G Edward Griffin, wtf? Listened to a speech and he was wrong about fractional reserv

[Josh_LA]

Crap! I just read your opinion about Money as Debt. Did I use the wrong tutorial?

Are you still going to start a bank thinking you can lend out $1000 the minute somebody gives you $100? Or not?

 

[Josh_LA]

Money As Debt says that a bank can get $1,000 and turn it into almost $90,000 worth of loans, because that $1,000 is high powered money from the Fed. They can use that type of reserve to create a loan to themselves for $10,000. They in turn can loan out $9,000, customer deposits, process repeats, etc.

I don't know what HPM is, but I assume it means "real FRN" created, that is solid in backing.

go back and look at Fox's pictorial, you'll see, you're thinking Scenario C, but the reality is closer to Scenario B.

 

[brandon]

he's explained this in detail before, and he understands how the system works.

The only reason he says what he says is because when you start talking about technicalities of how/why the banking system, as a whole, can create that $900 out of $100, most people will be bored, turned off, or asleep, and you've lost your audience at that point.

really, the bank can only loan out $90, then the second, $81, and so on.....the key here is, they're not actually loaning out $90 of the $100, they're loaning out $90 in totally new money...so, when they make the $90 loan, there's actually a total of $190 in the economy now.

edit: made this a while ago to help people visually see how the banking system works:

The Money as debt video is...atrocious IMHO--it comes close to the truth, but then perverts it just enough to point you in the wrong direction and thinking the wrong thing.

edit edit: there's a mistake in the image I made; I do believe scenario A does exist, but only in the instance of a credit union and not a bank (I could be wrong though).

I believe A is actually the correct scenario. If B were the correct scenario, then no bank would ever fail. Why would a bank need FDIC insurance when it always has full deposits in it's vaults at all time?

And scenario A does cause inflation because it expands M1.

 

[wizardwatson]

I believe A is actually the correct scenario. If B were the correct scenario, then no bank would ever fail. Why would a bank need FDIC insurance when it always has full deposits in it's vaults at all time?

And scenario A does cause inflation because it expands M1.

I have to agree with Brandon here. I believe it is scenario A that is what is occurring. If Josh or Fox think its B, you need to explain it in terms of assets and liabilities because the "What the bank THINKS vs what the customer THINKS" doesn't really mean anything to me.

If a bank kept the $100 as reserve and then loaned out $90 anyway, there would be no liability against that asset (asset being the loan), and the accounting would be fraudulent.

Now the bank could borrow the cash for the loan from another bank in order to even the liability, but that's not what you guys are saying.

 

[Josh_LA]

I believe A is actually the correct scenario. If B were the correct scenario, then no bank would ever fail. Why would a bank need FDIC insurance when it always has full deposits in it's vaults at all time?

And scenario A does cause inflation because it expands M1.

wrong, in both A & B, banks fail as soon as too many people come asking for cash.

Scenario A and B are only different in that what they report as usable cash.

 

[Josh_LA]

Now the bank could borrow the cash for the loan from another bank in order to even the liability, but that's not what you guys are saying.

We don't need to say that, that's what they do.

And their accounting IS essentially fraudulent in the sense that customers are completely unaware their money is being lent out, or else they'd never agree to deposit the money.

A & B really only differ by ONE THING, what banks operate on. B is the bank claiming they didn't lend it out, or not admitting to the public they've lent out such huge amount.

 

[Josh_LA]

I believe A is actually the correct scenario. If B were the correct scenario, then no bank would ever fail. Why would a bank need FDIC insurance when it always has full deposits in it's vaults at all time?

And scenario A does cause inflation because it expands M1.

If banks declared and admitted they operate on scenario A or B (which is a fact), people would bring guns and ask for their money back IMMEDIATELY.

This is why banks generally don't lend out 90% right away if they have ANY IDEA that people will come asking for money. But they do it if they can get away with it (and they lend out more if they can get away with it as well).

Yes, their accounting IS fraudulent, otherwise any oversight would keep reminding them to stop lending when it looks like they're failing from a mile away.

B does NOT mean they have full deposits, it means they ACT AS IF THEY DO OR LIE TO CUSTOMERS THEY DO.

If they operated on A, they wouldn't fail either (or they'd see it coming), as banks wouldn't be stupid enough to put themselves at risk knowing there's no safety net to protect them.

A is the most honest system that won't work, but won't fail a bank.
B is the fraudulent scenario where it can work until some people get smart.

 

[The_Orlonater]

I got a question about scenario b, how would the bank be able to keep $100 after it just lent out $90?

 

[gonegolfin]

I don't know what HPM is, but I assume it means "real FRN" created, that is solid in backing.

go back and look at Fox's pictorial, you'll see, you're thinking Scenario C, but the reality is closer to Scenario B.

