[Volks]

At crucial points in the novel, a twitch occurs, and Jack assigns it significant importance. Later in the novel, Jack briefly espouses the belief that all life is "The Great Twitch".

[RAILhead]

I only use banks for checking and highly liquid savings. Everything else is in places like ING (I can give you a referral and you'll earn $10) and holdings.

[Fred_Cokebottle]

Good point but banks are corporations that employ hordes of people. I think they are essential for financial order and control in the larger economic scale of things.

[Cody Dawg]

Volks, you're one smart cookie.



I enjoy your posts.

I hate Bank of America, BTW.

You forgot to mention outrageous FEES for things.

Bank of America.

[wdlove]

I Love my bank which is USAA Federal Savings Bank. That treat me very well, joined while on active duty Air Force in 1974.

[Y3a]

Banks like insurance companies play games with money. They have convoluted computer 'systems' that don't even show you your accurate Account BAlance, but just a snapshot of yesterday. Insurance companies don't even has a single database, but numerous ones that are redundant, all to charge you more.

[TheoCryst]

I'm a newcomer to the world of banks, but so far I've been pretty satisfied with mine (Wells Fargo). Of course, I never have more than a few hundred dollars in my account at once, but I get a shiny card! Ooh... shiny... :drools:

[ambush]

Joy Of Capitalism #4

[ghporter]

Ummmm...Yes that's what they do. And it works. It's called "multiplying value." And for the chance to loan your money out, the bank pays you some sort of (usually pretty small) interest.

And according to banking regulations, they have to be particularly careful about how much they loan against real assets, because overextending the bank can get executives put in jail. Really. It can.

wdlove, was '74 when you joined the Air Force, when you left it, or somewhere in between when USAA made you an offer you couldn't refuse. 1974 was during the time USAA was "too good for enlisted people." They didn't even allow enlisted members until the late 1980s. Now they court every military member they can find, but I still won't have anything to do with them because of their early, elitist attitude.

[ShotgunEd]

and shops, they take a product, buy it in at a cheap price and like add money on to it just for selling it to you.

the nerve.

[Kevin]

Originally Posted by ambush

Joy Of Capitalism #4

Nothing to do with capitalism, as capitalism can exist without this.

[Busemann]

Originally Posted by Kevin

Nothing to do with capitalism, as capitalism can exist without this.

But capitalism has been a great playing ground for the greedy. Unfortunately, no system will ever be perfect

[::maroma::]

Originally Posted by Volks

Why do banks think we are all dumb a$$es?

They don't think we're all dumbasses, only most of us. And they'd be correct.

[Big Mac]

Originally Posted by ghporter

Ummmm...Yes that's what they do. And it works. It's called "multiplying value." And for the chance to loan your money out, the bank pays you some sort of (usually pretty small) interest.

And according to banking regulations, they have to be particularly careful about how much they loan against real assets, because overextending the bank can get executives put in jail. Really. It can.

wdlove, was '74 when you joined the Air Force, when you left it, or somewhere in between when USAA made you an offer you couldn't refuse. 1974 was during the time USAA was "too good for enlisted people." They didn't even allow enlisted members until the late 1980s. Now they court every military member they can find, but I still won't have anything to do with them because of their early, elitist attitude.

Yeah, the system works. Mature, stable banking is one significant reason why America has such an effective economy. In contrast, the lack of strong funding of banks for lending is a bane of developing economies - entrepreneurs would love to start and expand more businesses but cannot secure loans.

[Fyre4ce]

Volks, it's called the federal reserve requirement. Take a course in macroeconomics and you can't miss it. I'm not saying I like banks, but it's part of how our economy works. Here, read this. It might make you feel better:

http://en.wikipedia.org/wiki/Money_supply

[freudling]

To get you started:

http://www.geocities.com/northstarzone/FED.html

[TheMosco]

Here is a link to a comic book I had to read for my intro to macro class.

http://mike-m.org/images/The_Story_o...ary_Policy.pdf

Kinda cool and bad at the same time. Atleast they made an efforr right?

[Kevin]

Originally Posted by Busemann

But capitalism has been a great playing ground for the greedy.

Yes, you love money, you work hard, you'll get it.

