Fractional Reserve Banking Questions

Torakx

Hello,
Ive been doing some personal research into the european banking system and am fairly new to all these banking terms and policies.

I will explain what i know so far in very basic terms and hopefully others can add to this for me so i get a broader understanding of the system we have in place and why it is acceptable as a monetary system.

ECB = European Central Bank
IB = An Irish Bank
Borrower = Person/entity lending from the IB

So far my understanding is that to keep inflation down the ECB uses a fixed rate of interest (2%) for the return of the money the banks lend from them, i presume in the form of bonds.

So for example ECB lend a bond to IB worth E100 @ 2% interest.
The IB now have E100 in there reserves and are allowed to loan out 98% of that keeping 2% in reserve incase of liquidation of the bank.
Loaning that E98 out at say 5% gives the IB a 3% interest profit over the time period agreed.
Now when the loan is created it is not handed out in cash so it is ussually put into the borrowers bank account meaning the bank has gotten a deposit of E98 of which it can loan out E94.04(2% reserve taken from E98)
This goes on and on until that E100 has created E5000 in loans.
Im guessing the IB would then have a reserve held of E100 for all those loans created.
If so this means they have created E4900 out of thin air and the borrowers must pay this back to the bank with 5% interest added to each little loan on top.
But since there is only E4900 in circulation how does the borrower pay the interest?
I understand if its plain competition that requires a person to take money from another to cover their interest and hope the other guy does the same to someone else until somebody gets screwed and loses out.
That is how i see it working now.
Im sure this is way off because such a system would be ridiculous and with all these banking terms that i dont understand so well, i am very sure im missing something important.

If possible i would like if somebody can show me clearly how this system works and why the banks must pay interest to the ECB and why it is a good idea to have a 2% reserve requirment when a nearly bankrupt america have a 10% reserve requirment.Surely it should be closer to 80%?If it was what would happen?
I would have thought taxes would pay for the running and organisation of our currency also.

Hope i havent confused the topic too much.And any questions people feel i might have forgotten to ask please answer them anyway.
The more info i have on this the better.
Thanks

nesf

Moved from Irish Economy.

You should get a better/quicker answer in this forum.

Torakx

Please dont let me be the only one in the economy section to have commented on this key area of our monetary system.
I am very new to all this detailed economy research and just curious if this is the game we are all ment to play or i have gotten it very wrong.

Surely it is not that complicated what i posted and all info was taken from the central banks website and wiki on fractional reserve practice.
Have i stumbled onto something that most do not want to believe exists or is it a case that most simply havent bothered to check the basics before carrying along with discussing the finer points of the economy.

I really would appreciate a small answer as to wether i am right or i have made a mistake as i intend to make a thread somewhere else on this which requires me to find out this answer first

There must at least be laws or rules put into the system to prevent inflation in general.As i dont understand how the system i dscribed does this.
It appears to create inflation by design.I understand it could be to encourage "growth" but if so where are the safety nets and why not a simpler solution like 80% fractional reserve(amount the bank must hold in reserve before lending out more.
No worries if nobody actually knows i will go to the conspracy theories forum later and might have more luck.
Hope at least i made some people think about the situation if i cant get a comment and should the answer not arrive here it most surely will be presumed in the CT forum hopefully close enough to the truth that i will have a clear view of how the money system works.After all we use it every day we should ALL know how it works.

There is a user called Economiste Monetaire who normally gives a really good answer (with cool graphs and pictures!) to this question. I guess we are all waiting for him to come along.

Saying that, this has been answered a few times before so searching the forum might help you.

Torakx

Well i found a thread that gave me one answer that i could see, so im making progress on figuring this system out.
http://www.boards.ie/vbulletin/showthread.php?t=2055859831&page=2
The last post was very informative,but doesnt answer from what i see all my queries.
From what i read an 80% fractional reserve wouldnt be flexible enough for such a large economy.I take that to mean there wouldnt be enough money floating around in the system and it would slow down buying and selling.

That sounds about right.But surely when we had this Celtic tiger we saw what happens when the banks have the ability to expand money at a ratio of 100/4900 or however that would be calculated.

It seems to me the ECB's interest rates and fractional reserve should not be linked as the same thing or even in the same basket if that is what is being done now.
What would make more sense to me is if the ECB were not charging interest on money they allow to be printed and the fractional reserve was somewhere near 100% we would have a system that was closed from inflation.
Now the only problem is the flow of money to keep the economy moving in a sideways direction as appose to upwards if that makes sense.
As in upwards being an inflationary mechanic and sideways being more a stable economy.

I now see the problem with the flow of money but hardly would consider a system where the bank makes so much interest out of nowhere by means of inflating the money and then sucking it back up again to come along with resources which have to be used instead of money to pay back this debt,because as i pointed out if there is interest with the first money bonds then that means there is more money out there than what is owed, for europe im guessing at a rate of 100/4900* the amount of banks and loans taken.
This might explain Ireland the current national debt of 80billion as a base analysis anyway.
Please correct me if any of my ramblings dont make sense,as i appear to be insinuating the banks are making a killing on this mechanic for loan exspansion.
If a bank can turn E100 into E4900 and charge 5% on top i seriously would like to know how i go about starting a bank

theg81der

As far as I know your 100% right. First time I heard it I thought - isn`t that like a pyramid scheme?!

The system is set up so people can never pay it back, it sucks!

Truthrevolution

The monetary system was set up to be too complicated for people to comprehend and allow the looting of public money without questioning.If nobody can prove Torack wrong or even give him an answer then well just have to take it that he is correct.

Now what was that famous quote from Nathan Mayer Rothschild.......

Flamed Diving

Torakx wrote: »

ECB = European Central Bank
IB = An Irish Bank
Borrower = Person/entity lending from the IB

So far my understanding is that to keep inflation down the ECB uses a fixed rate of interest (2%) for the return of the money the banks lend from them, i presume in the form of bonds.

Sort of. It's been a while since I studied this, but I think they issue X amount of bonds and try to manipulate the interest rate through the banks bidding for the bonds. The logic being that the bank that requires the dough the most (or more accurately, the bank that can use it most efficiently), will bid the lowest interest rate. There is usually a minimum bid rate as well, just so rates don't go below the ECB's control.

Torakx wrote: »

So for example ECB lend a bond to IB worth E100 @ 2% interest.
The IB now have E100 in there reserves and are allowed to loan out 98% of that keeping 2% in reserve incase of liquidation of the bank.

Where are you getting the 2% from? Banks are required to keep a reserve on deposits, which is set at around 10% (again, from memory). AFAIK, banks are not required to keep reserves on funds that they financed themselves.

Torakx wrote: »

Loaning that E98 out at say 5% gives the IB a 3% interest profit over the time period agreed.

Now when the loan is created it is not handed out in cash so it is usually put into the borrowers bank account meaning the bank has gotten a deposit of E98 of which it can loan out E94.04(2% reserve taken from E98)

Reserves on deposits are 10%.

Torakx wrote: »

This goes on and on until that E100 has created E5000 in loans.
Im guessing the IB would then have a reserve held of E100 for all those loans created.
If so this means they have created E4900 out of thin air and the borrowers must pay this back to the bank with 5% interest added to each little loan on top.

I'm going to leave this to the poster, EM. But as far as I can see, this would lead to increase in money supply by a factor of 50. A few days ago the ECB released €71bn, which is a tiny amount, compared to their other activities. But could you imagine the effect of €71bn exploding to €3.55trillion? Or the effect of the much larger amounts? It just doesn't seem right.

Torakx wrote: »

But since there is only E4900 in circulation how does the borrower pay the interest?

From his earnings. Some of things you may be reading are over-simplifications. Try to see how they fit to the real world, and where they fail to do the same.

Torakx wrote: »

I understand if its plain competition that requires a person to take money from another to cover their interest and hope the other guy does the same to someone else until somebody gets screwed and loses out.
That is how i see it working now.

