I am sorry that it has taken me so long to answer you. Life has intruded, and I wanted to try out on your different ways to explain these things.
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 had a good one in the past, 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.
Yes, Wikipedia makes an effort to report facts, which have been established repeatedly on these pages that facts have a liberal bent, unlike conservatives who need lies and conspiracy theories to justify their ideology.
Glad to see you understand this basic fact.
Then I suggest looking at your own source:
Fractional Reserve Banking
Wikipedia said:
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.
I agree with this.
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.
No, it says that the bank has to restrict its total amount of loans to some small percentage of their deposits. If the percentage is, say, 5%, the bank is limited to total loans of twenty times the amount of deposits in hand. However, I believe another reserve has to be kept to cover day to day demand accounts, which are the majority of the bank's money.
100% reserve banking would mean that the banks are restricted to the total amount of loans they have in deposits. But reserve banking doesn't mean that they loan out the deposits, no matter the reserve percentage.
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.
I certainly didn't miss this. In fact, I listed in post #106 to Harry as a reason that we know that banks don't loan out deposits; if they deposited the loan amount into the borrowers account in the same bank, it means that the amount of the loan is in the bank's books twice as a deposit.
Besides, deposits are liabilities to the bank. Loans are assets of the bank. Somewhere in your explanation of deposits becoming loans becoming deposits to allow more loans, you will cross the line of turning liabilities into assets repeatedly. I am not sure, but I suspect that this might run foul of the accounting rules.
Let's 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.)
You are the one saying that the bank loans out its deposits. You shouldn't be arguing with yourself. The bank only had a million dollars in deposits to loan out. After that, they were loaning money created somehow and not by double accounting deposits. I sent you to Wikipedia to see if they told you where the 9 million dollars came from to total the 10 million in loans. Did they?
A bank makes profits by making loans. Without any regulations, a could make as many loans as it wants to, and the Fed would be obligated to make as much money as the bank needs to make the loans. Therefore the Fed is faced with a constant battle to find some way to limit the loans that a bank can make. The battle is with the Congress in our system of you can only have as much representative democracy as you can pay for, and the banks can pay a lot.
FRB was in force for many years requiring banks to limit their loans to some percentage of the deposits they have in the bank. This didn't mean that the bank loaned out even the deposits' reserve amount, 10% in your simple and therefore irrelevant example. In fact, it means the opposite, that they have to hold this amount of deposits in reserve, hence the name.
The current limitation is that a bank can only loan out a total of 8 times its capitalization. This doesn't mean that the bank loans out its capitalization. That would be as nuts as repeatedly insisting that the bank loans out its deposits, which are the bank's liabilities.
What you are describing is well known; economists call it the velocity of money. As you say, a single dollar changes hands multiple times in a year growing the GDP by a dollar every time it is exchanged. It doesn't 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 you trust, and see if it is what you describe above.
What you are missing is that for its effect on the economy, the dollar
is counted each time it changes hands. Basically, economic activity = money supply * velocity.
I did point this out. See where I put my statement in bold above. I said that the velocity of money added to GDP but not to the money supply, as you said.
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, putting money that was doing nothing for the economy sitting in a reserve account and putting it back into the economy. Unfortunately, as interest rates are effectively below zero with the rise in the cost of living and the indexes of business costs, the Fed's control 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, such as putting 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 holding things on an even keel is the lag of even the interest rate approach. Your approach would lag even more than this cause the economy to wiggle around even more.
I don't know what you mean by the economy having to "wiggle around."
It is pretty easy. Inflation is too much money in the economy. Money is in the hands of people who want to spend it. So prices go up. Increasing the payroll tax and the amount of money withheld to pay those taxes will have nearly an immediate impact, a maximum lag of month, on the economy's amount of money if the government shreds the money if they don't spend it into the economy. Basically, ding everyone a little bit to control inflation rather than crippling the part of the economy that sells big-ticket items.
