@minusdotminus lol, i'm not defending the current debt system, just wondering about a fine point. this is a difficult subject, and I began with this video series and went on to the money as debt 2 and then to the secret of oz videos, plus other stuff. it dawned on me that fractional reserve lending is based on unsecured debt... I've watched this video several times. i agree with your observation
a bookie might have zero reserves, balancing his payables with his receivables, and skimming a percentage. it all works out unless someone doesn't pay up, in which case his "insurance company" has to go out and "collect". Now if bookies required all their bets up front, then there's no issue of debt to consider (except the bookie's), and he's a "financial intermediary" which sounds good to me. So what's outlawed here? Unsecured debt?
FRB is not the actual problem, exponential public debt is. Financial crises are not natural, fateful events of capitalism, they are part of the following cycle: exponential public debt leads first to inflation which lead to higher of interest rates which lead to disinflation which lead to lower of interest rates which lead to higher values of financial assets (bubble) which lead to an artificial wealth effect which leads to reflation which leads to higher interest rates which leads to a crash.
@lpmcdo You've left steps out of your cycle. How do you suppose public debt results in inflation? If the debt were simply repudiated there would be no inflation, but massive deflation instead. It's the monetization of debt by adding new money to the system that is inflation and leads to a general rise in prices (and asset bubbles and other sorts of problems).
The general rise in prices is halted by the Fed not creating new money as fast by which they allow interest rates to rise.
@xanas3712 Money is always credit (Hartley Withers: "loans make deposits"). The increase of credit is inflationary, the decrease deflationary. Without the state, prices would be stable, because private enterprises pay back their debts, but the state does not, so the latter is the only cause for inflation. Deflation always follow inflation, so the state is also the only cause for deflation. Asset bubbles occur during disinflations (intermediary phase), when interest rates decrease.
@lpmcdo In any case, I don't think what you are saying is entirely wrong, but I think leaving out these steps obscures where the problem comes in.
Also I definitely disagree with you that FRB isn't the actual problem. FRB creates runs which creates the initial demand for central banking and deposit insurance. The cycle is started by FRB, even if FRB could theoretically exist without it this is very unlikely due to the desire for "quick fix" solutions arising from a belief in using the state.
@xanas3712 System wide bank runs are always a consequence of a financial crisis which itself occurs when a bubble pops. FRB is vital for capitalism to exist, because there is never enough money in the system: when a loan is made, the money for the interest is always missing, so another loan needs to be made. That's why there must always be growth, zero growth is impossible. The soundness of a currency depends on the collateral, not the amount of reserves.
The Fed and the fractional reserve system was created by powerful bankers in the early 1900s for their sole benefit and greed. It's unfortunate how so few people even know the workings of the banking system.
Real productive activity can only be stimulated and sustained by real savings and by real consumer demand, expressed by real sacrifices of earned claims to wealth. Money created out of thin air is an artificial stimulus that can only lead to economic ruin, which it has.
By the time the money reaches us working stiffs, we will have been feeling the effects of inflation. The new money gets loaned at fraudulently lowered interest rates to stimulate production that is not based on genuine savings and therefore creates bubble activity for which sufficient consumer demand does not exist to sustain. Because it can only be sustained by artificially cheap money, the bubble inevitably bursts when the threat of hyperinflation causes the Fed to raise interest rates.
Money created out of thin air does not correspond to any increase in wealth, but represents only an unearned claim to wealth. The first recipients of this counterfeit money (the banks and their major clients) make claims to wealth before the money circulates through the economy and raises the general price level. They thus enjoy the purchasing power of the new money before it gets diminished by virtue of its having been spent.
I find it interesting that your first commentary was in Oct. 2008 and this one in Oct. 2009. Why? Because in Oct 2008 congress voted to require interest payments on excess reserves. By Oct 2009 the excess reserves swelled to $1 Trillion (from a historical level of almost 0).
This costs taxpayers $2.5 Billion/Yr. Worse, because of fractional reserve banking and the money multiplier this means about $10 Trillion has been siphoned from the most important segment of the..
