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Author Topic: Looks like we'll get a twofer
Daruma28
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quote:
Originally posted by Pyrtolin:
quote:
So if you sign up for a $300,000 mortgage, they only actually have to have $30,000 of cash in their vault (10% reserve requirement), in essence, creating $270,000 of currency out of thin-air...For which you owe them a substantial interest on. This is what I mean by the Bankers have the power of debt slavery. And this is also how the money supply continues to expand exponentially, driving inflation, (1929% since 1913).
You've got that inside out again.

If person A puts $300K into a bank, under a 10% reserve rule, if can lend out $270K of that to person B but must keep $30K on hand against the possibility of A coming along and wanting to withdraw some money.

That's a simple matter of the definition of Fractional Reserve there, and no amount of misconstruction can change that.

No Pyrtolin, you're repeating the official definition. In the end, the only way to see how it works in the real world is to audit a banks books...

...and all an audit need show is that any loan has the required 10% reserve physically present.

It's a bait and switch.

Read and learn:

Deadly Duo: Fiat Money and Fractional Reserve Banking

quote:
Recipients of government spending deposit the checks into their bank accounts; then their banks deposit the checks with the Fed. Bank reserves increase, and banks are allowed to pyramid around ten times the amount of the new and excessive reserves into new loans.
Reserves by smaller banks are essentially their deposits in their region's central bank.

All their books ever need to show is that the number of loans they've extended, is that they have the required 10% in reserves at their region's central bank.

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JWatts
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quote:
Originally posted by Daruma28:
This is how they convert their 'fiat' currency - an abstract number they typed into their computer represented by only the required 10% reserve of actual cash in their vault - into real physical assets. The foreclosed house? Essentially the bank only needed 30,000 reserves to make the 300,000 loan. They get a house worth 270,000 more than they initially had in their vault.

First, your conflating the actions of the Federal Reserve and a Mortgage bank. The Federal reserve can create money, it doesn't own mortgages.

Second, so what if the bank only has to have 30,000 in reserves to float a mortgage worth 300,000. A mortgagee from the bank can "buy" the house for 5% down. So the mortgagee gets the 300,000 dollar house for $15,000. By your logic, she's making out twice as good as the bank did.

quote:
Originally posted by Daruma28:
For everyone that makes it through the recession...great, they're still paying interest to the bankers for their fiat debt they created.

For those that fall by the wayside and lose their business, their homes, their repossessed automobiles...well, the banks gain all those physical assets - all for having done nothing more than "create" their fiat currency.

Please! You sound like a classic liberal where everyone is a victim and can't control their fate. It's pretty easy to beat the system. Don't borrow any money!

There is no reason for any American that's middle class or above to borrow for anything other than a house.

You should listen to Dave Ramsey some time. He has millions of listeners that have gotten out of the rat race and don't have any debt. Once you get rid of the credit card debt and the car notes and the boat notes and all the other crap, you find out you can afford all the same stuff and pocket the interest payments you used to make.

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Daruma28
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Please! You sound like a classic liberal where everyone is a victim and can't control their fate. It's pretty easy to beat the system. Don't borrow any money!

I agree 100%.

I'm merely objecting to the system that enables bankers to enslave the unknowing, the ignorant. Our entire culture is set up to promote debt serfdom.

Take out a student loan, to go to school, to get a degree to get a job, to take out a loan to buy a car, and to buy a house. This is the essence of the 21st century American Dream.

All based on debt. All based on paying bankers interest on money their allowed to create out of nothing.

So the mortgagee gets the 300,000 dollar house for $15,000. By your logic, she's making out twice as good as the bank did.

No, because she now has a 30 year obligation to pay up to 2/3rds of her monthly earnings to the bank.

And the first 15 years of that is servicing the "interest" of that $300,000 loan. You don't even begin to acquire substantial "equity" (which is than gone after by raising your credit score to get bigger debt agreements in the future.)

That's all fine and dandy if things were straight forward, and a bank was loaning you actual money it had earned by providing services to it's clientele.

But the ability to "create" money is nothing more than the ability to profit off of the creation of lifetime debt obligations out of thin air.

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Pyrtolin
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quote:
No Pyrtolin, you're repeating the official definition. In the end, the only way to see how it works in the real world is to audit a banks books...

...and all an audit need show is that any loan has the required 10% reserve physically present.

After the loan is made, yes. It will also show that the same 10% is 10% of the banks current deposits. (Actually, it will show 10% of deposits and 11% of loans, given the way the math works.)

The opinion piece you linked is flat out wrong and wouldn't hold up to any actual comparison to a commercial bank's books.

The bank gets $300K in deposits. It has to put 10% of that ($30K) on reserve, then it can lend or invest the other $270K, which is where it's profits and the interest it pays its depositors comes from. On its own, the commercial banks can't actually create money- they're explicitly bound by their deposits.

