By Dan Kervick, who does research in decision theory and analytic metaphysics. Originally posted at New Economic Perspectives.
Some people believe in endogenous money. They believe we live in a monetary system is which money is generated and extinguished as part of the ordinary flow of everyday economic activity. The economy tends to generate the money it needs in order to satisfy the exchange desires and saving preferences of participants in the economy, and to extinguish the money it doesn’t need.
The endogenous money picture is in some considerable tension with the idea that the monetary system is controlled by the government. The alternative exogenous money picture holds that the issuance and destruction of money is a task reserved for government alone, and that the total amount of money present in the economy is therefore a government policy choice.
We can achieve a happy medium between the endogenous money and exogenous money pictures by viewing things this way: Due to a combination of deliberate policy choices and historical contingencies, societies have chosen to institute complex monetary and credit systems in which the generation of the most commonly used means of exchange is primarily a market-driven phenomenon, but one that is heavily regulated and supplemented by government agencies that also issue their own forms of money. We can also note that those latter forms of narrow government money usually play a foundational role in constraining and underpinning the broader forms of money, since they are needed to settle the obligations that are incurred by issuing those broader forms of money.
So there is truth in each picture, and it is a mistake to adopt either extreme. One of those extremes is a view that I have sometimes called “hyper-endogeneity.” Hyper-endogenists systematically exaggerate the role of commercial bank money in our existing monetary system, treating the banks as possessing certain powers that are actually reserved to the federal government alone. Hyper-endogenists view banks as, in effect, operating their own fiat printing presses. They claim commercial banks manufacture money cost-free “from thin air” and therefore reap seigniorage profits from the exercise. I tried to point out the errors of hyper-endogeneity in my essay “Do Banks Create Money from Thin Air.” But since it was a long essay, let me recapitulate the main points as briefly as possible here.
Seigniorage is the profit earned by a money issuer from the spread between the real cost of creating the money and the real value of any assets that can be fetched for that money in markets. For example, suppose for whatever reason, you were privileged to own a perfectly legal and licensed government printing press (maybe it was awarded to you in a lottery.) The printing press makes $500 bills, and you are permitted to print 100 of these bills each year. Suppose the cost of each additional bill you print (the ink and paper you use) is 25 cents, and that this is a cost you have to bear yourself. Let’s say you print up a $500 bill, and use it to buy a fancy new tablet device that costs exactly $500. You have just reaped $499.75 in seigniorage profits.
But now let’s think of a different kind of printing. You don’t have a printing press for $500 bills, but only a printing press that creates IOU’s, which again cost you 25 cents apiece to print out. You print up a $500 IOU, sign it, and give it to a stranger in front of a witness in exchange for a $2 package of chewing gum. Have you made $1.75 in seigniorage profits? No of course not. You have lost $478.25, since in addition to the 25 cent cost of printing the IOU, you now have a debt of $500. Of the total cost of $500.25, only $2 was offset by the pack of gum. The stranger will at some point press the claim for the $500 you owe.
A typical bank loan transaction is like the second case, not the first. Commercial banks don’t earn seigniorage. Rather, they make money by charging interest on lending, in more or less the same way any of us could make money by charging interest in lending. Banks just do it on a much larger scale. Say you want to borrow $10,000 at 5% interest, with repayment due after one year. The bank creates a deposit account for you and credits it with $10,000. In exchange, you give the bank a promissory note for $10,000 plus the $500 in interest. Bank deposits are debts of the bank payable on demand, and the bank has thus incurred a $10,000 cost in the form of a debt. If things go well, they will have made $500, not $10,500.
Those bank debts represented by deposit balances are negotiable, and widely accepted at face value, and so drafts on those deposits function as a form of money in our economy. But the banks routinely have to make good on the debts they have incurred by issuing those deposits. They make good on the debts by making payments with a form of money that they, themselves do not issue and so must obtain through market transactions. The payment assets they use are issued by the government. They consist in both physical currency and deposit balances in the banks’ own deposit accounts at the central bank.
Hyper-endogenists sometimes go even further and suggest that governments have enslaved themselves to the banks, because the government somehow needs to obtain bank deposit money to carry out its operations. But this is erroneous. Governments choose to accept drafts on bank deposits in payment of taxes because the settlement of those payments is carried out with bank reserve balances or cash, which are a form of money that the government itself issues. In other words, payments to the government simply extinguish some of the money that the government itself has issued.
