Fractional Reserve Lending

[Aractus]

100% reserve banking would prevent banks from lending money.

Incorrect, it would mean they would only be able to lend you their money or the money they have from investors. Under 100% reserve banking, let's say I loan the bank my $20,000 - they can then loan that same $20,000 to someone else who wants to borrow it.

I'm not at all suggesting a return to the gold standard - that's even worse because it enriches the rich even more (since they're the ones with the gold already, and gold is a scarce commodity). What I'm saying is it should be backed by "real money" - i.e. currency issued by a sovereign State (or in the case of Europe, horrible paper money issued by the EU).

Let me put this into another context people might understand. Let's say I amass a wealth of $10 million. I then open the Aractus Bank. I then create $77 million in loans - I've just created $77 million and put it into the economy, and the only place that 77 million exists is in the numbers I put into my customer's bank accounts so they can pay another bank this fake money I just created out of thin air, and then I can hold the customer's debt and charge them interest. All the while I still have my $10 million in currency.

[The Grand Nudger]

Actually, the 77 million will exist as real assets as well..because people borrow money - to spend it.  That's -why- we use the system.  Cash sitting in a vault is dead money, it's still just a pile of iou's sitting in a vault, and fundamentally no different than the reserve backed iou's of a fractional system.  FRB is a tool used to stimulate the growth of real assets...like say, a small business loan, a house loan, or a car loan.  That's why banks go after those things when we default.  They need to recover the value of those things, because if they don't, they can't "create" any more money and they;ve already lost whatever the difference is between what we owe and what the asset will sell for.  Some portion of their fractional provision is tied up in whatever you bought with their loan.

Your summary above isn;t accurate. Fractional reserves don;t "create money", they extend credit, and whether or not that credit is worth anything is tied to the value of whatever it is that it underwrites. Labor "creates money", frb systems extend credit for the purpose of purchasing labor. The iou's you're discussing, whether they come in the form of diminishing credit from a fractional reserve or little green pieces of paper are just an agreement over what we'll accept as compensation. They're easier to carry in our pockets than a manufacturing plant, a townhouse, or a bmw.... but they have no actual value beyond that agreement, and whatever it is we use them to purchase. A 100% reserve doesn;t do anything to change that (unless it is something like gold or opiods, lol), it just makes it more difficult for an economy to purchase labor, and in so doing makes it more difficult for an economy to grow.

[Aractus]

Your summary above isn;t accurate.  Fractional reserves don;t "create money"

Yes they do. They create money, and the money is guaranteed by the government just like currency money is.

[The Grand Nudger]

If that's the way you'd prefer to conceptualize it, I can hardly see how it would make a difference. Why would holding one particular government backed bit of money be better than holding the other? If both are anchored by the same authority, what's the problem? So far all I'm getting is "they make money".. and putting aside that oversimplification, I can't figure out what else you might be trying to get at? FRB's are good at stimulating growth and making the money supply (digital or paper) do work - build real assets. That's what it's better at than a full reserve.

[Aractus]

Because Rhythm, if the Government had made the money instead of the Banks then it would have been created as debt-free currency the government could spend. Again, we're talking $1.6 Trillion dollars. That's more than 3 times the government debt. They could have that money to spend directly on schools, hospitals, and the public service. In other words, public money spent for the good of the public and put into circulation. People would only have received the money when created in exchange for goods and services - or in the forms of their government salaries. When Banks create money, the public has not received any good and services in exchange for the creation of that money, and it gets used to create debt: i.e. as a way for the banks to have leverage over members of the public. It benefits the wealthy because the wealthy are the ones who can create banks and then create money backed by their "capital". For example, backed by their $50 million house, or yacht, or bank building! It's just as unfair to ordinary citizens as the gold standard.

[The Grand Nudger]

Would they buy me a fast run pcb plant?  Would they build me a 4k sq ft home?  Okay, okay, how about a nice new 4 door with chrome and sweet running lights?  This all sounds suspiciously like an issue of whether or not a person prefers the government tit to private enterprise.  

What's stopping the gov from just creating more money to make those hospitals anyway?  Allowing banks to leverage the fractional provision doesn't stop them from doing that.  Split the baby?  Halve the fractional allowance and then print more of the other kind of iou? Truth is, they couldn't have that money. They were unwilling to do the things you've mentioned. They've allowed the banks to assume the risk of the loans, and they've allowed the citizens to accrue whatever debt they sign for and spend it how they intend to spend it. Central planning/free market. Here again, this is what frbs do better than full reserves.

Don't get me wrong, I'm not a big fan of the blip at the point of central banking and government backing the lines of credit these banks extend...but that's not a problem with fractional reserves vs full reserves, it's a whole different can of worms.

[The Grand Nudger]

-continuing with why subtle inaccuracies and tiny omissions matter...the government taxes all that shit we spend the loans on anyway, and they tax the profits the banks make on the loans.  

They get their slice of the money -they- create by both allowing the banks to engage in this practice -and- backing the loans extended.  So...make hospitals with that?  Or, I guess they could keep sending it down whatever black hole they send it down.  I guess I;m just not as enamored as you with the idea of my government deciding whether or not I can have my 300s, or with lines of credit being scarce and interests rates high, particularly if the other option on the table is letting all that potential growth sit in a vault where some geriatric hoards over it like a dragon with a pile of gold?

[Aractus]

What's stopping the gov from just creating more money to make those hospitals anyway?

Nothing but it puts us into debt because we have to borrow the bank's "invented money" by issuing bonds. We shouldn't have to issue government bonds to get loans from banks when we could just create the money ourselves. The money would still find its way into the system, but only because the government is paying people with it.