You are not factoring in earnings here. Despite recent events, not everybody lives on borrowing. People go to work and earn money. Their labour and the capital they work with creates more wealth than what was invested into it. This new wealth can be used to pay debt. This is not the same as printing money.

Torakx wrote: »

Im sure this is way off because such a system would be ridiculous and with all these banking terms that i dont understand so well, i am very sure im missing something important.

Well, at least you have the common sense to recognise that such a world cannot be. The rest just takes time to learn.

Torakx wrote: »

If possible i would like if somebody can show me clearly how this system works and why the banks must pay interest to the ECB and why it is a good idea to have a 2% reserve requirment when a nearly bankrupt america have a 10% reserve requirment.Surely it should be closer to 80%? If it was what would happen?

If banks had a reserve requirement of 80% on deposits, then banks would simply rely more heavily on capital markets as sources for funding for their own lending operations. Since banks don't have to keep a reserve against such funds. This would mean that banks would have huge levels of debt versus equity, meaning that they would be highly leveraged. The most highly leveraged banks, were all the ones which went to the wall, two years ago: Lehmans, Anglo, etc. Furthermore, since deposits would be such a dead weight on banks balance sheets it would be unlikely that any interest would be paid on savings. In fact, banks would probably charge you for keeping your money safe.

Torakx wrote: »

I would have thought taxes would pay for the running and organisation of our currency also.

The cost of doing it is not the point, though. Read:

http://en.wikipedia.org/wiki/Central_bank#Independence

Flamed Diving

Truthrevolution wrote: »

The monetary system was set up to be too complicated for people to comprehend and allow the looting of public money without questioning.If nobody can prove Torack wrong or even give him an answer then well just have to take it that he is correct.

Now what was that famous quote from Nathan Mayer Rothschild.......

You cannot prove that Reverse Vampires don't exist. Therefore, they exist.

:P

Économiste Monétaire

Torakx wrote: »

So far my understanding is that to keep inflation down the ECB uses a fixed rate of interest (2%) for the return of the money the banks lend from them, i presume in the form of bonds.

It’s currently 1%, not 2%. The fixed rate has only been in force since October 2008, before that banks would bid for money above the stated ECB rate (the ‘minimum bid rate’). That’s for weekly operations (the Main Refinancing Operation (MRO)). For longer-term refinancing operations (LTROs) the rate paid is an arithmetic-average of future MRO rates.

Torakx wrote: »

So for example ECB lend a bond to IB worth E100 @ 2% interest.

The ECB doesn’t issue bonds to banks. In fact, the ECB itself does not lend to anyone. The Eurosystem is a highly decentralised monetary system, Irish banks go to the CBFSAI, German banks go to the Bundesbank, et cetera.

Torakx wrote: »

The IB now have E100 in there reserves and are allowed to loan out 98% of that keeping 2% in reserve incase of liquidation of the bank.

That 2% varies by bank according to their needs. They need to keep 2% in reserves at the central bank over a specific time-frame, called the ‘reserve maintenance period’. The amount of reserves varies day-to-day.

Liquidation is a solvency issue, by the way, not a liquidity issue, which is why we have reserve ratios. You’re confusing this with capital ratios.

About 1186bn is held under reserves and physical currency, the ‘monetary base’. The amount of deposits in the Eurosystem covered by a reserve ratio is about 10500bn. This gives a multiplier of close to 10, not 50.

Torakx wrote: »

Loaning that E98 out at say 5% gives the IB a 3% interest profit over the time period agreed.

Minus impairments and operating costs. Again, the stated ECB rate is not always the rate at which banks borrow. They also issue debt securities at the long-end of the yield curve to have a better maturity profile of their liabilities. A relatively small amount of a banks funding comes from the central bank.

Torakx wrote: »

Now when the loan is created it is not handed out in cash so it is ussually put into the borrowers bank account meaning the bank has gotten a deposit of E98 of which it can loan out E94.04(2% reserve taken from E98)

Why is it not handed out in cash? This breaks the ‘money multiplier’ process.

Torakx wrote: »

But since there is only E4900 in circulation how does the borrower pay the interest?

One assumes that the bank has lent money to a profitable venture, which, hopefully, generates economic activity. This increased economic growth arising from investment (and population growth) is facilitated by the central bank in increasing the money supply. Think of it as oiling a wheel. If the interest isn’t paid back, the banks’ shareholders take the hit which is why you’re hearing about the need for banks to raise ‘capital’.

Torakx wrote: »

I understand if its plain competition that requires a person to take money from another to cover their interest and hope the other guy does the same to someone else until somebody gets screwed and loses out. That is how i see it working now. Im sure this is way off because such a system would be ridiculous and with all these banking terms that i dont understand so well, i am very sure im missing something important.

Transactions are a zero-sum game?

Torakx wrote: »

If possible i would like if somebody can show me clearly how this system works and why the banks must pay interest to the ECB and why it is a good idea to have a 2% reserve requirment when a nearly bankrupt america have a 10% reserve requirment.Surely it should be closer to 80%?If it was what would happen?
I would have thought taxes would pay for the running and organisation of our currency also.

Um, the US isn’t bankrupt, it has a lower debt to GDP than most countries I’m aware of. I don’t quite understand how a liquidity ratio comes into this. The 10% doesn’t apply to all forms of deposits, and, as I pointed out above, our monetary base to deposits could easily take a 10% ratio.

Why should it be closer to 80%? Why not 100%? Banks would then have no purpose as they cannot lend money, so you would need to pay them for placing your money on deposit. I have no idea where you’re getting the 80% from.

I would advise you to but a book on monetary economics from Amazon. Wikipedia and the Conspiracy Theories forum aren’t reputable sources for learning economics, especially the latter.

theg81der wrote: »

As far as I know your 100% right. First time I heard it I thought - isn`t that like a pyramid scheme?!

The system is set up so people can never pay it back, it sucks!

A system where people can't or shouldn't borrow is better right? Borrowing to invest and smooth consumption aren't nefarious things.

Truthrevolution wrote: »

The monetary system was set up to be too complicated for people to comprehend and allow the looting of public money without questioning.If nobody can prove Torack wrong or even give him an answer then well just have to take it that he is correct.

Now what was that famous quote from Nathan Mayer Rothschild.......

No, it's too complicated for the CT forum to understand, or they don't want to understand because it's not as nefarious as they believe. The posters on this forum have jobs and lives beyond Boards.ie. We aren't paid to be here all the time to answer your questions.

Truthrevolution

Flamed Diving wrote: »

You cannot prove that Reverse Vampires don't exist. Therefore, they exist.

:P

Oh vampires do exist, especially the financial ones......

Just out of interest when do you reckon will be the next financial crisis?

Flamed Diving

Truthrevolution wrote: »

Oh vampires do exist, especially the financial ones......

Just out of interest when do you reckon will be the next financial crisis?

No idea. Not my field of interest.

Just in case you would like to know, here is a selection of Economics many branches:

http://www.econ.ucsb.edu/aeastp/pdf_files/fields.pdf

Torakx

Im sorry if this is taking time out of peoples lives.
This is a board for discussion and i do appreciate all comments.Im trying to discredit a conspiracy theory and i was hoping for the help of some knowledgable people on this subject.
I also use my time to inform people on other parts of this forum about topics i have already learned because i understand that if we all are happy to share what we know everyone gets their information faster.
Unfortunatly im on the other end of the stick now and need some info..

This should be basic to explain how exactly the system works.
I just want to know who makes our money, how much they get,how much that is allowed to expand and what happens when it contracts and where does the money go when it detracts if it does.
Just basic things about how it goes. The 2% i used was a rough example taken from the ECB website and the wiki for fractional reserve both had 2% for europe and fractional reserve banking.
It was kept a basic 2% so i could work out a rough equation for myself to understand the process.
I dont know alot of the terms used here so really you are speaking with a layman in this regard and i hope can be patient.
Il get back here when i get time to do more research on all that was said so far.
Thanks all for commenting.

