Tuesday, March 16, 2010
More Evidence that Banks Create Credit Out of Thin Air
I recently provided evidence that banks create credit out of thin air.
I've just found two more pieces of evidence:
(1) William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech last July:Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference.(2) On February 10th, Ben Bernanke proposed the elimination of all reserve requirements:
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Of course, Bernanke's proposal is the exact opposite of the 100% reserve system proposed by Nobel prize winning economist Milton Friedman and Laurence Kotlikoff, former Senior Economist for the President’s Council of Economic Advisers.
More importantly, if banks don't make loans based on available reserves, but can enter into loan agreements first and then borrow any reserves needed, that means:
(1) This was never a liquidity crisis, but rather a solvency crisis, as I and many others have repeatedly tried to explain. In other words, it was not a lack of available liquid funds which got the banks in trouble, it was the fact that they speculated and committed fraud, so that their liabilities far exceeded their assets. If you don't understand what I'm saying, please read this.
(2) The giant banks are not needed, as the federal, state or local governments or small local banks and credit unions can create the credit instead, if the near-monopoly power the too big to fails are enjoying is taken away, and others are allowed to fill the vacuum.
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So can we now say that fractional reserve banking doesn't exist?
ReplyDeleteExcellent points. In particular point 2 illustrates that taking the correct course of action would not really have been that bad.
ReplyDeleteBy not doing this, and using economic theories that are literally backwards from reality to solve the crisis, the country (and the world) have entered scary territory.
I also recommend Steve Keen's description of this, at http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
The “Deutsche Bundesbank” recently published her revised booklet “Geld und Geldpolitik” (http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf)
ReplyDeleteThe Bundesbank abandoned completely the old theory of “multiple credit creation”, “fractional reserve banking” and “money multiplier”. (page 88-93).
Money is created as book-entry by purchasing assets or entering credits on the left side of the balance-sheet and corresponding deposits on the right side.
FESTANvonGELDERN@freenet.de
I believe that the context in which Friedman expoused a 100% reserve ratio on member bank deposits was as response to eliminating all inflationary pressures.
ReplyDeleteAt that juncture these institutions could only lend existing money (which has been saved), and all of these savings would originate outside of these intermediaries. I.e., the member banks would become financial intermediaries (intermediary between saver & borrower).
It was also Milton Friedman which expoused that legal reserves were a tax to the commercial banks. But under fractional reserve banking legal reserves are not a tax. An increase in reserves allows the banking system, and its banks, to expand its earning assets by a multiple amount.
The expansion in the system's earning assets dwarfs any unearned income on legal reserves. At the same time the Treasury's coffers benefit as well. It's long been a ruse by the bankers and their collaborators.
We all "create" money in one way or another. When a trader makes or buys a good and sells it on at a profit, they have created money. i.e I buy a widget from wholesaler at a dollar and sell for $5 in my store. I have created $4 from thin-air. Same can be said if we are employed. Human energy is based on the intake of food which we then expend during employment. So, at the end of the month I have eaten $200 of food and worked for a pay-check of $1000, I have created $800 from thin-air.
ReplyDeleteSimplistic yes... but the principle is sound. Multiply all these tiny amounts and that is the increase to the global monetary supply. It is possible to reverse this process, for instance when a debt is defaulted on and the money created by that debt has to be wiped, taking an amount OUT of the money supply.
So it's not just banks that create money from thin-air, we all do.
The bankster monopoly has always been about deflating the money. They lend money out of thin air but at a rate less than the production of goods. In this way, the money they are repaid is more valuable than the money loaned. see Tragedy and Hope pp 49 et seq
ReplyDeleteThe problem for us mortal folks is how to generate competing credit so as to escape this deflation.
I recently read Richard Werner's "New Paradigm in Macroeconomics" which discusses these issues with respect to Japan mostly, but very applicable to the US as we seem to be resembling Japan more and more. His ideas seem pretty sensible to me.
ReplyDeletehttp://books.google.com/books?id=MIONQgAACAAJ