FRED if the Banks bad loans are the Fed's Assets?

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

Alright! The Money has been created and Technically placed into circulation.

Part III?? I'm enjoying this lesson.

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

Notice something Odd, Peculiar, Funny,....

This "LOAN" has begun to accrued Interest...Payable in exactly WHAT?

The same digits that were just created?

But we are getting ahead of ourselves...

Following the entry of the Principal SUM Amount of the Promissory note into the Banker's Ledger, the Banker needs something to "REPRESENT" those digits on his Ledger. Thus, he either PRINTS -

Banks Notes:

Checks:

Or stamps Coins:

Which The Banker now can give to the Borrower in representation of the "digits" that were created.

Now, the Borrower can go into the Market Place and trade the "digits" for Goods and Services...

But there is more....

[Sharky]

Re: FRED if the Banks bad loans are the Fed's Assets?

Hmmm. In point 2, the bank creates money by writing a number in two places (in a ledger book and on a slip of paper the size of a check) and then worries about the risk that it may "lose" the money it just conjured out of thin air, for free? And charges interest as a profit to compensate for that risk?

Yes, mostly. Well, I would say the money is created as the result of an accounting entry:

                                     Credit          Debit
Loans (assets)                                       $XXX
Borrower's account (liability)       $XXX

"The process by which banks create money is so simple that the mind is repelled."
- Economist John Kenneth Galbraith

"[W]hen a bank makes a loan, it simply adds to the borrower's deposit account in the bank by the amount of the loan. The money is not taken from anyone else's deposit; it was not previously paid in to the bank by anyone. It's new money, created by the bank for the use of the borrower."
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

Exactly.

[Sharky]

Re: FRED if the Banks bad loans are the Fed's Assets?

The bank have to lend otherwise the money supply will not increase and the system will decay as the math dictates it will, the Fed and UST can only delay it as they are currently doing.

The math dictates no such thing. This myth has been debunked here before.

The real solution which I think you got it right is real income gains for the lower 50% of the income bracket. How this is accomplished will effect it's effectiveness. Some people may call this socialism or redistribution, but I think a better way of looking at it is to think of it as a check on greed and the abuse of people by those in power. Sorry for the run on paragraph, posting from my itouch.

Yes, it's socialism, aka collectivism. It's also morally repugnant, since it involves stealing from one group for the benefit of another. And, it wouldn't fix anything; immorality never does (that's why we have morals in the first place: to help guide choices like this).

It is not a "check on greed." The problem has nothing to do with simple greed; it's the collusion between government and business that's the real problem. Government doing things like exempting certain groups or individuals from prosecution for the violation of laws against theft and fraud, for example.

[thriftyandboringinohio]

Re: FRED if the Banks bad loans are the Fed's Assets?

Yes, it's socialism... it's the collusion between government and business that's the real problem.

As a simpleton, I struggle with the definitions of those terms.

I believe a "capitalist" makes a "profit" as her just compensation for the risk she accepts when she lets another person use her property ("capital"). She sometimes does not get her property back and would have no motivation to lend me her capital without a potential profit.

If that's true, then banking as described above is not "capitalism"; the bank risks losing nothing that it owned prior to the transaction.

As I say, I am simple-minded and easily confused in such matters.

[Sharky]

Re: FRED if the Banks bad loans are the Fed's Assets?

If that's true, then banking as described above is not "capitalism"; the bank risks losing nothing that it owned prior to the transaction.

This has nothing to do with capitalism, per se. Socialists uses banks, too. ;)

However, your statement is incorrect. Banks do risk losing something they owned prior to the transaction: if the loan is not repaid, they risk losing bank capital. In other words, they don't have to come up with the money in order to loan it, but they do have to come up with it if the borrower defaults (or, these days, when the default is recognized).

In the usual, normal, expected, ways of banking, when a bank makes a loan, they are taking a real risk. For example, a bank couldn't just make lots of high-interest, high-risk loans, earn what they could on the interest, and then suffer no repercussions if the borrowers default; instead, they would go out of business. Oh, except if the government steps in and covers their ass, that is.