The only bank that has the actual ability to generate money if needed is the central Fed itself. Banks that are short on funds to maintain their reserves can borrow from it at the Discount Rate. If the Fed wants to increase the money supply, it can buy securities from the banks- effectively putting money on deposit with them, a portion of which they still need to put on reserve and balance of which they can use for lending, and it can sell those securities back to remove money if there is too much circulating. So, while the Fed is effectively creating money, it still doesn't come free for commercial banks to get a hold of it; the rate they pay is set by how much the economy needs to have more money circulating at any given time.

And while the specific details of certain operations are shielded, the actual total revenue and expenses of the Fed are audited, and any profit that it makes, beyond a 6% return on the share price that all member banks are required to pay to have access to the Fed's resources (less than they could probably make investing the same money, but enough that it doesn't amount to assets being uselessly frozen) has to be turned over to the US treasury- no one but the US government actually makes a significant direct profit off of the Fed.

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Pyrtolin
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quote:
Take out a student loan, to go to school, to get a degree to get a job, to take out a loan to buy a car, and to buy a house. This is the essence of the 21st century American Dream.
As opposed to the late 19th century, where that same person essentially lived in indenture to their factory or mine, being paid in scrip that was only good for buying at the company store or paying rent at the company house (and were generally penalized if they dared find a way to save it) It was a bit better before that in the US because the government had huge expanses of acquired land to parcel out, but you only have to look to Europe to see where we'd have ended up when that ran out without major adjustments, with the majority over people living in effective, if not actual, servitude and debt to the small property owning class.

Funding growth on debt is nothing new. Smith devotes a few chapters to how fundamentally essential access to capital through borrowing is to economic growth. The only difference was that the shifts in policy allowed more than just an already wealthy minority to have access to it, so that they actually had the opportunity to acquire any amount of wealth in the first place, never mind that, in buying such things they allowed for the creation of the jobs of the people that provided those products, which allowed for the possibility of not only paying down the debts but saving and acquiring further wealth beyond that.

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JWatts
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I in essence agree with Pyrtolin here. The current system has generated a far greater prosperity than existed previously.

You make the statement that the current system is bad and that the old system is better, but all the historical evidence contradicts your assertions. Unless, you can point to some examples to back up your case, you merely make an intriguing intellectual argument.

I firmly agree that consumer debt is abused and bad for most consumers. I'm even willing to support the Democrats in tweaking the worst effects of the current system, but I'm not willing to support overthrowing the entire system on the theory that a previous system might turn out to be better. I'm not willing to throw out the baby with the bath water.

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kenmeer livermaile
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Reagan's former econ advisor's take on it
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G2
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In another sign of a pending double dip, we have a confirmed sighting of the Hindenburg Omen! The situation that creates this "Omen" needs to repeat 3-5 times (depending on the investor you ask) to be considered valid.
quote:
... the statistics are startling: "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days." The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches - something big is coming.
The federally mandated summer of recovery is all good news!
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Colin JM0397
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Some of you are conflating the difference between holding back 10% (assuming the bank has the 100% to loan to begin with) and only having the 10% on the books to start. They are not holding back 10% and loaning out the remaining 90%, and then getting it back in the future plus interest.

The bank is making out because, in the running example, they only had to have 10% on hand to begin with in order to make a loan for the other 90%. It is a bait and switch, they use your property title as the collateral for the other 90%. They then put the property title on their books to show as the balancing asset. In other words, the title is what they use to create the funds loaned out. When you pay in full, the bank just made 90% without even considering the interest.

This is why banks resell mortgages all the time. They make a mortgage for 10%, then immediately sell it for 20% to another bank, for example. 100% profit and next to no risk.

Of course, the info they put out is that they do have the 100% and are lending 90% and holding back 10% - that's part of the smoke and mirrors game to keep the masses ignorant of how the scam really works. Some of you are parroting the propaganda quite well.

A credit card works the exact same way. They don't loan you a single cent out of their reserve. They deposit your application as, more or less, a credit instrument IOU that has tangible value. For example, your 10k credit line gets deposited as a 10k asset to the bank, which they then loan your own asset back to you at interest.

There are legal ways you can get those deposit certificates back - it requires bringing Federal mail fraud and banking fraud charges against the issuing bank. But it's a pain and you'll never get credit again if you call the banks on their scam.

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Pyrtolin
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Colin- you're flat out wrong here, being tricked by propaganda from folks that are purposely lying about how the banking system works to stoke populist anger in the wrong direction.

One thing you're doing is confusing what assets and debts mean from the bank's perspective. Deposits and interest to depositors are debts- things they eventually have to pay out on. A bank's reserve requirements are based on it debts, not its assets (money that people have to pay it now or in the future). This reverse position opens up a linguistic loophole that you've been tricked by. How much a bank can lend is not based on its assets- assets are how much it has lent out and expects back. How much it can lend and how much it has to keep on reserve are based on its debts- the amount of money that's on deposit with the bank.

Investment banks are allowed to leverage their assets (use, say, $10 to borrow $90 more and invest it all, then pay the $90 margin back out of their returns) and, when they were allowed to pull investment out of commercial banks after 1999, they made matters much worse by leveraging those internal investments and then buying mortgages from non-bank brokers with them.

