SFGate poll - Will tighter regulations restore the nation's banks to health?

Another of the rare occasions when the SF Chronicle offers a poll that includes a libertarian view as one of the response options. You can vote at http://www.sfgate.com/news/, near the top of the left-hand side of the page. Right now the leading response is that "loosening the rules got us into this mess" (38%), with only 25% correctly noting that this is another power grab by government:

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To a large extent the lefties have it right. The disaster is a result of a failure to regulate. The failure is regulation by bureaucracy. The money in your pocket and in my pocket is not a free market product. It is produced by the US Treasury on bahalf of a privately owned monopoly, the Federal Reserve. The monopoly power to issue money was granted by congress. As there is no free market to control the issuence of money, regulation is a necessity for there no market controls on the money issuers. Their profits are their own and the risks are shared by all of us. The system is a moral abonination, foisted upon us so that government can finance it's various wars with debt . The system isabsolutely unconstitutional, as the present crisis is the inevitable and predicted result of paper money unbacked by anything. Jefferson and Madison would understand. That is why the present monetray order is expressly forbidden by Article 1 section 8


  The poll question appears to refer to regulation of U.S. banking, not regulation of the Federal Reserve's policies for issuing money, since neither the Fed nor issuing money are mentioned. So I think your point, while valid in regard to the Fed, is not relevant to this poll.

  Of course it's true that if ordinary banks are not regulated, and they make bad loans and are subsequently bailed out at taxpayer expense, this is a bad situation which forbidding certain types of lending might have largely or even entirely prevented (if one assumes that regulators could have successfully built a dam to stop the water from running downhill by prohibiting *all* of the potential instruments that a financial institution could use to engage in risky lending and investing). So in that sense, tighter regulations could have helped prevent this mess.

  But removing the *incentive* to make overly risky investments, namely making it clear that there would be no federal bailouts of banks, would have been a more effective means of prevention. And while tightening regulations on banks now might help prevent a recurrence of a similar problem -- not that such a future potentiality should be near the top of anyone's list of concerns right now, when the present disaster is still unfolding -- I don't see how it will do anything to restore the nation's banks to health. And that is what the poll question asks: Will tighter regulations restore the nation's banks to health? The correct answer, imho, is clearly "No -- it's another power grab by government."

Love & Liberty,
        ((( starchild )))

Starchild, Individual banks create the great majority of money by the very act of making a loan backed only partially by assets. This simple fact is the root of the instability. It is also the biggest baddest secret of our financial system hidden in the most secret place of all, plain sight. Each and every bank chartered by the State engages in this simple act of what amounts to sanctioned counterfeiting. The system appears complex, because all frauds are complex.


  OK, that's a very good point. I hadn't thought about that (maybe you weren't thinking of it either in your last message, since you referred to the money being "produced by the US Treasury on behalf of a privately owned monopoly, the Federal Reserve.") What percentage of created money do you think is created by ordinary banks lending money they don't have in assets? Approximately? Does this mean that banks, credit card companies, etc., and not government, are collectively the main direct source of inflation, even if government is the ultimate source by establishing a fiat currency?

  Is fractional reserve banking even the issue, or is electronic money the real issue here? After all, if the money is not in physical form, and a bank makes a loan by adding zeroes to a borrower's account, the bank still retains the same use of the physical money in its possession, and thus is creating new money even when it *doesn't* loan out any more than it has in assets, isn't it?

Love & Liberty,
        ((( starchild )))

The Federal Reserves balance sheet was 800 billion dollars going into this crisis. There are a whole bunch of ways of counting money, which in a wonderful you tube ron Paul got Alan Greenspan to admit were all very fraught with error. But the range is somewhere between 15 and 70 billion dollars sort of. the point is , that in a fractional reserve system, all money is borrowed into existence except in the rare instance when the Fed engages in quantitive easing, which is BS for creating money out of thin air to buy something. Now the Fed has ballooned it's balance sheet to multiples of the 800 billion in a matter of mmonths, but the amount is still small compared to the much larger amounts disappearing in the fractional reserve side as loans are paid down. The fractional reserve system is working in reverse right now. Money is being destroyed faster than treasury and the Fed can shovel it out. The big problem with the shovel full of money that is beingshovelled out is that the money is directed to failed enteprises, political projects that were low priority before the crisis, or just plain fraud. This moneysucks good and services away from what people need, and prevents the one thing that really helps people when there is less money around, lower prices. Before the government interfered so vigourously in the panics that it's fractional reserve system created, prices would drop, wages would drop, asset prices would drop, over leveraged banks and businesses would fail, and the economy would restt at lower prices in sometimes as little as 6 months after the panic began. witness the panic of 1920. I never knew it happened until a few months ago. Now I can see it on the fed's charts, and I really know that it was real because I read that JP Morgan's New York HQ was bombed.



