Hi Everyone!
Until now I thought that the central bank is loaning the banks money at the discount interest, and they to the borrowers. So central bank -> banks -> borrowers. in other words, the central banks are those who really create the money, and the government (at least where the central bank is in the hands of it) is taking low interest from the banks. that is why, interest rate by the central bank is so important.
i've seen the movie "Money as Debt"
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http://video.google.com/videoplay?docid=-2550156453790090544&hl=en
What this is saying, is that banks can multiply the base money (in the past, gold, now resrve money), by 100 times. They claim that banks create 95% of the money, the government only 5%. which means, COMMERCIAL BANKS create new money and not the government. and the the one who create inflation.
It doesn't make any sense to me, since:- why the interest rate is so important, if the banks can creating new money by themselves? they do not need to borrow money from the central bank anyway, so it wouldn't have any serious effect. let's say it 5%. who cares? they can lend in 2%, it doesn't matter, they create it.
- In my place, in Israel, we have in the last 20 years about 4% inflation (my estimation based on the changes in prices). if the banks could create 100 times the money, + the government prints is own money as taxation, how it could possibly be 4%? doesn't make sense.
- Why I hear Austrian Economics warning that the Government deficit will result in inflation. It's anyway, mostly, been created by private borrowers... not the government prints money. if the government will print like 2 trillion dollar to pay the Chinese, still private borrowers can borrow more all over America, and by that creating more new "money" (currency), in the supply
do you get my point here?
There is no doubt that new money (currency\) ic created when a new loan is being made. the question is, does it come from the central bank, that charge interest from the banks (it fot the power), or if it comes directly from the banks themeselves.
DD5:What are you talking aobut?? I defined inflation just so we don't start arguing about terminology.
The word "inflation" is used in two senses - one by Rothbardian Austrians, and one by the rest of the world. If you wish to use the Rothbardian definition, fine - but that definition doesn't give you the statement "inflation always produces the business cycle." If you use the definition used by the rest of the world, you get that statement, but you don't get "fractional reserve banking always is inflationary." To insist on the first definition, but then make use of consequences of the second, is equivocation.
DD5:No matter how many times you're going to use this claim about "excess of demand to hold" , it's not going to get more convincing. You are proving nothing but your own confusion about the issue.
And no matter how many times 100% reservers insist that they really are anarchists, and really want to have a free society, and then insist on laws (enforced by whom?) to prevent banks from engaging in fractional reserve banking, that's not going to be any more convincing.
DD5: If I save $100 by not consuming that $100, I am investing $100 in whatever. No middle man called a Bank is going to magically multiply it and channel more then that $100 without misallocating resources. I cannot believe we have to argue about this fact. Even If I am holding that $100 (Not investing it in capital goods for example), you can still only loan out that $100 until I decide I want it back. But Fractional Reserve Banking creates multiple copies of that $100.
If I save $100 by not consuming that $100, I am investing $100 in whatever. No middle man called a Bank is going to magically multiply it and channel more then that $100 without misallocating resources. I cannot believe we have to argue about this fact. Even If I am holding that $100 (Not investing it in capital goods for example), you can still only loan out that $100 until I decide I want it back. But Fractional Reserve Banking creates multiple copies of that $100.
Look at any other market whatsoever. Say, for instance, the cheese market. What do we do when demand for cheese rises? The price increases, and cheese companies increase their production of cheese. We can look at expenditures not just in consumption vs. investment, but other consumption vs. investment vs. cheese consumption. Now, when a person chooses to forgoe $100 worth of other consumption and/or investment, he now puts $100 into cheese. No one can make that into more than $100, right? So the cheese company should not increase its production of cheese, because that person will not put more than $100 into cheese, right - so by making more, all the company is doing is increasing its costs without increasing its revenue. Now, I think that's an absurd conclusion. If that's the case, then perhaps we should reconsider the logic of this kind of argument.