But the way the brokers worked wasn't about not somehow creating money- the Fed is the only bank that can do that. What they did was, on an application for, say, a $100K mortgage, they'd slap on a $5000k origination fee, making it a loan for $105K. They'd pay $100K out to the seller from their cash on hand, then turn around and sell the loan at the full $105K value to the investment banks, put $100 back in the pool and pocket the $5K as their personal, risk free, profit.

[ August 16, 2010, 12:29 PM: Message edited by: Pyrtolin ]

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Colin JM0397
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Nope.
Read "Money, Bank Credit, and Economic Cycles".
Pulled out my massive copy - 800 pages of all sorts of fun stuff. From pg 205:
quote:
...it appears as if the bank were loaning a portion of its deposits, the reality is that even an isolated bank creates loans ex nihilo (from nothing) for a sum larger than that originally deposited. This demonstrates that the principal source of deposits is not depositors, but rather loans banks create from nothing. (Deposits are a secondary result of these loans).
If you read the book, he gets deep into the mathematical computations. In short, it shows (using the standard 10% reserve requirement) how x amount in the bank becomes a total of 10x from all the loans (9x + the original 1x = 10x total).
In other words, $1,000 deposit eventually becomes $10,000 through the process of fractional reserve and independent (ie outside of the Federal Reserve) money creation.

Saying a bank can loan out 9x is a bit of a simplification of the process, but the end result is the same: a 9-fold increase in the money supply, and that’s not even considering all the money the Fed cranks out.

-----------

The great irony of all this is, going back to the Federal Reserve act - our Government bought the lie. If the treasury functioned directly as the Fed and cut the private bankers out of the deal, then there would not even be any reason for ANY taxes. Technically speaking, we would pay through inflation and in interest back to the government, but we ALREADY pay through inflation and interest, in addition to the sick amount of taxes!

For a good overview of how that works on the State level, look into North Dakota’s state bank.
http://www.opednews.com/articles/The-Bank-of-North-Dakota--by-Dr-Stuart-Bramhall-100507-842.html
quote:
North Dakota is receiving increasing national publicity, as the only state out of 50 currently running a surplus and expected to do so into the future as well as the only state adding jobs, rather than losing them...

...In reality private banks create the vast majority of US dollars by making loans. Under the fractional reserve lending system, private banks are only required to hold as reserves 10% of the money they lend out. In practice this means if the bank issues a $250,000 mortgage, they only hold $25,000 of this loan in deposits. They other $225,000 doesn't really exist until the borrower begins to make monthly payments.

What this means is that a sparsely populated state, such as North Dakota, doesn't have to be fantastically wealthy to stimulate the state economy by making mortgage, student, business and personal loans to North Dakota residents. For a relatively small investment, the Bank of North Dakota can multiply the funds they hold in reserve by 900% every time they make a loan.

Obviously private banks do this all the time and some analysts see the fractional reserve system itself as a major culprit in the 2008 crash.



[ August 16, 2010, 02:01 PM: Message edited by: Colin JM0397 ]

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G2
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Excellent link Colin.

To Pyrtolin's point (since virtually nobody is going to follow the link):
quote:
Up until a few years ago (when I first saw the film Money as Debt), I had the mistaken idea that the role of banks was to hold the money depositors entrusted to them and lend it out to borrowers at a slightly higher rate of interest. I also had the mistaken belief that most of the US dollars in circulation were printed by the US Treasury or the Federal Reserve. Nothing could be further from the truth.
The proof, as Colin quoted:
quote:
In practice this means if the bank issues a $250,000 mortgage, they only hold $25,000 of this loan in deposits. They [sic] other $225,000 doesn't really exist until the borrower begins to make monthly payments.
You put in a $25,000 deposit, that does not mean the bank can only loan out $22,500 (keeping $2,500 in reserve). They can actually loan out $250,000 - they have 10% of the loan, or $25,000, in reserve as required by law. That means the bank just created $225,000 dollars with that loan.

[ August 16, 2010, 02:21 PM: Message edited by: G2 ]

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Colin JM0397
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Py keeps trying to argue that the 90% loaned out is a hard asset. The point in the book I referenced is that it’s all a house of cards - loans beget more loans and those deposits counted as assets are, in reality, just loans from other banks in the system, and ultimately go back to loans from the Fed to the member banks.

If every asset held by the bank was really a hard asset, then Py would be correct. The 90% loaned out comes back in 30 years (for a standard mortgage for example), the original depositor is paid her asset back plus some interest, and then the bank keeps the remainder of the interest and the only money “created” was that 10%, the interest, and the amount of fees paid by the person taking the loan.

Again, that's the theory and the smoke and mirrors they give to the ignorant masses, but it is not true. When a dollar is loaned, deposited, loaned, deposited... 9 times, then you end up with 900% increase when it is all settled.

As I said, to accuse a single bank of inflating each dollar by 9x is a simplification, but it is indeed what occurs with the system as a whole.