My GOD! I've had a Whale of a Time listening and Learning from you. What an Experience. One reason I chose this Whole course 1st, is because this what you really Know. ,', I was sure if I didn't get IT, I never would. I HAVE GOT IT; this old girl has GOT IT. THANK YOU! WOW! I'm banking aware. I'm Off to Currency, Economics & Finance Next. Do U Know, U Can Teach an Old Dog New Tricks, sometimes. :)
By that I simply mean that whatever regulation that does exist needs to be about ensuring transparency of information. This applies to both government and private actions within a market.
The problem though comes down to asymmetry of information: even without the FDIC banks would still follow fractional reserve banking policies, because their customers do not have perfect information on the intentions of their bank's plans. This is what happened before the FDIC scheme was introduced, and was the cause of the numerous financial panics of the 19th century. A more realistic policy would be for regulation and public policy to explicitly recognise many of the advances in game theory.
Great series ! ! Sal finally i appears to me that in addition to liquidity sport+ FDIC insurance backed by federal reserve to run out banks there needs to more improved engineered ways to attack the problem. Instead of embracing new system ( venture capitalism ) where Federal reserve system has no role , we could strengthen loop holes you pointed out with addition mechanism in place. As FDIC insurance underestimates at dynamic instant bank run out panic.
BRILLIANT 3 video series on fractional reserve banking and the FDIC!
I would say less than 1% of Americans are aware of the important points that you are making, yet what you are talking about is becoming increasingly relevant as we go deeper into the financial crisis.
I would suggest to anyone watching these inaccurate videos on Money and Banking that you visit Mises.org for a much more in depth and thorough explanation. Mr. Khan has not done his homework himself before he has started teaching. Passing on false information makes one a poor teacher.
@khanacademy I am at a loss as to how you can see the shortcomings of FRB through logic and reason yet in one of your earlier lectures on the gold standard you indicate that it is an illogical / irrational system.
I would really like to hear details as to why you think that a small group of people being able to freely generate currency without any real work (no value added) is advantageous over a commodity that requires some kind of labor to produce (mining, growing, processing, etc.).
The only industry we need to carefully regulate is reinsurance. The government is a poor regulator by virtue of its bureaucratic nature. The "reserve ratio" set by regulators should refer to how much liability the reinsurance industry is allowed to take on relative to the private cash-equivalent equity backing it. The wealthiest of people are the best ones to defend the integrity of money. Our banking system should be designed around making their asset the first to perish in a crisis.
My question is why is there interest and wouldn't the system be better off if there was no interest? There is the concept that if the Fed lends a certain amount of money out, and the borrower owes that money plus the interest, then the full amount of the loan can never be repaid because there is only the money that was actually borrowed that is circulating. Do people have to keep borrowing more to pay back past loans and does this turn into a run-away borrowing scenario like a pyramid?
Well there I just flat out disagree with you. I think government has a role to play in ensuring macroeconomic stability. I'd much rather my money were backed by the full faith and credit of the government than by the value of a commodity - if I want to invest my wealth in a commodity, I'll just buy some.
Who do you think is going to set the rate of exchange between gold and silver dollars? Banks and politicians!
It's not based on the market value either way. If you want your wealth to be based on the market value of gold, just buy gold already. You can even use it to buy stuff if people will take it.
You have avoided all of my points: That fiat money isn't responsible for the bank run problem, and that money is actually less useful as money if it holds its value well.
The interesting thing there is that the gold/silver price remained somewhat stable. Flandreau (1996) argues that this is because arbitrage kept it that way - when the gold price rose slightly, people redeemed and sold gold until it dropped again.
The effect of this would have been to artificially pin the value of one metal to the other - which is itself a form of fiat money, the same as artificially inflating the value of bits of paper.
As Sal explained, the failures are not the result of fiat money but of the bank run problem arising from the fractional reserve system.