But government currency and central bank deposit balances are also usually classified as liabilities of the government that issues them. So are they debts in exactly the same sense as the liabilities issued by the commercial banks? No, they are special. Those government liabilities are not debts for anything that the government does not itself control and that it can’t manufacture at negligible cost. The possession of a $100 bill or a $100 balance in a Fed account doesn’t entitle you to anything more than another $100 bill (or a combination of bills and coins of smaller denominations). And the government has an infinite money well. It does have a printing press and it does reap seigniorage. It is limited in doing this only by its own policy choice not to destroy the market value of the currency it issues.
It is true that the government can also impose tax obligations on you, and that the government’s money discharges those obligations. So doesn’t that mean that a $100 bill is a bona fide liability of the government worth $100 in real terms, since issuing it deprives the government of $100 in tax revenue it would otherwise have received? Not quite. While the nominal asset value of a $100 tax obligation for the government is $100, its real marginal value to the government is zero, since the government has an infinite money well and doesn’t need additional cash. And while the nominal liability value of a $100 Fed deposit balance for the government is $100, its real marginal value to the government is zero, since again the government has an infinite money well and can always afford to part with any amount of cash. The government taxes dollars to remove them from private hands, and spends dollars to put them in private hands. And the ability to impose enforceable tax obligations is part of what fulfills the government’s policy purpose of creating a market demand for its currency.
So is bank lending constrained by the need for the government’s money, whether in the form of currency or deposit balances at the central bank? In one sense clearly, yes. Banks need that government money to fulfill the payment and withdrawal obligations that their lending and creation of deposit balances incurs. But for a given particular expansion of lending they might not need to acquire any additional reserves at all. And even if they do need more reserves, they don’t need to acquire the reserves first, before making the loan. They can make the loan and then acquire the reserves. Of course, the fact that they might not need to acquire additional reserves doesn’t mean that creating the deposit carries no cost. It does carry a cost because it is an additional claim against their exiting assets, and they will therefore lose assets as they settle those claims.
The truth in the endogenous money picture is that the processes by which the most widely accepted means of payment are introduced into the economy are driven by the demand for that money. Banks seek to satisfy that demand by making loans, and the government then satisfies the increased demand for government issued money that results. But the commercial banks don’t have their own printing presses.
56 comments
Comments are closed.
ISTM that because the government will always provide enough currency to fulfill the demand created by bank loans, it is indeed the commercial banks that determine the amount of currency in circulation (although indirectly, and only as a matter of policy, not necessity).
It would seem that because of the Fed’s policy of targeting interest rates and not monetary quantities, in the short-run unscrupulous control frauds can indeed use a commercial bank as a personal printing press, as described by Bill Black in The Best Way to Rob a Bank is to Own One. In a perfect world it wouldn’t be possible, but in the one we have right now I don’t think it’s an unfair assertion to say that Dimon, Blankfien, Stampf, et al are indeed able to “create money out of thin air.” They write as many IOUs as they want and the Fed makes sure they can always get the money to back them up.
On second thought, maybe it’s not correct to say that the banksters “create money out of thin air”. They’re actually creating money out of the crushed hopes and shattered dreams of millions of Americans…
“In other words it looks very much like an unusually elaborate version of what banks were doing when they lent money to dictators p Bolivia and Gabon in the late ’70s making utterly irresponsible loans with the full knowledge that, once it beame known they had done so, politicians and bureaucrats would scramble to ensure that they’d still be reimbursed anyway, no many how many human lives had to be devastated and destroyed in order to do it.
The difference, though, was that this time, the bankers were doing it on an inconceivable scale: the total amount of debt they had run up was larger tha the combined Gross Domestic Product of every country in the world – and it threw the world into a tailspin and almost destroyed the system itself”
David Graeber ‘ Debt: the first 5000 years’
so true. faaaaak, dude! you get an honorary NFL, GED from the University of Magonia.
I also appreciate Dan’s dissection here, which is quite good.
I’m often reminded of Werner Heisenberg’s comment that explaining quantum theory with any enduring lucidity posed “a serious problem of language”.
It seems to me a similar, although admittedly far less complex, problem constellates around “money”, since money is nothing more than a form of imagination and as Freud said of words in THE INTERPRETATION OF DREAMS that words “are the nodal points of numerous ideas and are therefore predestined to ambiguity”.
Money has only an imaginary reality but assets are quite real, either forms of nature, such as nails, wood, metal and glass (houses); rubber, copper, glass, aluminum, steel, chemical paint (cars); or forms of cooperation (businesses large and small). These are all, also, forms of property.
So clearly, since these forms of property are created and sustained by money and can be exchanged for money, we have by logical construction arrived at the postulate that money = property like wave = particle. And that assets are entities that exist when the money wave is collapsed upon observation by collective social consciousness.
