Average household net worth declined 36% over 10 years.... (1 Viewer)

[johnnycakes]

Divorce does a great job of taking one household and creating two with only half the net worth as before.

 

[Cjw_55106]

Divorce does a great job of taking one household and creating two with only half the net worth as before.

And marriages do the opposite. This doesnt affect the OP.

 

[IvanKaramazov]

Think about where "invested" dollars really go. Dollars spent in the secondary stock market don't go to companies, only IPOs do. And dollars saved in banks go straight to reserves, which are not loaned out - they don't help the economy, either.

When Bill Gates buys a stock (non-IPO), somebody else is selling it. If Gates buys $100 of Apple, his $100 goes to the seller, who presumably spends it. Or invests it in something else. Those funds don't just vanish -- they end up funding capital projects most of the time.

Dollars saved in banks do not generally go into reserves. They ware usually loaned out. That's how banks make money. When the economy is doing poorly and there aren't many profitable loan opportunities, then yes they frequently hold excess reserves. But that's not normal.

 

[IvanKaramazov]

Consumer spending is what drives the economy. Savings are overrated.

In the short run, consumer spending matters a lot and saving is a net drain on the economy. In the long run, saving matters a lot and consumer spending is a net drain on the economy.

Living standards rise over time due to things like capital accumulation and technological innovation, both of which are driven in part by savings. Saving produces capital directly, and it produces technological innovation indirectly by allowing for R&D and basic research.

 

[IvanKaramazov]

... When Bill Gates saves money, he's investing it in firms who spend it, usually on capital. ...

OK, I cut too much away so this seems out of context, but I don't think it really is...

Where did the Bill Gates of the world's money go when the top tax rates were 70 or 90%? I assume you agree they largely didn't go to taxes. Where did they go?

If marginal tax rates were 90%, Gates's savings would still go to firms and would usually fund capital projects. He just wouldn't be saving as much.

 

[IvanKaramazov]

Of course they don't lend out reserves. That's why they are reserves. That's not what you said though.

You said "dollars saved in banks go straight to reserves." That's simply not true.

No, it's true. If you deposit cash, it immediately becomes vault cash, which counts as reserves (although it doesn't earn interest). Banks adjust their vault cash so as not to have too much on hand, because it bears no interest. They deposit extra vault cash with the Fed, in their reserve accounts.

If you deposit a check or electronic transfer, the banks get nothing tangible, but they settle up with the other bank by transferring reserves through their reserve accounts at the Fed. So these deposits become reserves as well.

So when a bank loans out money, where do they get it from? The manager's piggy bank?

There is so much disinformation in your posts I don't even know where to start.

When a bank loans out money, it does so electronically. Transfers are made between banks using their reserve accounts. When you get a car loan, do you walk out of the bank with a gym bag full of cash?

Loans create deposits. A bank "expands their balance sheet" by creating a loan and a corresponding deposit. An asset and a matching liability. The bank loans you $30,000 for a car: they transfer $30,000 to the car dealer's bank via their reserve accounts, and they show the $30,000+ that you owe them as an asset on their books. Aside from the dollars that move between reserve accounts at the Fed, no dollars move at all. The car dealer's account is marked up $30,000, $30,000 moves from your bank's reserve acct. to the car dealer's bank's reserve account, and you owe your bank $30,000+. And $30,000 new dollars have been created by the bank loan. They will cease to exist once the loan is paid off.

Your explanation of the mechanics is basically right, but you're drawing the wrong conclusion because you're ignoring where the $30,000 came from to begin with. It starts with Bill Gates saving $30,000 by putting it in his savings account. Then the bank loans that $30,000 to me to buy a car (edit: technically the bank should hold some of those funds as required reserves -- it wouldn't be able to loan out all $30K). Which is $30,000 of spending. Which is why savings do not just vanish from the economy.

 

[Slapdash]

Banks do not make loans from deposits. They make loans, which create deposits.

 

[JohnfrmCleveland]

Think about where "invested" dollars really go. Dollars spent in the secondary stock market don't go to companies, only IPOs do. And dollars saved in banks go straight to reserves, which are not loaned out - they don't help the economy, either.

When Bill Gates buys a stock (non-IPO), somebody else is selling it. If Gates buys $100 of Apple, his $100 goes to the seller, who presumably spends it. Or invests it in something else. Those funds don't just vanish -- they end up funding capital projects most of the time.

Dollars saved in banks do not generally go into reserves. They ware usually loaned out. That's how banks make money. When the economy is doing poorly and there aren't many profitable loan opportunities, then yes they frequently hold excess reserves. But that's not normal.

When you buy stock secondhand, you are just exchanging positions with the guy that is selling the stock. Now you have the stock, and he has the money. The company doesn't see a dime. And that doesn't change depending upon what the seller does with the money. If he chooses to buy another stock (secondhand) with the money you gave him, that company won't see a dime, either.

If he spends it on goods or services, great, the economy wins. And if he invests it directly, by buying buildings or machinery, etc., the economy wins again (because a building or machinery has been purchased, and somebody is making money). But you really have to look closely at what is happening. If you invest money directly with a business, like venture capital, those investors usually expect to get their money back, with a profit, at some point. So they either loan money to an entrepreneur, who has to take money out of the business to pay them back, or they retain ownership of part of the business, and they get their money back from company profits. Businesses need this money to get going, but in the long run it means a net flow of dollars into the rich investor's pocket. And those dollars must come from consumer spending - where else would they come from?