[RAILhead]

Originally Posted by Busemann

But capitalism has been a great playing ground for the greedy. Unfortunately, no system will ever be perfect

[Cody Dawg]

ghporter: That's disgusting (about USAA bank) and enlisted people.





I wouldn't go there either. I think that the way that enlisted people were/are treated is disgusting sometimes. They give their lives in service (and sometimes in death) and the military doesn't treat them well. There are some enlisted people who are getting food stamps because their base pay is poverty level.

to Rumsfeld.

</rant>

[Busemann]

Originally Posted by Kevin

Yes, you love money, you work hard, you'll get it.

Tell that to teachers & nurses all over the world

Hard work does not equate wealth in a capitalistic system.

[cmeisenzahl]

This is somewhat topical to this thread.
http://www.lewrockwell.com/chernikov/chernikov16.html

[SimeyTheLimey]

Originally Posted by Volks

Why do banks think we are all dumb a$$es?

It's plain to see how banks operate.

Mr. customer walks into a bank and deposits $10,000. Mr. banker takes the $10,000 deposit and then thru "federal regulations" loans out nine times that amount, $90,000, to people knowing that most people will not demand the actual cash, but will just use checks. The bank writes a check to disburse the loan; people write checks to pay their bills. The people receiving those checks take them and deposit them in guess what? The bank. That $90,000 that the bank lends out at say, 10%, will make the bank $9,000 per year in interest.

The bank has made $9,000 off your $10,000 in one year, a real return of 90%. And what do they give you for allowing them to use your money? 0.60% in interest on your savings account. $60 for you, $9,000 for them.

On top of that, partly because of banks doing this, money is inflating at about 3.5% per year. So you are actually losing money thru the bank's "savings account." The real interest rate is -2.9%, meaning that after about 15 years or so, half of your "savings" is gone due to inflation.


Banks must think we're all really dumb that we can't see their game.

A flaw in this analysis is that you seem to think that checks (technically a type of draft) are not the same thing as cash. They are.

A second flaw is that you seem to think that banks make their money from lending to consumers. Mostly, they do not. Banks mostly lend to much larger investors than mom and pop. Your home mortgages and car loans are mostly funded by such things as pension funds and insurance companies. Those are called institutional lenders, and they are willing to lend money long term for a fixed, asset-based, low risk income stream. After the bank lends you the money it turns around and resells the loan to an institutional lender. So ultimately, it's pensions and insurance that lend out for most consumer debt. Banks are just the middle men.

The difference between a bank and an institutional lender is that a bank faces an immediate demand requirement. Deposit account holders are the bank's lenders. They are a type of lender who have the right to demand their money back instantly. That makes banking inherently risky. When banks loan out money they do so to people who have the right to keep it and repay it only slowly. Thus, a bank could be subject to a money crunch. They could face a demand from their lenders, but not be able to in turn demand money from their borrowers. There are two strategies to deal with this. One is the reserve requirement, but the main one is to sell those long-term loans as quickly as possible to lenders who don't face an immediate demand requirement and who are interested in a long steady income stream. The usually do this by packaging them up and selling them in a discounted process called securitization.

Banks mainly make their money by lending to other banks and to larger commercial borrowers. When banks borrow from one another it is through something called the interbank market. There are several around the world, the best known one is in London. If you have ever heard of the LIBOR rate, that is what it is. Long-duration commercial loans are in fact funded by a series of smaller-duration loans, typically of 90 day length. That (along with bonds) is what pays for industry, investment, power stations, factories, and so on. What makes the world go around isn't just money, it is the concept of borrowing short and lending long. That is what banks do for the economy.

The key point is that as a depositor you play a very important role in the economy. Economies don't work without banking. You can't fund investments on cash. In return, you the depositor get the convenience of a deposit account, the ability to earn a small amount of interest, and the right to apply for a small amount of consumer loans. But the real business of banking is below the surface, lubricating the wheels of the economy.

And finally, the reason why banks charge such low rates on savings accounts and even less (usually zero) on checking accounts is because you have that immediate demand requirement. One of the main factors in how much interest you can charge is how liquid the investment is. As an investment, demand accounts such as checking and savings accounts are completely liquid. You can demand repayment of the loan you made to the bank (which is what a deposit is) instantly, and in full. If you were willing to tie your money up longer (such as in a CD), you will earn more interest. Whether you realize it or not, when you decide what vehicle to place your money in, you are striking a bargain with your borrower, the bank. If you demand total access to your money, you are striking a very hard bargain. That's why the bank pays so little interest on those accounts.