Banks are shapers of the money wave into assets. They don’t create money, which is imagination and therefore eternal, formless and infinite, but they create assets, which are mortal, bounded by formal structures and finite. And these assets form the basis of the structures around which society cooperates — “cooperational structures”. In this regard, the money/property duality functions socially in much the same way that totems/taboos/myths function in non-monetary societies, they define the structures around which society organizes its imagination and cooperates among itsef.
But where these non-monetary structures are relatively fixed and change only very slowly, money liberates the imagination to change quickly and the forms around which society cooperates (property/assets) have an inherent mutability that totems/taboos/myths do not.
But money is very similar in that it’s a myth we all chose to believe, in order to acquire the cooperation we need to survive. They way a non-monetary society would agree that a certain clan and only that clan can make canoes, and another clan, and only that clan, can be shaman.
Faaaaak, that’s deep craazy…so true though. Trying to get your average Joe/Jane to understand that money is a social creation and not a fact of nature, though, is like trying to convince your tribesman that “anybody can make a canoe.” It is so foreign a concept to most people that you might as well be trying to explain Heisenberg uncertainty to a pre-destinationist, since for most of us, in our individual lives, money sometimes seems like the only real thing.
Nice, Craazy. So we’d have to say that the system of monetary conduits is the most valuable thing – even tho’ it is not accounted for. And the basic definition of an asset is something people will give money for. Or bribes. Political power is truly an asset. The purpose of the system is to perpetuate the system. Until hypothermia sets in.
Lambert, there’s no body coming through to the post entitled, “Wheels coming off . . .” No text, no comment infrastructure, nothing except the copyright dates at the very bottom of the page. Same problem on both PC and mobile (at least iPad) versions.
Also getting that problem
IT actually does come up quickly and then is replaced, but if you cut it as it comes up, then paste somewhere else, it can be read.
I was getting that too, and then I saw that the body appears and then disappears, so I clicked the stop button once it appeared and was able to read it. Somethings wrong…
Tried that Stop Button trick and it worked. Thanks! There’s still something for Lambert to fix when he gets back online, however.
Thanks YankeeFrank, that works for me too. Once the text appears go quickly and press the “stop loading” key and the article will remain in full on the page.
I have to first go to — nakedcapitalism.blogspot.com/
The wheels seem to fall off the ‘wheels’ post Lambert. It goes poof when I click ‘read the rest’ – creepy considering the reality generating content.
We seem to miss something essential in defining money – some of us have to put work in to get it and others don’t. In 100% Robot Heaven money might be very different.
Maybe we should be looking at the life-cycle of the stuff and our differing involvement with it, especially as we have big data techniques now. We lack adventure in considering it – such as imagining doing away with it and what we might have instead – or what it would be if everyone had a guaranteed living without work. Even preliminary guesses in these thought experiments tell us much more is involved than the ‘creation mechanisms’.
What would a genuinely modern future society think it was looking back? A cruel control device? I seem to remember going to war not that long ago to topple vile dictators, bring democracy and freedom from terrorists in a couple of countries. No one really believes that now. Could we think as differently about money in ten years?
It seems to me they control us with the stuff and we don’t seem to talk about that. To get anything done one seems to need lots of it, mostly paid to professionals. £9000 a year for tuition fees when a modern system could provide better for £1000. The sale is made by creating debt and issuing a certificate of potential future earnings (involving the threat of no job or crap job without the paper). Money in this, before we consider issue, is already some kind of fear and indenture system.
Thinking to the vanishing post on reality creators (a common management theme incidentally), what strange reality does money create? If we knew that, we’d know what money is – the incense of a massive control fraud. I’d like to see it defined (Wittgenstein) in use – from what it has come to mean to an Indian farmer contemplating suicide to lots of it being in the hands of Prince Bandar and other fools killing thousands in Syria. It’s time to remove the veil of neutrality from money in economic chatter.
When a bank agrees to lend $30,000 say for a car, it does not have to lend any of its own money or its depositors money. It can simply accomplish this with a few keystrokes on a computer. In addition to this, it can claim the new vehicle as collateral. This is indeed money creation and for the most part risk free, as long as the value of the collateral is sufficient to cover the losses on bad loans. Depositors money is no longer used for loans (at least most of it as far as I know). It is lent out into the shadow banking system every night and the banks do indeed profit from this arbitrage. But this is not the money creation scheme we are discussing here. Lets remember, to a bank deposits are liabilities, loans are assets. Mortgage lending, commercial lending, and private lending are all massive money creation schemes. The author seems to forget or ignore what fractional reserve banking is.
