Economics Questions

Re: Fractional Reserve Banking and my Community Credit Union

tveblen — Sat, 24 Jan 2009 15:52:02 GMT

Disclaimer: the following requires that enough people understand money to keep politicians and governments - and money - honest. So it is probably doomed, along with civilization and the human species.

In response to the Great Depression, Irving Fisher and a group of prominent US economists devised "The Chicago Plan" (CP). The CP requires all lenders to have a 100% reserve backing for their loans using fiat money created by the US government - perhaps in lieu of taxation. Fisher wrote a book about the CP, "100% Money", for the general public. (You may be able to get a copy from your local university through inter-library loan but it is out of print.) The idea is for the government to control the supply of money so that it is in proportion to what is required to circulate the real wealth of the economy - and NO more! No more Greenspan bubbles using cheap and easy money, no more wars using borrowed money, etc.

Fisher makes a convincing argument that normal flucuations in the business cycle are turned into economic catastrophes when the debt-based money supply collapses as bankers call in loans to meet reserve requirements. Our current collapse is apparently the product of capital NOT reserve requirements (which now have enough loopholes and evasions they are a joke). See articles by Ellen Brown on her web site http://webofdebt.com. I don't understand this stuff enough to consider capital requirements and so will only discuss Fisher's 100% reserve requirement.

The idea addresses the two largest problems with the Federal Reserve: 1-private parties creating the nation's money and walking off with the real wealth to which they can use that money to lay claim; 2-regulation of the money supply so there is a direct relationship between what the real economy requires and the amount of money in circulation.

Addressing this second problem is the whole purpose behind a gold standard. But from everything I've read, a return to the gold standard would not really solve the problem. The British master the art of gold-standard based fractional-reserve banking to the point where miniscule amounts of gold were required to preserve the fiction of a gold-back pound. It was only the combination of financial parasite-ism that destroyed the real British economy combined British imperial conflict culminating in WW 1 that blew the whole scheme apart. Add to this the fact that fractional-reserve banking and credit would never have come into existence if it didn't fill a need for more money than a gold-backed system could easily supply.

The point is - there is a unity of purpose behind backers of the gold standard and backers of a 100% reserve solution like Stephen Zarlenga of the American Monetary Institute - http://monetary.org. Just as government fiat money has the probably insuperable obstacle of enough public understanding of money to keep the system honest, devising a gold or commodity-backed money that will operate on 'automatic pilot' without this understanding is probably doomed from the outset.

Like the Mogambo says, we are doomed.

Re: Fractional Reserve Banking and my Community Credit Union

nazgulnarsil — Fri, 19 Dec 2008 18:38:46 GMT

I don't know about worldwide, but here a CD means certificate of deposit and is exactly what you describe: a certain amount of money you agree to leave alone for a set amount of time in exchange for a set amount of interest. you write and argue well for this being your second language. I have no aptitude for languages.

Re: Fractional Reserve Banking and my Community Credit Union

corpus delicti — Fri, 19 Dec 2008 18:34:54 GMT

Don't know if you have noticed, but I edited my initial reply to you to expres my apologies for writing in so harsh a tone.

nazgulnarsil:

corpus delicti:
By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency

I agree.

corpus delicti:
Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.

again, no problem with this, savings would be in the form of CD's.

corpus delicti:
FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite.

I agree. I'm talking about from the perspective of FRB supporters. I support free banking.

No worries then. You just got me worried initially

Actually I'm just learning too, so could you tell me what a CD is? Something to do with a Deposit I imagine? (sorry if it is a stupid question, but english isn't my primary language, nor is banking my primary field of interest)

nazgulnarsil:

corpus delicti:
You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say.

there's The Mystery of Banking, History of banking and currency in the U.S., and one other I can't remember. Which would you suggest?

The only book I have read about this subject is Mystery of Banking so perhaps that is not the best kind of recommendation

Re: Fractional Reserve Banking and my Community Credit Union

corpus delicti — Fri, 19 Dec 2008 18:15:27 GMT

tir38:

corpus delicti:
Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.

I'm unclear how this works

All I meant was that we must draw a distinction between demand deposits and time deposits. If you have a demand deposit you have the right to instantly redeem your deposit any time you want. With this right, however, it would be hard to receive any rate of interest. With a time deposit you forego your right to redemption for a set period of time. By foregoing this right you receive a corresponding rate of interest, e.g. 1 % interest if you forego your right 1 year, 2 % interest if you forego it 2 years etc. (all the numbers are just arbitrary).

Let us imagine A placing $10,000 in a bank. A's portfolio could look like this:

demand deposit: $2,000 @ 0% interest p.a. (monthly fee of $10)
time deposit #1: $4,000 @ 2% interest p.a. (locked for 2 years)
time deposit #2: $4,000 @ 5% interest p.a. (locked for 5 years)

In this case A can redeem $2,000 any time he wants, but will have to wait 2 years to redeem the next $4,000 and 5 years for the last $4,000. This way the bank is ensured that a bank run cannot happen. In effect, they can control their time-structure of assets to match the time-structure of their obligations. Thus they can remain solvent just like any other business.