"High powered money" is simply the reserves the Fed creates when it purchases securities. Of course these reserves comprise most of what is termed the monetary base.

MB = C + R

C = currency in circulation
R = bank reserves

Brian

 

[Josh_LA]

I got a question about scenario b, how would the bank be able to keep $100 after it just lent out $90?

they don't.

they just say they have it.

or, they digitally wire a bank $90 (and keep $100 cash in hand and act like the wire never happened).

The next bank tells Fed Res "that first bank wired me $90" and the Fed Res delivers them $90 in cash, so now both banks have cash, one with $100, one with $90.

 

[The_Orlonater]

they don't.

they just say they have it.

or, they digitally wire a bank $90 (and keep $100 cash in hand and act like the wire never happened).

The next bank tells Fed Res "that first bank wired me $90" and the Fed Res delivers them $90 in cash, so now both banks have cash, one with $100, one with $90.

So this is inflationary, correct?

Scenario A is the one that is going on. In the end this makes inflation because eventually the number will get to or, below zero?

 

[Josh_LA]

So this is inflationary, correct?

Scenario A is the one that is going on. In the end this makes inflation because eventually the number will get to or, below zero?

No, Scenario A doesn't cause any inflation, scenario A means the bank HAS TO TELL EVERYBODY they don't have such money on them (so they will not be allowed to operate as people won't let them lend out that money). And yes, eventually the money ends when the number gets too small, that's called a LIMIT, or else we'd be EVER MORE inflated.

 

[Josh_LA]

So this is inflationary, correct?

Scenario A is the one that is going on. In the end this makes inflation because eventually the number will get to or, below zero?

the only difference between scenario A and B is not a world, but the perception money is still there when it's already used somewhere else.

 

[icon124]

This is correct and is in alignment with what I posted earlier here ... http://www.ronpaulforums.com/showpost.php?p=1865473&postcount=32.

The above is also in alignment with the video cited in this thread. The video does not break the process down into its component parts, but it does illustrate the end result after the process reaches maximum leverage ... which as I pointed out many times is rarely the case in real practice.

Brian

Brian this has been said 4-5 different times in this thread, but the only person people seem to believe is you. Maybe it's because you have a hell of a lot of patience for people.

Very misleading, if true. I know I am not the only person who interpreted FRB in this way.

See like I said before...as soon as Brian says the samething 5 people already tried to tell you, it suddenly becomes true....hmmmm LOL

Okay I looked at the Money as Debt video again. It appears we're both right.

Central banks (The Fed) can and DO loan out by multiplying by the reserve ratio of 9 to 1 . So, if a central bank opens its doors with 1,000.00, it can loan out 9,000.00. The person it loans this to can write a check, spending the money. The check goes into yet another bank, that isn't a central bank so it cannot loan out at a multiplied 9 to 1 ratio, like the central bank, instead it is divided by a reserve ratio of 9 to 1 meaning of the 9,000.00 that was just deposited, 8,000.00 can be loaned out.


Right?

Both videos, the Mises one and the Money as Debt one clearly state that the Fed can loan by mulitplying the reserve ratio of 9 to 1. So we're both right.

Is this the cartoon movie? I have no idea what you are watching here, but obviously you are misinterpreting something somewhere in that movie.

First the Central Bank multiplying the reserve ratio by 9 to 1 makes no sense at all. The Central Bank doesn't choose a 9 to 1 ratio, they can add whatever amount of money they want, whenever they want. They don't open any door and have that money multiplied...they simply add money whenever they feel it is neccesary (or reduce, but that's going further than needed).

The person they write this check to (which is rarely the case...they hardly ever buy bonds directly from the public, but that is probably getting to far ahead) for whatever amount of money can take the money and deposit it into a bank. OR the Central Bank can deposit reserves directly into banks.

The difference between the two is that in the first case buying bonds from the public directly effects the money supply, and in the second case adding capital to a bank only effects the monetary base.

And no your both not right, whoever the both of you are. The central bank doesn't use a multiplier...only banks that have this reserve requirement. I'm going to try this one last time...THIS IS THE CORRECT ANSWER...believe it or not...I'll even use recent examples to try and get this explained better.

Let's say the Central bank decreases the interest rate by 50 basis points. Decreasing this rate means they must add more money into the system. Let's say it would take 20 billion dollars to decrease this fed funds rate by 50 basis points. So, knowing this, the Federal Reserve decides to give Bank of America 20 billion dollars. This would be the first area you aren't understanding. As you can clearly see the Fed doesn't write checks and multiply by 9, they simply just add money to a bank.

