2016: The Year of Bond Defaults

#101
#101
bamawriter said:
Indexing to gold, silver, aluminum, or whatever doesn't change the fact that money lent by a depository institution reduces the amount the institution has on reserve. It is the same "scheme" without the ability to control interest rates. We were still on the gold standard when the market crashed in 1929.
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That was a case of loose lending practices in the 1920's, also. Not because of the gold standard.

If you notice, once FDR got in office, the price of Au went from $20 to $35 per ounce to reflect just how much more money printing we had done since the Fed Reserve was created 20 years prior.
 
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#102
#102
Orange_Crush said:
And there you go. It's a system that designed to fail. But the banks aren't what will "fail". It's the debtor that fails.

I know that bamawriter and GAVol will take issue with the above, so let's look at the real world application.

Borrower goes into a bank seeking a loan. The bank knows that they probably can't pay the loan back, but the loan is an "asset" that goes on their books. They have little or no skin in the game because they get to create the "money" they are loaning out with a few strokes of the old QWERTY.

They create the money out of thin air, just like all of the other banks are doing. But they don't create the $$$ that will be required to pay the interest on the loan (just like all the other banks have been doing.)

The banking industry has created an economy where, by definition, more debt exists than money to pay off the debt (principle + interest). In other words, it is impossible for all of the debt to be paid off. This is important to keep in mind as we are considering John and Jane Doe below...

All of the Jane and John Does out there now get to play Economic Musical Chairs... With more debt in the economy than money, we get to run around chasing the available $$$ to pay the debts (principle + interest) when only the principle exists.

When the music stops for any given round, the loan (that was created from nothing by the bank) is called in by the bank. For anyone without access to the money that actually exists, the bank gets their real asset through foreclosure, and the music starts up again. More debt than $$$ still exists, more chairs are removed, more people lose their homes, and the bank gets more real assets in exchange for the "debt" assets on their books (that they created from nothing).

And on and on the Ponzi scheme goes, designed to fail (i.e. trade created $$$/debt for real assets). And when the system fails, we (the tax-paying hostages), give the banks lots of our $$$ through taxes because they are too big/important to fail.

But now, according to some, not only are they too big to fail, the very system they implement is so important that we could never have an economy that worked in any other way. (Or maybe that's not what GA said. Maybe he just meant that we should keep the Ponzi scheme b/c if we did away with the Ponzi scheme, the Ponzi scheme wouldn't work... Not sure... But I expect that we could have a working economy that is not a fiat economy Ponzi scheme since we've had them before.)
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Remember the government had some input into that, too. Banks were a bit more careful about lending money until the government turned it into a racial issue and congress started eliminating some of the restrictions that kept banks more honest. That and the rush to be bigger broke the dam, and banks were rushing to lend.

Banks didn't any longer even do the mortgage loan checks themselves - somebody else was surely to blame for not thoroughly vetting deals - ability to pay and property valuation; besides there was that legal stigma attached to saying "no" especially to protected classes. And by then banks had figured out they could sell debt - somebody else could take that asset (very possibly uncollectable debt) as "investment" - and they could flame on. I think it was Ras who pointed out that infinite money chasing finite goods is a problem, too. Skyrocketing property values simply following the economic principle of supply and demand. Assets valued way beyond reality, and all it took was a little chink in the wall.

But, hey, these are modern times; no reason to let old fashioned scruples and standards get in the way. 1929 was a long time ago; we're so much more advanced (progressives with electronics) than those people who put things back together after that little mess. Free money leads to a robust (if inflationary) economy - growth at all and any cost - at least until something upsets a market somewhere.
 
#103
#103
Orange_Crush said:
And do away with fractional reserve and tell banks that they can't lend it if they don't have the reserves on hand. Then it wouldn't be a Ponzi scheme. There would not be more debt than money, the banks would be much more careful as to who they lent to, and they would be much more accountable.

I know... I know... The doom and gloom that the economy would seize b/c debt would cease to drive the economy. Woe is us... We'd have an economy that wasn't driven by debt. I don't think that would be a bad thing in the long run.
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Exactly
 
#104
#104
Rasputin_Vol said:
Why would you still need the money supply to grow if there are no goods to buy?
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My point is that you can't just create money exponentially if there's no demand from borrowers. In theory, a fractional system could turn $100 into $1,000 using current reserve requirements, but they can't just create credit for the sake of creating credit without the market intervening.
 
