AOC and Rashida Tlaib propose creating public banks

[Canard DuJour]

Journalists often assume that "public" and "tax-funded" mean the same thing. They don't. For example, most countries' COVID relief schemes have been QE funded. While central banks aver that QE is money creation, journalists typically (mis)report QE - and schemes thereby funded - as having been paid for by "the tax payer".

It almost certainly doesn't mean that 'tax payers' money' would be lent out like most ppl think "savers'" deposits are by banks. Public banks with a central bank (Fed) charter could issue new money as 'double entries' against borrowers' future income and assets which cancel out upon repayment - as commercial banks are licensed to do.

Exactly -- they cancel out upon repayment. So if the loans are repaid then the taxpayers aren't paying for it; if they aren't then they are.

They might or might not be. "Public" and "tax-funded" aren't synonyms. When commercial banks suffer heavy losses, bailouts - contrary to popular misconception and journalism - generally aren't tax funded:

[YOUTUBE]https://www.youtube.com/watch?v=hiCs_YHlKSI[/YOUTUBE]

So the issue isn't any metaphysical technicality about QE and money creation and whether banks lend out savers' deposits. The issue is whether the loans will be repaid.

If they aren't, said "technicality" will be very much the issue.

Only they could do it non-profit for public good, like The Public Bank of North Dakota has been doing for over a century.

The PBND is profitable.

Indeed it is, but it only need run at cost. The profit motive - also contrary to popular misconception - does not deter dodgy lending. Quite the contrary.

It's functionally a state-owned credit union. If new public banks operate themselves like credit unions and lend with an eye to repayment, then they won't be "tax-funded". If new public banks instead operate themselves with an eye to "the public is finally capable of engineering loans and interest that actually make sense based on needs rather than 'risk', the latter being a concept that is really justification for charging more of those with the ability to pay less",

I don't see any incompatibility, but I think you're quoting a forum participant, not H.R.8721, which has yet to be submitted.

then they will be "tax-funded".

They might or might not be. That'd be a policy decision in the event of insolvency or illiquidity; not a corollary of publicness.

 

[SimpleDon]

Private banks (too big to fail) have also needed huge public funding in the past and are likely to need it in the future. What's the difference?

Lots of private banks didn't need public funding and didn't get it.

You are correct, but only if you are talking about raw numbers of banks. The majority of the bailout went to the five largest banks in the US, the traditional 'big four' banks, JP Morgan-Chase, Bank of America, CitiBank, Wells Fargo, plus Goldman Sachs, formerly an investment bank which became a commercial bank so that it could be bailed out, a miracle of fortunate timing that remains unexplained.

But in terms of the business of banking, these five handle about 70% of the banking done in the US, including banking for hundreds of smaller banks, by their buying of loans from the smaller banks. So by bailing out these banks, the government bailed out 70% of the banking and banks in the US. This is lots of banks.

The banks that needed public funding hadn't been acting like the ones that didn't. The problem isn't private banks; the problem is the government practice of rewarding banks for not acting like the banks that didn't need public funding.

It was the government's fault but I am pretty sure it wasn't in the way that you think. The Fed together with the SEC had ample authority to order the banks not to originate or to trade in the derivatives that triggered the 2008 Great Financial Crisis, but they choose not to because they thought that the notoriously unstable financial sector had learned to self-regulate. It hadn't.

This is why I call the 2008 Great Recession the 'Deregulation Delusion II' Recession. (The 'Deregulation Delusion I' was the Savings and Loan fiasco of Reaganomics, of course.)

The 'Republican Revolution' Congress in the 1990s, Newt Gingrich, Dick Armey, Phil Graham(sic), et al, and President Bill Clinton, deregulated the banks. This allowed the largest banks in New York and San Francisco to become national banks and much, much larger, by buying smaller regional and local banks.

The deregulation of the banks also allowed them to own stockbrokers, to own insurance companies, and to trade stocks and derivatives like the tranced mortgage derivatives that triggered the Deregulation Delusion II Recession. The Republican Revolution Congress also deregulated all derivatives.

Libertarianism kills ... the economy.

 

[SimpleDon]

I don't remember the 2008 banking bailout being called welfare....even though it really was.

I remember it being called welfare, quite frequently and quite correctly.

The truth is a little more complicated than that. First, we need a little background to understand what banking is.

Banking is critical for the economy. By making loans the banks create the money the economy needs for investment and consumption.

The banks don't loan out deposits nor do they loan their own money. The banks loan out money created for the purpose by the government through the Treasury Department and the Federal Reserve Bank. This is what makes a bank a bank and why a bank making a loan to you is different than borrowing money from your uncle or your local neighborhood loan shark.

Why is this simple and easily verifiable fact so misunderstood?

Probably for the same reason that we have to endure racial bigotry today more than 150 years past its expiration date and one half of the nation in the grip of lies and conspiracy theories think we can safely ignore the reality of science, because a few very politically powerful people benefit from it.

Many of these same people misstate this money creation process in order to demonize the Fed, the US government, and the very necessary banking regulations, as in "the Fed and The Treasury department are running the printing presses overtime in order to create inflation like in the Weimar Republic in Germany after World War I." The kneejerk response that we see so often on this board.

The government doesn't decide how much money to create, it is determined by the demand in the economy for investment and consumption.

Some others characterize this as "money created out of thin air," but this is also unfair. This is money created exactly for the reasons that we would want it to be created; because the economy needs it and has a good use for it.

The banks' ability to create money carries obvious risks with it, especially when the banks are private, for-profit entities. They have to be tightly regulated or else the banks will lower their underwriting standards to make more loans and more profits. Or they will loan the money to themselves to invest in the stock market, or as happened in 2008 to buy risky financial instruments that they created, tranced mortgage derivatives, which Congress declared in the 1990's to be exempt from any regulation.

