Quote: Original post by trzy

Quote: Original post by Daerax
capn_midnight argument is flawed due to being underpinned by the notion that "We have a liquidity crisis because savings are at an all time low". This would be accurate if banks actually only loaned money they had.

But banks create money out of thin air, thanks to extremely lenient modern fractional reserve requirements, banks can lend vast sums of money they dont have. So called investment banks exacerbated it further by inventing incomprehensible financial instruments which allowed the creation of imaginary money to accelerate unchecked. Any such inflationary boom must be followed by a deflationary spiral as the bubble pops and credit suddenly contracts inducing illiquidity due to runs, insolvency and the very fact that the money supply in use was in excess of the real total money available. Indeed it is the current nature of credit fueled economic expansion that makes deflation a bigger deal than inflation. As the real value of money increases so does the value of debt, making everyone who is in debt a lot poorer. With western governments and citizens such an occurrence would be disastrous, with closures and cuts and losses as one after the other defaulted leading to the decimation of the entire economy's productive capacity.

The fundemental flaw is in fractional reserve banking and its inflationary boom-bust nature, the so called business cycle.

I wonder though, loose money supplied fueled by credit also means greater social mobility and greater profit and gains played on risk. If money was a lot harder to come by, then class structures would arguable be even more rigid. So its a tough choice.

There's nothing inherently wrong with fractional reserve banking. The money supply ought to be able to accommodate productivity (which is what lending is supposed to finance.) When the debt is repaid, everything works out nice and neatly. The current financial crisis is not a normal bust cycle, it's the unraveling of an unsustainable economic model and lifestyle fueled by cheap credit. America's economy has been taking on the savings of other nations but rather than producing wealth, we've been speculating on stocks and trading houses back and forth.

What made all of this especially bad was the huge amount of leverage used to finance these investments. When it turned out that it was all just an overinflated bubble, everything came crashing down. America's entire way of life is being downsized, probably for good.

There actually is something wrong with fractional reserve banking. Sustainable productivity growth is based on capital, not the illusion of capital. It is this illusion that reduces the opportunity cost of malinvestment and creates bubbles.

Your following point about the consumption of other countries' savings is apt. But the reason we were employing the inbound capital in unproductive ways is because the market signals were corrupted by our original malinvestment caused by illusory capital.

Imagine the guy that "invented" the pet rock using that model as a benchmark and sinking his new found millions in the new and improved pet paperclip.

Quote: Original post by LessBread
It's not magic, it's economics.

This while defending the policies of a man that believed the economy was guided by animal spirits, classic.

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It seems to me that the savings of the people who acted responsibly during this whole mess was destroyed by the whole mess.

Not yet they haven't, but they will be once the stimulus strikes full bore.

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First you say there are no funds to loan, then you say that the banks are hoarding the money the government gave them to loan.

The term "funds" is ambiguous. There is no capital to loan.

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In that case, the root cause was crumbling wages. People didn't save because they had nothing left over to save because their wages had been falling for thirty years.

The root cause was a weak dollar policy that favored debt over capital, what follows is human nature.

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You think we should drink more market fundamentalist kool-aid? Really? If everyone puts their money in the bank, the economy will collapse. Seriously. It seems to me that you're tracing the economic policy of the Hoover administration.

Companies that are viable only in a bubble will fall unless they are permanently propped up by tax payer money. They need to fall or else be nationalized and offer their products as a public good.

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Regulations? Really? Now you're sounding like me.

Rather, we need to reaffirm the constitutional mandate of sound money. That is legal tender laws only apply to gold and silver then you can let the market sort the rest out. I'm not sure that would be considered a regulation, more like a vast deregulation.

Quote:
Actually, the fiscal irresponsibility began with Ronald Reagan. It began to turn around with Bush 41, but he "lied" about taxes and lost favor with his party. Clinton picked up the ball to institute "Pay-Go" and managed at least to balance the budget on paper. Then Bush 43 took over and ran the country into a ditch. Closing the Dept of Education is a terrible approach to improving literacy rates, but don't let that get in the way of promoting your ideological agenda.

I won't quibble about your partisan hackery(Go team), but standardized test scores have gone down in an inverse relation with the dept of education's budget.

Quote:
Pour on the kool-aid! When all you've got in your tool kit is tax cuts, every problem calls for more tax cuts!! And where did you come up with that half baked notion that income tax promised to end after WWII? You're right that income taxes are taxes on the poor and middle class. They're part of the mechanism for redistributing wealth upwards to those that don't need it.

What a well reasoned and civil response, by all means continue to lecture me about the civility of my responses.

