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

[wizardwatson]

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.

Scenario B is just as correct as A, yes, if (in scenario B) they borrow the cash reserves (with the borrowers loan liability as the collateral) from the Fed, or some other bank.

You saying "We don't need to say that" is precisely the wrong mentality with this thread. We do need to say it. People are trying to understand THE PROCESS of how FRB's are inflationary. It is not enough to tear apart someone else's argument, you need to explain how your argument is more correct.

And it is not that such and such bank is 'claiming' they have the depositors money in their bank and that they actually don't. It is the simple fact that the depositor has a legal claim to that deposit, and through FRB loans, the bank creates another depositor with an equally valid claim on a fraction of that same money.

Thus more legal 'claims' on money, than actual money.

Scenario A IS inflationary precisely because there are more claims on reserves than there are reserves. There is more paper/digital money floating around the economy than before the depositor put his cash into the FRB. Inflation is an increase in the supply of money while the supply of goods and services remains the same.

So I say scenario A only differs from scenario B in this manner:

A only differs from B in that A is short on cash reserves, not because it is short on assets. It could easily borrow the cash it needs based on its assets (borrowers loan liability, which is bank asset) from another bank or entity.

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


So admitting this, in my view, is saying that the only real difference between A & B is the amount of cash reserves the bank wants to hold, which is likely to be based on the amount of depositor demand for cash. In good times, the banks will hold less, in hard times (like now) banks will hoard cash, and increase deflationary pressure. If this is what you are saying then arguing scenario B over A isn't valid (since they are essentially the same) and isn't helping anyone on this thread understand the process.

If on the other hand what you are saying is that the central bank or Fed 'automatically' loans or gives banks more reserves based on their loans, then you are wrong, because then you're right back into scenario C.

 

[Deborah K]

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.

Can I please get an opinion from someone other than Josh on this who seems hell bent on brow beating rather than enlightening me (us). I've gotten PMs from others who are interpreting this the same way but who don't want to be attacked the way I have. Clear it up for us please. Is the above correct or not?

 

[icon124]

Can I please get an opinion from someone other than Josh on this who seems hell bent on brow beating rather than enlightening me (us). I've gotten PMs from others who are interpreting this the same way but who don't want to be attacked the way I have. Clear it up for us please. Is the above correct or not?

I just gave a full explanation on the page prior to this...accept it or not it is the correct answer.

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

Okay let's suppose they don't do that anymore. I'm trying to give an example where the Fed can directly have an affect on the money supply. Since you assume they can't do it that way let's use the example of the Fed going into the commercial paper market and directly purchasing CP from companies.

That would have a direct affect on the money supply.

Not to throw anyone off here, BUT if you do have a sound understanding of our banking system I suggest you read this,

http://www.mises.org/story/3121

and many other books from mises.org as well it's all free.

 

[gonegolfin]

Okay let's suppose they don't do that anymore. I'm trying to give an example where the Fed can directly have an affect on the money supply. Since you assume they can't do it that way let's use the example of the Fed going into the commercial paper market and directly purchasing CP from companies.

That would have a direct affect on the money supply.

Of course you realize that the Fed is not purchasing CP directly from companies. They have another outside facility setup to broker the auctions with member institutions on behalf of commercial paper clients (sellers).

The way I understand it is this ...

If it is not a banking asset that is being monetized (which is the example you brought forward with corporate issued commercial paper), the Fed still credits the appropriate reserve account. However, since it is a non-banking asset that is being monetized (which is extremely rare - except in this financial crisis where all the stops are being pulled), a deposit must also be created (crediting the seller). Therefore, yes, the money supply increases. I had a brain fart in an earlier post (in an example that used treasuries) and was treating that case as a banking asset, when the example was an asset privately owned (not owned by the banking system) ... if you get what I mean.

However, and this is very important ... all assets to be monetized, other than treasuries, must be discounted by the Fed. Else, serious monetary imbalances would be eventually created. This is one reason why it is rare. Also, when the Fed discounts collateral, is results in a decrease of bank shareholder equity and capital ratios. However, during the credit crisis, incredibly the banks have been allowed to keep such assets on their books at the full par value ... instead of the discounted value paid by the Fed.

The Fed purchase of treasuries (which are undiscounted) is the only way to reliably increase the monetary base on a permanent basis.

Brian

 

[tremendoustie]

Can I please get an opinion from someone other than Josh on this who seems hell bent on brow beating rather than enlightening me (us). I've gotten PMs from others who are interpreting this the same way but who don't want to be attacked the way I have. Clear it up for us please. Is the above correct or not?

"The Fed" doesn't open its doors for deposits from anyone. They are subject to no reserve requirements. It's actually worse than you're saying -- the Fed can issue "high powered" money with not reserve restrictions at all.