The more important questions are,

Why did Congress do something as stupid as to declare derivatives to be forever free from regulations?

Why weren't the bankers who were responsible for the collapse of their own banks by their clearly criminal behavior not arrested, convicted, and imprisoned?

Short of that, why did they continue to be in charge of their banks after the financial crisis that they caused?

The answer is simple, the disease known as deregulation spread by a few politically powerful people to make them more money. Deregulation is a cornerstone of neoliberalism, a disease that infects the study of economics developed to make a few powerful people more money.

The other key elements of neoliberalism are the fantasy of the self-regulating free market, the gold standard for money, the never before achieved true free market for labor where everyone is paid what they are worth, free trade and the free movement of capital, open borders, and the elimination of cash welfare. In other words, fantasies and delusions.

Neoliberalism is our current political economics that sets our nation's economic policies, implemented by Milton Friedman's "as if" principle, that if we treat the economy as if these were how the economy works the economy will eventually behave that way.

Do you see any problems with using neoliberalism as our political economics? Or by using the "as if" principle?

Do you think that this might affect our current problems with banking?

So now we are able to answer the question at the start of this.

Why did we bail out the banks?

Once again, the answer is simple. We had to bail them out, because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

There is no requirement for private, for-profit banks to provide this vital function. There is no reason to assert that the for-profit banks are even the best way for the government to use to provide this vital function; as you have noted referencing credit unions. For-profit banks charge higher interest rates, burdening the economy more for this needed service.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest by the best way that capitalism provides, through competition.

 

[Loren Pechtel]

The banks don't loan out deposits nor do they loan their own money. The banks loan out money created for the purpose by the government through the Treasury Department and the Federal Reserve Bank. This is what makes a bank a bank and why a bank making a loan to you is different than borrowing money from your uncle or your local neighborhood loan shark.

Why is this simple and easily verifiable fact so misunderstood?

Huh? How do you say they don't loan out the deposits??

The "creation" of money is simply the dollars moving around--loans do not actually create money, they move it around so that we see the same dollar engage in multiple economic activities at once. The fed creates the original money, most of the money in the economy is due to this moving--beyond the government's direct control. That is why they control it by altering interest rates--make people more or less willing to borrow, this controlling the speed at which it moves. (And when the economy is royally fucked, simply injecting extra money because they run out of control with interest rates.)

Many of these same people misstate this money creation process in order to demonize the Fed, the US government, and the very necessary banking regulations, as in "the Fed and The Treasury department are running the printing presses overtime in order to create inflation like in the Weimar Republic in Germany after World War I." The kneejerk response that we see so often on this board.

The government doesn't decide how much money to create, it is determined by the demand in the economy for investment and consumption.

It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.

Why did Congress do something as stupid as to declare derivatives to be forever free from regulations?

Yup, this is a big problem. In 1929 we learned the risk of allowing margin buying with too high a ratio. We quite sensibly addressed it by putting a limit on margin ratios. However, while derivatives are not loans they suffer from the same sort of problem that they can cause instability when the market changes--and it's no surprise they eventually blew up. (Yes, you can point to other factors that triggered it--they were TNT, not the blasting cap.)

Why weren't the bankers who were responsible for the collapse of their own banks by their clearly criminal behavior not arrested, convicted, and imprisoned?

Because it's extremely hard to prove that any given banker engaged in a criminal act.

Once again, the answer is simple. We had to bail them out, because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

The problem is the banking system lacks the ability for a company to go bankrupt and have it's shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest by the best way that capitalism provides, through competition.

The government rates are not going to be set by market forces. Public-private competition is generally a bad thing because the government business operates more from ideological rules than financial ones.

 

[Harry Bosch]

Huh? How do you say they don't loan out the deposits??

The "creation" of money is simply the dollars moving around--loans do not actually create money, they move it around so that we see the same dollar engage in multiple economic activities at once. The fed creates the original money, most of the money in the economy is due to this moving--beyond the government's direct control. That is why they control it by altering interest rates--make people more or less willing to borrow, this controlling the speed at which it moves. (And when the economy is royally fucked, simply injecting extra money because they run out of control with interest rates.)



It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.

Why did Congress do something as stupid as to declare derivatives to be forever free from regulations?

Yup, this is a big problem. In 1929 we learned the risk of allowing margin buying with too high a ratio. We quite sensibly addressed it by putting a limit on margin ratios. However, while derivatives are not loans they suffer from the same sort of problem that they can cause instability when the market changes--and it's no surprise they eventually blew up. (Yes, you can point to other factors that triggered it--they were TNT, not the blasting cap.)

Why weren't the bankers who were responsible for the collapse of their own banks by their clearly criminal behavior not arrested, convicted, and imprisoned?

Because it's extremely hard to prove that any given banker engaged in a criminal act.

Once again, the answer is simple. We had to bail them out, because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

The problem is the banking system lacks the ability for a company to go bankrupt and have it's shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest by the best way that capitalism provides, through competition.

The government rates are not going to be set by market forces. Public-private competition is generally a bad thing because the government business operates more from ideological rules than financial ones.

I agree with your post. Bankers who broke the law in 2008 were prosecuted in the crash. The last count that I saw was 28. I personally know a banker who spent a few years in jail. But the primary issue that caused the crash was closing loans to people who didn't have the cash flow or credit history to repay the loan. While this is not so smart, there's no law against it.

 

[Jarhyn]

Huh? How do you say they don't loan out the deposits??

The "creation" of money is simply the dollars moving around--loans do not actually create money, they move it around so that we see the same dollar engage in multiple economic activities at once. The fed creates the original money, most of the money in the economy is due to this moving--beyond the government's direct control. That is why they control it by altering interest rates--make people more or less willing to borrow, this controlling the speed at which it moves. (And when the economy is royally fucked, simply injecting extra money because they run out of control with interest rates.)