  This is very interesting. If banks loan money by adding zeroes to borrowers' accounts without transferring physical money or subtracting an equal number of zeroes from their own account, which is what I understand you're asserting (and I agree that's probably how it often works), then that is creating money. OK. But to repay a bank loan, most borrowers can't just add zeroes to the bank's account -- they have to return physical money. So how is money being destroyed as loans are paid down?

  Do you agree with my points about the poll, or are you saying that you believe the best response to the question "Will tighter regulations restore the nation's banks to health?" among those listed is "Yes — loosening the rules got us into this mess?"

  I don't understand what you are trying to say about the Federal Reserve balance sheet, or what you're referring to when you say "the range is somewhere between 15 and 70 billion dollars sort of."

Love & Liberty,
        ((( starchild )))

If you're talking about people repaying only a fraction of what they borrowed and the rest being written off the books, then I can see how that could potentially be destroying money, although it would seem to depend on how much of that bad debt the market considers as real money prior to it being officially written off. If the market already considers it to be worth only pennies on the dollar, than a loan that is repaid at pennies on the dollar wouldn't necessarily mean the destruction of money, would it?

Love & Liberty,
          ((( starchild )))

If money is created by an initiation of a loan, then money is destroyed when the loan is paid off. It is a simple fact,. The beauty of it is that people can't get thier mind around it. they think of money as something real, like a piece of silver, or even a dollar bill. If the money is not used to make another loan, it just sits on the banks balance sheet. If that money had been deposited into another bank, that bank just lost reserves needed to back a lot more loans. Hard to follow, huh. Thats the beauty of it all for the banksters. It's such a silly game that absolutely noone it. Everyone just figutres that they are guys in suits who went to Harvard. We better do what they say.

But what is worse, is that once the process of deleveraging gets going, the fractional reserve starts working in reverse. When a hedge fund pays off a million dollar loan, that means that there is a million dollars not sitting in someone's bank account, and that means that banks need to call in more loans.

This process, once it gets going can snowball. this was the underlying reason for the accelerating collapse last fall. Defaulting on the loan leaves the actual cash of the loan out in the economy, but destroys the banks assets, forcing it to call in other loans.

Now Geitner, right out of alex Jones's conspiratorial playbook, is going to provide 93 percent of the money so that the banks can buy back thier own bad assets with government money, but keep most of the profits if the assets recover. The degree of corruption right in plain sight is mind boggling.


  OK, maybe I'm stupid, but I'm not following you. It seems to me that if somebody repays a loan to the bank, the money hasn't been destroyed, but is now on the bank's balance sheet. And just as if it was deposited in another bank, the bank to which the loan was repaid can lend the money out again, or use it to pay salaries, or whatever. If it's a plus to the bank's balance sheet, then there's that much less chance the bank will have to call in other loans, no?

  I know you read a lot of financial columns, and are often posting them here. Can you refer me to a website that you think does a good job spelling out how this works? Or do a better job explaining it yourself? I don't understand the system well enough to definitely say you're wrong, but what you're saying just isn't making sense to me. What you say about the government financing the banks so they can buy back their own bad assets makes sense, but that's a separate topic. I'm trying to understand how money is "destroyed" when loans are repaid.

  Here's my stab at what happened. The banks were carrying an increasing load of bad debt on their books for a while now. As long as the market thought this debt was mostly good, the banks were able to use that "money" as assets. But once the market started realizing most of that debt was in fact bad, suddenly it was worth much less than the amount at which the banks were valuing it at, and they started finding themselves technically insolvent. Of course knowledge of this caused loss of faith in the banks, and people stopped investing and started withdrawing their money, and then the banks started having serious cash flow problems and had to run to the government for a bailout. But the money the banks loaned out wasn't "destroyed" -- little of it was paid back to the banks. It had already been spent, and the people who borrowed it largely couldn't afford to pay it back. Those outstanding loans were still sitting on the banks' books as if the money was going to be repaid, but actually that was a pipe dream and it was already long gone.

