critique of loon theories around banking/money creation/the federal reserve

[SpineyNorman]

I've had quite a lot of people telling me lately about how banks "create money out of nothing", how the federal reserve is a "Ponzi scheme" and other such nonsense. Now I know this is a load of bollocks but I don't really know enough about the way modern banking works to debunk them and explain what's really going on. (The least mental lot I've come across putting this stuff out have been a group called "Positive Money" but their theories are just a re-heated version of the Zeitgeist nonsense).

A slightly less mental, but I think equally incorrect, version says that interest is the reason why our economy requires year on year compound growth. Even some otherwise clued up commentators appear to believe this. I know it's bollocks too, and I am just about able to explain why capitalism requires this regardless of usury. But I'm not all that patient and can't generally be arsed to write out an essay or make a 10 minute speech every time I come across it (especially as it would be so badly written that nobody would bother reading/listening to it).

So I was wondering, does anyone know of a decent (preferrably Marxist, since I think Marx's theories explain why compound growth is essential for capitalism better than any other) critique of this crackpot shit? And if not does anyone have the patience/knowledge to write one out? Ideally I'd like something I can either link to, C&P or print out and give to people when I encounter this.

And is anyone else coming across this stuff more and more, even from people who really should know better?

 

[frogwoman]

yes

 

[Lo Siento.]

try this, refutation by a Marxist organisation (even if a fairly unorthodox one in terms of day-to-day practice)

 

[twentythreedom]

Goldman Sachs are cunts tbf

 

[SpineyNorman]

It's perfectly possible to agree that goldman sachs are cunts without swallowing a load of reality-free conspiracy theories.

 

[free spirit]

I've had quite a lot of people telling me lately about how banks "create money out of nothing", how the federal reserve is a "Ponzi scheme" and other such nonsense.

thing is, that in essence they're on the right track with this, although they don't quite create it from nothing, as they have to hold a certain percentage reserves relative to everything they lend out, but they're not too far off really.

At a fractional reserve rate of 20%, the commercial banking system can multiply the money loaned / given to it by the national bank 5 fold.

ie central bank loans commercial banks £1 billion, that eventually equates to £5 billion of loans being made into the economy.

erm, something like that anyway, it's a bit late for this sort of stuff.

Wiki seems to have a reasonable overview of this, from a quick scim read
http://en.wikipedia.org/wiki/Money_creation
http://en.wikipedia.org/wiki/Fractional_reserve_banking

 

[SpineyNorman]

thing is, that in essence they're on the right track with this, although they don't quite create it from nothing, as they have to hold a certain percentage reserves relative to everything they lend out, but they're not too far off really.

At a fractional reserve rate of 20%, the commercial banking system can multiply the money loaned / given to it by the national bank 5 fold.

ie central bank loans commercial banks £1 billion, that eventually equates to £5 billion of loans being made into the economy.

erm, something like that anyway, it's a bit late for this sort of stuff.

Wiki seems to have a reasonable overview of this, from a quick scim read
http://en.wikipedia.org/wiki/Money_creation
http://en.wikipedia.org/wiki/Fractional_reserve_banking

But the reality is it's not some grand "conspiracy" - they're doing it to meet the demand required for the necessary velocity of circulation to keep the system going. And they're not just magicking wealth into being to enrich themselves - if the money isn't repaid they have to cover it - hence the financial crisis. It would probably help to look at the Zeitgeist thing to see what it is I'm criticising here but I'm not posting it on here cos it's fucking mental.

These fruitbats think that bankers can just create money to make them (or at least their banks) rich, when in reality all they make is the interest, and even that only if the money is repaid.

The reason why I have a problem with this is 1) banks really are ripping us off, but if people are using wanky arguments like this it's a whole lot easier for apologists to claim all critics are just mental conspiracy theorists and 2) it gives the impression that banks are the problem, rather than a mere symptom.

 

[free spirit]

But the reality is it's not some grand "conspiracy" - they're doing it to meet the demand required for the necessary velocity of circulation to keep the system going. And they're not just magicking wealth into being to enrich themselves - if the money isn't repaid they have to cover it - hence the financial crisis.

hmm... well you'd think so, but the last 4 years sort of give the lie to that, as it turns out the banks mostly don't have to cover it if the shit hits the fan, as they're too big to fail, so governments will either borrow the money or create the money to recapitalise the banks as required.