It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.



Yup, this is a big problem. In 1929 we learned the risk of allowing margin buying with too high a ratio. We quite sensibly addressed it by putting a limit on margin ratios. However, while derivatives are not loans they suffer from the same sort of problem that they can cause instability when the market changes--and it's no surprise they eventually blew up. (Yes, you can point to other factors that triggered it--they were TNT, not the blasting cap.)



Because it's extremely hard to prove that any given banker engaged in a criminal act.

Once again, the answer is simple. We had to bail them out, because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

The problem is the banking system lacks the ability for a company to go bankrupt and have it's shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest by the best way that capitalism provides, through competition.

The government rates are not going to be set by market forces. Public-private competition is generally a bad thing because the government business operates more from ideological rules than financial ones.

I agree with your post. Bankers who broke the law in 2008 were prosecuted in the crash. The last count that I saw was 28. I personally know a banker who spent a few years in jail. But the primary issue that caused the crash was closing loans to people who didn't have the cash flow or credit history to repay the loan. While this is not so smart, there's no law against it.

Adjustable rate loans, during a period of stupidly low rates, with everything designed to create balloon payments when the rates shifted.

They weren't loans, they were foreclosure traps.

 

[Harry Bosch]

Huh? How do you say they don't loan out the deposits??

The "creation" of money is simply the dollars moving around--loans do not actually create money, they move it around so that we see the same dollar engage in multiple economic activities at once. The fed creates the original money, most of the money in the economy is due to this moving--beyond the government's direct control. That is why they control it by altering interest rates--make people more or less willing to borrow, this controlling the speed at which it moves. (And when the economy is royally fucked, simply injecting extra money because they run out of control with interest rates.)



It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.



Yup, this is a big problem. In 1929 we learned the risk of allowing margin buying with too high a ratio. We quite sensibly addressed it by putting a limit on margin ratios. However, while derivatives are not loans they suffer from the same sort of problem that they can cause instability when the market changes--and it's no surprise they eventually blew up. (Yes, you can point to other factors that triggered it--they were TNT, not the blasting cap.)



Because it's extremely hard to prove that any given banker engaged in a criminal act.



The problem is the banking system lacks the ability for a company to go bankrupt and have it's shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest by the best way that capitalism provides, through competition.

The government rates are not going to be set by market forces. Public-private competition is generally a bad thing because the government business operates more from ideological rules than financial ones.

I agree with your post. Bankers who broke the law in 2008 were prosecuted in the crash. The last count that I saw was 28. I personally know a banker who spent a few years in jail. But the primary issue that caused the crash was closing loans to people who didn't have the cash flow or credit history to repay the loan. While this is not so smart, there's no law against it.

Adjustable rate loans, during a period of stupidly low rates, with everything designed to create balloon payments when the rates shifted.

They weren't loans, they were foreclosure traps.

Those are not against the law. I have an ARM on a house right now. ARMs offer the lowest rate. And I plan to pay the house off when the ARM matures. Balloon payments are not against the law. Almost every commercial loan for a business to buy a building has a balloon. The industry standard is a 10-year term with a 25 year amortization. That means a balloon at the end of year 10. Is someone dosn't want an adjustable loan or a balloon, pay a higher interest rate and get it fixed to maturity.

 

[scombrid]

A couple of congressmen. We should definitely elevate their ideas to the highest discussion. What are the multiple QANON GOP incoming congressmen going to propose?

 

[Loren Pechtel]

Adjustable rate loans, during a period of stupidly low rates, with everything designed to create balloon payments when the rates shifted.

They weren't loans, they were foreclosure traps.

They were loans. The intent was to ride the wave up for a while and sell out for profit. They didn't intend to stay in the houses long enough for the downside to blow up on them.

The problem was that as with all bubbles they eventually pop and the result is very bad for those caught by the pop.

 

[Loren Pechtel]

Those are not against the law. I have an ARM on a house right now. ARMs offer the lowest rate. And I plan to pay the house off when the ARM matures. Balloon payments are not against the law. Almost every commercial loan for a business to buy a building has a balloon. The industry standard is a 10-year term with a 25 year amortization. That means a balloon at the end of year 10. Is someone dosn't want an adjustable loan or a balloon, pay a higher interest rate and get it fixed to maturity.

Yup. I've never had anything but an ARM, although no balloons. On average an ARM is always a better deal than a fixed-rate as you're assuming some of the risk rather than the mortgage company. Don't do it if you can't afford the risk, though--if you're going under if the ARM adjusts to it's max rate don't do it. Also, if you don't plan to keep it the whole term the advantage shifts even more towards the ARM.

 

[SimpleDon]

Huh? How do you say they don't loan out the deposits??

Read an explanation of Fractional Reserve Banking, what you have as support to claim that the banks loan out deposits. Search for yourself and find a source that you trust. (Wikipedia has in the past had a good one, but I am reluctant to suggest one any more because other people, not you, just use it as an excuse to ignore what the reference says and to attack the creditability of the source.)

The explanation that you find will say something along the lines of that the bank needs to be able to cover some percentage of its volume of loans with deposits. The explanation will probably use some percentage that makes the math easier, say 10%. But the Fed only required 3 to 8% only when FRB was in force.

No explanation of FRB that I saw told where the other 90% or 97% or whatever comes from.

A very large bank, the member banks of the system, have a reserve account belonging to Fed, which the bank loans out and deposits the loan repayments back in. Smaller banks have similar reserve accounts from member banks. If this account is drawn down to zero the bank goes to the Fed who creates money together with the Treasury Department to replenish it. This is the money created out of thin air, money created to satisfy the demand from the economy for it.

Congress made FRB moot when responding to requests from the banking industry they made commercial demand accounts exempt from the requirements to be used to cover outstanding loans, i.e. 0% had to be held as reserves. Commercial demand accounts, mainly checking accounts for payrolls and to cover daily operations, are the majority of the deposits in the banks.