[thriftyandboringinohio]

Re: FRED if the Banks bad loans are the Fed's Assets?

This has nothing to do with capitalism, per se. Socialists uses banks, too. ;)

However, your statement is incorrect. Banks do risk losing something they owned prior to the transaction: if the loan is not repaid, they risk losing bank capital. In other words, they don't have to come up with the money in order to loan it, but they do have to come up with it if the borrower defaults (or, these days, when the default is recognized).

In the usual, normal, expected, ways of banking, when a bank makes a loan, they are taking a real risk. For example, a bank couldn't just make lots of high-interest, high-risk loans, earn what they could on the interest, and then suffer no repercussions if the borrowers default; instead, they would go out of business. Oh, except if the government steps in and covers their ass, that is.

Thank you.

[BillBoard]

Re: FRED if the Banks bad loans are the Fed's Assets?

Before having the Borrower go out into the Market and exchange the newly created Money, we should address how Money is destroyed.

Money is destroyed when the "digits" are credited back to the account t where the "digits" were created.

-----------------------

[ThePythonicCow]

Re: FRED if the Banks bad loans are the Fed's Assets?

Money is destroyed when the "digits" are credited back to the account t where the "digits" were created.

Money is a distraction. It keeps our eye off off what really matters.

Money, whether in the form of oddly printed pieces of paper, or of ink marks in a accountant's ledger, or of data records in a software accounting application, is a but marker of the value of an outstanding economic transaction.

Money is a mere token of the status of an open contract position, just as a ball in a sports game is a mere token of some position in an active (currently being played out) contest.

We are often describe money as a generic form of goods, enabling a more convenient form of barter. I exchange my hen's egg for a dollar and use that to purchase a pint of milk. I can thus sell my egg to the cobbler (who does not own a cow) and buy my milk from another farmer (who has his own hen and doesn't need my hen's egg.)

But there are other, in some ways more interesting, uses of money.

Once a currency is in regular use in an economy for barter (see previous paragraph) then the regular flows of money can be monetized. I can trade my demonstrated ability to keep hens happily laying eggs for the use of a larger barn to house more hens, by taking out a mortgage to fund the building of the barn based on my promise to return some of that future income stream to the mortgage lender.

The politician can trade his power to pass laws controlling the local constable and tax collector for income streams from

• that mortgage (license fees or taxes paid at closing time),
• that real estate (property tax on the barn),
• that income flow coming to me (selling eggs) and
• that income stream of interest payments to the bank.

The politician can then trade those income streams for

• campaign contributions to get himself re-elected, and
• incentives to other businesses to move into his district, thereby creating more opportunities for tax revenue streams and increasing the politicians power to get yet more campaign contributions bribes.

The banker and a variety of other financiers have similar opportunities.

The insurance company can leverage up a small amount of business selling rather ordinary coverage (say fire insurance on my barn) into a larger business by lobbying bribing the politician to pass laws mandating additional insurance coverages.

Once money is reliably serving these two roles as the generalized value of goods and the unit of accounting for economic activity, then money can be extended further to serve as a general unit of wealth storage. Rather than having a large estate with a mansion, some original paintings on the wall and a yacht at the wharf, I might have a sizable balance in my account at the local bank or stock broker or in my retirement account. Any of these might be passed to my heirs in my will, or foreclosed by a banker if I don't honor some contract, or levied by the tax man if I get on the wrong side of some politician's efforts to aggrandize his power. But until such happens, they represent a store of wealth (and the likely cause of an expense stream for maintenance, fees or taxes.)

On top of all this we humans have layered "derivatives". All the above monetary flows and pools and commitments represented something "real", such as the value of some goods and services, or the monetization thereof, such as income and expense streams from and wealth pools of something "real". But money, being the ultimate fungible unit of value, can monetize monetizations. Securities can be securitized.