When you add in all the CDO's and other investment garbage, banks in the US were, IIRC, on average leveraged out not at the requisite 10-to-1, but more like 30-to-1, hence why when only a small amount of those assets are shown to be false/fake/worthless, the whole house of cards comes crashing down. If only 2 out of 30 are bad, then the bank goes bust. Of course, only small banks, not the "too big to fail".

[ August 16, 2010, 02:49 PM: Message edited by: Colin JM0397 ]

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Mike_W
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Fractional reserve banking does indeed add to the money supply. Manipulation of reserve ratio is one of the ways we can regulate it. What I dont understand from the posters is what is the problem with this and what is the proposed change? Fractional reserve banking is a natural product of a banking system. To prevent it you have to regulate against it. You also (as the regulator of money supply) take on greater responsibility to manage money supply in relation to economic activity.

Dont get me wrong, Banks are too big and have relied on privatising profit while socializing risk, but fractional reserve banking is not the culprit.

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JWatts
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quote:
Originally posted by Colin JM0397:
Again, that's the theory and the smoke and mirrors they give to the ignorant masses, but it is not true. When a dollar is loaned, deposited, loaned, deposited... 9 times, then you end up with 900% increase when it is all settled.

What you are stating is accepted widespread economic reality. It's called the non-M0 money supply, (it's the M1, M2 & M3 money supplies).

There are numerous economic books and articles on the subject. This is covered in every introductory macro-economics class. It's college level, but hardly a state secret.

quote:
Fractional-reserve banking
The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system:

1. central bank money (physical currency, government money)
2. commercial bank money (money created through loans) - sometimes referred to as private money, or checkbook money

Link

No one is telling the "ignorant masses" that all loans are backed up by an equal amount of deposits.

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Colin JM0397
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Py is trying to claim the 9-1 (900%) figure is inaccurate and that private banks don't create money - they most certainly do. M-figures have nothing to do with that part of the discussion other than helping prove the point. However, if you review the compounding curves of, for example, M3, you can see the exploding growth in the money supply. The vast amount of that compounding growth is due to the private banks, not the Fed issuing a new dollar in the form of loans to the private banks.

I once saw graphs overlying the M3 growth on top of the Fed's "printing" of new money. There is an exponential growth factor and that all comes from the nature of the fractional reserve system… Tried quickly to find them earlier today, but it wasn’t that important. I think maybe the Shadowstatistics website might keep the M3 estimates.

BTW, the Fed quit publishing M3 stats in 2006 - most folks figure to keep people in the dark as to how much money is actually out there so the foreign banks in the dark and the dollar value higher... The Fed claims the numbers are irrelevant and no longer matter.

No one is telling the masses that?
Funny, but that's exactly what the banks try to infer and get you to assume. When pressed, they will answer, but they aren't too happy about it. Go ask your mortgage broker where the money for the loan comes from.

Any way you slice it fractional reserve banking ought to be illegal. If you pick up a copy of that book I referenced, he shows in detail the mental gymnastics and justifications the modern banking and finance system has to go through in order to justify what is illegal for anyone else to do - create money from nothing, AKA counterfeiting.

[ August 16, 2010, 04:15 PM: Message edited by: Colin JM0397 ]

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Mike_W
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Again, what is the alternative? In a completely free and unregulated market, banks are free to lend as much as they want - there is no regulated reserve percentage.
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JWatts
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quote:
Originally posted by Colin JM0397:
Any way you slice it fractional reserve banking ought to be illegal.

Our entire economic financial system is based upon it. You might as well try and make obesity and pre-marital sex illegal while your at it.

quote:
Originally posted by Colin JM0397:
If you pick up a copy of that book I referenced, he shows in detail the mental gymnastics and justifications the modern banking and finance system has to go through in order to justify what is illegal for anyone else to do - create money from nothing, AKA counterfeiting.

I's a stretch to equate Fractional reserve banking and counterfeiting.
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Mike_W
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Forget about banks....If I write you a note payable, and I dont have the capital to pay it now, but expect to upon redemption, should that be illegal? Should you be able to sell the note to someone else?
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Daruma28
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Folks, you need to look at the big picture here.

The power to "Create" money by private bankers means essentially that Bankers literally charge interest at their great profit for literally doing almost nothing more than entering a number into their computer system.

Every house, every car, every business loan, every credit card account....

...the bankers profit off of it all.

And they drive inflation which steals the value of your savings.

Fiat currency combined with fractional reserve banking is a fiction! In this way, bankers "create" money out of thin air.

Than, if/when a person defaults, they foreclose and seize the house...or the car...or the business assets.

They essential have the grandest racket in the world. They have the literal ability to transform "air" (fiat currency) into real physical assets.

A 30 year mortgage...a 10 yr student loan, a 5 year car loan...all of which in the end is 90% fiat currency "created" when you signed the financing papers!

It's 21st century serfdom. We all work for the bankers, and most of us don't even realize it.

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Daruma28
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quote:
Originally posted by Mike_W:
Again, what is the alternative? In a completely free and unregulated market, banks are free to lend as much as they want - there is no regulated reserve percentage.