As for your point on banks, I'll just ask you to read the links I gave before, if you don't believe me. Banks don't just move old dollars around, they create credit out of thin air. And you know that it isn't limited by your deposits, because even if you believe the old fractional reserve story, banks can loan out 10x the number of dollars in loans that they hold in reserve, and the dollars they give you when they loan you money are just as good as any other dollar. Canada doesn't even have a reserve requirement.

Everything a bank makes goes into reserves. It's their own personal bank account. That's what they pay their employees out of, etc. But it's not what they loan out from. They loan out credit that they have created by expanding their balance sheet, adding a liability (the loan) and a matching asset (your obligation to repay the loan). If you deposit your loan at the same bank, they don't even have to move reserves around - they just credit your checking account up, and start sending you monthly bills. It's all just double-entry accounting. The bank's net financial position stays the same, except for the interest you end up paying.

Before QE, banks didn't hold excess reserves if they could help it. Banks normally bought short-term treasuries with any excess reserves. The yield on those treasuries set the rate on interbank lending; if a bank had excess reserves, they either loaned them to other banks on the interbank market, or they bought treasuries. In QE, the Fed exchanged dollars for bonds, which flooded banks with excess reserves, in the hopes that that would increase lending activity (it didn't). Now, banks just made the 0.25% that the Fed pays on reserves deposited at the Fed.

 

[JohnfrmCleveland]

Consumer spending is what drives the economy. Savings are overrated.

In the short run, consumer spending matters a lot and saving is a net drain on the economy. In the long run, saving matters a lot and consumer spending is a net drain on the economy.

Living standards rise over time due to things like capital accumulation and technological innovation, both of which are driven in part by savings. Saving produces capital directly, and it produces technological innovation indirectly by allowing for R&D and basic research.

Real investment helps companies grow, but the net result is that the rich investor gets his dollars back, and then some. He has made a profit, but has produced nothing to earn it, so his profit is being skimmed off the labor of workers that actually produce something. If you start a business and need start-up loans from a bank, you are taking some of your profits (from consumer spending) and giving them to the bank. So capital is nice, but consumer spending is necessary. And since banks have a virtually unlimited supply of capital (bank credit that they can create), there really is no need for Bill Gates' savings. You can borrow money from a bank, or you can borrow money from Bill Gates, it's all the same. Or, Bill Gates buys a portion of your company and takes some of the profits directly. I'd rather pay the bank back and retain full ownership of my company anyway.

Technological innovation is facilitated by capital, but it is driven by the desire for profit, and profit comes from consumer spending. Plenty of innovation has occurred without capital.

 

[JohnfrmCleveland]

Of course they don't lend out reserves. That's why they are reserves. That's not what you said though.

You said "dollars saved in banks go straight to reserves." That's simply not true.

No, it's true. If you deposit cash, it immediately becomes vault cash, which counts as reserves (although it doesn't earn interest). Banks adjust their vault cash so as not to have too much on hand, because it bears no interest. They deposit extra vault cash with the Fed, in their reserve accounts.

If you deposit a check or electronic transfer, the banks get nothing tangible, but they settle up with the other bank by transferring reserves through their reserve accounts at the Fed. So these deposits become reserves as well.

So when a bank loans out money, where do they get it from? The manager's piggy bank?

There is so much disinformation in your posts I don't even know where to start.

When a bank loans out money, it does so electronically. Transfers are made between banks using their reserve accounts. When you get a car loan, do you walk out of the bank with a gym bag full of cash?

Loans create deposits. A bank "expands their balance sheet" by creating a loan and a corresponding deposit. An asset and a matching liability. The bank loans you $30,000 for a car: they transfer $30,000 to the car dealer's bank via their reserve accounts, and they show the $30,000+ that you owe them as an asset on their books. Aside from the dollars that move between reserve accounts at the Fed, no dollars move at all. The car dealer's account is marked up $30,000, $30,000 moves from your bank's reserve acct. to the car dealer's bank's reserve account, and you owe your bank $30,000+. And $30,000 new dollars have been created by the bank loan. They will cease to exist once the loan is paid off.

Your explanation of the mechanics is basically right, but you're drawing the wrong conclusion because you're ignoring where the $30,000 came from to begin with. It starts with Bill Gates saving $30,000 by putting it in his savings account. Then the bank loans that $30,000 to me to buy a car (edit: technically the bank should hold some of those funds as required reserves -- it wouldn't be able to loan out all $30K). Which is $30,000 of spending. Which is why savings do not just vanish from the economy.

No, the $30,000 is created out of thin air by the bank. The bank doesn't need $30,000 on hand in order to loan you $30,000. They don't even need $3,000 in reserves - they can borrow those later. The only thing a bank really needs, the only thing that actually limits what a bank can loan out, is their capital requirement. And they don't dip into their pile of capital to make loans, either, it just sits there. It's just collateral.

 

[Politician Spock]

It was the republican adoption of "deficits don't matter" that paved the way for the tea party.