[Cody Dawg]

Simey proves just how much he knows...again.

Sigh.

[Big Mac]

+5 Informative, Simey

[Kevin]

Originally Posted by Busemann

Tell that to teachers & nurses all over the world

Hard work does not equate wealth in a capitalistic system.

Buseman you forgot about the part where I said "love money"

Someone money hungry will probably not go into the teaching or nursing business. (BTW nurses don't get payed that horribly)

There are some people that believe money means alot. There are some people that don't.

Capitolism can support both these groups.

If someone wants to spend their life making tons of money, if that is what makes them happy, why should we deny them that?

[Busemann]

Originally Posted by Kevin

Buseman you forgot about the part where I said "love money"

Someone money hungry will probably not go into the teaching or nursing business. (BTW nurses don't get payed that horribly)

There are some people that believe money means alot. There are some people that don't.

Capitolism can support both these groups.

Well, I find that assessment a little naive but hey

If someone wants to spend their life making tons of money, if that is what makes them happy, why should we deny them that?

I think money can serve as a great motivator for almost everyone. But when people and institutions get greedy at the expense of others, like big business has a tendency to be, then that's a form of money lust that has been a detriment to society.

[RAILhead]

Right, someone has to pay for all the poor people, right?

[Goldfinger]

Originally Posted by RAILhead

I only use banks for checking and highly liquid savings. Everything else is in places like ING (I can give you a referral and you'll earn $10) and holdings.

What do you think ING is ? It's a Dutch bank.

But, yes banks are retards. Especially in France. I've got lots of stories on them.

[finboy]

Originally Posted by Busemann

But capitalism has been a great playing ground for the greedy.

Right. Ask Chairman Mao about that.

[Busemann]

Originally Posted by finboy

Right. Ask Chairman Mao about that.

You forgot about the part where I said "Unfortunately, no system will ever be perfect".

[finboy]

Originally Posted by Busemann

Tell that to teachers & nurses all over the world

Hard work does not equate wealth in a capitalistic system.

You mean "tell that to ... who chose their professions with full knowledge of the pay scale and continue to work in those professions." Wealth comes in many forms.

[Busemann]

Originally Posted by finboy

You mean "tell that to ... who chose their professions with full knowledge of the pay scale and continue to work in those professions."

Well, there's a growing shortage of people in such professions.

Wealth comes in many forms.

Yes, but one does not exclude the other

[JoshuaZ]

I get about 1% interest rate in Japan, and have to deal with a wildly fluctuating currency rate. Because of last month currency flux I lost around $200 sending back $2,000 back to the US.

[RAILhead]

Originally Posted by Goldfinger

What do you think ING is ? It's a Dutch bank.

But, yes banks are retards. Especially in France. I've got lots of stories on them.

Of course it's a bank — but he's referring to your local bank with which you do so much business with only giving .0000001% interest with their savings.

THAT'S why a lot of people go outside "their" bank.

[Kevin]

Originally Posted by Busemann

Well, I find that assessment a little naive but hey

If you are going to say such a thing, please explain why at least.

I think money can serve as a great motivator for almost everyone. But when people and institutions get greedy at the expense of others, like big business has a tendency to be, then that's a form of money lust that has been a detriment to society.

Those business usually end up having a long meeting with Karma.

I am a big believer in Karma.

But then again, that may be naive as well.

[ghporter]

Originally Posted by Cody Dawg

ghporter: That's disgusting (about USAA bank) and enlisted people.





I wouldn't go there either. I think that the way that enlisted people were/are treated is disgusting sometimes. They give their lives in service (and sometimes in death) and the military doesn't treat them well. There are some enlisted people who are getting food stamps because their base pay is poverty level.

to Rumsfeld.

</rant>

It ain't Rummy, it's Congress. Getting paid crap© for risking one's life every day is Congress' doing because they set the pay rates. It doesn't take much for an enlisted person to qualify for assistance, either; have a kid and be under the E-6 pay grade and you may just meet the requirements.