So in effect they have magicked up the money, made themselves horrendously rich off it, then left the rest of us to cover their debts when it went tits up.

It would probably help to look at the Zeitgeist thing to see what it is I'm criticising here but I'm not posting it on here cos it's fucking mental.

I've checked it out before.

These fruitbats think that bankers can just create money to make them (or at least their banks) rich, when in reality all they make is the interest, and even that only if the money is repaid.

it's actually a lot more complex than that, eg a lot of this extra money they pump into the economy from the fractional reserve banking thing basically ends up back in their hands being invested in whatever the next big investment bubble is, and essentially causing the investment bubble as all that extra cash in the economy has to end up somewhere... so the banks make loads of cash in the boom times from these bubbles, maybe 40-50% of the profits of which seem to end up in bankers pay and bonusses, and then when the inevitable crash happens they mostly also make shedloads of cash on the way down through short selling etc while the smaller investers just end up losing the lot.

So yes it's more complex than just the bankers creating money to make them rich, but essentially that is the net impact over the cycle.

The reason why I have a problem with this is 1) banks really are ripping us off, but if people are using wanky arguments like this it's a whole lot easier for apologists to claim all critics are just mental conspiracy theorists and 2) it gives the impression that banks are the problem, rather than a mere symptom.

deregulated banks are a huge part of the problem - it's why they had to regulate the banks after the great depression, and it's no coincidence that we're getting such rapid transfers of wealth happening now, and such a rapid series of huge investment bubbles growing and bursting after the governments undid most of that regulation.

On another tack, the major reason for the stock market gains and the growth of the city and city pay and bonusses through the 80's, and 90s in the UK was the recycling of north sea oil money through to the city. The contraction of the UK money supply resulting from the reduction in North Sea oil and gas outputs, and the increased balance of trade deficits this is causing, is IMO the primary UK cause of the credit crunch, and the reason the BoE keeps having to release hundreds of billions into the banking system.

erm anyway, it's far too late for me to string a coherent argument together. I agree that the Zeitgeist lot either haven't entirely got it right, or aren't very good at putting it across properly, but there is a fair amount of truth to what they're saying.

btw - I doubt Marx is going to have covered this properly as a lot of the mechanisms for the banking system to act in this way wouldn't have existed back then, certainly not to the extent they do now where the data processing / IT developments mean that money can be created and traded around the world in the blink of an eye.

Worth doing some more reading into anyway IMO - I'm sure I've only scratched the surface of understanding how it all works, but enough to know that the deregulated bankers and their ultra-rich backers are essentially robbing us blind, and causing most of the catastrophic boom and bust investment bubbles in the process.

ps - looks like I was out of date with my 40-50% of bank profits going to the bankers

The part represented by payroll has on average gone up from 58 per cent in 2006 to 84 per cent last year.

[ft]

 

[free spirit]

as for conspiracy... well the bankers certainly conspired to get the regulations relaxed which then enabled them to get themselves into this seriously lucrative position at the expense of economic stability for the wider economy, and the increasing concentration of wealth in their hands.

whether or not they actually understood what they were conspiring to do, or were just wanting to get rid of the regulatory burdens they felt were holding them back is a bit less clear. I'd tend to think they quite possibly didn't really understand what it was they were doing, just as they mostly probably don't really understand what they're doing now, although some must.

 

[SpineyNorman]

I agree with pretty much all of that. But that's just the system doing what the system does and they're trying to say that it's when the money is created that the theft takes place, when it's through interest, investments, state bail-outs etc that they really get fat, not through magicking money out of thin air.

 

[DotCommunist]

its always two steps from pinning the woes of the world on Jews.

 

[purenarcotic]

its always two steps from pinning the woes of the world on Jews.

We are so very pesky.