As for the devaluation of money, it doesn't matter. Money is not an investment. It is not meant to hold its value. It is a medium of exchange used to purchase other investments.
If money gained value people would have less reason to spend it, and it would fail to serve its purpose as the medium of exchange within the economy.
Not THE people, just people. That is to say, some of that money belongs to you, some of it belongs to me. Do you want your money going poof?
Bimetallic standards don't work either. Let's say the commodity price of Palladium goes up by 5%. You trade all your gold dollars for Palladium dollars, redeem them and sell the metal for 105 cents per dollar.
The M2 money supply of the world is 46 trillion USD.
The total amount of gold mined in human history is worth 6 trillion.
The only way to go back to the gold standard without destroying most of the money in circulation - which, you know, actually belongs to people - is to value gold at many times its metal value.
Gold backed currency would be a terrible idea, and a lot of people seem unable to separate it from full reserve banking. Both fiat money and the fractional system allow for the production of money and thus make credit more available for projects which in turn can produce real wealth. Too much money looking to be invested leads to it being invested in bad places, like dodgy mortgage funds. Not enough leads to missed opportunities and poverty. A gold standard would guarantee a shortage of money.
A full-reserve system wouldn't work without (other) government regulation. At a minimum, you'd need a mechanism to take retail banks into receivership, because a breakdown in revolving credit creates real costs in the real economy.
You also need a mechanism like Glass-Steagall to ring-fence the retail banks, because a system-wide Minsky Moment will overwhelm your capacity to take banks into receivership unless you have a very clear idea about who you want to nationalise and who can go Ch. 11.
Hi. As new reserves are created by OMO purchases, a commercial bank could then lend a person the principal loan meaning that all borrowers would have to extract interest owed from the existing money supply. Since commercial banks are private, 100% of interest earned couldn't be recycled back into the system equally (due to the private investors' need to accumulate more money to make more money). Would a shortfall in the supply of money exist for any borrower who must pay interest on a bank loan?
Your work is truly a blessing to society. By the reserve bank adding new reserves into the system through the repo (by buying old treasury securities) can the reserve bank enable ordinary banks to purchase a large amount of new treasury securities from the Treasury (due to the multiplier effect on the new reserves). In this way reserves sort of get cancelled out. Can a govt. deficit financing be supported by a reserve bank that injects reserves into the system shortly before a treasury auction?
@scubidu1000 It seems the reserves would be canceled out only if the securities were bought from the federal reserve, which are not new. If the fed wanted to contract the money supply, which would be canceling out the reserves, they would sell the treasury securities on their balance sheet. Don't think the fed is able to create new securities.
@PenguinJin Thanks-If the Reserve Bank wanted to increase the capacity for banks to buy new treasury securities at auction they could inject enuf (temp) reserves b4 the auction. I think this is what my Central Bank (not the US) has been doing to finance their huge borrowing deficit. They reduced the reserve ratio recently to 4.5%, so for every $1 they add in through OMO they can finance a desired deficit of $22. So although omo changes are temporary banks can create new deposits from the auction
The FRB industry is inherently unstable (e.g. Ponzi scheme); the industry should survive on selling CDs or charging storage fees. The main purpose is to bailout banks (e.g. create money during a bank run) and extend infinite amounts of credit to the state (e.g. create money). A bank's balance sheet has current liabilities (e.g. deposits) that dwarf its current assets (e.g. cash), and would be immediately bankrupt for any other company.
It does not imply a constant shortage of money. It says that, without Fed Reserve intervention, there is a shortage of reserves when fear enters the system. It is also saying that FDIC insurance allows the banks to have artificially low costs of capital (and decouples the cost of capital from the risks they are taking). Finally, it is arguing that the combination of liquidity from the Fed + FDIC insurance allows banks to make money off of the yield curve with no real value delivered.
Right, Sal. I didn't say you lie. In your level of abstraction it is the way you explained it. The "lie" is hidden in the system.