My biggest gripe with USAA is not that they did stuff in the past, it that they haven't, to my knowledge, said anything about how they were mistaken in their past behavior. USAA was founded by a bunch of Army Signal Corps pilots who couldn't get life insurance from anyone, so they built their own insurance company. That's fine-there were sources for insurance for their enlisted comrades.

But when they moved into other forms of insurance (car insurance, for example) and banking, they no longer had good reason to exclude enlisted people except for an elitist policy (it was their written policy) that they should be an exclusively officer-serving organization. When they started insuring anyone, they should have said that they were wrong to exclude enlisted people at all, but they didn't.

[Busemann]

Originally Posted by Kevin

Those business usually end up having a long meeting with Karma.

I am a big believer in Karma.

But then again, that may be naive as well.

Too bad that usually happens after the regular joes have lost their savings.

[euchomai]

I thought that said Tyra Banks thinks you're really dumb. I was about to go off!

[ghporter]

No, Tyra still thinks we're all "sweet." Unfortunately, that's girl talk for "you don't rate as a boyfriend, but you're useful in other ways."

[historylme]

Originally Posted by Goldfinger

What do you think ING is ? It's a Dutch bank.

ING is being good to me, I'm getting 3.75 on my $$, much better than my local bank.

[turtle777]

Originally Posted by Volks

And what do they give you for allowing them to use your money? 0.60% in interest on your savings account.

If that's all you could find, you are really dumb...

-t

[Volks]

Originally Posted by SimeyTheLimey

A flaw in this analysis is that you seem to think that checks (technically a type of draft) are not the same thing as cash. They are.

A second flaw is that you seem to think that banks make their money from lending to consumers. Mostly, they do not. Banks mostly lend to much larger investors than mom and pop. Your home mortgages and car loans are mostly funded by such things as pension funds and insurance companies. Those are called institutional lenders, and they are willing to lend money long term for a fixed, asset-based, low risk income stream. After the bank lends you the money it turns around and resells the loan to an institutional lender. So ultimately, it's pensions and insurance that lend out for most consumer debt. Banks are just the middle men.

The difference between a bank and an institutional lender is that a bank faces an immediate demand requirement. Deposit account holders are the bank's lenders. They are a type of lender who have the right to demand their money back instantly. That makes banking inherently risky. When banks loan out money they do so to people who have the right to keep it and repay it qslowly. Thus, a bank could be subject to a money crunch. They could face a demand from their lenders, but not be able to in turn demand money from their borrowers. There are two strategies to deal with this. One is the reserve requirement, but the main one is to sell those long-term loans as quickly as possible to lenders who don't face an immediate demand requirement and who are interested in a long steady income stream. The usually do this by packaging them up and selling them in a discounted process called securitization.

Banks mainly make their money by lending to other banks and to larger commercial borrowers. When banks borrow from one another it is through something called the interbank market. There are several around the world, the best known one is in London. If you have ever heard of the LIBOR rate, that is what it is. Long-duration commercial loans are in fact funded by a series of smaller-duration loans, typically of 90 day length. That (along with bonds) is what pays for industry, investment, power stations, factories, and so on. What makes the world go around isn't just money, it is the concept of borrowing short and lending long. That is what banks do for the economy.

The key point is that as a depositor you play a very important role in the economy. Economies don't work without banking. You can't fund investments on cash. In return, you the depositor get the convenience of a deposit account, the ability to earn a small amount of interest, and the right to apply for a small amount of consumer loans. But the real business of banking is below the surface, lubricating the wheels of the economy.

And finally, the reason why banks charge such low rates on savings accounts and even less (usually zero) on checking accounts is because you have that immediate demand requirement. One of the main factors in how much interest you can charge is how liquid the investment is. As an investment, demand accounts such as checking and savings accounts are completely liquid. You can demand repayment of the loan you made to the bank (which is what a deposit is) instantly, and in full. If you were willing to tie your money up longer (such as in a CD), you will earn more interest. Whether you realize it or not, when you decide what vehicle to place your money in, you are striking a bargain with your borrower, the bank. If you demand total access to your money, you are striking a very hard bargain. That's why the bank pays so little interest on those accounts.

Thanks for your reply. I liked reading it.



However, the fundamental flaw in all of our currrent banking is that it is predicated upon lending money that doesn't really exist. It doesn't really exist because it has no value. Banks simply create this extra money on their books at the stroke of a pen and use checking and electronic transactions to move the numbers they have created around.