But they certainly aren't advertising that stance. When Democrats are the ones doing the spending, deficits matter again. Nobody running for office, in either party, is publicly saying that deficits don't matter. They can't - they'd get crushed at the polls. People aren't ready to hear it yet. When I try to explain deficits and debt in these forums, lots of people get absolutely angry. (FBG, on the other hand, has been a surprisingly pleasant experience.) I think if I had the same conversations in public, I'd risk a punch in the nose.

You're an alias.

 

[JohnfrmCleveland]

It was the republican adoption of "deficits don't matter" that paved the way for the tea party.

But they certainly aren't advertising that stance. When Democrats are the ones doing the spending, deficits matter again. Nobody running for office, in either party, is publicly saying that deficits don't matter. They can't - they'd get crushed at the polls. People aren't ready to hear it yet. When I try to explain deficits and debt in these forums, lots of people get absolutely angry. (FBG, on the other hand, has been a surprisingly pleasant experience.) I think if I had the same conversations in public, I'd risk a punch in the nose.

You're an alias.

I've used this same name, when possible, all over the internet since 2008. I omit the "o" in "from" because the first time I used this name, they had a 16-letter limit. Sometimes, I've had to cut off other letters, too, but the "frm" is, I think, unique to me.

Who (on this board) do you guys think I am, anyway? Just out of curiosity, since I'm new here...

Really.

 

[Politician Spock]

Thank you. I've heard of MMT before but didn't really understand what it was. I note that in the Wiki page that you referenced in your article, Paul Krugman is critical of MMT because increased debt creates inflation, which you acknowledge, but downplay.

It's a lot to digest. But again, intuitively, I have a very tough time accepting the notion that we can just keep increasing the debt and not worry about it at all.

I don't know if it's intuitively difficult; I just think that we've been taught a certain way for so long that it's hard to discard it and start over.

Consider this: with a fiat currency, debt is not even necessary. There is no operational need to issue debt at all, we could just issue currency directly and be done with it. Intuitively, the whole idea of debt doesn't make sense. But you have to get past a lifetime of bad information first.

Lincoln proved this to be true when he and the Secretary of the Treasury decided that the Constitution allowed the US Treasury to issue notes that could be exchanged as legal currency. They issued $450 million of them and used them to pay the northern army. Without this process, Lincoln would have had to pay the banks ridiculously high interest for the capital he needed to fund his army.

This option ended however with the 1863 and 1864 Banking Acts. The US Treasury can no longer issue notes that can be exchanged as legal currency. The Banking Acts established which banks can issue notes exchangeable as legal currency, and if the Treasury need funds above and beyond tax revenue, it would issue an interest bearing bond out of thin air and trade it with a bank for legally exchangeable currency.

This alone does not make "debt necessary", but after the passing of the Federal Reserve Act and then Nixon taking the currency off the gold standard, yes debt is now necessary for every dollar to come into existance.

If the US Treasury could just issue a note exchangeable as legal tender (again, like Lincoln did) then no, debt would not be neccessary when the government deficit spends. Essentially the government could have spent every single penny it's spent to date, and the national debt right now would be $0.00.

 

[timschochet]

Sure, the Lincoln example is one where it apparently worked, but isn't Weimar Germany an example where it failed miserably? In the early 1920s, Germany attempted to print enough reichmarks to pay off all of its World War I debts, and the economy collapsed. The mark became absolutely worthless and millions saw all their savings wiped out.

 

[JohnfrmCleveland]

Thank you. I've heard of MMT before but didn't really understand what it was. I note that in the Wiki page that you referenced in your article, Paul Krugman is critical of MMT because increased debt creates inflation, which you acknowledge, but downplay.

It's a lot to digest. But again, intuitively, I have a very tough time accepting the notion that we can just keep increasing the debt and not worry about it at all.

I don't know if it's intuitively difficult; I just think that we've been taught a certain way for so long that it's hard to discard it and start over.

Consider this: with a fiat currency, debt is not even necessary. There is no operational need to issue debt at all, we could just issue currency directly and be done with it. Intuitively, the whole idea of debt doesn't make sense. But you have to get past a lifetime of bad information first.

Lincoln proved this to be true when he and the Secretary of the Treasury decided that the Constitution allowed the US Treasury to issue notes that could be exchanged as legal currency. They issued $450 million of them and used them to pay the northern army. Without this process, Lincoln would have had to pay the banks ridiculously high interest for the capital he needed to fund his army.

This option ended however in with the 1863 and 1864 Banking Acts. The US Treasury can no longer issue notes that can be exchanged as legal currency. The Banking Acts established which banks can issue notes exchangeable as legal currency, and if the Treasury need funds above and beyond tax revenue, it would issue an interest bearing bond out of thin air and trade it with a bank for legally exchangeable currency.

This alone does not make "debt necessary", but after the passing of the Federal Reserve Act and then Nixon taking the currency off the gold standard, yes debt is now necessary for every dollar to come into existance.

If the US Treasury could just issue a note exchangeable as legal tender (again, like Lincoln did) then no, debt would not be neccessary when the government deficit spends. Essentially the government could have spent every single penny it's spent to date, and the national debt right now would be $0.00.

Actually, the law just says that Treasury's balance at the Fed must be in the black. It doesn't mandate that we have to do this by issuing bonds. That's why the platinum coin option was feasible, even legally.