It can enter the keystrokes on a computer, which creates a balance in your account. But if you then go to the car dealer and write a check to buy the car, the dealer will deposit the check in a bank. The check will be cleared and the payment will be settled between your bank and the dealer’s bank, and at that point $30,000 of your bank’s own money will indeed leave the bank. What it gets on the other side is your promissory note, for some higher amount, and as you say the loan is probably collateralized, giving the bank some other asset to seize if you can’t repay.
Deposits accounts are indeed liabilities, but when people make a deposit, the bank’s assets and liabilities both increase. If you bring in $1000 in cash and open up a demand deposit account, the bank now has both $1000 in additional cash in its vault, and a new $1000 liability on its books.
Fractional reserve banking just means the bank is permitted to have deposit liabilities that exceed its reserve assets, (though not its total assets). That does lead to an expansion of broad money as people demand loans, and that’s something that makes sense in a dynamic economy which is usually experiencing growth.
“at that point $30,000 of your bank’s own money will indeed leave the bank”
In practice this isn’t the case though, because banks use interbank clearing houses to net out payments, meaning they only have to settle a fraction of payments with central bank reserves. That’s still a very large amount, but only a fraction of all payments, most of which net out.
What those loans are being used for (and who’s getting them) make a big difference. Is it small businesses looking to expand, or Wall Street gamblers looking to speculate. Lately, we seem to have more of the latter.
Agree. One of the themes I have tried to push in much of my writing is that much discussion of the mechanics of the money and banking system is a way of avoiding the underlying structures of inequality and power than make exploitation and huge returns to capital possible. It doesn’t matter what kind of system we have for lending capital if some people are permitted to posses vastly larger quantities of it than others. I spend a lot of time on the dry details of the banking mechanics to de-mystify it.
Dan seems to believe that the Federal Reserve is a branch of the US government, but it’s not. It’s chairman is chosen by the president and confirmed by congress, but its important decisions are made by plurality vote of the chairmen together with those of its 12 branches, who are appointed by TBTF banks. In other words it is controlled by the banksters and is run for their benefit, not that of the people of the United States. The only money issued by the government’s Treasury dept. are coins, which make up only a trivial fraction of the money supply.
A less glaring but no less misleading implication of this article pertains to the claim that banks lend deposits. The problem here lies in the ambiguity of the term “banks” in this context. It is true that, when an individual bank makes a loan and that loan is withdrawn, that comes out of the banks reserves, which includes its deposits. But when spent it goes right back into the deposit base of one or more other banks. In other words, the BANKING SYSTEM as a WHOLE does NOT lend deposits, or its collective reserves at the Fed. So no single entity can directly control the money supply; that is done by the herd instinct of the banksters, who are demonstrated lemmings.
Then there is also the problem, not mentioned in this article, that in order to be able to pay off the interest on our debts, new debt and hence new money must first be created. This means our total debt, public and private, must grow exponentially until some physical or psychological limit is reached, at which point the boom goes bust. This is politely called a “business cycle”, but it is a physically and socially destructive process that will not stop until usury with demand deposits is made highly illegal.
Which is why I support the Public Banking Institute, the American Monetary Institute, the New Economy Foundation, and others attempting to achieve meaningful reform of our monetary system.
“Due to a combination of deliberate policy choices and historical contingencies, societies have chosen to institute complex monetary and credit systems in which the generation of the most commonly used means of exchange is primarily a market-driven phenomenon, but one that is heavily regulated and supplemented by government agencies that also issue their own forms of money.”
My goodness, Mr. Kervick, have we been living on the same planet for the last couple of decades?
Where I live, mortgage fraud began destroying the central city in the early 2000’s. There was no regulation of those practices. The fraud continues to thrive and destroy neighborhoods in the surrounding suburbs, and the perpetrators include, but are not limited to, Deutsche Bank, Citi, JP Morgan Chase, Bank of America and Wells Fargo.
Payday lenders charge more than 500 percent annual interest, and there is no effective regulation to prevent it, even though voters in the state of Ohio passed a law several years ago that capped interest rates at 28% annually. However, the payday lenders (many owned by major banks) are able to circumvent any law by claiming that they are not issuing “loans.”
Because of the great way the U.S. Treasury, the Federal Reserve, the White House and the Congress responded to the financial crisis of 2008, I have unemployed friends and relatives in Massachusetts, Maryland, and California as well as of course Ohio. Their lives have been destroyed and many of them will never draw a paycheck again.
The greatest cash contributors to the campaigns of Romney and Obama were from the same folks: the financial industry. And most of Dodd-Frank, which was actually written by finance lobbyists, hasn’t even been implemented. The “heavy regulation” you refer to is nowhere in sight.