Truthrevolution

Flamed Diving wrote: »

No idea. Not my field of interest.

Just in case you would like to know, here is a selection of Economics many branches:

http://www.econ.ucsb.edu/aeastp/pdf_files/fields.pdf

Well i was asking for your personal opinion, considering bankers caused the last one i thought you mite have a better knowledge of it than me......

Flamed Diving

Torakx wrote: »

Im sorry if this is taking time out of peoples lives.
This is a board for discussion and i do appreciate all comments.Im trying to discredit a conspiracy theory and i was hoping for the help of some knowledgable people on this subject.
I also use my time to inform people on other parts of this forum about topics i have already learned because i understand that if we all are happy to share what we know everyone gets their information faster.
Unfortunatly im on the other end of the stick now and need some info..

No problem.

Torakx wrote: »

This should be basic to explain how exactly the system works. I just want to know who makes our money, how much they get,how much that is allowed to expand and what happens when it contracts and where does the money go when it detracts if it does.

I need EM to explain this one fully, as my knowledge is a bit patchy. However, if you look at the links I provided earlier, you will see that the ECB set terms on the money they release. Sometimes it's a few days, or several months. So the money is returned, with interest, as a manner of speaking. I recall my lecturer describing it like waves hitting a beach, each wave approaches, and then retreats. If the ECB want to increase the supply of money, they let the tide in, and vice versa. The whole point of having waves of money going in and out allows the ECB to react quickly and change things. To understand this, compare the ECB policy to a central bank that releases one lump sum for the year, and does nothing until next year. It is clear to see that the ECB has more control over events. Other than this, I can't say much more.

Torakx wrote: »

I dont know alot of the terms used here so really you are speaking with a layman in this regard and i hope can be patient.

Anytime I write a technical term I tend to link to Wikipedia. If you don't understand a term, let me know.

Flamed Diving

Truthrevolution wrote: »

Well i was asking for your personal opinion, considering bankers caused the last one i thought you mite have a better knowledge of it than me......

I can't predict the future. I don't think anyone can, tbh. At least not long-term predictions, anyway.

Truthrevolution

Flamed Diving wrote: »

I can't predict the future. I don't think anyone can, tbh. At least not long-term predictions, anyway.

Its not rocket science, sovereign dept is at unsustainable levels in the US, Japan, Britain, western europe.This will inevitably collapse setting off a bond crisis.I reckon that will happen within the next two years.

Flamed Diving

Truthrevolution wrote: »

Its not rocket science, sovereign dept is at unsustainable levels in the US, Japan, Britain, western europe.This will inevitably collapse setting off a bond crisis.I reckon that will happen within the next two years.

You should publish your results.

Économiste Monétaire

Torakx wrote: »

Im sorry if this is taking time out of peoples lives.

Not at all, I think it's great when people ask questions and show genuine interest in economics. My point was to the CT poster who expects immediate answers, or assumes we're hiding something/don't know.

Torakx wrote: »

This is a board for discussion and i do appreciate all comments.Im trying to discredit a conspiracy theory and i was hoping for the help of some knowledgable people on this subject.
I also use my time to inform people on other parts of this forum about topics i have already learned because i understand that if we all are happy to share what we know everyone gets their information faster.
Unfortunatly im on the other end of the stick now and need some info..

This should be basic to explain how exactly the system works.
I just want to know who makes our money, how much they get,how much that is allowed to expand and what happens when it contracts and where does the money go when it detracts if it does.
Just basic things about how it goes. The 2% i used was a rough example taken from the ECB website and the wiki for fractional reserve both had 2% for europe and fractional reserve banking.
It was kept a basic 2% so i could work out a rough equation for myself to understand the process.
I dont know alot of the terms used here so really you are speaking with a layman in this regard and i hope can be patient.
Il get back here when i get time to do more research on all that was said so far.
Thanks all for commenting.

The central bank prints our money. In 1999, all the national central banks were told by the ECB how much to print for the transfer to the Euro in 2002. After that, printing was done on a 'pooled' basis. The German central bank (the Bundesbank) prints €200 and €50 notes this year, we print €10 notes this year, et cetera, and they're transported around. Last year, the Irish central bank (CBFSAI) printed €20 notes.

When you place a deposit with a bank, they don't have to keep 100% of it in their vaults. Instead, they lend it out to people looking to borrow. In return for this, you're paid for your deposits. This is the basic function of a bank, it acts as a 'financial intermediary'. With 100% reserve banking, they could not do this because they have to keep '100%' of it. Then, you, personally, would need to find willing borrowers and scrutinise them yourself to determine whether they can pay it back.

The 2% is the reserve requirement. That doesn't necessarily mean banks hold only 2% of deposits in cash at the central bank and lend out 98% of the rest in mortgages. The number 'depends' on a a lot of factors, and they hold some of their assets in very liquid form, such as government debt (which can be sold pretty quickly relative to trying to sell a mortgage to someone else). Banks generally know their liquidity requirements for a normal and even not so normal week, and adjust the amount of cash they hold to reflect this demand for money.

Their accounts at the central bank are also used to pay other banks, i.e. imagine you needed to transfer money to someone whose account was with BOI but you bank with AIB. A central bank doesn't just lend money to banks, it also operates the framework by which this transfer can happen; they're called gross-settlement systems. Even transferring money to other countries, say Italy, is done through the ECB's system. So the Eurosystem is also like a plumber in that they smooth out the transfer of money around Europe between banks.

I suggest you read this book:
http://www.amazon.co.uk/Monetary-Economics-Policy-Theoretical-Basis/dp/023020595X/

It should answer most of the questions you're asking. For information on central bank money and deposits, you should look at the ECB's monthly bulletin. It's on their web-page.

andrew

I get the impression you're asking these questions without a basic understanding of how the monetary system works. So here's an economics 101 explanation. Hopefully it's of some use.

Why do we have banks in the first place?

1. To create liquidity: They issue deposits more liquid than the assets which back them up, and extend lines of credit for long periods

2. They minimise the cost of obtaining funds: instead of having to search for lenders yourself, you can just go to a bank.

3. They minimise the cost of monitoring borrowers: because it'd be costly for you to keep an eye on everyone to whom you lend money

4. They pool risk: defaults on a loan are spread across all depositors so that no individual lender assumes a high level of risk. Of course, sometimes there are loads of defaults and then the govt. steps in, but that's rare.

So that's at least most of the reasons why we don't have 100% reserve banks; if they kept all of the money they received, they couldn't do all of these things. As it stands, banks and fractional reserve are the best way to do these things.

What do central banks do?

Amongst other things which don't really pertain to your question, the Central Bank:

1. Holds the reserves of commercial banks on deposit: It does so at a low interest rate; this is the 1% rate mentioned by Economist Monitaire.

2. Provides banking services in general to the commercial banks (facilitating the transfer of funds between them etc.

Central Bank Policy

So, how do central banks influence the amount of money in the system?

1. By changing the repo rate. This is the interest rate on loans to, and the reserves of, commerical banks. If the repo rate rises the cost of borrowing by commercial banks increses, so commercial banks lend less, the money supply is reduced, and other interest rates rise. I'm not sure what the deal is in the EMU.

2. Through open market operations: the the Central Bank can sell or purchase government bonds (The Irish Central bank issues it's own bonds) to or from banks. When the central bank sells bonds, banks buy them; they then have less reserves which means tighter monetary conditions. When the CB buys bonds from commercial banks they get more reserves, so there are looser monetary conditions.

How banks create money

Three things limit money creation:

1. The monetary base
2. Desired Reserves
3. Desired currency holdings.

1. The monetary base is the sum of commercial bank's reserves and the currency in circulation. The amount of desired currency holdings limits the total quantity of money that can be created. This is because when when someone has a sum of money, they don't deposit all of it, they'll deposit a % of it and keep the rest as cash. This'll become clearer later.