I really was hoping that Obama would have tried The Coin, if only to demonstrate to everybody that the world wouldn't collapse if we didn't issue bonds.

 

[Politician Spock]

Thank you. I've heard of MMT before but didn't really understand what it was. I note that in the Wiki page that you referenced in your article, Paul Krugman is critical of MMT because increased debt creates inflation, which you acknowledge, but downplay.

It's a lot to digest. But again, intuitively, I have a very tough time accepting the notion that we can just keep increasing the debt and not worry about it at all.

I don't know if it's intuitively difficult; I just think that we've been taught a certain way for so long that it's hard to discard it and start over.

Consider this: with a fiat currency, debt is not even necessary. There is no operational need to issue debt at all, we could just issue currency directly and be done with it. Intuitively, the whole idea of debt doesn't make sense. But you have to get past a lifetime of bad information first.

Lincoln proved this to be true when he and the Secretary of the Treasury decided that the Constitution allowed the US Treasury to issue notes that could be exchanged as legal currency. They issued $450 million of them and used them to pay the northern army. Without this process, Lincoln would have had to pay the banks ridiculously high interest for the capital he needed to fund his army.

This option ended however in with the 1863 and 1864 Banking Acts. The US Treasury can no longer issue notes that can be exchanged as legal currency. The Banking Acts established which banks can issue notes exchangeable as legal currency, and if the Treasury need funds above and beyond tax revenue, it would issue an interest bearing bond out of thin air and trade it with a bank for legally exchangeable currency.

This alone does not make "debt necessary", but after the passing of the Federal Reserve Act and then Nixon taking the currency off the gold standard, yes debt is now necessary for every dollar to come into existance.

If the US Treasury could just issue a note exchangeable as legal tender (again, like Lincoln did) then no, debt would not be neccessary when the government deficit spends. Essentially the government could have spent every single penny it's spent to date, and the national debt right now would be $0.00.

Actually, the law just says that Treasury's balance at the Fed must be in the black. It doesn't mandate that we have to do this by issuing bonds. That's why the platinum coin option was feasible, even legally.

I really was hoping that Obama would have tried The Coin, if only to demonstrate to everybody that the world wouldn't collapse if we didn't issue bonds.

Yes, the Constitution allows the Federal Government to issue coins as legally exchangeable tender, and no Banking Act can take that away from the Federal government like the right to issue notes legally exchangeable as tender was (Lincoln and his Treasury Secretaty used a really loose interpretation of the Constitution to claim they could).

As for the world not collapsing if we did this, there's a reason we don't do it. That's because you don't know anymore than anyone else knows how the world would respond if we did this. Some people around the world would look at that and say the dollar isn't worth anything more than poker chips.

 

[IvanKaramazov]

Think about where "invested" dollars really go. Dollars spent in the secondary stock market don't go to companies, only IPOs do. And dollars saved in banks go straight to reserves, which are not loaned out - they don't help the economy, either.

When Bill Gates buys a stock (non-IPO), somebody else is selling it. If Gates buys $100 of Apple, his $100 goes to the seller, who presumably spends it. Or invests it in something else. Those funds don't just vanish -- they end up funding capital projects most of the time.

Dollars saved in banks do not generally go into reserves. They ware usually loaned out. That's how banks make money. When the economy is doing poorly and there aren't many profitable loan opportunities, then yes they frequently hold excess reserves. But that's not normal.

When you buy stock secondhand, you are just exchanging positions with the guy that is selling the stock. Now you have the stock, and he has the money. The company doesn't see a dime. And that doesn't change depending upon what the seller does with the money. If he chooses to buy another stock (secondhand) with the money you gave him, that company won't see a dime, either.

If he spends it on goods or services, great, the economy wins. And if he invests it directly, by buying buildings or machinery, etc., the economy wins again (because a building or machinery has been purchased, and somebody is making money). But you really have to look closely at what is happening. If you invest money directly with a business, like venture capital, those investors usually expect to get their money back, with a profit, at some point. So they either loan money to an entrepreneur, who has to take money out of the business to pay them back, or they retain ownership of part of the business, and they get their money back from company profits. Businesses need this money to get going, but in the long run it means a net flow of dollars into the rich investor's pocket. And those dollars must come from consumer spending - where else would they come from?

As for your point on banks, I'll just ask you to read the links I gave before, if you don't believe me. Banks don't just move old dollars around, they create credit out of thin air. And you know that it isn't limited by your deposits, because even if you believe the old fractional reserve story, banks can loan out 10x the number of dollars in loans that they hold in reserve, and the dollars they give you when they loan you money are just as good as any other dollar. Canada doesn't even have a reserve requirement.

Everything a bank makes goes into reserves. It's their own personal bank account. That's what they pay their employees out of, etc. But it's not what they loan out from. They loan out credit that they have created by expanding their balance sheet, adding a liability (the loan) and a matching asset (your obligation to repay the loan). If you deposit your loan at the same bank, they don't even have to move reserves around - they just credit your checking account up, and start sending you monthly bills. It's all just double-entry accounting. The bank's net financial position stays the same, except for the interest you end up paying.