In sum, we have that money is:

1. a general unit of the value of some good, such as an egg or a pint of milk,
2. a general unit of the value of some service, such as an hour of my labor or a year's subscription to iTulip.com,
3. a general unit of accounting of some monetized stream, such as the income streams from regular labor, subscription fees, tax collections, or debt repayment,
4. a general unit of stored wealth valuation, such as a bank Certificate of Deposit value, and
5. a general unit of accounting for all manner of derivatives derived and securities securitized from the above and from themselves (derivatives squared.)

In each of these cases, the generally important matter is that which money tracks, not the money itself. Except perhaps for a few employees at the Bureau of Engraving and their contract suppliers, the quantity of money and its creation and destruction are minor details. What matters is that there is an essentially unlimited supply of the stuff, available on demand and at stable valuations to represent all manner of economic activity, goods, services, open contracts, and income, expense and tax streams. "Stable valuation" doesn't require unchanging prices. It means price changes for reasons of change in that which is valued (perhaps computer parts are cheaper to make than last year, or oil is more precious) rather than for reasons of instability or fraud in the monetary system itself.

Would you happily play a Monopoly Game if most of the paper money in the game was missing? No -- first you'd replace the toy money. You might cut up scraps of paper and write numbers on them, or you might head off to Toys-R-Us to purchase another packet of Parker Brothers (now Hasbro) Monopoly Game Money. The game would be rather annoyingly unplayable if there was not enough money to represent all the open positions and flows.

Aggregate economic statistics are rather deceptive. The amount of money sitting in the bankers stash in a Monopoly Game is a mildly interesting inverse of how much money is in play in the game, but when the players have to break open that newly purchased packet of Monopoly Money to replenish a depleted bankers stash, the amount of that sudden increase in that stash tells us nothing of interest as to how the game is going.

As EJ has noted, many of the economic statistics which had been serviceable indicators of various economic activities have gone bonkers, like a seismograph during "The Big One." This just means that these statistics have pretty much ceased being useful, as the hasty jury rigging (we could use a few more juries and a little less rigging ) of our financial system has invalidated or at least disrupted many of the tenuous connections these statistics had to our more essential economic realities. One might as well try to track global warming by tracking the aggregate volume of mercury in all our bulb thermometers (mercury does expand when warmed, doesn't it ??), after we start wholesale replacing them with digital thermometers.

In all cases, money is but a generalized measure of value. It is a useful and stable measure of that value only until it isn't. Do not be distracted by the tape measure (unless you're a tape measure manufacturer.) Keep your eye on the waist line being measured if you're dieting, or on the measurement to be transferred to your cloth if you're a tailor.

Unfortunately, given the great degree to which our economic production, consumption and wealth preserving activities have become monetized, a major instability in our monetary system is quite disruptive. A monetary system becomes unstable when too much of what has been monetized is over valued, perhaps by excessive fraud, a great natural disaster, a general war or the sort of economic warfare which has become a major tool of American economic colonization of the world since World War II.

We've seen what happens when such economic warfare attacks other nations. Argentina is one of the finer, but certainly not only, examples of this.

But what happens when this same cancer attacks its own power center. That's hard to get one's head around. It could be quite interesting :eek:.

[jacobdcoates]

Re: FRED if the Banks bad loans are the Fed's Assets?

The math dictates no such thing. This myth has been debunked here before.



Yes, it's socialism, aka collectivism. It's also morally repugnant, since it involves stealing from one group for the benefit of another. And, it wouldn't fix anything; immorality never does (that's why we have morals in the first place: to help guide choices like this).

It is not a "check on greed." The problem has nothing to do with simple greed; it's the collusion between government and business that's the real problem. Government doing things like exempting certain groups or individuals from prosecution for the violation of laws against theft and fraud, for example.

Really?How else do you explain why things really started to fall apart when the debt service ratio hit 20.5% and the money supply is currently in its steady state only by the actions of the FED and UST.