From where I sit, your essay is interesting, but it simply does not square with reality.
No, Carla. Mr. Kervick is still occupying the outer borders of Utopia. I would agree that his musings about monetary policy, while interesting (if not often comical), have little to do with the reality we are experiencing. It’s nice to dream about a world of benevolent dictators and a Congress free from corruption, but that’s not the world we live in.
Until the zombified, debt-laden populace wakes up the reality of their situation, the fraud and looting will continue.
I was talking only about the institutional structure of the monetary and credit system, and not all of its many perversions and social inadequacies: control fraud, TBTF, crony capitalist corruption, thoroughly inadequate regulation, predation. My feeling is that people can’t make sensible proposals for reform, or even revolutionary overhaul, if they don’t understand the structure of the current system.
But, Mr. Kervick, do you not also have to talk about how the structure has been perverted in, oh, so many ways? I can understand the structure as it is supposed to work which is what you have described. What I don’t understand is how this same structure has been so thoroughly and completely manipulated to work only for the rich who are robbing the poor.
Just understanding how the structure is supposed to work does not help us to see how that structure should work for the benefit of the public. There is a big gap to leap over for full understanding.
By making the system so thoroughly complicated both through regulation and then by description, it becomes a maze of darkness. Who can see the light?
I have read everything I can get a hold of to try to understand the structure as it really works but it is too difficult to hold all the pieces together to make one understandable picture. That is what makes it so easy for the predators to take advantage of the system that is wa-a-a-y too big and far, far too complicated.
If deposit banking were separated from investment banking and shadow banking was regulated, that would be one step to enlightenment.
If the structure has never provided an unperverted money system, perhaps there is something inherently wrong with it.
I agree it is useful to understand the underlying theory, if only to learn precisely what we do not want to create again. Now that we know that the system is predatory, corrupt and unsustainable, why on earth would we want to continue trying to prop it up?
And I do not accept TINA. There are alternatives. But I don’t find them in the MMT camp. There I see people saying “Look, we can tweak this money system and make utterly corrupt officials magically begin to act in a responsible way that is accountable to the people.” Why on earth should we believe this?
The MMT community does not readily accept that money need not be debt – not even fiat, much less shares in Equity.
The conditioning is so deep I suspect spiritual roots.
There has been no institution or institutional arrangement in history which has not been perverted, Carla. Humans psychopaths corrupt everything they touch.
MMT is not intended to cure human nature. Its purpose as I see it is to demystify the monetary system. The vast majority of people really do believe the government can “run out of money” and similar nonsense. It seems a bit foolish to throw out useful frameworks like MMT as you suggest simply because our society is run by thieves. I see plenty of good policy arguments coming out of the MMT camp such as platinum coin, job guarantee, minimum basic income, full employment. But no, MMT is not going to turn despicable scum into angels. Do you really require that from a theory of monetary systems?
Who has been saying that endongenous money is the same as fiat or exogenous money? Endogenous money is extinguished when the loan that created the money is paid off. Fiat money is extinguished when the government takes it back with a tax. A loan creates both an assett and a liability for the bank thus expanding its balance sheet but not its wealth. The wealth increase comes from interest and fees. The purpose of bank reserve requiremnts is to provide liquidity in the event of a bank run not to support loans. In the UK and other countries there is no reserve requirement. What constrains bank lending are capital ratios, level of optimism of the lender, and acceptable borrowers.
So we effectively already have in place a system using MMT at least in theory, limited only by the mad ravings of congress? And they would rather default on our obligations than concern themselves with how it should all be working. They have no problem, however, funding never-ending wars. All guns, no butter. So many opportunities for extortion; so little time.
Good article, Dan. You might be interested in: http://mythfighter.com/2013/07/27/i-just-thought-you-should-know-lunch-really-can-be-free/
Says some of the same things and some new things.
Rodger Malcolm Mitchell
Good article. A good reality check on theories is to set up a situation and use the rules of bookkeeping to trace where the money flows. One must always remember that the IRS will want to know where any money in the bank’s accounts came from. A bookkeeper would not forget to list taxes owned on magically appearing money.
Very good article, just think the Seniorage point needs more clarification. There is no doubt that this point is 100% accurate, but it doesn’t address where does the additional value comes from. It’s simple really, the additional value comes from ongoing production, i.e., the things the government will be able to buy with un-backed currency.
You see, if the government taxes funds out of the population, it has in essence earned it. The people are fully aware they have paid these funds to the government and as such expect the government to spend it. These are fully backed funds. This is not theft, it’s a contract between the government and the population and the people are in agreement for better or worst.