Raising interest rates doesn't trigger a multiplication factor. In theory, it cuts down the demand for high-cost items like homes, cars, white goods, commercial and industrial construction, etc., things that require a loan to buy. But when it is below zero, taking into account the inflation, changes in the interest rates don't impact the economy.
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 economy. The economy's reaction is positive growth that reduces the impact of the deficit. When the money 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.
Yes, we sell T-Bills to raise the money to give to the rich in tax cuts.
I bet that the T-Bill owner believes that he still has the $10,000 just in the form of a bond. Do you want to tell him that his money has been destroyed when he bought the bond, or should I? You believe it, so you should be the one to tell him. If only I could find another way to convince you, you might not have to do it.
Let's see; you like identities,
Your identity above is,
Y = M * v
Where Y is GDP, M one of the money stocks and v is the velocity of money. GDP is a flow of money through the economy in a year, and the money stock is a fixed amount, a stock. The velocity of money turns the money stock into a flow.
As I said before, there are many different money stocks measures, so there are just as many different velocities of money. This is not very useful for determining if the budget deficit creates money, is it?
Try this,
Y = C + I + G + (X - W)
Where Y is GDP, C is consumer spending, I is business investment, G is government spending, X is the exports plus the spending for non-residents for US stocks and bonds, insurance and real estate, and W is imports plus the same things that US residents buy ex-US - because I & M were already taken. This is the national identity, the cash flow for the US economy. But it still doesn't get us closer to answering our question. But there is one more identity that might help, the household identity.
Y = C + S + T
Where S is private savings and T is taxation adjusted for transfer payments to the household. The Y here is national income for households which is only about 60% of GDP. Still, for our purposes it is close enough because they move together, i.e. what we are interested in, the dY/dt, of each are proportional.
This means that we can combine the two identities like this,
C + S + T = C + I + G + (X - W)
which reduces to, S + T = I + G + (X - W) or by subtracting T and I from both sides we get,
(S - I) = (G - T) + (X - W)
this is where we want to be, (G - T) is the budget surplus or deficit, right?
So what does this tell us? It tells that the private savings minus the business investment equals the government budget deficit plus the net exports, that trade deficits reduce private savings and that trade surpluses add to private savings, and likewise, that budget deficits add to private savings and budget surpluses reduce private savings.
These are flows of money to the different sectors of the economy. This is apparently radical economics, not accepted by mainstream economics who prefer their seemingly never-ending quest for a valid mathematical model of the economy. Which has always been hamstrung by the incorrect assumptions of mainstream economics.
Their computer model of the economy couldn't have been used for this discussion because until recently banking and money weren't included in their models. After all, they assumed that these things were transparent to the economy and didn't matter. It makes it obvious why they couldn't predict the Great Financial Crisis and Recession.
In industrial processes, we take a different approach; we base our models on the flows of materials, heat, and gases through the system to produce a gas and material balance. We know that the flows of materials, heat, and gas all have to sum to zero throughout the process. We then model how each machine affects the flows; for example, a fan takes electrical power and moves gas by compressing it. A belt conveyor and an elevator move material from one place to another, mixers combine flows of solids, liquids, gases, etc.
The logical way to model the economy is to balance the flows of money through the economy. Like my industrial processes the money flows through the economy have to sum to zero, they have to balance out across the economy in any time period.
Wynne Godley and Marc Lavoie's work that they called the "Stock-Flow Consistent" model of an economy and allowed them to be two of only seven economists in the world to predict the Great Financial Crisis of 2008 and the causes of it using the model.
They also predicted that the trade deficit would be more dangerous to the economy than the national deficit, likewise for private debt to be more dangerous to the economy than public debt.
And when they put it in stocks they give it to somebody--and somebody does something with it.
You spare the details. I really wonder what the purpose was when you wrote this sentence. It is pretty obvious that it wasn't "I am going to wow everyone with this insightful logic." It is almost as if you were trying to convince yourself that it was correct, but that you couldn't remember why.
