lose money it can easily sell off some loans and investments at a discount, tighten its belt, and continue operating. Right? This actually works fine if this is the only bank doing FRB and other banks are 100% reserve. A problem arises when all banks are FRB and financially tied together as closely as the credit default swap market made them. The problem is that in aggregate the banks constituted a large proportion of all the loans on the market. When an economic downturn brought all the banks closer to insolvency they all tried to sell off some loans to regain their balance at the same time. You can imagine what this does to the demand curve for long term loans. The market went into free fall. This exacerbated the original problem, and now you have all the banks going insolvent at the same time. This is an unacceptable outcome. What led to FRB is a prisoners dilemma. FRB was advantageous for any one bank to do, but resulted in a negative outcome for everyone when everyone did it. --- The Founding Fathers never intended for poor people to live into their 40's.

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