Not all of us. 
I actually agree completely with what you are saying here, and think going back to the Gold Standard would be complete lunacy. I think Cecil did an article on how money is made that is pretty much what you were saying there…if I get a break later today I’ll see if I can dig it up.
-XT
This is incorrect (or at least misleading), I think. When you deposit $1000 the bank can lend $900. The amplification comes into play when the borrower parks that $900 in a checking account at the same bank; that bank can now lend out another $810 and so on. (Checking a major bank’s 1998 Consolidated balance sheet just now, I see “deposits” almost equal to “loans and leases”.)
You’re correct about how the money multiplier works–though I would be stronger about the flaws in the example you’re correcting–it’s not just misleading to say Bank A gets $1k deposits and can then lend out $10k–that is just plain wrong. Individual banks simply cannot create money–lending out money you don’t have is fraud when I do it, and fraud when a bank does it.
The money multiplier only works because, as you point out, there are multiple banks–so that A lends out 90% of its deposits, which are then deposited in B, which lends out 90% of that 90% and so on–but it is just plain wrong to suggest any bank lends out money that wasn’t first deposited with it.
If this was linked to already, my apologies, but here is The Masters take on the question of how money is ‘created’:
(incidentally, since no one has ever asked, this is where I get the quote that I often paraphrase ‘we’d all go back to being hunter-gatherers’)
Here is another article he did that has more general info on the Federal Reserve, if anyone is interested.
-XT
Some thoughts
Of course the reality is that if the same system that ensures the value of your assets (i.e. the guy with the gun or the mob, or the feudal lord / warlord doesn’t take it away), is the system that ensures the value of any currency, metal based or not.
It’s not as if the history of metallic currency is devoid of government fucking around with the value (debasement of content, etc), so the entire bizarre American lunatic obsession with gold as a way to avoid state power is mere … actually not mere, gross ignorance and mere superstition. It is a prime example of superstitious, magical thinking.
Bloody hell, one needn’t call on some passing American president’s action. The history of metallic currency is replete with debasements - generally disguised and rather less transparent than any fiat currency manipulation. Only someone who’s utterly ignorant of this history can argue with a straight face that gold or silver as a standard is less prone to manipulation, etc.
Rather the contrary, “fiat” (versus what, magical?) currency in modern economies is subject to rational analysis and is rather more transparent.
Without getting into boring American specifics, I would say that money is what the financial system says it is, and the primary authority is in fact the Issuer - which is the government, not your Fed. The Fed or any central bank (And what the US Fed does is exactly what every central bank in the world - except maybe North Korea, but then that’s hardly a model) does.
Irrational American paranoia aside, international best practice relative to monetary practice is to give central banks free hand in monetary policy management. The other models have rather less than enlightening results on the long term.
In any case, you all should have a sense at least - if you decide to pursue an 'America is exceptional" policy - that other folks have converged on pretty much exactly what US Fed (and Bank of England, European Central Bank, etc etc) do because other approaches have failed and painfully so.
No it doesn’t. Rationalising currency - that is abandoning the atavastic gold standard - nothing more than a primitive and ignorant superstition anyway - has clearly done much to alleviate - indeed more or less abolish depressions.
No, I have no fucking idea where this is coming from, but bubbles have long pre-dated any governmental market interventions (the word artificial is bizarre relative to purely human built institutions). Bubbles arise from, it would appear, from sadly fundamental behavioural biases in investing arising from us being merely glorified chimpanzees with bounded rationality, bounded in very specific ways. To suggest that bubbles arise from government action only says one knows nothing about economic history.
No it doesn’t and to state so indicates one knows nothing about economic history nor bubbles.
It has not stood the test of time, in fact monetary history suggest it has always been a “lacking anything particularly better” as economies have boomed (or failed) due to the exogenous availability - i.e. nothing to do with their real efficiency - of some metal. E.g. Spain.
There is nothing to recommend a gold or metallic standard at all.
**Utter Bollocks
**
Plenty of Non European pre-colonial systems did not use either Gold or Silver as their currency base - there is a European obsession with gold and silver as value over a few thousand years, but Europe is not humanity and frankly an accidental fetish is not an argument for a universal standard. It’s pure superstition.
I would bet that the Wolf never comes to the door, being old enough to have heard the same kind of superstitious analysis in the 1970s, and those who opted for such superstition based investment lost significant value. Of course sadly many - most I think - were and are too unsophisticated to understand how much they lost.
This is spot on (and most of the rest of that comment with some quibbles).
Your right. I screwed up the math.
The end result is the same though. Collectively, the banking system creates more money in the system, more or less out of thin air. That is to say, it isn’t directly tied to an increase in some physical asset like gold or something.
But the question is, is there anything wrong with that?
I’d say it is creating money out of assets which aren’t being utilized efficiently, just like the phone company create bandwidth out of “thin air” in a SLC system. if everyone was spending their bank balance all the time, loans couldn’t be made on it - if everyone was talking all the time, you’d need one central office line per subscriber. Since they don’t, you can make it look like there are n lines of bandwidth b, while providing only n / s lines at the switch - where s is a number I used to know after I took my telephony course.
I understand that, I was objecting to the idea that the Fed just wires money to create it out of thin air. My understanding is that the Fed uses the reserve rates, the prime rate, and other mechanisms to control the money supply rather than just poofing it into existence.
I agree, I was wondering also where that idea was coming from.
Why would someone be so cavalier to deny history and the current consensus?