Here's an accounting truism: MV=PQ
Keeping velocity constant, and money supply constant, PQ must be kept constant - so every increase in production must be met by a corresponding price deflation. Now, if Q rises, we all agree that it "punishes" savers. So, falling Q must "reward" savers, and thus is also non-neutral. To allow production increases to drop prices also skews the economy, this time towards more saving. On the other hand, if M is increased with P so as to allow Q to remain constant, we have a neutral monetary policy - depending on how M is increased. If M is increased in a distorted manner, say as is done by a central bank, then any advantages of increasing M disappear. The increase in M must be accomplished in a neutral manner - such as by banks that government doesn't regulate. (What - arguing for an unregulated market - how unAustrian of me...) Furthermore, how do we go about making sure that the increase in M matches the increase in Q? As Horwitz explains, until M equals Q, producing money remains profitable, but producing money beyond that is not profitable. Oh, wait, so prices provide signals to move economies towards equilibrium? I can swear I heard that before...oh yes, it's how Austrians explain every market besides money. But didn't Menger say that commodity money is just another market good? Well, yes, actually.
JAlanKatz: one by Rothbardian Austrians, and one by the rest of the world
one by Rothbardian Austrians, and one by the rest of the world
Trying to discredit me by associating me with Rothbard? I haven't mentioned him in my converstion with you but thanks for the complement.
So let me get this straight: Horowitz is now mainstream Austrian economics? But anyway you have just associated Horowitz with the rest of the Keynsian world. This is a joke right?
JAlanKatz: Look at any other market whatsoever. Say, for instance, the cheese market. What do we do when demand for cheese rises? The price increases, and cheese companies increase their production of cheese. We can look at expenditures not just in consumption vs. investment, but other consumption vs. investment vs. cheese consumption. Now, when a person chooses to forgoe $100 worth of other consumption and/or investment, he now puts $100 into cheese. No one can make that into more than $100, right? So the cheese company should not increase its production of cheese, because that person will not put more than $100 into cheese, right - so by making more, all the company is doing is increasing its costs without increasing its revenue. Now, I think that's an absurd conclusion. If that's the case, then perhaps we should reconsider the logic of this kind of argument.
If the $100 goes to cheese instead of ham for example, then $100 worth of resources would shift to cheese. The consumer has changed his preferense from ham to cheese by a value of $100. Your FRB would somehow divert $1000 worth resources from Ham or from whatever to cheese, despite the fact that only $100 worth of resources should have been directed to cheese from Ham.
JAlanKatz: Here's an accounting truism: MV=PQ
A truism that is useless for analyzing or predicting anything. It is mathematically invalid. 3 of its variables cannot be properly defined, calculated or measured. You entire passage about this truism is nothing but "planning". It is Monterism! You've simply changed the goal for the price level.
JAlanKatz: As Horwitz explains, until M equals Q, producing money remains profitable, but producing money beyond that is not profitable. Oh, wait, so prices provide signals to move economies towards equilibrium? I can swear I heard that before...oh yes, it's how Austrians explain every market besides money. But didn't Menger say that commodity money is just another market good? Well, yes, actually.
As Horwitz explains, until M equals Q, producing money remains profitable, but producing money beyond that is not profitable. Oh, wait, so prices provide signals to move economies towards equilibrium? I can swear I heard that before...oh yes, it's how Austrians explain every market besides money. But didn't Menger say that commodity money is just another market good? Well, yes, actually.
Horowitz is making the same fatal mistake as Milton Fiedman did, among other mistakes. There is no point to even talk hypotheically about adjusting M to any desired Q if the money supply is not dropped from a Helicopter. The whole point of the Austrian business cycle is that money is injected into the Capital Markets, thus creating the temporal misalocation. There is no way to increase the money supply via specific points in the credit marketsand expect the interest rate to reflect time preferense.
By using the MV=PQ to justify an increase in the money supply, you have now joined the mainstream economists who are claiming that investments and real savings need not be equal.
This is not Austrian economics, but Monterism.
