Did you know Banks create money out of thin air?

by TerryWalstrom 72 Replies latest jw friends

• 

  MeanMrMustard

  But they can loan money that they don't actually have deposited....

  Technically, they can only loan from the deposits, or possibly if the bank borrows from somewhere. If the bank has no deposits, it can’t loan. With fractional reserve banking, the banks loan out a certain percentage of deposits, but also keep that money on the accounts of the depositors. (That’s where the increase comes from... I have all my money, by 90% has been loaned out as well...)

  You are on pretty good footing if you say that banks, through FRB, cause a growth in the money supply. You can’t say they just print money or increase an account balance and then loan it out.

  Now whether you want to argue if FRB is fraud or not, that’s a different story. (How can I have my money and yet someone else has it too?)

  If you are willing to burn an hour, this lecture is pretty good. Notice Salerno doesn’t make value judgements on FRB. Rather, he just lays out what it is and gives examples:

  https://youtu.be/33RXhv0IuPc
  
• 

  knowsnothing1

  If charging interest created money out of thin air, then so do credit card companies, car dealers, etc.

  I'd say we have to look deeper to truly understand what is going on. First of all, what is money? A medium of exchange for goods and services. Paper money, also called fiat money, used to be backed up by gold and silver, things that are valuable in and of themselves. (Why they are considered valuable in and of themselves is another philosophical question)

  Fiat money is no longer backed by gold and silver, but by the full faith and credit of the US government.

  So the question is, does the system we currently have work? Yes, so far it's working ok. Could be better, but it's the best we have for now. We got rid of having to carry around gold and silver for our transactions, and now we've even moved on to digital exchanges. Money is now more a ledger of assets, purchasing power, and debt than anything else.

  The problem with interest is a question of resources. The economy dramatically increased with the industrial revolution and the rapid increase in manufacturing goods. Population grew rapidly following advances in many other areas of life, such as science, engineering, medicine, and so on. Quality of life increased for many.

  Then came the most important economic discovery of them all, oil. This is what really skyrocketed society to where it's at now. Transportation, agriculture, plastics, and anything else oil touches directly or indirectly is why we live in the modern world we do today. Oil is such a bountiful, easy to extract source of energy, that our global economy at it's heart is based on oil. It's not infinite, however.

  The problem is oil is a finite resource, and as easy reserves get used up, it becomes more difficult and costly to drill for it. So we still have plenty, but our economic system of perpetual growth through the charging of interest is fundamentally flawed, as there will be a day when there will be and can no longer be a continual growth in the production of goods and services. Both because of oil's increasingly difficult to access nature, and the depletion of natural resources.

  Many other factors are involved, such as global warming and a rising population, which further accelerate the depletion of natural resources available. We can't study economics without considering the underlying foundation for it, and it matters that we live in a planet with finite resources, yet expect unimpeded, perpetual growth. This is reflected in the charging of interest on loans, in a business as usual way of operating things.
• 

  Simon

  FRB just recognizes that people all wanting the money they have lent to the bank (deposited) all at the same time is unlikely so it allows them to leverage the risk, to loan more than just their own money but to dip into some of those other funds to make use of them.

  Literally, they don't need to keep the full reserves needed to give back all the money at once, they only need a fraction of it to hand. That's their "liquidity" rating.

  Things go south if there is a run on the bank - in the UK a few years ago, people lost faith in certain banks and wanted to withdraw their money. Lines formed around the block and of course the bank doesn't have the money sitting around in cash ... which then makes more people nervous and eager to withdraw theirs ASAP. Of course the bank doesn't have that money as liquid assets or, if they have lent it out without suitable credit checks, that money will not be coming back ever (which was also the issue in the US).

  The US banking collapse was a similar issue but caused by bad loans being bundled up and given a good credit rating slapped on. The banks ended up not having enough money to cover the payments that came due for them to pay and the money stopped coming in from the loans when the economy turned and people struggled to repay them.