2. Banks hold a fraction of deposits on reserve; the 'reserve ratio.' The more currency there is, the higher the ration. there's a required reserve ratio which the banks must hold, and a desired ratio which banks consider to be prudent. deposits * desired ratio = desired reserves. Their actual reserves - desired reserves = excess reserves, which are lent out.

3. the more deposits a bank has, the less currency is has in reserve. This is called currency drain (the ratio of currency to deposits) and reduces reserves, thereby reducing the amount banks can loan out.

Money is created according to the following mechanism:

1. Banks have excess reserves, for whatever reason. This might be because the central bank has purchased securities from the bank in an open market operation.
2. The bank lends out a portion of thee reserves in line with it's reserve ratio.
3. The new money is used to make payments.
4. Some of this new money remains on deposit. Some of this money remains as cash; this is currency drain.
5. Deposits have increased and so the amount of desired reserves the bank want to keep increses also.
6. The bank now has excess reserves again, but less than previously because of currency drain and because it now needs to keep more reserves because it now has more deposits.

And that's it. At least as far as procrastination goes this has been relatively useful.

Flamed Diving

As you can see, in an economy we have those with surplus income (left) and those with deficit income (right). Net Lenders (NL) deposit capital (K) in a bank and receive K(1+i) in return, where i is nominal interest. The bank, in turn, lends this K to the Net Borrower (NB) and receives K(1+(i+a)) in return, with ‘a’ being the banks profit. Some may say that NL is not getting a good deal, since they are missing out on that ‘a’. Why not sidestep the bank and go straight to that NB?

But how do they find each other? Advertise? Attend conferences and fairs? Yes, but all of these involve transaction costs (t). If t≥a, then the NL will be better off just putting his money in the bank, and letting them do the legwork. This is why financial systems are important, because they make life easier for everyone involved.

This is highly simplified, but gives you the basic idea.

Torakx

By its nature, the practice of fractional reserve banking expands money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.
http://en.wikipedia.org/wiki/Fractional-reserve_banking

This might be the part that is confusing me a bit.
I understand the basic concepts i think now of how the bank makes pofit.
I thought i read on the ECB website that they control inflation by setting their interest rates differently rougly around the 2% area.

Does this stop a bank purposely creating that E100-E4900(very rough example) ratio by lending out mortgages to many people?

So if the ECB create money and the bank can expand and contract it, isnt there always going to be situations where the money expands and people take loans but then the money contracts to keep inflation down and people then have a hard time paying the loans back?

It still appears to me that there is a problem with interest in this system.
Money has no value accept what worth is put on it based on this system.
If we used a copper based currency or something kind of common wouldnt this prevent expansion of the currency while still giving it value.

Sorry if the questions are very over simplified.Its the only way i can process all this new info in a short time.

Oak3

We have to be so careful. It may well be that individuals in our Department of Finance, Government, Central Bank officials, dynamic businessmen and bankers believed some of the twaddle they read in textbooks while they were studying economics, and are making monumental decisions for current and future generations based on their belief in that very twaddle.

Maybe "nothing is what it appears to be", so we must adopt critical thinking, flexibility and a healthy scepticism when confronted with economic theory.

andrew wrote: »

Why do we have banks in the first place?

1. To create liquidity: They issue deposits more liquid than the assets which back them up, and extend lines of credit for long periods

This could be misleading. They issue currency that is more liquid than the assets which back them up maybe? But they also create liquidity in the marketplace as a whole by virtue of the reserve ratio practice which is exponential by it's nature. Which of course has the power to create immense profit, which is as good a reason to have a bank as any, if capitalism is your construct.

2. They minimise the cost of obtaining funds: instead of having to search for lenders yourself, you can just go to a bank.

The only reason they're cheaper than loan sharks is because they have a monopoly in the marketplace. It's not a reason we have them, it's a consequence. And I bet there are loan sharks who are cheaper than banks, although granted they might be more tricky to find.

3. They minimise the cost of monitoring borrowers: because it'd be costly for you to keep an eye on everyone to whom you lend money

Nope, the cost of labour, goods and services is the same whether you are a loan shark or a bank. The more borrowers one has the more notebooks and pencils one needs and people to run those books. So again banks are merely a consequence of having many borrowers and critically having a licence to operate. Anyway, who uses banks to monitor borrowers? That's not to say it can't be done, or isn't.

4. They pool risk: defaults on a loan are spread across all depositors so that no individual lender assumes a high level of risk. Of course, sometimes there are loads of defaults and then the govt. steps in, but that's rare.

Careful, this would imply that all Banks in a particular marketplace share the risk of default on borrowings between them. If we change the word lender to borrower then this might reflect the basic theory a bit more accurately. Of course we've seen how individual banks do help each other out in terms of IL&P and the odd €7 billion, so they do lend to each other, or help each other fiddle the books(?) But that couldn't really come under the more fundamental functions of an individual entity described as a bank.

I don't really want to labour the point, hopefully I've made it. There was one more thing that I'd like to mention ...

As it stands, banks and fractional reserve are the best way to do these things.

I'd have to disagree with that. Banks and the fractional reserve system are one way of doing it. The merits or otherwise of doing any one of an infinite number of other ways of doing it have not been determined to the degree that they are popular or viable alternatives. Certainly I would expect it to be a hot topic of discussion in our academic institutions. And if not ... well, how can economics evolve?

Économiste Monétaire

Stop. Reading. Wikipedia.

Torakx wrote: »

This might be the part that is confusing me a bit.
I understand the basic concepts i think now of how the bank makes pofit.
I thought i read on the ECB website that they control inflation by setting their interest rates differently rougly around the 2% area.

No, the inflation target is at or below 2% over the medium-term. This doesn't mean they have a fixed interest rate of 2% on their loans. Right now it's at 1%, the deposit rate that Andrew is referring to is at 0.25%.

Torakx wrote: »

Does this stop a bank purposely creating that E100-E4900(very rough example) ratio by lending out mortgages to many people?

A reserve ratio is a way of ensuring banks keep a minimum amount of their assets in cash to meet depositors' daily demand for currency (when they withdraw money from their accounts). The 50*reserve-requirement is a notional number, assuming no leakages from that injection, i.e. no-one withdraws the money from their accounts. As I stated in my original post, the amount of deposits to base money gives a multiplier of less than 10, not 50.

Torakx wrote: »

So if the ECB create money and the bank can expand and contract it, isnt there always going to be situations where the money expands and people take loans but then the money contracts to keep inflation down and people then have a hard time paying the loans back?

They do have a hard time paying back loans. People cut back on other expenditure and businesses find investment more expensive; this 'cools' the economy. This is entirely intentional.

Torakx wrote: »

It still appears to me that there is a problem with interest in this system.
Money has no value accept what worth is put on it based on this system.
If we used a copper based currency or something kind of common wouldnt this prevent expansion of the currency while still giving it value.

We haven't, yet, seen hyperinflation in Europe/US arising from central banks printing a lot of money in the last half-century. It could happen. Just like we could find a depository of gold that quadruples the 160,000-odd metric tonnes of gold currently above ground. Here's an old paper on the question of returning to the gold standard:

http://research.stlouisfed.org/publications/review/81/05/Classical_May1981.pdf

It cites the benefits (long-run price stability) and costs (higher unemployment, greater short-run variation in the price level, et cetera). Personally, I see no reason for a return to a gold-standard. If inflation was running at 10% every year, then I would look for a change.

Économiste Monétaire

Oak3 wrote: »

We have to be so careful. It may well be that individuals in our Department of Finance, Government, Central Bank officials, dynamic businessmen and bankers believed some of the twaddle they read in textbooks while they were studying economics, and are making monumental decisions for current and future generations based on their belief in that very twaddle.