DD5:Trying to discredit me by associating me with Rothbard? I haven't mentioned him in my converstion with you but thanks for the complement.
Well, no, actually, I'm just mentioning who uses the two definitions. I tend to think that definitions ought not to carry ideological content, and so someone could, conceivably, advocate a free market in banking and still use the Rothbardian definition of inflation. He could say things like "the rate of inflation ought to be controlled by the market, not the government" and his use would be consistent with his definition. It turns out, though, that generally all and only Rothbardians use the definition you mentioned, while the rest of the Austrians, and the rest of the profession, uses the other definition. I don't think this means anything in terms of which is "right" and I also don't think the point of definitions is to be right, it is to communicate. A person is usually best off using terms in their accepted definitions. If you don't want to, though, that's fine. But then you have to acknowledge that there might be sentences that everyone else thinks are true, and you think are false, without having any disagreement except about the definitions. An example would be "fractional reserve banking is always inflationary" - which by your definition is true and by the one I use is false. Another would be "inflation produces business cycles" which is false by your definition and true by mine. My objection is to your attempts to use sentences like the last, combine them with sentences like the first, and produce conclusions which play on the definitions of words.
DD5:So let me get this straight: Horowitz is now mainstream Austrian economics? But anyway you have just associated Horowitz with the rest of the Keynsian world. This is a joke right?
I don't see what makes either of the first two sentences consequences of what I said. That Horwitz uses a definition that the Keynesians use doesn't make hima Keynesian. How do you define "purchase?" My guess is I'd get a similar answer if I asked a Keynesian, but that doesn't make you a Keynesian. I don't know what mainstream Austrian economics is. My view of intellectual history in the Austrian school begins with Menger, sees development with BB and Wieser - but also failures to grasp Menger's original thoughts in certain ways, with Mises recapturing Menger's original insights and combining them with his own philosophical understandings, while incorporating much of the development offered by previous greats. Hayek developed the ideas in a somewhat different (not complementary, not contradictory) direction. These two important strands come back together with Kirzner, who I think identified the sources of tension in Mises (for instance, what is a entrepeurship in Mises - is it a creative action that depends on the individual, or does it depend only on the position of the individual in the market order) and used Hayekian insights about emergent order to put them together. Rothbard developed the normative theory of anarchism and systematized the nuts and bolts of the Austrian system. I have no interest in comparing Kirzner and Rothbard as students of Mises, although it is true that Rothbard cleaves more fully to Mises than Kirzner does. On the banking question, I agree with Kirzner and his students, including Horwitz.
DD5:If the $100 goes to cheese instead of ham for example, then $100 worth of resources would shift to cheese. The consumer has changed his preferense from ham to cheese by a value of $100. Your FRB would somehow divert $1000 worth resources from Ham or from whatever to cheese, despite the fact that only $100 worth of resources should have been directed to cheese from Ham.
Capital is not homogenous, and there is no such thing as $100 worth of resources. Worth $100 to whom? None of these measurements make sense without assuming such a thing as "the price" of cheese, and so on. The question is the underlying value, not the numbers.
DD5:Horowitz is making the same fatal mistake as Milton Fiedman did, among other mistakes. There is no point to even talk hypotheically about adjusting M to any desired Q if the money supply is not dropped from a Helicopter. The whole point of the Austrian business cycle is that money is injected into the Capital Markets, thus creating the temporal misalocation. There is no way to increase the money supply via specific points in the credit marketsand expect the interest rate to reflect time preferense.
This is indeed Friedman's mistake - but it's not the lack of a helicopter that makes it fatal, rather the verb form "adjusting." Friedman advocates an extra-market force following a long-term rule to increase money supply - in a decidedly non-neutral way as you point out, and doesn't worry about the short-term discoordination. Horwitz's point, on the other hand, is precisely that no one in the market cares about, or ought to care about, macreconomic figures. What matters to actors in the market is not adjusting M to match P, but microeconomic equilibrating - that is, reacting to market pressures in order to make money. Money supply in free banking is endogenous, and its suppliers react to the profit motive and price signals just like the cheese makers.