What they replaced FRB with was a requirement that a bank could only have loans outstanding equal to a multiple of its capitalization, at first it was 10 times but Congress lowered it to 8 times in the aftermath of the Great Recession.

So now 100% of the money that the bank loans out is money that was created by the Fed or money from the interest charged by the banks to cover loans that defaulted, to replace money that was created by the Fed.

The "creation" of money is simply the dollars moving around--loans do not actually create money, they move it around so that we see the same dollar engage in multiple economic activities at once. The fed creates the original money, most of the money in the economy is due to this moving--beyond the government's direct control. That is why they control it by altering interest rates--make people more or less willing to borrow, this controlling the speed at which it moves. (And when the economy is royally fucked, simply injecting extra money because they run out of control with interest rates.)

What you are describing is well known, economists call it the velocity of money. It is as you say, a single dollar changes hands multiple times in a year growing the GDP by a dollar every time it is exchanged. What it doesn't do is count as an additional dollar in the money supply every time it is exchanged.

Once again, I urge you to search for "what is the velocity of money," pick a source that you trust, and see if it is what you are describing above.

The money supply is also well known. Search for "what is the money supply M1" or M2 or M3 or "Currency in Circulation" or "monetary base." They are different methods of counting different bank accounts as part of the money supply. These are made up of "Currency in Circulation" and money in various bank accounts.

Only "Currency in Circulation" (CURRCIR in FRED if you want to see a chart of it) is impacting the economy. Money in a bank account has no impact on the economy. Like everything in mainstream economics, there is a lot of voodoo about which measure of the money supply reflects the impact of money on the economy.

Interest rates control the velocity of money because they cause a change in the number and amounts of loans that directly create money, that put money that was doing nothing for the economy sitting in a reserve account and put it back into the economy. Unfortunately, as interest rates are effectively below zero in relation to the rise in the cost of living and the indexes of business costs, the amount of control the Fed has by adjusting the interest rates is nearly zero.

A much better way is to directly control the amount of money in the economy by using a variable tax rate controlled by the Fed. If we have inflation, increase the taxes withheld by the payroll tax, for example, and put the money from it into the document shredder. If you have deflation in a recession lower the payroll tax and the withholding for it and have the Fed create money to replace the lost taxes in the Social Security and Medicare and Medicaid trust fund.

It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.

The other way that money is created is by the federal government putting its budget into deficit. It has been used recently primarily to give tax relief to rich people. When the budget deficit is given to the bottom 90% of earners they tend to spend the money into the economy and the economy's reaction is positive growth that reduces the impact of the deficit. When the money that is created by the budget deficit is given to the very rich they tend to save the newly created money in stocks and bonds where there is no impact on the overall economy. No impact no growth.

The refusal of mainstream economics to see the effects of income distribution is intentional. The rationale for using neoliberalism rather than reality-based economics as our political economics is to reinstate the importance of the already rich to the economy whether it actually exists or not.

In both the case of Weimar Germany and Zimbabwe the budget deficit wasn't used to finance government expenditures inside the respective countries, the money created went out of the country, to pay reparations for WWI in the case of Germany and to import food in the case of Zimbabwe to make up for a disastrous farmland redistribution policy. Money that leaves the country creates deflation.

Why did Congress do something as stupid as to declare derivatives to be forever free from regulations?

Yup, this is a big problem. In 1929 we learned the risk of allowing margin buying with too high a ratio. We quite sensibly addressed it by putting a limit on margin ratios. However, while derivatives are not loans they suffer from the same sort of problem that they can cause instability when the market changes--and it's no surprise they eventually blew up. (Yes, you can point to other factors that triggered it--they were TNT, not the blasting cap.)

Correct.

Why weren't the bankers who were responsible for the collapse of their own banks by their clearly criminal behavior not arrested, convicted, and imprisoned?

Because it's extremely hard to prove that any given banker engaged in a criminal act.

Partially correct.

After the first much smaller deregulation delusion crisis, the Savings and Loan fiasco, over a thousand bank officers were convicted and sent to prison. The reason that only a handful of bank corporate officers went to prison after the deregulation delusion II crisis was because the very first order of business for Newt Gingrich and the Republican Revolution Congress in 1995, before any of the Contract with America was even considered, was to pass a law giving effective immunity to corporate executives for crimes committed by the corporations. They repealed the laws that sent the S&L corporate officers to prison.

So with no laws, it made it hard to prove criminality.

Once again, the answer is simple. We had to bail them out because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

The problem is the banking system lacks the ability for a company to go bankrupt and have its shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

Half credit for this answer. The only creditor for a failed bank is the Fed and the FDIC, the Federal Deposit Insurance Corporation.

There is a procedure for a failed bank. The bank is liquidated and the assets are used to pay the depositors and probably the deposit insurance company for returning their money. The assets of the bank, the checking and savings accounts are sold to a larger bank that opens the bank for business the next day.

The full credit answer would be because the banks that failed were so big that no one could take them over, except the government which the neoliberal Bush II administration was reluctant to do, literally they were too big to fail. It was a very bad idea to let them get so big, it was a very bad idea to tear down the wall between consumer/commercial banking and investment banking, it was a very bad idea to allow national banks instead of regional and local banks, and it was a very bad idea to let banks own stock brokerages and insurance companies. These bad ideas came from a single source, neoliberalism, and its idea of deregulation.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest in the best way that capitalism provides, through competition.

The government rates are not going to be set by market forces. Public-private competition is generally a bad thing because the government business operates more from ideological rules than financial ones.

That taste in your mouth that is turning fatally soar is Kool-aid if you think that the interest rates on debt are set by market forces today. If any bank realizes they are charging a lower rate than other banks the most probable outcome is a rate increase by the bank charging the lower rate, not a decrease by the banks charging higher interest rates.