On a wider range, a "higher" level of abstraction - why exist a financial system in the way we have it? Because of a shortage of money. If the existing money would circulate faster - "forced" by periodically devaluated money - than this "shortage" would be leveled out. One example? Wörgl - a small city in Austria after 1945. It worked. Banks would be only middlemen.
Norway, you sound like an economics student, i.e., an idiot whose passion for theory blinds him to financial reality. I realize that continually twisting your observations to conform to your textbooks is a constant source of frustration and insecurity. There is no hope for you and may god have mercy on your soul :-)
Accepting (financial) reality could -maybe- blind for new/other ideas. Remembering different ways (Wörgl happened and others) and different ideas could -maybe- an inspiration for...something totally different even from what I wrote. -Maybe- better than let the things happen and/or discuss and cure symptoms.
Sal really has a convincing logic. Why doesn't Norwayte just create a video response and just illustrate to us in a more convincing way that Sal is missing something... because he can't. I don't need fancy theories. I need down to earth explanations about how things work. Thanks again Sal you are an intellectual champion releasing people from ignorance. How can we participate in a democratic capitalist society if we simply hold incomplete or superstitious concepts about the world.
I created a video response. Don't know if Sal accepted it as a video response. You can find the video on my channel: "Why we have a financial system as we have it?"
@khanacademy issuance of currency/credit/money should be totaly free "free banking system". there should be goverment and different private currencies competing. amazing that we still have a communist-goverment-monopoly on currency and money creation systems. fractional or fullreserve isnt important, we need competition between different private and gov currencies and different money creation systems. you should make a video on freebanking so that people learn about real free market capitalism.
The 800 lb gorilla in the room is the presence of a cashless society. Money (US Dollars,M3) is now 98% digital. So the bigger lie is creating money out of holding a computer button down. This allows for a total umlimited virtual resource. The banking system doesn't even need to print the money. Great video.
@minusdotminus lol, i'm not defending the current debt system, just wondering about a fine point. this is a difficult subject, and I began with this video series and went on to the money as debt 2 and then to the secret of oz videos, plus other stuff. it dawned on me that fractional reserve lending is based on unsecured debt... I've watched this video several times. i agree with your observation
etzel33 1 month ago
a bookie might have zero reserves, balancing his payables with his receivables, and skimming a percentage. it all works out unless someone doesn't pay up, in which case his "insurance company" has to go out and "collect". Now if bookies required all their bets up front, then there's no issue of debt to consider (except the bookie's), and he's a "financial intermediary" which sounds good to me. So what's outlawed here? Unsecured debt?
etzel33 1 month ago
This video is actually worth watching many times!
There's so many things could made me think over and over again in this short video.
And the series really give me another sight to see the banking system. I gotta say it didn't like the thing I thought before at all!
dadac123 2 months ago
I am impressed with the quality of this man's understanding.
SirFinklebottom 2 months ago
you sal, are very informed. also thank you for using very precise terms, or using terms in a precise way.
ThaFacka 2 months ago
FRB is not the actual problem, exponential public debt is. Financial crises are not natural, fateful events of capitalism, they are part of the following cycle: exponential public debt leads first to inflation which lead to higher of interest rates which lead to disinflation which lead to lower of interest rates which lead to higher values of financial assets (bubble) which lead to an artificial wealth effect which leads to reflation which leads to higher interest rates which leads to a crash.
lpmcdo 2 months ago
@lpmcdo You've left steps out of your cycle. How do you suppose public debt results in inflation? If the debt were simply repudiated there would be no inflation, but massive deflation instead. It's the monetization of debt by adding new money to the system that is inflation and leads to a general rise in prices (and asset bubbles and other sorts of problems).
The general rise in prices is halted by the Fed not creating new money as fast by which they allow interest rates to rise.
xanas3712 2 months ago
@xanas3712 Money is always credit (Hartley Withers: "loans make deposits"). The increase of credit is inflationary, the decrease deflationary. Without the state, prices would be stable, because private enterprises pay back their debts, but the state does not, so the latter is the only cause for inflation. Deflation always follow inflation, so the state is also the only cause for deflation. Asset bubbles occur during disinflations (intermediary phase), when interest rates decrease.
lpmcdo 2 months ago
@lpmcdo In any case, I don't think what you are saying is entirely wrong, but I think leaving out these steps obscures where the problem comes in.