 

[free spirit]

I agree with pretty much all of that. But that's just the system doing what the system does and they're trying to say that it's when the money is created that the theft takes place, when it's through interest, investments, state bail-outs etc that they really get fat, not through magicking money out of thin air.

ah, well that'd be where I'd have to differ with them as well then.

tbh I didn't get that far with the Zeitgeist stuff before deciding that it seemed to not make a vast amount of sense myself, and can't entirely remember what their take on it was. TBF, it probably was partly in looking into the stuff they were on about that I felt the need to do some research into how all this actually did work, and tbh I reckon that's probably worse than the Zeitgeist lots concerns.

bed calls now though.

 

[love detective]

I've had quite a lot of people telling me lately about how banks "create money out of nothing", how the federal reserve is a "Ponzi scheme" and other such nonsense. Now I know this is a load of bollocks but I don't really know enough about the way modern banking works to debunk them and explain what's really going on. (The least mental lot I've come across putting this stuff out have been a group called "Positive Money" but their theories are just a re-heated version of the Zeitgeist nonsense).

A slightly less mental, but I think equally incorrect, version says that interest is the reason why our economy requires year on year compound growth. Even some otherwise clued up commentators appear to believe this. I know it's bollocks too, and I am just about able to explain why capitalism requires this regardless of usury. But I'm not all that patient and can't generally be arsed to write out an essay or make a 10 minute speech every time I come across it (especially as it would be so badly written that nobody would bother reading/listening to it).

So I was wondering, does anyone know of a decent (preferrably Marxist, since I think Marx's theories explain why compound growth is essential for capitalism better than any other) critique of this crackpot shit? And if not does anyone have the patience/knowledge to write one out? Ideally I'd like something I can either link to, C&P or print out and give to people when I encounter this.

And is anyone else coming across this stuff more and more, even from people who really should know better?

There's been quite a lot of threads on here recently where these kind of discussions have been had (in painstaking detail)

The bulk of this thread (from about post 8 onwards) pretty much concentrated on it from post 8 onwards - including dispelling the myth (for the hundredth time) that fractional reserve lending is creating money out of thin air so might be of some use to you

Also this, this, this, this and this might be useful but may also make your eyes bleed

 

[Blagsta]

thing is, that in essence they're on the right track with this, although they don't quite create it from nothing, as they have to hold a certain percentage reserves relative to everything they lend out, but they're not too far off really.

At a fractional reserve rate of 20%, the commercial banking system can multiply the money loaned / given to it by the national bank 5 fold.

ie central bank loans commercial banks £1 billion, that eventually equates to £5 billion of loans being made into the economy.

erm, something like that anyway, it's a bit late for this sort of stuff.

Wiki seems to have a reasonable overview of this, from a quick scim read
http://en.wikipedia.org/wiki/Money_creation
http://en.wikipedia.org/wiki/Fractional_reserve_banking

This is merely due to the fact that money circulates though, i.e. leaves a "trace" of value as it passes hands.

 

[cypher79]

Creating money from nothing is legalized fraud. This is the reason that currencies are holding less and less value and also the main reason the economies are getting so bad.

 

[ayatollah]

It is impossible to venture very far on the blogosphere nowadays without coming across the hordes of "end fractional banking - back to the gold standard" enthusiasts its true. without getting into all the complexities of the role of finance capital in facilitating the operations of a capitalist system,there does appear to have been one of those significant "quantity into quality" developments so beloved of Dialectical Materialism" enthusiasts , with the operation and impact of Finance Capital on a World scale over the last 30 years or so. Through that old favourite, the process of monopoly development , in this case into banking enterprises whose operations and turnovers dwarf most national governments, and parallel with this the domination of key national governments and international institutions, through placemen and widespread corruption of the legislative processes. Finance Capital seems now to be rampaging through the capitalist system in an almost "cancerous" manner, destroying the very system it should function to facilitate and support. Hard to see how, given Finance Capital's control of the US government and other key governments, that this rampaging monster can be brought back under control within the "normal" operations of capitalism.

There was an illuminating comment by the dreadful ex IMF head , Strauss Kahn, on one of the exellent Al Jazeera "Meltdown" documentaries. Apparently at the critical point during the great 2008 Crash when the whole system appeared to be about topple, some of the top world bankers wailed to Strauss Kahn " you shouldn't have let us operate with so little regulation .. you know what we're like". Strauss Kahn then recounted that a month later, when the banks were safely in public bail out mode, he met these same bankers again -- and they seemed to have no recollection of their earlier contrition !