Although I do have to admit that my suggestion about the government competing with private banks to replace banking regulations was meant to be provocative and not serious, especially in these days when Wall Street owns one political party outright and one half of the other one.

But the government shouldn't be cowed into not running consumer and commercial banks in cases where the private banking system is not providing the needed services to a geographic area or to a segment of the population. AOC is correct that the poor are not well served by the banking industry. It is just that there is more profit in writing one $500,000 mortgage in the suburbs than there is in writing ten $50,000 mortgages in the city. And there is no reason to believe that the banks serving the poor would lose money, especially a low overhead operation like a postal or internet bank.

 

[Harry Bosch]

Read an explanation of Fractional Reserve Banking, what you have as support to claim that the banks loan out deposits. Search for yourself and find a source that you trust. (Wikipedia has in the past had a good one, but I am reluctant to suggest one any more because other people, not you, just use it as an excuse to ignore what the reference says and to attack the creditability of the source.)

The explanation that you find will say something along the lines of that the bank needs to be able to cover some percentage of its volume of loans with deposits. The explanation will probably use some percentage that makes the math easier, say 10%. But the Fed only required 3 to 8% only when FRB was in force.

No explanation of FRB that I saw told where the other 90% or 97% or whatever comes from.

A very large bank, the member banks of the system, have a reserve account belonging to Fed, which the bank loans out and deposits the loan repayments back in. Smaller banks have similar reserve accounts from member banks. If this account is drawn down to zero the bank goes to the Fed who creates money together with the Treasury Department to replenish it. This is the money created out of thin air, money created to satisfy the demand from the economy for it.

Congress made FRB moot when responding to requests from the banking industry they made commercial demand accounts exempt from the requirements to be used to cover outstanding loans, i.e. 0% had to be held as reserves. Commercial demand accounts, mainly checking accounts for payrolls and to cover daily operations, are the majority of the deposits in the banks.

What they replaced FRB with was a requirement that a bank could only have loans outstanding equal to a multiple of its capitalization, at first it was 10 times but Congress lowered it to 8 times in the aftermath of the Great Recession.

So now 100% of the money that the bank loans out is money that was created by the Fed or money from the interest charged by the banks to cover loans that defaulted, to replace money that was created by the Fed.



What you are describing is well known, economists call it the velocity of money. It is as you say, a single dollar changes hands multiple times in a year growing the GDP by a dollar every time it is exchanged. What it doesn't do is count as an additional dollar in the money supply every time it is exchanged.

Once again, I urge you to search for "what is the velocity of money," pick a source that you trust, and see if it is what you are describing above.

The money supply is also well known. Search for "what is the money supply M1" or M2 or M3 or "Currency in Circulation" or "monetary base." They are different methods of counting different bank accounts as part of the money supply. These are made up of "Currency in Circulation" and money in various bank accounts.

Only "Currency in Circulation" (CURRCIR in FRED if you want to see a chart of it) is impacting the economy. Money in a bank account has no impact on the economy. Like everything in mainstream economics, there is a lot of voodoo about which measure of the money supply reflects the impact of money on the economy.

Interest rates control the velocity of money because they cause a change in the number and amounts of loans that directly create money, that put money that was doing nothing for the economy sitting in a reserve account and put it back into the economy. Unfortunately, as interest rates are effectively below zero in relation to the rise in the cost of living and the indexes of business costs, the amount of control the Fed has by adjusting the interest rates is nearly zero.

A much better way is to directly control the amount of money in the economy by using a variable tax rate controlled by the Fed. If we have inflation, increase the taxes withheld by the payroll tax, for example, and put the money from it into the document shredder. If you have deflation in a recession lower the payroll tax and the withholding for it and have the Fed create money to replace the lost taxes in the Social Security and Medicare and Medicaid trust fund.

It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.

The other way that money is created is by the federal government putting its budget into deficit. It has been used recently primarily to give tax relief to rich people. When the budget deficit is given to the bottom 90% of earners they tend to spend the money into the economy and the economy's reaction is positive growth that reduces the impact of the deficit. When the money that is created by the budget deficit is given to the very rich they tend to save the newly created money in stocks and bonds where there is no impact on the overall economy. No impact no growth.

The refusal of mainstream economics to see the effects of income distribution is intentional. The rationale for using neoliberalism rather than reality-based economics as our political economics is to reinstate the importance of the already rich to the economy whether it actually exists or not.

In both the case of Weimar Germany and Zimbabwe the budget deficit wasn't used to finance government expenditures inside the respective countries, the money created went out of the country, to pay reparations for WWI in the case of Germany and to import food in the case of Zimbabwe to make up for a disastrous farmland redistribution policy. Money that leaves the country creates deflation.

Why did Congress do something as stupid as to declare derivatives to be forever free from regulations?

Yup, this is a big problem. In 1929 we learned the risk of allowing margin buying with too high a ratio. We quite sensibly addressed it by putting a limit on margin ratios. However, while derivatives are not loans they suffer from the same sort of problem that they can cause instability when the market changes--and it's no surprise they eventually blew up. (Yes, you can point to other factors that triggered it--they were TNT, not the blasting cap.)

Correct.

Why weren't the bankers who were responsible for the collapse of their own banks by their clearly criminal behavior not arrested, convicted, and imprisoned?

Because it's extremely hard to prove that any given banker engaged in a criminal act.

Partially correct.

After the first much smaller deregulation delusion crisis, the Savings and Loan fiasco, over a thousand bank officers were convicted and sent to prison. The reason that only a handful of bank corporate officers went to prison after the deregulation delusion II crisis was because the very first order of business for Newt Gingrich and the Republican Revolution Congress in 1995, before any of the Contract with America was even considered, was to pass a law giving effective immunity to corporate executives for crimes committed by the corporations. They repealed the laws that sent the S&L corporate officers to prison.