The alternative is to have a free market banking system, and a commodity backed currency. That is why you didn't have inflation and exacerbated business cycles created by debt-inflated bubbles for most of the 1800's after Andrew Jackson abolished the Central Bank of America.

I wouldn't even oppose a small fractional reserve policy if the majority of the reserves had to be backed by gold.

But the system as it is....it's a racket.

And it most certainly is similar to counterfeiting, even if it is legalized by the Fed Reserve Act.

quote:
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” - Thomas Jefferson


[ August 16, 2010, 06:52 PM: Message edited by: Daruma28 ]

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DonaldD
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And yet... by all measurements, there are far more people owning far more property and with access to far more and better services than ever before in the US. It's a real mystery.
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Mike_W
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Daruma,
This is where you lose most people. Fractional reserve banking was invented before the Fed. It comes from a time of commodity backed currency. It is an invention of the free market and, frankly, makes banking as we know it possible. Without it, banks cant lend.

To say we shouldnt have it is to ask for greater government regulation over economic activity. To ban it is to say I can issue a note payable unless I can demonstrate the capital at time of issuance.

The choice to regulate banking and to set a reserve limit is an act of RESTRICTION on the banking industry. If we are arguing what that reserve ratio should be then we are arguing degree. Else, I dont think we are having a conversation.

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Daruma28
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quote:
Originally posted by DonaldD:
And yet... by all measurements, there are far more people owning far more property and with access to far more and better services than ever before in the US. It's a real mystery.

Yup, it's a real mystery, Donald! [Roll Eyes]

I forgot how no one owned property and everyone was destitute from 1800 to 1900.

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Daruma28
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quote:
Originally posted by Mike_W:
Daruma,
This is where you lose most people. Fractional reserve banking was invented before the Fed.

Yes, I know this.

The point is that the Fed codified fractional reserve banking combined with fiat currency, which allows banking industry to essential work as one giant, money-creating cartel.

And they "money" they are allowed to create, is debt.

I'm aware that I lose most people in this discussion.

But tell me, Mike...why do you think we've had 1920% inflation since the founding of the Fed?

The system as it is, is the primary cause for it...and the funny thing is the very reason the bankers lobbied for the creation of the Fed was to "fight inflation."

The jokes on us.

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Mike_W
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We have that inflation for the most part because of deliberate choices in economic policy, some good, and some, like the 1970s, not so good. There is no great mystery here (not to me or the people that went to school with me anyway). Central banks set inflation targets, since the 70s fiasco, far as I can tell, they've been pretty good at hitting them.

Inflation might be good or bad, depending on degree and cause. It is not a universal evil.

So what is the alternative? What grand regulatory scheme will you implement to prevent private citizens and businesses from lending more money than they have?

Replace the Fed. By all means. But, with what? All I can think of is to establish a new Federal agency (or you can do it at the State Level but I suspect that would create really interesting monetary instability). You can re-institute commodity currency (I wouldn’t, but let's say you do). This does nothing to prevent fractional reserve lending and money creation by the private sector.

Me? I'd re-regulate banking to some degree, probably ban the combination of Merchant and Investment Banking, and do something (size limit? Insurance requirements) to prevent institutions from reaching "too large to fail" size. I might even fiddle with reserve ratios, but I'd need a pretty solid evidence basis for that.

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Pyrtolin
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quote:
Originally posted by Colin JM0397:
Nope.
Read "Money, Bank Credit, and Economic Cycles".
Pulled out my massive copy - 800 pages of all sorts of fun stuff. From pg 205:
quote:
...it appears as if the bank were loaning a portion of its deposits, the reality is that even an isolated bank creates loans ex nihilo (from nothing) for a sum larger than that originally deposited. This demonstrates that the principal source of deposits is not depositors, but rather loans banks create from nothing. (Deposits are a secondary result of these loans).
If you read the book, he gets deep into the mathematical computations. In short, it shows (using the standard 10% reserve requirement) how x amount in the bank becomes a total of 10x from all the loans (9x + the original 1x = 10x total).
In other words, $1,000 deposit eventually becomes $10,000 through the process of fractional reserve and independent (ie outside of the Federal Reserve) money creation.

His entire point seems to be built on the inane premise that people don't expect and actively intend for their money to be pooled and used to make a profit from loans on their behalf.

In the passage that your footnote comes out of, he actively assumes that the person will leave their loan on deposit with the bank, rather than use it, you'll seldom, if ever see it in the commercial loan market, because most of those loans (like, say a mortgage) are generally payed out entirely to a third party rather than just being transferred into another depository account at the same bank. And where credit is offered, it only offers the ability to draw on existing resources, otherwise you'd be paying interest on your entire credit line (and earning some amount of interest on the unused portion) rather than only being responsible for interest on the part that you actually draw on and convert into an actual loan.

And even when that happens, it does reflect additional money that the bank can draw on, because the explicit nature of the loan they made you includes the fact that they can expect you to pay back the balance in the future and recoup the loan value; that's the entire point of a loan. There's no creation from nothing there- just and explicit agreement to manage pooled lending on behalf of depositors and to share the profits of such.