What you define to be "twaddle."

Oak3 wrote: »

This could be misleading. They issue currency that is more liquid than the assets which back them up maybe? But they also create liquidity in the marketplace as a whole by virtue of the reserve ratio practice which is exponential by it's nature. Which of course has the power to create immense profit, which is as good a reason to have a bank as any, if capitalism is your construct.

Banks don't print currency... They take on short-term liabilities and give these deposits a return by issuing long-term loans.

Oak3 wrote: »

The only reason they're cheaper than loan sharks is because they have a monopoly in the marketplace. It's not a reason we have them, it's a consequence. And I bet there are loan sharks who are cheaper than banks, although granted they might be more tricky to find.

Um, what? We don't have a banking system dominated by one firm.

Oak3 wrote: »

Nope, the cost of labour, goods and services is the same whether you are a loan shark or a bank. The more borrowers one has the more notebooks and pencils one needs and people to run those books. So again banks are merely a consequence of having many borrowers and critically having a licence to operate. Anyway, who uses banks to monitor borrowers? That's not to say it can't be done, or isn't.

He's correct, actually. The sum of time required of individual Joe-Soap lenders to scrutinise potential borrowers > that of a bank. Specialisation: an age-old concept.

Oak3 wrote: »

Careful, this would imply that all Banks in a particular marketplace share the risk of default on borrowings between them. If we change the word lender to borrower then this might reflect the basic theory a bit more accurately. Of course we've seen how individual banks do help each other out in terms of IL&P and the odd €7 billion, so they do lend to each other, or help each other fiddle the books(?) But that couldn't really come under the more fundamental functions of an individual entity described as a bank.

I don't really want to labour the point, hopefully I've made it. There was one more thing that I'd like to mention ...

He's talking about diversification of idiosyncratic risk, not market risk. His point is entirely correct and makes no reference to banks sharing risk.

Torakx

Alot to consider once more
So the wiki description is definetly wrong?
This seems to be the main source for alot of peoples issues the currently and widely accepted it appears fact that the fractional reserve allows the bank to expand money.
I understand totally my guesstimates might be closer to a multiplyer of 10 as appose to 50.Its irrelevant i think when i just need to understand the mechanics as appose the numbers.This is why i have been simplifyign things because you guys already understand the numbers and ratios.I dont need to tell you that 2% is flexible its just an example number for setting my bearings.

I will check out the links posted,especially that gold standard one and leave you guys with one i found on interest should it be suitable.
http://endtheecb.ning.com/forum/topics/on-interest
It gave me food for thought but i have not yet thought of or found a system i understand that can do a better job.
I fdont think the possibility to create a better one doesnt exist so hope to explore this a bit too.
As it stands it does appear we have serious issues with the current system if so many countries and regular people have so much debt on their heads.
You gotta wonder at some stage wheres it all going and why does it need to go in that direction.

andrew

Torakx wrote: »

This might be the part that is confusing me a bit.
I understand the basic concepts i think now of how the bank makes pofit.
I thought i read on the ECB website that they control inflation by setting their interest rates differently rougly around the 2% area.

Banks control inflation by affecting the amount of money in the system.

Does this stop a bank purposely creating that E100-E4900(very rough example) ratio by lending out mortgages to many people?

So if the ECB create money and the bank can expand and contract it, isnt there always going to be situations where the money expands and people take loans but then the money contracts to keep inflation down and people then have a hard time paying the loans back?

What stops the bank from just lending out a **** load money is the amount of excess reserves. A central bank controls the amount of excess reserves a bank has through open market operations, and adjustments to it's interest rate.

It still appears to me that there is a problem with interest in this system.
Money has no value accept what worth is put on it based on this system.
If we used a copper based currency or something kind of common wouldnt this prevent expansion of the currency while still giving it value.

You're right; money has no intrinsic value. But there are problems with using other means. Firstly, stuff like copper has a use other than than as a legal tender, so it's supply and value would be determined by a whole myriad of other factors, which would be problematic. Also, fixing money to something like copper or gold limits the ability of CB's to use monetary policy to smooth out the business cycle, a-la the great depression.

Oak3 wrote: »

We have to be so careful. It may well be that individuals in our Department of Finance, Government, Central Bank officials, dynamic businessmen and bankers believed some of the twaddle they read in textbooks while they were studying economics, and are making monumental decisions for current and future generations based on their belief in that very twaddle.

Have you ever read an economics text book?

This could be misleading. They issue currency that is more liquid than the assets which back them up maybe? But they also create liquidity in the marketplace as a whole by virtue of the reserve ratio practice which is exponential by it's nature. Which of course has the power to create immense profit, which is as good a reason to have a bank as any, if capitalism is your construct.

No, banks don't always issue currency. Loans don't always come in the form of currency; it's not like people go in looking for a loan and walk out with a suitcase full of cash ready to spend. Money is lent for specific things usually, like cars, or capital, and doesn't become currency.

The only reason they're cheaper than loan sharks is because they have a monopoly in the marketplace. It's not a reason we have them, it's a consequence. And I bet there are loan sharks who are cheaper than banks, although granted they might be more tricky to find.

No. Who do you think is going to charge more interest; the loan shark who lends 500, from a reserve base of thousands, or a bank who lends 500 from a reserve base of millions? The bank. As a proportion of it's total reserves, the loan shark's loans are greater and he's less diversified, and so to compensate for the greater risk they charge a higher interest rate.

Hah, Tricky to find? Try impossible.

Nope, the cost of labour, goods and services is the same whether you are a loan shark or a bank. The more borrowers one has the more notebooks and pencils one needs and people to run those books. So again banks are merely a consequence of having many borrowers and critically having a licence to operate. Anyway, who uses banks to monitor borrowers? That's not to say it can't be done, or isn't.

Economies of scale. Which do you think is more efficient; lots of individuals loaning to each other, monitoring each other for default and payment, or a centralised system which lends out money and monitors people? Division of labour and all that.

Careful, this would imply that all Banks in a particular marketplace share the risk of default on borrowings between them. If we change the word lender to borrower then this might reflect the basic theory a bit more accurately. Of course we've seen how individual banks do help each other out in terms of IL&P and the odd €7 billion, so they do lend to each other, or help each other fiddle the books(?) But that couldn't really come under the more fundamental functions of an individual entity described as a bank.

A small independent bank is better to absorb risk than an individual lender for the reasons given above. It has more reserves and diversified risk. How is a reduction of risk not the a fundamental function of a bank, and how does this imply that all Banks in a particular marketplace share the risk of default on borrowings between them?

I'd have to disagree with that. Banks and the fractional reserve system are one way of doing it. The merits or otherwise of doing any one of an infinite number of other ways of doing it have not been determined to the degree that they are popular or viable alternatives. Certainly I would expect it to be a hot topic of discussion in our academic institutions. And if not ... well, how can economics evolve?

Any examples of the 'infinite' other ways of doing things? Or are you just assuming that there 'must' be, just, well, because.

Économiste Monétaire

Torakx wrote: »

So the wiki description is definetly wrong?

I wouldn't use Wikipedia as a source to learn about this. It can be edited by anyone, regardless of their qualifications to make statements on the issue. Sort of like taking medical advice from your neighbour, who happens to be a butcher.

Torakx wrote: »

This seems to be the main source for alot of peoples issues the currently and widely accepted it appears fact that the fractional reserve allows the bank to expand money.

It's actually a two-way process between banks and their customers. If people didn't place their money on deposit, banks would have nothing to lend. The process is as you said previously, an initial deposit is lent by a bank to a customer. That creates another deposit, which is then used by the person to buy something. Then this money is placed on deposit, and that is lent out. Et cetera. So imagine the central bank creates money and buys a bond from a bank (a POMO).