  If they could just print their own money, it wouldn't have been an issue. It was because they can't.
• 

  truthseeker

  Are we to assume that for every credit/debit there has to be an equal credit/debit somewhere else to offset the first?

  The Federal Reserve and/or the Treasury print money. At the time of printing, what is the value of a $10 bill? Is it $10? The value of the paper that the note is printed on? Each bill has a serial number on it. What is it backed by?

  Simon, if I ask you to paint my flat for $100 and you agree and paint my flat, you give me a bill (invoice) for a $100. I give you a $100 dollar bill and therefore have discharged a debt. Hence the phrase the bill is legal tender for all debts, private and public.
• 

  TerryWalstrom

  
  Example 1
  Buyer A needs a widgit today.
  Seller B wants to sell a widgit today.
  
  So far, so good!
  
  Buyer A has no money today only an hourly wage job.
  Seller B is willing to come to credit terms = A will pay later for a higher amount.
  
  A Promise to pay (IOU) temporarily substitutes for $ until the debt is satisfied.
  
  Conclusion: Buyer A spent "money" out of thin air (the promise to pay).
  Would you agree?
  ___________
  
  Example 2
  If Buyer A offered a personal check post-dated (because the money isn't there until later)
  that personal check would bounce if an effort to cash it preceded the actual date.
  The check would bounce because there is no money; only thin air.
  
  Would you agree?
  ___________
  Example 3
  Buyer A enters into a contract with Banker C for a credit card.
  The terms consist of monthly payments.
  Each month of partial payment incurs an added interest charge.
  
  As long as monthly minimums are paid, Banker C comes out ahead and Buyer A is free to purchase things "as though" tomorrow's money existed today.
  Banker C regards the terms of the agreement as assets (accounts receivable).
  
  Conclusion: (Today's spent money is "thin air' money)
  
  Would you agree?
  _________
  
  Watch what happens next...
  _______
  
  Banker C has 1000 customers just like Buyer A.
  (Banker C's Virtual assets are huge.)
  Banker C uses the total "value" of IOU promises to create loans for local business start-ups.
  (Businesses enter into credit payment plans just like Buyer A)
  
  Note: (Banker C's loan fund is based on Buyer A's virtual promises).
  
  The local economy (for whatever external reason) now has a downturn.
  1,000 customers (just like Buyer A) default on payments.
  
  The IOU "assets" are now literally thin-air and so are Virtual assets of Banker C.
  Note: (Business loans default as well in a snowball effect)
  
  Conclusion: "Thin air"substitutes for actual today money just fine--until a downturn occurs.
  Would you agree?
  ________
  
  Big Banks have big "virtual assets" which are used just like "today cash".
  The "virtual assets" are thin-air until paid.
  Agree?
  
  Conclusion: It is not a silly exaggeration or conspiracy theory to say Banks create money out of thin air. Why not? Because it is Virtual Money.
  All parties agree to view it exactly like real money
  
  Game Over (economic crash) comes when customers want real cash today and the Banks only have cash on a tomorrow basis.
  
  ______
  What is the worst part of all this?
  The Bigger the Bank (too big to fail) the bigger the bailout needed.
  
  SPOILER ALERT....wait for it...wait for it...
  The Federal Government make the bailout out of future tax money it doesn't have today!!
  
  A snake swallows its own tail.
  
  
  
  
• 

  sparky1

  In your scenario, a bank is not creating money 'out of thin air'. The lender is extending and expanding credit for a tangible asset (the widget) according to the current market value of the widget. The monetary value is still in the widget and if the person that was extended credit does not pay for it, the bank can repossess the widget, sell it for cash and recoup their initial outlay of credit. All assets have an intrinsic monetary value and that is what banks loan against.
  