By glossing over the fact that the borrower has to repay the loan (and at a higher interest rate that he gets from just dumping the loan into a depository account) He tries to claim ex nihilo creation where his very accounting tables show that there is an explicit trail of the movement of money, with the expected overall diminishing returns. He severely abuses the term by calling the act of loaning money out of the banks deposits ex nihilo creation, when, in fact it is drawing on resources entrusted to the bank with the explicit intention that they be used to generate revenue while retaining enough on hand for day to day expenses.

The bank can't make a $100K loan out of $10 in deposits specifically because of the accounting involved. Let's say that it does just loan itself the money over and over again to multiply it. If you follow the full accounting, by the time it's generated that total $100K , all but a few pennies of it are tied up in the existing loans that it already owes itself and must pay down to meet its reserve requirements:

10K on deposit | 10K on hand - 1K reserve requirement = 9K available for loans
19K on deposit | 10K on hand - 1.9K reserve requirement = 8.1K available for loans
27.1K on deposit | 10K on hand - 2.71K reserve requirement = 7.29K available for loans

And so on. It can do the stacking, but by the time it's simulated 100K of deposits, there's almost nothing left for it to actually loan out, instead it just owes itself a ton of interest.

The basic opinion being advocated by the book is that banking services and the benefits of loans and investments should only be available to those that are already wealthy and those that they choose to lend money to, rather than being more universally accessible on all sides.

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Pyrtolin
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quote:
The alternative is to have a free market banking system, and a commodity backed currency. That is why you didn't have inflation and exacerbated business cycles created by debt-inflated bubbles for most of the 1800's after Andrew Jackson abolished the Central Bank of America.
The US, from its founding, had a banking panic just about every 20 years, like clockwork, until the FDIC was established.
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G2
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quote:
Originally posted by Pyrtolin:
The bank can't make a $100K loan out of $10 in deposits specifically because of the accounting involved. Let's say that it does just loan itself the money over and over again to multiply it. If you follow the full accounting, by the time it's generated that total $100K , all but a few pennies of it are tied up in the existing loans that it already owes itself and must pay down to meet its reserve requirements:

10K on deposit | 10K on hand - 1K reserve requirement = 9K available for loans
19K on deposit | 10K on hand - 1.9K reserve requirement = 8.1K available for loans
27.1K on deposit | 10K on hand - 2.71K reserve requirement = 7.29K available for loans

Check this: http://en.wikipedia.org/wiki/Fractional-reserve_banking#How_it_works

The example is very good and shows how an initial $100 deposit results in $457.05 in total deposits and $357.05 in total loans. Only $100 was actually deposited but over 4.5 times increase in total deposits.

[ August 16, 2010, 10:13 PM: Message edited by: G2 ]

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Pyrtolin
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quote:
Originally posted by G2:
Excellent link Colin.

To Pyrtolin's point (since virtually nobody is going to follow the link):
quote:
Up until a few years ago (when I first saw the film Money as Debt), I had the mistaken idea that the role of banks was to hold the money depositors entrusted to them and lend it out to borrowers at a slightly higher rate of interest. I also had the mistaken belief that most of the US dollars in circulation were printed by the US Treasury or the Federal Reserve. Nothing could be further from the truth.
The proof, as Colin quoted:
quote:
In practice this means if the bank issues a $250,000 mortgage, they only hold $25,000 of this loan in deposits. They [sic] other $225,000 doesn't really exist until the borrower begins to make monthly payments.
You put in a $25,000 deposit, that does not mean the bank can only loan out $22,500 (keeping $2,500 in reserve). They can actually loan out $250,000 - they have 10% of the loan, or $25,000, in reserve as required by law. That means the bank just created $225,000 dollars with that loan.

That's not proof- that's a false assertion that doesn't hold up to mathematical scrutiny.

The only level that can actually assert currency into existence without having to draw against current deposits (even if those are re-deposits of loans made) it the Federal Reserve. Everyone else actually has to have an explicit trail of assets and liabilities to account for the movement of the currency that they manage.

The overall effect is that savings, instead of being calcified, remain liquid and so can continue to serve the actual purpose of money, while allowing people to access their savings at the rate that they need to for regular expenses and profiting from the rest on the side.

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Pyrtolin
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quote:
Originally posted by G2:
quote:
Originally posted by Pyrtolin:
The bank can't make a $100K loan out of $10 in deposits specifically because of the accounting involved. Let's say that it does just loan itself the money over and over again to multiply it. If you follow the full accounting, by the time it's generated that total $100K , all but a few pennies of it are tied up in the existing loans that it already owes itself and must pay down to meet its reserve requirements:

10K on deposit | 10K on hand - 1K reserve requirement = 9K available for loans
19K on deposit | 10K on hand - 1.9K reserve requirement = 8.1K available for loans
27.1K on deposit | 10K on hand - 2.71K reserve requirement = 7.29K available for loans

Check this: http://en.wikipedia.org/wiki/Fractional-reserve_banking#How_it_works

The example is very good and shows how an initial $100 deposit results in $457.05 in total deposits and $357.05 in total loans. Only $100 was actually deposited but over 4.5 times increase in total deposits.