Before QE, banks didn't hold excess reserves if they could help it. Banks normally bought short-term treasuries with any excess reserves. The yield on those treasuries set the rate on interbank lending; if a bank had excess reserves, they either loaned them to other banks on the interbank market, or they bought treasuries. In QE, the Fed exchanged dollars for bonds, which flooded banks with excess reserves, in the hopes that that would increase lending activity (it didn't). Now, banks just made the 0.25% that the Fed pays on reserves deposited at the Fed.

The bolded part is exactly what I was saying.

You've obviously done some reading on the banking system, but your understanding is seriously wrong. Yes, banks don't loan out reserves. That's why they're reserves and not loans. But most deposits don't go into reserves. And banks don't pay their employees out of reserves. Again, those reserves have to be held to support the bank's loan portfolio.

 

[JohnfrmCleveland]

Sure, the Lincoln example is one where it apparently worked, but isn't Weimar Germany an example where it failed miserably? In the early 1920s, Germany attempted to print enough reichmarks to pay off all of its World War I debts, and the economy collapsed. The mark became absolutely worthless and millions saw all their savings wiped out.

The Weimar example has a lot of differences that set it apart. War reparations, food shortages, and (some say) a deliberate attempt by the Germans to avoid paying reparations by devaluing their own currency on purpose.

The most important things to remember, IMO, are these: first, sovereign debt (in a fiat currency regime) is not really debt as you and I know it. It's just accounting. Bonds are just another way to hold onto large piles of currency. Two, if your economy can meet the demand of new money, you won't get demand-pull inflation. So the practical limit of deficit spending is inflation, and the real limit is real resources. If you have the resources to meet demand, more demand just means more business.

Germany, for a lot of good reasons, couldn't meet all of that demand.

 

[IvanKaramazov]

Consumer spending is what drives the economy. Savings are overrated.

In the short run, consumer spending matters a lot and saving is a net drain on the economy. In the long run, saving matters a lot and consumer spending is a net drain on the economy.

Living standards rise over time due to things like capital accumulation and technological innovation, both of which are driven in part by savings. Saving produces capital directly, and it produces technological innovation indirectly by allowing for R&D and basic research.

Real investment helps companies grow, but the net result is that the rich investor gets his dollars back, and then some. He has made a profit, but has produced nothing to earn it, so his profit is being skimmed off the labor of workers that actually produce something. If you start a business and need start-up loans from a bank, you are taking some of your profits (from consumer spending) and giving them to the bank. So capital is nice, but consumer spending is necessary. And since banks have a virtually unlimited supply of capital (bank credit that they can create), there really is no need for Bill Gates' savings. You can borrow money from a bank, or you can borrow money from Bill Gates, it's all the same. Or, Bill Gates buys a portion of your company and takes some of the profits directly. I'd rather pay the bank back and retain full ownership of my company anyway.

Technological innovation is facilitated by capital, but it is driven by the desire for profit, and profit comes from consumer spending. Plenty of innovation has occurred without capital.

I think you're confusing what I mean by "capital." I'm using that term to refer to durable inputs, like factories, machinery, tools, networks, etc. I don't mean "loanable funds."

Also, you're right that borrowing money from a bank is the same as borrowing money from Bill Gates. Like I said earlier, it's literally the same thing -- the bank is just a conduit for channeling savings to borrowers.

 

[sporthenry]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

 

[JohnfrmCleveland]

I think you're confusing what I mean by "capital." I'm using that term to refer to durable inputs, like factories, machinery, tools, networks, etc. I don't mean "loanable funds."

Also, you're right that borrowing money from a bank is the same as borrowing money from Bill Gates. Like I said earlier, it's literally the same thing -- the bank is just a conduit for channeling savings to borrowers.

I was talking about loanable funds. Sorry for any confusion.

But on your second point, banks do not channel savings to borrowers, they loan out credit. And they create that credit out of nothing. Bill Gates needs cash in hand in order to loan you money, banks do not. The whole idea behind banking is to leverage a little into a lot. Banks do that by holding a little bit of real money (reserves) and balancing a whole bunch of assets and liabilities on paper.

 

[Slapdash]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

 

[JohnfrmCleveland]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

Banks don't hold much cash on hand (vault cash), because they can earn a bit of interest if they, instead, deposit cash at the Fed. They just keep enough on hand to meet their customers' demand for cash - some in the drawers, and some in ATMs. So in the event of a bank run, they run out of cash quickly. But your deposit is guaranteed by the govt., so nobody worries about runs. At the next opportunity, the bank will convert some of their reserves at the Fed and have more cash delivered. But even if other banks won't lend to the bank in trouble, the Fed will.

That banks don't hold a lot of cash is the same reason why you can't take out a loan for a car and walk out with $30,000 in cash - not without some lead time, anyway. Banks normally just do that loan electronically.

 

[Politician Spock]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

 

[sporthenry]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

Well what is to stop it from going back to the more basic system? You say the loan creates another deposit but if we take the auto loan from before, if they start hoarding money outside the banking system, the deposit doesn't exist. So then where do they get the deposit? I appreciate the modern banking system but it still relies on its basic principles. If you can't find the deposits, you still go belly up or in WaMu's case, a run can still put you at risk.

 

[Slapdash]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

Maybe you should try for shock value that resembles reality in any way.