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Your plans would wreck the country and the globe for that matter.

Your plans are wrecking the globe now, nothing wrong with trying a different tact.

Quote: Original post by trzy
Monetary theory is beyond my area of expertise (and I suspect that it is well beyond most people who want to argue about it.) I don't know many economists or bankers who support eliminating reserve banking or returning to a gold standard. It's a subject I would like to learn more about when I have the time to plunge into the nitty-gritty details.

The Case Against the Fed

Quote: Original post by Zahlman
Only if you had taxable income to begin with. If you don't have a job, you don't have income besides what the government gives you, which is presumably not itself taxed (since there would be no point to giving out extra and then taking some away, except to create more bureaucracy), which means you weren't paying taxes, which means your previous taxation of zero is reduced by X% to still zero, while you still don't have enough income to support yourself, because what the government is giving you isn't enough (unless this is the point you want to argue, in which case why didn't you just say so) to sustain food and shelter as a single parent.

What is so hard about this?

I am following what logically happens. I don't see you trying to do the same. I only see you repeating your economic policy talking points.

That's because you're either economically or ideologically ignorant of the topic. A person without a job doesn't need a check from the government, they need a job. Further, for that job to be sustainable they need to be producing wealth for their employer.

People hear the, "Give a man a fish and feed him for a day, teach a man to fish and feed him for a lifetime." truism and nod their head, then fail utterly to apply it to basic economic practices.

Quote: Original post by nobodynews

Quote: Original post by Dreddnafious Maelstrom

Quote: Original post by Zahlman
Meanwhile, in a large civilized country such as the US, if you don't have a job, a tax cut can't help you buy the necessities of life.

Tax cuts creates disposable income, you can follow what logically happens after assuming you're actually trying.

Yeah, you invest the money in the housing market. Or in unregulated financial instruments. Or with Bernie Madoff.

As a result of government created bubbles creating false market signals. As with Madoff, both cases are a form of fraud.

Quote: Original post by laeuchli
[If the banks dont loan out any money though, then captn_midnight's theory that large amounts of bank deposits always constitutes desirable economic activity is even less true.

You're conflating "money" and "specie", they are different animals.

Quote: Original post by Dreddnafious Maelstrom

Quote: Original post by trzy

Quote: Original post by Daerax
capn_midnight argument is flawed due to being underpinned by the notion that "We have a liquidity crisis because savings are at an all time low". This would be accurate if banks actually only loaned money they had.

But banks create money out of thin air, thanks to extremely lenient modern fractional reserve requirements, banks can lend vast sums of money they dont have. So called investment banks exacerbated it further by inventing incomprehensible financial instruments which allowed the creation of imaginary money to accelerate unchecked. Any such inflationary boom must be followed by a deflationary spiral as the bubble pops and credit suddenly contracts inducing illiquidity due to runs, insolvency and the very fact that the money supply in use was in excess of the real total money available. Indeed it is the current nature of credit fueled economic expansion that makes deflation a bigger deal than inflation. As the real value of money increases so does the value of debt, making everyone who is in debt a lot poorer. With western governments and citizens such an occurrence would be disastrous, with closures and cuts and losses as one after the other defaulted leading to the decimation of the entire economy's productive capacity.

The fundemental flaw is in fractional reserve banking and its inflationary boom-bust nature, the so called business cycle.

I wonder though, loose money supplied fueled by credit also means greater social mobility and greater profit and gains played on risk. If money was a lot harder to come by, then class structures would arguable be even more rigid. So its a tough choice.

There's nothing inherently wrong with fractional reserve banking. The money supply ought to be able to accommodate productivity (which is what lending is supposed to finance.) When the debt is repaid, everything works out nice and neatly. The current financial crisis is not a normal bust cycle, it's the unraveling of an unsustainable economic model and lifestyle fueled by cheap credit. America's economy has been taking on the savings of other nations but rather than producing wealth, we've been speculating on stocks and trading houses back and forth.

What made all of this especially bad was the huge amount of leverage used to finance these investments. When it turned out that it was all just an overinflated bubble, everything came crashing down. America's entire way of life is being downsized, probably for good.

There actually is something wrong with fractional reserve banking. Sustainable productivity growth is based on capital, not the illusion of capital. It is this illusion that reduces the opportunity cost of malinvestment and creates bubbles.

Your following point about the consumption of other countries' savings is apt. But the reason we were employing the inbound capital in unproductive ways is because the market signals were corrupted by our original malinvestment caused by illusory capital.

Imagine the guy that "invented" the pet rock using that model as a benchmark and sinking his new found millions in the new and improved pet paperclip.

