| The root fallacy of supply-side economics
Driving tax policy in a monetary zone costs you 300 credibility points, plus you have to spend a night in the box. |
Posted on 06/25/2011 10:50:30 AM PDT by Nanomaker
It doesn’t matter whether its cash or a check, on the same or some other bank. If it’s cash, the cash (asset to the bank) leaves the bank, lowering that asset count. If it’s a check (liability to the bank), it’s a liability that must be honored by the bank and has the same net effect on the balance sheet.
Well put...we already in the ditch and waiting for the inevitable rolling over of the bus. Time to start preparing—I hope everyone is.
The Federal Reserve Bank(FRB) requires a certain percentage of these totals to be held in reserve. The exact % varies by type of account, and is determined by the FRB.
The bank monitors its position daily to determine the required reserves, and if they are short, they buy excess reserves from another bank. These funds are returned the next day plus the overnight interest.
When money is loaned to Jack, the bank will reduce the cash account and increase the accounts receivable account. The amount of money that a bank is allowed to loan is a formula based on assets and liabilities. They also must meet the capitalization requirements.
Banks can structure their mortgages for sale to Fannie Mae (for example) as a conforming loan, based on Fannie's definition of “conforming”. Fannie buys the loan, which gives the bank cash back to turn around and loan again.
At the end of the day, the Government and the Federal Reserve make the rules, and the messes that ensue belong to them. For example as the definition of conforming loans changed, and banks were prodded to make loans to people who would not have qualified in the past, there was no incentive to the banks to push back, since Fannie Mae would be left holding the bag anyway.
Any attempts to overhaul Fannie and Freddie were met with adamant resistance by congressional leaders mouthing platitudes about affordable housing. No one in either party's leadership truly went to bat for the needed changes.
In the short, run housing was more expensive as prices increased. Ironically houses are now more affordable than they have been for years, but somehow it did not work out very well for anyone, especially those who lost their jobs.
One of the reasons so many major finance companies collapsed at the beginning of the housing bust was this reason.
Goldman loaned 10 times more dollars than they had.
In most cases the money banks lend is itself borrowed by the bank. Smaller banks are the only ones who use their own money.
Well not exactly right either. Now the bank has a $100,000 asset and Jill has a $100,000 asset and Jack has a $100,000 liability..So $200,000 in assets were created from $100,000. The bank is claiming an asset, Jill is claiming an asset, so if you figure in the future income from the interest, on paper, the bank has made a heck of a deal. Of course, if Jack goes belly up, then it all goes up in smoke (which is what happened to our false economy...)
Well not exactly right either. Now the bank has a $100,000 asset and Jill has a $100,000 asset and Jack has a $100,000 liability..So $200,000 in assets were created from $100,000. The bank is claiming an asset, Jill is claiming an asset, so if you figure in the future income from the interest, on paper, the bank has made a heck of a deal. Of course, if Jack goes belly up, then it all goes up in smoke (which is what happened to our false economy...)
Imagine if Robert Bonomo could afford to higher an editor.
They lend many times more than they have in actual reserves. Where do you think the extra money comes from? Printing money on demand is the whole point to a fiat currency system.
The Fed rules permit banks to lend ten times what they have on deposit as reserves at the Fed, plus ten percent of the deposits they take in from their depositors in the form of savings accounts. They used to accept only cash or US treasuries but lately the Fed has begun to accept corporate stock as reserves in order to rapidly expand the money printing authority of the banks.
Bank loans are always created from thin air. But if you don't repay the loan the bank has to cover the loss as if it had been pre-existing money. If they have to cover it out of their reserves it reduces the bank's money printing authority by ten times the amount lost, making you very unpopular with the bank.
| The root fallacy of supply-side economics
Driving tax policy in a monetary zone costs you 300 credibility points, plus you have to spend a night in the box. |
Nope. The bank's own funds are deposited with the Fed. For that they receive authority to create and lend out tend times the amount on deposit. This is money that never existed. Plus they are allowed to lend tend percent of their customer's deposits. This ten fold expansion of the money lent over the money on reserve is what is meant by the term fractional reserve. Since the crash the Fed has been accepting corporate junk securities instead of just cash and treasuries as bank reserves.
OK, who created the “Fed?”
And who “owns” it?
Is there really an international banking cartel playing any part in this whatsoever?
If so, who is the international banking cartel?
Banks are almost always the finest and newest buildings in most towns, especially smaller cites and towns which do not host the headquarters of large corporations. Someone really has to screw up royally to make the money creating institutions called banks unprofitable.
You are correct.
Say you are getting a loan for car. If you pass the basic requirements for a car loan, they will simply add the money to your account and you go buy the car.
They do not move money from THEIR accounts, but just make add to yours, and add the same amount to their liabilities.
They need to make sure that their ratios are good, but that is it. Money for nothing.
They get started because, to continue with the OP's property example, Jack wanted to own a house and piece of property. Once upon a time, long ago, Jack would just go to an unclaimed piece of land and build his own house.