Note|Reserves €|Loans €|Deposits €
POMO €1,000|+1,000|0|+1,000
Bank 1 lends to Person 1|-|+900|+900
Person 1 purchases an car from Person 2|-900|-|-900
Person 2 deposits the money in Bank 2|+900|-|+900
Bank 2 lends to Person 3|-|+810|+810
Person 3 purchases a computer from Person 4|-810|-|-810
Person 4 deposits the money in Bank 3|+810|-|+810
Bank 3 lends to Person 5|-|+729|+729
Person 5 purchases a house from Person 6|-729|-|-729
Person 6 deposits money in bank 1/2/3|+729|-|+729
....|""|""|""
Totals|1,000|9,000|10,000

Here the multiplier is 10, as the initial injection of €1,000 has led to deposits of €10,000. Imagine person 3 didn't place the money on deposit, but kept it in his wallet. Then the multiplier effect breaks down.

Torakx wrote: »

I will check out the links posted,especially that gold standard one and leave you guys with one i found on interest should it be suitable.
http://endtheecb.ning.com/forum/topics/on-interest
It gave me food for thought but i have not yet thought of or found a system i understand that can do a better job.

Most of those web-sites are run by ideological fronts. People who believe Obama is a Commie-Lizard and such.

Torakx wrote: »

I fdont think the possibility to create a better one doesnt exist so hope to explore this a bit too.
As it stands it does appear we have serious issues with the current system if so many countries and regular people have so much debt on their heads.
You gotta wonder at some stage wheres it all going and why does it need to go in that direction.

If I thought there was a better system, I would be arguing for it. What I don't appreciate is how videos such as Zeitgeist put evil symbolism around the banking system, and talk about how lending your money is such a terrible deed—as if you weren't already aware of what they do. Then economists are portrayed as people who attempt to 'hide' this 'fact' from the public, as if we're in on the gag. Most economists are nerds. Massive nerds, in fact; look at some old pictures of Ben Bernanke. They're about as far away from financial-elite as one can be.

Torakx

Even a multiplier of 10 is alot dont you think? But thank you for the clear explanation on how that is multiplied.
When you scale that with how much debt(money) is floating around it is alot.

I posted the link on interest not because of the conspiracy theory that might be linked to hitler etc etc but for the statements he makes on interest and that alone.I thought it was an interesting perspective on the "problem" of interest should there be one.I dont know yet myself, im still looking into it
I thought you guys might appreciate what he is saying more than soemone like me who doesnt fully understand yet the inner workings of the monetary system.

I have just watched "The Secret Of OZ" for a second time,this time after starting this thread and checking out about fractional reserve mechanics.
I cant see where this documentary is wrong in its convictions on a base monetary level.
I do wonder how it would be integrated with international trading and so on, but the basic idea of a fiat currency like the green back needs to be investigated for me before i would even consider the system we have today as the lesser of many evils.
http://www.theopensource.tv/the-money-masters/the-secret-of-oz-video_82fa50cc4.html
This is the documentary.Its advocating a fiat currency much like the one Lincoln brought out when he was president in America.

Now im not saying this is the solution but i am hoping to play devils advocate and debunk its ideas if anyone can help me.
This documentary appears to be more indepth than the likes of zeitgeist as its purely about the monetary system and how banks worked over the years with governments.

Time Magazine

Économiste Monétaire wrote: »

Most economists are nerds.

Économiste Monétaire

Torakx wrote: »

Even a multiplier of 10 is alot dont you think? But thank you for the clear explanation on how that is multiplied.
When you scale that with how much debt(money) is floating around it is alot.

I posted the link on interest not because of the conspiracy theory that might be linked to hitler etc etc but for the statements he makes on interest and that alone.I thought it was an interesting perspective on the "problem" of interest should there be one.I dont know yet myself, im still looking into it
I thought you guys might appreciate what he is saying more than soemone like me who doesnt fully understand yet the inner workings of the monetary system.

I have just watched "The Secret Of OZ" for a second time,this time after starting this thread and checking out about fractional reserve mechanics.
I cant see where this documentary is wrong in its convictions on a base monetary level.
I do wonder how it would be integrated with international trading and so on, but the basic idea of a fiat currency like the green back needs to be investigated for me before i would even consider the system we have today as the lesser of many evils.
http://www.theopensource.tv/the-money-masters/the-secret-of-oz-video_82fa50cc4.html
This is the documentary.Its advocating a fiat currency much like the one Lincoln brought out when he was president in America.

Now im not saying this is the solution but i am hoping to play devils advocate and debunk its ideas if anyone can help me.
This documentary appears to be more indepth than the likes of zeitgeist as its purely about the monetary system and how banks worked over the years with governments.

To be honest, I don't have 2 hours of free-time to watch that. On the point about a multiplier of 10, you have to ask: how much money do people demand in physical form? What's the difference between a multiplier of 2 and a multiplier of 10 if people only withdraw 5% of their deposits? When looking at the amount of debt, you need to consider the size the economy: money needed for investment and the age-profile of the population. There's also the problem of international capital flows in those deposit figures.

Time Magazine wrote: »

:pac: Selection bias, aye.

Torakx

I think you are talking about the multiplier when i am suprised we have one in the first place.
It still looks to me like for the most part the banks are creating by way of expansion most of the excess money in the system.
So we are basically giving the banks control of the large portion of the monetary system.
What is proposed in the documentary is that the government issue the money with no debt attached there by having 0 inflation.
Then when the money is paid back it is dissolved keeping the system free of self perpetuating debt.
They point out the gold standard simply keeps control of the money flow with those who own the gold and stated that any currency based of a resource will eventually be susceptable to tampering due to the issue of control of the money.
At least if government werent in debt to an outside party for the simple use of money and were able to print their own countries money free of interest they could then switch their loyalties and policies to the people who vote them in instead of the people who control the money.
This is the basic idea with the documentary i posted and i dont do it justice with my explanation.
I personally dont know exactly how that system would work,i presume it would be a gradual replacement of the current money within a small state and slowly expand the currency to suit the amount of goods needed to be traded etc.
Just control of money would be changed to the government instead of an outside party with no loyalties to state and country.
I do hope you guys watch it at some stage.Sometimes its good to question the status quo even if its just to appreciate why we have it in the first place.

andrew

But why would you want the government entirely in control of the money supply, what with the potential for short sighted ministers to use it for political gain and damage the economy. Remember the pressure on the government during the housing boom to remove stamp duty? Imagine the pressure that would've been on them to create more liquidity or something; there's huge potential for political abuse of the monetary system.

Torakx

andrew wrote: »

But why would you want the government entirely in control of the money supply, what with the potential for short sighted ministers to use it for political gain and damage the economy. Remember the pressure on the government during the housing boom to remove stamp duty? Imagine the pressure that would've been on them to create more liquidity or something; there's huge potential for political abuse of the monetary system.

Well im am the last person here to trust the government.
I have seen that with the current system allegiance to the controllers of money is not good when that allegiance possess the government too.
But when the government have a parliament or congress of some type to issue the currency without interest.There is no permanent expansion of money,there wouldnt be more debt than available money because of lack of this interest.
The parliament would then owe allegiance to those who vote them in aka the people of that country.
I agree its not a 100% solution for the whole economy but that is just the basic idea like we have the basic idea of the current system.There is more to both and i think both need to be explored openly and without bias.

Oak3

Économiste Monétaire wrote: »

What you define to be "twaddle."

For example;

Banks don't print currency...

Yes they do. Ireland's Central Bank printed €20 notes in recent times. The ECB prints banknotes.

They take on short-term liabilities and give these deposits a return by issuing long-term loans.

My understanding of the meaning of the word currency extends beyond cash and includes other types of currency. Long-term loans are currency which can be traded as we have found out to our detriment. CDO's being a case in point;

Um, what? We don't have a banking system dominated by one firm.

I reckon the ECB qualifies. Beyond that the IMF, signatories to which extends to 186 countries. Pretty damn monopolous.