How it currently works:

1. Banks create money.
2. Banks loan their money to individuals, companies, corporations, and governments.
3. Governments guarantee the bank-created money.
4. Governments borrow bank-created money to spend.

How it should work:

1. Governments create money through the mint.
2. Governments spend newly created money.
3. Banks do not profit from this, the public does. The people who actually do the work are the ones rewarded with newly created money, not the banks who simply created a number in a bank account.

[The Grand Nudger]

Step 1 is such a gross oversimplification that it's less than wrong.  The banks can only "create" what money the government allows in setting the thresholds and by their willingness to back it..limited by the amount of currency in little green pieces of paper in their possession and, collectively, limited by whatever amount of the same is in circulation.  The great thing about that...from the point of view of government, is that when people default - as they often do- the gov doesn't have to eat the loss. 

Step 2 is also wrong, banks extend credit which is limited and defined by step 1, it's not as if they've got their own little printing press in the back...hammering out 20s. Every time a bank -does- hand out some amount of the 20's they're required to keep in reserve, it reduces their ability to lend and they have to counter that by either not lending, or calling in notes in real assets.

Step 3 is redundant and out of place, it's just part of step 1.

Step 4 is true, it's called a commitment to fiscal responsibility.  If they don;t have the money...instead of printing it out, they ask for credit, and agree to pay interest on the loan. Depending on the terms and how long they can defer payment, the dollar value of the loan could be far less than the end value of the asset they purchase with it. You can see why this is a good deal for the government, I assume? It;s the same principle involve in deferring student loans until such a time inflation makes the cost marginal and the asset purchased of far greater relative value than the sum of the payments.

Now, your version of how things -should- work doesn't seem to contain a reference to full reserve banking..for starters...it relies on governments printing money as they see fit whenever they need it (generally seen as a bad thing), and leaves out anyone who isn't a government employee or working on a government project.

I thought we were discussing the merits of frb relative to full reserves...not frbs to fiscally irresponsible nanny states? If -that's- what we're actually discussing, it's a no brainer. FRB all day every day.

[Aractus]

Simply saying "Aractus is wrong" is so far fetched that no one in their right minds would believe it. Especially saying he's "less than wrong" - do you not understand that right and wrong are binary?

Step 2, I will prove Aractus is right. Yesterday I went to an ATM and withdrew money. About an hour later I realised I didn't have the money I withdrew. I won't mention who my bank is, but it's suffice to say that all banks are cunts - and that's putting it nicely. I phoned the telephone number and said that either the ATM did not dispense me the money, or I left it there, but that I believed it was their fault and that the money never appeared. I have a good reason to believe that: I've never in my life left money in an ATM, but once before an ATM did not produce the money - and I had to chase it up four times before the bank credited it. And IIRC that was just $20. I recalled this story not long ago to one of my associates and said I would never accept that kind of treatment from the bank again, I was only 20 or 21 at the time, but now I know I should have insisted they'd given me the money back immediately.

So when I phoned a "banker" she said she would lodge an ATM dispute and it would take up to a week to return my money. I said that's not good enough because I don't believe I did anything wrong - in fact if you leave money in an ATM it beeps at you to alert you to it! The ATM didn't beep at me, ergo I didn't leave money in it, ergo it never produced the money. Then the fucking bitch lied outright to me, the first of several lies - she said wait ten minutes because it should automatically credit back to me within 40 minutes of taking out the money. But I had waited almost 2 hours before calling - I asked why waiting another 10 minutes would make any difference? She acknowledged that it wouldn't! I said I wanted the money back in my account before I left the phone line, she said that she didn't have the authorisation to do that, and then I asked to speak to someone with authorisation and she said no one could do it unless I went to a branch. So I said fine I'll go to a branch and go ahead and lodge the ATM dispute (that she promised she would do about 3 or 4 times). Then she said "I can't lodge an ATM dispute because I don't have the ATM transaction ID yet".

OMFG. So the bitch lied twice, in total. First she said clearly that she would lodge the ATM dispute even after viewing my account and me telling her that I didn't have the ATM receipt. Then, as mentioned she said to wait ten minutes because it should automatically be reversed - even though it was well outside of the 40-minutes time-frame in which that supposedly happens.

Anyway, then I had to go into the branch. Well it took some time, and the banker said that she would lodge the ATM dispute for me and that it would appear in about a week. I said that's not good enough, that I didn't believe I left money in the ATM, and that as I believe it is their fault that I want it resolved immediately. She said policy is to credit the account when the machine's balance is tallied (well what she said amounted to that anyway) - I said it's my money and I honestly don't believe I made a mistake, which means that the fault is on their side and they should rectify it. I had to wait, but it got done and I walked out with my money in my hand.

In a way I think that experience proves to me just how arrogant banks are. Yes there is a slim possibility that I made the mistake - a very slim possibility, it's not like the other time when I clearly knew that the money wasn't dispensed. And there's a reason for my confusion now, I reasoned it out: I have my wallet in one hand, and I have to take three things from the ATM with the other: 1. the card, 2. the money, and 3. the receipt. If you have the card and you have the receipt and you look down for the money and it isn't there you can assume you already took it and placed it in your wallet - and that's exactly what I think I did. Because when I thought back to it I never remembered seeing the cash. If the cash was there then the ATM would have beeped at me to alert me to it, and I don't remember that either.

The point of this little story is to prove that I'm right. And also because by getting my money I corrected I regret from my past where I didn't insist that they fix their mistake right away. And also to show the bank acknowledge they were wrong this time by altering their usual procedure.