It's easy just to say, "well if banks just create money like this and it helps grease the wheels of the economy, who cares?"

But the fraud is that the banks lend this valueless, created-money out to people in exchange for real money the people earn with their labor (the real value). When the people cannot earn enough money through labor to repay the banks for the use of the always-growing valueless money they just create on their books, the economy is bust. The banks or note-holders take everything, even though the money originally lent was just made up. It didn't really exist. This is a great business for the fractional reserve bank.

Let's take an example of a repossession of a house by one of these banks. The bank funds a person for a home loan for $500,000 to be paid off at 6% per year for 30 years. The person with the loan pays for 20 years and then is unable to make enough money to pay for the house anymore. After 20 years of the 30 year loan, the person paid $489,478.56 in just interest charges alone on the money that the bank created and lent. So the bank risked practically nothing to make this $489,478.56. But in addition, the person also paid 229,982.07 in principal. The bank has thus made $719,460.63 to date on money that is simply created on its books. The person had to work to earn this money he paid to the bank.

Once the seller defaults the bank doesn't give this money he actually earned back to him, but keeps it in addition to the house. It labels the house a non-performing asset and quickly dumps it off at a "loss" to someone else for 75% of the value. So, in addition, the bank makes another $375,000. The total the bank has made is $1,094,460.43 on a $500,000 home loan which was simply created on the bank's books. The $500,000 was never actually held by the bank in any substanial form.

It is this creation of money by the banks that also causes inflation to occur (the more money there is, the less value each dollar holds) that surely robs everyone of their savings after a short time, transferring their wealth to those who create the money supply, as noted in my original post. In essence, people's assets are being transferred to banks through the current banking system.

Economies existed long before this type of banking came into existance. I didn't say banking is bad and unnecessary. But this type of banking predicated upon lending money that does not really exist obviously wrecks economies in the long run. The analysis is actually pretty simple. What is complex are the ways that people try to hide from the fact that the money being created by banks really does not exist. Constantly inflating the money supply = disaster. There's no way to get around that. The government can try to control it for a little while, but they cannot stop it.

[SimeyTheLimey]

Originally Posted by Volks

Thanks for your reply. I liked reading it.



However, the fundamental flaw in all of our currrent banking is that it is predicated upon lending money that doesn't really exist. It doesn't really exist because it has no value. Banks simply create this extra money on their books at the stroke of a pen and use checking and electronic transactions to move the numbers they have created around.

It's easy just to say, "well if banks just create money like this and it helps grease the wheels of the economy, who cares?"

But the fraud is that the banks lend this valueless, created-money out to people in exchange for real money the people earn with their labor (the real value). When the people cannot earn enough money through labor to repay the banks for the use of the always-growing valueless money they just create on their books, the economy is bust. The banks or note-holders take everything, even though the money originally lent was just made up. It didn't really exist. This is a great business for the fractional reserve bank.

Let's take an example of a repossession of a house by one of these banks. The bank funds a person for a home loan for $500,000 to be paid off at 6% per year for 30 years. The person with the loan pays for 20 years and then is unable to make enough money to pay for the house anymore. After 20 years of the 30 year loan, the person paid $489,478.56 in just interest charges alone on the money that the bank created and lent. So the bank risked practically nothing to make this $489,478.56. But in addition, the person also paid 229,982.07 in principal. The bank has thus made $719,460.63 to date on money that is simply created on its books. The person had to work to earn this money he paid to the bank.

Once the seller defaults the bank doesn't give this money he actually earned back to him, but keeps it in addition to the house. It labels the house a non-performing asset and quickly dumps it off at a "loss" to someone else for 75% of the value. So, in addition, the bank makes another $375,000. The total the bank has made is $1,094,460.43 on a $500,000 home loan which was simply created on the bank's books. The $500,000 was never actually held by the bank in any substanial form.

It is this creation of money by the banks that also causes inflation to occur (the more money there is, the less value each dollar holds) that surely robs everyone of their savings after a short time, transferring their wealth to those who create the money supply, as noted in my original post. In essence, people's assets are being transferred to banks through the current banking system.