He's correct, actually. The sum of time required of individual Joe-Soap lenders to scrutinise potential borrowers > that of a bank. Specialisation: an age-old concept.

A Joe-Soap lender might lend to you on the basis that your shoes are clean. Therefore the sum of time required to scrutinise potential borrowers may well be far < that of a bank.

3. They minimise the cost of monitoring borrowers: because it'd be costly for you to keep an eye on everyone to whom you lend money.

My point is that this statement is not sufficiently accurate to describe a reason why we have banks in the first place. We can borrow from Mutual Funds, Credit Unions and so on as well.

He's talking about diversification of idiosyncratic risk, not market risk. His point is entirely correct and makes no reference to banks sharing risk.

Granted, point taken.

andrew wrote: »

Have you ever read an economics text book?

Yes.

No, banks don't always issue currency. Loans don't always come in the form of currency; it's not like people go in looking for a loan and walk out with a suitcase full of cash ready to spend. Money is lent for specific things usually, like cars, or capital, and doesn't become currency.

My understanding of the meaning of the word currency extends beyond cash, or printed banknotes and includes other types of currency. Cleary you believe things like cars and capital are not currency. This is exactly the overall point I'm trying to make.

No. Who do you think is going to charge more interest; the loan shark who lends 500, from a reserve base of thousands, or a bank who lends 500 from a reserve base of millions? The bank. As a proportion of it's total reserves, the loan shark's loans are greater, and so to compensate for the greater risk they charge a higher interest rate.

Why should a loan shark be any less likely than a bank to lend €500 from a reserve base of millions, or for that matter to charge a lot less?

Hah, Tricky to find? Try impossible.

I'd say there are a great many people out there who borrow money from people who are not Banks, and more cheaply, and with a lot less red tape, all the time. To go back to a previous point, I'm just not sure it's an adequate reason to describe why banks exist in the first place.

Economies of scale. Which do you think is more efficient; lots of individuals loaning to each other, monitoring each other for default and payment, or a centralised system which lends out money and monitors people?

The former without a doubt. You believe a centralised system is more efficient than a more collective one? Open source software development is far more efficient than a single company developing that same software as a parallel. So one really has to look at the concepts and ideas one takes for granted, and more specifically the context in which it is held.

Any examples of the 'infinite' other ways of doing things? Or are you just assuming that there 'must' be, just, well, because.

Commodity trading, Resource trading, promissory note trading, bullion trading, a combination of any and all of the former ... for example. Banks and the fractional reserve just happen to be what we have, it doesn't mean it's the only or the most effective way of doing it. We just haven't developed another system to that degree. So it's a bit of a sweeping statement to be fair, particularly considering the human collateral damage that has ensued from it's most recent side effects.

Économiste Monétaire

Oak3 wrote: »

Yes they do. Ireland's Central Bank printed €20 notes in recent times. The ECB prints banknotes.

Err, commercial banks and central banks aren't the same thing. Commercial banks do not print money. The ECB itself doesn't print banknotes, by the way. If you believe so, what is the identification code on an Euro banknote ordered by the ECB? Bundesbank carries an X, the currency centre in Sandyford carries a T.

Oak3 wrote: »

My understanding of the meaning of the word currency extends beyond cash and includes other types of currency. Long-term loans are currency which can be traded as we have found out to our detriment. CDO's being a case in point;

Generally, currency means banknotes and coins that makes up part of the monetary base. If you're going to broaden the definition beyond what's used in economics, it's best to make that explicit.

Oak3 wrote: »

I reckon the ECB qualifies. Beyond that the IMF, signatories to which extends to 186 countries. Pretty damn monopolous.

Commercial banks, not in the issuance of currency. But you were comparing the ECB to a loan shark? IMF is a monopoly in what? Loans to broke Nations?

Oak3 wrote: »

A Joe-Soap lender might lend to you on the basis that your shoes are clean. Therefore the sum of time required to scrutinise potential borrowers may well be far < that of a bank.

Sum of time of Joe-Soap lenders.

Oak3 wrote: »

My point is that this statement is not sufficiently accurate to describe a reason why we have banks in the first place. We can borrow from Mutual Funds, Credit Unions and so on as well.

A mutual fund is hardly a perfect substitute for a commercial bank.

Oak3

Économiste Monétaire wrote: »

Err, commercial banks and central banks aren't the same thing. Commercial banks do not print money. The ECB itself doesn't print banknotes, by the way. If you believe so, what is the identification code on an Euro banknote ordered by the ECB? Bundesbank carries an X, the currency centre in Sandyford carries a T.

He didn't distinguish between either, he said Banks. And you can't print a banknote without permission from the ECB.

Generally, currency means banknotes and coins that makes up part of the monetary base. If you're going to broaden the definition beyond what's used in economics, it's best to make that explicit.

So generally diamonds for weapons is not economics then?

Commercial banks, not in the issuance of currency. But you were comparing the ECB to a loan shark? IMF is a monopoly in what? Loans to broke Nations?

Banks and banking are the monopoly.

Sum of time of Joe-Soap lenders.

You mentioned Joe-Soap lender, not me. And you mentioned the sum of time to scrutinise potential borrowers too.

A mutual fund is hardly a perfect substitute for a commercial bank.

I never said it was, but it could be.

Économiste Monétaire

Oak3 wrote: »

He didn't distinguish between either, he said Banks. And you can't print a banknote without permission from the ECB.

You said "[t]he ECB prints banknotes" after stating the same for the Irish CB. It doesn't. This point is on their web-page. The aggregate number of banknotes is decided by the Governing Council (ECB board + NCB governors), but the ECB does not print banknotes. 'Banks' usually refers to commercial banks, I've never heard someone refer to a central bank by using the general term.

"Legally, both the ECB and the central banks of the euro area countries have the right to issue euro banknotes. In practice, only the national central banks physically issue and withdraw euro banknotes (as well as coins). The ECB does not have a cash office and is not involved in any cash operations. As for euro coins, the legal issuers are the euro area countries. The European Commission coordinates all coin matters at euro area level. For further information, see the European Commission’s website.

The ECB is responsible for overseeing the activities of the national central banks (NCBs) and for initiating further harmonisation of cash services within the euro area, while the NCBs are responsible for the functioning of their national cash-distribution systems. The NCBs put banknotes and coins into circulation via the banking system and, to a lesser extent, via the retail trade. The ECB cannot perform these operations as it does not have its own technical departments (distribution units, banknote processing units, vaults, etc.)."

http://www.ecb.int/euro/intro/html/index.en.html#issuance

Oak3 wrote: »

So generally diamonds for weapons is not economics then?

So I can understand what you're referring to when you say 'currency'. Otherwise, we're talking about completely different things, and the discussion goes no-where.

Oak3 wrote: »

Banks and banking are the monopoly.

Banking is a monopoly of banking? I still don't see your point about the IMF.

Oak3 wrote: »

You mentioned Joe-Soap lender, not me. And you mentioned the sum of time to scrutinise potential borrowers too.

Lenders: plural. Many people looking to lend money and many potential borrowers. Banks agglomerate these two individual-level desires.

Oak3 wrote: »

I never said it was, but it could be.

Then they would no longer really be a mutual fund, they would be a commercial bank... I don't really see your point.

Time Magazine

Torakx wrote: »

They point out the gold standard simply keeps control of the money flow with those who own the gold and stated that any currency based of a resource will eventually be susceptable to tampering due to the issue of control of the money.

I like Paul.

Pixel8

Flamed Diving wrote: »

I can't predict the future. I don't think anyone can, tbh. At least not long-term predictions, anyway.

Ya haven't heard of Edgar Cayce then?