 

[Slapdash]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

Well what is to stop it from going back to the more basic system? You say the loan creates another deposit but if we take the auto loan from before, if they start hoarding money outside the banking system, the deposit doesn't exist. So then where do they get the deposit?I appreciate the modern banking system but it still relies on its basic principles. If you can't find the deposits, you still go belly up or in WaMu's case, a run can still put you at risk.

Sure, everyone could take 10% out of the money supply in cash to harm the banking system. Of course, the Fed would respond by meeting the additional liquidity demand.

You have the causality backwards on WaMu. The run was caused by insolvency, it didn't cause the insolvency. It only expedited the process of having it bought out. Those deposits didn't disappear, they were reallocated.

 

[Sand]

So the person spending all of their income either:

A) Works until death

B) Has a drastic change of lifestyle at retirement

Which is exactly what the average American faces. Especially since starving Social Security out of existence has been policy for 30+ years.

And there really isn't anything wrong with working until death, to be honest. No one is guaranteed a retirement - the whole idea that someone deserves a retirement is a bit silly. Retirement itself is a very new thing, really. If a person chooses to have their income=expenses then .

Why can't we lower the standard work week to 30 hours hire 25% more employees give everybody a raise to make up the difference. Then set up a minimum pay that is more in line with reality say like 40k/yr and a maximum pay let's say 5 million/yr. Add cost of living raises every year that coincide with inflation. Then flat tax everybody 10%.

EZ game.

This won't work because greed is good. We have a number of very motivated individuals that given this opportunity will create substantially more wealth than the rest. This plan would tip the scales in favor of the rent seekers and discourage the risk takers, which would hurt everyone in the long run.

 

[JohnfrmCleveland]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

 

[Politician Spock]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

 

[JohnfrmCleveland]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

Well what is to stop it from going back to the more basic system? You say the loan creates another deposit but if we take the auto loan from before, if they start hoarding money outside the banking system, the deposit doesn't exist. So then where do they get the deposit?I appreciate the modern banking system but it still relies on its basic principles. If you can't find the deposits, you still go belly up or in WaMu's case, a run can still put you at risk.

Even if people saved their money and didn't deposit their savings in banks, banks could still operate. They could simply borrow the necessary reserves from the Fed. So you borrow $1 million from the bank. The bank balances its books by creating a liability (the money they transferred to your other bank) and a matching asset (the right to the money you owe them). Your account at Bank #2 is marked up $1 million. Bank #1, who made the loan, borrows $1 million from the Fed, deposits it in their Fed account, and immediately transfers it to Bank #2's Fed account, to reflect the $1 million you just deposited there. Now, Bank #1 is paying a little interest to the Fed on $1 million, and receiving a lot of interest (and principle) from your loan payments. When they have paid back the loan to the Fed, the net transaction is a movement of some dollars (the interest) from you to Bank #1, plus a movement of some dollars (also interest) from Bank #1 to the Fed. Bank #1 makes a profit.

The important point - no big pile of saved-up dollars was ever needed to make this loan happen.

In real life, there are tons of transactions moving in both directions between lots of different banks, so the only reserve-account transfers that have to happen are the net amounts, after all bank credits to and from have been cancelled out. Because chances are that Bank #2 is also making loans, and some of those loans are going to be deposited in Bank #1.

 

[Dentist]

I blame cell phones, wireless internet, and cable.

these are real wealth destroyers that should be luxury items... but ones that even the poor and average have.

I also blame an ever-increasing standard of living.

Most bottom 65%ers should be adopting a Mr. Money Mustache system of spartan living.

 

[Slapdash]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

But you're discussing profitability here, not the flows of funds.

 

[Politician Spock]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

But you're discussing profitability here, not the flows of funds.

I agree with John that in modern banking loans are "essentially" made out of thin air. The flow of funds involved is so insignifcant to the modern process in modern banking that they can take care of the necessary details of the flow of funds later. As I said before, it's a lot like Las Vegas. Lot's of new risks being floated at every single second, but the overall risk is a net profit to the house. The house never loses... until of course AIG can't make good on their Credit Default Swap derivative contracts, and the house of cards begins to come crumbling down.

 

[Slapdash]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

But you're discussing profitability here, not the flows of funds.

I agree with John that in modern banking loans are "essentially" made out of thin air. The flow of funds involved is so insignifcant to the modern process in modern banking that they can take care of the necessary details of the flow of funds later. As I said before, it's a lot like Las Vegas. Lot's of new risks being floated at every single second, but the overall risk is a net profit to the house. The house never loses... until of course AIG can't make good on their Credit Default Swap derivative contracts, and the house of cards begins to come crumbling down.

I'm just really missing how you're connecting the operation of banking with lack of proper risk taking by various non-bank entities here.

 

[JohnfrmCleveland]

If you were in charge of everything, how would you fix it?

I'd expand the public sector. Lots more government jobs at all levels, plus a guaranteed govt. job at minimum wage for anybody who wanted to work. That solves the unemployment problem and helps tighten up the labor market.

Change taxation, a lot. Eliminate corporate taxes, eliminate taxes on anyone earning less than, say, $50,000, raise taxes on the superrich. Tariffs punishing the use of offshoring and cheap labor.

Paid for, mostly, with deficit spending.