DD5:By using the MV=PQ to justify an increase in the money supply, you have now joined the mainstream economists who are claiming that investments and real savings need not be equal.
What happens in the inflationary portion of the ABCT? Investments get ahead of savings, causing projects that cannot last until completion. That is what happens when there is an imbalance such that there is more money than is demanded for savings. In the bust, savings have to equilibrate with investments, both through forced savings and disinvestment. What happens if we go the other direction? That is, what if through deflationary policy - such as sending policemen to arrest bankers who react to market pressures and increase money supply - we cause savings to get ahead of investments? Then investments that are economically feasible, and that would have come to fruition, will not be made. Later, there will be forced investments - i.e. consumption goods sitting on shelves since they were made based on an artificially high interest rate, and incentives to unsave - low prices. There is no reason to describe this latter situation as investments=real savings. When do investments=savings? When the market is left free to operate, not by artificially raising interest rates by prohibiting certain types of financial arrangements.
What do free banks have that central banks don't? Three things:
1. Different base money from issued money - hence, overissue of notes results in notes being returned for redemption at face value, and the bank suffering loses. With the base money the same as the issued money, as in our system, there is no real redemption.
2. Competition
3. Profit motive - this and competition go together. Central banks have political motive, and will continue to issue money beyond the point at which a competitive bank would take a loss.
What reserve ratio should the free bank maintain? I don't know. That's why bankers are entrepreneurs. What they will do is watch consumer behavior. If there are more people seeking loans than depositing money, they will lower their ratio. If there are more people depositing money than seeking loans, they will increase their ratio. They will also increase their ratio if there are a lot of people redeeming notes.
The ABCT has a natural rate of interest, from which the market rate can diverge. Yet the assumption among 100% reservers is that the market rate can ony diverge downwards. Why can't it diverge upwards due to regulations?
I will reply in a few responses. First
JAlanKatz: What reserve ratio should the free bank maintain? I don't know. That's why bankers are entrepreneurs. What they will do is watch consumer behavior. If there are more people seeking loans than depositing money, they will lower their ratio. If there are more people depositing money than seeking loans, they will increase their ratio. They will also increase their ratio if there are a lot of people redeeming notes.
This is a strawman again. The argument is over the productivity of FRB in a free market. The fraudulent argument per se is not what I am debating about you right now, although, it is a related topic.
JAlanKatz: Investments get ahead of savings, causing projects that cannot last until completion
Investments get ahead of savings, causing projects that cannot last until completion
It is because you cannot invest what you had not saved. You are kidding yourself with this exchange equation nonsense. Real savings amount to real tangible goods that have been previously produced and not consumed. You cannot invest tomatoes or cheese that have not been produced. But now we have a system of money and this truth is scrapped away? All of a sudden you bring in the mystical MV=PQ. There is no way to introduce money via credit markets and not distort the interest rate. There is no way that you can maintain the interest rate at the natural rate, that is, the interest rate that is reflecting the true market time preference of the consumers. It is impossible. It is impossible for the simple fact that you cannot save what has not been previously produced.
If you save 2 tomatoes and 2 apples, then that is all you can invest. You cannot invest 4 apples and 4 tomatoes. Yet, now we have a medium of exchange and all of a sudden you bring in an equation that says it is possible?
Make up your mind: Either investment must equal real savings or they do not. There is no middle ground. If it's real savings that must fuel investment then it's real goods that have been produced and not consumed.
Anyhow, how are you basing your argument on a purely mystical concept such as MV=PQ. The only variable that is properly defined and measurable is M! The money supply! which is why it only makes sense to define inflation as an increase in the money supply. Any other definition is pure mystical for the simple reason that you cannot measure it. I cannot measure the price level and I cannot measure your equilibrium point for it based on an invalid equation.
