The Fed

Off Topic Politics and World Issues
21

[quote]SexMachine wrote:

[quote]Dr. Pangloss wrote:
I wonder if some of the opprobrium directed towards the Fed should be more accurately directed towards the fractional reserve banking system. Though the two go hand in hand, they aren’t the same. I could argue that there is a proper and limited place for a banking supervisor, even a liquidator of last resort.[/quote]

This is exactly what I’ve always said. The vast majority of “money” in the economy at any one time is not fiat currency, it’s all the theoretical money loaned and used as leverage and so on. The fractional reserve banking system lends something like $90 for every $10 in currency they have. That’s the problem. It’s not too much fiat and risk of hyperinflation.[/quote]

What organization lends money to the banks so they can make loans with money they do not have? Before the creation of the Federal Reserve Bank of the US banks did not have the ability to lend more than they kept on deposit without being at risk of insolvency. Hello! Moral Hazzard!

The Fed has to loan $80 (out of thin air) to the banks that lend out $90 for every $10 they keep on deposit. When those loans fail the money has already been spent, resources have been used, costs have risen in those sectors with malinvestment, and the banks have already profited by interest even if the loans don’t get fully repaid. The Fed profits just by printing paper for banks.

Imagine if you were able to charge interest on $100 if you only had $10 on deposit. Imagine if you could charge interest on money you never had to being with. That’s the Fed in a nutshell.

22

[quote]LIFTICVSMAXIMVS wrote:

What organization lends money to the banks so they can make loans with money they do not have? Before the creation of the Federal Reserve Bank of the US banks did not have the ability to lend more than they kept on deposit without being at risk of insolvency. Hello! Moral Hazzard!
[/quote]

Fractional reserve predates central banking.

Rather than try and paraphrase, I’ll copy pasta Wiki here:

Fractional-reserve banking predates the existence of governmental monetary authorities and originated many centuries ago in bankers’ realization that generally not all depositors demand payment at the same time.[5]

In the past, savers looking to keep their coins and valuables in safekeeping depositories deposited gold and silver at goldsmiths, receiving in exchange a note for their deposit (see Bank of Amsterdam). These notes gained acceptance as a medium of exchange for commercial transactions and thus became an early form of circulating paper money.[6] As the notes were used directly in trade, the goldsmiths observed that people would not usually redeem all their notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing loans and bills. This generated income for the goldsmiths but left them with more notes on issue than reserves with which to pay them. A process was started that altered the role of the goldsmiths from passive guardians of bullion, charging fees for safe storage, to interest-paying and interest-earning banks. Thus fractional-reserve banking was born.

…

Starting in the late 1600s nations began to establish central banks which were given the legal power to set the reserve requirement and to specify the form in which such assets (called the monetary base) are required to be held.[7] In order to mitigate the impact of bank failures and financial crises, central banks were also granted the authority to centralize banks’ storage of precious metal reserves, thereby facilitating transfer of gold in the event of bank runs, to regulate commercial banks, impose reserve requirements, and to act as lender-of-last-resort if any bank faced a bank run. The emergence of central banks reduced the risk of bank runs which is inherent in fractional-reserve banking, and it allowed the practice to continue as it does today.

In a nutshell, central banks were instituted to reduce the threat of bank-runs due to fractional reserve lending.

Interestingly, Islam prohibits fractional banking and NK and Cuba are two of the few countries who don’t follow the practice, most likely because traditional avenues of credit aren’t available to them.

23

[quote]Dr. Pangloss wrote:

In a nutshell, central banks were instituted to reduce the threat of bank-runs due to fractional reserve lending.
[/quote]

The irony is in order to prevent bank runs the Fed didn’t change the practice of fractional reserve they just transferred the Banks risk to savers.

Great job.

24

[quote]LIFTICVSMAXIMVS wrote:

[quote]Dr. Pangloss wrote:

In a nutshell, central banks were instituted to reduce the threat of bank-runs due to fractional reserve lending.
[/quote]

The irony is in order to prevent bank runs the Fed didn’t change the practice of fractional reserve they just transferred the Banks risk to savers.

Great job.[/quote]

Yep, they socialized the risk.

Because of QE, my elderly mom - who saved her entire life - is now earning just over %1 on her bank balances. Her annual income has been cut by $40,000 over the last 10 years.

25

[quote]Dr. Pangloss wrote:

[quote]LIFTICVSMAXIMVS wrote:

[quote]Dr. Pangloss wrote:

In a nutshell, central banks were instituted to reduce the threat of bank-runs due to fractional reserve lending.
[/quote]

The irony is in order to prevent bank runs the Fed didn’t change the practice of fractional reserve they just transferred the Banks risk to savers.

Great job.[/quote]

Yep, they socialized the risk.
[/quote]

And changed the mindset of future generations to one of less saving and more dependency.

26

[quote]LIFTICVSMAXIMVS wrote:
And changed the mindset of future generations to one of less saving and more dependency. [/quote]

Why would they do that?

Then you’re left with a populace who’s dependent upon the political party that offers widespread government handouts.

Oh.

Nevermind.

27

[quote]LIFTICVSMAXIMVS wrote:

[quote]Dr. Pangloss wrote:

In a nutshell, central banks were instituted to reduce the threat of bank-runs due to fractional reserve lending.
[/quote]

The irony is in order to prevent bank runs the Fed didn’t change the practice of fractional reserve they just transferred the Banks risk to savers.

Great job.[/quote]

I want to revisit this for moment to point out that the Fed exists because of Congress. Their mandate is set by Congress, they’re subject to Congressional oversight and reporting requirements, and the members of the Board of Governors, including its chair and vice-chair, are chosen by the President and confirmed by the Senate.

28

[quote]Dr. Pangloss wrote:

[quote]LIFTICVSMAXIMVS wrote:

[quote]Dr. Pangloss wrote:

In a nutshell, central banks were instituted to reduce the threat of bank-runs due to fractional reserve lending.
[/quote]

The irony is in order to prevent bank runs the Fed didn’t change the practice of fractional reserve they just transferred the Banks risk to savers.

Great job.[/quote]

I want to revisit this for moment to point out that the Fed exists because of Congress. Their mandate is set by Congress, they’re subject to Congressional oversight and reporting requirements, and the members of the Board of Governors, including its chair and vice-chair, are chosen by the President and confirmed by the Senate.
[/quote]

It doesn’t really matter what they are mandated to do though. They will always argue why their methods are necessary to carry out their “mandate”.

edit

And in terms of things the Fed can do there really is only one thing: lend money to banks.

29

The Fed does quite a bit more than simply lend money to banks. However, that’s not my point and I don’t want to veer into the pedantic.

My point is, if the Fed is a power drill, then Congress is the hand on that power drill. And if the hand on that drill isn’t steady, we shouldn’t be surprised when we find ourselves in a bigger hole than we expected.

30

[quote]Dr. Pangloss wrote:
The Fed does quite a bit more than simply lend money to banks. However, that’s not my point and I don’t want to veer into the pedantic.

My point is, if the Fed is a power drill, then Congress is the hand on that power drill. And if the hand on that drill isn’t steady, we shouldn’t be surprised when we find ourselves in a bigger hole than we expected.[/quote]

Ok, this analogy is almost apt. Instead of a power drill it is a magical wand and congress lacks the necessary powers to wield it.

31

An even more apt tool metaphor is that the Fed is a big rubber dildo wielded by Congress, who thinks the world looks like a butthole.

32

Agreed.