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

[DotCommunist]

At certain points in Jewish festivals we're actually commanded to drink (and get drunk) though but it's always in a ritualistic way.

interestingly* the little receptacles are twice the size of the communion ones you get at church. The church ones are just shy of a single measure shotglass, whereas the pesach ones we drank from the other night are double that, so two swigs worth rather than a swigsworth.

*to me

 

[sihhi]

Fair enough but the only people turning up to these meetings would probably either be ideologically convinced SPGB members or fash. They wouldn't be likely to convince anyone of their brand of utopian socialism who wasn't already convinced. Did many (any) BUF members or sympathisers join the SPGB as a result of this?

I've always wondered. If someone lives in Romford, I'd love to read a report of it in the 1935 Romford Times, they provided the hall and moderator and must have reported on it.

If anyone cares this is what butchers was on about - the SPGB debating with the anti-banking conspiracist Zeitgest Movement:

http://www.youtube.com/playlist?list=PLF6964B75F7B0F16C

Write up here:

On 22 July 38 people attended a meeting in Hammersmith, London, between the Socialist Party, as part of the World Socialist Movement, and the Zeitgeist Movement. There was agreement that the only framework within which the main problems facing humanity could be solved was one where the resources of the Earth had become the common heritage of all and so wealth could be produced and distributed without the need for money. We call it “world socialism”. ZM call it a “resource-based economy”.

Francesco, for ZM, argued that it was due to the need to pay interest to banks on money they had created, the money to pay which could only be found by borrowing more from the banks; so we were debt-slaves. Although ZM did not advocate monetary reform to mitigate this, he personally was in favour of it as a transitional measure towards a money-free society. In the discussion Party members challenged the view that banks had the power to create money out of thin air.

Hmm...

Personally, I've had one shop worker tell me 'You should check out the Zeitgeist Movement' and one Zeitgeist intervention at a local public meeting about the NHS 'all the government needs to do is not pay the banks'. Cheers, guys.

 

[frogwoman]

interestingly* the little receptacles are twice the size of the communion ones you get at church. The church ones are just shy of a single measure shotglass, whereas the pesach ones we drank from the other night are double that, so two swigs worth rather than a swigsworth.

*to me

the small metal cups or the glasses?

 

[frogwoman]

And of course the cup of Elijah

 

[Jazzz]

you don't even know what a cash reserve is you loon

you've been caught out already just now claiming something that wasn't true, and now when presented with an exact response to your original question, you willfully ignore it all to avoid any constructive engagement and go off on some other weird tangent - if you think that is how you get debate/discussion then you're fucked in the head. You've been proven wrong and caught out time and time again on this narrow topic, and not to mention your even more odious anti-semitic shite, so don't think for a second you're getting much more of my time you weird loon

I knew you wouldn't answer. It says much that you resort to insults. I've spent many hours patiently answering and clarifying. If you actually understood this stuff, you'd be at pains too.

Let me repeat the question:

"are you saying that the bank needs cash reserves equal to the value of the loan being made, or that the bank needs cash reserves equal to all its demand liabilities?"

it's very simple.

 

[DotCommunist]

the small metal cups or the glasses?

small metal receptcles

 

[frogwoman]

no

 

[Jazzz]

The bank does need to fund its loan, though, Jazz. Whether through pre-existing deposits or through a swift accounting procedure that can take the deposit created by the loan and use that to fund it. Banks have to balance their books. As soon as they can't they're fucked. You would agree with that, no?

There is a CRUCIAL difference here between full-reserve banking (which is what love-detective understands) and fractional reserve, and this gets to the bottom of it.

What I am after is a simple description of the nuts and bolts of loans (and the corresponding money creation). Language like 'fund the loan position' explains nothing.