So with no laws, it made it hard to prove criminality.

Once again, the answer is simple. We had to bail them out because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

The problem is the banking system lacks the ability for a company to go bankrupt and have its shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

Half credit for this answer. The only creditor for a failed bank is the Fed and the FDIC, the Federal Deposit Insurance Corporation.

There is a procedure for a failed bank. The bank is liquidated and the assets are used to pay the depositors and probably the deposit insurance company for returning their money. The assets of the bank, the checking and savings accounts are sold to a larger bank that opens the bank for business the next day.

The full credit answer would be because the banks that failed were so big that no one could take them over, except the government which the neoliberal Bush II administration was reluctant to do, literally they were too big to fail. It was a very bad idea to let them get so big, it was a very bad idea to tear down the wall between consumer/commercial banking and investment banking, it was a very bad idea to allow national banks instead of regional and local banks, and it was a very bad idea to let banks own stock brokerages and insurance companies. These bad ideas came from a single source, neoliberalism, and its idea of deregulation.

In fact, there is a good argument for the federal government to provide consumer and commercial banking directly by setting up postal banking or by other means. Since banks have been largely deregulated, government direct banking could force the banks to charge lower interest in the best way that capitalism provides, through competition.

The government rates are not going to be set by market forces. Public-private competition is generally a bad thing because the government business operates more from ideological rules than financial ones.

That taste in your mouth that is turning fatally soar is Kool-aid if you think that the interest rates on debt are set by market forces today. If any bank realizes they are charging a lower rate than other banks the most probable outcome is a rate increase by the bank charging the lower rate, not a decrease by the banks charging higher interest rates.

Although I do have to admit that my suggestion about the government competing with private banks to replace banking regulations was meant to be provocative and not serious, especially in these days when Wall Street owns one political party outright and one half of the other one.

But the government shouldn't be cowed into not running consumer and commercial banks in cases where the private banking system is not providing the needed services to a geographic area or to a segment of the population. AOC is correct that the poor are not well served by the banking industry. It is just that there is more profit in writing one $500,000 mortgage in the suburbs than there is in writing ten $50,000 mortgages in the city. And there is no reason to believe that the banks serving the poor would lose money, especially a low overhead operation like a postal or internet bank.

Of course banks lend out their deposits. Put it this way, if a bank closes a loan, it either uses it's existing reserves (which includes deposits) or it must borrower. Of course lending out from a bank's deposits is a lower cost of funds for banks. If they have to borrower, it's more expensive. Banks today are very flush with deposits (ie: deposits are greater than loans) and so their cost of funds is lower.

Don: it's a funny statement to say that "So with no laws, it made it hard to prove criminality!" It's not just hard - it's literally impossible! Most bankers are compensated for how many loans (in terms of volume and number) that they close. Of course they want to close loans. That's how they feed their family. It shouldn't be surprising that they push the boundaries in order to compete and get paid more.

 

[Harry Bosch]

Adjustable rate loans, during a period of stupidly low rates, with everything designed to create balloon payments when the rates shifted.

They weren't loans, they were foreclosure traps.

They were loans. The intent was to ride the wave up for a while and sell out for profit. They didn't intend to stay in the houses long enough for the downside to blow up on them.

The problem was that as with all bubbles they eventually pop and the result is very bad for those caught by the pop.

Yes, that's correct. In banking circles, it's called the "greater fool than I" theory. During the boom, home buyers were seeing in some areas RE appreciation of 60 to 70% in a year. People wanted to get into that.

 

[Loren Pechtel]

Read an explanation of Fractional Reserve Banking, what you have as support to claim that the banks loan out deposits. Search for yourself and find a source that you trust. (Wikipedia has in the past had a good one, but I am reluctant to suggest one any more because other people, not you, just use it as an excuse to ignore what the reference says and to attack the creditability of the source.)

Wikipedia can be counted on to take the leftist position right or wrong, but is otherwise generally quite good. In this case I have no problem with it.

The explanation that you find will say something along the lines of that the bank needs to be able to cover some percentage of its volume of loans with deposits. The explanation will probably use some percentage that makes the math easier, say 10%. But the Fed only required 3 to 8% only when FRB was in force.

No explanation of FRB that I saw told where the other 90% or 97% or whatever comes from.

Then I suggest looking at your own source:

Fractional Reserve Banking

involves banks accepting deposits from customers and making loans to borrowers while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities.

Which doesn't say what you think it says. This does not say that they can loan more than they have, but rather that they are limited to loaning less than they have. What you are missing is the vast majority of dollars loaned out get deposited back in some bank--probably not the same one but it will average out. Picture a simple world with only one bank and obviously those deposits come right back into the bank. The bank now has more money on deposit with which to make more loans, minus the reserve percentage. The money is loaned out, comes back, repeat.

Lets take a simple society with one bank, a million dollars (in the bank) and a 10% reserve requirement. If the bank loans as much as it possibly can you will have ten million in loans. What you're missing is the bank's books show 11 million in deposits and 10 million in loans, they have not loaned more than they had! They loaned more than they started with, but that's because the loans were deposited back in the bank. (Money can't be any place other than in the bank or as currency--and the currency supply is a small fraction of the total money supply.)

What you are describing is well known, economists call it the velocity of money. It is as you say, a single dollar changes hands multiple times in a year growing the GDP by a dollar every time it is exchanged. What it doesn't do is count as an additional dollar in the money supply every time it is exchanged.

Once again, I urge you to search for "what is the velocity of money," pick a source that you trust, and see if it is what you are describing above.

What you are missing is that for purposes of it's effect on the economy the dollar is counted each time it changes hands. Basically, economic activity = money supply * velocity.