Eventually, almost all land was claimed (owned) by someone, and Jack's descendents never learned the skills to build their own houses. So they had to exchange money for a plot of land and house built by someone else.
In Jack II's era, he could earn enough money to buy a plot of land with a house on it, or pay someone to build a house for him. The cost of houses was not out of reach for a thrifty laborer.
In Jack III's era, the cost of houses had exploded so that it was out of reach for even the thriftiest laborers. In the meantime, someone had figured out that money could be a commodity, and that it could be "sold" (lent; invested) for a cash return (interest). Enter bankers, who would lend Jack III money to buy that plot with a house. In that era, such transactions, called mortgages, were simple. The property was collateral, the bank owned and kept the mortgage, and it was not outside Jack III's ability to eventually pay it off and claim ownership outright.
By the time of Jack V's era, the down-payment needed to buy a plot and house was way outside the ability of even the most thrifty laborers to save, even with family helping. Enter government subsidies through mortgage interest deductions on taxes, loan guarantees through Freddie Mac, Fannie Mae, etc., and incentives to the banks to lend to low-income people. Also enter bank "products" like variable interest loans, no money down loans, and so on. And there you have it.
We are now in Jack VI's or VII's era, when the whole system is shaky, few people can afford to buy a home, and millions who do are what is euphemistically called "under water" with their mortgages. Agencies such as Freddie Mac and Fannie Mae are in deep doo-doo, banks pay only a ridiculous pittance of interest on deposits, the mortgage business has become an international racket. The old neighborhood bank and banker are long gone, replaced by rapacious huge national and international banking concerns, with supranational pseudo-governmental organizations like the IMF and Federal Reserve making the financial rules by which the rest of us have to live.
So the answer to how these crackpot ideas get started is with baby steps, long before their "crackpotism" is obvious. Control and negative change ratchets up over generations, each generation not recognizing (or perhaps not caring) about the danger the incremental change in their era poses for the future.
That was an excellent explanation.
This kind of why I do not like the basic concept of “insurance”.
I know it is necessary nowadays for many things. However, the concept of paying money for a policy in case something comes up you cannot afford just seems WRONG.
I guess the exploding costs of Jack III’s era just made insurance an unfortunate necessary evil.
Your analysis only accounts for loans out of customer deposits (which can not exceed 10% for ordinary savings accounts). What you are not accounting for are the reserve funds the bank deposits with the Fed. These funds can be loaned against in amounts up to 10 times the amount on deposit. This is fractional reserve banking. The bank lends more than it has.
It is required to retain a certain amount say 10% in reserves and permitted to invest the other 90% in loans, or other money making assets. Hence the term “fractional” because only a fraction of the deposit is held.
The depositor is actually considered to have “loaned” the money to the bank, but the bank has agreed to pay on demand.
Banks will at times, invest their deposits in high quality liquid assets to improve their liquidity.
The amount of money a bank can lend is a somewhat complicated formula which includes capital ratio requirements etc. in addition to the demand and time deposits, and cash in the bank vaults.
When a bank makes a loan, an asset - loan receivable is created, but it is offset by an increase in liability (ie checks payable type account). Hence no net impact on equity.
To state that a bank is allowed to loan 10 times against the amount it has in reserves is simply not accurate. Those reserves are the amount that is held in case the customer demands payment of the money deposited. The % of deposits held is determined by the Federal Reserve.
Actions are also determined by the open markets committee, which has the FRB Board of Governors, and 5 people from the FRB member banks.
I do not intend to discuss international bank cartel conspiracy theories. As I said the epic failure of Government on many levels is really the only point I was trying make.
Jill just made a $100,000 deposit from the sale. Where did that come from?
I have been a banker for 30 years and have an MBA in Finance from a top business school. If you reread my post about the iterative process of re-lending the original depositors' money and the multiplier effect you might understand that the creation process is a function of the reserve requirement banks have on deposit with the Fed. Banks don't lend reserves which are on deposit at the Fed and earn nothing. The reserve requirement is based on the size and types of deposits held by the individual bank. To maximize earnings banks lend out the amount of the deposits less the required reserves. When the borrower spends the proceeds of the loan, the company that receives the money takes it to the bank, incresing the bank's deposits and allowing it to relend those dollars less the increased amount of reserves required to be on deposit with the Fed. Other than the insane runaway printing press efforts of Bernanke and Geitner (a different M) the creation of money and the supply of money (M1, M2, M3, etc.) by banks is controlled by the Federal Reserve based on how much they require the banks to have on deposit with them (the Fed). When all is said and done each dollar of the original depositor ends up providing many times lendable dollars. It's by design and it has been in effect ever since the creation of the Fed in the early Twentieth Century. If the Fed wants to tighten the money supply all they have to do is increase bank reserve requirements. Conversely, if they want to make more money available to the banking sytem to lend (easing credit) they reduce reserve requirements.
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Pull over, buddy. Econ police.