• 

  TerryWalstrom

  sparky1 says:
  1. In your scenario, a bank is not creating money 'out of thin air'.
  Reply: Okay, let's adjust the statement a wee bit and see if it passes the smell test. How about this.
  The Bank is creating present-day trust out of tomorrow's payments "out of thin air"?
  Agree?
  ______
  2.The lender is extending and expanding credit for a tangible asset (the widget) according to the current market value of the widget.
  Reply: A Credit Card will purchase non-tangible goods and services--so, a vacation in Hawaii isn't much of an asset to seize in case of default.
  Further, if it is a housing loan like Pre-2008 standards, the actual collateral (house) is not the point (in a down market crash) as much as the pretense of low-income buyers being able to make mortgage payments. The effect is "thin-air."
  _______
  3. All assets have intrinsic monetary value is a true statement.
  Reply: "The probe of more than 40 large and midsize banks concluded that the cause of those fake accounts included "short-term sales promotions without adequate risk controls," deficient procedures and other isolated instances of "employee misconduct."

  
  

  However, as mentioned above--Credit cards don't necessarily buy valuable assets and there is a notorious over-estimation of credit-worthiness to create accounts on the part of Banks.
  Note: Wells Fargo created fake accounts to accrue bonus money.
  Conclusion? Fake accounts = thin-air. Agree?

  
  Soooo?
  Fake accounts we can call...umm...how about "thin air"? :)
  
  
  "Wells Fargo uncovers up to 1.4 million more fake accounts"
  https://money.cnn.com/2017/08/31/investing/wells-fargo-fake-accounts/index.html
  "Wells Fargo isn't the only bank with fake accounts, regulators say"
  https://www.americanbanker.com/news/not-just-wells-fargo-occ-finds-sales-practice-abuses-at-other-banks

  _________
  
  
• 

  sparky1

  1. Three individuals are involved in this scenario. The creator/seller of the widget. The purchaser of the widget. The bank lending money on the widget. No money was created 'out of thin air' in this transaction. The purchaser desired to own the widget but did not have the funds. He borrowed the money from a bank and gave the money to the person who created/sold the widget. The creator/seller of the widget re-deposited the money in the bank. (Simplified version of a transaction for sake of discussion). The intrinsic value is still in the widget and if the purchaser does not repay the bank, said widget is repossessed and sold. Simple circular transaction. Of course, the individuals 'promise to pay' comes into play but is in no way a 'creation of money out of thin air.'

  2. Credit card usage is not creating money out of thin air either. It is a promissory transaction between the borrower and the card authorizing institution. It is purely a 'promissory note' simplified according to the agreement between the institution and the credit card holder. Again, if the cardholder reneges on his payments, the institution is free to take him to court and attach his assets. It may be a poor lending practice but it is hardly creating 'money out of thin air'. In regards to the lending practices pre 2008 for home mortgages, that too was not 'creating money out of thin air'. That was out and out fraud. Stealing money on paper and hoping not to get caught. Banks bundled too many 'junk' mortgages into derivatives and sold them at a higher 'rating'. It was a case of 'let the buyer beware'; not creating money 'out of thin air'.

  3. The Wells Fargo scenario has nothing to do with this at all. Wells Fargo created false accounts for people that already had money in their banking system. What they did was move money from a depositors regular account into the new false, unauthorized account. In many cases, the original accounts became overdrawn and triggered fees that went into Wells Fargo's bottom line. No money 'was created out of thin air'. Just stolen from the depositors through fraud and added to the banks balance sheet.

  The Mark Twain story is cute. But it has no bearing on reality. If the principle of the story wanted to, he could have just deposited the money and begun to conduct business with his newfound wealth.
  
• 

  RubaDub

  Terry ...

  You had better check the balance in your Bitcoin account.

  Rub a Dub
• 

  JeffT

  The Wells Fargo problem was not "creating money (or credit) our of thin air." It was fraudulently creating false paperwork to create bogus accounts, for which the creators received bonuses they weren't entitled to.

  If you want to see credit created out of thin air look at the student loan program (which is ultimately run by the government). The government is backing loans to people with no credit history and a speculative future ability to repay the loan. However the money is going into the hands of educators who are a very powerful political block, and the students have to pay it back, they can't even get rid of the debt in bankruptcy court.