Only "Currency in Circulation" (CURRCIR in FRED if you want to see a chart of it) is impacting the economy. Money in a bank account has no impact on the economy. Like everything in mainstream economics, there is a lot of voodoo about which measure of the money supply reflects the impact of money on the economy.

Interest rates control the velocity of money because they cause a change in the number and amounts of loans that directly create money, that put money that was doing nothing for the economy sitting in a reserve account and put it back into the economy. Unfortunately, as interest rates are effectively below zero in relation to the rise in the cost of living and the indexes of business costs, the amount of control the Fed has by adjusting the interest rates is nearly zero.

Correct.

A much better way is to directly control the amount of money in the economy by using a variable tax rate controlled by the Fed. If we have inflation, increase the taxes withheld by the payroll tax, for example, and put the money from it into the document shredder. If you have deflation in a recession lower the payroll tax and the withholding for it and have the Fed create money to replace the lost taxes in the Social Security and Medicare and Medicaid trust fund.

But here you go wrong. The multiplication effect exists no matter what--you must create/destroy vast sums to produce the same effect as you get with a small change in interest rates. You can also change things faster with interest rates than you can with the printer and the shredder--and much of the problem the Fed has with holding things on an even keel is the lag of even the interest rate approach. Your approach would lag even more than thus cause the economy to wiggle around even more.

It should be determined by the demand. So far, in the US it has been. In places like the Weimar Republic and Zimbabwe it was used to fund government spending, with catastrophic results.

The other way that money is created is by the federal government putting its budget into deficit. It has been used recently primarily to give tax relief to rich people. When the budget deficit is given to the bottom 90% of earners they tend to spend the money into the economy and the economy's reaction is positive growth that reduces the impact of the deficit. When the money that is created by the budget deficit is given to the very rich they tend to save the newly created money in stocks and bonds where there is no impact on the overall economy. No impact no growth.

While the tax cuts have run up the deficit they don't create money, they just move money from elsewhere into government bonds.

And when they put it in stocks they give it to somebody--and that somebody does something with it. Likewise with commercial bonds. Government bonds are another matter--that does take it out of the cycle. Note that you have it exactly backwards--increasing the deficit removes money from the economy, it doesn't add money to the economy.

The refusal of mainstream economics to see the effects of income distribution is intentional. The rationale for using neoliberalism rather than reality-based economics as our political economics is to reinstate the importance of the already rich to the economy whether it actually exists or not.

You are refusing to see that an invested dollar goes somewhere, it doesn't just get parked.

In both the case of Weimar Germany and Zimbabwe the budget deficit wasn't used to finance government expenditures inside the respective countries, the money created went out of the country, to pay reparations for WWI in the case of Germany and to import food in the case of Zimbabwe to make up for a disastrous farmland redistribution policy. Money that leaves the country creates deflation.

You say that the money in Zimbabwe went to import food, removing it from the economy and causing deflation. Zimbabwe didn't have deflation, they had insane inflation.

Once again, the answer is simple. We had to bail them out because what they do is vital for the economy. In our real economy, the government is responsible for the governance of the banks. The banks don't self-regulate, obviously.

The problem is the banking system lacks the ability for a company to go bankrupt and have its shares turned over to creditors but continue to operate. Bail them out, take the shares and trickle them back onto the market at a set rate.

Half credit for this answer. The only creditor for a failed bank is the Fed and the FDIC, the Federal Deposit Insurance Corporation.

There is a procedure for a failed bank. The bank is liquidated and the assets are used to pay the depositors and probably the deposit insurance company for returning their money. The assets of the bank, the checking and savings accounts are sold to a larger bank that opens the bank for business the next day.

Which assumes there's a buyer. That wasn't a viable approach in 2008, we bailed them out with basically zero consequences.

That taste in your mouth that is turning fatally soar is Kool-aid if you think that the interest rates on debt are set by market forces today. If any bank realizes they are charging a lower rate than other banks the most probable outcome is a rate increase by the bank charging the lower rate, not a decrease by the banks charging higher interest rates.

Just because the market doesn't say what you want it to say doesn't mean it's not at work.

Simple test: Credit cards that have high underwriting standards generally have lower interest rates than those with lesser underwriting standards.

But the government shouldn't be cowed into not running consumer and commercial banks in cases where the private banking system is not providing the needed services to a geographic area or to a segment of the population. AOC is correct that the poor are not well served by the banking industry. It is just that there is more profit in writing one $500,000 mortgage in the suburbs than there is in writing ten $50,000 mortgages in the city. And there is no reason to believe that the banks serving the poor would lose money, especially a low overhead operation like a postal or internet bank.

Of course the $500k mortgage makes more profit--1/10th the work. Realistically, it doesn't matter which makes more profit anyway--they'll write any loan that looks good enough.

 

[Canard DuJour]

Then I suggest looking at your own source:

Fractional Reserve Banking

involves banks accepting deposits from customers and making loans to borrowers while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities.

Which doesn't say what you think it says. This does not say that they can loan more than they have, but rather that they are limited to loaning less than they have.

It certainly does not say that if you read the rest.

What you are missing is the vast majority of dollars loaned out get deposited back in some bank--probably not the same one but it will average out. Picture a simple world with only one bank and obviously those deposits come right back into the bank. The bank now has more money on deposit with which to make more loans, minus the reserve percentage.

Obviously not. If Customer A makes a $100 payment to Customer B, Customer A's account is debited by $100 and Customer B's account is credited by $100. The total quantity of money on deposit is unchanged no matter how many transactions occur.