I don't know why I must struggle so hard to convince you that this equation is mathematically invalid. You cannot use it unless you are a pseudo-scientist. Just because you are into economics, does not mean you must make a mockery out of yourself.
Credit expansion in a free banking system will not last. Why? Because of what you had already stated: The profit incentive. FRB would prove unprofitable and would be out competed by near 100% reserves, where time deposits constitute real savings. Only with time deposits, can you actually channel to investment real savings and not distort the natural rate of the market.
DD5:It is because you cannot invest what you had not saved. You are kidding yourself with this exchange equation nonsense. Real savings amount to real tangible goods that have been previously produced and not consumed. You cannot invest tomatoes or cheese that have not been produced. But now we have a system of money and this truth is scrapped away? All of a sudden you bring in the mystical MV=PQ. There is no way to introduce money via credit markets and not distort the interest rate. There is no way that you can maintain the interest rate at the natural rate, that is, the interest rate that is reflecting the true market time preference of the consumers. It is impossible. It is impossible for the simple fact that you cannot save what has not been previously produced.
The assumption here is that, if banks do not create money, then the interest rate will be at the natural rate. But the natural rate is supposed to reflect consumption and investment preferences. If the banks use 100% reserves, there can be people lined up at the doors asking to borrow money, and insufficient supplies to loan to them. This is not a way to maintain the price at a natural rate. In the cheese market, we recognize that the natural price is the equilibrium price - we do not say that producers are causing the price to deviate from the natural rate by making more cheese than they had before. Similarly, the interest rate is the price of money, and its natural rate is the price at which equilibrium is achieved. But what you're doing here is using policy to freeze the supply curve, and make it vertical.
DD5: Anyhow, how are you basing your argument on a purely mystical concept such as MV=PQ. The only variable that is properly defined and measurable is M! The money supply! which is why it only makes sense to define inflation as an increase in the money supply. Any other definition is pure mystical for the simple reason that you cannot measure it. I cannot measure the price level and I cannot measure your equilibrium point for it based on an invalid equation.
Of course, in any other market we don't worry that you cannot measure the equilibrium point - we recognize that the market process moves towards equilibrium.
DD5: Credit expansion in a free banking system will not last. Why? Because of what you had already stated: The profit incentive. FRB would prove unprofitable and would be out competed by near 100% reserves, where time deposits constitute real savings. Only with time deposits, can you actually channel to investment real savings and not distort the natural rate of the market.
Imagine a situation with 100% reserves, and free banking. If I move my reserve ratio slightly, say to 99%, how exactly would you be able to achieve higher profits than I can, if you stick with 100%? It seems pretty clear to me that I can get a higher interest return than you can, and that I will continue to do better as I move to 98, 97, and so on, until I hit a point where, if I moved another percentage point, I'd lose more money in increased redemptions than I would gain in interest, on the margin.
Regarding time deposits - does it matter what the time period is? I assume a year will work - how about a monthly timed deposit? Weekly? Daily? Minutely? A minute by minute time deposit, with the default being that it is renewed, is for all practical purposes a demand deposit account that you'll let me loan out.
JAlanKatz: Similarly, the interest rate is the price of money
Similarly, the interest rate is the price of money
No its not! The interest rate is the discount rate for buying future goods in exchange for present goods. The natural rate is the equilibrium price of the time market, not money market. price of money is a Keynesian fallacy.
JAlanKatz: If the banks use 100% reserves, there can be people lined up at the doors asking to borrow money, and insufficient supplies to loan to them
If the banks use 100% reserves, there can be people lined up at the doors asking to borrow money, and insufficient supplies to loan to them
There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese?
JAlanKatz: It seems pretty clear to me that I can get a higher interest return than you can, and that I will continue to do better as I move to 98, 97, and so on, until I hit a point where, if I moved another percentage point, I'd lose more money in increased redemptions than I would gain in interest, on the margin.