A last note. Foregoing a right to redemption for a set period of time doesn't have to be an absolute right, i.e. you would of course be able to withdraw money placed in time deposits if you really needed to. There would just be a considerable fee to restrain you from doing so unless it was an emergency.

Re: Fractional Reserve Banking and my Community Credit Union

nazgulnarsil — Fri, 19 Dec 2008 17:42:27 GMT

corpus delicti:
By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency

I agree.

corpus delicti:
Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.

again, no problem with this, savings would be in the form of CD's.

corpus delicti:
FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite.

I agree. I'm talking about from the perspective of FRB supporters. I support free banking.

corpus delicti:
You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say.

there's The Mystery of Banking, History of banking and currency in the U.S., and one other I can't remember. Which would you suggest?

Re: Fractional Reserve Banking and my Community Credit Union

David Z — Fri, 19 Dec 2008 17:04:09 GMT

During that 6 months you'll probably pay them $5 per quarter in "maintenance fees". For the luxury of earning .17% interest.

I closed my brick & mortar savings account after I saw the first quarterly fee exceed interest paid.

Re: Fractional Reserve Banking and my Community Credit Union

tir38 — Fri, 19 Dec 2008 16:16:29 GMT

I agree that there are a lot of holes in nazgulnarsil's theory but could you expound on one point:

corpus delicti:
Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.

I'm unclear how this works

Re: Fractional Reserve Banking and my Community Credit Union

corpus delicti — Fri, 19 Dec 2008 09:53:59 GMT

EDIT: Having just reread my reply I realize it is too antagonistic. I truly am sorry about that nazgulnarsil! Hope you can read through the gall nevertheless.

nazgulnarsil:
The bank can still claim solvency because they can point to the aggregate value of all their investements and deposits and loans and say "if we sold some of this off we could easily pay our depositors back".

By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency today. Every other kind of business than banks must always manage their money stream. You do this by aligning the time structure of yours assets and obligations. Thus if you know you must pay down $100.000.000 within two years (short-term loan) you damn better have aligned your assets to be able to pay the full amount within two years. Now, the time structure of bank assets and obligations todey makes this impossible, because customers can demand their deposits instantly. Thus the bank assets can potentially be redeemed within 0+ days. Thus bank obligations ought to reflect this!

nazgulnarsil:
As for full reserve banking...A full reserve bank wouldn't be able to treat depositor money as if it were an asset to be borrowed against. Loans would have to be borrowed against the operating capital of the bank and its investors itself.

Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.

nazgulnarsil:
The benefit of FRB is that it frees up more capital to be used as loans, which stimulates the economy. And it works fine...as long as you can predict the future.

FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite. In regards to "stimulating the economy" your are missing the caveat "in the short run". In the long run we are all dead, remember? Hence your caveat about "predicting the future" strikes me as being quite hollow.

nazgulnarsil:
A full reserve bank could do well. But it would constantly be tempted to do something with all the depositor money sitting there. After all, if you had 10 million sitting in a vault that hadly fluctuated in overall size, wouldn't you be tempted to invest half of it at 5% and make 500k a year? You'd tell yoursel fit was alright since you could always cash out your invetments if a bunch of depositors came calling one day.

You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say.

Re: Fractional Reserve Banking and my Community Credit Union

nazgulnarsil — Thu, 18 Dec 2008 20:42:59 GMT

with FRB, money for loans doesn't come out of deposits. when the bank makes a loan, the legal document you sign stating you will pay X amount by Y date becomes the basis for the loan. The bank then types the amount into your account, the money doesn't come from anywhere. Now obviously a piece of paper saying you will pay $10,000 over the next 5 years isn't worth 10k right now. It is worth less than that based on the risk of default, the interest rate of the money supply (how much less is 10k worth in 5 years?), and the overall supply and demand of the loan market. So say that the piece of paper can sell for 8k right now. the 2k difference is a risk assumed by the bank. So each loan has a certain monetary risk associated with it. What does the bank use as collateral to back up this risk and stay solvent? depositor money. This wouldn't even be that bad if they kept all depositor money on hand, but they keep just enough on hand for short term operating capital and invest the rest. By leveraging this investment they can make loans based on a pool of money 10-20 times larger than what the bank actually has. The bank can still claim solvency because they can point to the aggregate value of all their investements and deposits and loans and say "if we sold some of this off we could easily pay our depositors back". This works fine as long as your predictions of the actual selling price of your assets is 100% correct. So our financial system works fine as long as you can predict the future. 0_o So what did we see in the current financial crisis? We saw writedowns, because no one was actually willing to buy at the prices that the banks had assigned to their assets. Going back to our example, the loan worth 8k now is suddenly only selling for 6k. an additional $2k has just dissapeared off the banks balance sheets. With all the banks trying to sell at once, the demand for long term loans bottomed out making every bank go insolvent at the same time.

Basically, FRB creates artificial demand for long term loans, because it treats them as if they had the majority of their value now. This is based on their theoretical value at sale time. But their real value fluctuates.