The commercial banks as a system, after a high number of loans and deposits, eventually multiply this new money by 10x. This does not mean one bank can issue 10x in loans from a deposit -- they can only issue 90%. But by a large number of banks doing this repeatedly, it as the effect of multiplying the original deposit 10x.

 

[gonegolfin]

Can I please get an opinion from someone other than Josh on this who seems hell bent on brow beating rather than enlightening me (us). I've gotten PMs from others who are interpreting this the same way but who don't want to be attacked the way I have. Clear it up for us please. Is the above correct or not?

Deborah, the Fed is not required to maintain any level of reserves in order to increase bank reserves. The Gold stock held by the Fed is simply a confidence measure. And the percentage of Gold backing the monetary base has decreased rapidly over the years (notably since the gold window was closed).

Brian

 

[gonegolfin]

"The Fed" doesn't open its doors for deposits from anyone.

You are absolutely correct in your reply to Deborah. But I did want to point out the following ...

The Fed does take deposits. But these deposits do not affect the monetary base or money supply. For example, the Treasury routinely carries a deposit balance with the Fed. Foreign institutions also carry deposit balances with the Fed (foreign reserves). But the most glaring example is the recent Treasury Supplemental Financing Program (TSFP). Here, a significant amount of cash from auctioned treasury debt has been stashed on deposit by the Treasury with the Fed for as needed release into the banking system.

Brian

 

[Josh_LA]

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!

Deb, I am neither holier nor smarter than thou, just willing to consider whether my understanding of a system makes sense or confers with reality (and willing to be wrong upon correction).

 

[Josh_LA]

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


So admitting this, in my view, is saying that the only real difference between A & B is the amount of cash reserves the bank wants to hold, which is likely to be based on the amount of depositor demand for cash.

Yes, that's pretty much exactly what I am saying, the only difference between A & B is what they are honestly accounting for and how stable their money supply is.

 

[icon124]

Of course you realize that the Fed is not purchasing CP directly from companies. They have another outside facility setup to broker the auctions with member institutions on behalf of commercial paper clients (sellers).

The way I understand it is this ...

If it is not a banking asset that is being monetized (which is the example you brought forward with corporate issued commercial paper), the Fed still credits the appropriate reserve account. However, since it is a non-banking asset that is being monetized (which is extremely rare - except in this financial crisis where all the stops are being pulled), a deposit must also be created (crediting the seller). Therefore, yes, the money supply increases. I had a brain fart in an earlier post (in an example that used treasuries) and was treating that case as a banking asset, when the example was an asset privately owned (not owned by the banking system) ... if you get what I mean.

However, and this is very important ... all assets to be monetized, other than treasuries, must be discounted by the Fed. Else, serious monetary imbalances would be eventually created. This is one reason why it is rare. Also, when the Fed discounts collateral, is results in a decrease of bank shareholder equity and capital ratios. However, during the credit crisis, incredibly the banks have been allowed to keep such assets on their books at the full par value ... instead of the discounted value paid by the Fed.

The Fed purchase of treasuries (which are undiscounted) is the only way to reliably increase the monetary base on a permanent basis.

Brian

Of course they don't go directly to GE (or whoever) and give them money for their CP. I just gave the basic idea here...didn't want to get into to much detail in this thread as people are already having tons of problems understanding fractional reserve banking. If you want to talk in more detail about it we can, but from what I read you covered everything. Oh, and yes like I said this is very rare...but it is happening right now because of the crisis. The reason I brought this up is because Deborah said it (by mistake) and I wanted to tell her that yes there is a possibility, but the Fed purchasing Treasuries happens 9 times out of 10...if not more.

I think we need to create a thread at some point talking about all of these points and sticky it somewhere. I have tons of things we could talk about...and if anyone else wanted answers to questions we could have a group there to answer them specifically.

 

[gonegolfin]

Of course they don't go directly to GE (or whoever) and give them money for their CP. I just gave the basic idea here...didn't want to get into to much detail in this thread as people are already having tons of problems understanding fractional reserve banking.

Well, there would be more confusion when you explicitly say "let's use the example of the Fed going into the commercial paper market and directly purchasing CP from companies.". Which is why I mentioned it.

But I wanted to also stress the point that the proceeds from the Fed CP purchases are deposited by the Fed as reserves.

Brian

 

[slantedview]

For the record (I'm not gonna read the whole thread ), G. Edward Griffin's example here is almost identical to an example that Murray Rothbard used. So, it's fine.

 

[PeterSchiffVideos]

bump for knowledge.

I'm going to make a playlist on my channel that educates people on the Fed. Should I put "money as debt" in it? Or is that video too factually wrong?

 

[Josh_LA]

bump for knowledge.

I'm going to make a playlist on my channel that educates people on the Fed. Should I put "money as debt" in it? Or is that video too factually wrong?

You haven't heard we have a person here who hangs those that dig up dead corpses?