 

[SpineyNorman]

Creating money from nothing is legalized fraud. This is the reason that currencies are holding less and less value and also the main reason the economies are getting so bad.

This is the kind of nonsense argument I'm talking about.

 

[SpineyNorman]

There's been quite a lot of threads on here recently where these kind of discussions have been had (in painstaking detail)

The bulk of this thread (from about post 8 onwards) pretty much concentrated on it from post 8 onwards - including dispelling the myth (for the hundredth time) that fractional reserve lending is creating money out of thin air so might be of some use to you

Also this, this, this, this and this might be useful but may also make your eyes bleed

Thanks mate.

 

[butchersapron]

Easy:

But the quantity of money in circulation is, as we have seen, determined not only by the sum of commodity-prices to be realised, but also by the velocity with which money circulates, i.e., the speed with which this realisation of prices is accomplished during a given period. If in one day one and the same sovereign makes ten purchases each consisting of a commodity worth one sovereign, so that it changes hands ten times, it transacts the same amount of business as ten sovereigns each of which makes only one circuit a day. [3] The velocity of circulation of gold can thus make up for its quantity: in other words, the stock of gold in circulation is determined not only by gold functioning as an equivalent alongside commodities, but also by the function it fulfils in the movement of the metamorphoses of commodities. But the velocity of currency can make up for its quantity only to a certain extent, for an endless number of separate purchases and sales take place simultaneously at any given moment.

...

 

[ViolentPanda]

Goldman Sachs are cunts tbf

The dirty Jew lizard bastards!

 

[ViolentPanda]

We are so very pesky.

It's why She made us so disputatious.

 

[elbows]

I once photoshopped the poster below to put Max Keisers face on McKinley, and sent it to him. He published it as I don't think he knew I was taking the piss

 

[fredfelt]

For anyone with an interest in these ideas I strongly recommend 'Surviving Progress'. A 90 minute documentary that was on BB4 reciently (and again on soon HD I think).

http://survivingprogress.com/

The film covers lots of ground but encompasses the negative effects of progress, or where human ingenuity creates systems which inevitably have negative consequences and often results in system collapse. The more complex and interconnected the system the greater and bigger the crash.

The progress trap of unrestrained capitalism is explored and how this is destroying human life support systems is examined. Or to put into the context of this thread how the interest on loans is being repaid by destruction of our natural habitat.

But the film is so much more than how I describe it. It reminds me a little of Adam Davies Curtis documentaries where lots of threads of thought are put together in a coherent whole.

 

[elbows]

I hope it does a better job than Adam Curtis because putting things together is where he goes horribly wrong, with grotesquely oversimplified narratives and massive errors about peoples motivations and levels of naivety. And I say that as someone who really likes some of the details he brings to the viewers attention, just not the way he weaves it into tall story.

 

[magneze]

^ It's very good. Well worth watching.

 

[Spanky Longhorn]

Debt Generation by David Malone explains how it all works in very simple terms that addresses how money is really made in a way that could I think convert some of the more lucid conspiraloons, especially as the bloke initially seems like one of them (he's not though), and he is not a lefty either.

 

[butchersapron]

What do you/he mean 'really made' though?

 

[Spanky Longhorn]

What do you/he mean 'really made' though?

As far as I remember he talks about how securities are generated and circulate - based on prime or sub-prime loans - and then traded in a really easy to understand way, a bit like Mason in Meltdown only even simpler imo - but the point he makes is about how that happens or happened seperatly to the circulation of actual money.

 

[fredfelt]

I hope it does a better job than Adam Curtis because putting things together is where he goes horribly wrong, with grotesquely oversimplified narratives and massive errors about peoples motivations and levels of naivety. And I say that as someone who really likes some of the details he brings to the viewers attention, just not the way he weaves it into tall story.

With Adam Curtis I sometimes feel I have some kind of conceptual vertigo - the ideas are so diverse you have to leap from one to the other. Surviving Progress was different in that respect. It has some talking heads as well to underline ideas - Margaret Atwood for instance.

If you decide to watch it you can thank me afterwards for bringing it to your attention!