 

[frogwoman]

small metal receptcles

seen. i thought they were pretty small myself! relative innit tho
the glasses/cups for the kiddush at the synagogue are like shotglasses lol. "Amen" and then you down it lol

 

[littlebabyjesus]

There is a CRUCIAL difference here between full-reserve banking (which is what love-detective understands) and fractional reserve, and this gets to the bottom of it.

Ok, well let's get to the bottom of a full-reserve system.

Let's assume that the 'deposit-first' model is correct. I don't think it is correct, but let's assume it is - it is nominally how the system is currently supposed to work.

For a genuinely full-reserve system, a bank would only be able to take timed deposits and lend that amount out for that same time as loans. If someone wants a 25-year mortgage for £100k, someone else has to first buy a 25-year bond for £100k. (This begs the question as to where that first £100k came from, but let's ignore that.) If someone wants a loan for a month, someone else has to deposit for a month, etc. The only interest-bearing deposits will be timed deposits. In fact, instant-access accounts would have to incur charges.

This is negating one of banking's real, useful functions, which is to act as a pool. The aggregate behaviour of that pool can be predicted with a high degree of accuracy, allowing for timed loans to exceed the timed deposits. A full-reserve system would stifle long-term loans. This may have positive effects such as keeping house prices down, but it would also discourage long-term investment in productive things. The economy would grind to a halt.

 

[Jazzz]

Ok, well let's get to the bottom of a full-reserve system.

The discussion of deeper macroeconomic variables is getting way ahead of things when posters do not understand what fractional reserve banking is.

I am inviting people to say what happens - the nuts and bolts of the accounting entries - when banks make loans. And the particular question to love-detective is what he means by the bank 'funding the loan position'. What is 'funding the loan position'? What is going on there?

Does he mean that the bank must have cash equal to the amount of the loan? Or must the bank have cash equal to the total of its demand liabilities (of which the 'loan' is one)?

 

[littlebabyjesus]

I

"are you saying that the bank needs cash reserves equal to the value of the loan being made, or that the bank needs cash reserves equal to all its demand liabilities?"

The bank doesn't need cash reserves equal to all its liabilities. But it does need to balance its books. It has to fund its assets with its liabilities. It cannot have assets greater than its liabilities minus its cash reserves. And that's where Northern Rock comes in. It could no longer balance the two. It could no longer secure liabilities (deposits or loans from other banks) to match its assets. In that sense, the loan does not exist in isolation - it is only one half of the equation, and the equation has to balance.

In theory, it could have no cash reserves at all, and just have equal assets and liabilities, but that could only work if there were 100 percent confidence that all the loans would be repaid. The cash reserves allow the bank to protect itself against a certain amount of default. The cash reserves also allow the bank scope to match longer-term assets with shorter-term liabilities. Both of these are calculated risks. They expose the bank to the danger of a run, and they also expose the bank to the danger that it will no longer be able to secure new short-term liabilities to cover its long-term assets, which is exactly what happened to Northern Rock.

If you look at the standard money-multiplier model, the following equation always holds: loans + cash reserves = deposits.

 

[Jazzz]

A full-reserve system would stifle long-term loans. This may have positive effects such as keeping house prices down, but it would also discourage long-term investment in productive things. The economy would grind to a halt.

To answer your question though - the money in circulation would be kept at the same level, so the 'stifling of loans' simply equates to... LESS DEBT. I'm amazed that you think vast mortgage debt to the banks is a desirable thing! Mortgages, and by implication rents, are the very chains of our slavery. We are still going to live in the houses, but with lower rents, and lower house prices.

 

[SpineyNorman]

Just throwing this out there - not spent too long thinking about it so I might be talking out of my arse, but with 'full reserves' what happens if someone takes out a loan and that money ends up, somehow, as a timed deposit (and it would happen, irrational as it sounds) and then gets loaned out again? That money would exist twice (according to Jazzz's lunacy) so you'd still have banks 'creating money out of nothing' - sort of.