Lets take a simple society with one bank, a million dollars (in the bank) and a 10% reserve requirement. If the bank loans as much as it possibly can you will have ten million in loans. What you're missing is the bank's books show 11 million in deposits and 10 million in loans, they have not loaned more than they had! They loaned more than they started with, but that's because the loans were deposited back in the bank. (Money can't be any place other than in the bank or as currency--and the currency supply is a small fraction of the total money supply.)

i) Yes they would have "loaned more than they had" since how much they "had" and how much they "started with" mean the the same thing. The bank would obviously have loaned more more than it "had" or "started with" since 11,000,000 is more than 1,000,000.

ii) That isn't, in any case, how it actually works. That's the "money multiplier" model of money creation, which most central banks, the BIS and IMF aver is not how it works. It's readily falsified by the observation that the broad money supply in countries with minimum reserve ratio requirements is often a far larger multiple of the monetary base than would be possible if it were. It's also been empirically falsified by monitoring internal accounting at individual banks, e.g. by Prof. Richard Werner: https://www.sciencedirect.com/science/article/pii/S1057521914001070

 

[Bomb#20]

They might or might not be. "Public" and "tax-funded" aren't synonyms. When commercial banks suffer heavy losses, bailouts - contrary to popular misconception and journalism - generally aren't tax funded:

[YOUTUBE]https://www.youtube.com/watch?v=hiCs_YHlKSI[/YOUTUBE]

Like your man says, more akin to printing money than borrowing. But printing money is borrowing -- currency is a debt instrument. The bailout money from the Fed is a loan to the bank. If it's repaid -- which they mostly were -- no big deal. But if it isn't repaid, the akin-to-printed money will be a permanent addition to the money supply, bumping inflation up unless the Fed compensates elsewhere -- which it probably will: some other government operation will be financed by the taxpayers instead of by more akin-to-printing money. Or else they'll allow inflation to rise, which amounts to a tax on the currency held by the public. Money is fungible so it's easy to metaphysically relabel, but one way or another an unrepaid bailout is coming out of the taxpayers' hides.

It's functionally a state-owned credit union. If new public banks operate themselves like credit unions and lend with an eye to repayment, then they won't be "tax-funded". If new public banks instead operate themselves with an eye to "the public is finally capable of engineering loans and interest that actually make sense based on needs rather than 'risk', the latter being a concept that is really justification for charging more of those with the ability to pay less",

I don't see any incompatibility, but I think you're quoting a forum participant, not H.R.8721, which has yet to be submitted.

Sure; I quoted him because he has a gift for phrasing and appears to have perfectly captured the overall sentiment behind AOC et al.'s rhetoric on the subject.

then they will be "tax-funded".

They might or might not be. That'd be a policy decision in the event of insolvency or illiquidity; not a corollary of publicness.

True, the government might create a public bank and then let it go bankrupt and stiff all the depositors. But that seems an unlikely scenario.

 

[Bomb#20]

You are correct, but only if you are talking about raw numbers of banks. ... But in terms of the business of banking, these five handle about 70% of the banking done in the US, including banking for hundreds of smaller banks, by their buying of loans from the smaller banks. So by bailing out these banks, the government bailed out 70% of the banking and banks in the US. This is lots of banks.

That's an odd way of looking at it. It's like saying if I go broke and the government bails me out, that means it also bailed out the supermarket I bought my food from.

The banks that needed public funding hadn't been acting like the ones that didn't. The problem isn't private banks; the problem is the government practice of rewarding banks for not acting like the banks that didn't need public funding.

It was the government's fault but I am pretty sure it wasn't in the way that you think. The Fed together with the SEC had ample authority to order the banks not to originate or to trade in the derivatives that triggered the 2008 Great Financial Crisis, but they choose not to because they thought that the notoriously unstable financial sector had learned to self-regulate. It hadn't.

I am as usual highly skeptical of your endless stream of unsupported claims as to why other people made the decisions they made. Do you have evidence that the Fed and SEC thought the financial sector had learned to self-regulate?

This is why I call the 2008 Great Recession the 'Deregulation Delusion II' Recession. ... The Republican Revolution Congress also deregulated all derivatives.

Libertarianism kills ... the economy.

I am likewise highly skeptical of your endless stream of unsupported claims that a philosophy that appeals to 2% of the population is nonetheless so powerful it controls the economic destiny of the world. I know it's your personal bete-noire and anything can serve as a launchpad for another screed against it; but deregulation-plus-bailouts is not Libertarianism.

 

[Bomb#20]

I remember it being called welfare, quite frequently and quite correctly.

The truth is a little more complicated than that. First, we need a little background to understand what banking is.

I know you're not really trying to argue with me but are just launching into another of your conspiracy theory rants. But that said...

Banking is critical for the economy. By making loans the banks create the money the economy needs for investment and consumption.

The banks don't loan out deposits nor do they loan their own money. The banks loan out money created for the purpose by the government through the Treasury Department and the Federal Reserve Bank.

... you've contradicted yourself straight out of the starting gate. First you say the money is created by the banks; then, literally two sentences later, you say the money is created by the government.

Why is this simple and easily verifiable fact so misunderstood? ... because a few very politically powerful people benefit from it.

 

[Bomb#20]

The problem is the banking system lacks the ability for a company to go bankrupt and have it's shares turned over to creditors but continue to operate.

Why do you say that? Bankruptcy courts do that sort of thing every day.

 

[Bomb#20]

It was a very bad idea to let them get so big, it was a very bad idea to tear down the wall between consumer/commercial banking and investment banking, it was a very bad idea to allow national banks instead of regional and local banks, and it was a very bad idea to let banks own stock brokerages and insurance companies. These bad ideas came from a single source, neoliberalism, and its idea of deregulation.

Not commenting on your bete-noire, or on your other judgments; but allowing national banks instead of regional and local banks is not a very bad idea; it's a very good idea. Regional and local banks are overexposed to regional and local risks; being nationwide is a form of diversification. In 1929 the U.S. had 30,000 banks, all regional and local; 10,000 of them failed during the Depression. In 1929 Canada had 10 banks, all national; 0 of them failed during the Depression.