Economies existed long before this type of banking came into existance. I didn't say banking is bad and unnecessary. But this type of banking predicated upon lending money that does not really exist obviously wrecks economies in the long run. The analysis is actually pretty simple. What is complex are the ways that people try to hide from the fact that the money being created by banks really does not exist. Constantly inflating the money supply = disaster. There's no way to get around that. The government can try to control it for a little while, but they cannot stop it.

Please explain how banks "create money?" I take it you are not referring to a central bank, which is the national bank owned by the government that actually prints money. Only a central bank can actually make money in an inflationary sense. Private banks can earn money, and they can loan money, but they can't create it. They simply don't have that power. Every dollar that a bank puts on its books comes from some source external to the bank. That is money that "really exists" before the bank gets it, and it is certainly real when the bank handles it.

Typically, the money a bank carries on its books comes from deposits, loans, fees charged its customers, repaid loans, interest, or equity from the bank's owners. It has to come from somewhere because private banks don't have the power to print currency. Private banks cannot inflate the money supply because every dollar they have or could get was already in the money supply. They are part of the economy, not external to it the way a central bank is.

Maybe I am misunderstanding you but reading what you wrote, it seems like you are confusing interest charged with money created. Interest is nothing but a fee charged by a lender. It no more creates money than Apple creates money when it charges one of its customers for a computer. In both cases, there is a two way exchange going on between a buyer who wants something (money, or a computer) and a seller who wants to sell something (money, or a computer). Interest is the profit on a loan (and compensation for the opportunity costs and time value of money) just as profit is the profit on the sale of a tangible good.

I'm also getting the feeling from your comments about "substantial form" that you subscribe to the Marxist idea that value is the addition of labor to a physical good. That is incorrect. Just because you mix labor with a physical good does not make the physical good valuable. If you have any doubt about this, you can try an experiment. Go out to the local dump with a hammer. Find some unwanted trash, and hit it with the hammer. Keep pounding on it until you have expended several hours of labor. You may be surprised to discover that your additional labor has not increased the value of the garbage. It is still not something anyone wants, and therefore, it has no value. Value is nothing more than a relative measure of demand. If something is in demand, it is valuable. If it is not, it is not valuable.

Likewise, because value is nothing but demand meeting a limited supply, value can be added without expending any labor. Just holding an appreciating asset can do it. Appreciation is real wealth because it is a measure of increased demand. Appreciation on an asset is as real whether the asset is an existing house, a pile of bricks assembled into a house, a piece of land, heap of steel turned into a car, or a rare painting, or a bond reaching maturity. Any appreciation is a function of the increased value the market puts on the item. All that is is nothing more than people being willing to pay more for an item than they were yesterday.

On your example of a bank foreclosing on a house. It's true that the mortgagor loses the house. It is also true that the bank would typically sell the house rather cheaply. That is simply because houses being sold in foreclosure sales aren't valued very highly by buyers because they often have all kinds of problems. People who default on mortgages often defer maintenance, and so a foreclosed property is often a troubled property. This has nothing to do with the value of the original mortgage. The amount of money someone may have borrowed to buy a house has no bearing on what the property is worth when it is sold. That is determined by supply and demand. Again, wealth is not notional on a foreclosed house any more than a brand new one. It's very real, if, but only if, there is a buyer willing to buy.

In addition, how you can use an example of a foreclosure to say that lenders don't take risks when they lend is beyond me. Foreclosure is exactly the risk banks take. Lenders hate to foreclose, because it represents a bad loan that usually has to be offloaded at a loss and with a great deal of time and expensive effort. That, and the related need to be able to sell the mortgage on a secondary market (such as Fannie Mae) is why banks take so much trouble to screen borrowers. In addition, what they lose is the opportunity cost of their loan. Instead of making bad loan A, they could have made good loan B. There is also the Time Value of Money to account for. All of this is part of the costs and the risks of lending. In exchange, lenders charge interest, and then mitigate their risks by taking a security interest in the property so if the owner defaults, they have some source to look to to cut their losses. That's the purpose of foreclosure (although the actual mechanism can be complicated).

If any of the above misunderstands your position, I'd be interested in hearing what your actual position is.

[finboy]

Originally Posted by SimeyTheLimey

Every dollar that a bank puts on its books comes from some source external to the bank.