Also I definitely disagree with you that FRB isn't the actual problem. FRB creates runs which creates the initial demand for central banking and deposit insurance. The cycle is started by FRB, even if FRB could theoretically exist without it this is very unlikely due to the desire for "quick fix" solutions arising from a belief in using the state.
xanas3712 2 months ago
@xanas3712 System wide bank runs are always a consequence of a financial crisis which itself occurs when a bubble pops. FRB is vital for capitalism to exist, because there is never enough money in the system: when a loan is made, the money for the interest is always missing, so another loan needs to be made. That's why there must always be growth, zero growth is impossible. The soundness of a currency depends on the collateral, not the amount of reserves.
lpmcdo 2 months ago
ty
makeiteasyable 2 months ago
And one more thing is the inflation that the expansion of the money supply creates, devaluing the savings of the little guy!
IvanAndreevich 5 months ago
Superb big picture conclusion Sal.
The Fed and the fractional reserve system was created by powerful bankers in the early 1900s for their sole benefit and greed. It's unfortunate how so few people even know the workings of the banking system.
nadzTube 5 months ago
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Real productive activity can only be stimulated and sustained by real savings and by real consumer demand, expressed by real sacrifices of earned claims to wealth. Money created out of thin air is an artificial stimulus that can only lead to economic ruin, which it has.
truthseeker482 8 months ago
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By the time the money reaches us working stiffs, we will have been feeling the effects of inflation. The new money gets loaned at fraudulently lowered interest rates to stimulate production that is not based on genuine savings and therefore creates bubble activity for which sufficient consumer demand does not exist to sustain. Because it can only be sustained by artificially cheap money, the bubble inevitably bursts when the threat of hyperinflation causes the Fed to raise interest rates.
truthseeker482 8 months ago
Money created out of thin air does not correspond to any increase in wealth, but represents only an unearned claim to wealth. The first recipients of this counterfeit money (the banks and their major clients) make claims to wealth before the money circulates through the economy and raises the general price level. They thus enjoy the purchasing power of the new money before it gets diminished by virtue of its having been spent.
truthseeker482 8 months ago
cont. .. economy, consumers and small/medium businesses that create jobs.
Three questions for you:
1. Is this an accurate assessment
2. Are you disturbed by this
3. What can we do? (I am pressuring my representative and senators, but how many people will it take to have an impact?)
wordpresswidget 10 months ago
Once again thank you Sal.
I find it interesting that your first commentary was in Oct. 2008 and this one in Oct. 2009. Why? Because in Oct 2008 congress voted to require interest payments on excess reserves. By Oct 2009 the excess reserves swelled to $1 Trillion (from a historical level of almost 0).
This costs taxpayers $2.5 Billion/Yr. Worse, because of fractional reserve banking and the money multiplier this means about $10 Trillion has been siphoned from the most important segment of the..
wordpresswidget 10 months ago
My GOD! I've had a Whale of a Time listening and Learning from you. What an Experience. One reason I chose this Whole course 1st, is because this what you really Know. ,', I was sure if I didn't get IT, I never would. I HAVE GOT IT; this old girl has GOT IT. THANK YOU! WOW! I'm banking aware. I'm Off to Currency, Economics & Finance Next. Do U Know, U Can Teach an Old Dog New Tricks, sometimes. :)
Cecelle8910 11 months ago
Murray Rothbard's classic little book "What Has Government Done with Our Money?" exposes the central bankers as well has anything out there.
RunLiberty 11 months ago
how wun the us treasury respond?
trollwarlord3 1 year ago
By that I simply mean that whatever regulation that does exist needs to be about ensuring transparency of information. This applies to both government and private actions within a market.