However, the issuance of currency without taxing the funds is un-backed. As you are all aware, this new currency will chase the same goods and services that other currency in existence is chasing, meaning, it’s theft point blank. The population had to work and produce to receive their currency which they intended to purchase those goods with, now the population is competing against the government for the same goods and services. Meaning HIGHER prices, this is why there is no “free lunch”, the people are paying for the lunch by producing the goods and services that the government will rob from them. And you think this is good?
Yes, the government can do this, but it is theft anyway you put it.
As you are all aware, this new currency will chase the same goods and services that other currency in existence is chasing, meaning, it’s theft point blank. Bapoy
No because:
1) The banks create the principal but not the interest for loans except as even more debt. So simple JUSTICE requires that the monetary sovereign create the required interest.
2) The monetary sovereign SHOULD create enough new money to keep up with population growth otherwise money hoarders profit risk-free off the young. So failure to create enough new money allows theft.
3) Similar to 2), the monetary sovereign should create enough new money to counter hoarding tendencies during an economic down turn.
4) An inflation tax might be suitable to dilute unjust money hoards provided that innocents are protected from it by, say, giving the new money to them exclusively.
You are a thick head and I get tired of correcting you. I’m tempted to ask you be banned.
Btw, the “deficit spending is theft” meme is likely hypocritically pushed and/or financed by the banks who lend money they don’t have and thus cheat us all with price inflation. But YOU want to make paying off the filthy bastards more difficult?
Most of us get money by working for it. A lot of the time we don’t enjoy work and would rather be somewhere else. Unemployment, for people who need to earn, is usually dire, because it screws security.
Given today’s technology money could be linked much more closely with effort, getting what we need to do done and much less with the rich, libidinous economy and political capture. We could break the tie between money,fossil fuels and inheritance, and ludicrous war-mongering.
What we lack is any platform to do any of this from and what we have is the massive deterrence that even to think any of this is unrealistic.
Amen.
money can be anything, at any time, then aggregated at the positive terminal to create a new species…labor creates ‘money’ all the time, discounting the empire, beyond the empire’s view, until it appears…
money can be anything, at any time, then aggregated at the positive terminal to create a new species…labor creates ‘money’ all the time, discounting the empire, beyond the empire’s view, until it appears…
The majority lacks initiative and clarity to take action, yet must participate in return on risk to survive. Breeding, currency, bonds, stocks and politics is structured accordingly. Capital did it once upon a time. Modern monetary theories, like their predecessors, simply increase complexity in the layers hiding feudalistic extortion, hoping that some hapless fool accidently solves a problem attempting to solve an artificial crisis created for the purpose, resulting in his/her destruction in the swap.
taxation is the feedback signal, encouraging the tyrant.
I always find it amusing, cops paid with tax dollars complaining that they pay taxes too…
so let’s say F. Beard starts a bank called “The F. Beard Bank and Trust” wit the motto “earning interest at your expense.”
How does F. Beard start the bank? I guess he has to find an equity investor who puts in $100,000. The he sells some bonds, say $900,000 that pay 4%.
So now he has $1,000,000 to lend out at interest above his cost of capital, so he can earn interest at his borrower’s expens.
So then I come in for a loan. I say “I want to borrow $100,000 and lay around doing nothing watching Youtube videos of Adele and drinking red wine. I don’t want to work but I need money to pay rent and buy wine and food. Can I get a loan?”
And F. Beard says “Sure, that sounds like a good way for me to earn interest”.
So he gives me $100,000 at 8% which I put in another bank until I run through it all and go broke.
Now F. Beard has only $900,000 to lend out.
So let’s say somebody comes to him and says “Lend me $1 million dollars so I can buy 4 Ferraris and park them on the street in front of my house. My income is $40,000 a year and I’m thinking of quitting my job to make it big in the music business as a singer, even though I don’t have a plan. Will you lend me $1,000,000?
Can the F Beard bank say “OK” and just credit the borrower’s account. Or would it have to raise another $100,000 in deposits or through equity or bond sales?
He can’t lend out $1,000,000 now, since he only has $900,000, unless he raises another $100,000, can he? he can’t just credit somebody’s account with money he doesn’t already have? Or can he? I don’t think he can just lend out the extra $100,000 unless he raises it through bond sales or equity sales. maybe I’m wrong.
1) I would rather die than be a filthy banker and there is no other kind.
2) As long as the money lent stays at the originating bank then there’s no problem how much is lent. But money is borrowed to be spent so unless the originating bank is a mega-bank there is little chance it won’t end up in competing banks.
3) When competing banks send their bill for reserves (to be filled at the Fed), the originating bank can borrow the needed reserves inter-bank from its competitors or borrow from the Fed discount window. In either case, the interest is shared among the filthy cartel.