 

[littlebabyjesus]

Just throwing this out there - not spent too long thinking about it so I might be talking out of my arse, but with 'full reserves' what happens if someone takes out a loan and that money ends up, somehow, as a timed deposit (and it would happen, irrational as it sounds) and then gets loaned out again? That money would exist twice (according to Jazzz's lunacy) so you'd still have banks 'creating money out of nothing' - sort of.

Well assuming a 'loan-first' theory of money creation, a loan could only be made once a timed deposit equal to it had been agreed elsewhere. The loan would have to be arranged along with the deposit and a mechanism for getting that deposit back to the bank that made the loan via interbank lending. You're still creating money by creating the debt/deposit. That's what money is - the representation of a debt. And each taking out of a new loan will create new money, while any repaid loan destroys it, which is what we already have now. Except in this instance, the deposit would be out of circulation for the duration of the loan, so it isn't really creating new money. It's more like you giving me a tenner for a week, then me giving it back to you at the end of the week.. Actually it's not quite even that. It's the bank crediting me a tenner and debiting you a tenner for a week, then cancelling it out at the end. It's nothing - it doesn't circulate.

Assuming the money for the initial deposit already exists somehow, it still needs to match the loan in time, so the deposit is out of commission for the length of the loan, but the loan can create a new deposit. Thing is, lots of people are not going to want to tie up their money, so a great deal of the money won't be available for new loans. Assuming a strict enforcement of 'deposit-first' rules, only a very small amount of funds will be available for loans, and any funds used for loans will be taken out of circulation for the duration of the loan. So in theory, there would have to always be the same amount of money in circulation. Economic growth would lead to deflation, so there would need to be some kind of mechanism to prevent that - a periodic expansion of the money supply.

Banks wouldn't be in business in such a system, I wouldn't think. There's nothing in it for them and the total available credit would be near-zero.

 

[SpineyNorman]

Well assuming a 'loan-first' theory of money creation, a loan could only be made once a timed deposit equal to it had been agreed elsewhere. The loan would have to be arranged along with the deposit and a mechanism for getting that deposit back to the bank that made the loan via interbank lending. You're still creating money by creating the debt/deposit. That's what money is - the representation of a debt. And each taking out of a new loan will create new money, while any repaid loan destroys it, which is what we already have now. Except in this instance, the deposit would be out of circulation for the duration of the loan, so it isn't really creating new money. It's more like you giving me a tenner for a week, then me giving it back to you at the end of the week.

Assuming the money for the initial deposit already exists somehow, it still needs to match the loan in time, so the deposit is out of commission for the length of the loan, but the loan can create a new deposit. Thing is, lots of people are not going to want to tie up their money, so a great deal of the money won't be available for new loans. Assuming a strict enforcement of 'deposit-first' rules, only a very small amount of funds will be available for loans, and any funds used for loans will be taken out of circulation for the duration of the loan. So in theory, there would have to always be the same amount of money in circulation. Economic growth would lead to deflation, so there would need to be some kind of mechanism to prevent that - a periodic expansion of the money supply.

Oh yeah - it wouldn't work in practice I don't think - far too inflexible. But I'm just trying to work out if, if we pretend Jazzz is right for a minute, it would actually stop 'money being created out of nothing'. I've probably not explained it that well though - the lateness of the hour and guinness are conspiring against me and stopping my brainz from working - another fucking conspiracy

 

[littlebabyjesus]

Jazzz linked to an IMF working paper on this a while ago. I read most of it, and it wasn't actually proposing a truly full-deposit system. I can't remember exactly what it was proposing now (stuff that doesn't make sense stays in my head less well than stuff that makes sense), but it didn't seem sensible to me at all, and I simply fail to see what the problem is that it is supposed to be solving.

For instance, while I agree that lower house prices would be a good thing, they aren't such a good thing if you have to live in a cash economy with very restricted credit to get there. It would still be the same people at the top who will be able to afford to buy and everyone else renting from them. In fact, it would probably be far worse than it is now - the cost of a house isn't going to fall below the cost of the labour and materials to build it, so those without the cash up front to cover that will be excluded.