Central banks dictate the required reserve ratio (the amount of each dollar coming in that must be kept on hand in case of withdrawals). Once that amount is accounted for, the rest can be lent out over and over, creating money. There is something called the "money multiplier" that works here. If the ratio is 10%, then each dollar can create $10 in paper in circulation, essentially. Due to the wonder of checking accounts.

Otherwise, you're spot on.

[ghporter]

Originally Posted by SimeyTheLimey

Please explain how banks "create money?"

I have a spin on this: Banks CAN create "value." They do this by multiplying the buying power of the capital they hold through loans. This is NOT "creating money" at all, but it is indeed increasing the value of the bank's assets.

What so many people do not understand about money is that it is an abstract thing. The piece of paper or metal with some denomination on it is, today anyway, NOT a thing of value in and of itself. (There are a few exceptions, such as certain currencies that include a strip of precious metal in each bill, but they are indeed exceptions.) What IS of value is that the issuer of the paper or coin guarantees that they will back it with value. "Money" to most people is the paper currency or coins they use to buy goods and services-but they don't seem to have problems using checks or credit/debit cards... That is the essence of the abstraction: the "value" of currency is not inherent in the actual paper or coin, just as the value of a check or credit card is not inherent in the actual bank draft or plastic card.

This is Economics 101...but I guess too many people skip that class, eh?

[SimeyTheLimey]

Originally Posted by finboy

Central banks dictate the required reserve ratio (the amount of each dollar coming in that must be kept on hand in case of withdrawals). Once that amount is accounted for, the rest can be lent out over and over, creating money. There is something called the "money multiplier" that works here. If the ratio is 10%, then each dollar can create $10 in paper in circulation, essentially. Due to the wonder of checking accounts.

Otherwise, you're spot on.

Right, but as I understand it, the money multiplier is just the effect of money changing hands multiple times in an economy (as opposed to sitting unused in a reserve account). That unlocks value in the economy but it's not making new money in the way he was describing. Private banks don't literally add money to their books that wasn't already in circulation somewhere. By "in circulation" I am including the dollars the federal reserve system requires the banks to hold out of non-banking circulation. All that is is an indirect way for the government to control the money supply, and a way to ensure that private banks keep ome reserves so they don't overextend.

I think the confusion comes from the terminology. When we earn money, we colloquially refer to it as "making money." When money circulates, lots more people "make money" than would be the case without that economic activity. But the money itself (i.e. the currency) is already in the system somewhere. The only bank with a printing press (figurative or real) is the central bank. So it is not private banks who have the power to create inflation by flooding the economy with unearned money, rather, it is the central bank. That is, the government has that power, not the private sector.

But anyway, you are the economist, not me.

[SimeyTheLimey]

Originally Posted by ghporter

What so many people do not understand about money is that it is an abstract thing.

Actually, I would disagree with that. The biggest hurdle for most people seems to be understanding that money isn't just abstract. At least that was how I found it. People think there is a difference between money as a denominator of value, and a tangible thing (like a lump of gold) as a denominator of value. But in fact, both are just symbols for things that people desire and therefore value. A lump of gold, a car, a piece of land, etc. is no more inherently valuable than a pile of cash, or a check. The value of each is only created by demand. Lumps of gold, cars, pieces of land and so on don't demand themselves, so they have no inherent value. Their value comes from the same source as the value felt in money, so it is just as real, but no more.

Money becomes easier to understand if you let go of the idea that it is abstract. Think of it as a commodity that is bought and sold because that is what happens. When you do that, things like loans, interest, bonds, insurance, and so on become much easier to understand. You also avoid the trap of thinking that purely financial transactions, or transactions that purely involve an exchange of rights somehow aren't "real" the way a transaction involving widgets is real.

[ghporter]

Originally Posted by SimeyTheLimey

Actually, I would disagree with that. The biggest hurdle for most people seems to be understanding that money isn't just abstract. At least that was how I found it.

I think we're saying the same thing (or nearly the same thing) in different terms-and my Economic Vocabulary is weak at best. Money, value, and currency are complex ideas, and not enough people do anything to truly understand them at all.

If everyone understood the phrase "there ain't no such thing as a free lunch" then it would be an unnecessary statement. That would be a first step, I think.

[d4nth3m4n]

i take it you did better than i did in macro economics this semester...

though i do have to say, nicely done with keeping you're and your straight, it's screwed up so often online i had to re-read it a couple times before i was sure you'd done it right.