Ferrus91 1 year ago
The problem though comes down to asymmetry of information: even without the FDIC banks would still follow fractional reserve banking policies, because their customers do not have perfect information on the intentions of their bank's plans. This is what happened before the FDIC scheme was introduced, and was the cause of the numerous financial panics of the 19th century. A more realistic policy would be for regulation and public policy to explicitly recognise many of the advances in game theory.
Ferrus91 1 year ago
Great series ! ! Sal finally i appears to me that in addition to liquidity sport+ FDIC insurance backed by federal reserve to run out banks there needs to more improved engineered ways to attack the problem. Instead of embracing new system ( venture capitalism ) where Federal reserve system has no role , we could strengthen loop holes you pointed out with addition mechanism in place. As FDIC insurance underestimates at dynamic instant bank run out panic.
vpandita66 1 year ago
BRILLIANT 3 video series on fractional reserve banking and the FDIC!
I would say less than 1% of Americans are aware of the important points that you are making, yet what you are talking about is becoming increasingly relevant as we go deeper into the financial crisis.
silverfuturist 1 year ago
+1 not capitalism, there is nothing capitalist about government subsidized fraud.
tothemax01 1 year ago
@namewasavailable Australia does not have a legal reserve requirement, hence the banks are more or less free to create as much credit as they want.
tothemax01 1 year ago
I would suggest to anyone watching these inaccurate videos on Money and Banking that you visit Mises.org for a much more in depth and thorough explanation. Mr. Khan has not done his homework himself before he has started teaching. Passing on false information makes one a poor teacher.
sambking 1 year ago
I curse our professor for this video...
Allanhilario 1 year ago
@khanacademy I am at a loss as to how you can see the shortcomings of FRB through logic and reason yet in one of your earlier lectures on the gold standard you indicate that it is an illogical / irrational system.
I would really like to hear details as to why you think that a small group of people being able to freely generate currency without any real work (no value added) is advantageous over a commodity that requires some kind of labor to produce (mining, growing, processing, etc.).
Micah71381 1 year ago
The only industry we need to carefully regulate is reinsurance. The government is a poor regulator by virtue of its bureaucratic nature. The "reserve ratio" set by regulators should refer to how much liability the reinsurance industry is allowed to take on relative to the private cash-equivalent equity backing it. The wealthiest of people are the best ones to defend the integrity of money. Our banking system should be designed around making their asset the first to perish in a crisis.
ananiasacts 1 year ago
My question is why is there interest and wouldn't the system be better off if there was no interest? There is the concept that if the Fed lends a certain amount of money out, and the borrower owes that money plus the interest, then the full amount of the loan can never be repaid because there is only the money that was actually borrowed that is circulating. Do people have to keep borrowing more to pay back past loans and does this turn into a run-away borrowing scenario like a pyramid?
ddemic1 1 year ago
This guys is the most intelligent, clear and reasonable person I've ever heard discussing this topic. Amazing.
etzel33 1 year ago
@HyperBorealOperator
Yes, it is meant to lose it. That gives people a reason to spend or invest it, which is what it's for.
I believe in saving. When you want to save, you invest your money or have a bank invest it for you, via a savings account, which pays interest.
Yes, I obviously love slavery. I want to marry it and have its babies. Well spotted.
pickmanfox 1 year ago
@HyperBorealOperator
Well there I just flat out disagree with you. I think government has a role to play in ensuring macroeconomic stability. I'd much rather my money were backed by the full faith and credit of the government than by the value of a commodity - if I want to invest my wealth in a commodity, I'll just buy some.
pickmanfox 1 year ago
@HyperBorealOperator
Who do you think is going to set the rate of exchange between gold and silver dollars? Banks and politicians!
It's not based on the market value either way. If you want your wealth to be based on the market value of gold, just buy gold already. You can even use it to buy stuff if people will take it.
You have avoided all of my points: That fiat money isn't responsible for the bank run problem, and that money is actually less useful as money if it holds its value well.
pickmanfox 1 year ago
@HyperBorealOperator
Imagined? France, 1850-1870.