Do you mean it is socialism like the rich are doing to the middle class and poor or is that just only "right" kind of capitalism. Capital has been favored over labor way too much over the last 40 years, another part of the reason why we are where we are. Please don't ever mistake me for a socialist. I believe in profit, very much so. When capital has absolute primacy as it does now, Pragmatically the system is not sustainable as workers do not make enough to afford the things they need/want via savings and current income, so they use debt which has it's inherent flaws. Without labor there is no capital and vice versa, Neither should be privileged.

Morally(I know a lot about morality too, we can have that discussion to if you wish) speaking the "capital"(aka the rich) have been stealing from poor and middle class and redistributing the gains to themselves through corruption and outright theft, this is as repugnant as the other way around.

You seem to be arguing for the status quo, That labor must have little or no power and the balance between capital and labor must not be changed. Greed is very much a problem:eek:!!, talk about immorality.


Sharky- banks do not lose something they had, they lose their shareholders/investors money, when a loan defaults. Which is a round about way of losing other peoples money, so they have to get "new" money from new shareholders/investors, in order to continue lending, if they fall below the require reserves.


ThePythonicCow- agree with you views about what is important- value! money is suppose be to what we use to measure value, not value itself. I also agree most of the govt statistics have been massaged to the point of being meaningless.


boy this is getting really off topic

[thriftyandboringinohio]

Re: FRED if the Banks bad loans are the Fed's Assets?

Really?How else do you explain why things really started to fall apart when...

Use caution; it's easy to find a correlation beween two things, but much harder to prove causality.

[lsa420]

Re: FRED if the Banks bad loans are the Fed's Assets?

                                     Credit          Debit
Loans (assets)                                       $XXX
Borrower's account (liability)       $XXX

Debit on the right really threw me off for a second!

[Sharky]

Re: FRED if the Banks bad loans are the Fed's Assets?

Do you mean it is socialism like the rich are doing to the middle class and poor or is that just only "right" kind of capitalism. Capital has been favored over labor way too much over the last 40 years, another part of the reason why we are where we are.

I suppose it depends which sector of the economy you're talking about. From my perspective, there are problems on both (all) sides.

Please don't ever mistake me for a socialist. I believe in profit, very much so. When capital has absolute primacy as it does now, Pragmatically the system is not sustainable as workers do not make enough to afford the things they need/want via savings and current income, so they use debt which has it's inherent flaws. Without labor there is no capital and vice versa, Neither should be privileged.

My view is that the problem is with government interference in the economy, again on both sides. For example, they interfere with labor by way of laws relating to unions, minimum wage, how and when people can be hired or fired, etc. They interfere with capital by manipulating interest rates, forcing certain types and amounts of lending, acting as a guarantor, controlling the ratings agencies, etc. And on both sides, they accept money from lobbyists and often completely ignore sound, moral laws and fail to prosecute obvious violations (such as mortgage fraud).

Morally(I know a lot about morality too, we can have that discussion to if you wish) speaking the "capital"(aka the rich) have been stealing from poor and middle class and redistributing the gains to themselves through corruption and outright theft, this is as repugnant as the other way around.

There are immoralities on both sides. It's a mistake to blame the capital side only. Look at GM: basically destroyed by several generations of concessions to labor, coupled with endless government intervention.

You seem to be arguing for the status quo, That labor must have little or no power and the balance between capital and labor must not be changed. Greed is very much a problem:eek:!!, talk about immorality.

I am definitely not arguing for the status quo. What I think is required is a separation of business and state, in the same way and for the same reasons as the separation of church and state.

If you look closely, most of today's big problems involve some level of criminality; we aren't talking about people who are freely and morally interacting with each other. From where we are now, a great first step toward sanity would be for the looters on all sides to be prosecuted.

Sharky- banks do not lose something they had, they lose their shareholders/investors money, when a loan defaults. Which is a round about way of losing other peoples money, so they have to get "new" money from new shareholders/investors, in order to continue lending, if they fall below the require reserves.

Semantics. In a very real sense, banks are their shareholders and investors.