Pixel8

Économiste Monétaire wrote: »

If I thought there was a better system, I would be arguing for it. What I don't appreciate is how videos such as Zeitgeist put evil symbolism around the banking system, and talk about how lending your money is such a terrible deed—as if you weren't already aware of what they do. Then economists are portrayed as people who attempt to 'hide' this 'fact' from the public, as if we're in on the gag. Most economists are nerds. Massive nerds, in fact; look at some old pictures of Ben Bernanke. They're about as far away from financial-elite as one can be.

I'd be more interested to hear what you think of The Secret Of Oz which is a documentary all about the banking system, its (dark) history in America from the 1700's to the present day and how some American presidents fought with the private bankers over control of the money supply throughout history. The private bankers ended up killing a lot of people to retain control of the power to change the 'quantity' of money in the money supply.

Bill Still the presenter claims that whenever the government had taken back control of the quantity of money in the money supply the country would prosper because money was printed with no debt attached to it but when the bankers took back control of the quantity of money in the money supply, depressions and recessions would set in as a result of the bankers charging interest to the government on every dollar printed. This would basically make the rich (bankers) get richer and the poor get poorer, and is this not what we see today?

How is the American system described in Secret of Oz similar to the Irish situation is what i wanna know? A similarity here is that our government also issue bonds which the banks exchange for money at interest to the government, so do we give non-government controlled banks control of changing the quantity of our money supply and therefore the power to create recessions at will or does our government print its own money? If we print our own money, why do we have a national debt? Why would we need to borrow money if we could print our own? Who controls the quantity of money in the Irish money supply?

Something is seriously wrong here and i think its beginning to come to light, at last. Who stands to benefit most from a recession?

Buy Gold or Silver fast if you have any savings left.

Pixel8

Économiste Monétaire wrote: »

IMF is a monopoly in what? Loans to broke Nations?

Just curious, have you read the book Confessions Of An Economic Hit Man by John Perkins? Great read, eye opening book on how America really took over the world with the help of the IMF and the corrupting of presidents of various countries, if you couldn't be corrupted, you were taken out.

Flamed Diving

Note that this forum falls under the category 'science', not for conspiracy theories.

Hasschu

Robin Wells and Paul Krugman wrote an article titled Our Giant Banking Crisis - What to Expect in the New York Review of Books. An excellent article that puts things in perspective by reviewing three books dealing with the crisis.

http://www.nybooks.com/articles/archives/2010/may/13/our-giant-banking-crisis/

Économiste Monétaire

Pixel8 wrote: »

I'd be more interested to hear what you think of The Secret Of Oz which is a documentary all about the banking system, its (dark) history in America from the 1700's to the present day and how some American presidents fought with the private bankers over control of the money supply throughout history. The private bankers ended up killing a lot of people to retain control of the power to change the 'quantity' of money in the money supply.

Bill Still the presenter claims that whenever the government had taken back control of the quantity of money in the money supply the country would prosper because money was printed with no debt attached to it but when the bankers took back control of the quantity of money in the money supply, depressions and recessions would set in as a result of the bankers charging interest to the government on every dollar printed. This would basically make the rich (bankers) get richer and the poor get poorer, and is this not what we see today?

How is the American system described in Secret of Oz similar to the Irish situation is what i wanna know? A similarity here is that our government also issue bonds which the banks exchange for money at interest to the government, so do we give non-government controlled banks control of changing the quantity of our money supply and therefore the power to create recessions at will or does our government print its own money? If we print our own money, why do we have a national debt? Why would we need to borrow money if we could print our own? Who controls the quantity of money in the Irish money supply?

Something is seriously wrong here and i think its beginning to come to light, at last. Who stands to benefit most from a recession?

Buy Gold or Silver fast if you have any savings left.

I won't be watching it because I have other, better things to do with my time. If someone wants to watch it and provide a running commentary for you, then I'll let them answer.

Pixel8 wrote: »

Just curious, have you read the book Confessions Of An Economic Hit Man by John Perkins? Great read, eye opening book on how America really took over the world with the help of the IMF and the corrupting of presidents of various countries, if you couldn't be corrupted, you were taken out.

I have read Perkins' book and it was a good read. Just like Harry Potter is a good read.

BESman

Truthrevolution wrote: »

Just out of interest when do you reckon will be the next financial crisis?

2:37pm, Thursday, 26th September, 2013.

Pixel8

Until the Federal Reserve is audited, i don't think any economist can claim to know about how the system *really* operates. Ron Paul has been accusing the Fed of bailing out Greece and the Euro, wtf?:

http://www.youtube.com/results?search_query=ron+paul+greece+euro&aq=f

The Secret Of Oz has the only solution worth considering and i bet Ron Paul has watched it.

Économiste Monétaire has loads of time to post on boards.ie but doesnt have 2 hours to watch The Secret Of Oz? Mmm, cop out. If you're really an economist prove the Secret Of Oz wrong, thats what the OP originally asked. Nobody cares about what you think about the system which we were all brought up to believe in, its the Secret Of Oz that was being asked about so until you have seen that, your opinion is irrelevant and off the point. You do seem to know your stuff though and so it would be more helpful to everyone if you actually did watch it and give us a more informed opinion. No point in trying to guess what points are being made in Secret of Oz by what we're telling you, you HAVE to watch it yourself.

I cant stand it when people have opinions about stuff they haven't even researched themselves, and they're going on old outdated information. The Secret Of Oz is being brought to everyones attention because it challenges what we thought we knew, including you ÉM. Bill Still obviously knows something that you don't know yourself and most of us didn't know either.

And thanks to the OP for investigating this further, after seeing the Secret Of Oz myself im as interested in this investigation as the OP is and im sure anyone that has seen it or will see it will want to know more too. Things are not as we thought they were...

Translate that video into a paper and I'll read it.

This is the way that serious, credible ideas are spread in both academic and professional economic environments.

Its the same as the way that I'll ignore some nutter on the side of the street claiming that he knows the secret of the holy grail, but I'll to go a debate on the manner. If you want to be taken seriously in economics, you present the information in a professional, well researched paper. If you won't take the time to do that, I won't take the time to listen to you.

BESman

What is the argument in this thread?

I can't make any logical sense of it which means it must really be complete ring talk.

Flamed Diving

I think the OP wanted an explanation of the fractional reserve system.

No argument.

Économiste Monétaire

Pixel8 wrote: »

Until the Federal Reserve is audited, i don't think any economist can claim to know about how the system *really* operates. Ron Paul has been accusing the Fed of bailing out Greece and the Euro, wtf?:

http://www.youtube.com/results?search_query=ron+paul+greece+euro&aq=f

The Secret Of Oz has the only solution worth considering and i bet Ron Paul has watched it.

Économiste Monétaire has loads of time to post on boards.ie but doesnt have 2 hours to watch The Secret Of Oz? Mmm, cop out. If you're really an economist prove the Secret Of Oz wrong, thats what the OP originally asked. Nobody cares about what you think about the system which we were all brought up to believe in, its the Secret Of Oz that was being asked about so until you have seen that, your opinion is irrelevant and off the point. You do seem to know your stuff though and so it would be more helpful to everyone if you actually did watch it and give us a more informed opinion. No point in trying to guess what points are being made in Secret of Oz by what we're telling you, you HAVE to watch it yourself.

I cant stand it when people have opinions about stuff they haven't even researched themselves, and they're going on old outdated information. The Secret Of Oz is being brought to everyones attention because it challenges what we thought we knew, including you ÉM. Bill Still obviously knows something that you don't know yourself and most of us didn't know either.

And thanks to the OP for investigating this further, after seeing the Secret Of Oz myself im as interested in this investigation as the OP is and im sure anyone that has seen it or will see it will want to know more too. Things are not as we thought they were...

First, the Fed is audited every year. Its accounts are on the Fed website. Second, the OP never referenced 'The Secret of Oz' in their first post, it doesn't appear on the first page even, so that wasn't what "the OP originally asked."

FYI, school-yard goading doesn't work on me , I have no intention of watching that.