Okay, Bank of America now has this 20 billion dollars. 10% of this is required reserves, so BoA has to keep 2 billion dollars on hand, and can do whatever they please with the other 18 billion dollars. From here they can loan money, invest in securites, keep this money as excess reserves, etc. IF Bank of America decides to loan the 18 billion dollars (let's say they do it all in one loan...unrealistic but let's keep it simple) to consumer A, consumer A now has the option to spend the 18 billion or deposit it into a bank. This is where the movie makes it really way to simple. They assume consumer A deposits this money back into the bank. If this is done 18 billion goes into the banks deposits, and out of this 18 billion Bank of America only needs to keep 1.8 billion in required reserves. Now this is where the movie gets way way way to simple because they now assume Bank of America will again loan this 16.2 billion (18 billion - 1.8 billion RR) to consumer B and consumer B will inturn deposit it back into the bank. The movies assume this happens 9 times or so, which would give you the maximum money multiplier. Realistically this never happens...at most the multiplier in between 2-3.

I think you are mixing up the definitions. What the movie is saying is that the Federal Reserve could possibly in THEORY play an inderect role in multiplying the money supply by 9. They NEED the banks to do this. They can't multiply what they add to the system...the banks have to do it on their own. The movie gives you, again in THEORY, the worst possible sceneario.

And one more time just to reiterrate. The Fed can either directly inject money into the money supply by buying from the public, or they can inject capital into banks only causing an increase in the monetary base. These are TWO DIFFERENT THINGS. They cannot be confused...which they are all the time...when you hear all of this crap about inflating the money supply...that is simply not true at all...the Fed is inflating the monetary base...which causes no inflation until this base is multiplied into the money supply...by lending, etc.

oh before anyone gets to technical...they fed injects money into banks by buying "securities" from them.

 

[Fox McCloud]

If scenario A were truly the case, then you would hear few, if any people complaining about it, except for the still existent possibility of a bank-run; aside from that, how could inflation occur under scenario A?

I'm not the top-expert on the topic, but G. Edward Griffin does explain FRB in further detail in his book; it's all about how the bank classifies things and how it appears as book entries--in the end, everything is balanced and "ok", but in actuality, it's...not, at all.

edit: also, banks can still fail under scenario B because the minute a loan is made, there is more money than the bank has on deposit (ie: $100, loans out $90...there's now a total of $190, when, in actuality, there should only be $100).

 

[gonegolfin]

The person they write this check to (which is rarely the case...they hardly ever buy bonds directly from the public, but that is probably getting to far ahead) for whatever amount of money can take the money and deposit it into a bank. OR the Central Bank can deposit reserves directly into banks.

The difference between the two is that in the first case buying bonds from the public directly effects the money supply, and in the second case adding capital to a bank only effects the monetary base.

Regardless of whether the Fed purchases treasury securities from one of the primary dealers (nearly always the case) or from a member bank on behalf of a client, the result is the same ... the proceeds are credited to the reserve account of the selling member banking institution (either the primary dealer or the member bank representing the seller).

Brian

 

[icon124]

Regardless of whether the Fed purchases treasury securities from one of the primary dealers (nearly always the case) or from a member bank on behalf of a client, the result is the same ... the proceeds are credited to the reserve account of the selling member banking institution (either the primary dealer or the member bank representing the seller). Only the monetary base is increased, not the money supply.

Brian

No Brian I'm talking about purchasing from a member of the public...like me or you...it can be done, but rarely...and if it is done it directly effects the money supply.

 

[gonegolfin]

No Brian I'm talking about purchasing from a member of the public...like me or you...it can be done, but rarely...and if it is done it directly effects the money supply.

It may have been allowed in the 20's, but all such transactions must be conducted via member institutions. The member institution acts on behalf of the client.

Brian

 

[smokey]

So what limits the amount a bank can loan. Isn't it the amount they can borrow as reserves?

.
​

Yes but with good credit a bank can borrow many more reserves than necessary to cover payments to other banks created through loans.

Therefore, in our system the reserve requirement does not limit the amount a bank can loan. This is why the authorities developed another method to control credit creation. Banks are limited in their creation and purchasing of risk-based assets by their total capital.

The Basel I Accord in 1988 regulates how banks must handle their capital. The Fed adopted this measure in 1989.

However since then, banks have found innovative ways around the restrictions placed by the accord. These machinations provoked the more complicated and restrictive Basel II Accord in 2004 which the Fed has postponed implementing for the simple reason that it would render all the largest US banks insolvent.

Here is some Wiki material on the subject:

Capital Requirement

Basel II Accord

.​

 

[Deborah K]

Are you still going to start a bank thinking you can lend out $1000 the minute somebody gives you $100? Or not?

Josh, back the f'k off!! You are making false assumptions about my interpretation of frb. Go beat someone else over the head with your holier than thou bullshit!