As for full reserve banking...A full reserve bank wouldn't be able to treat depositor money as if it were an asset to be borrowed against. Loans would have to be borrowed against the operating capital of the bank and its investors itself. Of course this reduces the supply of overall loans being made and thus drives up the price. The benefit of FRB is that it frees up more capital to be used as loans, which stimulates the economy. And it works fine...as long as you can predict the future. A full reserve bank could do well. But it would constantly be tempted to do something with all the depositor money sitting there. After all, if you had 10 million sitting in a vault that hadly fluctuated in overall size, wouldn't you be tempted to invest half of it at 5% and make 500k a year? You'd tell yoursel fit was alright since you could always cash out your invetments if a bunch of depositors came calling one day.

Re: Fractional Reserve Banking and my Community Credit Union

Schaden13 — Thu, 18 Dec 2008 19:26:21 GMT

ah, i see your point

idk if a bank does that though

Re: Fractional Reserve Banking and my Community Credit Union

tir38 — Thu, 18 Dec 2008 18:54:00 GMT

Schaden13,

Right, but if the fee was high enough then it would be profitable for them to do business.

On my checking account, it never gains interest. I don't want it to. I want to be able to do things that I normally do with a checking account: write checks, debit card, e-purchaces, etc. Basically, All I want is to pay extra money each month to guarantee that my checking account is on full reserve.

Re: Fractional Reserve Banking and my Community Credit Union

Schaden13 — Thu, 18 Dec 2008 00:27:52 GMT

tir38:

Attackdonkey,

Yes, in my savings account, I had to open it with $50 that was not refundable until the account was 6 months old. About my savingschecking account, I agree that a free checking account with only an FDIC guarantee is good for some people and obviously the bank. I however, would be willing to pay a monthly fee for the service of having the bank store my money for me (and not lend it out to anyone).

Surely there must be some bank somewhere that operates under this model. If the fee was high enough, the bank could still make money by simply acting as a vault.

if they dont lend it out, they make no profit (beside your monthly fee)

That means your deposit will gain no interest, so why not just buy a safe for your house or bury the money?

Re: Fractional Reserve Banking and my Community Credit Union

tir38 — Wed, 17 Dec 2008 23:04:10 GMT

Attackdonkey,

Yes, in my savings account, I had to open it with $50 that was not refundable until the account was 6 months old. About my savingschecking account, I agree that a free checking account with only an FDIC guarantee is good for some people and obviously the bank. I however, would be willing to pay a monthly fee for the service of having the bank store my money for me (and not lend it out to anyone).

Surely there must be some bank somewhere that operates under this model. If the fee was high enough, the bank could still make money by simply acting as a vault.

Re: Fractional Reserve Banking and my Community Credit Union

Attackdonkey — Wed, 17 Dec 2008 20:53:16 GMT

We need to acknowledge 2 diffferent types of accounts. 1. Savings. 2 checking.

The the FRB system that everyone here complains about is on the checking account side. it is to be expected that when you put your money into savings that you can't just take it out willy nilly, of course in more recent times this has become the case, but the idea is that a savings account is a CD that you save, or lend to the bank for so much intrest, they invest in "widgets R us" and and after the specified amount of time, you can get your money back, plus the interest it has earned.

The checking account on the other hand, is the one that the FRB system creates inflation, in this case there ought to be a fee charged by the bank in order to keep the money, just like at a grain silo or at a self storage center. you pay to leave your money in the "warehouse" and you can have access to it at any time. because its a checking account.

Think if it were a chair at a storage place, you place your chair in storage and want to be able to pick it up whenever you need it, but the storage company bets you wont be back for it any time soon, so they rent it out to "B." That is criminal and that is what the banks are doing.

I'd recommend reading The case against the Fed... and maybe what has the gov't done to our money. both by Murray Rothbard. I would put up a link to the audio, but it seems that part of the site is down.

Re: Fractional Reserve Banking and my Community Credit Union

corpus delicti — Wed, 17 Dec 2008 20:03:13 GMT

tir38:
First off, is there a good simple text which I could share with the bank heads about how FRB works and its benefits?

I'm going to tread carefully here because I don't want you to be ridiculed if you show up with a text that is not official. Now, I'm having difficulties finding out if what I'm about to suggest is infact official. Also, I haven't read it myself, so all manner of disclaimers apply here!

I watched Zeitgeist Addendum the other day. I must admit it seems a little too conspiracy-theory-like. It does, however, mention a booklet from The Federal Reserve Bank of Chicago titled Modern Money Mechanics (PDF, HTML). This might be what you are looking for.

Edward L Winston is fact-checking the Zeitgeist movies and he actually emailed the The Federal Reserve Bank of Chicago about this booklet. The answer he got back was:

From: Information.CHI@chi.frb.org

Dear Edward,

Sorry, that publication is out of print for several years now. It dealt with the expansion of the money supply through the banking system. This process can be studied in books at your local library in the money and banking section..

Don Wagener
Public Information

Best of luck with the bank heads