In and of itself, this solves nothing. You'd need a massive programme of social-housing building to provide social justice. Just like you do now. That's the thing to fight for, not full-reserve lending.

 

[SpineyNorman]

Jazzz linked to an IMF working paper on this a while ago. I read most of it, and it wasn't actually proposing a truly full-deposit system. I can't remember exactly what it was proposing now (stuff that doesn't make sense stays in my head less well than stuff that makes sense), but it didn't seem sensible to me at all, and I simply fail to see what the problem is that it is supposed to be solving.

I think, for the non-loon full reserve people it's about making sure there isn't another 'black hole' - it's to stop financial crises. Of course it misses the point that finacial crises like this one aren't just about finance - they're an expression of a much deeper structural crisis.

But for loons like Jazzz it's to stop banks lending out the same deposit three times without it needing to circulate at all - it's to stop them 'creating money out of thin air' (if you want to understand this lunacy watch the beginning of Zeitgeist addendum - that's where most of them get it from). They never explain why, if banks can perform this financial alchemy, there was a financial crisis - because of course if they could there wouldn't have been one.

 

[SpineyNorman]

Wow, just took a peek at Jazzz's last offering, where he claims that it would do away with mortages and we'd somehow magically not need mortgages after that. He really is a complete and utter economic illiterate.

Woofbark eh donkey!

 

[Jazzz]

Wow, just took a peek at Jazzz's last offering, where he claims that it would do away with mortages and we'd somehow magically not need mortgages after that. He really is a complete and utter economic illiterate.

Woofbark eh donkey!

Woof indeed.

We, as the people, have already built the houses. The bankers didn't lift a single brick, or a single bag of cement. Why must we pay such fortunes to the bankers to live in them?

 

[frogwoman]

Woof indeed.

We, as the people, have already built the houses. The bankers didn't lift a single brick, or a single bag of cement. Why must we pay such fortunes to the bankers to live in them?

It's not only the bankers is it Jazzz? It's the mortgage companies, the estate agents, the water, gas and electricity companies, the food companies etc. Why are you only focusing on banks to the exclusion of every other part of the capitalist system?

 

[Jazzz]

They never explain why, if banks can perform this financial alchemy, there was a financial crisis - because of course if they could there wouldn't have been one.

I am hoarse with explaining precisely that. No-one ever has any criticism of my explanation - they just ignore it, as you have done.

Why don't you actually read the Ann Pettifor link that you liked?

 

[littlebabyjesus]

Woof indeed.

We, as the people, have already built the houses. The bankers didn't lift a single brick, or a single bag of cement. Why must we pay such fortunes to the bankers to live in them?

Well that's one area where things have become worse. Up to the 80s, most people took out mortgages with building societies. This was not intrinsically evil at all, yet the building societies matched long-term mortgages with short-term deposits and savings. They kept only fractional reserves. And in general they were more conservative in the amounts they would lend than banks were in the last 10 or so years - this fact in itself keeping prices down.

I would argue that building societies perform a valuable social role here within a system of private home ownership. If you're arguing for the abolition of private home ownership, that's another matter, and I wouldn't necessarily disagree, but it can't happen within our current economic and social system. And while so much housing is private, most people are only ever going to be able to afford to buy by taking out a mortgage, whatever the banking system's rules.

Again, what you're arguing for isn't necessarily the abolition of mortgages, but the mutualisation of the financial institutions that provide them. So it's not so much the function of the banks as the ownership of the banks that is the problem. Shareholder capitalism, in other words - that's the root problem, the root cause of the injustice, the source of the banks' insatiable desire for profit.

 

[Jazzz]

It's not only the bankers is it Jazzz? It's the mortgage companies, the estate agents, the water, gas and electricity companies, the food companies etc. Why are you only focusing on banks to the exclusion of every other part of the capitalist system?