#105
#105
bamawriter said:
If a depository institution has 1 billion on deposit, and lends $100, it has created money.
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It doesn't create money until it lends money it doesn't have on reserves.

bamawriter said:
Its reserve would still be vastly larger than its receivables, but if every depositor came in to withdraw his balance, the bank is going to be $100 short.
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And you would deserve to go bankrupt in that scenario. How many bad bets on a 1:1 reserve ratio did you have to make to get to that point? Or, would you prefer the fractional reserve option? I deposit $1000 on Monday, you loan out $900 by Wednesday and I come in Friday to ask for my $1000 back. In that scenario, all you need is one depositor per 9 borrowers to cause a bank run.

bamawriter said:
Any scenario in which deposits are subsequently lent requires the creation of money.
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Is it the responsibility of private banks to create our legal tender in the United States?
 
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#106
#106
GAVol said:
If there are no goods to buy, the money supply will stop growing. For every buyer, there has to be a seller. For every borrower there have to be depositors willing to not spend money. For every liability there is an asset.
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And for more money than goods there is inflation; and when something upsets it all and the bubble bursts, every "asset" is debt.
 
#107
#107
GAVol said:
My point is that you can't just create money exponentially if there's no demand from borrowers. In theory, a fractional system could turn $100 into $1,000 using current reserve requirements, but they can't just create credit for the sake of creating credit without the market intervening.
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Yet that is precisely what we have been doing since 2008, GA. The borrowers got wiped out in 2008 and are up to their eyeballs in debt right now. We've driven interest rates to 0% and started bank with a greater vengeance than before with subprime lending in order to try to jump start the economy... in the process we are just blowing an even larger bubble.
 
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#108
#108
AM64 said:
And for more money than goods there is inflation; and when something upsets it all and the bubble bursts, every "asset" is debt.
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The assets will still be assets. Money doesn't cause bubbles. Stupid decisions do.
 
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#109
#109
Orange_Crush said:
If I got to print my own money, I could write every loss off too--no harm, no foul--right? So, you're saying that the banks get to create money out of nothing, loan it out, add it as an asset on their ledgers, and then write it off as a loss when they lose it. It can always be listed as an asset, unless they lose it, then it was never a liability.

But a wheel and a radiator is a car. And it was never a liability to give the current worth of a Dodge Challenger, when you may only get a wheel and a radiator?

Equivocate much?
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Illustrates perfectly how banks win no matter what.
 
#111
#111
DancingOutlaw said:
That's not really an answer. 1:1 or no?
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No.

The money supply should only grow at the rate of resource growth.

Edit: I keep forgetting that in the present paradigm, banks are creating our legal tender.

To answer your question again, if banks want to engage in fractional reserve lending, they can. What they would have to do is issue bank notes to each borrower, but not US legal tender. People can trade with the bank notes and that only puts at risk that particular bank, not the entire economy.
 
#119
#119
bamawriter said:
I'm sure he won't. But this entire debate has been about whether or not we should call something what it happens to be. "Legal tender" is not a nebulous term.
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That borrower can take his/her electronic legal tender from their acct and trade it for payments, goods and services, public and private.
 
#123
#123
Rasputin_Vol said:
No.

The money supply should only grow at the rate of resource growth.

Edit: I keep forgetting that in the present paradigm, banks are creating our legal tender.

To answer your question again, if banks want to engage in fractional reserve lending, they can. What they would have to do is issue bank notes to each borrower, but not US legal tender. People can trade with the bank notes and that only puts at risk that particular bank, not the entire economy.
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Pretty sure that under that model, banks would be largely out of the lending business.

Look at what has happened the last few years. Bank reserves have gone up. Consumer lending is down.
 
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#124
#124
GAVol said:
Pretty sure that under that model, banks would be largely out of the lending business.

Look at what has happened the last few years. Bank reserves have gone up. Consumer lending is down.
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Yep. Their profits will come from making change for vending machines and paying interest to savings accounts. :crazy:

They will still be in the lending business because that is their business. Lending will just slow, which would be a good thing in the long term.
 
#125
#125
GAVol said:
Pretty sure that under that model, banks would be largely out of the lending business.

Look at what has happened the last few years. Bank reserves have gone up. Consumer lending is down.
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Bank reserves have gone up because the toxic "assets" were transferred from the bank's balance sheet to the fed's balance sheet at face value. Those excess reserves were a handout to the banks at the expense of everyone else.
 
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