Sure- but it didn't allow one bank, on it's own, to make a single $357.05 loan from that initial $100. It had to move through multiple hands, each consecutive set of which has an obligation to pay back the loan.

No money was actually created- if one bank had been trying to amplify its own deposits by lending to itself that way, it would have ended up with $10.74 to loan out in the end and hundreds of dollars of obligations to itself.

But when you go through multiple hands, the fundamental purpose of enabling the actual physical money to keep working while still allowing people to save is clearly accomplished. That $100 created $357.05 of economic growth and will allow ten people to benefit from the returns on investing it in a bank and 10 people to profit from the returns on whatever they invested the money that they borrowed in.

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Daruma28
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Sure- but it didn't allow one bank, on it's own, to make a single $357.05 loan from that initial $100. It had to move through multiple hands, each consecutive set of which has an obligation to pay back the loan.

Hence the term "Cartel."

No money was actually created

Shocking. You actually got this part correct. A debt-obligation was created, for which a person is required to pay interest on.

But no actual money beyond the 10% required reserve existed.

But when you go through multiple hands, the fundamental purpose of enabling the actual physical money to keep working while still allowing people to save is clearly accomplished.

Clearly.

That $100 created $357.05 of economic growth

No, it created $900 of fiat, fractionally reserve created "cash" that never existed other than as entries on the cartel-member bank's computer systems.

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Daruma28
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you're flat out wrong here, being tricked by propaganda from folks that are purposely lying about how the banking system works to stoke populist anger in the wrong direction.

[LOL]

Pyrtolin, you're flat out wrong here, promulgating propaganda from folks that are purposely lying about how the banking system works to keep people ignorant of the long running racket they've got going.

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Pyrtolin
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quote:
Originally posted by Daruma28:
Sure- but it didn't allow one bank, on it's own, to make a single $357.05 loan from that initial $100. It had to move through multiple hands, each consecutive set of which has an obligation to pay back the loan.

Hence the term "Cartel."


A Cartel of bank customers? You lose any sense of the word when you call an entire business chain of relatively unconnected people a cartel.

quote:
[qb]No money was actually created

Shocking. You actually got this part correct. A debt-obligation was created, for which a person is required to pay interest on.

But no actual money beyond the 10% required reserve existed. [

No- $100 existed, per the base example statement. It was deposited and 20% was kept on reserve. The entire original $100 was there, the rest came from a series of loans, used for purchases or investments, which were then put into new deposits. $100 managed to produce $357 in economic activity (and if the borrowers invested that money wisely, the returns on it will exceed the interest they need to pay), while the original depositor was still able to draw on that $100 when it was needed. This is a far better alternative than either freezing the liquidity out of the system by uselessly leaving the money in a lock box or forcing the original investor to have to make a direct loan and preventing him from having access to his money when he needs it.
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Pyrtolin
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quote:
Originally posted by Daruma28:
you're flat out wrong here, being tricked by propaganda from folks that are purposely lying about how the banking system works to stoke populist anger in the wrong direction.

[LOL]

Pyrtolin, you're flat out wrong here, promulgating propaganda from folks that are purposely lying about how the banking system works to keep people ignorant of the long running racket they've got going.

The definitions, math, and basic logic are on my side here- all you've shown is disingenuous speculation without any actual evidence to back it up. The closest thing to evidence that's been presented is work whose intent is to express support for full reserve banking, and even as much as it agrees with your overall position, it doesn't actually support your assertion that any given loan can be made if a bank only has 10% of the funds on hand. (On the other hand, the entire recent lending freeze that occurred because of depleted reserves stands as evidence to the opposite- if the banks never actually had to risk their liquid assets, it couldn't have happened.)
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Daruma28
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A Cartel of bank customers? You lose any sense of the word when you call an entire business chain of relatively unconnected people a cartel.

Relatively unconnected? [LOL]

Why do you think the Federal Reserve system was created? ALL BANKS ARE CONNECTED BY THE FED.

Pyrtolin, you keep repeating the official narrative.

But it's bull****.

Now....are you really interested in learning the truth - or are you an active agent in disseminating lies so the banking cartel can continue it's racket of debt slavery?

Let's start with this - : from the pdf document from the law library of Minnesota


quote:
BY THE COURT
Dated December 9, 1968
Justice MARTIN V. MAHONEY
Credit River Township

Scott County, Minnesota

MEMORANDUM

The issues in this case were simple. There was no material dispute of the facts for the Jury to resolve.

