Archive for April, 2013

Banking Solution

If you want to fix banking, you can throw out all of the banking laws and replace it with three things.
1) Mandate that banks have 100% banking reserves at all times so that they cannot lend out others people money.
2) Mandate that people have ownership rights over their own deposits so that banks cannot consume and speculate with other people deposites.
3) Mandate that all banks act only as loan intermediaries for those individuals whom want to lend out their own money, which is tied directly to a loan.

Everything else will fall in place.

It is that simple.


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Have you ever pulled out a dollar bill from your pocket and ever wondered, how it came into being?  If not, you are not the only one.  But ponder this.  Currently, there is no one able to print this.  Well, not legally anyway.  And yet here it is in your hand.

Many people falsely claim that central banks print this money and give it to banks in order to be lent.  Many believe that the money that you see in your hand is not even owned by the government.  It is owned by the federal reserve who holds bonds as collateral or some such scheme as this.  These ideas are complete nonsense.

No,  in the US money is not printed out and handed to banks.  If this worked there would not be any capital markets.  Central governments would have replaced them a long time ago, which would solidify political power.  And the Soviet Union would be here today.

Physical dollars are created by the bureau of engraving, not the Federal Reserve.  It prints dollars and furnish them to banks based upon withdraw demand, not lines of credit. Basically, bank buy physical dollars with their reserves.  You can read about it here.


But where do the banking reserves come from?  They come from deposits.  Money is created through the fractional reserves system when a loan is created.


The St Louis fed came out with a publication called Money Mechanics years ago.  In it, it showed how a simple $10,000 deposit can generate up to $90,000 worth of loans assuming a 10 to 1 reserve ratio,.  Yes, that is right. Go ahead an Google it and you will see.

For the most part, money today is nothing more than digital lines of credits between banks that reside within a closed banking loop. This is why central banks exist. Central banks exist so that other banks will except checks from member bank.  And central banks exist so that all domestic money stays within the closed loop.  Otherwise, money can leave from nation to nation, like it would if gold coinage was traded as money.  This is why such things are taxed.

This idea is foreign to most people.  For most people, they have to earn their money,  They never thinking of where it came from. In order for money to enter circulation, someone must borrow it form a commercial bank.

You see money is created with loans.   The more deposits (reserves) a bank has, the more it can lend.  As a loan applicant  gets a new line of credit, a line of credit is established on the banks book entry.  Then, the consumer simply writes checks From one bank to  bank to another a book entry is adjusted at the central bank.  Existing Money simply changes ownership.

But the dirty secret is that when one with draws there money, after it has been lent, any loans made with this money is not recalled.  It is not tied directly to the loan. And this despite is redeposited in another bank, it gets lent again.  So, in essence you can have multiple loans on the same money.  This is where inflation comes from.

The actual transfer of the check is nothing more than a line of credit from one bank to another, not physical dollars.  If it were physical dollars, when one were to withdraw the cash, money would leave banking reserves and not lent until it got redeposited.  But today everything is done electronically, not cash.

Banks are encouraged to make loans  to inflate the money supply.  Inflation gives rise to an artificial boom, jobs, industries, and, most importantly,  is a source of additional tax revenue which means more government spending.  And in this way government can pay for things that normally could not be afforded, like social security, and welfare.  And is paid for by the poor who must feel the effects of inflation.

In essence new money created and lent causes a boom as the money supply expands.  But money that is lent must be paid back, which causes a bust as  money flows back into banking reserves waiting to be lent again.  As long as there are more people are borrowing more money, the boom is continued.  This is why we have the housing crises.  Houses produce a lot of new money in the economy, which is taxed.  At some point people are unable to borrow enough money to support the economy.

This is why that without consumer debt, there is no economy.

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