Sure there is a certain dignity in having a job and that should be a consideration. And there is plenty of infrastructure work to do so expanding spending on that is not a bad thing either. But creating jobs just for the sake of creating jobs no matter how inefficient just doesn't seem all that wise. When you reach levels of saturation where adding people doesn't add (and may even reduce) productivity it is time to pay people not to work. I'm not sure we are there but rather than creating meaningless jobs we would be far better off as a society if we adopted a guaranteed income now and then just allow market forces and individual desires decide the job market now and in the future.

You're right, the main thing is to get money into peoples' hands so they can live. But a job guarantee has other benefits - besides the dignity for those getting paid for doing something, I think it's also more palatable for the rest of us to see people work for a paycheck, and not just collect welfare. But as for reducing productivity, you wouldn't be adding workers to the private sector, you'd be giving them govt. jobs. Some meaningless, maybe, and some very useful. Productivity at the lower-level jobs really wouldn't be a concern.

The guaranteed income idea has been talked about (not by politicians so much, tho). Switzerland is seriously considering the idea.

 

[Slapdash]

I'd much prefer guaranteed income to guaranteed jobs. There is a certain amount of deadweight loss around taxing to pay for expanded program, better not to compound it by making to many central planning decisions around the jobs.

 

[Politician Spock]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

But you're discussing profitability here, not the flows of funds.

I agree with John that in modern banking loans are "essentially" made out of thin air. The flow of funds involved is so insignifcant to the modern process in modern banking that they can take care of the necessary details of the flow of funds later. As I said before, it's a lot like Las Vegas. Lot's of new risks being floated at every single second, but the overall risk is a net profit to the house. The house never loses... until of course AIG can't make good on their Credit Default Swap derivative contracts, and the house of cards begins to come crumbling down.

I'm just really missing how you're connecting the operation of banking with lack of proper risk taking by various non-bank entities here.

I'm just really missing how you can be so obtuse in discussing this.

The government hasn't figured out a way to regulate derivatives. But the banking industry depends on them quite heavily.

Sure, if/when the system collapses the bankers can point at non-bank entities and say "they sold as crap derivative contracts" and make a great case that the banking industry wasn't at fault. But to Mr. and Mrs. Average American, does fault really matter at that point? The system collapsed. The banking idustry is just a part of the system.

 

[Slapdash]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

But you're discussing profitability here, not the flows of funds.

I agree with John that in modern banking loans are "essentially" made out of thin air. The flow of funds involved is so insignifcant to the modern process in modern banking that they can take care of the necessary details of the flow of funds later. As I said before, it's a lot like Las Vegas. Lot's of new risks being floated at every single second, but the overall risk is a net profit to the house. The house never loses... until of course AIG can't make good on their Credit Default Swap derivative contracts, and the house of cards begins to come crumbling down.

I'm just really missing how you're connecting the operation of banking with lack of proper risk taking by various non-bank entities here.

I'm just really missing how you can be so obtuse in discussing this.

The government hasn't figured out a way to regulate derivatives. But the banking industry depends on them quite heavily.

Sure, if/when the system collapses the bankers can point at non-bank entities and say "they sold as crap derivative contracts" and make a great case that the banking industry wasn't at fault. But to Mr. and Mrs. Average American, does fault really matter at that point? The system collapsed. The banking idustry is just a part of the system.

Calling me obtuse doesn't change that you're conflating too different things.

 

[Politician Spock]

The whole loan/deposit thing is just semantics. Perhaps our banking system has developed enough so that the bank doesn't need the deposit first anymore because it can get it elsewhere. But in the earliest, most basic banking system, the deposit was needed to loan the money out.

To prove the importance of deposits, what happens in a run on the banks? People take their deposits/accounts elsewhere and the banks stop lending overnight or short term to said bank. Not that they can't find places to loan their money out. For the most part, the individual borrower doesn't care much about the run. Some large borrowers with credit terms might care but that isn't what puts the bank in jeopardy. If everyone started to hide money, our system would collapse.

It isn't semantics at all. Of course the bank can get the deposit elsewhere; it created deposits into the system by extending a loan.

Few people appreciate the differences between the "most basic banking system" and the modern financial system. Certainly, in economics, it is not accurately considered by many. MMT is interesting because it does a good job of describing the system, but I question some of the conclusions it makes.

There's a good reason for that. Given how much of the system is now derivative based, and given how a derivative can be created for any reason under the sun, a bank can get a deposit by finding someone else willing to make a bet on the up coming Superbowl. Yes, I'm being intentionally flamboyant in my example for shock value. But the jist is a lot of the system, which the system = money, is now established on bets. It wouldn't take much to turn Las Vegas into the "modern financial system".

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

The bolded is true. Banks can now offset that risk by pairing it with a derivative contract. The goal being that whatever happens the bank profits. If the loan gets paid back, the bank profits. If the loan defaults, the derivative pays off, and the bank profits.

In regards to Slapdash's comment "Few people appreciate the differences between the 'most basic banking system' and the modern financial system" it's these derivatives that make that true. The government can't even regulate it because a derivative can be derived from almost anything.

But you're discussing profitability here, not the flows of funds.

I agree with John that in modern banking loans are "essentially" made out of thin air. The flow of funds involved is so insignifcant to the modern process in modern banking that they can take care of the necessary details of the flow of funds later. As I said before, it's a lot like Las Vegas. Lot's of new risks being floated at every single second, but the overall risk is a net profit to the house. The house never loses... until of course AIG can't make good on their Credit Default Swap derivative contracts, and the house of cards begins to come crumbling down.