It is not correct. When you buy a stock, none of the money goes to the corporation to build new plants, innovate new products, or improve productivity. It goes to the guy who sold the stock. If he made money off the sale, he made money off you, not the corporation.
The stock market has little to no impact on the economy and this minuscule impact is largely negative. I suspect that your belief in the positive impact of the stock market is largely due to your faith in your brand of the conservative/libertarian ideology and not based on any understanding of the matter's reality. This is why you can't provide any explanation of how the stock market impacts the economy.
Likewise with commercial bonds. Government bonds are another matter--that does take it out of the cycle. Note that you have it exactly backward--increasing the deficit removes money from the economy, it doesn't add money to the economy.
Once again, the already rich get their money from the tax cut, which increases the budget deficit. The Treasury is obligated to finance by selling bonds, which increases the national savings, which is paradoxically also called the national debt.
In numbers, ± from the publics and the economy's view,
1)
|
someone gets a tax cut
|
+ $10,000
|
2)
|
the budget deficit increases and the Treasury sells a bond to the public
|
- $10,000
|
3)
|
the bond is worth, depending on when it is redeemed, plus the interest if held to maturity, minus some small amount if sold early
|
+ $10,000
|
For a gain of $10,000 ± the interest in the money supply.
I am arguing that the T-Bill is a form of US money. I have paid for goods and services manufactured for my company with T-Bills in the early days in the PRC, ~1988. The companies that accepted the T-Bills in payment certainly didn't believe in your assertion that the T-Bills destroyed the 10,000 dollars in money and are worthless.
The refusal of mainstream economics to see the effects of income distribution is intentional. The rationale for using neoliberalism rather than more realistic-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.
But you can't say where it goes? Beyond it "goes somewhere?"
Your "somebody somehow does something" argument is less compelling than you obviously believe.
I can help. If the "investment" is in stocks the money goes to the previous owner of the stock. None of it goes to the corporation. The most likely place for the "invested dollar" to go is back into the stock market.
The use of the word "stock" tells us all that we need to know, it is also the opposite of a flow. Look at the sector identities above. GDP, consumer spending, taxes, investment, etc. are all flows, money moving through the economy.
Money in the stock market is parked. It doesn't leak out into the economy "somehow, somewhere."
People are proud of themselves that they remember to point out that the stock market provides a large degree of liquidity than other forms of ownership. Liquidity is the conversion of a stock into a flow, to a more liquid asset, cash.
If it is in corporate bonds it's a loan to the corporation. The amount of the bond is usually spent into the economy, changing hands and generating growth, the same as if it had been spent into the economy for consumption without a bank loan money. But it is only an slightly lower interest plus saving the originating fees of a bank loan.
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 Zimbabwe went to import food, removing it from the economy and causing deflation. Zimbabwe didn't have deflation, they had insane inflation.
I misspoke.
Money leaving an economy increases private debt. Private debt is -S in the sector identities above.
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 bank's assets, 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.
I agree.
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.
How many times have you shopped for a large commercial loan? We always found a certain sameness to the banks' offerings for loans in the 3 to 50 million dollar range, for both our shorter cash flow for the construction period and for our customers' longer-term financing.
Simple test: Credit cards with high underwriting standards generally have lower interest rates than those with lesser underwriting standards.
Not a surprise. What would be more pertinent would be a comparison between different banks for the same client. I have no idea what that would be.
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 a segment of the population. AOC is correct that the banking industry does not well serve the poor. 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.
You understood part of my point. The law was written because the banks were using the deposits in the intercity banks to make loans in the suburbs. It was when FRB was in force when the amount of deposits was used to limit the loans a bank could make. Currently, it is moot, a bank's capitalization is used for this purpose. The Community Reinvestment Act is only in force in right-wing conspiracy theories and banking industry apologetics for destroying the world's economy in 2008.
