Banks operate reckless scheme: it is simply not necessary. Here's SIMPLE idea to fix it all.

[originalpckelly]

As it stands, any chartered bank has the right to make loans based upon deposits. A well-capitalized bank under the FDIC's guidelines is a bank that keeps 10% of its deposits in reserve.

Inherent in that situation, is that in any scenario that would cause 10% of the deposits to be withdrawn from a bank, the bank fails. Our system has instituted programs like the FDIC, interbank lending, and the Fed (as lender of last resort) as an attempt to outrun this absolutely logical, provable thing.

However, there are always limitations. The cold hard fact remains: a bank is a house of cards waiting for a good wind to come along a blow it down.

We CAN solve this problem. As it stands, a bank lends out the deposits, while allowing people to keep their deposits on call. We can easily, easily solve this problem by giving chartered banks the ability to simply print money.

THAT ALREADY HAPPENS! Don't fucking freak! I know it sounds bad, and it opens the door to inflation, BUT THAT ALREADY HAPPENS! So cool the fuck down!

What we do, is let banks make money out of thin air, but only for the value of their deposits. We would do this, so that a rinky dink bank won't be able to just print up money without any restraint.

What it does is completely remove from the table the possibility of the money supply collapsing due to a bank failure.

If there's a big enough failure, the FDIC won't be able to pay back uninsured deposits. This will cause the overall money supply to collapse, because the money in the depositors accounts will vanish into thin air, because it was really loaned out to someone.

Even if the FDIC can resolve a bank, the loans the bank had may no longer be of the same value as the uninsured amounts. The FDIC would have to borrow money from the government, even just to cover insured amounts, as it keeps a very minute amount of money on hand to insure deposits (only about 1%, it's actually less than that now because the fund has been raided by all the recent bank failures.)

The problem with the FDIC borrowing money from the government, is that the government doesn't have the money, so it would have to borrow it from American private investors, overseas investors (both public and private) or the Fed.

Right now, we are approaching demand exhaustion in the treasuries market, because the stock market is perceived to be recovering, and investors can make more money in stocks than they can in a treasury, which for short terms rates, is less than one percent, and for longer terms higher, but lower than average, or the average rate of return in stocks.

BUT the problem is that the Fed can't raise rates, because if it does, the ARMs will reset higher, causing people's monthly payments to go up, and once again restarting the surge in defaults/foreclosures/evictions/house prices falling.

So, what could be done, is to kill off the possibility of a bank failure, by killing off fractional reserve banks. Allow people to withdraw all their money.

Allow banks to print money, but not off of deposits, but out of thin air (which it kind of already is.)

They will make as much money, and actually might make MORE money.

Savings and CD holders would still get interest, because a bank would be limited to printing no more money than it has in deposits. It might be lower interest, but on the other hand, loans would be cheaper.

Banks could still make as much money with this model, in both the sense of profits and expanding the money supply, but it has none of the stupid downsides of fractional reserve banking.

I still don't approve of credit, on the grounds that it allows corrective feedback to build up, but if we're going to do credit and loans, then we should do it this way, to protect customers AND banks. Both parties would benefit.

All I'm proposing is sort of like undoing the knot that's become the financial system.

[originalpckelly]

1. I've explained this once before...

but the thread cratered. It's such an obvious solution, and it really doesn't change much for either banks or consumers, except that it increases the stability of the financial system by solving this stupid ass problem.

[TreasonousBastard]

2. And they keep coming out of the woodwork...

one would almost think from this that banks only have personal deposits on hand and there are no commercial accounts.

Even then, it would be a screwy idea.

[originalpckelly]

3. Why is it a screwy idea?

Deposits are deposits, commercial or otherwise.

Banks already make money, all I'm saying is that the amount of deposits should be a limiting factor, not the actual "source" of money. It works the same way, except when there's a run on the bank by depositors.

[originalpckelly]

4. You better damn well reply, don't post a hit job and then run off.

Defend your statement that it's screwy, it almost sounds like you don't have a basic understand of fractional reserve banking.

[originalpckelly]

5. I'm waiting punk.

Go ahead, make my day!

[TreasonousBastard]

6. Actually, I do, but I also understand that you can't...

just immediately double the money supply without control. Or consequences.

You are proposing that banks lend money up to the amount of their deposits, but don't lend the money deposited and just write checks with nothing to back up the checks.

Right now, they are not creating money out of thin air but the deposits are backing the money they create, and that pretty much is all those deposits are good for, aside from depositors having a place for parking cash. Without that backing, the money supply increases wildly and and uncontrollably and inflation becomes rampant.