Plaintiff admitted that it, in combination with the federal Reserve Bank of Minneapolis, which are for all practical purposes, because of their interlocking activity and practices, and both being Banking Institutions Incorporated under the Laws of the United States, are in the Law to be treated as one and the same Bank, did create the entire $14,000.00 in money or credit upon its own books by bookkeeping entry. That this was the Consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence when they created it. Mr. Morgan admitted that no United States Law Statute existed which gave him the right to do this. A lawful consideration must exist and be tendered to support the Note. See Ansheuser-Busch Brewing Company v. Emma Mason, 44 Minn. 318, 46 N.W. 558. The Jury found that there was no consideration and I agree. Only God can create something of value out of nothing.

You got that Pyrtolin?

It was an actual foreclosure case in Minnesota court, for which the Bank President "let the cat out of the bag."

The banks create money out of thin air by simply entering in a number into their computer system.

They need merely show that they have 10% reserve in their account at the Federal Reserve regional bank to "back up" the loans they give out.

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Daruma28
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Please note: that PDF document was sourced from

First National Bank of Montgomery vs Jerome Daly

You can read Judge Martin Mahoney's Judgment and Decree and Finding of Facts documents.

The President of the the First National Bank of Montgomery basically took the stand and admitted that Banks "create money out of thin air" by book keeping entry.

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Daruma28
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From the cross examination of RONALD GRAHAM, Vice President and General Counsel of the Federal Reserve Bank of Minneapolis taken Wednesday February 11, 1970.

quote:
Q. Now, when a member bank makes a loan, what is the percentage of so-called reserves that they are supposed to have on hand?
A. That is determined by the Board of Governors of the Federal Reserve System and it varies at what the Board decides.

Q. What is it at present?
A. It is kind of a multiple breakdown at present; my recollection is reserves are seventeen per cent reserve requirement; a sixteen per cent for the country banks, which are required to have a lower reserve.

Q. In other words, when say like the First National Bank of Montgomery wants to make a loan of one hundred dollars; if it has a reserve of seventeen dollars on deposit with our bank, it can make a loan of a hundred dollars?
A. If the reserve bank decides to lend it, yes, this is discretionary.

Q. If the First National Bank decides to lend it?
A. Now, now, an application for a loan or discount from the Federal Reserve Bank may be made; in discretion with the Federal Reserve Bank, if it feels it is an appropriate borrowing.

Q. Does the First National Bank of Montgomery, do they have to get the permission of the Federal Reserve Bank of Minneapolis before they can make a loan?
A. They make application for a loan and they can be turned down if the Federal Reserve Bank in Minneapolis did not deem it a good loan.

Q. To an individual?
A. They only make loans and discounts to banks.

Q. I am talking about the individual citizen that walks into a bank and wants to borrow ten thousand dollars from the bank out in the country.
A. All right.

Q. Does that bank out in the country also create money on its books?
A. That bank may make a loan to that individual if it has the funds available to make that loan.

Q. Does that bank, the commercial banks can also create credit on their books?
A. To the extent that the reserve or equity at the position permits them to make a loan in accordance with their policy. They can do this by issuing a cashier's check, which is a liability in the bank or do so by crediting the deposit account of that individual.

Q. To what extent can they do that?
A. I guess I don't follow your question.

Q. Is there a limit upon them? Is there a limit to the extent that they can do that?

A. The ultimate limit to which they would be restricted would be determined by the amount of reserves they are required to hold back, dependent upon what the reserve requirements, as established by the Board of Governors of the Federal Reserve System, are.

Q. So, there is a percentage of limit?
A. Yes.

Q. They also create credit on their books?
A. To the extent they can make loans or investments.

Q. And this credit first comes into being when they create it?

A. When the credit is made to the account of the customers, they have thus created a loan to the customer in the form of a deposit balance. Now, this may be drawn upon to pay off perhaps creditors of the individual, that is making the loan.

Q. But in any event, this is the first time that this credit comes into existence, they create it on their books?
A. Yes.

At the time of this testimony, the reserve requirement was 17%.

Therefore, as plainly stated by the Federal Reserve Banking Official under oath, a member bank need only have $17 in their reserve account with the Fed to for every $100 of "Created" loans.

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Pyrtolin
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So the basic contention is that because some of the lending banks assets came from a deposit from the Federal Reserve, which is a separate entity, with the legal authority to do that, it was not valid money that the bank had, because the Justice of Peace decided to assert that they were the same institution and thus confuse the specific distinctions between them.

The Fed does create money- thats where our supply of money comes from. That doesn't change the fact that the bank had to have the cash on deposit (from the Fed, in this case, which it would have to pay interest on that deposit to, just like any other deposit) to make the loan. The lending bank didn't make the money from nowhere, it made it from the deposits it had, which included Fed deposits to maintain the money supply.

That's about like saying that a farmer creates water from nothing when he pays a city water system to pipe in water for irrigation instead of waiting for it to fall from the sky.

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Pyrtolin
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quote:
Therefore, as plainly stated by the Federal Reserve Banking Official under oath, a member bank need only have $17 in their reserve account with the Fed to for every $100 of "Created" loans.
No. By his testimony, it has $17 on reserve, it can loan out $100 from the balance of its cash on hand. It can also borrow money from the Fed to lend out based on the reserves it has with the Fed.
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