Love & Liberty,
        ((( starchild )))

Like I said , the mind revolts at the idea that the act of taking out a oan creates money. It does. Paying off a loan puts the fractional reserve system in reverse. Just as the money supply was multiplied by people taking out loans in the boom, money disappears when the loans are paid off in a bust. If the loan is defaulted on, the money stays in circulation, but the bank tries to call in other loans because it's reserves have been impaired. Remember ,it's all a scam, that is why it is difucult to explain how it woeks and how it malfunctions. If it was hones and simple, it would be easy. this is the beauty of it. You gotta be a nerdy freak to wrap your mind around it. And I can assure you that not one banker in a hundred knows how the system works on the macro level, and only one Congressman does. All the banker knows is that if he can keep a hundred dollars on deposit overnight he can lend thousand or perhaps even ten thousand. and if the loans go bad, the Fed or someoneelse will abil him out, but meanwhile he gests to pocket a whole bunch of interest, and even can squeeze the depositor for fees.That is how the fractional reserve system works. It would work the same wether the dollars were paper dollarsor electronic dollars. They are interchangeable.

There is nothing inherently wrong with electronic money.

Lets see why.

Froma libertarian perspective, we support a monetary regime that is voluntary in nature. People individually and collectively working as individuals should b;e free to chose what they want to use as money.

Most people desire to use money that has the following attributes.

It is portable.
It is durable.
It maintains it's value to be exchanged over time, thus it is limited in supply, and it is diffucult to change the total supply.
It is divisible.

Gold and silver have been chosen by most societies over time due to natural characteristics that perform the functions listed.

However other systems have been very successful, especially in instances where gold and silver have been concentrated by force or fraud in few hands.

The English for many years used sticks The sticks were split lengthwise and the king maintained one half of the stick and the remainder was allowed to circulate at a very high value. Each stick half was unique to the other half, thus counterfeiting was impossible, and the sticks were in finite supply, very valuable, and portable. They were notched to be divisible.

but I digress.

Gold and silver coin have many of the properties that people desire for a medium of exchange. But they still are not as convenient as pieces of paper or electronic blips.

There is a wonderful electronic blip version of gold called egold, and another called goldmoney.com. The underlying gold is stored in a vault in a choice of countries. The gold is available for redemtion of trade with other egold subscribers. Just a click away. There is no reason except of course Uncle sams barriers, why tilte to gold in egold's vaults could not be transferred by Visa cards, or used to spit out paper claims on the gold at ATMs. So long as the underlying asset is there, there is nothing wrong with paper or elctronic money.

On the flip side, a gold based system under aregime of goverment control ,can be justas bad as our current system. How you say.

I have a silver coiin that I bought in the old section of tel aviv a few years back. It dates form the roman occupation during the second Macabee revolt. the coin has a hig silver content andthus value in its own right. But the Romans were not content with just the silver value. So they used the silver and minted it into aspecial coin with the image of a Roman umptedump. They then declared the coin with the image to be worth far more than the silver in the coin. If you were caught using any other coin, or just plain silver as money... death. Now at this time the Jews were weak. They didn't have the ability to run a mint. But the Jewish high priests wanted to extract money from the believers, and wanted more than just the roman coins. so they took the roman coins and struck over them a picture of the second tmeple and some other jewish paparhanelia. They then made this the official coin for sacrifices at the Temple. If you wnated to make a sacrifice, you had to buy this coin. I will bring the coin to the next meeting if want to see it.

So the use of force by the state to affect the value of money goes waay back. Over time the romans used less and less silver in the coins and more and more force. The dilution of silver took centuries, and correlated with many declines in Roman culture.

The US removed nearly all the silver in it's coins in one fell swope in 1964.

We were under a gold standard until 1971. The system still had major problems. Since 1864 peple were forced to use US dollars as money. The banks were able to use the fractional reserve system to issue more paper dollars than they had gold in the vaults. Also sometimes the government used fiat powers to increase or decrease the amount of silver that could be used to back up a paper dollar. In other woekds , since 1864, bankers have permitted to issue dollars in larger quantity than the gold they supposedly represented.