Effectively, they are sort of doing that now, since the "money" in the accounts are essentially notations in a ledger, and loans are simply other ledger entries somewhere. So, it's likely that in the short run nothing much would happen, but it wouldn't take too long for things to get out of control if they were able to issue loans without it affecting deposits. Deposits are much of their assets, and keeping both the deposits and the loans on the books as assets with no liabilities makes for strange economics and even stranger bookkeeping.

[originalpckelly]

7. Your understanding of fractional reserve banking is clearly not a macroeconomic one.

I can easily clear up your misunderstanding.

What happens if there is no FDIC and no Fed and people make a run on the bank?

The money that the people "had" is then found out to only be in existence in the form of loans, not the notional deposits. When the reserve of a fractional reserve bank is exhausted, the rest of the deposits in the bank poof into thin air. The money supply includes these notional deposits.

When the bank deposits go poof, then the part of the money supply they represented goes poof. This causes deflation.

This is what happened during the great depression. If you don't believe me, you can go look it up for yourself. I don't care how it is accounted for at the bank, from the macroeconomic perspective, what I say is absolutely true.

They wouldn't be affecting deposits, just the mirror image of the deposits. They wouldn't be able to lend our more money than the deposits.

The only thing that's different is that if a lot of people pull out their deposits, the money supply wouldn't collapse, there would only be a loan/deposit imbalance, and there could be regulations forcing banks to raise the interest rates they pay out to depositors to lure them back, but this would already happen, because the banks could make no additional loans.

[HamdenRice]

8. Aw, jeez

There's so much shit wrong with your analysis, it's hard to know where to begin.

But let's start with the "panics" of the 1800s. Do you know why they happened? Have you ever heard of banks issuing "notes" in the 1800s, which was pretty much like banks "printing money"?

Didn't work out too well, did it?

That's why Congress created the Federal Reserve.

[originalpckelly]

9. How is a bank issuing proprietary notes backed by specie comparable to Fed notes?

We would still use dollars, and they would be backed up by the full faith and credit of the federal government. The problem with your idiotic analysis is that you make the uninformed jump that I want banks to issue proprietary notes, like the ones issued during that time. They caused problems because not all banks would honor each other's notes.

The other problems you point to would actually be solved by my plan, again, as I said before.

These notes would not be issued based upon specie as those notes were, but rather would fiat currency issued with nothing to back them but the value of all the goods and services in the economy, which is what backing up money with the full faith and credit of the USA is.

To analyze something according to it be "backed" directly is an antiquated way of thinking about money. That's not how people deal with money. If fiat money is a universal good that can be exchanged for anything, then it is money on it's own two feet. Like I said before, our money is backed up by all the goods and services in the economy which can be purchased with it. We're on the good standard.

You seem to be assuming, yet again, that I'm a proponent of a gold standard or something.

There would be a major role of the Fed, it would act like MasterCard/PayPal/Visa in the electronic currency system this plan would necessitate, and already exists to some degree and can be proved by those companies.

The banks would issue dollars that are the same as today's dollars, they would even be called Federal Reserve notes, because the Fed would still need to provide electronic payment services to the banks.

[HamdenRice]

10. You took the words right out of my mouth...

"The problem with your idiotic analysis ..."

You're so out of the loop on history, finance and banking that arguing with you about your proposal is like arguing about evolutionary morphology with a creationist.

Notes issued by banks in the 19th century were not all backed by metal. They were like kited checks -- something like today's commercial paper. If they had been backed by specie, there never would have been panics.

If banks issued fiat currency tidat, no one would accept them as payment at face value. It would be Weimar.

Your proposals are all just dumb, but they're so dumb, they're so lacking in any basis in reality, that it's kind of pointless to show you how.

Again, it's like arguing about lunar geology with someone whose starting point is that the moon is made of greed cheese.

[originalpckelly]

11. Are you high? Greed cheese? Um, I hate to inform you...

but not specifically backing something with an actual specific asset makes it fiat currency or credit money:
http://en.wikipedia.org/wiki/Fiat_currency
http://en.wikipedia.org/wiki/Credit_money

Um, do you have a dollar bill? Would you please pull it out. On it, it says that "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE."

Um, notice that legal tender part there? Yes, that means that the dollar is a fiat currency. The stuff in banks is credit money, because of the fact that it's backed up by loan payments at a future date, but the fiat currency is multiplied over and over to make the credit money. So we've got some kind of weird ass hybrid system. My proposal is based upon an energy budget analysis of the economy. It's a little bit more advanced way of looking at things. Money is just a representation of energy, and the reason the money supply should never contract is that we're always acquiring new energy in the system that is the economy.

e = delta e (energy from raw minerals, crops and power) + constant e (energy that comprises most non-farm, non-power and non-mining transactions)

Farmers, miners (of things like oil, coil, natural gas and raw materials) and power companies with geothermal, solar, and wind assets add energy to the system.