Mortgage companies are banks. The money you are currently spending on rent/mortgages reflects no consumption of anything (aside for some small allowance for wear and tear on rental payments). That is where the great problem is. It is the face of the monster. It is your chain.

 

[SpineyNorman]

It's not only the bankers is it Jazzz? It's the mortgage companies, the estate agents, the water, gas and electricity companies, the food companies etc. Why are you only focusing on banks to the exclusion of every other part of the capitalist system?

Because looking at this stuff seriously, constructing a serious analysis of capitalism, is fucking hard work, it takes dedication. And if you're looking at things objectively there's always a bit of doubt.

Why bother with that when you can watch a couple of antisemitic youtube videos that give you the twoof (TM) in an easy to digest 20 minute video, a twoof that's 100% certain and unshakeable and allows you to feel superior to the sheeple who are wasting their time reading books written by people who have dedicated their lives to studying the economy.

 

[Jazzz]

Well that's one area where things have become worse. Up to the 80s, most people took out mortgages with building societies. This was not intrinsically evil at all, yet the building societies matched long-term mortgages with short-term deposits and savings. They kept only fractional reserves. And in general they were more conservative in the amounts they would lend than banks were in the last 10 or so years - this fact in itself keeping prices down.

I would argue that building societies perform a valuable social role here within a system of private home ownership. If you're arguing for the abolition of private home ownership, that's another matter, and I wouldn't necessarily disagree, but it can't happen within our current economic and social system. And while so much housing is private, most people are only ever going to be able to afford to buy by taking out a mortgage, whatever the banking system's rules.

Again, what you're arguing for isn't necessarily the abolition of mortgages, but the mutualisation of the financial institutions that provide them. So it's not so much the function of the banks as the ownership of the banks that is the problem.

But building societies were originally full-reserve institutions.

From Ralphonomics:

In fact UK building societies used to work in a full reserve manner: that is they didn’t lend out money till they’d got the requisite funds in the kitty. Indeed some mutual building societies may still work in this full reserve manner, but whether they still do is beside the point. The real point is that building societies which work on full reserve principles had / have no trouble arranging for “funds of multiple savers indirectly to finance multiple borrowers”.

 

[frogwoman]

Mortgage companies are banks. The money you are currently spending on rent/mortgages reflects no consumption of anything (aside for some small allowance for wear and tear on rental payments). That is where the great problem is. It is your chain.

So every other commodity produced under capitalism and which we depend on money to buy is produced in a completely ethical and non exploitative way? It is just the banks that are the problem? What about people working in dangerous and filthy working conditions, or people whose wages hardly cover the cost of living, eating etc, resulting in stress, disease and early death? No all this stuff is just the banks' fault is it jazzz? And it's just mortgages and rents which are the problem, rather than their being part of a wider problem?

 

[free spirit]

some serious deja vu going on here.

 

[littlebabyjesus]

Mortgage companies are banks. The money you are currently spending on rent/mortgages reflects no consumption of anything (aside for some small allowance for wear and tear on rental payments). That is where the great problem is. It is the face of the monster. It is your chain.

You're buying the right to be on that bit of land. You buy that right from the last person who had it, and pay a price that reflects how many others would also like it.

Again, I agree that this process stinks in many ways. But it's not caused by the banks - it's an inevitable consequence of a system of that allows people to buy and sell land.

 

[Jazzz]

So every other commodity produced under capitalism and which we depend on money to buy is produced in a completely ethical and non exploitative way? It is just the banks that are the problem? What about people working in dangerous and filthy working conditions, or people whose wages hardly cover the cost of living, eating etc, resulting in stress, disease and early death? No all this stuff is just the banks' fault is it jazzz? And it's just mortgages and rents which are the problem, rather than their being part of a wider problem?

"There are a thousand hacking at the branches of evil to one who is striking at the root." Henry David Thoreau

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