In addition, in 1933 the dollar was devalued by fiat to represent only 1 35th as opposed to 1 20th of an ounce. An overnight devaluation of seventy percent. That starved quite a few poor americans, including members of my own family.

Thus, we will continue to suffer from swings between inflation and deflation until we can somehow repeal legal tender laws and institute free market banking. This was a hot topic when Andrew Jackson was elected to eleiminate the SecondNational Bank and Jefferson the First. Now its up to us to kill the Third. We need to get the governemtn out of the money business. It is priority one in limiting it's power.


  Interesting stories about the ancient Jewish priests and all (sure, I'd be happy to see the coin), but your explanation of how repaying bank loans destroys money still isn't making sense to me. You seem to be holding it as self-evident that if a process going forward has one result, then reversing the process will automatically have the opposite result, but that's not necessarily always true. For instance if you jump into a lake you will rapidly become wet, but jumping out again just as quickly will not make you dry!

  If your aim is to help me (and I suspect others) understand what's going on as you see it, quoting my comments in your response and addressing them one at a time, pointing out what you believe I got wrong and filling in the gaps, would be more useful than all this background stuff. I don't disagree with most of the "gold bug" theory/history you espouse. What I was hoping you'd provide, however, is the technical detail to support your analysis of current banking practices.

Love & Liberty,
        ((( starchild )))


Joe 6P deppsits 100 bucks in the Bank of Starchild.

The Bank of Starchild figures the odds are Joe 6P isn't going to come back and get his money right away. But just in joe 6P or some other Joe comes back, he holds ten dollars of joes money on reserve and lends out the other 90 to Jane Chardoney.

The 90 dollars borrowed by Jane Chardoney, is deposited in the Bank of Mike. The BofMike leaves 9 dollars in reserves and loans out 81 to and so on.

Now all that money from the whole chain, so long as it is redopisited in another bank each time it is spent, is in circulation. If you withdraw the money and stick it undr the mattress, or leave it in your pocket for a few months, that also removes money from circulation within the banking system, but otherwise ,in aggregate ,checks are drawn from one bank to another and the great majority of th money remains in the banking system doing the job of being money for all the joes and janes.

Now Jane Chardoney decides to pay off her loan. she withdraws 90 dollars plus interest owed from the Bank of Mike and pays off her loan. The Bank of Mike now has 90 dollars less on deposit, and so has to call in 81 dollars in loans in order to maintain it's reserve requirements, and so on.

The Bank of Starchild takes in the one hundred dollars, tears up the loan papers. It still has theten dollars it held on reserve, and so now it is right back where it was before it made the loan. It wipes the loan off the books, but still owes the original depositer the money. If it does not turn around and make another loan with that money, then , as above, money will disappear all down the chain. And it probably doesn't want to make the loan because the whole system is in reverse because people have started to realize that the loans from the boom were misspent, and it is likely that they will be defaulted on. So The act of Jane Chardonney paying off a ninety dollar loan has sucked money out of the Bank of Mike, and a borrower from the Bank of Mike, all the way down the line... It's giant sucking sound of the fractional reserve system accelerating in reverse.

What a ridiculous system.

Why do we have this ridiculous system. In part for the same reason that our eyes are wired in reverse and we have to see through outr optic nerve. We are stuck with the evolved status quo. It is very difficult to change the status quo. But the system got started because it served the interest of the state and the Bankers. The Bankers , like any normal red blooded human, wanted Monompoly profits. they wanted to print paper promises than they gold they gold to back up the promises. But competing bankers keept an eye on each other , but I am getting too sleepy to continue now..


  Now hold on a second, pardner! We run a tighter ship than that here at the Bank of Starchild! My accounts clearly show that we received a $100 deposit from Joe 6P, of which we kept $10 and loaned out $90 to Jane Chardoney, and she has now repaid us her loan of $90 plus $10 interest for a total of $100. Added to the $10 we retained from Joe 6P's deposit, that makes our new balance $110, so our bank is *not* "right back where it was before it made the loan," but rather $10 richer.