I'm just really missing how you're connecting the operation of banking with lack of proper risk taking by various non-bank entities here.

I'm just really missing how you can be so obtuse in discussing this.

The government hasn't figured out a way to regulate derivatives. But the banking industry depends on them quite heavily.

Sure, if/when the system collapses the bankers can point at non-bank entities and say "they sold as crap derivative contracts" and make a great case that the banking industry wasn't at fault. But to Mr. and Mrs. Average American, does fault really matter at that point? The system collapsed. The banking idustry is just a part of the system.

Calling me obtuse doesn't change that you're conflating too different things.

Right. Because we all know the 2008 banking crisis had nothing to do with AIG's over extended portfolio of derivatives which they sold to banks to offeset the risk banks were engaging in with subprime mortgage loans.

 

[cstu]

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

Risk how exactly? Taking 20% down and lending money they get for virtually nothing.

 

[JohnfrmCleveland]

But modern loans have nothing to do with derivatives, and I think the guys here are getting hung up on the concept of banks being able to create loans without having the cash on hand.. When they make loans, banks are still taking a real risk, so they don't make loans to people/businesses unless they think they will get their money back. If you default on a loan, that comes out of the bank's pocket, because bank-created credit still has to be settled up with govt.-created, high-powered money. So the "bets" banks are making when they create a loan are no worse than the bets an investor makes, and no worse than the bets banks made in the gold standard days.

Risk how exactly? Taking 20% down and lending money they get for virtually nothing.

If the borrower doesn't repay the loan, the bank takes a loss. Maybe they can recover some or all of that loss by grabbing an asset, but not always. The point is, just because banks can create credit out of thin air does not mean they can create a profit out of thin air. They risk real assets when a loan defaults.

 

[Slapdash]

Calling me obtuse doesn't change that you're conflating too different things.

Right. Because we all know the 2008 banking crisis had nothing to do with AIG's over extended portfolio of derivatives which they sold to banks to offeset the risk banks were engaging in with subprime mortgage loans.

I guess you aren't able to make the connection I have asked you for.

 

[DiStefano]

It's a pity all those countries with high inflation rates don't understand how easy it is create money at no cost.

Oh, wait...maybe that's why they have high inflation.

 

[Politician Spock]

Calling me obtuse doesn't change that you're conflating too different things.

Right. Because we all know the 2008 banking crisis had nothing to do with AIG's over extended portfolio of derivatives which they sold to banks to offeset the risk banks were engaging in with subprime mortgage loans.

I guess you aren't able to make the connection I have asked you for.

They make a loan, and place a derivative bet to insure it. What more explanation of the connection do you want?

Do you also want me to explain in detail how the electricity gets from the power plant to their computers, because saying they buy electricity from the utility industry isn't a good enough explanation for you?

 

[JohnfrmCleveland]

It's a pity all those countries with high inflation rates don't understand how easy it is create money at no cost.

Oh, wait...maybe that's why they have high inflation.

Well, what "cost" do you propose paying that will eliminate inflation?

 

[Slapdash]

Calling me obtuse doesn't change that you're conflating too different things.

Right. Because we all know the 2008 banking crisis had nothing to do with AIG's over extended portfolio of derivatives which they sold to banks to offeset the risk banks were engaging in with subprime mortgage loans.

I guess you aren't able to make the connection I have asked you for.

They make a loan, and place a derivative bet to insure it. What more explanation of the connection do you want?

Do you also want me to explain in detail how the electricity gets from the power plant to their computers, because saying they buy electricity from the utility industry isn't a good enough explanation for you?

None of this has really anything to do with mechanics of how money is created. It is off topic and uninteresting.

 

[Politician Spock]

Calling me obtuse doesn't change that you're conflating too different things.

Right. Because we all know the 2008 banking crisis had nothing to do with AIG's over extended portfolio of derivatives which they sold to banks to offeset the risk banks were engaging in with subprime mortgage loans.

I guess you aren't able to make the connection I have asked you for.

They make a loan, and place a derivative bet to insure it. What more explanation of the connection do you want?

Do you also want me to explain in detail how the electricity gets from the power plant to their computers, because saying they buy electricity from the utility industry isn't a good enough explanation for you?

None of this has really anything to do with mechanics of how money is created. It is off topic and uninteresting.

Of course it does. When a bank makes a loan, money is created.

 

[DiStefano]

It's a pity all those countries with high inflation rates don't understand how easy it is create money at no cost.

Oh, wait...maybe that's why they have high inflation.

Well, what "cost" do you propose paying that will eliminate inflation?

I've lived in a place with 17,000 percent inflation. Done by the government creating money.

 

[JohnfrmCleveland]

It's a pity all those countries with high inflation rates don't understand how easy it is create money at no cost.

Oh, wait...maybe that's why they have high inflation.

Well, what "cost" do you propose paying that will eliminate inflation?

I've lived in a place with 17,000 percent inflation. Done by the government creating money.

Almost every economy in the world operates on fiat currency, and very few have severe inflation, so there must be a better explanation than that. Plus, inflation was present in the gold standard era, too.

What country was it, anyway?