4) So it follows that a bank does not need depositors or even reserves. All one needs to join the counterfeiting cartel is some capital and a bank charter.
On # 4, no the bank cannot. This is not the issue with fiat.
The issue is not creating the money, it’s lending the same money times over. See, a bank can lend you $500,000 to purchase a house. The $500,000 will go from your bank’s account to the sellers bank account, say bank A to bank B.
No money has been created, right? Now bank B, takes the $490,000 of the 500k and without telling the owner, lends them to another client, in bank C, who uses the funds to buy a boat. This happens times over in a fractional reserve system.
And by the way, there are no reserves. The banks lend first and fund reserve requirements later. The banks run into issue when they become insolvent due to capital requirements to support their operation. These banks would fail if the government was not there to bail them out. Keep in mind that the Fed cannot create capital, it can only provide liquidity and it was capital that the banks needed. Two different things and it’s what MMT and the marxists miss.
You’re wrong. On all of it.
Not all of it. But I am wrong on a lot of it! I admit it. I left out deposits and reserve requirements and executive bonuses and proprietary trading and bank tellers. They don’t give out free toasters anymore do they? I don’t think so. I left those out too. I also left out branches. And wholesale funding. And credit cards and debit cards, and bank clocks facing the street that are broken and stuck at 1:39 in need of both paint and rust removal. Most of the clocks are gone too. No more clocks or toasters. Mostly the tellers are behind glass windows or bars. I left those out too. You’d think the tellers shouldn’t be the ones behind bars, but that’s another issue entirely. You can’t lend out a broken bank clock unless you’ve already got one, but you can lend it out if you borrowed it from another bank, who borrowed it from another bank, etc. If somebody wants their broken clock back, there’ll be a lot of scrambling! :)
The main reason I read the comments is for craazyman. You rock.
I would suggest that everyone commenting on The Web™ attempt to (get back to, if middle aged and older) start thinking how they might live their lives without The Web ….
Start thinking about how they might get along with their local neighbors (whom so many Web inhabitors don’t appear to give a rats ass about when they walk down a pedestrian sidewalk so sickeningly and obliviously involved with their, unaffordable to billions, creepy $mart [GP$’d] Phones ™), in the event they are cut off from The Web™…much like The: Homeless; Poverty Ridden; and millions of just keeping their heads above water Elderly ……always ‘Have Been[s?]’ ………………………
Much like the non-human mammals technophobes so proclaim to love (as long as those non human mammals are not able to assert their power over those technophobes) yet don’t demand be hooked up to a machine/technology 24/7 in order to be considered valid and worthy of consideration.
do you want to come over, pop some Xanax, get drunk on red wine and do some channeling? We can check out some Adele Youtube videos too. If we lose consciousness, we’ll wake up eventually — I always do. I have to work on Tuesday so by that point I need to be sober with my game face on. Just don’t bring any sharp objects because I’m suspicious of strangers, at first.
1) What does that mean? So if you lend me 10 chickens and I have to pay you 11, JUSTICE requires the sovereign to produce the 1 chicken I owe you? The government must, just because I’m more important than you are Mr Beard. Who is the thug Beard?
2) Got it, so if the population around me grows from , say 10 to 20 and I produce 100 cows, 1000 pounds of rice, 5000 gallons of milk which I have to sell to them at whatever the 20 people can pay me. It’s better if the government appropriates half of my goods and gives people a fraction. That will for sure motivate me (I guess this is what you call hoarder?) to produce more. And since the 20 people around me are getting “free things” this will also motivate them to work for me. Oh wait, not it won’t. I would stop producing anything in excess in a heartbeat and just produce for me. And the free loaders will stop working in a heartbeat to, until they are starving to death. If this is what hoarders are, I want tons of them around me. Rather than free loaders who consume and don’t contribute. Funny how the same folks “feel” sorry to see people starving around the world. No jack geniuses, you are consuming and not producing the things those same poor folks could be eating. You are the issue.
3) Right, if I produce the mentionied above and the government just steals enough from me (by creating un-backed currency), that will for sure motivate me produce more. And you know what, maybe it’s ok if the government starts firing shots at farmers unwilling to comply, because after all they are starving the population around them by not working themselves to death for the good of the anointed ones. Have you ever thought you have may just have this backwards?
4) Right, and I will vote to nominate you as the only person that will not have any bias, for only you know who the innocents are and who the non-innocents are. I sure don’t, and I’m sure if you think about it too, you will see that there is no freaking to know who the innocents are. You are not god and will never be. The only thing without a bias are free markets, which you seem sure you dont want and I can say without a doubt that the reason is one word, WORK.