  More to the point, if everybody all down the lending chain calls in their loans, only the final borrower in the chain, who didn't turn around and loan the money out at interest, would be out the money: The Bank of Mike pays Jane her $90 dollars plus interest (say $95, since being a regular borrower she would presumably not be earning as much interest as would a bank like the Bank of Starchild that deals in larger sums), and since the Bank of Mike had only $9 on hand, it is now $86 in the hole, so it calls in its $81 that was loaned out to the Bank of Phil, and earning interest at banking rates gets at least $5 interest on that $81, so it is in the black, and so on down the line.

  Now it's true that $107 or so of the $110 we have on hand here at the Bank of Starchild is stlll owed to Joe 6P at such time as he comes asking for it (his deposit of $100 plus interest), but even if he decides to take it all out, we're still $3 or so in the black. And the other banks aren't affected, because we already called in our outstanding loan to the Bank of Mike. So where is the money being destroyed?

  I'll look forward to hearing back from you later today after some more interest has had time to accumulate. :wink:

Love & Liberty,
        ((( starchild )))

OOps , The range in money supply is in the order of 15 to 70 trillion not billion, in other words it is many multiples of the money that was created by the fed. The money creation by the banks using the fractional reserve system is many multiples of that created by the Fed. I don't remember the exact reported numbers as they are all admittedly hokus pokus.

Google money supply federal reserve definitions of the many different money supplies. Even rothbard invesnted a money supply estimate.

As the fractional reserve system has broken down and the reserves have actually gone negative in aggregate, estimates are pretty difficult.

The Fed creates base money traditionally by buying treasuries. The Fed then has the cash it created out of thin air to buy the treasury as a liability and the treasury as an asset. Now they have traded many of ;those treasuries for sub prime mortgages and other assets of questionalble value, plus now they buy a lot more stuff than treasuries. They buy stuff with cash create out of thin air. Electronic credits, or credits that do some shenaginans with treasury to print the cash. It's all inside baseball to confuse the basic issue. They create the money out of thin air to buy something. they call that something collateral, andthey declare the value of that something equal to what they paid for it..

Mish's blog by Michael shedlock is the one who says that the feds printing so far is not up to the task of balancing the deleveraging of the jfractional reserve system.

But as Bill Bonner says, I have confidence that eventually they will get the hang of it and send us into hyperinflation.

Time for sleep. but maybe I need to use different words. Credit derived money is removed from circulation. The act of paying off a ninety dollar loan causes 900 dollars of credit derived money to be removed from circulation. I think I caused confustsion by using such a literal word as "destroyed",The money that was created by credit down the line when the loan was made toJane Chardonnenow is paid back down the linethe act of paying off a 90 dollar loan removes900 dollars of credit based money. But in fact the fractions held in reserve are infitesimally smaller than ten percent so the disappearance of credit based money is even more severe than mentioned. Interest is not an issue that I addressed here, but on a macro level, it is big problem for keeping the credit inflation going. As the interest is sucked out from the borrowers who are the depositors. It is a net wealth transfer from the people to the bankers. The interest paid to the bank of Starchild sucks money out of the system in the same manner that Jane paying off a loan does. In order to keep the inflation going, new loans must constantly be made to reintroduce the money that paid off old loans and to reintroduce the interest paid. If new loans are not made in sufficient quantity, then the amount of credit derived money begins to shrink.

Starchild - This video is probably the best overview of debt based money I have seen so far, and up to date -

http://montanasoundmoney.org/parksvideo.html (55min)

this one is also good -

http://video.google.com/videoplay?docid=-9050474362583451279 (47min)

I believe 'Money as Debt' was posted here last year, but probably a good refresher for those trying to understand fed-speak



Just jumping in here cuz I've been offline a couple of days---part of the problem with the ongoing debate over both the bank bailouts and the auto industry bailouts is that there is a fundamental misunderstanding (which the media is aggravating) between free market economics and corporatism. Free market economics is what our system is premised upon; corporatism is what has actually been practiced for the last few decades.

  In a free market, the government's sole responsibility is to provide a stable national currency and uphold the economic rights of the individual. In corporatism, the government and large economic cartels combine to control the economy. In a system with a stable currency like a gold standard, for example, debts and surpluses are temporary economic fluctuations which naturally equalize over time. In a corporate state, monetary values are manipulated which is why we've seen concentrations of wealth and poverty as well as concentrations of power in certain economic sectors. Corporatism is really nothing more than socialism with a capitalistic veneer.