I have noticed that guys like Ron Paul also go for the gold standard and deny that there is global warming.
It seems that many libertarians are pushing a lot of those contrarian ideas lately.
I think the common factor is the mentality involved; they are all ideas that ignore the facts in favor of a fantasy that appeals to them. They all involve the same mental habits; a faith based view of the world. Don’t like the idea of global warming? Declare that it isn’t so, deny the evidence that it is. Don’t like government? Deny that it is necessary, and deny the evidence that says it is. Like gold? Claim that gold is a good standard for money and ignore any evidence that it isn’t.
Your understanding is incorrect.[
](Open market operation - Wikipedia)Emphasis added.
I want to note, also, that this process is different from what private banks do to “create money”. The Fed (and its equivalents in other countries) increases the monetary base. They do this with pushing buttons on a computer. The most useful metaphor for this process is “printing money” (that is effectively the idea), but nowadays the new money is created by simply altering the debits and credits on computer bank accounts, rather than by running the presses hot. After the monetary base is created by the Fed, private institutions use that new money base to loan funds, which causes the money multiplier. Private banks, with their lending, can expand the effective money supply many times past the base. This is why the base, created solely by the fiat of the Fed, is often referred to as high-powered money.
I’m getting off-topic, but it is interesting that the people who deny global warming tend to be the same people with flawed understanding of the monetary system, etc. etc. That’s why I think of America’s political divide as “rationalists” vs the “irrational”, rather than left vs right.
As extreme example and proof of the point consider this: the percentage of Americans who believe in UFO’s and the percentage who accept Genesis literally sum to more than 100%, even though the theories are incompatible. (Or do Christian fundamentalists think ET’s are the descendants of Cain? :dubious: )
No, demons or otherwise Satanic creatures, or so I was taught as a child. The “logic” being that since we were made in God’s Image, aliens are NOT in God’s image and therefore must be Satanic in origin.
On the contrary. Instead of tying the money supply to a single commodity, it’s effectively tied to all the assets in the economy.
Not exactly. Other than what people are keeping in their wallet, most of the money is always deposited in someone’s bank account. Yours, your bill collector’s, their employee’s, and so on.
The issue is when banks lend out money that can’t be paid back. A banks interest rate (or whether they even decide to loan to you) more or less reflects the amount of risk they associate with a loan. The riskier the loan, the higher the rate. If banks collectively fail to accurately assess this risk (as can happen with overly complex instruments like RMBSs), they effectively create a bubble. It creates a situation where people can invest much more in assets than the assets are worth (ie houses). The increased demand artifically drives the price up until the system can no longer sustain itself and collapses. There are more defaults than the banks anticipated, they have less money to lend, are less willing to lend it and are even in danger of failing.
Just incomplete. Issuing debt in the form of treasury securities is effectively creating money out of thin air.
They also tend to be people who think only jobs where you pysically make something with your hands are “productive” and college is a waste of time because you don’t learn nothin’.
Basically it’s people with a very myoptic view of the world. They understand the simple and narrow perspective they grew up with to be the “way things are”. They only accept evidence that supports that view and reject anything that counters it. They tend to be more right because resistance to change is the very definition of “conservative”.
Would it be accurate to say that most of the high-profile people pushing for a return to the gold standard are inflation hawks who are paranoid about rising inflation?
I was speaking of savings banks, not exotic investments. Reserves are to handle the problem of loan defaults, just as there is bandwidth to spare to handle times of higher than normal calling. And there are exceptional times - in emergency situations, where everyone is calling, some will get busy signals. Banks might have to get more capital to increase their reserves if there is a higher than expected bad loan rate. (Or reduce lending.) The big difference is that in the banking system, fear might cause a run, which is the reason for the FDIC. A run is much more likely to ruin a bank than bad debts (assuming a reasonable level of regulation, unlike the first banking crisis.) I suppose if someone wanted to be sure that their phone was working they could keep getting a dial tone when not needed, and thus cause buy signals, but that is a bit far fetched. I vaguely remember, back in the days of dial up, if you had trouble getting connected to your ISP you might stay on even if you weren’t doing anything, which made the problem worse.
Of course where the money gets deposited - checking accounts - is a lot more fluid than savings accounts, so the bank would lend based on average balances and float across all their clients.
Probably; but it seems to go a lot deeper than that.
I don’t think one needs to be an economist to understand that we are going broke. You can’t look at how many trillion we owe and say that, ‘It’s just a loan’…
There is a 70 or doubling rule. This based on the percentage rate of the loan. Now if we can pay it off and avoid interest that is one thing but if you do the math these loans are going to start growing like Jack’s bean stalk on miracle grow.
The gold standard kept us honest. We had the Great Depression because we had the gold standard. We would be in a great depression right now if we were still on the gold standard because we couldn’t borrow from the reserve bank. People would not be bailed out and would be destitute. Tricky Dick did a lot more then wire taps. He set this financial crisis in motion as soon as we got a president that has poor math skills.
Even Greenspan knows we are doomed. He should as this was his last ditch effort to save the economy that helped create the Fanny Mae’s. He just had no idea that the bankers would be so irresponsible on the issuance of loans. The banking rules went out the window and when that wasn’t enough we had to start a war or two to stimulate the economy and that isn’t enough.
I’m not into blaming any one person or institution. I think there must be better accountability of the nations money then the Federal Reserve. Any system can be abused.
So just so I’m clear–you’re saying a great depression would be preferable to what we’re going through now? Seriously?