Yes, I know about the notes, they were not backed with enough "money" as they considered it (specie/commodity money) at the time back then, so it was like a fractional reserve bank, which is what I'm arguing against again.

I would, by the way, eliminate checks altogether, and switch to a system of electronic bank cards, and bar coded paper money for situations where electronic transactions cannot be processed. Banks would apply for new note serials from the Fed, and the Fed would check to make sure the banks have enough deposits to back them up.

The problem with you, is that you're working on 20th century economics, and I'm working with an advanced 21st century theory.

I realize that my system is practically no different than the current system, save for the fact that it eliminates deflationary spirals caused by bank failures.

All physics cares about is that the energy that money represents is conserved, and with my system, it operates like a black box. If you do the e = delta e + constant e analysis on a bank in my system and the current one, in all situations it's the same, save for bank panics. Fractional reserve banks cause deflation when the observer (in this case the depositor) collapses the superposition of the money in the bank as deposits, which causes the overall money to energy ratio of the system to increase, causing the money to represent more energy, causing the money to be more valuable, causing deflation. If you've ever heard of Shroedinger's Cat, that's what a fractional reserve bank is most of the time. It's like never opening the box the cat is in. Withdrawing one's money from a bank during a panic acts like opening the box and observing the cat dead/alive.

So my dear friend, you can see how your primitive analysis is inferior to mine, and you now see why my system is absolutely no different.

[HamdenRice]

12. uhhh...

Your proposal is insane.

That is all.

[originalpckelly]

13. Basically, you are calling the current system insane.

The only difference between my proposed system and this one is the behavior of it during a loss of confidence in the banking system.

Example town 1 has 100 people and $100 in M0. The money in the town is equally held by all the people, and they all deposit their $1 in example bank 1, a fractional reserve bank. The bank can loan out $90 and be a well-capitalized bank by FDIC standards. The total supply of money in the economy as measured by M1, is now $190.

If example town 2 has 100 people and $100 in M0. The money in town 2 is equally held like town 1. The all deposit their $1 in example bank 2, a fully callable reserve bank. The bank applies to the Fed for new serials, the Fed approves $90 (less than the full $100 for a safety margin) in serials. The serials then go out in the form of loans. The town now has $190 in M1.

The slices of the pie that is the total energy in the economy is the same, 190, but the difference comes when there is a bank panic.

People in example town 1 lose confidence in example bank 1. Then run to the bank and pull all of their money out...but wait! The money is not all there! Example bank 1 loaned it out! So the money supply collapses, and M1 becomes $100 again for example town 1.

While no one would have any reason to worry about a fully callable bank, for some reason the people of example town 2 lose confidence and decide to pull all their money out of example bank 2. They remove all their money. That's OK, because the bank has it all there.

M1 for example town 2 is the same as it was before all the people pulled their money out. The bank can no longer make any loans, however.

M1 contracts when loans made do not come in as expected, as it should be, because the expected transaction that the recipient of the loan took out didn't occur, and while we may not realize it, this is usually because the growth of energy in the economy didn't occur as planned. A harvest didn't produce as much as thought, so the loan can be fully repaid then. That's OK, because the bank doesn't need it to be repaid for liquidity concerns. The power plant isn't as efficient as thought, and the loan can't be repaid, which is OK, because doesn't need it for liquidity for depositors.

Now, you notice how I said M1, and not M0. That's where this fully callable system is different. Electronic serials would be M0 from the start. Paper money and electronic transactions would both be described in the change of ownership of the serial. Paper money would have a bar code on it describing this serial number. When paper money is withdrawn, it would go to an "in circulation" ownership status, and would be able to be exchanged without electronic approval. That makes sense for hot dog carts and other vendors who don't want to pay for their own electronic transfer system. However, this electronic currency system would reduce greatly the ability of a robber to use the fruits of their robbery. A robber could steal a note from a big store, but if the ownership status of the serial is still at the store, then the money is useless for transactions where there is interaction with a store capable of processing electronic funds. The only way they could use it is an off the radar system.

The bar codes would make it easier for cashiers to deal with money, they could just scan it like any other thing they deal with.

Coins wouldn't be on this system, and it might be necessary to eliminate them, and come up with decimal bills, like $1.25, $1.50, $1.75.