I dont see why businesses created by loans of fractional reserve dollars are any more or less a real creation of capital, then a buisness created by a loan of dollars from a bank that is fully reserved. Dollars are artificial, and they enter the system faster or slower depending on what rate of reserve the central bank requires. Its not clear why 100% rate of reserve is automatically the best rate no matter what the circumstances. You are claiming that making it eaiser for banks to give loans distorts market signals in a way thats always undesirable, but I dont see how that can be true. What if there are X amount of good loans to be made, Y amount of loanable nondeposit assets(whatever those might be), and Z amount of total deposits and W amount of deposits that need to kept on hand on average. Are you saying that it never occurs that (X>Y), and that (Z>W)? To me it seems that this occurs all the time, under both regulated and deregulated markets, and if you dont allow fractional reserves in this case, then you are preventing the creation of desirable captial.

As far as I can see theres nothing wrong with fractional reserve banking per se, simply people misadminster it occassionally. This hardly seems to be an arguement to toss the whole system, since any paticular system would be misadjusted on occasion. I suppose one could attempt to claim that there would have been more real capital created over the past X years, if a different system had been used, but this seems like a difficult arguement to make to me. Do you have any paticular model that could demonstrate this?

[Edited by - laeuchli on February 4, 2009 12:13:09 PM]

Quote: There's nothing inherently wrong with fractional reserve banking.

Yes, there is. Fractional reserve banking creates money out of nothing. If a bank is required to keep 3% on reserve and can lend out 97% (the real value is higher), that 97% will eventually make it's way back into a bank account somewhere. That new money can then be called "reserve" and lent out again at 97%, and again, and again. The exact number I don't know, but it's something like every dollar can be loaned out 10 times before the limit is reached.

This elastic money supply is the real root of economic troubles. Remember that ever since banks began using a fractional reserve we've seen a near constant roller coaster of booms, busts, inflation, and bank failures. You never see this in the rare cases in history of sound banking principles (like the Bank of Amsterdam, and Hamburg).

Onto a very real situation: these latest economic bailout plans. Do you know how they get paid for? Certainly not by taxes. With a little slight of hand, the Fed essentially just creates the money out of nothing. We end up paying for it through rising prices everywhere as the money floods the system at a cost of about $10000 lost in spending value per family.

The truth is that the government depends on this elastic money supply for spending. Creating money from nothing is also how we finance wars abroad. We could actually completely eliminate taxes and do all government spending this way, but then people would catch on to this hidden tax we pay called inflation. If taxes were raised proportional to the real cost of wars, the public would never accept them.

Finally, one more food for thought. In a fiat money system like we have today where money is not backed by any real measurable value, if everyone were to pay off all of their debts (including the government's national debt), there would be no money in the system because our money supply is backed only by debt.

I recommend The Creature from Jekyll Island: A Second Look at the Federal Reserve if all this piques your interest.

Original post by think_different

Quote: This elastic money supply is the real root of economic troubles. Remember that ever since banks began using a fractional reserve we've seen a near constant roller coaster of booms, busts, inflation, and bank failures. You never see this in the rare cases in history of sound banking principles (like the Bank of Amsterdam, and Hamburg).

This is quite questionable. There have been any number of economies with inelastic money supplies, and they've had thier own stream of booms and busts. Such economic problems will exisit no matter what fincial system you choose to operate under. You could attempt to argue that there are paticularly more of them under the fractional reserve I suppose, but I think that would be pretty hard to argue, at least from a historical perspective.

<economic naivete>
Why isn't this applied since Republicans such as Steele are for tax cuts? The "this" is: Give me the little person a tax cut. Let's throw out a number.... 50%. A federal income tax cut of 50% would put, based on my salary, an extra $161.50 on my biweekly paycheck. That comes out to $4200 a year. With $4200 I could actually go to a store and buy things. Me (and a million other people) buying things creates revenue which will eventually create profit. Profitable companies can hire more people who can in turn buy (more) things because they have income with which to buy things.

It seems that I need the tax cut far more than companies do. It seems that no one, especially low income families/person, should have to pay 15%+ interest on ANYTHING. It shouldn't take 7 years for my credit to "repaired". Interest on my car loan, student loan, credit cards, payday loan, citifinancial loan, or X loan should be deductible, ALWAYS, especially if you're paying 15%+ interest on any of the above.

After 8 years of tax cuts for businesses, why not have what Jon Stewart termed the "trickle-up" theory of economics. Give me tax cuts and incentives, so I can do something more with my money besides sweat, catch up on bills, and tell myself I can't afford this or that.
</economic naivete>