It seems pretty clear to me that I can get a higher interest return than you can, and that I will continue to do better as I move to 98, 97, and so on, until I hit a point where, if I moved another percentage point, I'd lose more money in increased redemptions than I would gain in interest, on the margin.
You are clearly missing the point here. This is not about redemptions, nor is this about bank runs! This is a clear indication that you are misunderstanding Austrian Capital Theory. This is about investments that do not equal real savings (I don't want to repeat the previous explanation of what real savings means). This is about a mismatch between credit and time preference. If you increase the money supply via credit markets, you will misdirect resources into higher order goods by distorting the natural rate of interest, which does not correspond to consumers time preference. There is no place for MV=PQ in Capital Theory. If you value yourself as one who adheres to science, you cannot use a mystical equation.
You are in no position to take this Rothbard vs everyone else tone, for you are clearly confused about basic Austrian theory. We can thank Horowitz and White for that. They are brilliant in many respects but they have deeply blundered on this matter.
Hi Alan… Thank you for the answer.The reason I was so confused is because of this movie, and they said something we left in the conversation between us.
In that movie, they claim as if they the moment the banks deposit a reserve in the central bank, it can ,multiply the money at 9x (in the movie, from $1111 to $10,000) and after they multiply it, they have the reserve ratio of 10%, which allows them to multiply it y 90X totally.
Look at minute 14 "Money As Debt" http://video.google.com/videoplay?docid=-2550156453790090544&hl=en
As you can see, they claim that what they deposit as a reserve in the central bank, could automatically be multiply 9X.If I understand right, In the movie, they claim the ratio is opposite. If the reserve ratio is 5%, the commercial banks can lend 95% of the deposit. But for the central bank, it is the opposite. It can lend not 1/20 of the deposits, but 20x the deposits. If the reserve ratio is 9:1 (new money: old money) , then the central bank can multiply it 9 times, and for the banks the ratio means - loaned : kept - 90%:10% -> 10% ratio. it is not that obvious.
That is what I really didn't understand, the source of confusion.
2- Reserves are just the money the bank has on hand. Now, part of it stays with the bank. And part of it the bank deposits in central bank. If I deposited $1000, the bank lent $900. Now, it could save $50 and another $50 save in the federal reserve. The reserve ratio is different thing. How much the banks should put in the federal reserve hands? And what the purpose of it anyway. They could keep it in their bank. What I thought was, that it allows the federal reserve to lend the banks money. The reserve ratio, is also applied on the federal reserve. So they have interest to keep all their savings, in the central bank, so they could lend the maximum from it. In this context – does the reserve ratio of the federal reserve is the same as the commercial banks? They deposited the $100 left in the central bank. Now, in 10% reserve ratio, the federal reserve can lend
3- I asked you where the interest collected by the central bank, goes to. And you answered about the commercial banks, so I re-ask it: When the federal reserve loans money to the commercial bank, and collects interest. Where does this interest, of the central bank goes to. It doesn't go to the government, right (as you might think since it is "federal", It goes right back to the commercial banks.
To sum it all that up, the Federal Reserve has three main authorities: 1) Buying or selling securities from the government (Open Market Committee). 2) Set the reserve ratio of the banks, and actually its own ratio. 3) Set the interest rate. Anything else?
DD5: There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese?
That tomatoe and cheese are rotting in the deposit being wasted.
rimon: In that movie, they claim as if they the moment the banks deposit a reserve in the central bank, it can ,multiply the money at 9x (in the movie, from $1111 to $10,000) and after they multiply it, they have the reserve ratio of 10%, which allows them to multiply it y 90X totally. Look at minute 14 "Money As Debt" http://video.google.com/videoplay?docid=-2550156453790090544&hl=en As you can see, they claim that what they deposit as a reserve in the central bank, could automatically be multiply 9X.If I understand right, In the movie, they claim the ratio is opposite. If the reserve ratio is 5%, the commercial banks can lend 95% of the deposit. But for the central bank, it is the opposite. It can lend not 1/20 of the deposits, but 20x the deposits. If the reserve ratio is 9:1 (new money: old money) , then the central bank can multiply it 9 times, and for the banks the ratio means - loaned : kept - 90%:10% -> 10% ratio. it is not that obvious. That is what I really didn't understand, the source of confusion.