This would also provide an effective method for the blind to use money, because instead of putting some kind of braille type thing on it (which might be worn out and cost lots of money to develop), they can swipe it over a special scanner that has a computer in it that will read aloud the value of the bill. It should be possible to arrange the bill on the scanner by aligning the face.

Counterfeiting would be more difficult, because you'd have to know serials of "in circulation bills" and you wouldn't be able to counterfeit money without putting serials from notes you already have on it. You could never use counterfeited money at a place with electronic processing, in sequence. So it would help crack down on counterfeiting, by making it more difficult, as you'd have to spend it on non-electronic processing vendors, and they would tend to not have enough money to cash big bills.

My idea uses existing technology, and it would relieve the problem of modern electronic currency, which is what Visa and MasterCard act like. Interestingly, they're much like those bank-specific notes you cited from the 19th century, because they're proprietary solutions. Not all places take Visa or MasterCard, and you can be SOL if the place you are doesn't take one or the other.

In many ways, credit probably originally developed as a solution to eliminate the logistics of moving around paper or commodity currency.

[HamdenRice]

14. I'll pass your "brilliant" proposal on to my old pal Tim Geithner next time I see him

I'm sure the entire world will jump at the chance of adopting your world wide banking solution because it's self-evidently such a quantum improve over existing reality.

That said, it seems you fundamentally don't understand banking, banking crises or runs. If a bank has $100 million in deposits and $90 million in loans, mass withdrawal does not cause the bank to fail. That's your basic misunderstanding. The reason the bank doesn't fail is that the $90 million in outstanding loans constitute the bank's assets.

All the bank has to do is sell the loans to some other institution -- and presto! it has enough money to pay all its depositors. That's because there is a national market for loan paper. Fannie Mae helped create a national market in mortgage paper decades ago.

A banking crisis only occurs when the bank holds assets that have declined in value because of foreclosure, or when there is no longer a market for that kind of asset.

We are experiencing both of those phenomena right now. But that is not a normal condition of banking and has rarely happened in the past.

Your proposal would simple create hyper inflation. But hey, I heard that Weimar had some great nightlife and cabarets.

[originalpckelly]

15. "mass withdrawal does not cause the bank to fail"

Um, yes, yes, it does. I don't know what reality you're living in, but if the FDIC didn't seize poorly capitalized banks, they would fail and the money supply as measured by M1 would collapse. You're completely full of crap. I'm not talking to you until you admit, that in the absence of a lender of last resort, short term interbank lending (not buying of assets), or the FDIC, a bank would collapse if it's reserves became depleted.

OF COURSE THE LOANS ARE ASSETS AND GET SOLD! The problem is mostly like you said, that when a large number of banks collapse, the ability of the banks to sell of their assets at full value is greatly decreased, causing the money the depositors had in the bank to go "poof!"

The money supply then collapses. There's also an important period between when the bank stops allowing people to pull out their money and when the assets are sold for full or partial value, in this period the supply of money to the people collapses beyond the 10% a well-capitalized bank keeps on hand in liquid form. This fear causes the people who use the bank to freak out, it causes others to freak out. It's like a house waiting to blow down.

Uh DUH! That's the problem, the money simply cannot be given out, because the bank lacks liquidity to do it. It has to sell the assets on the market at lower values, destroying the wealth of the depositors, which was tied up in a loan of some kind.

That's the house of cards, M1 collapses in a banking panic, because the value of the assets decrease as there is a flooded market.

No, my system would NOT create hyper-inflation, again, because from the perspective of M1, the money supply stays the same. Only M0 changes, and since we are in an electronic economy, it has already changed in reality.

"All the bank has to do is sell the loans to some other institution -- and presto! it has enough money to pay all its depositors. That's because there is a national market for loan paper. Fannie Mae helped create a national market in mortgage paper decades ago."

Not now, as you admitted. That's what's wrong with this system, it relies on banks being able to sell the assets, or even the FDIC, but if the market is flooded with supply, or people are afraid to buy them, because they don't know if they'll be next, then the model of protection fails.

My plan is sort of like making every bank a central bank, because it already is to some degree, as it increases M1 when it makes a loan. You're pretty fucking dense if you can't get this by now.

Tim Geithner needs to find better friends if he hangs out with a dude who is incapable of using the English language properly, is intellectually dishonest, incapable of real creative thought, and repeats wrote what he was drilled into thinking at school.

I would like to finish off by saying that you are obviously incapable of realizing just exactly why the fuck Fannie was such a bad idea. Banks should only be able to loan out their deposits. I don't give a shit about a fucking movie, like you mentioned in the other thread. It's A Wonderful Life is just that, a movie.