The interesting thing there is that the gold/silver price remained somewhat stable. Flandreau (1996) argues that this is because arbitrage kept it that way - when the gold price rose slightly, people redeemed and sold gold until it dropped again.
The effect of this would have been to artificially pin the value of one metal to the other - which is itself a form of fiat money, the same as artificially inflating the value of bits of paper.
pickmanfox 1 year ago
@HyperBorealOperator
As Sal explained, the failures are not the result of fiat money but of the bank run problem arising from the fractional reserve system.
As for the devaluation of money, it doesn't matter. Money is not an investment. It is not meant to hold its value. It is a medium of exchange used to purchase other investments.
If money gained value people would have less reason to spend it, and it would fail to serve its purpose as the medium of exchange within the economy.
pickmanfox 1 year ago
@HyperBorealOperator
Not THE people, just people. That is to say, some of that money belongs to you, some of it belongs to me. Do you want your money going poof?
Bimetallic standards don't work either. Let's say the commodity price of Palladium goes up by 5%. You trade all your gold dollars for Palladium dollars, redeem them and sell the metal for 105 cents per dollar.
pickmanfox 1 year ago
@HyperBorealOperator
The M2 money supply of the world is 46 trillion USD.
The total amount of gold mined in human history is worth 6 trillion.
The only way to go back to the gold standard without destroying most of the money in circulation - which, you know, actually belongs to people - is to value gold at many times its metal value.
pickmanfox 1 year ago
I never said it wouldn't be fun or that politicians wouldn't like it, so I'm not sure what you're responding to there.
What I said was that the gold standard is broken. It doesn't work.
pickmanfox 2 years ago
Gold backed currency would be a terrible idea, and a lot of people seem unable to separate it from full reserve banking. Both fiat money and the fractional system allow for the production of money and thus make credit more available for projects which in turn can produce real wealth. Too much money looking to be invested leads to it being invested in bad places, like dodgy mortgage funds. Not enough leads to missed opportunities and poverty. A gold standard would guarantee a shortage of money.
pickmanfox 2 years ago
A full-reserve system wouldn't work without (other) government regulation. At a minimum, you'd need a mechanism to take retail banks into receivership, because a breakdown in revolving credit creates real costs in the real economy.
You also need a mechanism like Glass-Steagall to ring-fence the retail banks, because a system-wide Minsky Moment will overwhelm your capacity to take banks into receivership unless you have a very clear idea about who you want to nationalise and who can go Ch. 11.
ThatIsNotDeadWhich 2 years ago
Is this still the case if the FDIC eventually pays back the taxpayer with interest?
wtanaka 2 years ago
This has been flagged as spam show
Hi. As new reserves are created by OMO purchases, a commercial bank could then lend a person the principal loan meaning that all borrowers would have to extract interest owed from the existing money supply. Since commercial banks are private, 100% of interest earned couldn't be recycled back into the system equally (due to the private investors' need to accumulate more money to make more money). Would a shortfall in the supply of money exist for any borrower who must pay interest on a bank loan?
scubidu1000 2 years ago
Your work is truly a blessing to society. By the reserve bank adding new reserves into the system through the repo (by buying old treasury securities) can the reserve bank enable ordinary banks to purchase a large amount of new treasury securities from the Treasury (due to the multiplier effect on the new reserves). In this way reserves sort of get cancelled out. Can a govt. deficit financing be supported by a reserve bank that injects reserves into the system shortly before a treasury auction?
scubidu1000 2 years ago
@scubidu1000 It seems the reserves would be canceled out only if the securities were bought from the federal reserve, which are not new. If the fed wanted to contract the money supply, which would be canceling out the reserves, they would sell the treasury securities on their balance sheet. Don't think the fed is able to create new securities.