No need to respond to your last comments, I’m sure you will later see them as innapropriate.
Fiat clucks?
So if you lend me 10 chickens and I have to pay you 11 Bapoy
Idiot! Chickens can reproduce; money can’t!
Now piss off. I’m sure I’ve answered the rest of your comment at least once.
At the least, you’re dense.
The voice of reason goes down hard. Perhaps it’s a bad day or bad week, or month.
The chickens reproduce when you feed them. And by the way, to feed them you have to purchase what they consumer, do you not?
Truth is you cannot tell me how much money we need because the amounto of money is irrelevant. I don’t know how much money we need, and neither do you. I don’t know what the rate of interest should be and neither do you.
What i do know is that for me to consume something, someone else has to work to produce it. That is a concept outside of some people’s grasp. Perhaps you are the one that should be banned.
[“Banks seek to satisfy that demand by making loans, and the government then satisfies the increased demand for government issued money that results. But the commercial banks don’t have their own printing presses.”]
No, not the commercial banks, but the _investment_ banks have one, obviously, especially the TBTF ones.
It’s not a limitless printing press, neither does it have to be. Just enough to absurdly leverage themselves and distribute just as absurd bonuses thanks to the wonders of mark-to-market accounting.
A memorable scene from the Lehman collapse reenactment movie comes to mind where Dick Fuld has Paulson on the phone, and is in the process of pleading for help before the imminent collapse, saying in doesn’t make sense for Lehman to go down, adding :
“you can’t say that we’ve run out of money; this isn’t the kind of money you can run out of.”
http://www.youtube.com/watch?v=RLWIPyQXcRE
between 32:18 to 32:58
The movie does start with a warning that though [some scenes and dialogs have been invented, the film is based on actual events and public records], I would be curious to know if that phrase was really uttered.
I tend to believe it actually probably has…
The printing press is the financial rent extortion capabilities given to a privileged few who happen to work where large sums of money are transacted. Dubious assets get created, but the bonuses are always siphoned.
Ultimately, who does the printing is not that relevant, what matters is the portion of resources that the system can way too easily allow to be misallocated during financial intermediation given the obvious moral hazards of the incentive structure of that sphere of the economy.
I would even argue that the legal system holds rent-extorting power as well, but that’s another story for another post….
I want to party with Diane and Craazyman…while watching a video of a mud wrestle between Bapoy and F. Beard with Lou Reed’s “Sweet Jane” playing (live version, Rock n Roll Animal), and then wake up and confess my sins to Worldismorphing…if he or she will hear them.
Is money primary a ‘means of exchange’, if so what’s being exchanged? The last time I looked, I lived in a capitalist economy. In my day-to-day work I fight tooth and nail with everyone else over resources. We nominally value these resources in money. I think money is closer to the soul of capitalism than it is to a ‘means of exchange’. Particularly so because today most of this money is not counting goods in the market; it’s counting debt. From the creditor’s point of view the promise to repay, and actual repayments, are what counts. From the debtors point of view it’s their bondage, their future in tutelage to pay off the debt.
I read this in hope of finding some mention of the words debt, credit, capital, real world. Nope, just money. MMT seems to live in an abstract world where money floats free from the social relations establishing it (ownership, debt, bankruptcy, law and police who enforce such ownership).
“Do Banks Create Money from Thin Air”. Clearly not. The debtor’s signature on their mortgage note creates money.
Mark Pawelek:Is money primary a ‘means of exchange’, if so what’s being exchanged?
Absolutely not. An important MMT observation is that there is no medium/mean of exchange. Never was.
The last time I looked, I lived in a capitalist economy. In my day-to-day work I fight tooth and nail with everyone else over resources. I kinda doubt this. :-)
I read this in hope of finding some mention of the words debt, credit, capital, real world. Nope, just money. MMT seems to live in an abstract world where money floats free from the social relations establishing it (ownership, debt, bankruptcy, law and police who enforce such ownership).
No, MMT does not live in this abstract world. But what Dan expounds here is largely his own theory. It is NOT MMT. It is wrong because it doesn’t treat credit/debt correctly, and money as a form of credit/debt. Social relations don’t establish money – they constitute it. Money is a social relation, nothing more, nothing less. MMT does correctly treat your concerns.
“Do Banks Create Money from Thin Air”. Of course they do. Anybody can create money. Bank money is better than your “money” you create when signing a loan document, is all. Neither the banks nor the state have any magically different money or credit creation powers than anybody else. They’re different because, uh, they’re The Bank, or The State – not some shmuck like you or me, that’s all.