It doesn't take into account the motive on the part of banks to loan out to anyone who they can loan to, so that they can increase their profit margins. When you take away the self-regulation of not fucking up a limited amount of money, then you let the invisible hand slap America. Fannie degrades loan quality, so did the other non-depository loan originators. I can just tell from you talking that you were somehow involved in all this, and have an unchangeable impression of banking in America. That's because it is working for you. Not so much for the people who are out there in the streets as I type, living in tent cities. Not so for the investors of the banks that had to be taken over because of the way an ABS/MBS/CDO works. This system separates the people making decisions about money from the people who suffer the consequences of it, and that's wrong, and will only lead to more problems.

The pathetic attempts of the government to prop up the economy will fail, because they will eventually exhaust their capacity to borrow at a reasonable rate.

The problem here is that they can't escape the inefficiencies in the economy caused by investors planning the allocation of capital, and managers planning the allocation of labor and resources. After all, from the Fed on down, there is all kinds of central planning going on. What's funny is that all these people claim to be capitalists, but the way a firm actually works, it's really not a capitalist system. It's a collectivist system, only instead of re-distributing wealth to workers who laze off, it goes to investors and managers.

[HamdenRice]

16. You're clueless

"in the absence of a lender of last resort, short term interbank lending (not buying of assets), or the FDIC,"

"In the absence of any oxygen on planet earth, all mammals will die. Therefore planet earth is inhospitable to mammals."

Idiotic assumption on your part. You don't even know the difference between reserves and assets.

There is no reason for me to read any further into your nonsense and insanity.

But about your "proposal" -- was it transmitted to you from an alien planet or the CIA through your dental filings? Just curious, because your writing and "ideas" are the sort of thing usually associated with those kinds of "transmissions."

[originalpckelly]

17. As we all know, the FDIC will be able to borrow money from the government...

when it cannot sell off the assets of a bank it has seized, because too many banks have failed, flooding the market for assets, and dramatically lowering their prices.

It will not hit the lending wall. The government can keep borrowing money, even if the last treasury auction showed signs of demand exhaustion at the offered discount rate. And uninsured amounts will not go unprotected, although they are after all uninsured. No one should be worried that banks didn't pay any premiums to the FDIC for ten years between '96 and '06, when every fucking fool thought things would only go up, up and away, and now the FDIC has only $19 billion in its insurance fund to cover $4 trillion in liabilities.

The uninsured amounts will not be SOL. M1 will not go poof.

Banks will not be afraid to lend money to one another because they're afraid they may need the liquidity themselves in a few days/weeks.

The Fed would not be placed in a precarious position of having to disclose the discount window recipients, even though the mob is getting pissed and wants to find out, and this will not cause banks to stay away from the facility for fear their names could be released at a future date, even if it never happens. We all know, no one listens to those hearings where the idiots with the ability to make laws ask this kind of thing.

Sometimes there is no oxygen, sometimes there's only methane. In our history we've experienced a massive contraction of the money supply, and just recently interbank lending came to a halt. The facts I state about the recent treasury auction and precarious position of the FDIC's fund are true. There are times when you just can't outrun the energy budget math, and money is just a representation of energy, if the increase in the system's energy is not greater than its losses, then we have to lower our living standards until the deficit can be accounted for.

[originalpckelly]

18. Here I am sitting in bed, and I realize that you don't understand M1!

When a bank no longer has enough liquidity to allow people to withdraw their money, the loans of the bank become one and the same value as the notional deposits.

That's the problem here, because M1 is accounted for as both the amount of loans and the notional amount of demand deposits. When the amount of notional deposits becomes the same thing as the loans, once the reserve of the bank is run through, the amount of money as measured by M1 decreases. That's the problem with the way you're thinking.

M1 = currency in circulation (which includes M0 the monetary base + loans) + demand deposits (which collapse down to loans when a bank must sell off it's assets, after reserves have been depleted)

Now, in America, the Fed uses the term M1 to describe something a little different, but in general analysis, this is what they're called. I'm really quite disappointed that our schools are not teaching students this most basic knowledge.

You may dispute what I'm saying, but this is really an axiom. I hope you get this by now. When a bank must sell off assets to pay depositors, they must destroy money, because the money supply as measured by M1 includes both the notional assets of the demand accounts AND the loans, which are money in circulation along with physical currency. That's assuming the assets can be sold for full value, which in a glut of assets caused by a bank panic, is not true. Supply exceeds demand, so the price of the assets decreases, and the depositors cannot be fully repaid, and money is destroyed.

I'm not going to debate you anymore about this, it's silly for you not to admit what I'm saying is true.