PenguinJin 2 years ago
@PenguinJin Thanks-If the Reserve Bank wanted to increase the capacity for banks to buy new treasury securities at auction they could inject enuf (temp) reserves b4 the auction. I think this is what my Central Bank (not the US) has been doing to finance their huge borrowing deficit. They reduced the reserve ratio recently to 4.5%, so for every $1 they add in through OMO they can finance a desired deficit of $22. So although omo changes are temporary banks can create new deposits from the auction
scubidu1000 2 years ago
Comment removed
scubidu1000 2 years ago
khanacademy, thanks ,and serious thanks for all this . i have been learning so much from you!!
Penksimo 2 years ago 19
thanks
Troinik 2 years ago
The FRB industry is inherently unstable (e.g. Ponzi scheme); the industry should survive on selling CDs or charging storage fees. The main purpose is to bailout banks (e.g. create money during a bank run) and extend infinite amounts of credit to the state (e.g. create money). A bank's balance sheet has current liabilities (e.g. deposits) that dwarf its current assets (e.g. cash), and would be immediately bankrupt for any other company.
siggyboss 2 years ago 2
There was and is always a trade off between market and governance. Directly/indirectly-active/passive.
If you are not willing to fight symptoms (video) and want an effective and efficient financial system? Draw a distinction:
The video (existing financial system) implies a constant shortage of money. That`s the lie.
Take the amount of money (M3) and accelerate the velocity of money in that way you devaluate money in certain periods of time.
No shortage of money. Inflation, interest down etc.
norwayte 2 years ago
It does not imply a constant shortage of money. It says that, without Fed Reserve intervention, there is a shortage of reserves when fear enters the system. It is also saying that FDIC insurance allows the banks to have artificially low costs of capital (and decouples the cost of capital from the risks they are taking). Finally, it is arguing that the combination of liquidity from the Fed + FDIC insurance allows banks to make money off of the yield curve with no real value delivered.
khanacademy 2 years ago 13
Right, Sal. I didn't say you lie. In your level of abstraction it is the way you explained it. The "lie" is hidden in the system.
On a wider range, a "higher" level of abstraction - why exist a financial system in the way we have it? Because of a shortage of money. If the existing money would circulate faster - "forced" by periodically devaluated money - than this "shortage" would be leveled out. One example? Wörgl - a small city in Austria after 1945. It worked. Banks would be only middlemen.
norwayte 2 years ago
Norway, you sound like an economics student, i.e., an idiot whose passion for theory blinds him to financial reality. I realize that continually twisting your observations to conform to your textbooks is a constant source of frustration and insecurity. There is no hope for you and may god have mercy on your soul :-)
warrenlaurde 2 years ago
Accepting (financial) reality could -maybe- blind for new/other ideas. Remembering different ways (Wörgl happened and others) and different ideas could -maybe- an inspiration for...something totally different even from what I wrote. -Maybe- better than let the things happen and/or discuss and cure symptoms.
norwayte 2 years ago
Sal really has a convincing logic. Why doesn't Norwayte just create a video response and just illustrate to us in a more convincing way that Sal is missing something... because he can't. I don't need fancy theories. I need down to earth explanations about how things work. Thanks again Sal you are an intellectual champion releasing people from ignorance. How can we participate in a democratic capitalist society if we simply hold incomplete or superstitious concepts about the world.
expchrist 2 years ago
I created a video response. Don't know if Sal accepted it as a video response. You can find the video on my channel: "Why we have a financial system as we have it?"
And... Sal is brilliant.
norwayte 2 years ago
@khanacademy issuance of currency/credit/money should be totaly free "free banking system". there should be goverment and different private currencies competing. amazing that we still have a communist-goverment-monopoly on currency and money creation systems. fractional or fullreserve isnt important, we need competition between different private and gov currencies and different money creation systems. you should make a video on freebanking so that people learn about real free market capitalism.
Asskick2010 1 year ago
The 800 lb gorilla in the room is the presence of a cashless society. Money (US Dollars,M3) is now 98% digital. So the bigger lie is creating money out of holding a computer button down. This allows for a total umlimited virtual resource. The banking system doesn't even need to print the money. Great video.
agentj001 2 years ago