I dont understand it either, but unfortunately I couldn't get the movie to play. As such, I can't evaluate that part of the question, only give my understanding of how the process works.
rimon:2- Reserves are just the money the bank has on hand. Now, part of it stays with the bank. And part of it the bank deposits in central bank. If I deposited $1000, the bank lent $900. Now, it could save $50 and another $50 save in the federal reserve. The reserve ratio is different thing. How much the banks should put in the federal reserve hands? And what the purpose of it anyway. They could keep it in their bank. What I thought was, that it allows the federal reserve to lend the banks money. The reserve ratio, is also applied on the federal reserve. So they have interest to keep all their savings, in the central bank, so they could lend the maximum from it. In this context – does the reserve ratio of the federal reserve is the same as the commercial banks? They deposited the $100 left in the central bank. Now, in 10% reserve ratio, the federal reserve can lend
The purpose of having an account with the federal reserve is, officially, that this is how the reserve ratios are enforced. In your example, suppose the reserve ratio is 10%, so they have to keep $100 for the $1000 you deposited. The way that the Fed ensures that they do so is to require them to deposit thet $100 in their account at the Fed. If they want to keep $50 on hand, they'll have to refrain from lending $150. Now, another "benefit" (for the banksters) is, as you say, it allows the Fed to lend money out without printing money (which is actually a benefit to us, too, to the extent that they do it.)
rimon:3- I asked you where the interest collected by the central bank, goes to. And you answered about the commercial banks, so I re-ask it: When the federal reserve loans money to the commercial bank, and collects interest. Where does this interest, of the central bank goes to. It doesn't go to the government, right (as you might think since it is "federal", It goes right back to the commercial banks.
Sorry, I misread your question. According to Fed propaganda, the money it earns, whether through interest on these loans or on the bonds it owns, is used for operating expenses - salaries, building upkeep, and so on. Theoretically, any surplus at the end of the year goes to the Treasury. (Another interesting note - the Fed Chief is supposedly not allowed to invest his own money in securities. I say supposedly, because there was a minor wave of upset, quickly passed over by the media, during the Greenspan years when he mentioned that he indeed doesn't invest in stocks or bonds, much less trade them - but his wife does with their joint bank account.)
Joshua:If the banks use 100% reserves, there can be people lined up at the doors asking to borrow money, and insufficient supplies to loan to them
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
scineram: DD5: There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese? That tomatoe and cheese are rotting in the deposit being wasted.
That is ignoring the inherent subjectivity of value. You don't get a say in how I use (or don't use) my property. I prefer that my tomato and cheese sit in storage rather than being used by someone else. There is no waste.
JAlanKatz: DD5:Here we go again with the Crank Equilibrium theories. After spending a lot of time around Austrians who somehow want to prevent banks from lending at fractional reserves, I am no longer at a loss to explain how others can trust the free market in all things except defense. After all, if Austrians can trust the market to do all things except money...
DD5:Here we go again with the Crank Equilibrium theories.
After spending a lot of time around Austrians who somehow want to prevent banks from lending at fractional reserves, I am no longer at a loss to explain how others can trust the free market in all things except defense. After all, if Austrians can trust the market to do all things except money...
You misrepresent us.
We trust the market to punish fraudsters.
Otherwise, good write up on the Fed.
Idle money is not wasted. Otherwise we could spend ourselves into prosperity.
Keynesians always argue that without fractional reserve lending there would be less growth, as in "lining up to get supplies". Aside from other refutations of that, bank lending per se is not even necessary for financing industrial expansion. There's this thing called the stock market. They clearly don't understand that anymore than anything else.
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